ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

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

o WHETHER THE ALTERNATIVE ENERGY AND GAS-EFFICIENT VEHICLE MARKET FOR OUR 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 IMPLEMENT OUR GROWTH STRATEGIES,
o OUR ABILITY TO OBTAIN APPROVAL FROM GOVERNMENT AUTHORITIES FOR OUR PRODUCTS;
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 CHANGING MARKET 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.

SUMMARY OF KEY ACCOMPLISHMENTS DURING 2008
Recent Developments

Some of the significant events for the Company that occurred during the year of 2008 and through the date of this report are as follows:

1. We introduced a new four wheeled Electric Van and a Truck in December 2008. ZAP's new Shuttle was designed for passenger transport or cargo. The seats are removable so it can convert into a cargo vehicle with 108 cubic feet and a 900 lb. total carrying capacity. ZAP's new XL Truck was designed with a roomy cab for two and a sturdy bed platform capable of transporting 800 lbs. for on-road use and up to 1,600 lbs. capacity for private roads and facilities.

2. In January of 2009 we also introduced the ZAP Alias which is a stylish, 100% electric, 2-seater capable of freeway speeds. ZAP indicated the mass-production version of the Alias is targeted to be priced under $35,000. In the fourth quarter of 2009, ZAP plans to produce a limited number of hand-crafted, Signature Series Alias roadsters.

3. We are currently engaged in ongoing talks with Franklin-based ZAP Motor Manufacturing Kentucky led by CEO Gary Dodd and his new management team to build and assemble several of ZAP's best-selling electric vehicles.

4. 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.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2008 COMPARED TO YEAR ENDED DECEMBER 31, 2007

NET SALES for the year ended December 31, 2008, were $7.5 million compared to $5.7 million for the year ended December 31 in the prior year which is an increase of $1.8 million or 31%. Some of the reasons for the increase in sales are as follows:

Sales in the Advanced Technology segment increased from $2.8 million in 2007 to $4.9 million in 2008 primarily due to greater demand. With the higher price of gasoline in the U.S. during a major part of 2008 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 $39,000 in sales of consumer products from $742,000 in 2007 to $703,000 in 2008. Our main consumer product the ZAPPY3 electric scooter was not available until late in 2008 since our previous manufacturer experienced financial difficulties and discontinued production. We have located a new supplier to a new contractor but did not receive new products until March 2009.

Sales in our Portable Energy segment decreased from $875,000 in 2007 to $173,000 in 2008. The primary reason for the decrease was the transfer in June of 2008 of 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 $1.3 million in 2007 to $1.7 million in 2008. However, the overall U.S. market for retail cars remains sluggish due to the tight economic conditions.

GROSS PROFIT was $799,000 for the year ended December 31, 2008 compared to 775,000 for the year ended December 31, 2008 resulting in a increase of $24,000. The reasons for the increase were as follows:

In our Advanced Technology segment our gross profit increased from $247,000 in 2007 to $709,000 in 2008.
The increase was due to greater units sold from 287 vehicles in 2007 to 554 in 2008. The gross margins also increased from 9% to 14% due to less minor repairs to the finished vehicles sent by the factory in China.

In our Consumer Products segment we experienced a decrease of $224,000 in gross loss from $88,000 in 2007 to a gross loss of $312,000 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 $331,000 or 25% of sales to $298,000 or 14 % of sales in 2008. This reflects lower margins on car sales due to the tight economy.

SALES AND MARKETING EXPENSES for the year of 2008 increased by $300,000 from $1.5 million in 2007 to $1.8 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 in the Advanced Technology Segment.

GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December 31, 2008 decreased by $17.4 million from $25.3 million in 2007 to $7.8 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.
We also experienced a decrease in professional fees of approximately $600,000 in 2008.

