8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of

The Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported):  January 21, 2011

ZAP

(Exact name of Registrant as specified in its charter)

California	0-303000		94-3210624
(State or other jurisdiction of incorporation)	(Commission File Number)		(IRS Employer Identification Number)
501 Fourth Street Santa Rosa, CA		95401
(Address of principal executive offices)		(Zip Code)

(707) 525-8658

(Registrant’s telephone number, including area code)

not applicable

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions:

o Written communications pursuant to Rule 425 under Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-14(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 1 Registrant’s Business and Operations

Item 1.01 Entry into Material Definitive Agreement

On January 21, 2011, the Company completed it's acquisition of 51% of the capital stock of Zhejiang Jonway Automobile Co. Ltd. with the final payments of US $19 million. Prior to this payment, the company, on January 12, 2011 also entered into a Senior Secured Convertible Note and Warrant Purchase Agreement (the “Agreement”) with China Electric Vehicle Corporation (“CEVC”), a British Virgin Island company whose sole shareholder is Cathaya Capital, L.P.

Pursuant to the Agreement, (i) CEVC purchased from the Company a Senior Secured Convertible Note (the “Note”) in the principal amount of US$19 million, (ii) the Company issued to CEVC a warrant (the “Warrant”) exercisable for two years for the purchase up to 20,000,000 shares of the Company’s Common Stock at $0.50 per share, subject to adjustments as set forth therein, (iii) the Company, certain investors and CEVC entered into an Amended and Restated Voting Agreement that amended and restated that certain Voting Agreement, dated as of August 6, 2009, (iv) the Company, certain investors and CEVC entered into an Amended and Restated Registration Rights Agreement that amended and restated that certa in Registration Rights Agreement, dated as of August 6, 2009, which grants certain registration rights relating to the Note and the Warrant, and (v) the Company and CEVC entered into a Security Agreement that secures the Note with all of the Company’s assets other than those assets specifically excluded from the lien created by the Security Agreement.

Copies of the Purchase Agreement, Note, Warrant, Amended and Restated Voting Agreement, Amended and Restated Registration Rights Agreement and Security Agreement are attached hereto as Exhibits 10.1 through 10.6, respectively, and are all incorporated herein by reference.

The Note matures in 13 months, accrues interest at a rate per annum of 8%, and is convertible upon the option of CEVC at any time, subject to any adjustments called for by the terms of the Note, into (a) shares of Common Stock of the Company at a price of $0.25 per share, or (b) the capital stock of Zhejiang Jonway Automobile Co, LTD at a conversion rate of 4,435 shares of capital stock for each $1,000 principal amount of the Note being converted. Upon a conversion, any accrued interest on the Note is waived.

Section 2  Financial Information

Item 2.01  Completion of Acquisition or Disposition of Assets.

 The Company finalized the acquisition of 51 percent of Zhejiang Jonway Automobile Co. Ltd. of Sanmen, Zhejiang China pursuant to that certain Equity Transfer Agreement entered into between the Company and Jonway Group Co., Ltd., dated July 2, 2010 (the “Transfer Agreement”), with the payment by the Company of US$19 million in cash on January 21, 2011, which in addition to the US$11 million the Company paid under the Transfer Agreement in October of 2010, amounted to a total payment of US$30 million (the “Transaction”).  The Company funded the purchase price of the Transaction through the Agreement described in Item 1.01 above and through the  A copy of the Transfer Agreement, originally filed as an exhibit to the Form 8-K Current Report filed on July 8, 2010 is incorporated herein by reference.

Item 2.03  Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.

The disclosures under Item 1.01 are incorporated into this Item 2.03 by reference.

Section 3  Securities and Trading Markets

Item 3.02. Unregistered Sales of Equity Securities.

The information set forth in Item 1.01 are incorporated into this Item 3.02 by reference.

As of January 21, 2011, there were 220,213,868 shares of the Company’s Common Stock issued and outstanding.

The Note and the Warrant were issued in reliance on an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, as the securities were not sold pursuant to a public offering.

Section 7 Regulation FD

Item 7.01. Regulation FD Disclosure.

On January 25, 2011, the Company issued a press release announcing the Transaction. A copy of the press release is furnished as Exhibit 99.4 to this report.

In accordance with General Instruction B.2 of Form 8-K, the information in Item 7.01 of this Current Report on Form 8-K, including Exhibit 99.4, shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Section 9 Financial Statements and Exhibits

Item 9.01 Financial Statements and Exhibits.

(a) Financial Statements of Businesses Acquired

The financial statements required by Item 9.01(a) of Form 8-K are not filed herewith, but will be filed by amendment within 71 calendar days after the date this Current Report on Form 8-K must be filed.

(b) Pro Forma Financial Information

The pro forma financial information required by Item 9.01(b) of Form 8-K are not filed herewith, but will be filed by amendment within 71 calendar days after the date this Current Report on Form 8-K must be filed.

Exhibit Description

10.1 Senior Secured Convertible Note and Warrant Purchase Agreement with CEVC dated January 12, 2011.

10.2 Senior Secured Convertible Promissory Note to CEVC January 12, 2011.

10.3 Warrant to Purchase Common Stock to CEVC dated January 12, 2012.

10.4 Amended and Restated Registration Rights Agreement dated January 12, 2011.

10.5 Amended and Restated Voting Agreement dated January 12, 2011.

10.6  Security Agreement with CEVC dated January 12, 2011.

10.7  Equity Transfer Agreement with Jonway Group Co., Ltd. dated July 2, 2010. (1)

10.8  Securities Purchase Agreement with Cathaya Capital L.P. dated July 9, 2010. (2)

(1) Previously filed as an exhibit to the Registrant’s Form 8-K of July 8, 2010 and incorporated by reference.

(2) Previously filed as an exhibit to the Registrant’s Form 8-K of July 15, 2010 and incorporated by reference.

99.1 Press release of ZAP dated January 25, 2011

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

	ZAP
Dated:    January 25, 2011	By:	/s/ Steven M. Schneider
		Steven M. Schneider
		Chief Executive Officer

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EX-10.1

EXHIBIT 10.1

SENIOR SECURED CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT

Dated as of January 12, 2011

by and among

ZAP, a California corporation

and

China Electric Vehicle Corporation, a British Virgin Island company

TABLE OF CONTENTS

PAGE

SECTION I   Purchase and Sale of Securities		2
Section 1.1	Issuance of the Note and Warrant	2
Section 1.2	Purchase Price and Closing	2
Section 1.3	Reservation of Note and Warrant Shares	2
SECTION II   Representations and Warranties of Company		2
Section 2.1	Organization and Qualification	2
Section 2.2	Authorization; Enforcement; Validity	2
Section 2.3	Issuance of Securities	3
Section 2.4	No Conflicts	3
Section 2.5	Consents	3
Section 2.6	No General Solicitation; Placement Agent's Fees	4
Section 2.7	No Integrated Offering	4
Section 2.8	Application of Takeover Protections; Rights Agreement	4
Section 2.9	Dilutive Effect	4
Section 2.10	Application of Takeover Protections; Rights Agreement	4
Section 2.11	SEC Documents; Financial Statements	5
Section 2.12	Dilutive Effect	5
Section 2.13	Absence of Certain Changes	5
Section 2.14	No Undisclosed Events, Liabilities, Developments or Circumstances	5
Section 2.15	Conduct of Business; Regulatory Permits	6
Section 2.16	Foreign Corrupt Practices	6
Section 2.17	Sarbanes-Oxley Act	6
Section 2.18	Transactions With Affiliates	6
Section 2.19	Equity Capitalization	6
Section 2.20	Indebtedness and Other Contracts	7
Section 2.21	Absence of Litigation	7
Section 2.22	Insurance	8
Section 2.23	Employee Relations.	8
Section 2.24	Title	8
Section 2.25	Intellectual Property Rights	8
Section 2.26	Environmental Laws	9
Section 2.27	Subsidiary Rights	9
Section 2.28	Tax Status	9
Section 2.29	Internal Accounting Controls	9
Section 2.30	U.S. Real Property Holding Corporation	9
Section 2.31	Manipulation of Price	9
Section 2.32	Disclosure	10
SECTION III   Representations and Warranties of Investor		10
Section 3.1	Organization; Authority	10
Section 3.2	No Public Sale or Distribution	10
Section 3.3	Accredited Investor Status	10
Section 3.4	Reliance on Exemptions	10
Section 3.5	Information	10

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Section 3.6	No Governmental Review	11
Section 3.7	Transfer or Resale	11
Section 3.8	Legends	11
Section 3.9	Validity; Enforcement	12
Section 3.10	No Conflicts	12
SECTION IV   Covenants		12
Section 4.1	Form D and Blue Sky	12
Section 4.2	Reporting Status	13
Section 4.3	Use of Proceeds	13
Section 4.4	Financial Information	13
Section 4.5	Listing	13
Section 4.6	Fees	13
Section 4.7	Pledge of Securities	13
Section 4.8	Disclosure of Transaction	14
Section 4.9	Maintenance of Existence	14
Section 4.10	Payment of Obligations	14
Section 4.11	Maintenance of Properties	14
Section 4.12	Insurance	14
Investments		14
Section 4.13	Restricted Payments	15
Section 4.14	Additional Issuances of Securities	15
Section 4.15	Incurrence of Indebtedness	15
Section 4.16	Existence of Liens	15
Section 4.17	Payments on Other Indebtedness	15
Section 4.18	Reservation of Shares	15
Section 4.19	Conduct of Business	15
Section 4.20	Board Matters	15
Section 4.21	Other Corporate Matters	16
Section 4.22	Specific Covenants	16
Section 4.23	Financial Statements.	18
Section 4.24	Tax Payments.	18
Section 4.25	Register of the Note.	19
SECTION V   Conditions to Closing of the Investor		19
Section 5.1	Representations and Warranties	19
Section 5.2	Consents, Permits and Waivers	19
Section 5.3	Shareholder Approval	19
Section 5.4	Legal Requirements	19
Section 5.5	Proceedings and Documents	19
Section 5.6	Transaction Documents	19
Section 5.7	Governmental Approvals	20
Section 5.8	Corporate Documents	20
Section 5.9	Board Matters	20
SECTION VI   Conditions to Closing of the Company		20
Section 6.1	Representations and Warranties	20
Section 6.2	Consents, Permits and Waivers	20

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Section 6.3	Legal Requirements	21
Section 6.4	Purchase Price	21
Section 6.5	Transaction Documents	21
SECTION VII    Definitions		21
SECTION VIII   Miscellaneous		24
Section 8.1	Governing Law; Jurisdiction	24
Section 8.2	Entire Agreement; Amendment	25
Section 8.3	Notices, etc	25
Section 8.4	Delays or Omissions	25
Section 8.5	Public Disclosure	26
Section 8.6	Titles; Subtitles	26
Section 8.7	Successors and Assigns	26
Section 8.8	No Third Party Beneficiaries	26
Section 8.9	Survival	26
Section 8.10	Counterparts	26
Section 8.11	Severability	26
Section 8.12	SPECIFIC PERFORMANCE	26
Section 8.13	Consents	26
Section 8.14	Construction of Agreement	26
Section 8.15	Variations of Pronouns	26

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SENIOR SECURED CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT

This SENIOR SECURED CONVERTIBLE NOTE AND WARRANT PURCHASE AGREEMENT (as amended, restated, modified or otherwise supplemented hereby and from time to time, this “Agreement”) is entered into as of January 12, 2011, by and between ZAP, Inc. a California corporation (the “Company”), and China Electric Vehicle Corporation, a British Virgin Island company (the “Investor”).

RECITALS

A.           On July 2, 2010, the Company entered into an Equity Transfer Agreement for the Purchase and Transfer of Certain Equity Interest in Zhejiang Jonway Automobile Co., Ltd. with Jonway Group Co., Ltd. to acquire a 51% interest (the “Jonway Shares”) in Zhejiang Jonway Autombile Co., Ltd., a limited liability company of the People’s Republic of China, for $29,030,000 (the “Acquisition Transaction”) , the closing of which is conditioned on, among other things, the receipt of certain approvals, registrations and licenses from the Ministry of Commerce of the People’s Republic of China, the Zhejiang Administration of Industry and Commerce, and the local counterparts of these entities and other relevant government authorities (“Governmental Approvals”).

B.           On July 9, 2010, the Company entered into a Securities Purchase Agreement, by and between the Company and Cathaya Capital, L.P. (“Cathaya”), pursuant to which, the Company sold the Cathaya 44,000,000 shares of Common Stock of the Company in exchange for Eleven Million U.S. dollars ($11,000,000), Ten Million U.S. dollars ($10,000,000) of which was delivered to Zhejiang Jonway Autombile Co., Ltd. on behalf of the Company in partial satisfaction of the Company’s obligations pursuant to the Acquisition Transaction and was deemed to be payment to the Company pursuant to such Agreement (the “First Investment Amoun t”).

C.           On the terms and subject to the conditions set forth herein, the Investor is willing to purchase from the Company, and the Company is willing to sell to the Investor, the Senior Secured Convertible Note in substantially the form attached hereto as Exhibit A (the “Note”) in the aggregate principal amount of Nineteen Million U.S. dollars ($19,000,0000), together with a related warrant to acquire 20,000,000 shares of the Company’s Common Stock in substantially the form attached hereto as Exhibit B (t he “Warrant”).

D.           Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering an Amended and Restated Registration Rights Agreement, substantially in the form attached hereto as Exhibit C (the “Amended and Restated Registration Rights Agreement”), for the purpose of amending the prior Registration Rights Agreement, dated as of August 6, 2009, entered into between the Company and the parties listed therein and pursuant to which the Company has agreed to provide certain registration rights with respect to Note Shares and the Warrant Shares (each as defined below) and other securities under the Securities Act and the rules and regulations promulgated thereunder, and applicable state securities laws.

E.           Contemporaneously with the execution and delivery of this Agreement, the parties hereto are executing and delivering an Amended and Restated Voting Agreement, substantially in the form attached hereto as Exhibit D (the “Amended and Restated Voting Agreement”), for the purpose of amending the prior Voting Agreement, dated as of August 6, 2009, entered into between the Company and the parties listed therein and setting forth the terms and conditions pursuant to which the Investor and the parties to the prior Voting Agreement shall vote their shares of the Company's voting stock in favor of certain designees to the Company's Board.

AGREEMENT

NOW THEREFORE, in consideration of the foregoing, and the representations, warranties, and conditions set forth below, the parties hereto, intending to be legally bound, hereby agree as follows:

SECTION 1

Purchase and Sale of Securities

Section 1.1Issuance of the Note and Warrant.  Upon the following terms and conditions, the Company shall issue and sell to the Investor, and the Investor shall purchase from the Company: (a) the Note, which may be convertible into Common Stock of the Company on the terms set forth therein (the “Note Shares”) and (b) the Warrant.  The Company and the Investor are executing and delivering this Agreement in accordance with an d in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder, including Regulation D (“Regulation D”), and/or upon such other exemption from the registration requirements of the Securities Act as may be available with respect to any or all of the investments to be made hereunder.

Section 1.2Purchase Price and Closing.  The sale and purchase of the Note and Warrant shall take place at a closing (the “Closing”) to be held at such place and time as the Company and the Investor may determine (the “Closing Date”).  At the Closing, the Company will deliver to the Investor a Note in the principal amount set forth opposite such Investor’s name on Schedule I, the Warrant, and the Investor will deliver the Purchase Price set forth opposite such Investor’s name on Schedule I (the “Purchase Price”).  The Note and Warrant will be registered in the Investor's name in the Company's records.

Section 1.3Reservation of Note and Warrant Shares.  The Company has authorized and has reserved and covenants to continue to reserve a number of its authorized but unissued shares of Common Stock equal to the aggregate number of shares of Common Stock necessary to permit the conversion of the Note and the exercise of the Warrant, so long as the Note or the Warrant are outstanding.  Any shares of Common Stock issuable upon exercise of the Warrant (and such shares when issued) are herein referred to as the “Warrant Shares”.  The Note, the Note Shares, the Warrant and the Warrant Shares are sometimes collectively, individually, or in some combination thereof, referred to herein as the “Securities”.

SECTION 2

Representations and Warranties of Company

The Company hereby represents and warrants that:

Section 2.1Organization and Qualification.  The Company and its Subsidiaries are entities duly organized and validly existing in good standing under the laws of the jurisdiction in which they are formed, and have the requisite power and authorization to own their properties and to carry on their business as now being conducted.  Each of the Company and its Subsidiaries is duly qualified as a foreign entity to do business and is in good standing in every jurisdiction in which its ownership of pr operty or the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect.  The Company has no Subsidiaries except as set forth on Schedule 2.1.

Section 2.2Authorization; Enforcement; Validity.  The Company has the requisite corporate power and authority to enter into and perform its obligations under each Transaction Document and to issue the Securities in accordance with the terms hereof and thereof.  The execution and delivery of the Transaction Documents by the Company and the consummation by the Company of the transactions

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contemplated hereby and thereby, including, without limitation, the issuance of the Note and the Warrant, the reservation for issuance and the issuance of the Note Sharesissuable upon conversion of the Note, the reservation for issuance and issuance of the Warrant Shares issuable upon exercise of the Warrant, and the granting of a security interest in the Collateral (as defined in the Security Agreement) have been duly authorized by the Company's Board (the “Board”) and (other than (i) the filing of appropriate UCC financing statements with the appropriate states and other authorities pursuant to the Security Agreement, and (ii) the filing with the Securities and Exchange Commission (the “SEC”) of one or more registration statements in accordance with the requirements of the Amended and Restated Registration Rights Agreement) no further filing, consent, or authorization is required by the Company, the Board or its shareholders.  This Agreement and the other Transaction Documents of even date herewith have been duly executed and delivered by the Company, and constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies.

Section 2.3Issuance of Securities.  The issuance of the Note and the Warrant is duly authorized and upon issuance of the Note and the Warrant in accordance with the terms of the Transaction Documents, they shall be free from all taxes, liens and charges with respect to the issue thereof.  As of the Closing, a number of shares of Common Stock shall have been duly authorized and reserved for issuance which equals the maximum number of shares of Common Stock issuable upon conversion of the Note an d upon exercise of the Warrant.  Upon conversion in accordance with the Note or exercise in accordance with the Warrant, as the case may be, the Note Shares and the Warrant Shares, respectively, will be validly issued, fully paid and nonassessable and free from all preemptive or similar rights, and upon issuance of the Note Shares and Warrant Shares, respectively, in accordance with the terms of the Transaction Documents, they shall be free from all taxes, liens and charges with respect to the issue thereof, with the holders being entitled to all rights accorded to a holder of Common Stock.  The offer and issuance by the Company of the Securities is exempt from registration under the Securities Act.

Section 2.4No Conflicts.  The execution, delivery and performance of the Transaction Documents by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance of the Note and Warrant, the granting of a security interest in the Collateral and reservation for issuance and issuance of the Note Shares and the Warrant Shares) will not (i) result in a violation of the Articles of Incorporation (as defined in Section 2.19) of th e Company, any capital stock of the Company or Bylaws (as defined in Section 2.19) of the Company or any of its Subsidiaries or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the OTC Bulletin Board (the “Principal Market”)) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected.

Section 2.5Consents.  Except as set forth on Schedule 2.5, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency or any regulatory or self-regulatory agency or any other Person in order for it to execute, deliver or perform any of its obligations under or contemplated by the Transaction Documents, in each case in accordance with the terms hereof or thereof.  All consents, authorizations, orders, fili ngs and registrations which the Company is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the Closing Date, and the Company and its Subsidiaries are unaware of

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any facts or circumstances which might prevent the Company from obtaining or effecting any of the registration, application or filings pursuant to the preceding sentence.  The Company is not in violation of the listing requirements of the Principal Market and has no knowledge of any facts which would reasonably lead to delisting or suspension of the Common Stock in the foreseeable future.

Section 2.6No General Solicitation; Placement Agent's Fees.  Neither the Company, nor any of its affiliates, nor any Person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D) in connection with the offer or sale of the Note and Warrant.  The Company shall be responsible for the payment of any placement agent's fees, financial advisory fees, or brokers' commissions (other than, in each case, for persons engag ed by any Investor or its investment advisor) relating to or arising out of the transactions contemplated hereby.  The Company shall pay, and hold the Investor harmless against, any liability, loss or expense (including, without limitation, attorney's fees and out-of-pocket expenses) arising in connection with any such claim.  The Company has not engaged any placement agent or other agent in connection with the sale of the Note and Warrant.

Section 2.7No Integrated Offering.  None of the Company, its Subsidiaries, any of their affiliates, and any Person acting on their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Securities under the Securities Act or cause this offering of the Note and Warrant to be integrated with prior offerings by the Company for purposes of the Securities Act or any applicable s hareholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated.  None of the Company, its Subsidiaries, their affiliates and any Person acting on their behalf will take any action or steps referred to in the preceding sentence that would require registration of any of the Securities under the Securities Act or cause the offering of the Note and Warrant to be integrated with other offerings.

Section 2.8Application of Takeover Protections; Rights Agreement.  The Company and the Board have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Articles of Incorporation or the laws of the jurisdiction of its formation which is or could become applicable to any Investor as a result of the transactions contemplated b y this Agreement, including, without limitation, the Company's issuance of the Note and Warrant and the Investor's ownership of the Note and Warrant.

Section 2.9Dilutive Effect.  The Company understands and acknowledges that its obligation to issue the Note Shares upon conversion of the Note in accordance with this Agreement and the Note and its obligation to issue the Warrant Shares upon exercise of the Warrant in accordance with this Agreement and the Warrant is, in each case, absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company, subject to the provis ions of the Transaction Documents and applicable law.

Section 2.10Application of Takeover Protections; Rights Agreement.  The Company and the Board have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Articles of Incorporation or the laws of the jurisdiction of its formation which is or could become applicable to any Investor as a result of the transactions contemplated by this Agreement, including, without limitation, the Company's issuance of the Securities and the Investor's ownership of the Securities.

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Section 2.11SEC Documents; Financial Statements.  During the two (2) years prior to the date hereof, the Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the 1934 Act (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements, notes and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the  220;SEC Documents”).  The Company has delivered to the Investor or its representatives true, correct and complete copies of each of the SEC Documents not available on the EDGAR system that have been requested by the Investor.  As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.  As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable acco unting requirements and the published rules and regulations of the SEC with respect thereto as in effect as of the time of filing.  Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied, during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).  No other information provided by or on behalf of the Company to the Investor which is not included in the SEC Documents contains any untrue statement of a material fact or omits to state any material fact necessary i n order to make the statements therein, in the light of the circumstance under which they are or were made, not misleading.

Section 2.12Dilutive Effect.  The Company understands and acknowledges that its obligation to issue Company shares upon conversion of the Note in accordance with this Agreement and the Note is absolute and unconditional regardless of the dilutive effect that such issuance may have on the ownership interests of other shareholders of the Company, subject to the provisions of the Transaction Documents and applicable law.

Section 2.13Absence of Certain Changes.  Except as disclosed in Schedule 2.11 or in the SEC Documents listed in Schedule 2.11, since December 31, 2010, there has been no material adverse change and no material adverse development in the business, properties, operations, condition (financial or otherwise), results of operations or prospects of the Company or its Subsidiaries.  Except as disclosed in Schedule 2.11 or in the SEC Documents listed in Schedule 2.11, since December 31, 2010, the Compa ny has not (i) declared or paid any dividends, (ii) as of the date hereof, sold any assets, individually or in the aggregate, in excess of $100,000 outside of the ordinary course of business or (iii) as of the date hereof, had capital expenditures, individually or in the aggregate, in excess of $100,000.  The Company has not taken any steps to seek protection pursuant to any bankruptcy law nor does the Company have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings or any actual knowledge of any fact which would reasonably lead a creditor to do so.  The Company is not as of the date hereof, and after giving effect to the transactions contemplated hereby to occur at the Closing, will not be Insolvent (as defined below).

Section 2.14No Undisclosed Events, Liabilities, Developments or Circumstances.  Except as set forth on Schedule 2.12, no event, liability, development or circumstance has occurred or exists, or is contemplated to occur with respect to the Company or its Subsidiaries or their respective business, properties, prospects, operations or financial condition, that would be required to be disclosed by the Company under applicable securities laws on a registration statement on Form S-1 filed with the SEC relating to an issuance and sale by the Company of its Common Stock and which has not been publicly announced.

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Section 2.15Conduct of Business; Regulatory Permits.  Neither the Company nor its Subsidiaries is in violation of any term of or in default under its Charter Documents.  Neither the Company nor any of its Subsidiaries is in violation of any judgment, decree or order or any statute, ordinance, rule or regulation applicable to the Company or its Subsidiaries, and neither the Company nor any of its Subsidiaries will conduct its business in violation of any of the foregoing.  Without limi ting the generality of the foregoing, the Company is not in violation of any of the rules, regulations or requirements of the Principal Market and has no knowledge of any facts or circumstances which would reasonably lead to delisting or suspension of the Common Stock by the Principal Market in the foreseeable future.  Since November 1, 2006, (i) the Common Stock has been designated for quotation on the Principal Market, (ii) trading in the Common Stock has not been suspended by the SEC or the Principal Market and (iii) the Company has received no communication, written or oral, from the SEC or the Principal Market regarding the suspension or delisting of the Common Stock from the Principal Market.  The Company and its Subsidiaries possess all certificates, authorizations and permits issued by the appropriate regulatory authorities necessary to conduct their respective businesses, and neither the Company nor any such Subsidiary has received any notice of proceedings relating to the revoca tion or modification of any such certificate, authorization or permit.

Section 2.16Foreign Corrupt Practices.  Neither the Company, nor any of its Subsidiaries, nor any director, officer, agent, employee or other Person acting on behalf of the Company or any of its Subsidiaries has, in the course of its actions for, or on behalf of, the Company (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government offici al or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

Section 2.17Sarbanes-Oxley Act.  The Company is in compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of the date hereof.

Section 2.18Transactions With Affiliates.  Except as set forth in the SEC Documents and other than the grant of stock options disclosed on Schedule 2.18, none of the officers, directors or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries that would require disclosure pursuant to Item 404 of Regulation S-K promulgated under the Securities Act (other than for ordinary course services as employees, officers or directors), including any contract, ag reement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any such officer, director or employee or, to the knowledge of the Company, any corporation, partnership, trust or other entity in which any such officer, director, or employee has a substantial interest or is an officer, director, trustee or partner.

Section 2.19Equity Capitalization.  As of the date hereof, the authorized capital stock of the Company consists of (i) 400,000,000 shares of Common Stock, of which 211,824,689 shares were issued and outstanding as of December 30, 2010 (the “Capitalization Date”), 25,847,669 shares were subject to outstanding options granted pursuant to the Company's stock option and purchase plans as of the Capitalization Date and 67,618,391 shares are reserved for issuance pursuant to securities exercisable

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or exchangeable for, or convertible into, shares of Common Stock as of the Capitalization Date and (ii) 50,000,000 shares of preferred stock, no par value, of which as of the date hereof, none are issued and outstanding.  All of such outstanding shares have been, or upon issuance will be, validly issued and are fully paid and nonassessable.  Except as set forth in the SEC Documents or as disclosed in Schedule 2.19: (i) none of the Company's share capital is subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company; (ii) there are no outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, a ny share capital of the Company or any of its Subsidiaries, or contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to issue additional share capital of the Company or any of its Subsidiaries or options, warrants, scrip, rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities or rights convertible into, or exercisable or exchangeable for, any share capital of the Company or any of its Subsidiaries; (iii) there are no outstanding debt securities, notes, credit agreements, credit facilities or other agreements, documents or instruments evidencing Indebtedness of the Company or any of its Subsidiaries or by which the Company or any of its Subsidiaries is or may become bound; (iv) there are no Liens existing on or against any property of the Company or any of its subsidiaries; (v) there are no agreements or arrangements under which the Company or any of its Subsidiaries is obligated to register th e sale of any of their securities under the Securities Act (except the Amended and Restated Registration Rights Agreement); (vi) there are no outstanding securities or instruments of the Company or any of its Subsidiaries which contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any of its Subsidiaries is or may become bound to redeem a security of the Company or any of its Subsidiaries; (vii) there are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of the Note and Warrant; (viii) the Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement; and (ix) the Company and its Subsidiaries have no liabilities or obligations required to be disclosed in the SEC Documents but not so disclosed in the SEC Documents.  The Company has furnished to the Investor true, correct and c omplete copies of the Company's Amended and Restated Articles of Incorporation, as amended and as in effect on the date hereof (the “Articles of Incorporation”), and the Company's Bylaws, as amended and as in effect on the date hereof (the “Bylaws”), and the terms of all securities convertible into, or exercisable or exchangeable for, shares of Common Stock and the material rights of the holders thereof in respect thereto.

