**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**




**Washington,
      D.C. 20549**




**FORM
      10-QSB**




**x
      QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**


**For
      the quarterly period ended December 31, 2007**




or




**o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**


For
      the
      transition period from _________ to________




**Commission
      File Number 001-33540**




**ZBB
      ENERGY CORPORATION**


(Exact
      name of small business issuer as specified in its charter)




**Wisconsin**
            **39-1987014**(State
                or other jurisdiction of
            (I.R.S.
                Employer Identification No.)incorporation
                or organization)




**N93
      W14475 Whittaker Way, Menomonee Falls, WI 53051**


(Address
      of principal executive offices)




**(262)
      253-9800**


(Issuer’s
      telephone number)




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
      for
      such shorter period that the registrant was required to file such reports),
      and
      (2) has been subject to such filing requirements for the past 90 days. Yes
x           
No o




As
      of
      February 14, 2008 there were 10,512,283 shares of common stock, $0.01 par value,
      of the registrant issued and outstanding.




Transitional
      Small Business




Check
      whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange
      Act. Yes o        
No x




Transitional
      Small Business Disclosure Format (Check one): Yes o       
No x









ZBB
      Energy Corporation









Form
      10-QSB




TABLE
      OF
      CONTENTS




PART
                I. FINANCIAL INFORMATION (*)Item
                1.
            Financial
                Statements
            1Consolidated
                Balance Sheet
            1Statement
                of Operations
            2Statement
                of Changes in Shareholders’ Equity
            3Statement
                of Cash Flows
            4Notes
                to Financial Statements
            5Item
                2.
            Management’s
                Discussion and Analysis and Results of Operations
            14Item
                3.
            Controls
                and Procedures
            18PART
                II. OTHER INFORMATIONItem
                1.
            Legal
                Proceedings
            18Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            19Item
                3.
            Defaults
                upon Senior Securities
            19Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            19Item
                5.
            Other
                Information
            19Item
                6.
            Exhibits
            19Signatures
            20





(*)
      All
      of the financial statements contained in this Quarterly Report are unaudited
      with the exception of the financial information at June 30, 2007, which has
      been
      derived from our audited financial statements at that date and should be read
      in
      conjunction therewith. Our audited financial statements as of June 30, 2007
      and
      for the year then ended, and the notes thereto, can be found in our Annual
      Report on Form 10-KSB, which was filed with the Securities and Exchange
      Commission on October 10, 2007.









**PART
      I. FINANCIAL INFORMATION**




**Item
      1.**  **FINANCIAL STATEMENTS**




The
      accompanying unaudited balance sheet of ZBB Energy Corporation (the “Company”)
      at December 31, 2007 and the related unaudited statements of operations, changes
      in shareholder’s equity and cash flows for the three and six months ended
      December 31, 2007 and 2006 have been prepared by management in conformity with
      accounting principles generally accepted in the United States. In the opinion
      of
      management, all adjustments considered necessary for a fair presentation of
      the
      results of operations and financial position have been included and all such
      adjustments are of a normal recurring nature. Operating results for the period
      ended December 31, 2007 are not necessarily indicative of the results that
      can
      be expected for the fiscal year ending June 30, 2008 or any other subsequent
      period.




***ZBB
        ENERGY CORPORATION***
 
 Consolidated
        Balance Sheets as of December 31, 2007 and June 30, 2007
  **Dec
                    31, 2007**
                
                **June
                    30, 2007****Assets**
                
                *(unaudited)*Current
                    assets:Cash
                    and cash equivalents
                
                $
                10,710,581
                
                $
                17,823,022Accounts
                    receivable
                
                
                233,468
                
                
                192,768Other
                    receivables
                
                
                123,932
                
                
                36,602Inventories
                
                
                1,695,133
                
                
                1,272,568Prepaids
                    and other current assets
                
                
                168,662
                
                
                319,790**Total
                    current assets**
                
                
                **12,931,776**
                
                
                **19,644,750**Long-term
                    assets:Property,
                    plant and equipment, net
                
                
                3,834,288
                
                
                3,570,386Investment
                    in joint venture
                
                
                221,875
                
                
                213,025Goodwill
                
                
                803,079
                
                
                803,079**Total
                    assets**
                
                
                **17,791,018**
                
                **$**
                **24,231,240****Liabilities
                    and Shareholders' Equity**Current
                    liabilities:Bank
                    loans
                
                
                1,890,379
                
                
                1,890,379Accounts
                    payable
                
                
                423,267
                
                
                836,183Accrued
                    loss on contracts
                
                
                268,000
                
                
                357,250Deferred
                    revenues
                
                
                233,368
                
                
                336,305Accrued
                    compensation and benefits
                
                
                94,478
                
                
                84,148Notes
                    payable
                
                
                -
                
                
                4,523,060**Total
                    current liabilites**
                
                
                **2,909,492**
                
                
                **8,027,325**Long-term
                    liabilities:Bank
                    loans
                
                
                239,385
                
                
                285,712**Total
                    liabilities**
                
                **$**
                **3,148,877**
                
                **$**
                **8,313,037**Shareholders'
                    equityCommon
                    stock*($0.01
                    par value); 150,000,000 authorized**10,512,283
                    and 10,087,090 shares issued and outstanding*
                
                
                105,123
                
                
                100,871Additional
                    paid-in capital
                
                
                45,365,318
                
                
                44,994,333Note
                    receivable from shareholders
                
                
                (708,333
                )
                
                (808,333
                )Accumulated
                    other comprehensive (loss)
                
                
                (1,499,531
                )
                
                (1,546,537
                )Accumulated
                    (deficit)
                
                
                (28,620,436
                )
                
                (26,822,131
                )**Total
                    shareholders' equity**
                
                **$**
                **14,642,141**
                
                **$**
                **15,918,203****Total
                    liabilities and shareholders' equity**
                
                **$**
                **17,791,018**
                
                **$**
                **24,231,240**
 
 *See
        accompanying notes to consolidated financial statements*




-
          1-




***ZBB
        ENERGY CORPORATION***
 Consolidated
        Statements of Operations for the
 Three
        and
        Six Months Ended December 31, 2007 and 2006
  *Three
                  months ended December 31,*
              