RESEARCH AND DEVELOPMENT EXPENSES DECREASED by $200,000 from $616,000 in 2007 to $416,000 in 2008. The expenses in 2008 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. In 2008 we also incurred expenses to develop a heavy duty ATV for ZAP in the USA market and a four wheeled electric truck. During 2007 we spent approximately $600,000 for a project with Lotus Engineering for research and development for two concept electrical vehicles.

INTEREST EXPENSE, NET decreased by $998,000 from an interest expense of $1.4 million for the year ended December 31, 2007 to interest expense of $395,000 for the year ended December 31, 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 INCOME (EXPENSE) decreased from income of $199,000 for the year ended 2007 to an expense of $52,000 for 2007. In 2008 the expense includes our donation of $25,000 to the Red Cross for China earthquake relief and expensing the remaining balance of offering costs in connection with the convertible debt offering. In 2007 we recorded other

income due to the favorable valuation of stock that was issued in connection with the property we purchased in Mendocino, California.

NET LOSS was $9.8 million for the year ended December 31, 2008 as compared to a net loss of $28 million for period ended December 31, 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.

In 2008 we also experienced a $1.8 million increase in sales of our Advanced Technology electric vehicles. Many consumers are seeking sources of alternate energy transportation.

LIQUIDITY AND CAPITAL RESOURCES

The Company used cash in operations of $ 6.9 million and $5.3 million during the years ended December 31, 2008 and 2007, respectively. Cash used in operations in 2008 was the result of the net loss incurred for the year of $9.8 million, offset by non-cash expenses of $2.8 million. In 2008, non-cash expenses included $1.8 million for stock -based compensation for consulting and other services, $2.7 million for stock-based compensation to employees. Cash used in operations in 2007 was the result of the net loss incurred for the year of $28 million, offset by non-cash expenses of $5.1 million. In 2007,non-cash included $4.4million related to stock-based compensation for consulting and other services, $17.3million for stock-based compensation to employees.

In 2008, the net change in operating assets and liabilities resulted in a cash decrease of $2.1 million. The change was primarily due to increases for inventory.

In 2007,The net change in operating assets and liabilities resulted in a cash decrease of $739,000. The change was primarily due to decreases for inventory to generate cash.

Investing activities used cash of $110,000 and $189,000 during the year ended December 31, 2008 and 2007, respectively.

Financing activities provided cash of $3.1 million and $7.7 million during the year ended December 31, 2008 and 2007, respectively. In 2008, the Company borrowed funds on a $10 million financing facility established by Al Yousuf. In 2007, the Company received a $5 million investment by Al Yousuf.

The Company had cash and cash equivalents of $341,000 at December 31, 2008 as compared to $4.3 million at December 31, 2007. The Company had a working capital deficit of $981,000 at December 31, 2008 as compared to working capital of $3.4 million at December 31, 2007.

We do not have a bank operating line of credit, and there can be no assurance that any required or desired financing will be available through bank borrowings, debt or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may experience significant dilution in the net book value per share of common stock, and there is no guarantee that a market will exist for the sale of the Company's shares.

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.

Even though we received the $10 million financing arrangement noted above, we are still seeking additional capital to expand our current product line. The Company's primary capital needs are to continue building our dealer network

and expanding ZAP's market initiatives. ZAP also requires financing to purchase consumer product inventory for the continued roll-out of new products, to add qualified sales and professional staff to execute on ZAP's business plan, and to expand ZAP's efforts in the research and development of advanced technology vehicles, such as the new ZAP Alias and other fuel efficient vehicles.

STOCK ISSUED AS COLLATERAL

The stock was returned to the Company in January, 2008 and cancelled.

8% Senior Convertible Notes

On December 5, 2006, when the market price of the Company's common stock was $0.89 per share, the Company entered into a Securities Purchase Agreement with three institutional and accredited investors or purchasers pursuant to which the Company sold to the purchasers $1.5 million aggregate principal amount of 8% senior convertible notes due December 5, 2008 (the "Notes due 2008") and warrants to purchase 450,000 shares of common stock of the Company (the "Initial Warrants") in a private placement. The Notes due 2008 were originally convertible at $1.00 per share (the "Conversion Price") into 1,500,000 shares of the Company's common stock, subject to anti-dilution and other adjustments. The Initial Warrants, each immediately exercisable and expiring on December 5, 2011, are exercisable at $1.10 per share, subject to anti-dilution and other adjustments.