Section 2.20Indebtedness and Other Contracts.  Except as set forth in the SEC Documents or as disclosed in Schedule 2.20, neither the Company nor any of its Subsidiaries (i) is a party to or has any obligation with respect to any outstanding Indebtedness, (ii) is a party to any contract, agreement or instrument, the violation of which, or default under which, by the other party(ies) to such contract, agreement or instrument would result in a Material Adverse Effect, (iii) is in violation of any term of o r in default under any contract, agreement or instrument relating to any Indebtedness, or (iv) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company's officers, has or is expected to have a Material Adverse Effect.  Schedule 2.18 provides a detailed description of the material terms of any such outstanding Indebtedness.

Section 2.21Absence of Litigation.  Except as set forth in the SEC Documents, there is no action, suit, proceeding, inquiry or investigation before or by the Principal Market, any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the Company, threatened against or affecting the Company, the Common Stock or any of the Company's Subsidiaries or any of the Company's or the Company's Subsidiaries' officers or directors in their capacities as such, th at could, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

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Section 2.22Insurance.  The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged.  Neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for and neither the Company nor any such Subsidiary has any reason to believe t hat it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect.

Section 2.23Employee Relations.

(a)Except as set forth in the SEC Documents or as disclosed on Schedule 2.21, neither the Company nor any of its Subsidiaries is a party to any collective bargaining agreement or employs any member of a union.  The Company and its Subsidiaries believe that their relations with their employees are good.  No executive officer of the Company (as defined in Rule 501(f) of the Securities Act) has notified the Company that such officer intends to leave the Company or otherwise terminate such officer's employment with the Company.  No executive officer of the Company, to the knowledge of the Company, is, or is no w expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters.

(b)The Company and its Subsidiaries are in compliance with all federal, state, local and foreign laws and regulations respecting labor, employment and employment practices and benefits, terms and conditions of employment and wages and hours.

Section 2.24Title.  Except as set forth in the SEC Documents or as disclosed on Schedule 2.22, the Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all Liens (other than Permitted Liens) or other encumbrances and defects except such as do not materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company and any of its Subsidiaries.  Any real property and facilities held under lease by the Company and any of its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company and its Subsidiaries.

Section 2.25Intellectual Property Rights.  The Company and its Subsidiaries own or possess adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and other intellectual property rights (“Intellectual Property Rights”) necessary to conduct their respective busine sses as now conducted.  Except as set forth in the SEC Documents or as disclosed in Schedule 2.25, none of the Company's Intellectual Property Rights have expired or terminated, or are expected to expire or terminate, within three years from the date of this Agreement.  The Company does not have any knowledge of any infringement by the Company or its Subsidiaries of Intellectual Property Rights of others.  There is no claim, action or proceeding being made or brought, or to the knowledge of the Company, being threatened, against the Company or its Subsidiaries regarding its Intellectual Property Rights.  The Company is unaware of any facts or circumstances which might give rise to any of the foregoing infringements or claims, actions or proceedings.  The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties.

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Section 2.26Environmental Laws.  Except as set forth in the SEC Documents, the Company and its Subsidiaries (i) are in compliance with any and all Environmental Laws (as hereinafter defined), (ii) have received all permits, licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses and (iii) are in compliance with all terms and conditions of any such permit, license or approval.  The term “Environmental Laws” means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”)into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder.

Section 2.27Subsidiary Rights.  Except as set forth in the SEC Documents or as disclosed in Schedule 2.27, the Company or one of its Subsidiaries has the unrestricted right to vote, and (subject to limitations imposed by applicable law) to receive dividends and distributions on, all capital securities of its Subsidiaries as owned by the Company or such Subsidiary.

Section 2.28Tax Status.  The Company and each of its Subsidiaries (i) has made or filed all foreign, federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (iii) has set aside on its books provision adequate for th e payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply or otherwise payable in respect of the taxable periods covered by such returns.  There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim.

Section 2.29Internal Accounting Controls. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset and liability accountability, (iii) access to assets or incurre nce of liabilities is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets and liabilities is compared with the existing assets and liabilities at reasonable intervals and appropriate action is taken with respect to any differences.

Section 2.30U.S. Real Property Holding Corporation.  The Company is not, nor has ever been, a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon Investor's request.

Section 2.31Manipulation of Price.  The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any person any compensation for solicit ing another to purchase any other securities of the Company.

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Section 2.32Disclosure.  The Company understands and confirms that the Investor will rely on the foregoing representations in effecting transactions in securities of the Company.  All disclosure provided to the Investor regarding the Company, its business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Company is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact n ecessary in order to make the statements made therein, in the light of the circumstances under which they were made, not misleading.  Each press release issued by the Company during the twelve (12) months preceding the date of this Agreement which contained results of operations or financial condition information of the Company for a completed quarterly or annual fiscal period did not, at the time of release, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they are made, not misleading.  No event or circumstance has occurred or information exists with respect to the Company or any of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly annou nced or disclosed.

SECTION 3

Representations and Warranties of Investor

Investor hereby represents and warrants that:

Section 3.1Organization; Authority.  The Investor is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization with the requisite power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder.

Section 3.2No Public Sale or Distribution.  The Investor is (i) acquiring the Note and Warrant and (ii) upon conversion of the Note, may acquire the Note Shares, and upon exercise of the Warrant, will acquire the Warrant Shares, for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the Investor does no t agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.  The Investor is acquiring the Securities hereunder in the ordinary course of its business.  The Investor does not presently have any agreement or understanding, directly or indirectly, with any Person to distribute any of the Securities.

Section 3.3Accredited Investor Status.  At the time the Investor was offered the Securities, it was, and as of the date hereof, it is an “accredited investor” as that term is defined in Rule 501(a) of Regulation D.

Section 3.4Reliance on Exemptions.  The Investor understands that the Securities are being offered and sold to it in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and the Investor's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Investor set forth herein in order to determine the availability of such exempt ions and the eligibility of the Investor to acquire the Securities.

Section 3.5Information.  The Investor and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Securities which have been requested by the Investor.  The Investor and its advisors,

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 if any, have been afforded the opportunity to ask questions of the Company.  Neither such inquiries nor any other due diligence investigations conducted by the Investor or its advisors, if any, or its representatives shall modify, amend or affect the Investor's right to rely on the Company's representations and warranties contained herein.  The Investor understands that its investment in the Securities involves a high degree of risk.  The Investor has sought such accounting, legal and tax advice as it has considered necessary to make an informed investment decision with respect to its acquisition of the Securities.

Section 3.6No Governmental Review.  The Investor understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Securities or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Securities.

Section 3.7Transfer or Resale.  The Investor understands that except as provided in the Amended and Restated Registration Rights Agreement: (i) the Securities have not been and are not being registered under the Securities Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) subsequently registered thereunder, (B) the Investor shall have delivered to the Company an opinion of counsel, selected by the Investor and reasonably acceptable to the Company, the form and substance of which shall be reasonably satisfactory to the Company, to the effect that such Securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration, or (C) the Investor provides the Company with reasonable assurance that such Securities can be sold, assigned or transferred pursuant to Rule 144 or Rule 144A promulgated under the Securities Act, as amended, (or a successor rule thereto) (collectively, “Rule 144”); (ii) any sale of the Securities made in reliance on Rule 144 may be made only in accordance with the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of the Securities under circumstances in which the seller (or the Person through whom the sale is made) may be deemed to be an underwriter (as that term is defined in the Securities Act) may require compliance with some other exemption under the Securities Act or the rules a nd regulations of the SEC thereunder; and (iii) neither the Company nor any other Person is under any obligation to register the Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder.

Section 3.8Legends.  The Investor understands that the certificates or other instruments representing the Note and the Warrant and, until such time as the resale of the Note Shares and the Warrant Shares have been registered under the Securities Act as contemplated by the Amended and Restated Registration Rights Agreement, the stock certificates representing the Note Shares and the Warrant Shares, except as set forth below, shall bear any legend as required by the “blue sky” laws of any state and a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates, certificates or other instruments):

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS DOCUMENT NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE CONVERTIBLE OREXERCISABLE HAVE BEENREGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  

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NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED TO AN “ACCREDITED INVESTOR” (AS SUCH TERM IS DEFINED IN THE RULES AND REGULATIONS PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED) IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

The legend set forth above shall be removed and the Company shall issue a certificate without such legend to the holder of the Securities upon which it is stamped, if, unless otherwise required by state securities laws, (i) such securities are sold pursuant to an effective registration statement covering the resale of such Securities under the Securities Act, or (ii) in connection with a sale, assignment or other transfer, such holder provides the Company with an opinion of counsel, selected by the Investor and reasonably acceptable to the Company, the form and substance of which shall be reasonably satisfactory to the Company, to the effect that such sale, assignment or transfer of the Securities may be made without registration under the applicable requirements of the Securities Act and that such Sec urities are no longer restricted securties.

Section 3.9Validity; Enforcement.  This Agreement, the Amended and Restated Registration Rights Agreement, the Amended and Restated Voting Agreement, and the Security Agreement to which the Investor is a party have been duly and validly authorized by all necessary action on the part of the Investor, executed and delivered on behalf of the Investor and shall constitute the legal, valid and binding obligations of the Investor enforceable against the Investor in accordance with their respective terms, excep t as such enforceability may be limited by general principles of equity or to applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar laws relating to, or affecting generally, the enforcement of applicable creditors' rights and remedies.

Section 3.10No Conflicts.  The execution, delivery and performance by the Investor of this Agreement and the other Transaction Documents to which the Investor is a party and the consummation by the Investor of the transactions contemplated hereby and thereby will not (i) result in a violation of the organizational documents of the Investor or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of t ermination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Investor is a party, or (iii) result in a violation of any law, rule, regulation, order, judgment  or decree (including federal and state securities laws) applicable to the Investor, except in the case of clauses (ii) and (iii) above, for such conflicts, defaults, rights or violations which would not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the ability of the Investor to perform its obligations hereunder.

SECTION 4

Covenants

Section 4.1Form D and Blue Sky.  The Company agrees to file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof to the Investor promptly after such filing.  The Company shall, on or before the Closing Date, take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities for sale to the Investor at the Closing pursuant to this Agreement under applicable securities or “B lue Sky” laws of the states of the United States (or to obtain an exemption from such qualification), and shall provide evidence of any such action so taken to the Investor on or prior to the Closing Date.  The Company shall make all filings and reports relating to the offer and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of the United States following the Closing Date.

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Section 4.2Reporting Status.  Until the date on which the Investor shall have sold all the Note Shares and the Warrant Sharesand neither the Note northe Warrant are outstanding (the “Reporting Period”), the Company shall (i) file with the SEC within the time periods prescribed by its rules and regulations, and (ii) furnish to the Investor within 15 days after the date on which the Company would be required to file the same with the SEC pursuant to its rules and regulations, all quarterly and annual financial information (without exhibits) required to be contained in a filing with the SEC on Forms 10-Q and 10-K, including a “Management's Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual consolidated financial statements only, a report thereon by the Company's independent auditors.  The Company shall not be required to file any report or other information with the SEC if the SEC does not permit such filing, although such reports or other information will be required to be furnished to the Investor.  In addition, the Company will furnish to Investor, beneficial owners of the Note or the Warrant and prospective purchasers of the Note, the Warrant, the Note Shares or the Warrant Shares, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) of the Securities Act.

Section 4.3Use of Proceeds.  The Company will use the proceeds from the sale of the Notes solely and exclusively in satisfaction of the Company’s obligations under the Acquisition Transaction.

Section 4.4Financial Information.  The Company agrees to send the following to each Investor during the Reporting Period (i) unless the following are filed with the SEC through EDGAR and are available to the public through the EDGAR system, within one (1) business day after the filing thereof with the SEC, a copy of its Annual Reports on Form 10-K or 10-KSB, any interim reports or any consolidated balance sheets, income statements, shareholders' equity statements and/or cash flow statements for any perio d other than annual, any Current Reports on Form 8-K and any registration statements (other than on Form S-8) or amendments filed pursuant to the Securities Act, (ii) on the same day as the release thereof, copies of all press releases issued by the Company or any of its Subsidiaries via electronic mail, and (iii) copies of any notices and other information made available or given to the shareholders of the Company generally, contemporaneously with the making available or giving thereof to the shareholders.

Section 4.5Listing.  The Company shall promptly secure the listing of all of the Registrable Securities (as defined in the Amended and Restated Registration Rights Agreement) upon each national securities exchange and automated quotation system, if any, upon which the Common Stock is then listed (subject to official notice of issuance) and shall maintain such listing of all Registrable Securities from time to time issuable under the terms of the Transaction Documents, as set forth in the Amended and Rest ated Registration Rights Agreement.  The Company shall use its best efforts to maintain the Common Stocks' authorization for quotation on the Principal Market.  Neither the Company nor any of its Subsidiaries shall take any action which would be reasonably expected to result in the delisting or suspension of the Common Stock on the Principal Market.  The Company shall pay all fees and expenses in connection with satisfying its obligations under this Section 4.5.

Section 4.6Fees.  Within one month from the Closing, the Company shall pay the reasonable legal fees and expenses incurred by the Company and the Investor in connection with this Agreement and the Transaction Documents by wire directly to Hogan Lovells US LLP and shall pay up to $20,000 of legal fees and expenses incurred by Investor in connection with their fund formation directly to Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP.

Section 4.7Pledge of Securities.  The Company acknowledges and agrees that the Securities may be pledged by the Investor in connection with a bona fide margin agreement or other loan or financing arrangement that is secured by the Securities.  The pledge of Securities shall not be deemed to be a transfer, sale or assignment of the Securities hereunder, and the Investor shall not be required to

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provide the Company with any notice thereof or otherwise make any delivery to the Company pursuant to this Agreement or any other Transaction Document, including, without limitation, Section 3.7 hereof; provided that the Investor and its pledgee shall be required to comply with the provisions of Section 3.7 hereof in order to effect a sale, transfer or assignment of Securities to such pledgee.  The Company hereby agrees to execute and deliver such documentation as a pledgee of the Securities may reasonably request in connection with a pledge of the Securities to such pledgee by the Investor.

Section 4.8Disclosure of Transaction.  On or before 8:30 a.m., Eastern Standard Time, on the fourth business day following the date of this Agreement, the Company shall file a Current Report on Form 8-K describing the terms of the transactions contemplated by the Transaction Documents in the form required by the 1934 Act and attaching the material Transaction Documents (including, without limitation, this Agreement (and all schedules to this Agreement), the form of the Note, the form of the Warrant, the Amended and Restated Registration Rights Agreement, the Amended and Restated Voting Agreement and Security Agreement) (including all attachments, the “8-K Filing”).

Section 4.9Maintenance of Existence.  So long as the Investor beneficially owns any Securities, the Company will do or cause to be done all things necessary to obtain, preserve, renew and keep in full force and effect (a) its legal existence and (b) the rights, licenses, permits, privileges, franchises and Intellectual Property Rights material to the conduct of its business.

Section 4.10Payment of Obligations.  So long as any Obligations are outstanding, the Company will, and will cause each of its Subsidiaries to, pay its material obligations, including tax liabilities, before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Company or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP, (c)  such contest effectively suspends collection of the contested obligation and the enforcement of any Lien securing such obligation and (d) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect.

Section 4.11Maintenance of Properties.  So long as any Obligations are outstanding, the Company will, and will cause each of its Subsidiaries to, keep and maintain all of its respective property in good working order and condition, ordinary wear and tear excepted, except to the extent the failure to so keep and maintain such property could not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

Section 4.12Insurance.  So long as any Obligations are outstanding, the Company will, and will cause each of its Subsidiaries to, maintain, with financially sound and reputable insurance companies, (a) insurance in such amounts (after giving effect to any self-insurance reasonable and customary for similarly situated Persons in engaged in the same or similar businesses as the Company and its Subsidiaries) and against such risks as is (i) customarily maintained by companies of established repute engaged in the same or similar businesses operating in the same or similar locations and (ii) considered adequate by the Company and (b) all other insurance as may be required by law.  The Company shall present its insurance policies relating to directors and officers, errors and omissions and product liability to the Investor. If any of the policies do not meet with Investor’s approval, the Company shall modify coverage or obtain a new policy that meets Investor’s requirements.

Section 4.13Investments.  So long as any Obligations are outstanding, neither Company nor any of its Subsidiaries shall make any Investment except for Permitted Investments.

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Section 4.14Restricted Payments.  So long as any Obligations are outstanding, the Company will not, and will not permit any of its Subsidiaries to, make any Restricted Payment.

Section 4.15Additional Issuances of Securities.  So long as the Investor beneficially owns any Securities, the Company will not issue any other securities that would cause a breach or default under the Note.  Additionally, so long as the Investor beneficially owns any Securities, the Company shall not, without the prior written consent of the Investor, issue or obligate itself to issue any securities with rights, preferences, privileges, powers, or restrictions provided for the benefit of the p urchaser of such securities, senior to or more favorable than the rights, preferences, privileges, powers, and restrictions provided for the benefit of the Investor, of the Note and the Warrant issued to Investor pursuant to the Transaction Documents.

In the event the Company issues to another party any securities following the Closing with terms more favorable to such party than the terms received by the Investor (including but not limited to liquidation preference, security, anti-dilution, voting, warrants or other convertible securities or any other rights or terms), the Investor shall be entitled to require the Company to take such other action as would be necessary to give the Holder the benefit of terms at least as favorable as those received by the other party.

Section 4.16Incurrence of Indebtedness.  So long as any Obligations are outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, incur or guarantee, assume or suffer to exist any Indebtedness, other than Permitted Indebtedness.

Section 4.17Existence of Liens.  So long as any Obligations are outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, allow or suffer to exist any Lien other than Permitted Liens.

Section 4.18Payments on Other Indebtedness.  So long as any Obligations are outstanding, the Company shall not, and the Company shall not permit any of its Subsidiaries to, directly or indirectly, redeem, defease, repurchase, repay or make any payments in respect of, by the payment of cash or cash equivalents (in whole or in part, whether by way of open market purchases, tender offers, private transactions or otherwise), all or any portion of any Permitted Indebtedness (excluding the Note), whether by wa y of payment in respect of principal of (or premium, if any) or interest on, such Indebtedness if at the time such payment is due or is otherwise made or, after giving effect to such payment, an event constituting, or that with the passage of time and without being cured would constitute, an Event of Default (as defined in the Note) has occurred and is continuing.

Section 4.19Reservation of Shares.  The Company shall take all action necessary to at all times have authorized, and reserved for the purpose of issuance, after the Closing Date, the number of shares of Common Stock issuable upon conversion of the Note and issuable upon exercise of the Warrant.

Section 4.20Conduct of Business.  So long as the Investor beneficially owns any Securities, the business of the Company and its Subsidiaries shall not be conducted in violation of any law, ordinance or regulation of any governmental entity, except where such violations would not result, either individually or in the aggregate, in a Material Adverse Effect.

Section 4.21Board Matters

(a)The Board of the Company shall not exceed seven (7) members without prior written consent of the Investor and Cathaya.

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(b)The Board shall appoint directors designated as follows, and the Company shall take all necessary action, including, but not limited to nominating such individuals for election by the stockholders, recommending such individuals to the stockholders and convening a meeting of stockholders for the election of such individuals:

(1)           For as long as the Investor or Cathaya (including its affiliates and subsidiaries) holds at least 5% of the outstanding Common Stock of the Company (together or individually), the Company shall take all action necessary to ensure that four designees of Cathaya are elected to the Board, including the Chairman of the Board.  The Investor’s first designee shall initially be Priscilla Lu, the Chairman of the Board. The positions reserved for Cathaya’s second, third and fourth designees shall initially be vacant, but Cathaya is entitled at any time to notify the Company of their intended designees and the Company will take all efforts to ensure are elected, pursuant to this clause.

(2)           Immediately following the closing of the Acquisition Transaction, the Board of the Company shall appoint Wang Huai Yi (the Chairman of Jonway Group) to serve as a member of the Board.

(c)The Board of the Company shall nominate (i) Alex Wang and, (ii) if Cathaya should notify the Company of any intended designees three days prior to the Company’s distribution of its proxy materials, such designees (the “Board Appointees”) for election to the Board of the Company at the next annual meeting of shareholders of the Company and shall distribute proxy material to the shareholders of the Company in which such nominations are included.

Section 4.22Other Corporate Matters

(a)The Company will not issue any shares of capital stock or any options, warrants or other securities exercisable for or convertible into capital stock of the Company without prior approval of the Board.

(b)The Company shall hold annual meetings of its shareholders on an annual basis.  The Company shall hold the next annual meeting of its shareholders as soon as possible following the Closing, but in any event, no later than March 15, 2011.  In addition to the election of directors, the Company shall seek approval for a reverse split of the Company’s common stock within a range that shall be determined by the Board and approved by the Investor, with the goal of increasing the trading price of the Company’s Common Stock to $4.00 per share or higher.

Section 4.23Specific Covenants

(a)The Company will use all commercially reasonable efforts to provide all documentation, signatures and assistance including, but not limited to signing off on the balance sheet with audited assets of the Company and providing the audited financial statements of the Company for the last two years, that may be required by PricewaterhouseCoopers or an audit firm of equal caliber and standing acceptable to the Investor in the completion of an audit report and “good standing” certification in relation to the Acquisition Transaction.

(b)As soon as practicable following the Closing, the Company shall offer to holders of certain warrants and/or options the opportunity to exchange or amend outstanding warrants and options for new warrants and/or options on terms agreed upon by the Company and the Investor, with the objective of reducing the number of shares exercisable upon the exercise of warrants and/or options.

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(c)The Company shall hire a Chief Financial Officer located in China, whose responsibilities will include management of the Company’s overall financial reporting obligations.

(d)The Company shall hire a Chief Operations Officer, whose responsibilities will include implementing financial controls, corporate governance and adherence to reporting requirements for the Company, including all subsidiaries and related entities, worldwide.

(e)The Company shall appoint Hogan  Lovells US LLP as the Company’s outside corporate counsel (“Counsel”), and shall consult with Counsel in drafting securities filings, shall incorporate Counsel’s comments in securities filings, and shall not submit securities filings without obtaining Counsel’s approval to the final form of filing.

(f)The Board of the Company shall meet no less frequently than quarterly.  The Company shall hold monthly business updates for the Chairman of the Company and the Chief Executive Officer of Zhejiang Jonway Automobile Co., Ltd. to review the financial progress and business developments of both the Company and Zhejiang Jonway Automobile Co., Ltd.

(g)The Company shall establish policies and procedures to maintain and protect the company’s assets and intellectual property, which policies and procedures will include a mechanism to ensure compliance.

(h)The Company shall adopt company-wide systems to track and administer product inventory control, procurement, sales, and manage all of the Company’s resources.

(i)The Company shall arrange for a quarterly call to report to stockholders the results and earnings of the Company, commencing on the first quarter of fiscal year 2011.

(j)The Company shall engage an accounting firm of the type customarily engaged by companies of established repute engaged in the same or similar businesses operating in the same or similar locations to audit the Company’s financial statements and shall obtain stockholder approval of such appointment.

(k)Upon completion of the Acquisition Transaction, the Company in cooperation with Zhejiang Jonway Automobile Co., Ltd. shall develop a plan reasonably acceptable to the Investor to develop “best in class” internal financial controls and procedures of the Company and Zhejiang Jonway Automobile Co., Ltd., including but not limited to bank account transaction controls and cash transfer authorization approval process and procedure.  This plan shall be approved by the Board of the Company as well as the chief financial officers and financial controllers of the Company and Zhejiang Jonway Automobile Co., Ltd.  no later than March 1, 2011.

(l)Upon completion of the Acquisition Transaction, the Company shall develop a financial plan reasonably acceptable to the Investor to achieve profitability by the fourth quarter of 2011.  This plan shall be prepared by the chief executive officer, the chief operations officer and the chief financial officer of the Company and Zhejiang Jonway Automobile Co., Ltd. and approved by the chairman of the Board of the Company no later than February 25, 2011.  The financial results of the Company for fiscal year 2011 shall achieve at least 80% of the financial plan.

In addition to the remedies provided for under the Transaction Agreements, if the Company fails to show significant progress towards completing the above covenants by April 30, 2011, it grants Investor the right, and covenants to perform all actions, obtain all approvals and execute all documents that may be required in order for Investor to replace or hire key executives in management to ensure that the Company complies with the above covenants.

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Section 4.24Financial Statements.

The Company shall deliver to the Investor:

(a)as soon as practicable, but in any event within 90 days after the end of each fiscal year of the Company, an income statement for such fiscal year, a balance sheet of the Company and statement of stockholder’s equity as of the end of such year, and a statement of cash flows for such year, such year-end financial reports to be in reasonable detail, prepared in accordance with generally accepted accounting principles (“GAAP”), and audited and certified by an independent public accounting firm of nationally recognized standing selected by the Company;

(b)as soon as practicable, but in any event within 30 days after the end of each of the first three quarters of each fiscal year of the Company, an unaudited profit or loss statement, a statement of cash flows for such fiscal quarter and an unaudited balance sheet as of the end of such fiscal quarter;

(c)within 10 days of the end of each month, an unaudited income statement and a statement of cash flows and balance sheet for and as of the end of such month, in reasonable detail, including a detailed breakdown of operational expenses;

(d)as soon as practicable, but in any event 30 days prior to the end of each fiscal year, a budget and business plan for the next fiscal year, prepared on a monthly basis, and, as soon as prepared, any other budgets or revised budgets prepared by the Company;

(e)any other financial information reasonably requested by the Investor; and

(f)with respect to the financial statements called for in subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief Financial Officer or President of the Company and certifying that such financials were prepared in accordance with GAAP consistently applied with prior practice for earlier periods (with the exception of footnotes that may be required by GAAP) and fairly present the financial condition of the Company and its results of operation for the period specified, subject to year-end audit adjustment, provided that the foregoing shall not restrict the right of the Company to change its accounting principles consistent with GAAP, if the Board determines that it is in the best interest of the Company to do so.

Section 4.25Tax Payments.  All payments of principal, interest and other amounts by the Company to Investor in respect of the Securities shall be made without deduction or withholding for or on account of any taxes, fees or other amounts.  In the event that any taxes, fees or other amounts are required to be deducted or withheld from any payment to Investor in respect of the Securities:  (i) the Company shall deduct or withhold the appropriate amount in respect of taxes, fees or other amounts; (ii) the Company shall pay the full amount so deducted or withheld to the appropriate tax or governmental authority not later than the date when due (and shall provide Investor with an official receipt evidencing such payment); (iii) the Company shall pay to Investor, together with the applicable payment then due, such additional amounts as may be necessary so that Investor receives, on an after-tax basis, after the making of all such deductions and withholdings, the full amount payable under the Securities as if no such deduction or withholding had been made; and (iv) the Company shall indemnify and reimburse Investor for any such taxes, fees or other amounts paid directly by Investor.  Without limiting the foregoing, the Company shall timely pay all present or future stamp or documentary taxes, if any, arising from any payment made to Investor in respect of the Securities.

Section 4.26Register of the Note.  The Company shall maintain a register (the “Register”) of the Note in which shall be noted payments of principal and interest that are to become due thereon and payments of principal and interest that are paid thereon; provided that no failure on the part of the Company to maintain such register or to record any information therein, nor any error in the information so recorded, shall impair or otherwise affect the rights of Investor in respect of the Note.

