THIS QUARTERLY REPORT OF FORM 10-Q, INCLUDING THE FOLLOWING MANAGEMENT'S DISCUSSION AND ANALYSIS, AND OTHER REPORTS FILED BY THE REGISTRANT FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION (COLLECTIVELY THE "FILINGS") CONTAIN FORWARD-LOOKING STATEMENTS WHICH ARE INTENDED TO CONVEY OUR EXPECTATIONS OR PREDICTIONS REGARDING THE OCCURRENCE OF POSSIBLE FUTURE EVENTS OR THE EXISTENCE OF TRENDS AND FACTORS THAT MAY IMPACT OUR FUTURE PLANS AND OPERATING RESULTS. THESE FORWARD-LOOKING STATEMENTS ARE DERIVED, IN PART, FROM VARIOUS ASSUMPTIONS AND ANALYSES WE HAVE MADE IN THE CONTEXT OF OUR CURRENT BUSINESS PLAN AND INFORMATION CURRENTLY AVAILABLE TO US AND IN LIGHT OF OUR EXPERIENCE AND PERCEPTIONS OF HISTORICAL TRENDS, CURRENT CONDITIONS AND EXPECTED FUTURE DEVELOPMENTS AND OTHER FACTORS WE BELIEVE TO BE APPROPRIATE IN THE CIRCUMSTANCES. YOU CAN GENERALLY IDENTIFY FORWARD-LOOKING STATEMENTS THROUGH WORDS AND PHRASES SUCH AS "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT", "INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY RESULT", AND SIMILAR EXPRESSIONS. WHEN READING ANY FORWARD-LOOKING STATEMENT YOU SHOULD REMAIN MINDFUL THAT ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS OR FUTURE PERFORMANCE OF OUR COMPANY, AND ARE SUBJECT TO RISKS, UNCERTAINTIES, ASSUMPTIONS AND OTHER FACTORS RELATING TO OUR INDUSTRY AND RESULTS OF OPERATIONS, INCLUDING BUT NOT LIMITED TO THE FOLLOWING FACTORS:

o WHETHER THE ALTERNATIVE ENERGY AND GAS-EFFICIENT VEHICLE MARKET FOROUR PRODUCTS CONTINUES TO GROW AND, IF IT DOES, THE PACE AT WHICH IT MAY GROW;

o OUR ABILITY TO ATTRACT AND RETAIN THE PERSONNEL QUALIFIED TO IMPLEMENTOUR GROWTH STRATEGIES,

o OUR ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR OURPRODUCTS;

o OUR ABILITY TO PROTECT THE PATENTS ON OUR PROPRIETARY TECHNOLOGY;

o OUR ABILITY TO FUND OUR SHORT-TERM AND LONG-TERM FINANCING NEEDS;

o OUR ABILITY TO COMPETE AGAINST LARGE COMPETITORS IN A RAPIDLY CHANGINGMARKET FOR ELECTRIC AND GAS-EFFICIENT VEHICLES;

o CHANGES IN OUR BUSINESS PLAN AND CORPORATE STRATEGIES; AND

o OTHER RISKS AND UNCERTAINTIES DISCUSSED IN GREATER DETAIL IN VARIOUS SECTIONS OF THIS REPORT, PARTICULARLY THE SECTION CAPTIONED "RISK FACTORS."

SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD THE UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE ANTICIPATED, BELIEVED, ESTIMATED, EXPECTED, INTENDED OR PLANNED.

EACH FORWARD-LOOKING STATEMENT SHOULD BE READ IN CONTEXT WITH, AND WITH AN UNDERSTANDING OF, THE VARIOUS OTHER DISCLOSURES CONCERNING OUR COMPANY AND OUR BUSINESS MADE IN OUR FILINGS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENT AS A PREDICTION OF ACTUAL RESULTS OR DEVELOPMENTS. WE ARE NOT OBLIGATED TO UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENT CONTAINED IN THIS REPORT TO REFLECT NEW EVENTS OR CIRCUMSTANCES UNLESS AND TO THE EXTENT REQUIRED BY APPLICABLE LAW.

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

ZAP stands for Zero Air Pollution(R). With its new product offerings, the Company is positioned to become a leading brand and distribution portal of electric and other advanced technology vehicles. ZAP is committed to running its business based on a strong philosophical foundation that supports the environment, social responsibility and profitability.