              *Six
                  months ended December 31,***2007**
              
              **2006**
              
              **2007**
              
              **2006**unaudited
              
              unaudited
              
              unaudited
              
              unaudited**Revenues**Product
                  sales and revenues
              
              $
              12,418
              
              $
              299,309
              
              $
              121,355
              
              $
              509,589Engineering
                  and development contracts
              
              
              162,841
              
              
              -
              
              
              440,326
              
              
              -**Total
                  Revenues**
              
              
              **175,259**
              
              
              **299,309**
              
              
              **561,681**
              
              
              **509,589****Cost
                  and Expenses**Cost
                  of product sales
              
              
              13,562
              
              
              277,994
              
              
              102,975
              
              
              471,484Cost
                  of engineering and development contracts
              
              
              143,220
              
              
              -
              
              
              318,898
              
              
              -Selling,
                  general, and administrative
              
              
              852,469
              
              
              400,377
              
              
              1,467,831
              
              
              997,888Advanced
                  engineering and development
              
              
              342,652
              
              
              133,759
              
              
              519,756
              
              
              323,579Depreciation
              
              
              82,404
              
              
              64,565
              
              
              153,331
              
              
              128,736**Total
                  Costs and Expenses**
              
              
              **1,434,307**
              
              
              **876,695**
              
              
              **2,562,791**
              
              
              **1,921,687****Loss
                  from Operations**
              
              
              (1,259,048
              )
              
              (577,386
              )
              
              (2,001,110
              )
              
              (1,412,098
              )**Other
                  Income (Expense)**Interest
                  income
              
              
              146,062
              
              
              36,606
              
              
              324,924
              
              
              36,609Interest
                  expense
              
              
              (41,512
              )
              
              (185,018
              )
              
              (94,334
              )
              
              (352,165
              )Finance
                  costs
              
              
              -
              
              
              (84,182
              )
              
              (52,785
              )
              
              (161,875
              )Amortization
                  of debt discounts
              
              
              -
              
              
              (389,211
              )
              
              -
              
              
              (612,485
              )Rental
                  income
              
              
              12,500
              
              
              17,300
              
              
              25,000
              
              
              23,467**Total
                  Other Income (Expense)**
              ****
              ****
              **117,050**
              ****
              ****
              **(604,505**
              **)**
              ****
              **202,805**
              ****
              ****
              **(1,066,449**
              **)**Loss
                  before provision for Income Taxes
              
              
              (1,141,998
              )
              
              (1,181,891
              )
              
              (1,798,305
              )
              
              (2,478,547
              )Provision
                  for Income Taxes
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Net
                  Loss**
              
              **$**
              **(1,141,998**
              **)**
              **$**
              **(1,181,891**
              **)**
              **$**
              **(1,798,305**
              **)**
              **$**
              **(2,478,547**
              **)****Net
                  Loss per share-**Basic
                  and diluted
              
              **$**
              **(0.11**
              **)**
              **$**
              **(0.23**
              **)**
              **$**
              **(0.17**
              **)**
              **$**
              **(0.47**
              **)****Weighted
                  average shares-basic and diluted:**Basic
              
              
              10,512,283
              
              
              5,249,624
              
              
              10,414,875
              
              
              5,240,402Diluted
              
              
              10,512,283
              
              
              5,249,624
              
              
              10,414,875
              
              
              5,240,402




*See
        accompanying notes to consolidated financial statements.*




-2-




**ZBB
        Energy Corporation**
 **Consolidated
        Statements of Changes in Shareholders' Equity (unaudited)**
  Number
                  of
                Shares
              
              Common
                Stock
              
              Add'l
                  Paid-in
                Capital
              
              Note
                  Receivable fromShareholders
              
              Accumulated
                Other
                Comprehensive
                (Loss)
              
              Accumulated
                  Deficit
              
              **TOTAL
                  Shareholders'**
                **Equity**
              
              Comprehensive
                  (Loss)**Balance:
                  June 30, 2007**
              ****
              ****
              **10,087,090**
              ****
              **$**
              **100,871**
              ****
              **$**
              **44,994,333**
              ****
              **$**
              **(808,333**
              **)**
              **$**
              **(1,546,537**
              **)**
              **$**
              **(26,822,131**
              **)**
              **$**
              **15,918,203**
              ****Issuance
                  of common stockpursuant
                  to note conversions
              
              
              159,256
              
              
              1,593
              
              
              473,644
              
              
              
              
              
              
              
              
              
              
              $
              475,237Issuance
                  of common stockMontgomery
                  warrants
              
              
              265,937
              
              
              2,659
              
              
              (2,659
              )Reduction
                  of note receivable
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              -from
                  stockholder
              
              
              
              
              
              
              
              
              
              
              
              100,000
              
              
              
              
              
              
              
              $
              100,000Public
                  offering costs
              
              
              
              
              
              
              
              
              (100,000
              )
              
              
              
              
              
              
              
              
              
              $
              (100,000
              )Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (1,798,305
              )
              $
              (1,798,305
              )
              $
              (1,798,305
              )Net
                  Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              47,006
              
              
              
              
              $
              47,006
              
              
              47,006**Balance:
                  December 31, 2007**
              ****
              ****
              **10,512,283**
              ****
              **$**
              **105,123**
              ****
              **$**
              **45,365,318**
              ****
              **$**
              **(708,333**
              **)**
              **$**
              **(1,499,531**
              **)**
              **$**
              **(28,620,436**
              **)**
              **$**
              **14,642,141**
              ****
              **$**
              **(1,751,299**
              **)**
 
 *See
        accompanying notes to consolidated financial statements.*




-3-




**ZBB
                  Energy Corporation**
              
              Six
                  months ended December 31,Consolidated
                  Statements of Cash Flows (unaudited)
              
              **2007**
              
              **2006****Cash
                  flows from operating activities:**Net
                  loss
              
              **$**
              **(1,798,305**
              **)**
              **$**
              **(2,478,547**
              **)**Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
              
              
              153,331
              
              
              128,736Accrued
                  interest on notes payable
              
              
              -
              
              
              189,925Equipment
                  expensed to cost of contracts
              
              
              118,000
              
              
              -Payments
                  applied to note receivable for consulting fees
              
              
              100,000
              
              
              91,667Amortization
                  of note discounts and options
              
              
              -
              
              
              612,486Amortization
                  of deferred finance fees
              
              
              -
              
              
              161,875Prepaids
                  and other current assets reclassed to property, plant and
                  equipment
              
              
              (239,000
              )
              
              -(Increase)
                  decrease in operating assets:Accounts
                  receivable
              
              
              (40,700
              )
              
              (50,785
              )Inventories
              
              
              (422,565
              )
              
              (168,284
              )Prepaids
                  and other current assets
              
              
              151,128
              
              
              (7,330
              )Other
                  assets-interest receivable
              
              
              (87,330
              )
              
              -Increase
                  (decrease) in operating liabilities:Accounts
                  payable
              
              
              (412,917
              )
              
              386,375Accrued
                  expenses
              
              
              10,331
              
              
              24,401Accrued
                  loss on contracts
              
              
              (89,250
              )
              
              -Deferred
                  revenues
              
              
              (102,937
              )
              