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SECTION 5

Conditions to Closing of the Investor

The Investor's obligations at the Closing are subject to the fulfillment, on or prior to the Closing Date, of all of the following conditions, any of which may be waived in whole or in part by the Investor:

Section 5.1Representations and Warranties.  The representations and warranties made by the Company in Section 2 hereof shall have been true and correct as of the Closing Date, except to the extent such representations and warranties address matters as of a particular date or period, in which case such representations and warranties shall be true and correct as of such date or period and with the same force and effect as if they had been made as of that date.

Section 5.2Consents, Permits and Waivers.  Except for any notices required or permitted to be filed after the Closing Date with certain federal and state securities commissions, the Company shall have obtained all consents, permits, waivers, and governmental or regulatory approvals required, necessary or appropriate for consummation of the transactions contemplated by this Agreement.

Section 5.3Shareholder Approval.  The Company shall have obtained the consent of the Company’s shareholders required, necessary or appropriate for consummation of the transactions contemplated by this Agreement.

Section 5.4Legal Requirements.  At the Closing, the sale and issuance by the Company, and the purchase by the Investor of the Note and Warrant shall be legally permitted by all laws and regulations to which the Investor or the Company are subject.

Section 5.5Proceedings and Documents.  All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents and instruments incident to such transactions shall be reasonably satisfactory in substance and form to the Investor.

Section 5.6Transaction Documents.  The Company shall have duly executed and delivered to the Investor the following documents:

(a)this Agreement;

(b)a document representing the Note issued hereunder, in the form attached hereto asExhibit A;

(c)a document representing the Warrant issued hereunder, in the form attached hereto asExhibit B; and

(d)that certain Amended and Restated Registration Rights Agreement, in the form attached hereto as Exhibit C;

(e)that certain Amended and Restated Voting Agreement, in the form attached hereto as Exhibit D;

(f)that certain Security Agreement, in the form attached hereto as Exhibit E.

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Section 5.7Governmental Approvals.  All Governmental Approvals in connection with the Acquisition Transaction shall have been received.

Section 5.8Corporate Documents.  The Company shall have delivered to the Investor each of the following:

(a)a certificate of the Secretary of the Company, dated as of the Closing Date, certifying (i) that the Articles of Incorporation, certified as of a recent date by the Secretary of State of the State of California and attached thereto, is in full force and effect and has not been amended, supplemented, revoked or repealed since the date of such certification; (ii) that attached thereto is a true and correct copy of the Bylaws of the Company as in effect on the Closing Date; and (iii) that attached thereto are true and correct copies of resolutions duly adopted by the Board and continuing in effect, which authorize the execution, delivery and performance by the Company of the Transacti on Documents and the consummation of the transactions contemplated hereby and thereby; and

(b)a Certificate of Good Standing or comparable certificate as to the Company, certified as of a recent date prior to the Closing Date by the Secretary of State of California.

Section 5.9Board Matters

Prior to the Closing, the Board of the Company shall have adopted resolutions approving the following actions:

(a)The Board of the Company shall have appointed Georges Penalver (or another designee of Investor) to serve as a member of the Board of the Company.

(b)Two members of the Board of the Company, excluding Priscilla Lu, Steven Schneider and Alex Wang, prior to the Closing shall have resigned from the Board.

(c)The Registration Rights Agreement, dated August 6, 2009, shall have been amended and restated in substantially the form of Amended and Restated Registration Rights Agreement attached hereto as Exhibit C.

(d)The Voting Agreement, dated August 6, 2009, shall have been amended and restated in substantially the form of Amended and Restated Voting Agreement attached hereto as Exhibit D.

SECTION 6

Conditions to Closing of the Company

The Company's obligations at the Closing are subject to the fulfillment, on or prior to the Closing Date, of the following conditions, any of which may be waived in whole or in part by the Company:

Section 6.1Representations and Warranties.  The representations and warranties made by the Investor in Section 3 hereof shall be true and correct when made, and shall be true and correct as of the Closing Date.

Section 6.2Consents, Permits and Waivers.  Except for any notices required or permitted to be filed after the Closing Date with certain federal and state securities commissions, the Company shall have obtained all consents, permits, waivers, and governmental approvals required, necessary or appropriate for consummation of the transactions contemplated by this Agreement.

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Section 6.3Legal Requirements.  At the Closing, the sale and issuance by the Company, and the purchase by the Investor, of the Note and Warrant shall be legally permitted by all laws and regulations to which the Investor or the Company are subject.

Section 6.4Purchase Price.  The Investor shall have delivered to the Company the Purchase Price (less any amounts deducted pursuant to Section 4.6 of this Agreement).

Section 6.5Transaction Documents.  The Investor shall have duly executed and delivered to the Company the following documents:

this Agreement;

(a)that certain Amended and Restated Registration Rights Agreement, in the form attached hereto as Exhibit C;

(b)that certain Amended and Restated Voting Agreement, in the form attached hereto as Exhibit D; and

(c)that certain Security Agreement, in the form attached hereto as Exhibit E.

SECTION 7

Definitions

“Capital Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

“Charter Documents” means, with respect to any Person, its charter, certificate or articles of incorporation, bylaws, articles of organization, limited liability agreement, operating agreement, members agreement, shareholders agreement, partnership agreement, certificate of partnership, certificate of formation, voting trust agreement, or similar agreement or instrument governing the formation or operation of such Person.

“Collateral” has the meaning set forth in the Security Agreement.

“Equity Securities” of any means (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Person (regardless of how designated and whether or not voting or non-voting) and (b) all warrants, options and other rights to acquire any of the foregoing.

“GAAP” means generally accepted accounting principles in the United States of America.

“Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b)  to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of

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credit or letter of guaranty issued to support such Indebtedness or obligation, provided that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business or customary and reasonable indemnity obligations (other than any such obligations with respect to Indebtedness).  The amount of any Guarantee shall be deemed to be the lower of (i) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made and (ii) the maximum amount for which such guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Guarantee, or, if such Guarantee is not an unconditional guarantee of the entire amount of the primary obligation and such maximum amount is not stated or determinable, the amount of such guaranteeing Person’s maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith.

“Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding accounts payable and intercompany charges of expenses (including expenses related to research and development and information technology) and other accrued obligations, in e ach case incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances.  The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor.  The amount of Indebtedness of any Person for purposes of clause (f) above shall (unless such Indebtedness has been assumed by such Person) be deemed to be equal to the lesser of (i) the aggregate unpaid amount of such Indebtedness and (ii) the fair market value of the property encumbered thereby as determined by such Person in good faith.

“Insolvent” means (i) the present fair saleable value of the Company's assets is less than the amount required to pay the Company's total Indebtedness, (ii) the Company is unable to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, (iii) the Company intends to incur or believes that it will incur debts that would be beyond its ability to pay as such debts mature or (iv) the Company has unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted.

“Investment” of any Person means any loan or advance of funds by such Person to any other Person (other than advances to employees of such Person for moving and travel expense, drawing accounts and similar expenditures in the ordinary course of business), any purchase or other acquisition of any Equity Securities or Indebtedness of any other Person, any capital contribution by such Person to or any other investment by such Person in any other Person (including, without limitation, any Guarantee); provided, however, that Investments shall not include accounts receivable or other indebtedness owed by customer s of such Person which are current assets and arose from sales or non-exclusive licensing in the ordinary course of such Person’s business.

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“Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

“Material Adverse Effect” means any material adverse effect on the business, properties, assets, operations, results of operations or condition (financial or otherwise) of the Company and its Subsidiaries, taken as a whole, or on the transactions contemplated hereby and by the other Transaction Documents or by the agreements and instruments to be entered into in connection herewith or therewith, or on the authority or ability of the Company to perform its obligations under the Transaction Documents.

“Notice of Borrowing” has the meaning set forth in the in the Note.

“Obligations” means all loans, advances, debts, liabilities and obligations, howsoever arising, owed by the Company to the Investor of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), now existing or hereafter arising under the Note or the Security Agreement, including, all interest, fees, charges, expenses, attorneys' fees and costs and accountants' fees and costs chargeable to and payable by the Company thereunder, in each case, whether direct or indirect, absolute or contingent, due or to become due, and whether or not arising after the commencement of a proceeding under Title 11 of the United States Code (11 U.S.C. Section 101 et seq.), as amended from tim e to time (including post-petition interest) and whether or not allowed or allowable as a claim in any such proceeding.

“Permitted Indebtedness” means (a) Indebtedness of the Company evidenced by the Note, (b) Indebtedness arising from the endorsement of instruments in the ordinary course of business, (c) Indebtedness existing on the date hereof and set forth on Schedule 2.19 and any extension, renewal or refinancing thereof; provided that any such extension, renewal or refinancing shall not be in a principal amount that exceeds the principal amount of the Indebtedness being extended, renewed or refinanced, and (f) other Indebtedness in an aggregate principal amount at any time outstanding not to exceed One Million Dollars ( $1,000,000).

“Permitted Investments” means: (a) deposits accounts of the Company with commercial banks organized under the laws of the United States or a state thereof to the extent such deposits are fully insured by the Federal Deposit Insurance Corporation; (b) Investments in marketable obligations issued or fully guaranteed by the United States and maturing not more than one (1) year from the date of issuance; (c) Investments in open market commercial paper rated at least “A-l “ or “P-1” or higher by a national credit rating agency and maturing not more than 270 days from the creation thereof; (d) Investments pursuant to or arising under currency agreements or interest rate agreements entere d into in connection with bona fide hedging arrangements; (e) deposit accounts of Subsidiaries maintained in the ordinary course of business; and (f) other Investments aggregating not in excess of One Million Dollars ($1,000,000) at any time.

“Permitted Liens” means (a) Liens for taxes not yet delinquent or Liens for taxes being contested in good faith and by appropriate proceedings for which adequate reserves have been established; (b) Liens in respect of property or assets imposed by law which were incurred in the ordinary course of business, such as carriers’, warehousemen’s, materialmen’s and mechanics’ Liens and other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings; (c) Liens incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, and mechanic’s Liens, carrier’s Liens and

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other Liens to secure the performance of tenders, statutory obligations, contract bids, government contracts, performance and return of money bonds and other similar obligations, incurred in the ordinary course of business, whether pursuant to statutory requirements, common law or consensual arrangements, and (d) Liens in favor of Investor.

 “Person” means an individual, a partnership, a corporation, a business trust, a joint stock company, a limited liability company, an unincorporated association or other entity and any domestic or foreign national, state or local government, any political subdivision thereof, and any department, agency, authority or bureau of any of the foregoing.

“Restricted Payment” means (a) any dividend or other distribution on account of any shares of any class of stock of Company now or hereafter outstanding, except a dividend payable solely in shares of that class of stock to the holders of that class; (b) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value of any shares of any class of stock of Company now or hereafter outstanding; or (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of stock of Company now or hereafter outstanding.

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP, as well as any other corporation, limited liability company, partnership, association or other entity (a) of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general part nership interests are, as of such date, owned, controlled or held, or (b) that is, as of such date, otherwise controlled, by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent.

“Transaction Documents” means this Agreement, the Amended and Restated Registration Rights Agreement, the Amended and Restated Voting Agreement, the Note, the Security Agreement, the Warrant and each other agreement entered into by the parties hereto in connection with the transactions contemplated hereby.

SECTION 8

Miscellaneous

Section 8.1Governing Law; Jurisdiction.  This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of California without giving effect to the principles of conflicts of laws.  Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in the State of California.  Each party hereto agrees to t he entry of an order to enforce any resolution, settlement, order or award made pursuant to this Section 8.1 by the state and federal courts located in the State of California and in connection therewith hereby waives, and agrees not to assert by way of motion, as a defense, or otherwise, any claim that such resolution, settlement, order or award is inconsistent with or violative of the laws or public policy of the laws of the State of California or any other jurisdiction.

Section 8.2Entire Agreement; Amendment.  This Agreement and the other Transaction Documents constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof.  Any previous agreements among the parties relative to the specific subject matter hereof are superseded by this Agreement.  Neither this Agreement nor any provision hereof

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may be amended, changed, waived, discharged or terminated other than by a written instrument signed by the party against who enforcement of any such amendment, change, waiver, discharge or termination is sought.

Section 8.3Notices, etc.  All notices and other communications required or permitted hereunder shall be effective upon receipt and shall be in writing and may be delivered in person, by telecopy, electronic mail, express delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, addressed, to the party to be notified, at the respective addresses set forth below, or at such other address which may hereinafter be designated in writing:

If to the Investor, to:

China Electric Vehicle Corporation

In care of Priscilla Lu

Cathaya Capital, L.P.

718 Best Court

San Carlos, CA 94070

If to the Company, to:

ZAP

Attention: Chief Financial Officer

501 4th Street

Santa Rosa, CA 95401

Attention: Chief Executive Officer

Phone: (707) 525-8658

Fax No.: (707) 525-8692

with a copy to:

Hogan Lovells US LLP

525 University Avenue, 4th Floor

Palo Alto, CA 94301

Attention: Jon Layman, Esq.

Fax No.:  (650) 463-4199

Section 8.4Delays or Omissions.  It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party upon any breach or default of any other party under this Agreement shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein, or of any similar breach or default thereafter occurring; nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default t heretofore or thereafter occurring.  It is further agreed that any waiver, permit, consent or approval of any kind or character of any breach or default under this Agreement, or any waiver of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in writing, and that all remedies, either under this Agreement, by law or otherwise, shall be cumulative and not alternative.

Section 8.5Public Disclosure.  The parties shall consult with each other, and to the extent practicable, agree, before issuing any press release or otherwise making any public statement with respect to the transactions contemplated by the Transaction Documents.

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Section 8.6Titles; Subtitles.  The titles of the Sections of this Agreement are for convenience of reference only and in no way define, limit, extend, or describe the scope of this Agreement or the intent of any of its provisions.

Section 8.7Successors and Assigns.  Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto.  The Investor shall have the right to assign any and all of Investor’s rights, duties and obligations hereunder at any time without the prior written consent of the Company.

Section 8.8No Third Party Beneficiaries.  This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

Section 8.9Survival.  The representations and warranties of the Company and the Investor contained herein shall not survive the Closing except as specifically stated in such representations and warranties.

Section 8.10Counterparts.  This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument.

Section 8.11Severability.  If any provision of this Agreement shall be judicially determined to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby.

Section 8.12SPECIFIC PERFORMANCE.  THE PARTIES HERETO AGREE THAT IRREPARABLE DAMAGE WOULD OCCUR IN THE EVENT THAT ANY OF THE PROVISIONS OF THIS AGREEMENT WERE NOT PERFORMED IN ACCORDANCE WITH ITS SPECIFIC INTENT OR WERE OTHERWISE BREACHED.  IT IS ACCORDINGLY AGREED THAT THE PARTIES SHALL BE ENTITLED TO AN INJUNCTION OR INJUNCTIONS, WITHOUT BOND, TO PREVENT OR CURE BREACHES OF THE PROVISIONS OF THIS AGREEMENT AND TO ENFORCE SPECIFICALLY THE TERMS AND PROVISIONS HEREOF, THIS BEING IN ADDITION TO ANY OTHER REMEDY TO WHICH THEY MAY BE ENTITLED BY LAW OR EQUITY, AND ANY PARTY SUED FOR BREACH OF THIS AGREEMENT EXPRESSLY WAIVES ANY DEFENSE THAT A REMEDY IN DAMAGES WOULD BE ADEQUATE.

Section 8.13Consents.  Any permission, consent, or approval of any kind or character under this Agreement shall be in writing and shall be effective only to the extent specifically set forth in such writing.

Section 8.14Construction of Agreement.  No provision of this Agreement shall be construed against either party as the drafter thereof.

Section 8.15Variations of Pronouns.  All pronouns and all variations thereof shall be deemed to refer to the masculine, feminine, or neuter, singular or plural, as the context in which they are used may require.

[Remainder of page intentionally left blank.  Signature pages to follow]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written.

ZAP

a California corporation

By:  /s/  Steven Schneider

Name: Steven Schneider

Title:   Chief Executive Officer

Signature Page to Senior Secured Convertible Note and Warrant Purchase Agreement

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the date first above written.

CHINA ELECTRIC VEHICLE CORPORATION,

a British Virgin Island company

By: CATHAYA CAPITAL, L.P.

Its Sole Stockholder

By: Cathaya Capital, G.P.

Its General Partner

By: Cathaya Capital Co., Ltd.

Its General Partner

By: /s/ Priscilla Lu                                      

Name: Priscilla Lu                                       

Title: Director                                              

Signature Page to Senior Secured Convertible Note and Warrant Purchase Agreement

SCHEDULE I

SCHEDULE OF INVESTORS

Name	Purchase Price
China Electric Vehicle Corporation, a British Virgin Island company In care of Priscilla Lu Cathaya Capital, L.P. 718 Best Court San Carlos, CA 94070	$19,000,000

Signature Page to Senior Secured Convertible Note and Warrant Purchase Agreement

EX-10.2

EXHIBIT 10.2

THIS NOTE AND THE COMMON STOCK ISSUABLE UPON ITS CONVERSION HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS.  THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.  NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED TO AN “ACCREDITED INVESTOR” (AS SUCH TERM IS DEFINED IN THE RULES AND REGULATIONS PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED) IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

ZAP

SENIOR SECURED CONVERTIBLE PROMISSORY NOTE DUE 2012

No. 1  $19,000,000.00 

ZAP, a California corporation (the “Company”), for value received, hereby promises to pay to China Electric Vehicle Corporation, a British Virgin Island company, or its registered assigns (the “Holder”), the principal sum of NINETEEN MILLION DOLLARS ($19,000,000.00), or if less, the aggregate outstanding principal amount of the Note, on February 12, 2012 (or if earlier the date the Note becomes automatically due and payable upon the occurrence of an Event of Default), (the “Maturity Date”) and to pay interest thereon, from the date hereof, at the Interest Rate until the principal hereof is paid and in the manner set forth below.

Upon the Holder’s election, the Company shall repay the outstanding principal amount of the Note, together with unwaived accrued and unpaid interest thereon, on the Maturity Date.  Payment of the principal of this Note shall be made upon the surrender of this Note to the Company, at its chief executive office (or such other office within the United States as shall be designated by the Company to the holder hereof) (the “Designated Office”), in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts.  Payment of interest in cashand all other amounts payable in cash with respect to this Note shall be made by wire transfer to the Holder, provided that if the Holder shall not have furnished wire instructions in writing to the Company on or prior to the third Business Day immediately prior to the date on which the Company makes such payment, such payment may be made by U.S. dollar check mailed to the address of the Person entitled thereto as such address shall appear in the Company security register.  Capitalized terms used and not otherwise defined herein, shall have the respective meanings given to those terms in Section 6 hereof. The Company shall not be entitled to prepay this Note without Holder’s consent.

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1.Repayment in Jonway Stock.  Upon Holder’s election, before 5:00 p.m., California time, three Business Days prior to the Maturity Date, the Company shall repay the Note in shares of the capital stock of Zhejiang Jonway Automobile Co., Ltd. ( “Jonway”) owned by the Company pursuant to the Acquisition Transaction (the “Jonway Stock”).  In exchange for the outstanding principal of this Note (or any portion of the principal outstanding amount hereof that is an integral multiple of $1,0 00) (the “Repayment Amount”), for each multiple of $1,000, Holder shall receive 0.003743% of the Jonway Stock, by surrender of this Note, duly endorsed or assigned to the Company or in blank to the Company at the Designated Office, accompanied by written notice to the Company that the Holder hereof elects to receive the Repayment Amount in Jonway Stock.  In the event that the Note is repaid pursuant to this Section 1(b), all accrued and unpaid Interest or discount, if any, on this Note is waived.

2.Conversion.

(a)

(i)The holder of this Note is entitled before 5:00 p.m., California time, three Business Days prior to the Maturity Date, to convert the outstanding principal of this Note (or any portion of the principal outstanding amount hereof that is an integral multiple of $1,000) (the “Conversion Amount”), into fully paid and nonassessable Common Stock (calculated as to each conversion to the nearest 1/100 of a share) of the Company at the rate (or at the then current adjusted rate if an adjustment has been made as provided below) of 4,435 shares of Common Stock for each $1,000 of the Conversion Amount (such number of shares of Common Stock issuable for each $1,000 principal amount of the Note, which shall initially be 4,435, the “Conversion Rate”).  The term “Conversion Price” on any day shall equal $1,000 divided by the Conversion Rate in effect on such day.

(ii)In the event that the conversion of this Note into shares of capital stock would require the Company and the Holder of this Note to file notification and report forms with the Federal Trade Commission and Antitrust Division of the Department of Justice (the “FTC”) pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), then the Holder of this Note and the Company agree (i) to use their best efforts to complete all applicable filings and provide all necessary information as required pursuant to the HSR Act, and (ii) such conversion of t his Note into shares of capital stock shall not occur until such time as the required filings are made pursuant to the HSR Act and the required waiting periods have passed or early termination notifications have been granted by the FTC.

(iii)The Company shall, if the Holder so elects, deliver the capital stock issuable upon conversion of this Note to any third party designated by the Holder, subject to compliance with Sections 2(f) and 7(c) – (g) hereof.

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(iv)In the event that the Note is converted pursuant to this Section 2(a), all accrued and unpaid Interest or discount, if any, on this Note is waived.

(b)The Conversion Rate will be subject to adjustment from time to time as follows:

(1)If the Company shall pay or make a dividend or other distribution to all or substantially all holders of its outstanding shares of Common Stock of the Company payable in Common Stock, the Conversion Rate in effect at the opening of business on the day following the Determination Date for such dividend or other distribution shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date and the denominator shall be the sum of such number of shares of Common Stock and the total number of shares of Common Stock constituting such dividend or other distribution, such increase to become effective immed iately after the opening of business on the day following such Determination Date.

(2)If the Company shall issue rights, options or warrants to all or substantially all holders of its Common Stock entitling them to subscribe for or purchase Common Stock (or securities convertible into shares of Common Stock) at a price per share (or having a conversion price per share) less than the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on the Determination Date for such distribution, the Conversion Rate in effect at the opening of business on the day following such Determination Date shall be increased by dividing such Conversion Rate by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business o n such Determination Date plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered (or into which the convertible securities so offered are convertible) for subscription or purchase would purchase at such current market price and the denominator shall be the number of shares of Common Stock outstanding at the close of business on such Determination Date plus the number of shares of Common Stock so offered (or into which the convertible securities so offered are convertible) for subscription or purchase, such increase to become effective immediately after the opening of business on the day following such Determination Date.  The Company will not issue any rights, options or warrants in respect of Common Stock held in the treasury of the Company.  Upon the expiration of any right, option or warrant to purchase Common Stock the issuance of which resulted in an adjustment to the Conversion Rate pursuant to thi s paragraph (2) of Section 2(b), if any such right, option or warrant shall expire and shall not have been exercised, the Conversion Rate shall immediately upon such expiration be recomputed to the Conversion Rate which would have been in effect had the adjustment of the Conversion Rate made upon the issuance of such right, option or warrant been made on the basis of offering for subscription or purchase only that number of shares of Common Stock actually purchased upon the exercise of such right, option and warrant actually exercised.

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(3)If the outstanding Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately increased, and, conversely, in case outstanding Common Stock shall each be combined into a smaller number of shares of Common Stock, the Conversion Rate in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately reduced.  Any such increase or reduction, as the case may be, shall become effective immediately after the opening of business on the day following the day upon which such subdivis ion or combination becomes effective.

(4)If the Company shall, by dividend or otherwise, distribute to all or substantially all holders of its Common Stock evidences of its indebtedness, shares of any class of capital stock, or other property (including securities, but excluding (i) any rights, options or warrants referred to in paragraph (2) of this Section 2(b), (ii) any dividend or distribution paid exclusively in cash, (iii) any dividend or distribution referred to in paragraph (1) of this Section 2(b) and (iv) any merger or consolidation to which Section 2(h) applies (the “Distributed Property”)), the Conversion Rate shall be adjusted so that the same shall equal the rate determined by di viding the Conversion Rate in effect immediately prior to the close of business on the Determination Date for such distribution by a fraction of which the numerator shall be the current market price per share (determined as provided in paragraph (8) of this Section 2(b)) of the Common Stock on such Determination Date less the then fair market value (as determined in good faith by the Board of Directors of the Company in accordance with the provisions of this paragraph (4) of Section 2(b)) on the Determination Date of the portion of the assets, shares or evidences of indebtedness so distributed applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock outstanding at the close of business on such Determination Date) and the denominator shall be such current market price per share of the Common Stock, such adjustment to become effective immediately prior to the opening of business on the day following such Determination Date; provided, however, that if the Distributed Property consists of shares of capital stock of a Subsidiary, the Company may, at its option and in lieu of the foregoing adjustment to the Conversion Rate, elect to make adequate provision so that the Holder shall have the right to receive upon conversion the amount of such shares of capital stock that the Holder would have received if the Holder had converted such Note on the record date.  If the Board of Directors determines the fair market value of any distribution for purposes of this paragraph (4) by reference to the actual or when issued trading market for any securities constituting such distribution, it must in doing so consider the prices in such market over the same period used in computing the current market price per share pursuant to paragraph (8) of this Section 2(b).

If the Company should adopt a shareholder rights plan (a “Rights Plan”), upon conversion of this Note into Common Stock, the holder of this Note will receive, in addition to the Common Stock, the rights described therein (whether or not the rights have separated from the Common Stock at the time of conversion), subject to the limitations set forth in the Rights Plan.  Any distribution of rights or warrants pursuant to the Rights Plan in compliance with the requirements set forth in the immediately preceding sentence of this paragraph shall not constitute a distribution of rights or warrants pursuant to this Section 2(b).

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Rights or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company’s capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events (“Trigger Event”):  (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been distributed for purposes of this Section 2(b) (and no adjustment to the Conversion Rate under this Section 2(b) will be required) until the occurrence of the earliest Trigger Event, whereupon such rights and warrants sha ll be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Rate shall be made under this Section 2(b).  If any such right or warrant, including any such existing rights or warrants distributed prior to the original issue date of this Note, are subject to events, upon the occurrence of which such rights or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and record date with respect to new rights or warrants with such rights (and a termination or expiration of the existing rights or warrants without exercise by any of the holders thereof).  In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Rate under this Section was made, (x) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Rate shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (y) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Rate shall be readjusted as if such rights and warrants had not been issued.

(5)In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding any cash that is distributed as part of a distribution referred to in paragraph (4) of Section 2(b) or a merger or consolidation to which Section 2(h) applies), immediately after the close of business on such Determination Date, the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate in effect immediately prior to the close of business on the date fixed for determination of the stockholders entitled to receive such distribution by a fraction (i) the numerator of which shall be equal to the current market price per share of the Common Stock on the De termination Date minus the amount of such cash dividend or distribution applicable to one share of Common Stock (determined on the basis of the number of shares of Common Stock outstanding at the close of business on the Determination Date) and (ii) the denominator of which shall be equal to the current market price per share of the Common Stock on the Determination Date.

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(6)In case of a tender offer made by the Company or any Subsidiary of the Company for all or any portion of the Common Stock shall expire and such tender offer or exchange (as amended upon the expiration thereof) shall require the payment to stockholders (based on the acceptance (up to any maximum specified in the terms of the tender offer) of Purchased Shares (as defined below)) of an aggregate consideration having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a board resolution), of the current market price per share of the Common Stock (determined as provided in paragraph (7) of this Section 2(b)) as of the last time tenders or exchanges could have bee n made pursuant to such tender or exchange offer (as it may be amended) then, and in each such case, immediately prior to the opening of business on the day after the date of the last time (the “Expiration Time”) tenders or exchanges could have been made pursuant to such tender or exchange offer (as it may be amended), the Conversion Rate shall be adjusted so that the same shall equal the rate determined by dividing the Conversion Rate immediately prior to close of business on the date of the Expiration Time by a fraction (i) the numerator of which shall be equal to (A) the product of (I) the current market price per share of Common Stock on the date of the Expiration Time multiplied by (II) the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the date of the Expiration Time less (B) the combined tender and cash amount, and (ii) the denominator of which shall be equal to the product of (A) the current market price per share of the Common Stock as of the Expiration Time multiplied by (B) the number of shares of Common Stock outstanding (including any tendered or exchanged shares) as of the Expiration Time less the number of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted up to and any such maximum, being referred to as the “Purchased Shares”).