ZAP's strategy is to serve the growing and underrepresented consumer that seeks electric and fuel efficient vehicles. With the recent increases in the cost of oil and increasing concern about the environment and the effects of global warming, we believe there is a large and untapped demand in the areas of transportation and consumer products. During the energy crisis of the 1970s, Japanese automobile manufacturers penetrated the United States market when domestic automobile manufacturers failed to anticipate changes. ZAP believes a similar opportunity is present today, enhanced by heightened environmental awareness, climate changes and economic pressures. ZAP has assembled a complete line of products to meet the growing demands of the environmentally conscious consumer focused on two primary businesses: ZAP Automotive and ZAP Power Systems.

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

SUBSIDIARIES

We have the following wholly owned subsidiaries : Voltage Vehicles, a Nevada company ("Voltage Vehicles"), ZAP Rental Outlet, a Nevada company ("ZAP Rentals"), ZAP Stores, Inc., a California company ("ZAP Stores"), ZAP Manufacturing, Inc., a Nevada company ("ZAP Manufacturing") and ZAP World Outlet, Inc., a California company ("ZAP World") ; Voltage Vehicles is engaged primarily in the distribution and sale of advanced technology and conventional automobiles; ZAP Stores is engaged primarily in consumer sales of ZAP products at one location and ZAP Manufacturing is engaged primarily in the distribution of ZAP products. ZAP World Outlet, ZAP Rental Outlet and RAP Group are not currently operating subsidiaries.

Recent Developments

Some of the noteworthy events for the Company that occurred during the third quarter of 2008 and through the date of this report are as follows:

1. On July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf Group, a Dubai-based conglomerate to provide future working capital to ZAP and help meet the growing demand for ZAP electric vehicles. The Al-Yousuf group is a major investor of ours and the President of Al-Yousuf LLC, Mr. Eqbal Al-Yousuf is our Chairman of the Board. The financing arrangement allows for advances by ZAP over the next few years.

3. Work commenced at the site of an electric car factory in Franklin, Kentucky, according to officials for Integrity Automotive, to expand electric vehicle manufacturing in the USA for ZAP. The Kentucky Economic Development Finance Authority gave preliminary approval for $68 million in state incentives for a large-scale manufacturing initiative with Integrity.

4. Zap's South American arm, ZAP Latin America, began sales of Zap's products in Uruguay and other South American and Latin American countries.

Results of Operations

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

                                      Three months ended   Nine months ended
                                         September 30        September 30
                                       2008       2007       2008     2007
      Statements of Operations Data:
      Net sales                        100%       100%      100%      100%
      Cost of sales                   (87.9)     (73.1)    (88.6)    (82.2)
      Operating expenses              (91.4)    (201.4)    (129.6)   (479.7)
      Loss from operations            (79.3)    (174.5)    (118.2)   (461.9)
      Net loss                        (81.0)    (185.4)    (123.7)   (480.0)

Quarter Ended September 30, 2008 Compared to Quarter Ended September 30, 2007

Net sales for the quarter ended September 30, 2008 were $3.1 million compared to $2 million for the period ended September 30, 2007.

Our third quarter sales of Advanced Technology vehicles such as the Xebra, our three wheeled electric car and Zapino, a full size electric road scooter increased from $773,000 in 2007 to $2.1 million in 2008. The primary reason is greater consumer demand due growing EV awareness and a larger number of dealers carrying our products.

We experienced an increase in retail sales by our car lot in the third quarter of $172,000 from $356,000 in 2007 to $528,000. Increase was due to a better mix of energy efficient cars and lower cost car models. In our Consumer Product segment third quarter sales increased from $156,000 in 2007 to $242,000 in 2008. The increase was due to sales of our new model of the ZAPPY PRO in 2008.

Gross profit decreased by $173,000 from $543,000 for the third quarter ended September 30, 2007 to $370,000 for the quarter ended September 30, 2008.

The third quarter gross profits for our Advanced Technology vehicles were approximately $262,000 for 2008 and $273,000 for 2007. The gross profit percentage decreased from 35% in third quarter of 2007 to 12% in 2008. The reason for the decrease was start up production issues for the new metal Xebra electric vehicles and upgrades to the Zapino which required additional labor post production.