On February 20, 2007, when the market price of the Company's common stock was $1.08 per share, the Company entered into a Purchase and Amendment Agreement (the "Amendment"), amending the Securities Purchase Agreement entered into by the Company on December 5, 2006 (the "Original Agreement" and as amended by the Amendment, the "Agreement"), with several institutional and accredited investors or purchasers pursuant to which the Company sold to the purchasers $1.2 million aggregate principal amount of 8% senior convertible notes due February 2009 (the "Notes due 2009" and with the Notes due 2008, the "Notes") and warrants to purchase 360,000 shares of the common stock of the Company (the "Additional Warrants" and with the Initial Warrants, the "Warrants"), in a private placement. The transaction closed on February 22, 2007 (the "February 2007 financing"). The Notes due 2009 were originally convertible at $1.00 per share into 1,200,000 shares of the Company's common stock, subject to anti-dilution and other adjustments.

On June 26, 2007, the Company entered into an Amendment Agreement (the "Second Amendment") with the purchasers to adjust certain provisions of the Notes and Initial Warrants as a consequence of selling shares to a third party investor for per share consideration less than the conversion price of the Notes and exercise price of the Initial Warrants. As a result, the conversion price of the Notes was reduced to $0.72 per share.

On May 7, 2008, the Company entered into a settlement with Gemini Master Fund, LTD and Gemini Strategies, LLC, the holders of the 8% Senior Convertible Notes. The agreement reached requires the termination and cancellation of the notes in exchange for $475,000 in cash and 100,000 common shares of ZAP common stock. In connection with the aforementioned agreement ZAP has obtained the funds necessary for the payment of $475,000 through a note payable to Al Yousuf LLC. Eqbal Al Yousuf, who is the Chairman of the Board of ZAP, is also the President of Al Yousuf LLC.

The note bears interest at the greater of 6 month LIBOR plus 250 basis points or 6% per annum and may be converted in whole or in part into securities of the Company by November of 2008 in accordance with the terms of the note. The price was agreed to be at 90% of the closing market price on the date selected for conversion. On November 28, 2008, Al Yousuf converted the debt of $492,424 which represented principal and interest into 2,140,974 shares of ZAP common stock.

In order to finance our working capital requirements, we require additional financing, but there can be no assurances that we will obtain this capital or that it will be obtained on terms favorable to us. There can be no assurance that any required or desired financing will be available through bank borrowings, debt, or equity offerings, or otherwise, on acceptable terms. If future financing requirements are satisfied through the issuance of equity securities, investors may

experience significant dilution in the net book value per share of common stock and there is no guarantee that a market will exist for the sale of the Company's shares.

In addition to the above working capital needs, our other capital needs are to fund our growth strategy, which includes increasing our shopping mall presence, improving and increasing distribution channels, establishing Company owned and franchised ZAP stores, expanding our electric vehicle dealerships, introducing new products, improving existing product lines, and developing a strong corporate infrastructure.

SEASONALITY AND QUARTERLY RESULTS

The Company's business is subject to seasonal influences. Sales volumes in this industry typically slow down during the winter months, November to March in the U.S. The Company intends to develop a wide auto distribution network to counter any seasonality effects.

INFLATION

Our raw materials and finished products are sourced from stable, cost-competitive industries. As such, we do not foresee any material inflationary trends for our raw materials and finished goods sources.

USE OF ESTIMATES

The preparation of financial statements in conformity with U. S. generally accepted accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions affecting the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as revenues and expenses during the reporting period. The amounts estimated could differ from actual results.