(7)If and whenever on or after the date hereof, the Company issues or sells, or in accordance with this Section 2(b)(7) is deemed to have issued or sold, any shares of Common Stock (including the issuance or sale of shares of Common Stock owned or held by or for the account of the Company, but excluding shares of Common Stock issued or deemed to have been issued or sold by the Company in connection with any Excluded Security) for a consideration per share less than a price (the “Applicable Price”) equal to either (i) in the case of the issuance or sale of shares of Common Stock, the lesser of $0.25 per share or the Conversion Price in effect immediately pr ior to such issue or sale or (ii) in the case of the issuance or sale of Options or other Convertible Securities, the Conversion Price in effect immediately prior to such issue or sale (the foregoing a “Dilutive Issuance”), then immediately after such Dilutive Issuance, the Conversion Price then in effect shall be reduced to an amount equal to the Applicable Price and the Conversion Rate shall be increased to an amount equal to $1,000 divided by such new Conversion Price.  For purposes of determining the adjusted Conversion Rate under this Section 2(b)(7), the following shall be applicable:

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(A)           If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share.  For purposes of this Section 2(b)(7)(A) the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion or exchange or exercise of any Convertible Securities issuable upon exercise of such Option” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion or exchange or exercise of any Convertible Security issuable upon exercise of such Option.  No further adjustment of the Conversion Rate shall be made upon the actual issuance of such share of Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion or exchange or exercise of such Convertible Securities.

(B)           If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance of sale of such Convertible Securities for such price per share.  For the purposes of this Section 2(7)(B), the “lowest price per share for which one share of Common Stock is issuable upon such conversion or exchange or exercise” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share o f Common Stock upon the issuance or sale of the Convertible Security and upon the conversion or exchange or exercise of such Convertible Security.  No further adjustment of the Conversion Rate shall be made upon the actual issuance of such share of Common Stock upon conversion or exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Rate had been or are to be made pursuant to other provisions of this Section 2(b)(7), no further adjustment of the Conversion Rate shall be made by reason of such issue or sale.

(C)           If the purchase price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Rate in effect at the time of such change shall be adjusted to the Conversion Rate which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.  For purposes of this Section 2(b)(7)(C), if the terms of any Option or Convertible Security that was o utstanding as of the date of issuance of this Note are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change.  No adjustment shall be made if such adjustment would result in a decrease of the Conversion Rate then in effect.

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(D)           In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for a consideration of $0.01.  If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor.  If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of s uch consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Closing Price of such securities on the date of receipt.  If any Common Stock, Options or Convertible Securities are issued to the owners of the non-surviving entity in connection with any merger in which the Company is the surviving entity, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving entity as is attributable to such Common Stock, Options or Convertible Securities, as the case may be.  The fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors of the Company within five (5) days after the occurrence of an event requiring valuation.  If the Holder disagrees with the determination of the Board of Directors and gives written notice of such disagreement to the Company wit hin ten (10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such consideration will be determined within five (5) Business Days after the tenth day following the Valuation Event by an independent, reputable appraiser jointly selected by the Company and the Holder.  The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.  Notwithstanding the foregoing, in the event any Common Stock, Options or Convertible Securities are issued in exchange for the extinguishment of any invoice, account payable, loan, advance, debt, liability or obligation denominated in U.S. dollars or any other currency, then the consideration received by the Company will be deemed to be the U.S. dollar amount of such extinguished invoice, account payable, loan, advance, debt, l iability or obligation.

(E)           If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

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(F)           No adjustment shall be made under this paragraph (7) with respect to matters or events for which the Conversion Rate adjusts pursuant to paragraphs (1), (3), (5) and (6) of this Section 2(b).  In the event that an event would result in an adjustment to the Conversion Rate under both paragraph (2) or (4) of this Section 2(b) and this paragraph (7), an adjustment shall be made under only such applicable paragraph that results in the lowest Conversion Rate.

(7)For the purpose of any computation under paragraphs (2), (4), (5) or (6) of this Section 2(b), the current market price per share of Common Stock on any date shall be calculated by the Company and be deemed to be the average of the daily Closing Prices for the five (5) consecutive Trading Days commencing ten (10) Trading Days before the earlier of (i) the day in question and (ii) the day before the “ex” date with respect to the issuance or distribution requiring such computation.  For purposes of this paragraph, the term “ex date”, when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way in the applicable securities market or on th e applicable securities exchange without the right to receive such issuance or distribution.

(8)No adjustment in the Conversion Rate shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (8)) would require an increase or decrease of at least one percent (1%) in such rate; provided, however, that any adjustments which by reason of this paragraph (8) are not required to be made shall be carried forward and taken into account in any subsequent adjustment.  All calculations under this Section 2 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be.

(9)The Company may make such increases in the Conversion Rate, for the remaining term of the Note or any shorter term, in addition to those required by paragraphs (1), (2), (3), (4), (5) and (6) of this Section 2(b) as it considers to be advisable in order to avoid or diminish any income tax to any holders of Common Stock resulting from any dividend or distribution of stock or issuance of rights or warrants to purchase or subscribe for stock or from any event treated as such for income tax purposes.

(10)For purposes of this Section 2(b), the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock.  The Company shall not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company.

(c)Whenever the Conversion Rate is adjusted as provided in Section 2(b), the Company shall compute the adjusted Conversion Rate in accordance with Section 2(b) and shall prepare a certificate signed by the chief financial officer of the Company setting forth the adjusted Conversion Rate and showing in reasonable detail the facts upon which such adjustment is based, and shall promptly deliver such certificate to the Holder.

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(d)In case:

(1)the Company shall declare a dividend or other distribution on its Common Stock that would require any adjustment pursuant to Section 2(b); or

(2)the Company shall authorize the granting to the holders of its Common Stock of rights, options or warrants to subscribe for or purchase any shares of capital stock of any class or of any other rights; or

(3)of any reclassification of the Common Stock of the Company, or of any consolidation, merger or share exchange to which the Company is a party and for which approval of any shareholders of the Company is required, or of the conveyance, sale, transfer or lease of all or substantially all of the assets of the Company; or

(4) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or

(5)the Company or any Subsidiary shall commence a tender offer for all or a portion of the Company’s outstanding Common Stock (or shall amend any such tender offer);

then the Company shall cause to be delivered to the Holder, at least twenty (20) days (or ten (10) days in any case specified in clause (1) or (2) above) prior to the applicable record, expiration or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights, options or warrants, or, if a record is not to be taken, the date as of which the holders of Common Stock of record to be entitled to such dividend, distribution, rights, options or warrants are to be determined, (y) the date on which the right to make tenders under such tender offer expires or (z) the date on which such reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation or winding up is expected to become effective, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, conveyance, transfer, sale, lease, dissolution, liquidation or winding up.  Neither the failure to give such notice nor any defect therein shall affect the legality or validity of the proceedings described in clauses (1) through (5) of this Section 2(d).

(e)The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Common Stock, for the purpose of effecting the conversion of the Note, the full number of shares of Common Stock then issuable upon the conversion of this Note.

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(f)Except as provided in the next sentence, the Company will pay any and all taxes and duties that may be payable in respect of the issue or delivery of Common Stock on conversion of the Note.  The Company shall not, however, be required to pay any tax or duty which may be payable in respect of any transfer involved in the issue and delivery of Common Stock in a name other than that of the holder of this Note, and no such issue or delivery shall be made unless and until the Person requesting such issue has paid to the Company the amount of any such tax or duty, or has established to the satisfaction of the Company that such tax or duty has been paid.

(g)The Company agrees that all Common Stock which may be delivered upon conversion of the Note, upon such delivery, will have been duly authorized and validly issued and will be fully paid and nonassessable (and shall be issued out of the Company's authorized but unissued Common Stock) and, except as provided in Section 2(f), the Company will pay all taxes, liens and charges with respect to the issue thereof.

(h)In case of any recapitalization or reclassification of the Common Stock or other change of the outstanding shares of Common Stock (other than a change in par value, or as a result of a subdivision or combination covered by paragraph (3) of this Section 2(b)), or any consolidation of the Company with any other Person, any merger of the Company into another Person or of another Person into the Company (other than a merger which does not result in a reclassification, conversion, exchange or cancellation of the outstanding Common Stock), or any conveyance, sale, transfer or lease of all or substantially all of the properties and assets of the Company (collectively, a “Ca pital Reorganization”), in each case as a result of which the holders of Common Stock are entitled to receive stock, other securities, other property, assets or cash (or any combination thereof) (collectively, “Reference Property”) with respect to or in exchange for such Common Stock, then the Company or the Person formed by such Capital Reorganization, as the case may be, shall execute and deliver to the Holder of this Note a supplemental agreement providing that such Holder has the right thereafter, during the period this Note shall be convertible as specified in Section 2(a), to convert this Note only into the kind and amount of Reference Property receivable upon such Capital Reorganization by a holder of the number of shares of Common Stock of the Company into which this Note might have been converted immediately prior to such Capital Reorganization, assuming such holder of Common Stock of the Company (i) is not a P erson with which the Company consolidated, into which the Company merged or which merged into the Company or to which any conveyance, sale, transfer or lease was made, as the case may be (a “Constituent Person”), or an Affiliate of a Constituent Person and (ii) failed to exercise its rights of election, if any, as to the kind or amount of securities, cash and other property receivable upon such Capital Reorganization.  In the event holders of Common Stock have the opportunity to elect the form of consideration to be received in a recapitalization, reclassification, change, consolidation, merger, combination, sale, lease, assignment, conveyance or other transfer, the Company will make adequate provision whereby the Holder shall have the opportunity, on a timely basis, to determine the form of Reference Property into which this Note shall be convertible. & #160;The Company shall not become party to any such recapitalization,

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reclassification, change, consolidation, merger combination, sale, lease, assignment, conveyance or other transfer unless the terms of such transaction are consistent with the foregoing.  Such supplemental agreement shall provide for adjustments which, for events subsequent to the effective date of such supplemental agreement, shall be equivalent to the adjustments provided for in this Section 2.  The above provisions of this Section 2(h) shall similarly apply to successive Capital Reorganizations.  If this Section 2(h) applies to any event or occurrence, then the other provisions of Section 2(b) shall not apply.

(i)No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of this Note.  If any fractional share of stock otherwise would be issuable upon the conversion of this Note, the Company may elect to make an adjustment therefore in cash based upon the Closing Price of the Common Stock on the last Trading Day prior to the date of conversion, or in lieu of making such cash payment, the Company may elect to round up to the next whole share the number of shares of Common Stock to be issued to the Holder upon conversion.

(j)The Company (i) will effect all registrations with, and obtain all approvals by, all governmental authorities that may be necessary under any United States Federal or state law (including the Securities Act, the Exchange Act and state securities and Blue Sky laws) for the Common Stock issuable upon conversion of this Note to be lawfully issued and delivered as provided herein, and thereafter publicly traded (if permissible under the Securities Act) and qualified or listed as contemplated by clause (ii) (it being understood that the Company shall not be required to register the offer, sale or resale of Common Stock issuable on conversion hereof under the Securities Act except pursuant to the Registration Rights Agreement); and (ii ) if required, will list the Common Stock required to be issued and delivered upon conversion of the Note, prior to such issuance or delivery, on each national securities exchange on which outstanding Common Stock is listed or quoted at the time of such delivery, or if the Common Stock is not then listed on any securities exchange, to qualify the Common Stock for quotation on the Nasdaq Stock Market or such other inter-dealer quotation system (including, without limitation, the OTC Bulletin Board), if any, on which the Common Stock is then quoted.

3.Right to Require Repurchase.

(a)In the event that a Change in Control shall occur, then the Holder of this Note shall have the right, at such Holder’s option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, this Note, or any portion of the principal amount hereof that is equal to $1,000 or any integral multiple thereof, on the date (the “Repurchase Date”) such Change of Control occurs, at a purchase price equal to the Repurchase Price (as hereinafter defined).  The Company agrees to give the Holder, in the manner provided in Section 7(b), of any Change in Control, promptly and in any event within ten (10) Trading D ays prior to the occurrence thereof.

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(b)To exercise a repurchase right, the Holder shall deliver to the Company on or before the 2nd day prior to the Repurchase Date, together with this Note, written notice of the Holder’s exercise of such right, which notice shall set forth the name of the Holder, the principal amount of this Note to be repurchased (and, if this Note is to be repurchased in part, the portion of the principal amount thereof to be repurchased) and a statement that an election to exercise the repurchase right is being made thereby.  Such written notice shall be irrevocable, except that the right of the Holder to convert this Note (or the portion hereof with respect to which the repurchase right is being exercised) shall continue until the close of business on the Trading Day prior to the Repurchase Date.

(c)In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the Holder the Repurchase Price in cash on the Repurchase Date in the manner set forth in the introductory paragraph to this Note.

(d)If this Note is to be repurchased only in part, it shall be surrendered to the Company at the Designated Office (with, if the Company so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company duly executed by, the Holder hereof or his attorney duly authorized in writing), and the Company shall execute and make available for delivery to the Holder without service charge, a new Note or Notes, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Note so surrendered.

(e)For purposes of this Section 3:

(1)The term “beneficial owner” shall be determined in accordance with Rule 13d-3 promulgated by the Securities and Exchange Commission pursuant to the Exchange Act.

(2)          A “Change in Control” shall be deemed to have occurred at the time, after the original issuance of this Note, of:

(i)the acquisition by any Person or group (within the meaning of the Exchange Act and the rules of the Commission thereunder as in effect on the date hereof)  of beneficial ownership, directly or indirectly, through a purchase, merger or other acquisition transaction or series of transactions, of shares of capital stock of the Company entitling such Person to exercise 50% or more of the total voting power of all shares of capital stock of the Company entitled to vote generally in the elections of directors (any shares of voting stock of which such Person is the beneficial owner that are not then outstanding being deemed outstanding for purposes of calculating such percentage) other than any such acquisition by the Company or any employee benefit plan of the Company; or

(ii)any consolidation or merger of the Company with or into, any other Person, any merger of another Person with or into the Company, or any conveyance, transfer, sale, lease or other disposition of all or substantially all of the assets of the Company to another Person (other than (a) any such transaction pursuant to which holders of Common Stock immediately prior to such transaction have the entitlement to exercise, directly or indirectly, 50% or more of the total voting power of all shares of capital stock entitled to vote generally in the election of directors of the continuing or surviving Person immediately after such transaction and (b) any merger (x) which does not result in any reclassification, conversion, exchange or can cellation of outstanding Common Stock or (y) which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding Common Stock into solely shares of common stock); or

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(iii) the occupation of a majority of the seats (other than vacant seats) on the board of directors of the Company by Persons who were neither (i) nominated by the board of directors of the Company nor (ii) appointed by directors so nominated.

(3)          The “current market price” of a share of Common Stock shall be the Closing Price of the Common Stock on the Trading Day immediately preceding the Repurchase Date.

(4)          Repurchase Price” means the sum of (a) 100% of the principal amount of this Note to be repurchased pursuant to this Section 3 and (b) accrued and unpaid interest on this Note to the date of payment.

4.Certain Covenants.  This Note is entitled to the benefits of the covenants set forth in the Securities Purchase Agreement.

5.Events of Default.

(a)“Event of Default”, wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(1)(A) default in the payment of any principal on this Note when due or (B) default in the payment of any interest upon this Note when it becomes due and payable, and continuance of such default for a period of 3 days; or

(2)default by the Company in the performance of its obligations in respect of any conversion of this Note (or any portion hereof) in accordance with Section 2 for a period of 5 days; or

(3)failure by the Company to give any notice of a Change of Control required to be delivered in accordance with Section 5(a); or

(4)(A) default in the performance, or breach of the representations or covenants of the Securities Purchase Agreement or (B) default in the performance, or breach, of any other covenant of the Company under any Transaction Document (other than a covenant, a default in the performance or breach of which is specifically dealt with elsewhere in this Section 5(a)) and continuance of such default or breach for a period of 10 days; or

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(5)any breach or default by or of the Company occurs under any document, instrument or agreement to which it is a party or by which it or any of its properties is bound, relating to any Indebtedness having a principal amount (individually or in the aggregate) in excess of $100,000, if the maturity of or any payment with respect to such Indebtedness is or may be accelerated or demanded due to such breach; or

(6)the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of the Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 30 consecutive days; or

(7)the commencement by the Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by the Company to the entry of a decree or order for relief in respect of the Company  in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against either the Company, or the filing by either the Company  of a petition or answer or consent seeking reorganization or similar relief under any applica ble Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company  or of any substantial part of the property of the Company, or the making by either the Company  of an assignment for the benefit of creditors, or the admission by either the Company  in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by the Company in furtherance of any such action; or

(8)any representation, warranty or other written statement of the Company made in connection with any Transaction Document or the transactions contemplated thereby is incorrect or misleading in any material respect when made, or deemed made, or given; or

(9)at any time after the execution and delivery thereof, (A) this Note or any Transaction Document ceases to be in full force and effect (other than upon satisfaction of the Company’s obligations thereunder) or shall be declared null and void or the Holder shall not have or shall cease to have a valid and perfected lien in any collateral purported to be covered by the Transaction Documents with the priority required by such Transaction Document or (B) the Company shall contest the validity or enforceability of any Transaction Document in writing or deny in writing that it has any further liability under any Transaction Document.

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(b)If an Event of Default (other than an Event of Default specified in Section 5(a)(6) or 5(a)(7)) occurs and is continuing, then in every such case the Holder of this Note may declare the principal hereof (or, if there is at such time more than one holder, holders of least twenty-five percent (25%) of the outstanding principal amount of all then outstanding securities of the same series as this Note) may declare the principal amount of this Note and all other such securities then outstanding to be due and payable immediately, by a notice in writing to the Company, and upon any such declaration such principal and all accrued interest thereon shall become immediately due and payable.  For purposes of the immediately precedi ng sentence, “securities of the same series” shall mean collectively this Note and any notes issued upon a Transfer of a portion of this Note.  If an Event of Default specified in Section 5(a)(6) or 5(a)(7) occurs and is continuing with respect to the Company, the principal of, and accrued interest on, this Note shall ipso facto become immediately due and payable without any declaration or other act of the holders.

(c)The Company will give the holder of this Note notice, promptly and in any event within three days of the occurrence thereof, of any Event of Default or Default.  Such notice shall be given in the manner provided in Section 7(b).

6.Definitions.  Capitalized terms used in this Note and not otherwise defined have the meanings given to them in the Securities Purchase Agreement.  Unless otherwise defined in this Note, the following capitalized terms shall have the following respective meanings when used herein:

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person.  For the purposes of this definition, “control”, when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Approved Stock Plan” means the Company’s 2008 Equity Compensation Plan, 2007 Equity Compensation Plan, 2006 Incentive Stock Plan, 2002 Incentive Stock Plan, 1999 Incentive Stock Plan, as may be amended from time to time, or any employee benefit plan, stock grant, stock option or purchase plan, or stock option exchange plan or other employee stock incentive or similar agreement approved by the Board of Directors of the Company and the Holder in writing pursuant to which the Company's securities may be issued to any officers, directors, or employees of, or consultants to, the Company for services provided thereto.

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“Business Day” means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which the banking institutions in California are authorized or obligated by law or executive order to close or be closed.

“Closing Price” means, with respect to the Common Stock of the Company, for any day, the reported last sale price per share on the Nasdaq Stock Market, or, if the Common Stock is not admitted to trading on the Nasdaq Stock Market, on the principal national securities exchange or inter-dealer quotation system (including, without limitation, the OTC Bulletin Board) on which the Common Stock is listed or admitted to trading, or if not admitted to trading on the Nasdaq Stock Market, or listed or admitted to trading on any national securities exchange or inter-dealer quotation system, the closing bid price per share in the over-the-counter market as furnished by any New York Stock Exchange member firm selected from time to time by the Company for that purpose.

“Commission” means the United States Securities and Exchange Commission, or any other federal agency at the time administering the Exchange Act or the Securities Act, whichever is the relevant statute for the particular purpose.

“Common Stock” means the Common Stock, no par value per share, of the Company authorized at the date of this instrument as originally executed.  Subject to the provisions of Section 2, shares issuable on conversion of this Note shall include only Common Stock or shares of any class or classes of common stock resulting from any reclassification or reclassifications thereof; provided, however, that if at any time there shall be more than one such resulting class, the shares so issuable on conversion of this Note shall include shares of all such classes, and the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications.

“Conversion Price” has the meaning given to such term in Section 2(a).

“Conversion Rate” has the meaning given to such term in Section 2(a).

“Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.

“Default” means any event that with the giving of notice or the passage of time, or both, would become an Event of Default.

“Determination Date” means, in the case of a dividend or other distribution, including the issuance of rights, options or warrants, to shareholders, the date fixed for the determination of shareholders entitled to receive such dividend or other distribution and, in the case of a tender offer, the last time that tenders could have been made pursuant to such tender offer.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

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“Excluded Securities” means any Common Stock issued or issuable: (i) in connection with any Approved Stock Plan or to vendors or service providers that have a relationship with the Company as of the date hereof, provided that the aggregate number of shares issued or issuable in connection with any Approved Stock Plan and issued or issuable to such vendors and service providers shall not exceed 30 million shares; (iii) upon conversion of the Note or the exercise of the warrants issued to Holder pursuant to the Securities Purchase Agreement; (iv) upon conversion of any Options or Convertible Securities (other than any Options issued pursuant to an Approved Stock Plan) which are outstanding on the day immediately preceding the date hereof, provided that the terms of such Options or Convertible Securities are not amended, modified or changed on or after the date of issuance of this Note; or (v)in other transactions so long as the consideration payable in any such transaction does not exceed $500,000 and the aggregate consideration payable in all such transactions does not exceed $1,500,000 during any twelve (12) month period.  For purposes of this definition, the consideration payable in a transaction shall be determined pursuant to Section 2(b)(7)(D).

“Holder” means the holder of this Note.

“Interest Rate” means a rate per annum of 8%.

“Options” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

“Person” shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, an unincorporated association, a joint venture or other entity or a governmental authority.

“Repurchase Date” has the meaning given to such term in Section 2(a) hereof.

“Securities Act” means the Securities Act of 1933, as amended.

“Securities Purchase Agreement” means the Senior Secured Convertible Note and Warrant Purchase Agreement, dated as of the date hereof, between the Company and Holder, as amended, restated, modified or otherwise supplemented from time to time.

“Stock Price” means the average of the Closing Prices for the twenty Trading Day period ending on (and including) the Trading Day ending immediately prior to the Interest Payment Date.

“Subsidiary” shall mean (a) any corporation of which more than 50% of the issued and outstanding equity securities having ordinary voting power to elect a majority of the board of directors of such corporation is at the time directly or indirectly owned or controlled by the Company, (b) any partnership, joint venture, limited liability company or other association of which more than 50% of the equity interests having the power to vote, direct or control the management of such partnership, joint venture, limited liability company or other association is at the time directly or indirectly owned and controlled by the Company, and (c) any other entity included in the financial statements of the Company on a consolidated basis.

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“Trading Day” means (i) if the Common Stock is admitted to trading on the Nasdaq Stock Market or any other system of automated dissemination of quotations of securities prices, a day on which trades may be effected through such system; (ii) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or any other national securities exchange, a day on which such exchange is open for business; or (iii) if the Common Stock is not admitted to trading on the Nasdaq Stock Market or listed or admitted for trading on any national securities exchange or any other system of automated dissemination of quotation of securities prices, a day on which the Common Stock is traded regular way in the over-the-counter market and for which a closing bid a nd a closing asked price for the Common Stock are available.

7.Other.

(a)No provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest, if any, on this Note at the times, places and rate, and in the coin or currency, herein prescribed or to convert this Note as herein provided.

(b)The Company will give prompt written notice to the Holder of any change in the location of the Designated Office.  Any notice to the Company or to the Holder shall be given in the manner set forth in the Securities Purchase Agreement, provided that the Holder, if not a party to the Agreement, may specify alternative notice instructions to the Company.

(c)The transfer of this Note is registrable on the register maintained by the Company upon surrender of this Note for registration of transfer at the Designated Office, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new notes, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.  Such notes are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof.  No service charge shall be made for any such registrat ion of transfer, but the Company may require payment of a sum sufficient to recover any tax or other governmental charge payable in connection therewith.  Prior to due presentation of this Note for registration of transfer, the Company and any agent of the Company may treat the Person in whose name this Note is registered as the owner thereof for all purposes, whether or not this Note be overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.

(d)This Note and the Common Stock issuable upon conversion of this Note have not been registered under the Securities Act, or the securities laws of any state or other jurisdiction.  Neither this Note nor the Common Stock issuable upon conversion of this Note nor any interest or participation herein may be reoffered, sold, assigned,

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transferred, pledged, encumbered or otherwise disposed of (a “Transfer”) in the absence of such registration or unless such transaction is exempt from, or not subject to, registration.  The Holder by its acceptance of this Note or the Common Stock issuable upon conversion of this Note agrees that it shall not offer, sell, assign, transfer, pledge, encumber or otherwise dispose of this Note or any portion thereof or interest therein (other than with respect to a Transfer pursuant to a registration statement that is effective at the time of such Transfer) only (a) to the Company, or (b) pursuant to an available exemption from registration, and in the case of (b) above in which the transferor furnishes the Company with such certifications, legal opinions or other inf ormation as the Company may reasonably request to confirm that such transfer is being made pursuant to an exemption from, in a transaction not subject to, the registration requirements of the Securities Act.  Notwithstanding the foregoing, Holder shall have the right, in its sole discretion, to assign or transfer this Note to an affiliated company of Holder within sixty (60) days of the date hereof.

(e)Upon presentation of this Note for registration of transfer at the office of the Company specified herein accompanied by (i) certification by the transferor that such transfer is in compliance with the terms hereof and (ii) by a written instrument of transfer in a form approved by the Company executed by the registered holder, in person or by such holder's attorney thereunto duly authorized in writing, and including the name, address and telephone and fax numbers of the transferee and name of the contact person of the transferee, such Note shall be transferred on the Note register, and a new Note of like tenor and bearing the same legends shall be issued in the name of the transferee and sent to the transferee at the address and c/o the contact person so indicated.

(f)Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Note, and in the case of loss, theft or destruction, receipt of indemnity or security reasonably satisfactory to the Company, and upon reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of such Note, if mutilated, the Company will deliver a new Note of like tenor and dated as of such cancellation, in lieu of such Note.

(g)Such Holder makes the representations and warranties set forth in Section III of the Securities Purchase Agreement.

(h)Neither this Note nor any term hereof may be amended or waived except by a writing signed by the Holder and the Company.

(i)Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to the Note, together with all fees, charges and other amounts that are treated as interest the Note under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) that may be contracted for, charged, taken, received or reserved by the Holder in accordance with applicable law, the rate of interest payable in respect of the Note hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the ex tent lawful, the interest and Charges that would have been payable in respect of the Note, but

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were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to the Holder in respect of other Notes shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon [at the rate of 6.25% per annum to the date of repayment], shall have been received by the Holder.

(j)All payments made by the Company under this Note shall be made by the Company free and clear of and without deduction for any and all present and future taxes, levies, charges, deductions and withholdings.  In addition, the Holder shall pay upon demand any stamp or other taxes, levies or charges of any jurisdiction with respect to the execution, delivery, registration, performance and enforcement of this Note.  Upon request by the Holder, the Company shall furnish evidence satisfactory to the Holder that all requisite authorizations and approvals by, and notices to and filings with, governmental authorities and regulatory bodies have been obtained and made and that all requisite taxes, levies and charges have been paid.