The gross profits in the third quarter for our car lot sales increased from $77,000 or 22% of sales in 2007 to $156,000 or 29% of sales in 2008. The higher profits are due to the mix of vehicle models sold during the quarter.

Sales and marketing expenses decreased by $81,000 from $519,000 for the quarter ended September 30, 2007 to $438,000 in 2008. As a percentage of sales it represents a decrease from 25% to 14%. The decrease was due less use of outside consultants used to promote the sales efforts and a decrease in trade show attendance.

General and administrative expenses decreased by $1.3 million from $3.5million for the quarter ended September 30, 2007 to $2.2 million in 2008. The reason for the decrease was due to less expenditures for consulting and professional fees. Also the expense for stock options was less in the 2008 quarter since 2007 expenses included some one time grants to key employees.

Research and development expenses increased by $112,000 from $23,000 in 2007 to $135,000. The primary reason for the increase was expenses incurred in the new ATV, ZAP Dude, in the final development of a four (4)wheel product line, a line of low cost wheel motors and to build a full scale model of our new vehicle, the ZAP-Alias. This vehicle will be a production-ready all electric highway vehicle.

Interest expense, net decreased from an expense of $210,000 in third quarter 2007 to $55,000 in third quarter of 2008. The decrease was due to lower interest bearing balances on the 8% senior convertible debt.

Other income (expense), net increased from an expense of $10,000 for the third quarter of 2007 to other income of $2,000 in the third quarter of 2008.

Net Loss for the quarter ended September 30, 2008 was $2.5 million compared to a net loss of $3.7 million for period ended September 30, 2007.

Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Net sales for the nine months ended September 30, 2008, were $6 million compared to $4.5 million for the nine months ended September 30 in the prior year. Sales in the Advanced Technology segment increased from $2.2 million in 2007 to $4.2 million in 2008 primarily due to greater demand. With the high price of gasoline in the U.S. many consumers are seeking alternatives such as electric vehicles both our Xebra electric vehicle and our Zapino a full-size electric scooter.

We experienced a decrease of $243,000 in sales of consumer products from $543,000 in 2007 to $300,000 in 2008. Our main consumer product the ZAPPY3 electric scooter was not available in 2008 since our previous manufacturer experienced financial difficulties in early 2008 and we switched to a new contractor but did not receive new products until June 2008.

Sales in our Portable Energy segment decreased from $800,000 in 2007 to $173,000 in 2008. The primary reason for the decrease was the transfer in June of 2008of this product line to a new company, Portable Energy LLC in exchange for a 50% interest and a new product mix

Our retail car lot experienced a slight increase in sales from $1,012,000 in 2007 to $1,250,000 in 2008. However, the overall U.S. market for retail cars remains sluggish due to the tight economy.

In our Advanced Technology segment our gross profit increased from $353,000 in 2007 to $632,000 in 2008 or 16% of sales for both years. The increase was due to greater units sold from 60 vehicles in 2007 to 160 in 2008.

In our Consumer Products segment we experienced a decrease of $416,000 in gross profit from $265,000 in 2007 to a gross loss of $126,000 in 2008. As per above we did not have product available in 2008 but still incurred fixed expenses for labor, rents etc.

Gross profits in our retail car lot decreased from $195,000 or 19% of sales to $181,000 or 14 % of sales in 2008. This reflects lower margins on car sales due to the tight economy.

Sales and marketing expenses in the first nine months of 2008 increased by $86,000 from $1.1 million in 2007 to $1.2 million in 2008. The increase was due to higher salaries with more personnel in the function and outside consultants used to promote the sales efforts.

General and administrative expenses for the nine months ended September 30, 2008 decreased by $14.2 million from $20.3 million in 2007 to $6.1 million in 2008. The primary reason for the decrease was due to the 2007 one-time non-cash expense of $12 million to account for the modification and extension of certain expiring warrants that were issued to shareholders pursuant to the plan of reorganization in June of 2002 and also to current ZAP employees for compensation purposes. The warrants were extended by five years until July 2012 with the exercise prices also adjusted.