              (268,064
              )Net
                  cash used in operating activities
              
              
              **(2,660,214**
              **)**
              ****
              **(1,377,545**
              **)****Cash
                  flows from investing activities**Capital
                  expenditures
              
              
              (258,077
              )
              
              (16,968
              )Net
                  cash (used) in investing activities
              
              
              **(258,077**
              **)**
              ****
              **(16,968**
              **)****Cash
                  flows from financing activities**Bank
                  loans and other borrowings
              
              
              (46,327
              )
              
              24,870Repayments
                  of notes payable
              
              
              (4,047,822
              )
              
              -Proceeds
                  from issue of notes payable
              
              
              -
              
              
              787,500Additional
                  public offering costs
              
              
              (100,000
              )
              
              -Deferred
                  finance fees
              
              
              -
              
              
              (214,485
              )Net
                  cash used by financing activities
              
              
              **(4,194,149**
              **)**
              
              **597,884**Effect
                  of exchange rate changes on cash
              
              
              -
              
              
              2,022**Net
                  decrease in cash and cash equivalents**
              
              
              (7,112,441
              )
              
              (794,606
              )**Cash
                  and cash equivalents - beginning of period**
              
              
              17,823,022
              
              
              794,606**Cash
                  and cash equivalents - end of period**
              
              **$**
              **10,710,581**
              ****
              **$**
              **-**Cash
                  paid for interest
              
              $
              146,440
              
              $
              162,240Supplemental
                  schedule of non-cash investing and financing activities:Issuance
                  of common stock pursuant to conversion of convertible
                  notes
              
              
              475,237
              
              
              60,000Issuance
                  of common stock pursuant to issuance of note receivable
              
              
              -
              
              
              1,000,000Prepaids
                  and other current assets reclassed to property, plant and
                  equipment
              
              
              239,000
              
              
              -Beneficial
                  conversion features on convertible debt issued
              
              
              -
              
              
              769,832
 
 *See
        accompanying notes to consolidated financial statements.*
  -4-





**ZBB
      ENERGY CORPORATION**


**Notes
      to Unaudited Consolidated Financial Statements**


**December
      31, 2007**





**NOTE
      1 - Basis of Presentation**




The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with generally accepted accounting principles for interim financial
      statements and with the instructions to Form 10-QSB. Accordingly, they do not
      include all of the information and disclosures required for annual financial
      statements. These financial statements should be read in conjunction with the
      financial statements and related footnotes for the year ended June 30,
      2007.




In
      the opinion of the Company’s management, all adjustments (consisting of normal
      recurring accruals) necessary to make the Company’s financial position as of
      December 31, 2007 and the results of operations and statements of cash flows
      for
      the periods shown not misleading, have been included.




The
      accompanying consolidated financial statements include the accounts of the
      Company and its wholly-owned subsidiaries and have been prepared in accordance
      with accounting principles generally accepted in the United States of America
      (GAAP). All significant intercompany accounts and transactions have been
      eliminated upon consolidation. The Company accounts for its 49% investment
      in
      ZBB China Pty Ltd, a joint venture company, under the “equity” method of
      accounting.




**NOTE
      2 - Nature of Organization**




The
      Company develops and manufactures distributed energy storage solutions based
      upon the Company’s proprietary zinc-bromine rechargeable electrical energy
      storage technology. The Company was incorporated under the laws of Wisconsin
      in
      1998.




The
      Company develops, manufactures and markets energy storage systems with electric
      utility applications as its initial market. This scalable, mobile system is
      ideally suited for a number of market applications including:




---
      Load
      management for generation, transmission and distribution utilities, energy
      service companies and large industrial customers allowing peak shaving and
      deferral of capital expenditures that otherwise would be required to alleviate
      utility system constraints.




---
      Uninterruptible power supply (“UPS”) providing power and quality protection for
      voltage, current or frequency deviations.




---
      Storage of renewable wind and solar energy production in both grid connected
      and
      grid independent environments.




The
      consolidated financial statements include the accounts of the Company and those
      of its wholly owned subsidiaries, ZBB Technologies, Inc. its manufacturing
      facility in Milwaukee, Wisconsin, and ZBB Technologies, Ltd., its Perth,
      Australia based advanced engineering and development facility and a 49% interest
      in a joint venture company called ZBB China Pty Ltd.





**NOTE
      3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




**Stock
      Split**




The
      Company completed a 1-for-17 reverse stock split immediately prior to the
      Company completing its public offering on June 20, 2007. All share and per
      share
      information included in these financial statements has been restated for this
      reverse stock split.




**Foreign
      Currency**




The
      Company uses the United States dollar as its reporting currency, while the
      Australian dollar is the functional currency of one of its operating units.
      Assets and liabilities of the Company’s international operations are translated
      into United States dollars at exchange rates that are in effect as at the
      balance sheet date while equity accounts are translated at historical exchange
      rates. Income and expense items are translated at average exchange rates which
      were applicable during the reporting period. Translation adjustments are
      accumulated in Accumulated Other Comprehensive (Loss) as a separate component
      of
      Shareholders’ Equity in the consolidated balance sheet. No gain or loss on
      translation is included in the net loss.




-5-




**Use
      of Estimates**




The
      preparation of financial statements and related disclosures in conformity with
      accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the consolidated financial statements and revenues
      and expenses during the period reported on. Actual results could differ from
      those estimates. Estimates are used in accounting for, amongst other things,
      revenue and losses recognized under the percentage of completion method for
      sales, impairment of assets, depreciation, and ending valuations of equity
      and
      debt instruments. Estimates and assumptions are reviewed periodically and the
      effects of any revisions are reflected in the consolidated financial statements
      in the period they are determined to be necessary.




**Income
      Tax**




Provisions
      for income taxes are based on taxes payable or refundable for the current year
      and deferred tax assets and liabilities are included in the financial statements
      at currently enacted income tax rates applicable to the period in which the
      deferred tax assets and liabilities are expected to be realized or settled
      as
      prescribed in FASB Statement No. 109, "Accounting for Income Taxes". As changes
      in tax laws or rates are enacted, deferred tax assets and liabilities are
      adjusted through the provision for income taxes.




Deferred
      tax assets, if any, are recorded at the likely realizable amounts as at the
      balance sheet dates.




**Property,
      Plant and Equipment**




Land,
      building, equipment, computers and furniture and fixtures are recorded at cost.
      Maintenance, repairs and betterments are charged to expense.




Finished
      goods normally held for sale to customers may sometimes be used in demonstration
      and testing by customers. During the periods that the units are transferred
      from
      Inventory to Plant and Equipment they are depreciated over the period in use.
      Since the intent is for these units to be eventually sold they are returned
      to
      Inventory upon the completion of customer demonstration and testing at their
      written down value.