(k)The provisions of this Note shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided that neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Company without the prior written consent of Holder.

(l)This Note shall be governed by and construed in accordance with the internal laws of the State of California.

[Remainder of page intentionally left blank.]

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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed.

Dated: January 12, 2011

ZAP

By: /s/ Steven Schneider

Name:  Steven Schneider                                                                

Title:  Chief Executive Officer

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ELECTION OF HOLDER TO REQUIRE REPURCHASE

1.  Pursuant to Section 3(a) of this Note, the undersigned hereby elects to have all or a portion of this Note repurchased by the Company.

2.  The undersigned hereby directs the Company to pay [choose one] (a) it or (b) Name: __________________; address: __________________; Social Security or Other Taxpayer Identification Number, if any: ____________, an amount in cash equal to the Repurchase Price, as provided herein.

Dated: _______________________

China Electric Vehicle Corporation

                                                                A British Virgin Island Company

By:  _______________________

Name:

Title:

[Number of shares of Common Stock

owned by the holder and its affiliates: _____________________]

Principal amount to be repurchased

(an integral multiple of $1,000): ______________________

Remaining principal amount following

such repurchase (not less than $1,000): ______________________

NOTICE: The signature to the foregoing Election must correspond to the name as written upon the face of this Note in every particular, without alteration or any change whatsoever.

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CONVERSION NOTICE

The undersigned holder of this Note hereby irrevocably exercises the option to convert this Note, or any portion of the principal amount hereof (which is an integral multiple of $1,000) below designated, into Common Stock in accordance with the terms of this Note, and directs that such shares, together with a check in payment for any fractional share and any Note representing any unconverted principal amount hereof, be delivered to and be registered in the name of the undersigned unless a different name has been indicated below.  If Common Stock or Notes are to be registered in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto.

Dated: ________________________

                 China Electric Vehicle Corporation

                                                                                 A British Virgin Island Company

By:___________________________

Name:

Title:

If shares or Notes are to be registered in the name of a Person other than the holder, please print such Person’s name and address:

_________________________

Name

 _________________________

Address

_________________________

Social Security or other Taxpayer Identification Number, if any

If only a portion of the Notes is to be converted, please indicate:

1. Principal amount to be converted: $___________

2. Principal amount and denomination of Note representing unconverted principal amount to be issued:

Amount: $________

Denominations: $________ (any integral multiple of $1,000)

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EX-10.3

EXHIBIT 10.3

THIS WARRANT AND THE UNDERLYING SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS IN ACCORDANCE WITH APPLICABLE REGISTRATION REQUIREMENTS OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MUST BE SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE SALE, TR ANSFER, PLEDGE OR HYPOTHECATION OF ANY INTEREST IN ANY OF THE SECURITIES REPRESENTED HEREBY.

WARRANT TO PURCHASE SHARES OF COMMON STOCK

of

ZAP

Dated as of January 12, 2011

Void after the date specified in Section 8

Warrant to Purchase

20,000,000 Shares of

Common Stock

THIS CERTIFIES THAT, for value received, China Electric Vehicle Corporation, a British Virgin Island company, or its registered assigns (the “Holder”), is entitled, subject to the provisions and upon the terms and conditions set forth herein, to purchase from ZAP, a California corporation (the “Company”), shares of the Company’s Common Stock (the “Shares”), in the amounts, at such times and at the price per share set forth in Section 1. The term “Warrant” as used herein shall in clude this Warrant and any warrants delivered in substitution or exchange therefor as provided herein. This Warrant is issued in connection with the transactions described in the Securities Purchase Agreement, dated as of the date hereof, by and among the Company and the Holder (the “Purchase Agreement”).  This is the warrant defined in the Purchase Agreement as the “First Warrant.”

The following is a statement of the rights of the Holder and the conditions to which this Warrant is subject, and to which Holder, by acceptance of this Warrant, agrees:

1.Number and Price of Shares; Exercise Period.

(a)Number of Shares. Subject to any previous exercise of the Warrant, the Holder shall have the right to purchase the number of Shares that equals the quotient obtained by dividing (x) the Warrant Coverage Amount (as defined below) by (y) the Exercise Price (as defined below), prior to (or in connection with) the expiration of this Warrant as provided in Section 8.

(b)Warrant Coverage Amount. The “Warrant Coverage Amount” shall be equal to ten million dollars ($10,000,000.00).

(c)Exercise Price.  The exercise price per Share shall initially be equal to $0.50, subject to adjustment pursuant hereto (the “Exercise Price”).

(d)Exercise Period. This Warrant shall be exercisable, in whole or in part, at any time prior to (or in connection with) the expiration of this Warrant as set forth in Section 8.

2.Exercise of the Warrant.

(a)Exercise. The purchase rights represented by this Warrant may be exercised at the election of the Holder, in whole or in part, in accordance with Section 1, by:

(i)the tender to the Company at its principal office (or such other office or agency as the Company may designate) of a notice of exercise in the form of Exhibit A (the “Notice of Exercise”), duly completed and executed by or on behalf of the Holder, together with the surrender of this Warrant; and

(ii)the payment to the Company of an amount equal to (x) the Exercise Price multiplied by (y) the number of Shares being purchased, by (a) wire transfer or certified, cashier’s or other check acceptable to the Company and payable to the order of the Company; (b) surrender and cancellation of promissory notes or other instruments representing indebtedness of the Company to the Holder; or (c) a combination of (a) and (b).

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(b)Stock Certificates. The rights under this Warrant shall be deemed to have been exercised and the Shares issuable upon such exercise shall be deemed to have been issued immediately prior to the close of business on the date this Warrant is exercised in accordance with its terms, and the person entitled to receive the Shares issuable upon such exercise shall be treated for all purposes as the holder of record of such Shares as of the close of business on such date. As promptly as reasonably practicable on or after such date, and in any event within thirty (30) days thereafter, the Company shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for that number of shares issuable upon such exercise. In the event that the rights under this Warrant are exercised in part and have not expired, the Company shall execute and deliver a new Warrant reflecting the number of Shares that remain subject to this Warrant.

(c)No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of the rights under this Warrant. In lieu of such fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction.

(d)Conditional Exercise. The Holder may exercise this Warrant conditioned upon (and effective immediately prior to) consummation of any transaction that would cause the expiration of this Warrant pursuant to Section 8 by so indicating in the notice of exercise.

(e)Automatic Exercise. If the Holder of this Warrant has not elected to exercise this Warrant prior to expiration of this Warrant pursuant to Section 8, then this Warrant shall automatically (without any act on the part of the Holder) be exercised pursuant to Section 2(b) effective immediately prior to the expiration of the Warrant to the extent such net issue exercise would result in the issuance of Shares, unless Holder shall earlier provide written notice to the Company that the Holder desires that this Warrant expire unexercised. If this Warrant is automatically exercised, the Company shall notify the Hold er of the automatic exercise as soon as reasonably practicable, and the Holder shall surrender the Warrant to the Company in accordance with the terms hereof.

(f)Forced Exercise.  If (i) a registration is demanded by Holder pursuant to that certain Registration Rights Agreement dated as of the date hereof by and among the Holder and the Company, (ii) the volume weighted average sales price per share of the Common Stock (as reported, absent manifest error, on the OTCBB or any other internationally recognized exchange or market upon which the Common Stock is then listed) for the thirty (30) Trading Days prior to the effective date of such registration statement is equal to or greater than $1.00 per share and (iii) the Company delivers a written notice to Holder s tating its intent to force the Holder to exercise this Warrant under this Section 2(g) within ten (10) business days of Holder demanding a registration, then, contingent upon such registration statement being declared effective, Holder shall exercise this Warrant for at least that number of shares of Common Stock equal to twenty-five percent (25%) of the Warrant Coverage Amount divided by the Exercise Price; provided, however, that the Company shall be able to force the Holder to exercise this Warrant under this Section 2(g) one (1) time only.

(g)Reservation of Stock. The Company agrees during the term the rights under this Warrant are exercisable to reserve and keep available from its authorized and unissued shares of common stock solely for the purpose of effecting the exercise of this Warrant such number of shares as shall from time to time be sufficient to effect the exercise of the rights under this Warrant; and if at any time the number of authorized but unissued shares of common stock shall not be sufficient for purposes of the exercise of this

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Warrant in accordance with its terms, without limitation of such other remedies as may be available to the Holder, the Company will use its best efforts to take such corporate action as may be necessary to increase its authorized and unissued shares of its common stock to a number of shares as shall be sufficient for such purposes. The Company represents and warrants that all shares that may be issued upon the exercise of this Warrant will, when issued in accordance with the terms hereof, be validly issued, fully paid and nonassessable.

3.Replacement of the Warrant. Subject to the receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at the expense of the Holder shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount.

4.Transfer of the Warrant.

(a)Warrant Register. The Company shall maintain a register (the “Warrant Register”) containing the name and address of the Holder or Holders. Until this Warrant is transferred on the Warrant Register in accordance herewith, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. Any Holder of this Warrant (or of any portion of this Warrant) may change its address as shown on the Warrant Register by written notice to the Compa ny requesting a change.

(b)Warrant Agent. The Company may appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 4(a), issuing the Shares or other securities then issuable upon the exercise of the rights under this Warrant, exchanging this Warrant, replacing this Warrant or conducting related activities.

(c)Transferability of the Warrant. Subject to the provisions of this Warrant with respect to compliance with the Securities Act of 1933, as amended (the “Securities Act”) and limitations on assignments and transfers, including without limitation compliance with the restrictions on transfer set forth in Section 5, title to this Warrant may be transferred by endorsement (by the transferor and the transferee executing the assignment form attached as Exhibit B(the “Assignment Form”)) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery.

(d)Exchange of the Warrant upon a Transfer. On surrender of this Warrant (and a properly endorsed Assignment Form) for exchange, subject to the provisions of this Warrant with respect to compliance with the Securities Act and limitations on assignments and transfers, the Company shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof, and the Company shall register any such transfer upon the Warrant Register. This Warrant ( and the securities issuable upon exercise of the rights under this Warrant) must be surrendered to the Company or its warrant or transfer agent, as applicable, as a condition precedent to the sale, pledge, hypothecation or other transfer of any interest in any of the securities represented hereby.

(e)Taxes. In no event shall the Company be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of any certificate in a name other than that of the Holder, and the Company shall not be required to issue or deliver any such certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid or is not payable.

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5.Restrictions on Transfer of the Warrant and Shares; Compliance with Securities Laws. By acceptance of this Warrant, the Holder agrees to comply with the following:

(a)Restrictions on Transfers. Subject to Section 5(b), this Warrant may not be transferred or assigned in whole or in part without the Company’s prior written consent (which shall not be unreasonably withheld), and any attempt by Holder to transfer or assign any rights, duties or obligations that arise under this Warrant without such permission shall be void. Any transfer of this Warrant or the Shares (the “Securities”) must be in compliance with all applicable federal and state securities laws. The Holder agrees not to ma ke any sale, assignment, transfer, pledge or other disposition of all or any portion of the Securities, or any beneficial interest therein, unless and until the transferee thereof has agreed in writing for the benefit of the Company to take and hold such Securities subject to, and to be bound by, the terms and conditions set forth in this Warrant to the same extent as if the transferee were the original Holder hereunder, and

(i)there is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement, or

(ii)(A) the Holder shall have given prior written notice to the Company of the Holder’s intention to make such disposition and shall have furnished the Company with a detailed description of the manner and circumstances of the proposed disposition and, with respect to any transfer of this Warrant, except for those dispositions set forth in Section 5(b) below, the Company shall have provided the Holder with prior written approval of such disposition (which approval shall not be unreasonably withheld, conditioned or delayed) and (B) if requested by the Company, other than as set forth in Section 5(b) below, the Holder shall have furnished the Company, at the Holder’s expense, with evidence reasonably satisfactor y to the Company (including, if requested by the Company, an opinion of counsel to the Holder) that such disposition will not require registration of such Securities under the Securities Act.  It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 under the Securities Act, except in unusual circumstances.

(b)Permitted Transfers. Permitted transfers include (i) a transfer not involving a change in beneficial ownership, or (ii) transactions involving the distribution without consideration of Securities by any Holder to (x) a parent, subsidiary or other affiliate of a Holder that is a corporation, (y) any of the Holder’s partners, members or other equity owners, or retired partners or members, or to the estate of any of its partners, members or other equity owners or retired partners or members, or (z) a venture capital fund that is controlled by or under common control with one or more genera l partners or managing members of, or shares the same management company with, the Holder; provided, in each case, that the Holder shall give written notice to the Company of the Holder’s intention to effect such disposition and shall have furnished the Company with a detailed description of the manner and circumstances of the proposed disposition.

(c)Securities Law Legend. The Securities shall (unless otherwise permitted by the provisions of this Warrant) be stamped or imprinted with a legend substantially similar to the following (in addition to any legend required by state securities laws):

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS IN ACCORDANCE WITH APPLICABLE REGISTRATION REQUIREMENTS OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS. THIS CERTIFICATE MUST BE SURRENDERED TO THE COMPANY OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE SALE, TRANSFER, PLEDGE OR HYPOTHECATION OF ANY INTEREST IN ANY OF THE SECURITIES REPRESENTED HEREBY.

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(d)Instructions Regarding Transfer Restrictions. The Holder consents to the Company making a notation on its records and giving instructions to any transfer agent in order to implement the restrictions on transfer established in this Section 5.

(e)Removal of Legend. The legend referring to federal and state securities laws identified in Section 5(c) stamped on a certificate evidencing the Shares and the stock transfer instructions and record notations with respect to such securities shall be removed and the Company shall issue a certificate without such legend to the holder of such securities if (i) such securities are registered under the Securities Act, or (ii) such holder provides the Company with an opinion of counsel reasonably acceptable to the Company to the effect that a sale or transfer of such securities may be made without registratio n or qualification.

6.Adjustments. Subject to the expiration of this Warrant pursuant to Section 8, the number and kind of shares purchasable hereunder and the Exercise Price therefor are subject to adjustment from time to time, as follows:

(a)Merger or Reorganization. If at any time there shall be any reorganization, recapitalization, merger or consolidation (a “Reorganization”) involving the Company (other than as otherwise provided for herein or as would cause the expiration of this Warrant under Section 8) in which shares of the Company’s stock are converted into or exchanged for securities, cash or other property, then, as a part of such Reorganization, lawful provision shall be made so that the Holder shall thereafter be entitled to receive upon exercis e of this Warrant, the kind and amount of securities, cash or other property of the successor corporation resulting from such Reorganization, equivalent in value to that which a holder of the Shares deliverable upon exercise of this Warrant would have been entitled in such Reorganization if the right to purchase the Shares hereunder had been exercised immediately prior to such Reorganization. In any such case, appropriate adjustment (as determined in good faith by the Board of Directors of the successor corporation) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after such Reorganization to the end that the provisions of this Warrant shall be applicable after the event, as near as reasonably may be, in relation to any shares or other securities deliverable after that event upon the exercise of this Warrant.

(b)Reclassification of Shares. If the securities issuable upon exercise of this Warrant are changed into the same or a different number of securities of any other class or classes by reclassification, capital reorganization or otherwise (other than as otherwise provided for herein) (a “Reclassification”), then, in any such event, in lieu of the number of Shares which the Holder would otherwise have been entitled to receive, the Holder shall have the right thereafter to exercise this Warrant for a number of shares of such other class or classes of stock that a holder of the number of securities deliverable upon exercise of this Warrant immediately before that change would have been entitled to receive in such Reclassification, all subject to further adjustment as provided herein with respect to such other shares.

(c)Subdivisions and Combinations. In the event that the outstanding shares of common stock are subdivided (by stock split, by payment of a stock dividend or otherwise) into a greater number of shares of such securities, the number of Shares issuable upon exercise of the rights under this Warrant immediately prior to such subdivision shall, concurrently with the effectiveness of such subdivision, be proportionately increased, and the Exercise Price shall be proportionately decreased, and in the event that the outstanding shares of common stock are combined (by reclassification or otherwise) into a lesser number of shares of such securities, the number of Shares issuable upon exercise of the rights under this Warrant immediately prior to such combination shall, concurrently with the effectiveness of such combination, be proportionately decreased, and the Exercise Price shall be proportionately increased.

(d) Dilutive Issuances.  (i)If the Company takes a record of the holders of Common Stock for the purpose of entitling them (A) to receive a dividend or other distribution payable in Common Stock, Options or in Convertible Securities or (B) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

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(ii)In the event that an event would result in an adjustment to the Exercise Price under Sections 6(a), 6(b) or 6(c) and also under this Section 6(d) an adjustment shall be made under only such applicable paragraph that results in the lowest Exercise Price.

(e)Notice of Adjustments. Upon any adjustment in accordance with this Section 6, the Company shall give notice thereof to the Holder, which notice shall state the event giving rise to the adjustment, the Exercise Price as adjusted and the number of securities or other property purchasable upon the exercise of the rights under this Warrant, setting forth in reasonable detail the method of calculation of each. The Company shall, upon the written request of any Holder, furnish or cause to be furnished to such Holder a certificate setting forth (i) such adjustments, (ii) the Exercise Price at the time in effe ct and (iii) the number of securities and the amount, if any, of other property that at the time would be received upon exercise of this Warrant.

7.Notification of Certain Events. Prior to the expiration of this Warrant pursuant to Section 8, in the event that the Company shall authorize:

(a)the issuance of any dividend or other distribution on the capital stock of the Company (other than (i) dividends or distributions otherwise provided for in Section 6, (ii) repurchases of common stock issued to or held by employees, officers, directors or consultants of the Company or its subsidiaries upon termination of their employment or services pursuant to agreements providing for the right of said repurchase; (iii) repurchases of common stock issued to or held by employees, officers, directors or consultants of the Company or its subsidiaries pursuant to rights of first refusal or first offer contained in agreements providing for such rights; or (iv) repurchases of capital stock of the Company in con nection with the settlement of disputes with any stockholder), whether in cash, property, stock or other securities; or

(b)the voluntary liquidation, dissolution or winding up of the Company.

the Company shall send to the Holder of this Warrant at least ten (10) days prior written notice of the date on which a record shall be taken for any such dividend or distribution specified in clause (a) or the expected effective date of any such other event specified in clause (b). The notice provisions set forth in this section may be shortened or waived prospectively or retrospectively by the consent of the Holder of this Warrant.

8.Expiration of the Warrant. This Warrant shall expire and shall no longer be exercisable as of 5:00 p.m., Pacific time, on the two year anniversary of the date of issuance of this Warrant.

9.No Rights as a Stockholder. Nothing contained herein shall entitle the Holder to any rights as a stockholder of the Company or to be deemed the holder of any securities that may at any time be issuable on the exercise of the rights hereunder for any purpose nor shall anything contained herein be construed to confer upon the Holder, as such, any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value or change of stock to no par value, consolidatio n, merger, conveyance or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or any other rights of a stockholder of the Company until the rights under the Warrant shall have been exercised and the Shares purchasable upon exercise of the rights hereunder shall have become deliverable as provided herein.

10.Definitions.  Capitalized terms used in this Warrant and not otherwise defined have the meanings given to them in the Purchase Agreement.  Unless otherwise defined in this Warrant, the following capitalized terms shall have the following respective meanings when used herein:

“Approved Stock Plan” means the Company’s 2008 Equity Compensation Plan, 2007 Equity Compensation Plan, 2006 Incentive Stock Plan, 2002 Incentive Stock Plan, 1999 Incentive Stock Plan, each as may be amended from time to time, or any employee benefit plan, stock grant, stock option or purchase plan, or stock option exchange plan or other employee stock incentive or similar agreement approved by the Board of Directors of the Company and the Holder in writing pursuant to which the Company's securities may be issued to any officers, directors, or employees of, or consultants to, the Company for services provided thereto.

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“Common Stock” means the Common Stock, no par value per share, of the Company authorized at the date of this Warrant as originally executed.

“Convertible Securities” means any stock or securities (other than Options) directly or indirectly convertible into or exercisable or exchangeable for Common Stock.

“Excluded Securities” means any Common Stock issued or issuable: (i) in connection with any Approved Stock Plan or to vendors or service providers that have a relationship with the Company as of the date hereof, provided that the aggregate number of shares issued or issuable in connection with any Approved Stock Plan and issued or issuable to such vendors and service providers shall not exceed 30 million shares; (ii) to Steven Schneider in accordance with Section 4.25 of the Securities Purchase Agreement; (iii) upon conversion of the Note or the exercise of the warrants issued to Holder pursuant to the Purchase Agreement; (iv) upon conversion of any Options or Convertible Securities (oth er than any Options issued pursuant to an Approved Stock Plan) which are outstanding on the day immediately preceding the date hereof, provided that the terms of such Options or Convertible Securities are not amended, modified or changed on or after the date of issuance of this Warrant; or (v)in other transactions so long as the consideration payable in any such transaction does not exceed $500,000 and the aggregate consideration payable in all such transactions does not exceed $1,500,000 during any twelve (12) month period.  For purposes of this definition, the consideration payable in a transaction shall be determined pursuant to Section 6(d)(iv).

“Options” means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

“Trading Day” means (i) if the Common Stock is admitted to trading on the Nasdaq Stock Market or any other system of automated dissemination of quotations of securities prices, a day on which trades may be effected through such system; (ii) if the Common Stock is listed or admitted for trading on the New York Stock Exchange or any other national securities exchange, a day on which such exchange is open for business; or (iii) if the Common Stock is not admitted to trading on the Nasdaq Stock Market or listed or admitted for trading on any national securities exchange or any other system of automated dissemination of quotation of securities prices, a day on which the Common Stock is traded regular way in the over-the-counter market and for which a closi ng bid and a closing asked price for the Common Stock are available.

11.Miscellaneous.

(a)Amendments. Except as expressly provided herein, neither this Warrant nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument referencing this Warrant and signed by the Company and the Holder.

(b)Waivers. No waiver of any single breach or default shall be deemed a waiver of any other breach or default theretofore or thereafter occurring.

(c)Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail (if to the Holder) or otherwise delivered by hand, messenger or courier service addressed:

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(i)if to the Holder, to the Holder at the Holder’s address, facsimile number or electronic mail address as shown in the Company’s records, as may be updated in accordance with the provisions hereof, or until any such Holder so furnishes an address, facsimile number or electronic mail address to the Company, then to and at the address, facsimile number or electronic mail address of the last holder of this Warrant for which the Company has contact information in its records; or

(ii)if to the Company, to the attention of the Chief Financial Officer of the Company at 501 4th Street, Santa Rosa, California 95401, or at such other address as the Company shall have furnished to the Holder.

Each such notice or other communication shall for all purposes of this Warrant be treated as effective or having been given (i) if delivered by hand, messenger or courier service, when delivered, or (ii) if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or (iii) if sent by facsimile, upon confirmation of facsimile transfer or, if sent by electronic mail, upon confirmation of delivery when directed to the relevant electronic mail address. In the event of any conflict between the Company’s books and records and this Warrant or any notice delivered hereunder, the Company’s books and records will control absent fraud or error.

(d)Governing Law. This Warrant and all actions arising out of or in connection with this Warrant shall be governed by and construed in accordance with the laws of the State of California, without regard to the conflicts of law provisions of the State of California, or of any other state.

(e)Titles and Subtitles. The titles and subtitles used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant. All references in this Warrant to sections, paragraphs and exhibits shall, unless otherwise provided, refer to sections and paragraphs hereof and exhibits attached hereto.

(f)Severability. If any provision of this Warrant becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, portions of such provision, or such provision in its entirety, to the extent necessary, shall be severed from this Warrant, and such illegal, unenforceable or void provision shall be replaced with a valid and enforceable provision that will achieve, to the extent possible, the same economic, business and other purposes of the illegal, unenforceable or void provision. The balance of this Warrant shall be enforceable in accordance with its terms.

(g)Saturdays, Sundays and Holidays. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or U.S. federal holiday, then such action may be taken or such right may be exercised on the next succeeding day that is not a Saturday, Sunday or U.S. federal holiday.

(h)Entire Agreement. Except as expressly set forth herein, this Warrant (including the exhibits attached hereto) along with the other Transaction Documents (as defined in the Purchase Agreement) constitute the entire agreement and understanding of the Company and the Holder with respect to the subject matter hereof and supersede all prior agreements and understandings relating to the subject matter hereof.

(signature page follows)

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The Company signs this Warrant as of the date stated on the first page.

ZAP

a California corporation

By: /s/ Steven Schneider

Name: Steven Schneider

Title: Chief Executive Officer

(Signature Page to Warrant to Purchase Shares of Common Stock of ZAP)

EXHIBIT A

NOTICE OF EXERCISE

To: ZAP (the “Company”)

Attention: Chief Executive Officer

Holder: _______________________                     

Date: _________________________

(1)   Exercise. The undersigned elects to purchase the following pursuant to the terms of the attached warrant:

Number of shares: ___________________

Type of security: ____________________

(2)   Method of Exercise. The undersigned elects to exercise the attached warrant pursuant to:

 A cash payment or cancellation of indebtedness, and tenders herewith payment of the purchase price for such shares in full, together with all applicable transfer taxes, if any.

(3)   Conditional Exercise. Is this a conditional exercise pursuant to Section 2(e):

 Yes  No

If “Yes,” indicate the applicable condition:

____________________________________________________________________________]

(4)   Stock Certificate. Please issue a certificate or certificates representing the shares in the name of:

 The undersigned

 Other—Name: ________________________________________________

Address: ______________________________________________

A-1

(5)   Unexercised Portion of the Warrant. Please issue a new warrant for the unexercised portion of the attached warrant in the name of:

 The undersigned

 Other—Name: ________________________________________________

Address: ______________________________________________

 Not applicable

HOLDER

(Print name of the warrant holder)

(Signature)

(Name and title of signatory, if applicable)

(Date)

(Fax number)

(Email address)

A-2

EXHIBIT B

ASSIGNMENT FORM

ASSIGNOR: ______________________________________ 

COMPANY: ZAP (THE “COMPANY”)

WARRANT: THE WARRANT TO PURCHASE SHARES OF COMMON STOCK ISSUED ON JANUARY 12, 2011 (THE “WARRANT”)

DATE: ______________________________________

(1)   Assignment. The undersigned registered holder of the Warrant (“Assignor”) assigns and transfers to the assignee named below (“Assignee”) all of the rights of Assignor under the Warrant, with respect to the number of shares set forth below:

Name of Assignee: _____________________________________________________

Address of Assignee: ___________________________________________________

Number of Shares Assigned: _____________________________________________

and does irrevocably constitute and appoint ______________________ as attorney to make such transfer on the books of the Company, maintained for the purpose, with full power of substitution in the premises.

(2)   Obligations of Assignee. Assignee agrees to take and hold the Warrant and any shares of stock to be issued upon exercise of the rights thereunder (the “Securities”) subject to, and to be bound by, the terms and conditions set forth in the Warrant to the same extent as if Assignee were the original holder thereof.

B-1

Assignor and Assignee are signing this Assignment Form on the date first set forth above.

ASSIGNOR     (Print name of Assignor)     (Signature of Assignor)   (Print name of signatory, if applicable)             (Print title of signatory, if applicable)       Address:         ASSIGNEE     (Print name of Assignee)     (Signature of Assignee)     (Print name of signatory, if applicable)     (Print title of signatory, if applicable)       Address:            

B-2

EX-10.4

EXHIBIT 10.4

AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT

This Amended and Restated Registration Rights Agreement (this “Agreement”) is made as of January 12, 2011, by and between ZAP, a California corporation (the “Company”), China Electric Vehicle Corporation, a British Virgin Island company (the “Investor”). Unless otherwise defined herein, capitalized terms used in this Agreement have the meanings ascribed to them in Section 1 or in the Purchase Agreement (as defined below).

RECITALS

A.           The Company and the party listed therein (the “Prior Holder”) previously entered into that certain Registration Rights Agreement dated as of August 6, 2009 (the “Prior Registration Rights Agreement”), pursuant to which the Company provided certain registration rights to the Prior Holder.