Research and development expenses increased by $44,000 from $412,000 in 2007 to $456,000 in 2008.
The higher expenses were due additional costs to build a full scale model of our new vehicle, the ZAP-Alias. This vehicle will be a production-ready all electric highway vehicle. We also incurred expenses to develop a heavy duty ATV for ZAP in the USA market and a four wheeled electric truck.

Interest expense, net decreased by $526,000 from an interest expense of $810,000 for the first nine months of 2007 to interest expense of $284,000 in the nine months ended September 30, 2008. The decrease was due to less interest and penalties paid in connection with the senior convertible debt that was issued in late 2006 and early 2007.

Other expense increased from $11,000 for the nine months ended September 30, 2007 to $42,000 in the first nine months of 2008. The main reason for the increase was our donation of $25,000 to the Red Cross for China earthquake relief.

Net Loss was $7.5 million for the nine months ended September 30, 2008 as compared to a net loss of $21.9 million for period ended September 30, 2007. The additional losses in 2007 were primarily due to the modification and extension of certain expiring warrants that were issued by the Company to selected shareholders and current ZAP employees, as well as stock-based compensation expense due to the adoption of SFAS 123R.

Liquidity and Capital Resources

In the first nine months of 2008 net cash used for operating activities was $5.3 million. Cash used in the first nine months of 2008 was comprised of the net loss incurred for the first nine months of $7.3 million plus net non-cash expenses of $4.2 million and the net decrease of $2.1 million in operating assets and liabilities. In the first nine months of 2007, the Company used cash for operations of $4.1 million was comprised of the net loss of $22.9 million plus net non-cash expenses of $18.2 million, and the net change in operating assets and liabilities of $458,000.

Investing activities used cash of $60,000 in the first nine months ended September 30, 2008 compared with a use of cash of $20,000 in 2007.

The Company had cash of $996,000 million at September 30, 2008 as compared to $ 739,000 at September 30, 2007. The Company had working capital of $235,000 and a working capital deficit of $1.5 million for the periods ended September 30, 2008 and 2007 respectively.

On July 30, 2008 we received a $10 million financing arrangement from the Al Yousuf Group, a Dubai-based conglomerate to provide future working capital to ZAP and help meet the growing demand for ZAP electric vehicles. The Al-Yousuf group is a major investor of ours and the President of Al-Yousuf, Mr. Eqbal Al-Yousuf is our Chairman of the Board. The financing arrangement allows for advances by ZAP over the next few years commencing on the date of the Note.

CRITICAL ACCOUNTING POLICIES

Revenue Recognition

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

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

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

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

The Company deems the collection of the amount invoiced probable.

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

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

Allowance for Doubtful Accounts

The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company records an allowance for doubtful accounts receivable for credit losses at the end of each period based on an analysis of individual aged accounts receivable balances. As a result of this analysis, the Company believes that its allowance for doubtful accounts is adequate at September 30, 2008 and 2007, respectively. If the financial condition of the Company's customers should deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Inventory Valuation

We adjust the value of our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions and development of new products by our competitors. Inventories consist primarily of vehicles, both gas and electric, parts and supplies, and finished goods, and are carried at the lower of cost (first-in, first-out method) or market.

We record a full valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made.

BUSINESS DEVELOPMENT

Founded in 1994, ZAP has invented, designed, manufactured, and marketed numerous innovative products since the Company's inception. In 1995, ZAP began marketing electric transportation on the Internet through our website, www.zapworld.com. ZAP has been a pioneer in developing and marketing electric vehicles such as a zero-emission ZAP(R) electric bicycle, ZAP Power System, which adapts to most bicycles, and the ZAPPY(R) folding electric scooter. From 1996 through 1998, we continued to add to our product line; in 1999, ZAP added electric motorbikes; in 2001, it added electric dive scooters; in 2003, ZAP announced its first electric automobiles, including the first-ever production electric automobile imported from its manufacturing partner in China; in 2004 ZAP introduced electric all-terrain vehicles and the fuel-efficient Smart Car; and in 2005 ZAP introduced multi-fuel vehicles, capable of running on ethanol and/or gasoline. To date, we have delivered more than 100,000 electric vehicles and consumer products to customers in more than 75 countries, which we believe establishes us as one of the leaders in the alternative transportation marketplace.