**Depreciation**





Depreciation
      is provided for all Property, Plant and Equipment (excluding land) on a straight
      line basis over estimated useful lives of the assets.





The
      depreciation rate used for each class of depreciable asset is:




Depreciation
                RateManufacturing Equipment
            3
                - 15 yearsOffice Equipment
            3
                - 8 yearsBuilding
            40
                years




**Impairment
      of Long-Lived Assets**





In
      accordance with Statement of Financial Accounting Standards ("SFAS") No. 144,
      "Accounting for the Impairment or Disposal Of Long-Lived Assets," the Company
      assesses potential impairments to its long-lived assets including property,
      plant and equipment when there is evidence that events or changes in
      circumstances indicate that the carrying value may not be
      recoverable.





If
      such
      an indication exists, the recoverable amount of the asset, being the higher
      of
      the asset’s fair value less costs to sell and value in use, is compared to the
      asset’s carrying value. Any excess of the asset’s carrying value over its
      recoverable amount is expensed to the statement of operations. In assessing
      value in use, the estimated future cash flows are discounted to their present
      value using a pre-tax discount rate.





**Goodwill**





Goodwill
      represents the cost of acquisition of a group of assets in excess of the net
      fair value of the identifiable assets.





Following
      initial recognition, goodwill is measured at cost less any accumulated
      impairment losses. Goodwill is not amortized but reviewed for impairment
      annually or more frequently if events or changes in circumstances indicate
      that
      its carrying value may be impaired.




-6-




**Cash
      and Cash Equivalents**





The
      Company considers all highly liquid investments with maturities of 90 days
      or
      less to be cash equivalents.




The
      Company maintains its cash deposits with a few high credit quality financial
      institutions predominately in the United States. At times such balances may
      exceed federally insurable limits. The Company has not experienced any losses
      in
      such accounts and believes it is not exposed to any significant
      risk.




**Inventories**





Inventories
      are stated at the lower of cost (first-in, first-out method) or market and
      consist of raw materials, work in progress and finished goods held for
      resale.





Costs
      incurred in bringing each product to its present location and conditions are
      accounted for as follows:


·
            Raw
                materials - purchased cost of direct
                material


·
            Finished
                goods and work-in-progress - purchased cost of direct material plus
                direct
                labor plus a proportion of manufacturing
                overheads.





**Revenue
      Recognition**





The
      Company currently contracts with its customers to develop, manufacture, install
      and service its energy storage systems under long-term contracts. These
      contracts have resulted in two distinct arrangements and revenue recognition
      policies. The first type of contract is for the production, delivery and
      installation of energy storage systems. The second type of contract is for
      product engineering and development activities. Where agreements become more
      complex and contain features of both products and services, the Company will
      attempt to separate the features into multiple accounting units in which each
      unit would contain an allocation of the relative fair value of the contract
      and
      be recognized over the respective reporting period. Such determinations require
      the Company to make certain assumptions, estimates and judgments.





Revenue
      recognition on energy storage system contracts utilizes the
      percentage-of-completion method which recognizes revenue proportionally as
      costs
      are incurred and compared to the estimated total costs for each contract. The
      amount of revenue deferred under this method as of December 31, 2007 is $233,368
      calculated on the $1,905,956 billed under the terms of the current contracts,
      less $1,672,588 recognized as revenue to date. Included in the deferred revenue
      is $160,000 received from ZBB China Pty Ltd, a 49% owned joint venture company
      (see Note 14 - Related Party Transactions). During the six months ended December
      31, 2007 and 2006, $121,355 and $509,589 respectively was recognized as revenue
      on an energy storage system contract with the California Energy
      Commission.





Engineering
      and development contracts are typically collaborative agreements to further
      develop renewable energy technologies and are often sponsored and partially
      funded in various amounts between government agencies and the Company. Such
      multi-year agreements may contain several elements and provide for varying
      consideration based on allowable costs, milestones and similar payment
      provisions and may provide for future licensing and royalties beyond the term
      of
      the arrangement. Revenue associated with performance milestones is recognized
      based on expenditures or achievements as defined in the respective
      agreements.





In
      July
      2007 the Company commenced engineering and product development activities
      pursuant to a collaborative project (Advanced Electricity Storage Technologies
      project) with an Australian government agency through July 2010 which terms
      include the receipt of funding of A$3.1M (approximately US$2.6M) toward future
      development costs which include the production and delivery of one 500kWh energy
      storage system. During the six months ended December 31, 2007, $440,326 was
      recognized as revenue based on the completion of all or a part of the first
      three of nine performance milestones specified in the contract.





As
      the
      Company’s energy storage systems are still being developed and integrated into
      commercial production actual costs incurred could differ materially from those
      previously estimated. Once the Company has established that its costs can be
      reasonably estimated, costs to complete an individual contract in excess of
      revenue will be accrued upon identification. As of December 31, 2007 provisions
      of $268,000 have been identified and accrued on existing contracts.





For
      the
      period ended December 31, 2007 substantially all of the Company’s revenues were
      from the two multi-year contracts discussed above.




-7-




**Loss
      per Share**





The
      Company adopted Statement of Financial Accounting Standards No. 128 which
      requires the reporting of both basic and diluted earnings (loss) per share.
      Basic earnings (loss) per share is computed by dividing net income (loss)
      available to common stockholders by the weighted average number of common shares
      outstanding for the period.





Diluted
      earnings (net loss) per share reflect the potential dilution that could occur
      if
      securities or other contracts to issue Common stock were exercised or converted
      into common stock. In accordance with FASB 128, any anti-dilutive effects on
      net
      income (loss) per share are excluded.




**Convertible
      Notes**





The
      Company accounts for convertible notes deemed conventional and conversion
      options embedded in non-convertible notes which qualify as equity under EITF
      00-19, in accordance with the provisions of Emerging Issues Task Force Issue
      ("EITF") 98-5 "Accounting for Convertible Securities with Beneficial Conversion
      Features," and EITF 00-27 "Application of EITF 98-5 to Certain Convertible
      Instruments." Accordingly, the Company records as a discount to convertible
      notes, the intrinsic value of such conversion options based upon the differences
      between the fair value of the underlying common stock at the commitment date
      of
      the note transaction and the effective conversion price embedded in the note.
      Debt discounts under these arrangements are amortized over the term of the
      related debt to their earliest date of redemption.





**Stock-Based
      Compensation**





In
      December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS
      No.
      123, "Share-Based Payment" ("SFAS No. 123(R)"), which is a revision of SFAS
      No.
      123. SFAS 123(R) supersedes APB 25 and amends SFAS No. 95, "Statement of Cash
      Flows." Generally, the approach in SFAS No. 123(R) is similar to the approach
      described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based
      payments to employees, including grants of employee stock options, to be
      recognized in the income statement based on their fair values. Pro forma
      disclosure is no longer an alternative. The provisions of this statement are
      effective for the Company as of July 1, 2006.