B.           The Company and the China Electric Vehicle Corporation, a British Virgin Island company, have entered into a Senior Secured Convertible Note and Warrant Purchase Agreement (the “Purchase Agreement”) dated of even date herewith, pursuant to which the Company desires to sell to the Investor and the Investor desires to purchase from the Company a Senior Secured Convertible Promissory Note and a warrant to purchase shares of the Company’s Common Stock, such sale being referred to herein as  the “Financing.”  As a condition to the Financing, the parties have agreed to amend the Prior Registration Rights Agreement and enter into this Agreement.

WHEREAS,  the Investor is a party to that certain Senior Secured Convertible Note and Warrant Purchase Agreement, dated as of the date hereof, with the Company (the “Purchase Agreement”).

WHEREAS,  pursuant to the Purchase Agreement, the Company agreed to enter into this Agreement in order to provide certain registration rights to the Investor.

NOW, THEREFORE:  In consideration of the mutual promises and covenants set forth herein, and other consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

Section 1

Definitions

1.1Certain Definitions. As used in this Agreement, the following terms shall have the meanings set forth below:

(a)“Commission” shall mean the Securities and Exchange Commission or any other federal agency at the time administering the Securities Act.

(b)“Common Stock” means the Common Stock of the Company.

(c)“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time.

(d)“Note” shall mean that certain senior secured convertible promissory note, dated as of the date hereof, issued to the Investor pursuant to the Purchase Agreement.

(e)“Prior Note” shall mean that secured convertible note issued to the Prior Holder pursuant to the Prior Purchase Agreement.

(f)“Prior Shares” shall mean the shares of Common Stock issued to the Prior Holder pursuant to the Prior Purchase Agreement.

(g) “Prior Warrant” shall mean that warrant to purchase shares of the Company’s Common Stock issued to the Prior Holder pursuant to the Prior Purchase Agreement.

(h)“Registrable Securities” shall mean (i) the Prior Shares, (ii) shares of Common Stock issued or issuable upon (x) conversion of the Note or the Prior Note or (y) exercise of the Warrant or the Prior Warrant, and (iii) any Common Stock issued as a dividend or other distribution with respect to or in exchange for or in replacement of the Prior Shares; provided, however, that Registrable Securities shall not include any shares of Common Stock which have previously been registered or which have been sold to the public either pursuant to a registratio n statement or Rule 144, or which have been sold in a private transaction in which the transferor’s rights under this Agreement are not validly assigned in accordance with this Agreement.

(i)The terms “register,” “registered” and “registration” shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act and applicable rules and regulations thereunder, and the declaration or ordering of the effectiveness of such registration statement.

(j)“Registration Expenses” shall mean all expenses incurred in effecting any registration pursuant to this Agreement, including, without limitation, all registration, qualification, and filing fees, printing expenses, escrow fees, fees and disbursements of counsel for the Companyand one special counsel for Investor, blue sky fees and expenses, and expenses of any regular or special audits incident to or required by any such registration, but shall not include Selling Expenses and fees and disbursements of other counsel for Investor.

(k)“Restricted Securities” shall mean any Registrable Securities required to bear the legend set forth in Section 2.6(b) hereof.

(l)“Rule 144” shall mean Rule 144 as promulgated by the Commission under the Securities Act, as such Rule may be amended from time to time, or any similar successor rule that may be promulgated by the Commission.

(m)“Securities Act” shall mean the Securities Act of 1933, as amended, or any similar successor federal statute and the rules and regulations thereunder, all as the same shall be in effect from time to time.

(n)“Selling Expenses” shall mean all underwriting discounts, selling commissions and stock transfer taxes applicable to the sale of Registrable Securities and fees and disbursements of counsel for Investor (other than the fees and disbursements of one special counsel to Investor included in Registration Expenses).

(o)“Warrants” shall mean those certain warrants, dated as of the date hereof, issued to the Investor pursuant to the Purchase Agreement.

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Section 2

Registration Rights

2.1Requested Registration

.

(a)Request for Registration. Subject to the conditions set forth in this Section 2.1, if the Company shall receive from Investor a written request signed by Investor that the Company effect any registration with respect to all or a part of the Registrable Securities (such request shall state the number of shares of Registrable Securities to be disposed of by Investor), the Company will, as soon as practicable, file and use its commercially reasonable efforts to effect such registration (including, without limitation, filing post-effective amendments, appropriate qualifications under applicable blue sky or other state securities laws, and appropriate co mpliance with the Securities Act) and to permit or facilitate the sale and distribution of all or such portion of such Registrable Securities as are specified in such request.

(b)Limitations on Requested Registration. The Company shall not be obligated to effect, or to take any action to effect, any such registration pursuant to this Section 2.1:

(i)Prior to eighteen (18) months after the date of this Agreement;

(ii)In any particular jurisdiction in which the Company would be required to execute a general consent to service of process in effecting such registration, qualification, or compliance, unless the Company is already subject to service in such jurisdiction and except as may be required by the Securities Act; or

(iii)After the Company has initiated two such registrations pursuant to this Section 2.1 (counting for these purposes only registrations which have been declared or ordered effective and pursuant to which securities have been sold).

(c)Deferral. Notwithstanding anything to the contrary herein, the Company may delay, including by delaying the filing of a registration statement, the disclosure of material, non-public information concerning the Company, the disclosure of which at the time is not, in the good faith opinion of the Board of Directors of the Company, in the best interest of the Company (a "Grace Period") and, as applicable, suspend sales of Registrable Securities under an effective registration statement; provided, that the Company shall promptly (i) notify the Inv estor in writing of the existence of material, non-public information giving rise to a Grace Period (provided that in each notice the Company will not disclose the content of such material, non-public information to the Investor) and the date on which the Grace Period will begin, and (ii) notify the Investor in writing of the date on which the Grace Period ends; and, provided further, that no Grace Period shall exceed ten (10) consecutive days and during any three hundred sixty five (365) day period such Grace Periods shall not exceed an aggregate of thirty (30) days.  For purposes of determining the length of a Grace Period above, the Grace Period shall begin on and include the date the Investor receives the notice referred to in clause (i) and shall end on and include the later of the date the Investor receives the notice referred to in clause (ii) and the date referred to in such notice.

(d)Limitation on Investor’s Ability to Sell. Investor shall not sell more than twenty-five percent (25%) of the aggregate number of shares of Common Stock held by Investor that may be issued pursuant to the Purchase Agreement and the exhibits thereto, including shares of Common Stock issuable upon conversion of options, warrants or any convertible securities, during any six (6) month period following the effective date of the registration statement without the prior written consent of the Company.

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2.2Expenses of Registration. All Registration Expenses incurred in connection with registration and distribution of Registrable Securities pursuant to Section 2.1 hereof shall be borne equally by the Company and the Investor. All Selling Expenses shall be borne by the Investor.

2.3Registration Procedures. The Company will keep Investor advised in writing as to the initiation of the registration pursuant to Section 2.1 and as to the completion thereof. At its expense, the Company will use its commercially reasonable efforts to:

(a)Keep such registration effective for a period ending on the earlier of the date which is two (2) years from the effective date of the registration statement or such time as Investor has completed the distribution described in the registration statement relating thereto;

(b)Prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement for the period set forth in subsection (a) above;

(c)Furnish such number of prospectuses, including any preliminary prospectuses, and other documents incident thereto, including any amendment of or supplement to the prospectus, as Investor from time to time may reasonably request;

(d)Use its reasonable best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdiction as shall be reasonably requested by Investor; provided, that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions;

(e)Notify Investor at any time when a prospectus relating to such registration statement is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in light of the circumstances then existing, and following such notification promptly prepare and furnish to Investor a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such shares, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or incomplete in light of the circumstances then existing;

(f)Use its commercially reasonable efforts to furnish, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, (i) an opinion, dated as of such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and (ii) a “comfort” letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addres sed to the underwriters;

(g)Provide a transfer agent and registrar for all Registrable Securities registered pursuant to such registration statement and a CUSIP number for all such Registrable Securities, in each case not later than the effective date of such registration;

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(h)Otherwise use its commercially reasonable efforts to comply with all applicable rules and regulations of the Commission, and make available to its security holders, as soon as reasonably practicable, an earnings statement covering the period of at least twelve months, but not more than eighteen months, beginning with the first month after the effective date of such registration statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act;

(i)Cause all such Registrable Securities registered pursuant hereunder to be listed on each securities exchange on which similar securities issued by the Company are then listed;

(j)Use its commercially reasonable efforts to, within the time periods required by applicable law, file all documents and reports required to be filed with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act; and

(k)In connection with any underwritten offering pursuant to the registration statement to be filed pursuant to Section 2.1 hereof, enter into an underwriting agreement in form reasonably necessary to effect the offer and sale of Common Stock, provided such underwriting agreement contains reasonable and customary provisions, and provided further, that Investor shall also enter into and perform its obligations under such an agreement.

2.4Indemnification. 

(a)To the extent permitted by law, the Company will indemnify and hold harmless Investor, each of its officers, directors and partners, legal counsel and accountants and each person controlling Investor within the meaning of Section 15 of the Securities Act, with respect to which registration, qualification or compliance has been effected pursuant to this Section 2, and each underwriter, if any, and each person who controls within the meaning of Section 15 of the Securities Act any underwriter, against all expenses, claims, losses, damages and liabilities (or actions, proceedings or settlements in respect thereof) arising out of or based on: (i) any untrue statement (or alleged untrue statement) of a material fact con tained or incorporated by reference in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, qualification or compliance; (ii) any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any violation (or alleged violation) by the Company of the Securities Act, any state securities laws or any rule or regulation thereunder applicable to the Company and relating to action or inaction required of the Company in connection with any offering covered by such registration, qualification or compliance, and the Company will reimburse Investor, each of its officers, directors, partners, legal counsel and accountants and each person controlling Investor, each such underwriter and each person who controls any such underwriter, for any legal and an y other expenses reasonably incurred in connection with investigating and defending or settling any such claim, loss, damage, liability or action.

(b)Each party entitled to indemnification under this Section 2.4 (the “IndemnifiedParty”) shall give notice to the Company (the “IndemnifyingParty”) promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of such claim or any litigation resulting t herefrom; provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or any litigation resulting therefrom, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at its own expense; and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations under this Section 2.4, to the extent such failure is not prejudicial. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the

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claimant or plaintiff to such Indemnified Party of a release from all liability in respect to such claim or litigation. Each Indemnified Party shall furnish such information regarding itself or the claim in question as an Indemnifying Party may reasonably request in writing and as shall be reasonably required in connection with defense of such claim and litigation resulting therefrom.

(c)If the indemnification provided for in this Section 2.4 is held by a court of competent jurisdiction to be unavailable to an Indemnified Party with respect to any loss, liability, claim, damage, or expense referred to herein, then the Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such loss, liability, claim, damage, or expense in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other in connection with the statements or omissions that resulted in such loss, liability, claim, damage, or expense as well as any other r elevant equitable considerations. The relative fault of the Indemnifying Party and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Indemnifying Party or by the Indemnified Party and the parties’ relative intent, knowledge, access to information, and opportunity to correct or prevent such statement or omission. No person or entity will be required under this Section 2.4(c) to contribute any amount in excess of the net proceeds from the offering received by such person or entity, except in the case of fraud or willful misconduct by such person or entity. No person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity that was not guilty of such fraudulent misrepresentation.

(d)Notwithstanding the foregoing, to the extent that the provisions on indemnification and contribution contained in the underwriting agreement entered into in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall control.

2.5Information by Investor. Investor shall furnish to the Company such information regarding Investor and the distribution proposed by Investor as the Company may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification, or compliance referred to in this Section 2.

2.6Restrictions on Transfer.

(a)Investor, by acceptance of the Registrable Securities, agrees to comply in all respects with the provisions of this Section 2.6. Investor agrees not to make any sale, assignment, transfer, pledge or other disposition of all or any portion of the Restricted Securities, or any beneficial interest therein, unless and until the transferee thereof has agreed in writing for the benefit of the Company to take and hold such Restricted Securities subject to, and to be bound by, the terms and conditions set forth in this Agreement, including, without limitation, this Section 2.6, and:

(i)There is then in effect a registration statement under the Securities Act covering such proposed disposition and the disposition is made in accordance with the registration statement; or

(ii)Investor shall have given prior written notice to the Company of Investor’s intention to make such disposition and shall have furnished the Company with a detailed description of the manner and circumstances of the proposed disposition, and such disposition will not require registration of such Restricted Securities under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances.

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(b)Each certificate representing Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws):

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR UNDER THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT AS PERMITTED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS PURSUANT TO REGISTRATION OR AN EXEMPTION THEREFROM. THE ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE ISSUER THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION OTHERWISE COMPLIES WITH THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

Investor consents to the Company making a notation on its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer established in this Section 2.6.

(c)The legend referring to federal and state securities laws identified in Section 2.6(b) hereof stamped on a certificate evidencing the Restricted Securities and the stock transfer instructions and record notations with respect to such Restricted Securities shall be removed and the Company shall issue a certificate without such legend to the holder of such Restricted Securities if (i) such securities are registered under the Securities Act, or (ii) such holder provides the Company with an opinion of counsel reasonably acceptable to the Company to the effect that a sale or transfer of the securities may be made without registration or qualification.

2.7Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the Commission that may permit the sale of the Restricted Securities to the public without registration, the Company agrees to use its commercially reasonable efforts to:

(a)Make and keep adequate current public information with respect to the Company available in accordance with Rule 144 under the Securities Act; and

(b)File with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act at any time after it has become subject to such reporting requirements.

2.8Transfer or Assignment of Registration Rights. The rights to cause the Company to register securities granted to Investor by the Company under this Section 2 may be transferred or assigned by Investor to any transferee or assignee; provided that (i) such transfer or assignment of Registrable Securities is effected in accordance with the terms of Section 2.6 hereof and applicable securities laws, (ii) the Company is given written notice prior to said transfer or assignment, stating the name and address of the transferee or assignee and identifying the securities with respect to which such registration rights are intended to be transferred or assigned and (iii) the transferee or assignee of such rights assumes in writing the obligations of Investor under this Agreement, including without limitation the obligations set forth in Section 2.4.

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2.9Limitations on Subsequent Registration Rights. From and after the date of this Agreement, the Company shall not, without the prior written consent of Investor, enter into any agreement with any holder or prospective holder of any securities of the Company giving such holder or prospective holder any registration rights the terms of which are pari passu with or senior to the registration rights granted to Investor hereunder.

Section 3

Miscellaneous

3.1Amendment.

3.2

(a)The Prior Registration Rights Agreement is hereby amended and restated in its entirety to read as set forth in this Agreement, and the Company, the Prior Holder and the Investor hereby agree to be bound by the provisions hereof as the sole agreement of the Company and its stockholders with respect to the matters set forth herein.

(b)Except as expressly provided herein, neither this Agreement nor any term hereof may be amended, waived, discharged or terminated other than by a written instrument referencing this Agreement and signed by the Company and Investor.

3.3Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or otherwise delivered by hand or by messenger addressed:

(a)if to the Investor, at the Investor’s address or facsimile number as shown in the Company’s records, as may be updated in accordance with the provisions hereof; or

(b)if to the Company, to the attention of the Chief Financial Officer at 501 4th Street, Santa Rosa, California 95401, or at such other address as the Company shall have furnished to the Investor.

Each party hereto agrees that such notice may be given by facsimile or by electronic mail.

Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid or, if sent by facsimile, upon confirmation of facsimile transfer.

3.4Governing Law. This Agreement shall be governed in all respects by the internal laws of the State of California as applied to agreements entered into among California residents to be performed entirely within California, without regard to principles of conflicts of law.

3.5Entire Agreement. This Agreement and the other Transaction Documents (as defined in the Purchase Agreement), constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof. No party hereto shall be liable or bound to any other party in any manner with regard to the subjects hereof or thereof by any warranties, representations or covenants except as specifically set forth herein.

3.6Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors and assigns of the parties hereto.  The Investor shall have the right to assign any and all of Investor’s rights, duties and obligations hereunder at any time without the prior written consent of the Company.

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3.7Delays or Omissions. Except as expressly provided herein, no delay or omission to exercise any right, power or remedy accruing to any party to this Agreement upon any breach or default of any other party under this Agreement shall impair any such right, power or remedy of such non-defaulting party, nor shall it be construed to be a waiver of any such breach or default, or an acquiescence therein, or of or in any similar breach or default thereafter occurring, nor shall any waiver of any single breach or default be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consen t or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any party to this Agreement, shall be cumulative and not alternative.

3.8Severability. If any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, portions of such provision, or such provision in its entirety, to the extent necessary, shall be severed from this Agreement, and such court will replace such illegal, void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the same economic, business and other purposes of the illegal, void or unenforceable provision. The balance of this Agreement shall be enforceable in accordance with its terms.

3.9Titles and Subtitles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs and exhibits shall, unless otherwise provided, refer to sections and paragraphs hereof and exhibits attached hereto.

3.10Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be enforceable against the parties that execute such counterparts, and all of which together shall constitute one instrument.

3.11Telecopy Execution and Delivery. A facsimile, telecopy or other reproduction of this Agreement may be executed by one or more parties hereto and delivered by such party by facsimile or any similar electronic transmission device pursuant to which the signature of or on behalf of such party can be seen. Such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of any party hereto, all parties hereto agree to execute and deliver an original of this Agreement as well as any facsimile, telecopy or other reproduction hereof.

3.12Jurisdiction; Venue. Each of the parties hereto hereby submits and consents irrevocably to the exclusive jurisdiction of the courts of the State of California and the United States District Court for the Northern District of California for the interpretation and enforcement of the provisions of this Agreement. Each of the parties hereto also agrees that the jurisdiction over the person of such parties and the subject matter of such dispute shall be effected by the mailing of process or other papers in connection with any such action in the manner provided for in Sectio n 3.2 or in such other manner as may be lawful, and that service in such manner shall constitute valid and sufficient service of process.

3.13Further Assurances. Each party hereto agrees to execute and deliver, by the proper exercise of its corporate, limited liability company, partnership or other powers, all such other and additional instruments and documents and do all such other acts and things as may be reasonably necessary to more fully effectuate this Agreement.

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3.14Attorneys’ Fees. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals.

(signature page follows)

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The parties hereto have executed this Amended and Restated Registration Rights Agreement effective as of the day and year first above written.

COMPANY:

ZAP

a California corporation

By: /s/ Steven Schneider

Name: Steven Schneider

Title: Chief Executive Officer

PRIOR HOLDER:

CATHAYA CAPITAL, L.P.

a Cayman Islands exempted limited partnership

By: Cathaya Capital, G.P.

Its General Partner

By: Cathaya Capital Co., Ltd.

Its General Partner]

By: /s/ Priscilla Lu

Name: Priscilla Lu

Title: Director

INVESTOR:

CHINA ELECTRIC VEHICLE CORPORATION,

a British Virgin Island company

[By: CATHAYA CAPITAL, L.P.

a Cayman Islands exempted limited partnership

By: Cathaya Capital, G.P.

Its General Partner

By: Cathaya Capital Co., Ltd.

Its General Partner]

By: /s/ Priscilla Lu

Name: Priscilla Lu

Title: Director

(Signature Page to Registration Rights Agreement)

EX-10.5

EXHIBIT 10.5

AMENDED AND RESTATED VOTING AGREEMENT

This Amended and Restated Voting Agreement(this “Agreement”) is made as of January 12, 2011 by and among ZAP, a California corporation (the “Company”), China Electric Vehicle Corporation, a British Virgin Island company. (the “Investor”), and the shareholders of the Company set forth on Schedule I hereto (each a “Significant Holder,” and collectively the “Significant Holders& #8221;).

RECITALS

A.           The Company and the parties listed therein (the “Prior Holders”) previously entered into that certain Voting Agreement dated as of August 6, 2009 (the “Prior Voting Agreement”), pursuant to which the Prior Holders agreed to vote their shares of the Company’s voting stock in favor of certain designees to the Company’s Board of Directors.

B.           The Company and the China Electric Vehicle Corporation, a British Virgin Island company, have entered into a Senior Secured Convertible Note and Warrant Purchase Agreement (the “Purchase Agreement”) dated of even date herewith, pursuant to which the Company desires to sell to the Investor and the Investor desires to purchase from the Company a Senior Secured Convertible Promissory Note and a warrant to purchase shares of the Company’s Common Stock, such sale being referred to herein as  the “Financing.”  As a condition to the Financing, the parties have agreed to amend the Prior Voting Agreement and enter int o this Agreement.

SECTION 1

VOTING

1.1Amendment of Prior Voting Agreement.  The Prior Voting Agreement is hereby amended and restated in its entirety to read as set forth in this Agreement, and the Company, the Prior Holders and the Investor hereby agree to be bound by the provisions hereof as the sole agreement of the Company and its stockholders with respect to the matters set forth herein.  In accordance with the terms of the Prior Voting Agreement, this Agreement is binding on all parties to the Prior Voting Agreement, whether or not they execute this Agreement.

1.2Consent to Sale under the Purchase Agreement. Cathaya Captial, L.P., a Significant Holder who is a party to that certain Securities Purchase Agreement, dated August 6, 2009 (the “Prior Purchase Agreement”, and along with all other agreements referenced therein, including, but not limited to the Voting Agreement, the Registration Rights Agreement and the Security Agreement, the “Prior Transaction”), hereby consents to the sale and issuance of the securities pursuant to the Purchase Agreement and hereby waives any rights of first offer, antidilution, notice provisions or other penalties or obligations that would otherwise accrue pursuant to the Prior Transaction, including, but not limited to the agreement that the securities issued pursuant to the Purchase Agreement constitute Permitted Indebtedness under the secured convertible note issued pursuant to the Prior Purchase Agreement.

1.3General.  During the term of this Agreement, each Significant Holder agrees to vote all shares of the Company’s voting securities now or hereafter owned by it, whether beneficially or otherwise, or as to which it has voting power (the “Shares”) in accordance with the provisions of this Agreement.

SECTION 2

ELECTION OF DIRECTORS

2.1Voting.  During the term of this Agreement, each Significant Holder agrees to vote all Shares in such manner as may be necessary to: (i) elect (and maintain in office) as a member of the Company’s board of directors (the “Board”) that person designated by the Investor (the “Designee”) in accordance with Section 4.21 of the Purchase Agreement, and (ii) vote for or against, as directed by the Investor, any person ’s appointment to or nomination for any position on the Company’s Board that is vacant as of the date of this Agreement.

2.2Changes in Designee.  From time to time during the term of this Agreement, Investor may, in its sole discretion:

(a)notify the Company in writing of an intention to remove from the Company’s board of directors any incumbent director who occupies the board seat for which Investor is entitled to designate the Designee; or

(b)notify the Company in writing of an intention to select a new Designee for election to the board seat for which Investor is entitled to designate the Designee (whether to replace a prior Designee or to fill a vacancy in such board seat).

In the event of such an initiation of a removal or selection of a Designee under this section, the Company shall take such reasonable actions as are necessary to facilitate such removals or elections, including, without limitation, soliciting the votes of the appropriate shareholders, and the Significant Holders shall vote their Shares to cause: (a) the removal from the Company’s board of directors of the Designee; and (b) the election to the Company’s board of directors of any new Designee so designated.

2.3Size of the Board of Directors.  During the term of this Agreement, each Significant Holder agrees to vote all Shares to maintain the authorized number of members of the board of directors of the Company at 7 directors.

2.4No Liability for Election of Recommended Director.  None of the parties and no officer, director, shareholder, partner, employee or agent of any party makes any representation or warranty as to the fitness or competence of the Designee of the Investor hereunder to serve on the board of directors by virtue of such party’s execution of this Agreement or by the act of such party in voting for such Designee pursuant to this Agreement.

SECTION 3

ADDITIONAL AGREEMENTS

3.1Best Efforts.  The Company agrees to use its best efforts to ensure that the rights given to the Investor hereunder are effective and that the Investor enjoys the benefits thereof. Such actions include, without limitation, the use of the Company’s best efforts to cause the nomination and election of the Designee as provided in Section 2, to cause the size of the board of directors to remain as provided in Section 2.3, to enforce the terms of this Agreement and to inform the Investor of any breach hereof (to the extent the Company has knowledge thereof). The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all of the provisions of this Agreement and in the taking of all such actions as may be necessary, appropriate or reasonably requested by the Investor in order to protect the rights of the parties hereunder against impairment and to assist the Investor and the Significant Holders in the exercise of their rights and the performance of their obligations hereunder.

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3.2Transfer of Shares.  The Company shall not permit the transfer of any Shares on its books or issue a new certificate representing any Shares unless and until the person to whom such security is to be transferred shall have executed a written agreement pursuant to which such person becomes a party to this Agreement and agrees to be bound by all the provisions hereof as if such person was a Significant Holder hereunder. Each Significant Holder covenants that such Significant Holder will not request that the Company register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any of the Shares unless such transfer is made in compliance with this Agreement.  Each Significant Holder authorizes the Company to issue stop-transfer orders or certificates to prevent any transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any of the Shares in breach of this Agreement.

3.3Disclosure.  Each Significant Holder hereby agrees to permit the Company to publish and disclose in any disclosure document which the Company determines to be necessary or desirable in connection with the transactions contemplated by the Purchase Agreement and hereby, such Significant Holder’s identity and ownership of Common Stock and the nature of such Significant Holder’s commitments, arrangements and understandings under this Agreement.

3.4Significant Holder Assurances.  From time to time, and without further consideration, each Significant Holder shall execute and deliver or cause to be executed and delivered such additional documents and instruments and take all such further action as may be reasonably necessary or desirable to consummate the transactions contemplated by this Agreement.  If such Significant Holder is not the legal owner of the Shares set forth opposite such Significant Holder’s name on Schedule I hereto, such Significant Holder shall cause the legal o wner to act in accordance or consistent with such Significant Holder’s obligations hereunder.

SECTION 4

REPRESENTATIONS AND WARRANTIES OF THE COMPANY

The Company represents and warrants to the Investor and the Significant Holders that:

4.1Authorization; Capacity.  The execution, delivery and performance by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby are within the corporate powers of the Company and have been duly authorized by all necessary action on the part of the Company.  This Agreement constitutes a valid and binding Agreement of the Company.

4.2Non-contravention.  The execution, delivery and performance by the Company of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) violate the Articles of Incorporation or Bylaws of the Company, (ii) violate any applicable law, rule, regulation, judgment, injunction, order or decree to which the Company is bound or (iii) require any consent or other action by any person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration or to a loss of any benefit to which the Company is entitled under any provision of any agreement or other instrument binding on the Company.

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SECTION 5

REPRESENTATIONS AND WARRANTIES OF THE SIGNIFICANT HOLDERS

The Significant Holders, severally and not jointly, represent and warrant to the Investor and the Company that:

5.1Authorization; Capacity.  The execution, delivery and performance by such Significant Holder (if not an individual) of this Agreement and the consummation by such Significant Holder of the transactions contemplated hereby are within the powers (corporate or otherwise) of such Significant Holder and have been duly authorized by all necessary action (corporate or otherwise) on the part of such Significant Holder.  Such Significant Holder (if an individual) has the legal capacity to enter into this Agreement.  This Agreement constitu tes a valid and binding Agreement of such Significant Holder.

5.2Non-Contravention.  The execution, delivery and performance by such Significant Holder of this Agreement and the consummation of the transactions contemplated hereby do not and will not (i) violate the constituent documents, if any, of such Significant Holder, (ii) violate any applicable law, rule, regulation, judgment, injunction, order or decree to which such Significant Holder is bound or (iii) require any consent or other action by any person under, constitute a default under, or give rise to any right of termination, cancellation or acceleration or to a loss of any benefit to which such Significant Holder is entitled under any provision of any agreement or other instrument binding on such Significant Holder.