Today, ZAP is continuing its focus as one of the pioneers of advanced transportation technologies and leveraging its place in the market as a magnet for new technologies. The Company believes there is a growing and underrepresented market for fuel efficient transportation vehicles and we are capitalizing on the opportunities enhanced by heightened environmental awareness, climate changes and economic pressures. The technology is available to deliver transportation solutions that are practical and affordable. With our products such as the XEBRA and ZAPPY 3, ZAP is already delivering such solutions to the market. Our goal is to become one of the largest and most complete brand and distribution portals in the United States for advanced technology vehicles and 100% plug-in electrics.

To distribute our practical, affordable and advanced transportation technologies, we have established and are growing both our portal of qualified automotive dealers and our relationships with specialty dealers/distributors for our power system products. Through these distribution channels, coupled with the continued establishment of partnerships with select manufacturers, we intend to expand our market recognition by building awareness of the evolving technologies available for automotive transportation and in reducing our nation's dependency on foreign oil.

PRODUCT SUMMARY

Our existing product line, which includes completed, market ready products and planned introductions, is as follows:

ZAP AUTOMOTIVE

ZAP believes it is positioned to become one of the leading distributors of fuel efficient alternative energy vehicles in the United States. We believe that we are one of only a few companies distributing a 100% production electric vehicle capable of speeds up to 40 mph. Within the next twelve to thirty-six months, we hope to have distribution agreements in place with vehicle manufacturers whose products fit ZAP's mission. To distribute our product to end consumers and fleets, we have established more than 50 licensed automotive dealers and intend to grow this base significantly over the next several years.

In 2006, ZAP Automotive introduced the following automobile products:

o the 100% electric XEBRA sedan with an MSRP of approximately$11,000;

In 2007, ZAP Automotive introduced a new electric scooter, the ZAPINO, with an advanced 3,000 watt brushless DC hub motor, perfect for city commuting and able to reach speeds of 30 MPH with an MSRP of $3,500.

Our future offerings that are currently in the developmental stage include:

o The ZAP Alias, which has a target price of $32,500 per vehicle and an estimated range of 100 miles per charge. This vehicle launch date is for 2009.

o The ZAP Truck XL, which is a low speed 4 wheel utility truck and having a MSRP of approximately $14,900, scheduled for launch in the 4th quarter, 2009.

We are also in discussions with other foreign manufacturers and hope to establish additional relationships within the next twelve to thirty-six months for other vehicle platforms.

XEBRA

We believe that XEBRA is the only series production electric vehicle in the United States that can legally travel faster than 25 mph. The car's suggested retail price of $11,000 is significantly less expensive than most of its competitors, some of which cost more than $100,000 and are not yet widely available today. XEBRA has three wheels and is being imported as a motor-driven cycle, yet, unlike most other motor-driven cycles, the XEBRA is enclosed with windows and a roof, affording it protection from inclement weather.

Working with our Chinese manufacturing partner, we have designed two XEBRA models: a sedan and a utility pick-up truck. The Chinese manufacturer's current manufacturing capacity is approximately 1,000 vehicles per month. Subject in large part to the level of financing secured, our current target is to distribute approximately 200 vehicles per month over the next 12 months. Initial market demand has been strong, both from end consumers using the vehicle as a "city-car" and from fleet managers of municipalities, states, green friendly corporations, and universities who have a preference or mandate to purchase zero emission vehicles.

We are working closely with our manufacturing partner to continually upgrade the XEBRA, adding features while balancing the goal of maintaining an affordable price level. We are in the process of looking into incorporating options to enhance the consumer's experience, including providing lithium battery packs for additional (up to 100 mile) range. Solar options were introduced in the current quarter for true Zero Air Pollution.

XEBRA Sedan (ZAPCAR (R))

ZAP launched the sedan version of its XEBRA ZAPCAR on July 11, 2006. The sedan has a seating capacity for four and is being targeted for city/commuter use. Based on initial feedback, ZAP will be marketing the XEBRA sedan to government and corporate fleets as well as to families with two or more cars, but with plenty of occasion to use their vehicles for short, city drives.

XEBRA PK (ZAPTRUCK(R))

ZAP launched its utility pick-up truck version of the XEBRA, the XEBRA ZAPTRUCK, on August 24, 2006. This electric vehicle seats two with a . . .