**Advanced
      engineering and development**





The
      Company expenses advanced engineering and development costs as incurred. These
      costs consist primarily of labor, overhead, and materials to build prototype
      units, materials for testing, develop manufacturing processes and include
      consulting fees and other costs. Intellectual property, including internally
      generated patents and know-how is carried at no value. To the extent these
      cost
      are allowable costs and funded by advanced engineering and development type
      agreements with outside parties, typically government agencies, they will be
      shown separately on the statement of operations as a cost to these projects.
      See
      the Revenue Recognition accounting policy note above for additional information
      on these type of agreements.





**Comprehensive
      income (loss)**





The
      Company reports its comprehensive income (loss) in accordance with SFAS 130,
      Reporting Comprehensive Income, which requires presentation of the components
      of
      comprehensive earnings. Comprehensive income (loss) consists of net income
      (loss) for the period plus or minus any net translation adjustments applicable
      for the periods ended December 31, 2007 and 2006.





**Recent
      Accounting Pronouncements**





In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 141 (revised 2007), Business
      Combinations (“SFAS No.141R”). SFAS No.141R among other things, establishes
      principles and requirements for how the acquirer in a business combination
      (i)
      recognizes and measures in its financial statements the identifiable assets
      acquired, the liabilities assumed, and any non **-** controlling
      interest in the acquired business, (ii) recognizes and measures the goodwill
      acquired in the business combination or a gain from a bargain purchase and
      (iii)
      determines what information to disclose to enable users of the financial
      statements to evaluate the nature and financial effects of the business
      combination. SFAS No.141R is effective for fiscal years beginning on or after
      December 15, 2008, with early adoption prohibited. This standard will change
      our
      accounting treatment for business combinations on a prospective basis.




-8-




In
      December 2007, the Financial Accounting Standards Board (FASB) issued SFAS
      No.
      160, “Non-controlling Interests in Consolidated Financial Statements - an
      amendment of ARB No. 51”. This statement improves the financial information that
      a reporting entity provides in its consolidated financial statements by
      establishing accounting and reporting standards that require; the ownership
      interests in subsidiaries held by parties other than the parent and the amount
      of consolidated net income attributable to the parent and to the non-controlling
      interest be clearly identified and presented on the face of the consolidated
      statements. SFAS No. 160 is effective for fiscal years, and interim periods
      within those fiscal years beginning on or after December 15, 2008. Early
      adoption is prohibited. The adoption of this statement is not expected to have
      a
      material effect on the Company's financial statements.




**NOTE
      4 - INVENTORIES**




Inventory
      balances are comprised of the following amounts as of December 31,
      2007:





Raw
                materials
            
            $
            575,006Work
                in progress
            
            
            655,012Finished
                goods
            
            
            465,115**TOTAL**
            
            **$**
            **1,695,133**




**NOTE
      5- PROPERTY, PLANT & EQUIPMENT**




Office
                equipment
            
            $
            108,834Manufacturing
                equipment
            
            
            3,193,447Test
                units
            
            
            364,258Building
            
            
            1,996,134Land
            
            
            217,000**5,879,673**Less,
                accumulated depreciation
            
            
            (2,045,385
            )Net
                Property, Plant & Equipment
            
            **$**
            **3,834,288**




**NOTE
      6 - INVESTMENT IN JOINT VENTURE**




In
      March
      2005, the Company acquired a 49% interest in ZBB China Pty Ltd for a cost of
      $221,875 (adjusted for current period foreign exchange rates). The joint venture
      company is licensed to distribute ZBB energy storage systems into the Chinese
      market.





During
      the periods ended December 31, 2007 and 2006 there was no significant activity
      in the joint venture company.





**NOTE
      7 - GOODWILL**




The
      Company through a series of transactions in March 1996 acquired ZBB
      Technologies, Inc., a wholly-owned subsidiary.





Goodwill
      is the excess of the purchase price paid over the fair value of the identifiable
      net assets acquired in purchase business combinations. The Company accounts
      for
      goodwill in accordance with Statement of Financial Accounting Standards
      No. 142, Goodwill and Other Intangible Assets (“Statement 142”). Under
      Statement 142, goodwill and other intangible assets deemed to have indefinite
      lives are not amortized but are subject to annual impairment tests. Impairment
      is the condition that exists when the carrying amount of goodwill exceeds its
      implied fair value. The implied fair value of goodwill is the amount determined
      by deducting the estimated fair value of all tangible and identifiable
      intangible net assets of the reporting unit to which goodwill has been allocated
      from the estimated fair value of the reporting unit. If the recorded value
      of
      goodwill exceeds its implied value, an impairment charge is recorded for the
      excess.





The
      goodwill amount of $1.134 million, the difference between the price paid for
      ZBB
      Technologies, Inc. and the net assets of the acquisition, amortized through
      fiscal 2002, results in the net goodwill amount of $803,079 as of December
      31,
      2007.





-9-




**NOTE
      8 - NOTE RECEIVABLE-SHAREHOLDER**





In
      July
      2006, the Company agreed to a stock sale agreement with 41 Broadway Associates,
      LLC. Under the terms of the agreement the Company sold to 41 Broadway Associates
      a total of 294,118 shares in consideration for a 4% $1,000,000 promissory note
      from 41 Broadway Associates payable in installments over 5 years.




As
      of
      December 31, 2007 the Company is owed $708,333 on the note, which is reflected
      as a reduction to Shareholders’ equity and $56,275 in accrued interest.





**NOTE
      9 - NOTES PAYABLE AND CONVERTIBLE DEBT**





***$1,000,000
      Montgomery Capital Partners LP Convertible Debt
      Facility***





On
      February 28, 2006 the Company borrowed $1,000,000 from Montgomery Capital
      Partners L.P., and entered into a convertible loan and warrant agreement (the
      “Montgomery Facility”). Interest on the Montgomery facility accrued at 10% per
      annum compounded monthly and became payable in full on the earliest to occur
      of
      the consummation by the Company of any major financing, a default, or February
      28, 2008.





On
      July
      11, 2007, subsequent to the Company’s public offering the Company repaid the
      Montgomery Facility an aggregate of $1,295,239 representing $890,000 of the
      outstanding principal amount of the Montgomery Facility, $124,918 in accrued
      interest, $178,000 as the contractual prepayment premium, and $102,321 in
      certain loan deferral fees all of which were accrued and expensed during the
      year ended June 30, 2007. Under the terms of the Montgomery Facility the Company
      was also required to issue to Montgomery shares of common stock equal to 50%
      of
      the amount required to be repaid under the Montgomery Facility, divided by
      the
      conversion price then in effect. Based on the application of above formula
      Montgomery was issued an aggregate of 202,674 shares of common stock.