5.3Ownership of Shares.  Such Significant Holder is, as of the date hereof, the record and beneficial owner of the Shares set forth opposite the name of such Significant Holder on Schedule I to this Agreement, free and clear of any lien and any other limitation or restriction (including any restriction on the right to vote or otherwise dispose of such Shares).  None of the Shares is subject to any voting trust or other agreement or arrangement with respect to the voting of such Shares.  Except as set forth opposite the name of such S ignificant Holder on the applicable signature page to this Agreement, as of the date hereof, such Significant Holder does not beneficially own any (i) shares of capital stock or voting securities of the Company, (ii) securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company or (iii) options or other rights to acquire from the Company any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company.

5.4Required Filings and Consents.  The execution and delivery of this Agreement by such Significant Holder does not, and the performance of this Agreement by such Significant Holder will not, require any consent, approval, authorization or permit of, or filing with or notification to, any federal, state, government or other public legal authority (“Governmental Entity”) or third party (including such Significant Holder’s spouse, if any).

5.5Absence of Litigation.  There is no litigation, suit, claim, action, proceeding or investigation pending or, to the knowledge of such Significant Holder, threatened against such Significant Holder, or any property or asset of such Significant Holder, before any Governmental Entity that seeks to delay or prevent the performance by such Significant Holder of any of such Significant Holder’s obligations under this Agreement or that would adversely affect the title of such Significant Holder to any of the Shares.

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SECTION 6

TERMINATION

6.1Termination.  This Agreement shall terminate upon the five (5) year anniversary of the date of this Agreement; provided, however, that if on such date, the Investor, or its registered assigns, beneficially owns shares of the Company’s capital stock equal to at least 10% of the outstanding shares of capital stock of the Company, then this Agreement shall continue in full force and effect until such time as the Investor, or its registered assigns, no longer beneficially owns at least 10% of the outstanding shares of capital stock of the Company.  Notwithstanding the foregoing, this Agreement may be terminated at any time upon the written consent of the Investor.

SECTION 7

ADDITIONAL SHARES

7.1Additional Shares.  In the event that subsequent to the date of this Agreement any shares or other securities are issued on, or in exchange for, any of the Shares by reason of any stock dividend, stock split, consolidation of shares, reclassification or consolidation involving the Company, such shares or securities shall be deemed to be Shares for purposes of this Agreement.

SECTION 8

MISCELLANEOUS

8.1Certain Definitions.  Shares “held” by a Significant Holder shall mean any Shares directly or indirectly owned (of record or beneficially) by such Significant Holder or as to which such Significant Holder has voting power. “Vote” shall include any exercise of voting rights whether at an annual or special meeting or by written consent or in any other manner permitted by applicable law. A “majority-in-interest” of the Significant Holders shall mean the holders of a majority of the Common Stock of the Company (determined on an as-converted basis) then held by such group.

8.2Notices.  All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail or otherwise delivered by hand, messenger or courier service addressed:

(a)if to the Investor, to the attention of Priscilla Lu at 718 Best Court, San Carlos, California 94070, or at such other address as the Investor shall have furnished to the Company, with a copy to the attention of Jon Layman, Esq., Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304, Fax No. (650) 493-6811; or

(b)if to a Significant Holder, to the Significant Holder’s address, facsimile number or electronic mail address as shown in Schedule I to this Agreement or in the Company’s records, as may be updated in accordance with the provisions hereof, or, until any such Significant Holder so furnishes an address, facsimile number or electronic mail address to the Company, then to the address, facsimile number or electronic mail address of the last holder of the relevant Shares for which the Company has contact information in its records; or

(c)if to the Company, to the attention of the Chief Financial Officer of the Company at 501 4th Street, Santa Rosa, California 95401, or at such other address as the Company shall have furnished to the Investor and Significant Holders.

Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given (i) if delivered by hand, messenger or courier service, when delivered, or (ii) if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or (iii) if sent by facsimile, upon confirmation of facsimile transfer or, if sent by electronic mail, upon confirmation of delivery when directed to the relevant electronic mail address. In the event of any conflict between the Company’s books and records and this Agreement or any notice delivered hereunder, the Company’s books and records will control absent fraud or error.

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8.3Successors and Assigns.  The provisions of this Agreement shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties.  The Investor shall have the right to assign any and all of Investor’s rights, duties and obligations hereunder at any time without the prior written consent of the Company.

8.4Governing Law.  This Agreement shall be governed in all respects by the internal laws of the State of California as applied to agreements entered into among California residents to be performed entirely within California, without regard to principles of conflicts of law.

8.5Titles and Subtitles.  The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. All references in this Agreement to sections, paragraphs and exhibits shall, unless otherwise provided, refer to sections and paragraphs hereof and exhibits attached hereto.

8.6Further Assurances.  Each party agrees to execute and deliver, by the proper exercise of its corporate, limited liability company, partnership or other powers, all such other and additional instruments and documents and do all such other acts and things as may be necessary to more fully effectuate this Agreement. Each party shall promptly consult with the other and provide any necessary information and material with respect to all filings required to be made by such party with any Governmental Entity in connection with this Agreement and the Transact ions.

8.7Entire Agreement.  This Agreement and the Transaction Documents (as defined in the Purchase Agreement) constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof. No party shall be liable or bound to any other party in any manner with regard to the subjects hereof or thereof by any warranties, representations or covenants except as specifically set forth herein.

8.8No Grant of Proxy.  This Agreement does not grant any proxy and should not be interpreted as doing so. Nevertheless, should the provisions of this Agreement be construed to constitute the granting of proxies, such proxies shall be deemed coupled with an interest and are irrevocable for the term of this Agreement.

8.9Not a Voting Trust.  This Agreement is not a voting trust governed by Section 706(b) of the California Corporations Code and should not be interpreted as such.

8.10Specific Performance.  It is agreed and understood that monetary damages would not adequately compensate an injured party for the breach of this Agreement by any party, that this Agreement shall be specifically enforceable, and that any breach or threatened breach of this Agreement shall be the proper subject of a temporary or permanent injunction or restraining order. Further, each party waives any claim or defense that there is an adequate remedy at law for such breach or threatened breach.

8.11Amendment and Waiver.  Except as expressly provided herein, this Agreement may not be amended except by a written instrument referencing this Agreement and signed by (i) the Company, (ii) the Investor, and (iii) a majority-in-interest of the Significant Holders. Except as expressly provided herein, any term of this Agreement may not be waived except by a written instrument referencing this Agreement and signed by the Investor.

8.12No Waiver.  The failure or delay by a party to enforce any provision of this Agreement will not in any way be construed as a waiver of any such provision or prevent that party from thereafter enforcing any other provision of this Agreement. The rights granted both parties hereunder are cumulative and will not constitute a waiver of either party’s right to assert any other legal remedy available to it.

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8.13Jurisdiction and Venue.  The parties (i) hereby irrevocably and unconditionally submit to the jurisdiction of the federal and state courts located within the geographic boundaries of the United States District Court for the Northern District of California for the purpose of any suit, action or other proceeding arising out of or based upon this Agreement and the other Transaction Documents, (ii) agree not to commence any suit, action or other proceeding arising out of or based upon this Agreement or the Transaction Documents except in the f ederal and state courts located within the geographic boundaries of the United States District Court for the Northern District of California, and (iii) hereby waive, and agree not to assert, by way of motion, as a defense, or otherwise, in any such suit, action or proceeding, any claim that is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution that the suit, action or proceeding is brought in an inconvenient forum, that the venue of the suit, action or proceeding is improper or that this Agreement or the Transaction Documents or the subject matter hereof may not be enforced in or by such court.

8.14Severability.  If any provision of this Agreement becomes or is declared by a court of competent jurisdiction to be illegal, unenforceable or void, portions of such provision, or such provision in its entirety, to the extent necessary, shall be severed from this Agreement, and such court will replace such illegal, void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the extent possible, the same economic, business and other purposes of the illegal, void or unenforceable provision. The balance of this Agreement shall be enforceable in accordance with its terms.

8.15Counterparts.  This Agreement may be executed in one or more counterparts, each of which will be deemed an original, but all of which together will constitute one and the same agreement. Facsimile copies of signed signature pages will be deemed binding originals.

 (signature page follows)

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The parties are signing this Voting Agreement as of the date stated in the introductory clause.

COMPANY:

ZAP

a California corporation

By:  /s/ Steven Schneider

Name: Steven Schneider

Title: Chief Executive Officer

INVESTOR:

CHINA ELECTRIC VEHICLE CORPORATION,  

a British Virgin Island company

 [By: CATHAYA CAPITAL, L.P.

Its Sole Stockholder

By: Cathaya Capital, G.P.

Its General Partner

By: Cathaya Capital Co., Ltd.

Its General Partner]

By: /s/ Priscilla Lu  

Name: [Priscilla Lu]    

Title: [Director]

The parties are signing this Voting Agreement as of the date stated in the introductory clause.

SIGNIFICANT HOLDER

CATHAYA CAPITAL, L.P.

a Cayman Islands exempted limited partnership

By: Cathaya Capital, G.P.

Its General Partner

By: Cathaya Capital Co., Ltd.

Its General Partner

By: /s/ Priscilla Lu

Name: Priscilla Lu

Title: Director

The parties are signing this Voting Agreement as of the date stated in the introductory clause.

SIGNIFICANT HOLDER

Steven Schneider

(Print name of Significant Holder)

/s/ Steven Schneider

 (Signature)

(Print name of signatory, if signing for an entity)

 (Print title of signatory, if signing for an entity)

SCHEDULE I

SIGNIFICANT HOLDERS

Significant Holder	Common Stock
CATHAYA CAPITAL, L.P. a Cayman Islands exempted limited partnership	80,000,000
Steven Schneider 501 4th Street Santa Rosa, CA 95401	3,107,636

EX-10.6

EXHIBIT 10.6

SECURITY AGREEMENT

This Security Agreement (as amended, restated, modified or otherwise supplemented from time to time, this “Security Agreement”), dated as of January 12, 2011, is executed by ZAP, a California corporation (together with its successors and assigns, “Debtor”), in favor of China Electric Vehicle Corporation, a British Virgin Island company, as secured party (together with its successors and assigns, “Secured Party”).

RECITALS

A.           Debtor and Secured Party have executed a Senior Secured Convertible Note and Warrant Purchase Agreement, dated as of the date hereof (as amended, restated, modified or otherwise supplemented from time to time, the “Securities Purchase Agreement”).

B.           Pursuant to the Securities Purchase Agreement, Debtor has executed a Senior Secured Convertible Promissory Note, dated as of the date hereof (as amended, modified or otherwise supplemented from time to time, the “Note”) in the principal amount of nineteen million dollars ($19,000,000.00) in favor of Secured Party.

C.           In order to induce Secured Party to extend the credit evidenced by the Note, Debtor has agreed to enter into this Security Agreement and to grant Secured Party the security interest in the Collateral described below.

AGREEMENT

NOW, THEREFORE, in consideration of the above recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Debtor hereby agrees with Secured Party as follows:

1.Definitions and Interpretation.  When used in this Security Agreement, the following terms have the following respective meanings:

“Account Debtor” shall mean a Person who is obligated under an Account or any Chattel Paper, Document, Instrument, General Intangible or Supporting Obligation in respect thereof or relating thereto.

“Account” shall mean “account” as defined in the UCC, and all rights to payment, whether or not earned by performance, for goods or other property sold, leased, licensed, assigned or otherwise disposed of, or services rendered or to be rendered, including, without limitation all such rights constituting or evidenced by any General Intangible, together with all of Debtor’s rights, if any, in any goods or other property giving rise to such right to payment.

“Applicable Law” shall mean all laws, rules, regulations and binding governmental guidelines applicable to the Person, conduct, transaction, agreement or matter in question, including all applicable statutory law, common law and equitable principles, and all provisions of constitutions, treaties, statutes, rules, regulations, orders, rulings and decrees of Governmental Authorities having jurisdiction over such Person.

“Bankruptcy Code” shall mean Title 11 of the United States Code.

“Chattel Paper” shall mean all “chattel paper” as defined in Article 9 of the UCC.

“Collateral” has the meaning given to that term in Section 2 hereof.

“Commercial Tort Claim” shall have the meaning given to such term in Article 9 of the UCC.

“Copyright” means all:

(a)           Copyrights, whether or not published or registered under the Copyright Act of 1976, 17 U.S.C. Section 101 et seq., as the same shall be amended from time to time and any predecessor or successor statute thereto (the “Copyright Act”), and applications for registration of copyrights, and all works of authorship and other intellectual property rights therein, including without limitation, copyrights for computer programs, source code and object code databases and related materials and documentation, and (i) all renewals, revisions, derivative works, enhancements, modifications, updates, new releases and other revisions thereof, (ii) all income, royalties, da mages and payments now and hereafter due and/or payable with respect thereto, including without limitation, payments under all licenses entered into in connection therewith and damages and payments for past or future infringements thereof, (iii) the right to sue for past, present and future infringements thereof and (iv) all of Debtor’s rights corresponding thereto throughout the world;

(b)           Rights under or interests in any copyright license agreements with any other party, whether Debtor is a licensee or licensor under any such license agreement and the right to use the foregoing in connection with the enforcement of the Secured Party’s rights under the Transaction Documents; and

(c)           Copyrightable materials now or hereafter owned by Debtor, including without limitation, all tangible property embodying the copyright described in clause (a) hereof or such copyrightable materials, and all tangible property covered by the licenses described in clause (b) hereof.

“Deposit Account” shall mean “deposit account” as defined in Article 9 of the UCC.

“Document” shall mean “document” as defined in Article 9 of the UCC.

“Equipment” shall mean all “equipment” as defined in Article 9 of the UCC.

“Event of Default” has the meaning given to that term in the Note.

“Financed Receivables” shall mean all receivables against which advances are made to Debtor under the Note.

“General Intangible” shall mean “general intangible” as defined in Article 9 of the UCC.

“Goods” shall mean all “goods” as defined in Article 9 of the UCC.

“Governmental Authority” shall mean any federal, state, provincial, territorial, municipal, foreign or other governmental department, agency, commission, board, bureau, court, tribunal, instrumentality, political subdivision, or other entity or officer exercising executive, legislative, judicial, regulatory or administrative functions for or pertaining to any government or court, in each case whether associated with the United States, a state, district or territory thereof, Canada, or a province or territory thereof, or any other foreign entity or government.

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“Insolvency Proceeding” shall mean any case or proceeding commenced by or against a Person under any state, provincial, territorial, federal or foreign law for, or any agreement of such Person to, (a) the entry of an order for relief under the Bankruptcy Code, or the commencement of any proceeding under any other insolvency, debtor relief or debt adjustment law; (b) the appointment of a receiver, interim receiver, receiver-manager, monitor, trustee, liquidator, administrator, conservator or other custodian for such Person or any part of its Property under any bankruptcy or insolvency law; or (c) an assignment or trust mortgage for the benefit of creditors under any bankruptcy or insolvency law.

“Instrument” shall mean “instrument” as defined in Article 9 of the UCC.

“Intellectual Property” means all intellectual and similar property of every kind and nature now owned or hereafter acquired by Debtor, including inventions, designs, Patents, Copyrights, Trademarks, trade secrets, domain names, confidential or proprietary technical and business information, know-how, methods, processes, drawings, specifications or other data or information and all memoranda, notes and records with respect to any research and development, software and databases and all embodiments or fixations thereof whether in tangible or intangible form or contained on magnetic media readable by machine together with all such magnetic media and related documentation, registrations and franchises, and all additio ns, improvements and accessions to, and books and records describing or used in connection with, any of the foregoing.

“Inventory” shall mean: (i) all “inventory” as defined in Article 9 of the UCC and (ii) all goods held for sale or lease or to be furnished under contracts of service or so leased or furnished, all raw materials, work in process, finished goods, and materials used or consumed in the manufacture, packing, shipping, advertising, selling, leasing, furnishing or production of such inventory or otherwise used or consumed in Debtor’s business; all goods in which Debtor has an interest in mass or a joint or other interest or right of any kind; and all goods which are returned to or repossessed by Debtor, all computer programs embedded in any goods and all accessions thereto and products thereof (in each case, regardless of whether characterized as inventory un der the UCC).

“Investment Property” means “investment property” as defined in Article 9 of the UCC.

“Letter-of-Credit Right” means “letter-of-credit right” as defined in Article 9 of the UCC.

“Patents” means all (a) letters patent, design patents, utility patents, inventions and trade secrets, all patents and patent applications in the United States Patent and Trademark Office, and interests under patent license agreements, including without limitation, the inventions and improvements described and claimed therein, (b) licenses pertaining to any patent whether Debtor is licensor or licensee, (c) income, royalties, damages and payments now and hereafter due and /or payable under and with respect thereto, including without limitation, damages and payments for past, present or future infringements, (d) rights to sue for past, present and future infringements thereof, (e) rights corresponding thereto throughout the world in all jurisdictions in which such patents have been issued or applied for and (f) the reissues, divisions, continuations, renewals, extensions and continuations-in-part of any of the foregoing.

“Proceeds” shall mean all “proceeds” as defined in Article 9 of the UCC.

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“Property” shall mean any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible.

“Supporting Obligations” shall mean all “supporting obligations” as defined in Article 9 of the UCC.

“Trademarks” means all (a) trademarks, trademark registrations, interest under trademark license agreements, trade names, trademark applications, service marks, business names, trade styles, designs, logos and other source or business identifiers for which registrations have been issued or applied for in the United States Patent and Trademark Office or in any other office or with any other official anywhere in the world or which are used in the United States or any state, territory or possession thereof, or in any other place, nation or jurisdiction anywhere in the world, (b) licenses pertaining to any such mark whether Debtor is licensor or licensee, (c) all income, royalties, damages and payments for past, present or future infringements thereof, (d) rights to sue for past, present and future infringements thereof, (e) rights corresponding thereto throughout the world, (f) all product specification documents and production and quality control manuals used in the manufacture of products sold under or in connection with such marks, (g) all documents that reveal the name and address of all sources of supply of, and all terms of purchase and delivery for, all materials and components used in the production of products sold under or in connection with such marks, (h) all documents constituting or concerning the then current or proposed advertising and promotion by Debtor, their subsidiaries or licensees of products sold under or in connection with such marks, including without limitation, all documents that reveal the media used or to be used and the cost for all such advertising conducted within the described period or planned for such products and (i) renewals and proceeds of any of the foregoing.

“UCC” means the Uniform Commercial Code as in effect in the State of California from time to time.

All capitalized terms not otherwise defined herein shall have the respective meanings given in the Securities Purchase Agreement.

2.Grant of Security Interest.  As security for the Obligations, Debtor hereby pledges to Secured Party and grants to Secured Party a security interest of first priority in all right, title and interests of Debtor in and to all of the following property, whether now existing or hereafter from time to time acquired by the Company, including, but not limited to the following types of property (collectively, the “Collateral”):

(a)           all Accounts;

(b)           all Chattel paper;

(c)           all Commercial Tort Claims listed on Schedule B.

(d)           all Deposit Accounts and cash;

(e)           all Documents;

(f)           all Equipment;

(g)           all General Intangibles;

(h)           all Goods;

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(i)           all Instruments;

(j)           all Intellectual Property;

(k)           all Inventory;

(l)           all Investment Property;

(m)           all Letter-of-Credit rights;

(n)           upon completion of the Acquisition Transaction, all rights and title to, and interest in the Jonway Shares;

(o)           all accessions to, substitutions for, and all replacements, products, and cash and non-cash Proceeds of the foregoing, including Proceeds of and unearned premiums with respect to insurance policies, and claims against any Person for loss, damage or destruction of any Collateral; and

(p)           all books and records (including customer lists, files, correspondence, tapes, computer programs, print-outs and computer records) pertaining to the foregoing.

3.Representations and Warranties.  Debtor represents and warrants to Secured Party that:

(a)Collateral.  (i) Debtor is the owner of the Collateral (or, in the case of after-acquired Collateral, at the time Debtor acquires rights in the Collateral, will be the owner thereof) and that no other Person has (or, in the case of after-acquired Collateral, at the time Debtor acquires rights therein, will have) any right, title, claim or interest (by way of Lien or otherwise) in, against or to the Collateral, other than Permitted Liens; (ii) upon the filing of UCC-1 financing statements in the appropriate filing offices and execution of a control agreement with respect to each Deposit Account, Secured Party has (or in the case of after-acquired Collateral, at the time Debtor acquires rights therein, will have) a first priority perfected security interest in the Collateral to the extent that a security interest in the Collateral can be perfected by such filing or execution of such control agreement, except for Permitted Liens; (iii) other than financing statements filed in favor of Secured Party, no effective UCC-1 financing statement, fixture filing or other instrument similar in effect under any Applicable Law covering all of any part of the Collateral is on file in any filing or recording office except for (x) financing statements for which proper termination statements have been delivered to Secured Party and (y) financing statements filed in connection with Permitted Liens; (iv) all inventory related to Accounts has been (or, in the case of hereafter produced inventory, will be) produced in compliance with applicable laws, including the Fair Labor Standards Act; iv) all accounts receivable and payment intangibles are genuine and enfor ceable against the party obligated to pay the same; (v) the originals of all documents evidencing all accounts receivable and payment intangibles of Debtor and the only original books of account and records of Debtor relating thereto are, and will continue to be, kept at the chief executive office of Debtor set forth on Schedule B or at such other locations as Debtor may establish in accordance with Section 4(d), and (f) all information set forth in Schedule A and Schedule B hereto is true and correct.

(b)Accounts.  With respect to each Account,

(i)such Account represents valid, binding and enforceable obligations of the Account Debtor or other Persons obligated thereon;

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(ii)such Account is genuine and in all respects what it purports to be, and is not evidenced by a judgment;

(iii)such Account arises out of a an undisputed, completed and bona fide sale and delivery of goods in the ordinary course of business consistent with past practices, and substantially in accordance with any purchase order, contract or other document relating thereto;

(iv)such Account is for a sum certain, maturing as stated in the invoice or purchase order covering such sale, a copy of which has been furnished to Secured Party;

(v)such Account is not subject to any offset, Lien (other than Secured Party’s Lien) deduction, defense, dispute, counterclaim or other adverse condition except as arising in the ordinary course of business and disclosed to Secured Party or as contemplated by clause (vii) below, and it is absolutely owing by the Account Debtor, without contingency in any respect;

(vi)no purchase order, agreement, document or Applicable Law restricts grants of security interests in such Account to Secured Party (unless under Applicable Law the restriction is ineffective), and Debtor is the sole payee or remittance party shown on the invoice;

(vii)no extension, compromise, settlement, modification, credit, deduction or return has been authorized with respect to the Account, except discounts or allowances granted in the ordinary course of business consistent with past practices for prompt payment that are reflected on the face of the invoice related thereto and in the reports submitted to Secured Party hereunder;

(viii)to the best of Debtor’s knowledge, (x) there are no facts or circumstances that are reasonably likely to impair the enforceability or collectability of such Account; (y) the Account Debtor had the capacity to contract when the Account arose, continues to meet Debtor’s customary credit standards, is solvent,is generally paying its debts as they become due (except to the extent that such Account Debtor has established adequate reserves therefor in accordance with GAAP), is not contemplating or subject to an Insolvency Proceeding, and has not failed, or suspended or ceased doing business; and (z) there are no proceedings or actions threatened in writing o r pending against any Account Debtor that could reasonably be expected to have a material adverse effect on the Account Debtor’s financial condition;

(ix)to the best of Debtor’s knowledge, all Accounts comply in all material respects with all Applicable Laws concerning form, content and manner of preparation and execution, including, where applicable, any federal or state consumer credit laws;

(x)Debtor has not assigned any of its rights under the Account except as provided in this Security Agreement or as set forth in or permitted by the other Transaction Documents;

(xi)all statements made, all unpaid balances and all other information in the books and records and other documentation pertaining to the Account are in all material respects true and correct and what they purport to be; and

(xii)the originals of all documents evidencing all accounts receivable and payment intangibles of Debtor and the only original books of account and records of Debtor relating thereto are, and will continue to be, kept at the chief executive office of Debtor set forth on Schedule B or at such other locations as Debtor may establish in accordance with Section 4(d), and all information set forth in Schedule B hereto is true and correct.

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(c)Inventory Relating to Accounts.  Except for Inventory relating to Accounts that is in transit or as disclosed to Secured Party in writing prior to the date hereof, (i) no bailee, warehouseman or similar Person has possession of Inventory relating to Accounts and owned by Debtor and (ii) no Inventory relating to Accounts and owned by Debtor has been consigned to any Person or is held by such Debtor pursuant to a sale or return, sale on approval or similar arrangement.

(d)Intellectual Property.  (i) Debtor does not own any patents, trademarks, copyrights or mask works registered in, or the subject of pending applications in, the Patent and Trademark Office or the Copyright Office or any similar offices or agencies in any other country or any political subdivision thereof, other than those described on Schedule A hereto; (ii) Debtor has, except for Permitted Liens, the sole, full and unencumbered right, title and interest in and to the trademarks shown on Schedule A and the goods and services covered by the registrations thereof and, to the extent registered, such registrations are valid and enforceable and in full force and effect; (iii) Debtor has, except for Permitted Liens, the sole, full and unencumbered right, title and interest in and to each of the patents shown on Schedule A and the registrations thereof are valid and enforceable and in full force and effect; (iv) Debtor has, except for Permitted Liens, the sole, full and unencumbered right, title and interest in and to each of the copyrights shown on Schedule A and according to the records of the Copyright Office, each of said copyrights is valid and enforceable and in full force and effect; (v) Debtor has, except for Permitted Liens, the sole, full and encumbered right, title and interest in and to the mask works shown on Schedule A and according to the records of the Copyright Office, each of said mask works is valid and enforceable and in full force and effect; (vi) there is no claim by any third party that any patents, trademarks, copyrights or mask works are invalid and unenforceable or do or may violate the rights of any Person; (vii) all licenses (other than non-exclusive licenses to end-users) of patents, trademarks, copyrights, mask works and trade secrets which Debtor has granted to any Person are set forth in Schedule A hereto; (viii) Debtor has obtained from each employee who may be considered the inventor of patentable inventions (invented within the scope of such employee's employment) an assignment to Debtor of all rights to such inventions, including patents; and (ix) Debtor has taken all reasonable steps necessary to protect the secrecy and the validity under applicable law of all material trade secrets.

4.Covenants Relating to Collateral.  Debtor hereby agrees (a) to perform all acts that may be necessary to maintain, preserve, protect and perfect the Collateral, the Lien granted to Secured Party therein and the perfection and priority of such Lien, except for Permitted Liens; (b) not to use or permit any Collateral to be used (i) in violation in any material respect of any Applicable Law, or (ii) in violation of any policy of insurance covering the Collateral; (c) to pay promptly when due all taxes and other governmental charges, all Liens and all other charges now or hereafter imposed upon or affecting any Collateral; (d) with out 30 days' prior written notice to Secured Party, (i) not to change Debtor's name or place of business (or, if Debtor has more than one place of business, its chief executive office), or the office in which Debtor's records relating to accounts receivable and payment intangibles are kept, (ii) not to change Debtor’s state of incorporation, (iii) not to keep Collateral consisting of chattel paper at any location other than its chief executive office set forth in item 1 of Schedule B hereto, and (iv) not to keep Collateral consisting of equipment or inventory at any location other than the locations set forth in item 5 of Schedule B hereto,(f) to procure, execute and deliver from time to time any endorsements, assignments, financing statements and other writings reasonably deemed necessary or a ppropriate by Secured Party to perfect, maintain and protect its Lien hereunder and the validity and priority thereof or to enable Secured Party to exercise and enforce its rights and remedies hereunder, and to deliver promptly to Secured Party all originals of Collateral consisting of instruments; (g) to appear in and defend any action or proceeding which may affect its title to or Secured Party's interest in the Collateral; (h) if Secured Party gives value to enable Debtor to acquire rights in or the use of any Collateral, to use such value for such purpose; (i) to keep separate, accurate and complete records of the Collateral and to provide Secured Party with such records and such other reports and information relating to the Collateral as Secured Party may reasonably request from time to time; (j) not to surrender or

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lose possession of (other than to Secured Party), sell, encumber, lease, rent, or otherwise dispose of or transfer any Collateral or right or interest therein, and to keep the Collateral free of all Liens except Permitted Liens; provided that Debtor may sell, lease, transfer, license or otherwise dispose of any of the Collateral in the ordinary course of business consisting of (i) the sale of inventory, (ii) sales of worn-out or obsolete equipment, and (iii) non-exclusive licenses and similar arrangements for the use of the property of Debtor; (k) if requested by Secured Party, to type, print or stamp conspicuously on the face of all original copies of all Collateral consisting of chattel paper a legend satisfactory to Secured Party indicating that such chattel paper is subject to the security interest granted hereby; (l) to collect, enforce and receive delivery of the accounts receivable and payment intangibles in accordance with past practice until otherwise notified by Secured Party; (m) to comply with all material requirements of law relating to the production, possession, operation, maintenance and control of the Collateral (including the Fair Labor Standards Act); and (n) to permit Secured Party and its representatives the right, at any time during normal business hours, upon reasonable prior notice, to visit and inspect the properties of Debtor and its corporate, financial and operating records, and make abstracts therefrom, and to discuss Debtor’s affairs, finances and accounts with its directors, officers and independent public accountants.