The
      Montgomery Facility also provided that Montgomery would receive up to 117,647
      warrants to purchase common stock, the exercise price of which was to set at
      the
      time subscription notice is given with respect to such warrants. On July 11,
      2007, the Company issued an aggregate of 63,263 shares of common stock in
      respect of the cashless exercise of Montgomery’s warrants on July 5,
      2007.





***$2,226,667
      Bushido Loan***





On
      June
      14, 2006 the Company entered into a Note Purchase Agreement with Bushido Capital
      Master Fund, L.P.; ABS SOS-Plus Partners, Ltd; and Pierce Diversified Strategy
      Master Fund, (the “Bushido Lenders”) pursuant to which the Company issued an
      aggregate of $2,226,667 face amount of secured promissory notes at a 25%
      original issue discount and warrants to purchase the Company’s common stock (the
“Bushido Warrants”). Interest on the Bushido Loan accrued at 8%, payable
      quarterly on 75% of the face amount of the notes. The Bushido loan was due
      in
      full on July 14, 2008.





In
      June
      of 2007, all of the warrants were exercised resulting in the issuance of 110,628
      shares to each of Bushido and Pierce and 436,600 shares to ABS-SOS. ABS-SOS
      paid
      an aggregate of $1,113,300 for their shares with Bushido and Pierce exercising
      via cashless exercise.





On
      August
      7, 2007, after discussions with the Bushido Lenders, the Company agreed to
      the
      following re-payment terms, all of which have been satisfied:





---The
      Company paid the full $2,226,667 due under the Bushido Loan to Bushido, Pierce
      and ABS-SOS Partners, plus $20,000 in reimbursement of their legal fees on
      August 8, 2007 in full satisfaction of all obligations under the note purchase
      agreement. Such payment resulted in a release of all liens of ZBB assets
      including a pledge of the shares of our subsidiaries.





---The
      Company agreed to file with the SEC a resale registration statement, registering
      an aggregate of 436,600 shares of common stock for ABS-SOS, as a selling
      shareholder;





---The
      resale registration statement was required to be declared effective by the
      SEC
      by October 31, 2007 discharging the Company from all of its obligations under
      the new registration rights agreement, and the prior exercise by ABS-SOS of
      their warrants for $1,113,300 in cash and the issuance of our 436,600 shares
      shall not be affected.





The
      Company satisfied all of the foregoing requirements.




-10-




***$3,260,000
      Convertible Promissory Notes***





Between
      April 2006 and May of 2007 the Company issued $3,260,000 convertible promissory
      notes various accredited investors in a series of private placement
      transactions. The Notes accrued interest at 15% per annum and were due on June
      30, 2007. Each lender had the right to receive payment in full along with a
      warrant to purchase such number of shares of common stock equal to 50% of the
      principal amount of the Note at an exercise price equal to 120% of the offering
      price in the Company’s June 2007 public offering. Alternatively, each lender
      could choose to convert the principal and interest owed into the Company’s
      common stock at a conversion price equal to 50% of the $6.00 per share offering
      price in the Company’s United States public offering. There was an “embedded
      conversion benefit discount” deemed to be available to the note holders
      resulting in additional paid-in capital recorded at the time the notes were
      issued of $1,630,000 which were amortized over the term of the
      notes.





As
      of
      December 31, 2007 all of the Notes had either been converted into shares or
      repaid. Payments to redeem $556,250 in principal and interest due on the notes
      were disbursed in the six months ended December 31, 2007.





**NOTE
      10 - BANK LOANS AND NOTES PAYABLE**




At
                  December 31, 2007 the Company's debt consisted of the
                  following:Bank
                  loans-current
              
              $
              1,890,379Bank
                  loans-long term
              
              $
              239,385**Total**
              
              **$**
              **2,129,764**During
                  the period ended December 31, 2007 the Company came to terms with
                  all the
                  note and convertible debt holders toretire
                  all principal and interest outstanding.Interest
                  on the building loan is calculated at prime rate, secured by the
                  property
                  and equipment with the principal balanceat
                  December 31, 2007 of $1,798,868. The Company is currently in negotiations
                  with its lenders to convert their buildingloan
                  to long-term.Maximum
                  aggregate annual principal payments for the 12 month periods subsequent
                  to
                  December 31, 2007 are as follows:
  2008
              
              $
              1,890,3792009
              
              $
              100,0362010
              
              $
              108,6082011
              
              $
              30,741**$**
              **2,129,764**




**NOTE
      11- EMPLOYEE/DIRECTOR OPTION PLANS**





In
      1998
      the Company adopted a Key Employee Stock Option Plan (the “KESOP”) pursuant to
      which up to 268,927 shares of common stock were authorized for grants of
      options, rights, and stock awards. The exercise price of all options granted
      under the Plan was determined by the Board of Directors at an amount no less
      than the estimated fair value of the Company’s common stock at the date of
      grant. All options available under the KESOP have been granted. As of December
      31, 2007, 4,412 options remain outstanding with an exercise price of $8.50
      per
      share, which expire March 15, 2008.





In
      1998
      the Company entered into an Outside (Non-Executive) Directors Stock Option
      Plan
      (ODSOP) whereby 67,231 options were issued to Non-Executive Directors over
      a
      five year period commencing on January 2, 1999. At June 30, 2003, all ODSOP
      options had been granted. During fiscal 2007, 9,882 ODSOP options were
      exercised. No options have been exercised in the current periods ended December
      31, 2007. At December 31, 2007 8,470 ODSOP options with an exercise price of
      $4.25 and an exercise date of January 2, 2008 remain outstanding. No ODSOP
      options were exercised in the first half of fiscal 2008.





In
      2002
      the Company established the 2002 Stock Option Plan (“SOP”) whereby a stock
      option committee was given the discretion to grant up to 617,647options to
      key
      employees of the Company at exercise prices and dates to be determined (but
      in
      any case not less than $5.61 per share) by the directors. At December 31, 2007
      there remain 174,435 options outstanding with exercise prices of not less than
      $5.61 and exercise dates up to March 30, 2010. A further 193,213 options are
      available to be issued under the SOP. No options were exercised in the first
      half of fiscal 2008.




-11-




During
      2005 the Company established an Employee Stock Option Scheme that authorizes
      the
      board of directors or a committee thereof, to grant options to employees and
      directors of the Company or any affiliate of the Company. The maximum number
      of
      options that may be granted in aggregate at any time under this option scheme
      or
      under any other employee option or share plan is the number equivalent to 5%
      of
      the total number of issued shares of the Company including all shares underlying
      options under the KESOP, the ODSOP and the 2002 Plan. Options issued expire
      five
      years after the grant. During the year ended June 30, 2007 250,000 options
      were granted with a balance of 295,804 options available for future grant.
      At
      December 31, 2007, 250,000 options with an exercise price of $3.82 with an
      exercise date of June 12, 2012 remain outstanding. No options have been
      exercised in fiscal 2007 or 2008 year to date.