5.Covenants Relating to Accounts.  Debtor hereby agrees to:

(a)Upon the request of Secured Party, promptly provide Secured Party with: (i) master customer listings, including all names and addresses, together with copies or originals (as requested by Secured Party) of documents, customer statements, repayment histories and present status reports relating to the Accounts; (ii) accurate records and summaries of Accounts, including detailed agings specifying the name, face value and date of each Financed Receivable, and listings of Accounts that are disputed or have been cancelled; and (iii) such other matters and information relating to the Accounts as Secured Party shall from time to time reasonably request;

(b)Give only normal discounts, allowances and credits and discounts, allowances and credits that are not materially less favorable to Debtor as is its standard practice as of the Closing Date as to Accounts, in the ordinary course of business, according to normal trade practices, and enforce all Accounts in accordance with their terms according to normal trade practices, and take all such action to such end as may from time to time be reasonably requested by Secured Party;

(c)Other than in the ordinary course of business, according to normal trade practices used by Debtor in the past, if any discount, allowance, credit, extension of time for payment, agreement to make a rebate or otherwise to reduce the amount owing on, or compromise or settle, an Account exists or occurs, or if, to Debtor’s knowledge, any dispute, setoff, claim, counter-claim or defense exists or has been asserted or threatened with respect to an Account, disclose such fact fully to Secured Party in the books and records relating to such Account and in connection with any Financed Receivable or report furnished by Debtor to Secured Party relating to such Account; provide d that after the occurrence and during the continuation of an Event of Default, Debtor shall not (i) grant any extension or renewal of time of payment of any Account, (ii) compromise or settle any dispute, claim or legal proceeding with respect to any Account for less than the total unpaid balance thereof, (iii) release, wholly or partially, any Person liable for the payment thereof, or (iv) allow any credit or discount thereon;

(d)If any Accounts arise from contracts with the United States or any department, agency or instrumentality thereof that individually or in the aggregate become material, use reasonable efforts to, as promptly as practicable, notify Secured Party thereof and execute any documents and instruments and take any other steps reasonably requested by Secured Party in order that all monies due and to become due thereunder shall be assigned to Secured Party and notice thereof given to the Federal authorities under the Federal Assignment of Claims Act;

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(e)In accordance with its sound business judgment, perform and comply in all material respects with its obligations in respect of the Accounts;

(f)Upon request of Secured Party, use reasonable efforts to, as promptly as practicable, mark the Accounts and all of Debtor’s books and records pertaining thereto with such legends as Secured Party shall reasonably specify to reference to the fact that Secured Party has a security interest therein;

(g)Upon request of Secured Party, (i) use reasonable efforts to, as promptly as practicable, notify all or any designated portion of the Account Debtors of Secured Party’s security interest, and (ii) upon the occurrence and during the continuation of an Event of Default, notify the Account Debtors or any designated portion thereof that payment shall be made directly to Secured Party or to such other Person or location as Secured Party shall specify;

(h)Upon the occurrence and during the continuation of any Event of Default, establish such lockbox or similar arrangements for the payment of the Accounts as Secured Party shall require;

(i)If at any time Debtor shall take a security interest in any property of an Account Debtor to secure the payment and performance of an Account, Debtor shall (i) promptly notify Secured Party of such security interest and (ii) if requested by Secured Party, promptly assign such security interest to Secured Party; and

(j)With respect to any Account that is evidenced by, or constitutes, Chattel Paper or Instruments, Debtor shall cause each originally executed copy thereof to be delivered to Secured Party promptly after Debtor’s receipt thereof, appropriately indorsed to Secured Party or indorsed in blank.

6.Covenants Relating to Inventory.  Debtor hereby agrees, upon the request of Secured Party, to (i) use reasonable efforts to, as promptly as practicable, provide Secured Party with a report of all Collateral consisting of Inventory relating to Accounts, in form and substance reasonably satisfactory to Secured Party; (ii) monthlytake a physical listing of such Inventory relating to Accounts and promptly deliver a copy of such physical listing to Secured Party; (iii) if any Collateral consisting of Inventory relating to Accounts is at any time evidenced by a document of title use reasonable efforts to, as promptly as practicable, deliver such document to Secured Party; and (iv) prior to any third party obtaining possession or control of any Inventory relating to Accounts, Debtor shall join with Secured Party in notifying the third party of Secured Party’s security interest and obtaining acknowledgement from the third party that it is holding such Inventory for the benefit of Secured Party.

7.Covenants Regarding Intellectual Property.  Debtor hereby agrees:

(a)Debtor will perform all acts and execute all documents, including notices of security interest for each relevant type of intellectual property in forms suitable for filing with the Patent and Trademark Office or the Copyright Office, that may be necessary or desirable to record, maintain, preserve, protect and perfect Secured Party's interest in the Collateral, the Lien granted to Secured Party in the Collateral and the first priority of such Lien;

(b)Except to the extent that Secured Party gives its prior written consent:

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(i)Debtor (either itself or through licensees) will continue to use its trademarks in connection with each and every trademark class of goods or services applicable to its current line of products or services as reflected in its current catalogs, brochures, price lists or similar materials in order to maintain such trademarks in full force and effect free from any claim of abandonment for nonuse, and Debtor will not (and will not permit any licensee thereof to) do any act or knowingly omit to do any act whereby any material trademark may become invalidated;

(ii)Debtor will not do any act or omit to do any act whereby any material patent registrations may become abandoned or dedicated to the public domain or the remedies available against potential infringers weakened and shall notify Secured Party immediately if it knows of any reason or has reason to know that any patent registration may become abandoned or dedicated; and

(iii)Debtor will not do any act or omit to do any act whereby any material registered copyrights or mask works may become abandoned or dedicated to the public domain or the remedies available against potential infringers weakened and shall notify Secured Party immediately if it knows of any reason or has reason to know that any registered copyright or mask work may become abandoned or dedicated to the public domain.

(c)While any Obligations remain outstanding or Secured Party has any commitment to extend credit under any Transaction Document, without the prior written consent of Secured Party, Debtor shall not register or cause to be registered with the United States Copyright Office any copyright registrations with respect to any proprietary software of Debtor or any other property of Debtor that may be registered with the United States Copyright Office.

(d)Subject to Section 5(c), Debtor will take all necessary steps in any proceeding before the Patent and Trademark Office, the Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to diligently prosecute or maintain, as applicable, each application and registration of the Patents, Trademarks, Copyrights and mask works, including filing of renewals, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings (except to the extent that dedication, abandonment or invalidation is permitted hereunder).

(e)While any Obligations are outstanding, Debtor shall (i) make application to the Patent and Trademark Office to register any material unpatented but patentable inventions developed by Debtor or its employees (within the scope of their employment), unless Debtor, in the exercise of its reasonable business judgment, deems any such patent not to have any significant commercial value or determines that its rights thereunder are better preserved as a trade secret; and (ii) make application to the Patent and Trademark Office to register any registerable but unregistered material Trademarks used by Debtor in connection with its products or services.

(f)Debtor shall (i) use proper statutory notice in connection with its use of the Patents, Trademarks, Copyrights and mask works, (ii) maintain consistent standards of quality in its manufacture of products sold under the trademarks or provision of services in connection with the trademarks, and (iii) take all steps necessary to protect the secrecy and the validity under Applicable Law of all material trade secrets.

(g)Debtor agrees that if it learns of any use by any Person of any term or design likely to cause confusion with any Trademark owned by Debtor, Debtor shall promptly notify Secured Party of such use and of all steps taken and to be taken to remedy any infringement of any Trademark owned by Debtor.

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(h)Debtor shall maintain with each employee who may have access to the trade secrets of Debtor an agreement by which such employee agrees not to disclose such trade secrets and with each employee who may be the inventor of patentable inventions (invented within the scope of such employee's employment) an invention assignment agreement requiring such employee to assign all rights to such inventions, including patents and patent applications, to Debtor and further requiring such employee to cooperate fully with Debtor, its successors in interest, including Secured Party, and their counsel, in the prosecution of any patent application or in any litigation involving the invention, whether such cooperation is required during such employe e's employment with Debtor or after the termination of such employment.

(i)Debtor shall have the right and obligation to commence and diligently prosecute such suits, proceedings or other actions for infringement or other damage, or reexamination or reissue proceedings, or opposition or cancellation proceedings as are reasonable to protect any of its Patents, Trademarks, Copyrights, mask works or trade secrets.  No such suit, proceeding or other actions shall be settled or voluntarily dismissed, nor shall any party be released or excused of any claims of or liability for infringement, without the prior written consent of Secured Party, which consent shall not be unreasonably withheld.

8.Authorized Action by Secured Party.  Debtor hereby irrevocably appoints Secured Party as its attorney-in-fact (which appointment is coupled with an interest) and agrees that Secured Party may perform (but Secured Party shall not be obligated to and shall incur no liability to Debtor or any third party for failure so to do) any act which Debtor is obligated by this Security Agreement to perform, and to exercise such rights and powers as Debtor might exercise with respect to the Collateral, including the right to (a) collect by legal proceedings or otherwise and endorse, receive and receipt for all dividends, interest, payments, proceeds and other sums a nd property now or hereafter payable on or on account of the Collateral; (b) enter into any extension, reorganization, deposit, merger, consolidation or other agreement pertaining to, or deposit, surrender, accept, hold or apply other property in exchange for the Collateral; (c) make any compromise or settlement, and take any action it deems advisable, with respect to the Collateral; (d) insure, process and preserve the Collateral; (e) pay any indebtedness of Debtor relating to the Collateral; and (f) execute UCC financing statements and other documents, instruments and agreements required hereunder; provided, however, that Secured Party shall not exercise any such powers granted pursuant to subsections (a) through (c) unless an Event of Default exists.  Debtor agrees to reimburse Secured Party upon demand for any reasonable costs and expenses, i ncluding attorneys' fees, Secured Party may incur while acting as Debtor's attorney-in-fact hereunder, all of which costs and expenses are included in the Obligations.  It is further agreed and understood between the parties hereto that such care as Secured Party gives to the safekeeping of its own property of like kind shall constitute reasonable care of the Collateral when in Secured Party's possession; provided, however, that Secured Party shall not be required to make any presentment, demand or protest, or give any notice and need not take any action to preserve any rights against any prior party or any other person in connection with the Obligations or with respect to the Collateral.

9.Default and Remedies.

(a)Default.  Debtor shall be deemed in default under this Security Agreement upon the occurrence and during the continuance of an Event of Default.

(b)Remedies.  Upon the occurrence and during the continuance of any such Event of Default, Secured Party shall have the rights of a secured creditor under the UCC, all rights granted by this Security Agreement and by law, including the right to:  (a) require Debtor to assemble the Collateral and make it available to Secured Party at a place to be designated by Secured Party; and (b) prior to the disposition of the Collateral, store, process, repair or recondition it or otherwise prepare it for disposition in any manner and to the extent Secured Party deems appropriate and in connection with such preparation and

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disposition, without charge, use any Trademark, trade name, Copyright, Patent or technical process used by Debtor.  Debtor hereby agrees that ten (10) days' notice of any intended sale or disposition of any Collateral is reasonable.  In furtherance of Secured Party's rights hereunder, Debtor hereby grants to Secured Party an irrevocable, non-exclusive license (exercisable without royalty or other payment by Secured Party, but only in connection with the exercise of remedies hereunder) to use, license or sublicense any Patent, Trademark, trade name, Copyright or other Intellectual Property in which Debtor now or hereafter has any right, title or interest together with the right of access to all media in which any of the foregoing may be recorded or stored.

(c)Litigation and Other Proceedings.  Upon the occurrence and during the continuation of an Event of Default, Secured Party shall have the right but not the obligation to bring suit or institute proceedings in the name of Debtor or Secured Party to enforce any rights in the Collateral, in which event Debtor shall at the request of Secured Party do any and all lawful acts and execute any and all documents reasonably required by Secured Party in aid of such enforcement.  If Secured Party elects not to bring suit to enforce any right under the Collateral, Debtor agrees to use all reasonable measures, whether by suit, proceeding or other action, to caus e to cease any infringement of any right under the Collateral by any Person and for that purpose agrees to diligently maintain any action, suit or proceeding against any Person so infringing necessary to prevent such infringement.

10.Miscellaneous.

(a)Notices.  Except as otherwise provided herein, all notices and other communications required or permitted hereunder shall be effective upon receipt and shall be in writing and may be delivered in person, by telecopy, electronic mail, express delivery service or U.S. mail, in which event it may be mailed by first-class, certified or registered, postage prepaid, addressed, to the party to be notified, at the respective addresses set forth below, or at such other address which may hereinafter be designated in writing:

Secured Party:

China Electric Vehicle Corporation

In care of Priscilla Lu

Cathaya Capital, L.P.

718 Best Court

San Carlos, CA 94070

with a copy to:

Hogan Lovells US LLP

525 University Avenue, 4th Floor

Palo Alto, CA 94301

Attention: Jon Layman, Esq.

Fax No.:  (650) 463-4199

Debtor:                                ZAP

Attn: Chief Financial Officer

501 4th Street

Santa Rosa, CA 95401

Attention: Chief Executive Officer

Telephone: (707) 525-8658

Fax No.: (707) 525-8692

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(b)Nonwaiver.  No failure or delay on Secured Party's part in exercising any right hereunder shall operate as a waiver thereof or of any other right nor shall any single or partial exercise of any such right preclude any other further exercise thereof or of any other right

(c)Amendments and Waivers.  This Security Agreement may not be amended or modified, nor may any of its terms be waived, except by written instruments signed by Debtor and Secured Party.  Each waiver or consent under any provision hereof shall be effective only in the specific instances for the purpose for which given.

(d)Assignments.  This Security Agreement shall be binding upon and inure to the benefit of Secured Party and Debtor and their respective successors and assigns; provided, however, that Debtor may not sell, assign or delegate rights, duties and obligations hereunder without the prior written consent of Secured Party; provided, further, that Secured Party shall have the right to assign any and all of Secur ed Party’s rights, duties and obligations hereunder at any time without the prior written consent of Debtor.

(e)Cumulative Rights, etc.  The rights, powers and remedies of Secured Party under this Security Agreement shall be in addition to all rights, powers and remedies given to Secured Party by virtue of any applicable law, rule or regulation of any governmental authority, the Transaction Documents or any other agreement, all of which rights, powers, and remedies shall be cumulative and may be exercised successively or concurrently without impairing Secured Party's rights hereunder.  Debtor waives any right to require Secured Party to proceed against any Person or to exhaust any Collateral or to pursue any remedy in Secured Party's power.

(f)Payments Free of Taxes, Etc.  All payments made by Debtor under the Transaction Documents shall be made by Debtor free and clear of and without deduction for any and all present and future taxes, levies, charges, deductions and withholdings.  In addition, Debtor shall pay upon demand any stamp or other taxes, levies or charges of any jurisdiction with respect to the execution, delivery, registration, performance and enforcement of this Security Agreement.  Upon request by Secured Party, Debtor shall furnish evidence satisfactory to Secured Party that all requisite authorizations and approvals by, and notices to and filings with, governm ental authorities and regulatory bodies have been obtained and made and that all requisite taxes, levies and charges have been paid.

(g)Partial Invalidity.  If at any time any provision of this Security Agreement is or becomes illegal, invalid or unenforceable in any respect under the law or any jurisdiction, neither the legality, validity or enforceability of the remaining provisions of this Security Agreement nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby.

(h)Expenses.  Debtor shall pay on demand all reasonable fees and expenses, including reasonable attorneys' fees and expenses, incurred by Secured Party in connection with custody, preservation or sale of, or other realization on, any of the Collateral or the enforcement or attempt to enforce any of the Obligations which is not performed as and when required by this Security Agreement.

(i)Headings.  Headings in this Security Agreement and each of the other Transaction Documents are for convenience of reference only and are not part of the substance hereof or thereof.

(j)Plural Terms.  All terms defined in this Security Agreement or any other Transaction Document in the singular form shall have comparable meanings when used in the plural form and vice versa.

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(k)Construction.  Each of this Security Agreement and the other Transaction Documents is the result of negotiations among, and has been reviewed by, Debtor, Secured Party and their respective counsel.  Accordingly, this Security Agreement and the other Transaction Documents shall be deemed to be the product of all parties hereto, and no ambiguity shall be construed in favor of or against Debtor or Secured Party.

(l)Entire Agreement.  This Security Agreement and each of the other Transaction Documents, taken together, constitute and contain the entire agreement of Debtor and Secured Party and supersede any and all prior agreements, negotiations, correspondence, understandings and communications among the parties, whether written or oral, respecting the subject matter hereof.

(m)Other Interpretive Provisions.   References in this Security Agreement to any document, instrument or agreement (a) includes all exhibits, schedules and other attachments thereto, (b) includes all documents, instruments or agreements issued or executed in replacement thereof, and (c) means such document, instrument or agreement, or replacement or predecessor thereto, as amended, modified and supplemented from time to time and in effect at any given time.  The words “hereof,” “herein” and “hereunder” and words of similar import when used in this Security Agreement refer to this Security Agree ment, as the case may be, as a whole and not to any particular provision of this Security Agreement.  The words “include” and “including” and words of similar import when used in this Security Agreement shall not be construed to be limiting or exclusive.

(n)Governing Law.  This Security Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to conflicts of law rules (except to the extent governed by the UCC).

[The remainder of this page is intentionally left blank]

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IN WITNESS WHEREOF, Debtor has caused this Security Agreement to be executed as of the day and year first above written.

ZAP

By: /s/ Steven Schneider       

Name: Steven Schneider

Title: Chief Executive Officer

AGREED:

China Electric Vehicle Corporation,

a British Virgin Island company

[By: Cathaya Capital, L.P.,

as Secured Party

By: Cathaya Capital, G.P.

Its General Partner

By: Cathaya Capital Co., Ltd.

Its General Partner]

By:  /s/ Priscilla Lu                                                                        

Name: Priscilla Lu                                                                

Title: Director                                                                

[Signature Page to Security Agreement]

SCHEDULE A

TO SECURITY AGREEMENT

COPYRIGHTS

None.

PATENTS

Patent #	Date Issued	Subject
Patent No. 5,491,390	2/13/1996	Electric motor power system for bicycles, tricycles, and scooters
Patent No. 5,671,821	9/30/1997	Electric motor system
Patent No. 5,848,660	12/15/1998	Portable Collapsible Scooter (ZAPPY)
Patent No. 5,634,423	6/3/1997	Personal Submersible Marine Vehicle
Patent No. 5,423,278	6/13/1995	Submersible Marine Vessel
Patent No. 5,303,666	4/19/1994	Submersible Marine Vessel
Patent No. 6,748,894	6/15/2004	Submersible Marine Vessel (sea scooter)
Patent No. 6,588,528	7/8/2003	Electric Vehicle Drive System
Patent No. 5,842,535	12/1/1998	Electric Drive Assembly for Bicycles
Patent No. 6,050,357	4/18/2000	Powered Skateboard
Patent No. 6,059,062	5/9/2000	Powered Roller Skates
Patent No. 5,735,361	4/7/1998	Dual-Pole Personal Towing Vehicle
Patent No. 5,913,373	6/22/1999	Dual-Pole Dual-Wheel Personal Towing Vehicle
Patent No. DS540,400	04/10/07	Three-Wheeled Vehicle (ZAPPY 3 Scooter)
Patent No. D433,718	11/14/2000	Portable Collapsible Scooter (ZAPPY)
Patent No. D347,418	5/31/1994	Scuba Scooter
Patent No. D359,022	6/6/1995	Scuba Scooter

A-1

PATENT APPLICATIONS

None.

TRADEMARKS

Mark	Registration No.	Registration Date
The Future is Electric	Trademark No. 2329466	12/21/99
ZAP	Trademark No. 1794866	07/06/93
ZAP Car	Trademark No. 2912329	12/21/04
ZAP Electric Vehicle Outlet	Trademark No. 2335090	03/28/00
ZAPPY	Trademark No. 2330894	03/21/00
Zapworld.com	Trademark No. 2371240	07/25/00
Zero Air Pollution	Trademark No. 2320346	12/22/00

TRADEMARK APPLICATIONS

None.

MASK WORKS

None.

A-2

SCHEDULE B

TO SECURITY AGREEMENT

DEBTOR PROFILE

1.Name.  The legal name of Debtor is and the address of its chief executive office is:

ZAP

501 4th Street

Santa Rosa, CA 95401

2.Organizational Identification Number; Federal Employer Identification Number.  The Debtor’s organizational identification number in its state of incorporation is 1913349 and Debtor's federal employer identification number is 94-3210624.

3.State of Incorporation; Prior Names.  Debtor was incorporated on September 23, 1994 in the state of California.  Since its incorporation Debtor has had the following legal names (other than its current legal name):

Date Debtor's Name

Prior Name                                                      Was Changed From Such Name

ZAP Power Systems                                        June 2, 1999

ZAPWorld.com                                               December 15, 2004

4.Debtor does business under the following trade names:

Trade Name	Is This Name Registered?	Registration No.	Registration Date
The Future is Electric	Yes	Trademark No. 2329466	12/21/99
ZAP	Yes	Trademark No. 1794866	07/06/93
ZAP Car	Yes	Trademark No. 2912329	12/21/04
ZAP Electric Vehicle Outlet	Yes	Trademark No. 2335090	03/28/00
ZAPPY	Yes	Trademark No. 2330894	03/21/00
Zapworld.com	Yes	Trademark No. 2371240	07/25/00
Zero Air Pollution	Yes	Trademark No. 2320346	12/22/00

A-3

5.Place of Business.  Debtor has the following places of business:

Address	Owner of Location	Brief Description of Assets and Value
501 4th Street, Santa Rosa, CA	ZAP	Corporate Headquarters; 20,000 square feet; approximate value - $2,700,000
8/9th Street, Santa Rosa, CA	Railroad Square LLC	Warehousing; 60,000 square feet
3362 & 3405 Fulton Road Santa Rosa, CA	Steven Schneider	Auto Lot / Office; 21,780 square feet; approximate value - $500,000

6.Assets in Possession of Third Parties.  The following are names and addresses of all persons or entities other than Debtor, such as lessees, consignees, warehousemen or purchasers of chattel paper, which have possession or are intended to have possession of any of the Collateral consisting of intsruments, chattel paper, inventory or equipment:

Name                                Mailing Address                                                      County                    ;                        State

None

7.Qualification To Do Business.  Debtor is qualified to do business in the following states:

All 50 States

8.Existing Security Interests.  Debtor's assets are subject to the following security interest of Persons other than the Collateral Agent:

None

9.Tax Assessments.  The following tax assessments are currently outstanding and unpaid:

Assessing Authority                                 Amount and Description

None

A-4

10.Bank Accounts; Securities Accounts:  The following is a complete list of all bank accounts and securities accounts maintained by Debtor (provide name and address of depository bank (or brokerage firm), type of account and account number):

Bank	Account Description	Account Number
North Coast Bank 90 South E. Street, Santa Rosa, CA 95404	ZAP Operating Account	#231XXXXXXX
North Coast Bank 90 South E. Street, Santa Rosa, CA 95404	ZAP Payroll Account	#231XXXXXXX
North Coast Bank 90 South E. Street, Santa Rosa, CA 95404	Voltage Vehicles Operating Account	#231XXXXXXX
North Coast Bank 90 South E. Street, Santa Rosa, CA 95404	Voltage Vehicles Payroll Account	#231XXXXXXX
North Coast Bank 90 South E. Street, Santa Rosa, CA 95404	Voltage Vehicles Money Market Account	#231XXXXXXX
North Coast Bank 90 South E. Street, Santa Rosa, CA 95404	ZAP Money Market Account	#231XXXXXXX
North Coast Bank 90 South E. Street, Santa Rosa, CA 95404	ZAP Inventory Purchases Account	#231XXXXXXX

11.Commercial Tort Claims.  Debtor has the following Commercial Tort Claims:

None

A-5

EX-99.1

EXHIBIT 99.1

ZAP Completes 51% Acquisition of China’s Jonway Automobile, Cathaya Capital Funded US$36 Million in Total

New U.S.-China Automaker Aims at Emerging Electric Car Market

SANTA ROSA, California (January 25) – Electric vehicle market pioneer ZAP (OTC BB: ZAAP) announced today that it has completed its acquisition of 51 percent of the capital stock of Zhejiang Jonway Automobile Co. Ltd. of Sanmen, Zhejiang, China.   Cathaya Capital LP has funded the aggregate amount of US$36 million.

 The final payment of US$19 million related to the acquisition was made on January 21, 2011 with the funding from Cathaya Capital.  Total cash payment for the acquisition of 51% of Jonway Automobile was US$30,030,000.

With ZAP’s electric vehicle (EV) technology expertise and international experience, the combined company intends to build the necessary production platform to address the Chinese EV market. The newly combined company, to be renamed ZAP Jonway, will leverage Jonway Auto’s SUV A380, as well as its established distribution channels to the Chinese market with over 90 direct dealers to manufacture and sell the SUVs powered by ZAP’s electric drive train.  ZAP Jonway’s electric vehicle sales will benefit from the 60,000 RMB (approximately US$9000) government incentives granted to electric car buyers.

Jonway Automobile anticipates vehicl sales for its gasoline A380 SUV will increase by 40 percent in 2011.  In 2009, Jonway Automobile experienced sales of 4,000 SUVs, their first year of sale for the A380 SUVs, and in 2010 sales rose to over 7,000, each with a sales price of around US$11,000. ZAP Jonway is currently adding to its manufacturing production lines to deliver the A380 EV SUV by the anticipated date of June 2011 and ZAP’s ALIAS EV roadster by September 2011.

“Jonway Automobile’s revenues from selling its gasoline vehicles will help build the foundation for ZAP Jonway’s growth in the electric vehicle market, allowing ZAP to focus on further strengthening its EV technology, reinforced by Jonway’s manufacturing production expertise and ready market access to China,” said Dr. Priscilla Lu founder and manager of Cathaya Capital, a Cross Border Fund focused on China. Dr. Lu has served as Chairman of the Board for ZAP since September 2009.  Cathaya Capital has invested US$36 million in ZAP since September 2009 with the goal of completing this 51 percent acquisition of Jonway Automobile.

Jonway Automobile is ISO 9000 certified with over 3.6 million square feet of fully provisioned factory space on 141 acres of land

This press release contains forward-looking statements. Investors are cautioned that such forward-looking statements involve risks and uncertainties, including, without limitation, continued acceptance of ZAP’s products, increased levels of competition, new products and technological changes, ZAP’s dependence upon third-party suppliers, intellectual property rights and other risks detailed from time to time in the ZAP’s periodic reports filed with the Securities and Exchange Commission.

Contact:

Alex Campbell

ZAP Jonway USA

+1-707-525-8658 x 241

acampbell@zapworld.com

Jessica Gao

ZAP Jonway China

+86 13511038395

juan.gao@zapworld.com