During
      2007 the Company established the 2007 Equity Incentive Plan that authorizes
      the
      board of directors or a committee thereof, to grant up to a maximum of 1,500,000
      options to employees and directors of the Company at exercise prices to be
      determined by the administrator but shall not be less than 100% (110% for a
      10%
      shareholder) of the market value on the date granted. The maximum
      number of shares subject to options granted to any one employee during any
      fiscal year shall not exceed 300,000. No options were issued under this plan
      as
      of December 31, 2007.





At
      December 31, 2007 the Company had 1, 989,017 options available for future
      grant.





The
      following table summarizes information relating to the stock options outstanding
      at December 31, 2007:




**Outstanding**
              
              
              
              **Exercisable****Range
                of Exercise Prices**
              
              **Number
                    of**
                  **Options**
                  **Outstanding**
              
              **Weighted-**
                **Average**
                **Remaining**
                **Contractual
                  Life**
                ***(in
                  years)***
              
              **Weighted-**
                **Average**
                **Exercise**
                **Price**
              
              **Number
                  ofOptions**
              
              **Weighted-**
                **Average**
                **Exercise**
                **Price**$3.06-3.82
              
              
              250,000
              
              
              4.5
              
              $
              3.82
              
              
              250,000
              
              $
              3.82$4.25-5.61
              
              
              94,998
              
              
              0.4
              
              $
              5.49
              
              
              94,998
              
              $
              5.49$6.51-8.50
              
              
              92,319
              
              
              2.1
              
              $
              6.61
              
              
              92,319
              
              $
              6.61**Balance
                  at December 31, 2007**
              
              
              437,317
              
              
              3.1
              
              $
              4.77
              
              
              437,317
              
              $
              4.77




**NOTE
      12 - NON RELATED PARTY OPTIONS**





At
      December 31, 2007 there were 120,023 warrants issued and outstanding to
      Empire Financial Group, Ltd. in connection with certain capital raising
      activities in 2006, exercisable at $3.23 per share and which expire on September
      30, 2011.





At
      December 31, 2007 there were 50,000 warrants issued and outstanding to Empire
      Financial Group, Ltd. in connection with our recent United States public
      offering which are exercisable at $7.20 per share.





At
      December 31, 2007 there were 195,800 warrants issued and outstanding to
      Strategic Growth International in connection with capital raising activities
      in
      2006 and 2007, with an expiration date between March 2011 and June 2012 and
      an
      exercise price of between $3.75 and $7.20.





The
      table
      below summarizes non-related party option balances:


**Stock
                  Options**
              
              
              
              
              **Weighted-Average****Non-related
                  party activity**
              
              **Number
                  of Options**
              
              
              **Exercise
                  Price Per Share****Balance
                  at June 30, 2006**
              
              
              **1,242,510**
              
              
              **$**
              **5.96**Options
                  granted
              
              
              715,103
              
              
              
              3.40Options
                  expired
              
              
              (152,811
              )
              
              
              6.00Options
                  exercised
              
              
              (720,391
              )
              
              
              4.33**Balance
                  at June 30, 2007**
              
              
              **1,084,411**
              
              
              **$**
              **5.41**Options
                  granted
              
              
              -
              
              
              
              -Options
                  expired
              
              
              (600,941
              )
              
              
              8.50Options
                  exercised
              
              
              (117,647
              )
              
              
              3.40**Balance
                  at December 31, 2007**
              
              
              **365,823**
              
              
              **$**
              **4.24**
              ****


-12-




**NOTE
        13 - COMMITMENTS**
 
 In
        July
        2006, the Company entered into a business development agreement with 41 Broadway
        Associates, whereby 41 Broadway Associates is to provide consulting services
        including business planning and facilitation of introductions to strategic
        relationships and customers, corporate financiers and investment bankers
        at a
        fee of $200,000 per year payable quarterly until September 2010. During the
        six
        months ended December 31, 2007 fees of $100,000 were incurred by the
        Company.
 
 In
        July
        2007 the Company commenced engineering and product development activities
        pursuant to a collaborative project entitled the Advanced Electricity Storage
        Technologies project (the “AEST Project”), with an Australian government agency.
        The AEST project runs through July 2010. The terms of the project provide
        for
        the receipt of funding by the Company for future development costs which
        include
        the production and delivery of one 500kWh energy storage system.
 
 During
        the six months ended December 31, 2007 $440,326 was recognized as revenue
        based
        on the completion of all or a part of the first three of nine performance
        milestones specified in the contract.
 
 The
        AEST
        Project has total budgeted expenditure for operating and capital items of
        approximately $5.1 million (A$5.9 million) exclusive of any Australian taxes.
        The Company’s contribution of approximately $2.5 million (A$2.8 million) is the
        value of any cash and in-kind contributions provided to the project by the
        Company in undertaking the project activities. The Australian Government
        is
        providing the project funding of approximately $2.6 million (A$3.0 million)
        to
        be paid in accordance with the completion of contracted project milestones
        and
        subject to the Company’s compliance with project reporting requirements, and the
        Company demonstrating that the funds already provided to it have been fully
        spent or will be fully spent in the near future.
 
 **NOTE
        14 - RELATED PARTY TRANSACTIONS**
 
 The
        Company leases its Australian office facility from an entity affiliated with
        three of the Company’s officers, one of which retired effective December 31,
        2007. The current rental is $58,520 per annum (A$66,500) and is subject to
        an
        annual CPI adjustment.
 
 Rent
        expense was $28,388 and $20,896 for the six months ended December 31, 2007
        and
        2006.
 
 The
        future payments required under the terms of the lease are as
        follows:
 
 For
        the twelve months ending December 31,
 2008
              $58,5202009
              $58,5202010
              $58,5202011
              $53,6432012
              $
                  -0-**TOTAL:**
              **$229,203**
 
 
 In
        2007,
        the Company received a purchase order from ZBB China Pty Ltd for delivery
        of an
        energy storage system. There was no other activity during the three months
        ended
        December 31, 2007. The Company has received a deposit of $160,000 on the
        order
        which it has recorded as deferred revenue at December 31, 2007. See additional
        discussion in Note 3, “Revenue Recognition”.
 
 
 **NOTE
        15 - RETIREMENT PLANS**
  All
        Australian based employees are entitled to varying degrees of benefits on
        retirement, disability, or death. The Company contributes to an accumulation
        fund on behalf of the employees under an award which is legally enforceable.
        For
        U.S. employees, the Company has a 401(k) plan. All active participants are
        100%
        vested immediately.
  Expenses
        under these plans were $19,734 and $14,695 for the six months ending December
        31, 2007 and 2006.


-13-




**ZBB
      ENERGY CORPORATION**




**Item
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS**


**OF
      FINANCIAL CONDITION AND RESULTS OF OPERATIONS**




**Introduction**




The
        following information should be read in conjunction with the financial
        statements and notes thereto in Part I, Item 1 of this Quarterly Report and
        with
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations contained in our Annual Report on Form 10-KSB for the year ended
        June
        30, 2007.




**Forward-Looking
      and Cautionary Statements**




We
        do not
        provide forecasts of our future financial performance. However, from time
        to
        time, information provided by us or statements made by our employees may
        contain
“forward-looking” information that involves risks and uncertainties. In
        particular, statements contained in this Quarterly Report that are not
        historical facts constitute forward-looking statements and are made under
        the
        safe harbor provisions of the Private Securities Litigation Reform Act of
        1995.
        Forward-looking statements involve substantial risks and uncertainties. You
        can
        identify these statements by forward-looking words such as “may”, “will”,
“expect”, “anticipate”, “believe”, “estimate”, “continue”, and similar words.
        You should read forward-looking statements carefully because they: (1) discuss
        our future expectations; (2) contain projections of our future operating
        results
        or financial condition; or (3) state other “forward-looking” information.
        Various factors described below, as well as any other instances of cautionary
        language in this Quarterly Report, refer to or provide examples of risks,
        uncertainties and events that may cause our actual results to be materially
        different than the expectations described in our forward-looking statements.
        You
        should be aware that the occurrence of any of the events or factors described
        below and elsewhere in this Quarterly Report could materially and adversely
        affect our business. All forward-looking statements included in this Quarterly
        Report are based on information available to us on the date hereof, and we
        assume no obligation to update any such forward-looking statements.
        .


.


Each
        forward-looking statement should be read in conjunction with the financial
        statements and notes thereto in Part I, Item 1 of this Quarterly Report,
        this
        section, and Management’s Discussion and Analysis of Financial Condition and
        Results of Operations and Description of Business and Risk Factors contained
        in
        our Annual Report on Form 10-KSB for the year ended June 30, 2007.




In
      addition to the risks and uncertainties faced generally by participants in
      the
      renewable energy industry, we face the
      following risks and uncertainties:





**·**
            **We
                have incurred losses and anticipate incurring continuing
                losses.**


**·**
            **Until
                2004, we were primarily a research and development company with no
                commercial sales.**


**·**
            **We
                have made only one direct sale of our energy storage system and there
                can
                be no assurance that we will be able to make additional sales to
                such
                customer or other potential
                purchasers.**


**·**
            **Our
                ability to sell our energy storage systems to California Energy Commission
                and other utility companies will be materially and adversely affected
                if
                our two installed systems fail to perform satisfactorily or otherwise
                fail
                to meet performance
                specifications.**


**·**
            **Our
                initial customer focus, namely, utilities and renewable energy companies
                are generally slow to react to new technologies or make substantial
                financial commitments.**


**·**
            **The
                market for our products is new and evolving and a viable market may
                never
                develop or may take longer to develop than we
                anticipate.**


**·**
            **Undetected
                and unanticipated defects in our energy storage systems could increase
                our
                costs and harm our reputation.**


**·**
            **We
                will be required to regularly devote capital to updating, refining
                and
                expanding our energy storage systems technology and there is no assurance
                that we will be able to make improvements to remain competitive with
                new
                technologies.**


**·**
            **Our
                products must compete against both existing and newly developed
                technologies.**


**·**
            **We
                face competition from larger, more well-established companies.**


**·**
            **We
                may not be able to protect important intellectual property.**


**·**
            **We
                face risks associated with our plans to market, distribute and service
                our
                products internationally.**


**·**
            **Sales
                of our common stock may have an adverse effect on the market price
                of our
                common stock.**




-14-




**Overview**




**Company
      Background**




Since
      our
      inception in 1981, and through 2004, we have been a research and development
      company with little or no revenues. We have historically funded our operations
      primarily through debt and equity financings, government grants and joint
      ventures.





On
      June
      18, 2007, in connection with our initial United States public offering of
      3,333,333 shares of our common stock at an initial offering price of $6.00
      per
      share, our shares of common stock began trading on the American Stock Exchange
      and we delisted on the Australian Stock Exchange effective as of August 9,
      2007.





Our
      production capacity currently remains limited because we have only recently
      commenced implementation of our business plan which requires the acquisition
      of
      manufacturing plant and equipment to increase production output as well as
      increasing the level of inventory purchases to obtain economies of scale in
      pricing.





Our
      business model involves marketing primarily to large utility companies and
      renewable energy customers. In order for these customers to make the most
      efficient use of our products in their electricity production and delivery
      operations, they would likely purchase our energy storage systems in quantities
      that could exceed our current production capacity.





Our
      products reflect a new technology that has not yet attained market acceptance.
      Additionally, we intend to compete primarily with the existing lead-acid storage
      system technologies which have attained market acceptance.





We
      do not
      believe that historic performance, trend, financial ratios or industry
      benchmarks are useful for analysis of our financial condition.  This is due
      to the transitional nature of the Company as we evolve from a research and
      development entity into a commercial manufacturer of energy storage
      systems.





We
      have
      recently implemented performance reviews and detailed individual objectives
      for
      existing employees and initiated performance objectives for new employees
      during their first year. We are also in the process of developing standards
      and
      detailed objectives that can be reviewed and used as a tool for reviewing
      individuals and overall performance of our business.




**Results
      of Operations**





***Three
      and six months ended December 31, 2007 and 2006:***





*Revenue
      and Other income:*





Our
      revenues for the three and six months ended December 31, 2007 and 2006 were
      $175,259, $561,681, $299,309 and $509,589 respectively. The increase of $52,092
      in the six months ended December 31, 2007 is attributable to a $440,326 increase
      in revenues from the Advanced Electricity Storage Technologies engineering
      project (“AEST”) with an Australian government agency which began in July 2007
      and a reduction in revenues of $388,234 in the contract with the California
      Energy Commission (“CEC”) was substantially completed in prior periods. Revenues
      include estimates based on the percentage-of-completion method of accounting
      for
      long-term contracts.





Other
      income for the three and six months ended December 31, 2007 and 2006 was
      $158,562, $349,924, $53,906 and $60,076 respectively. The increase of $289,848
      in the six months ended December 31, 2006 resulted from an increase in interest
      income from the investment of proceeds from the Company’s public offering in
      June 2007. Interest income is expected to decrease in future periods as proceeds
      from the public offering are utilized for capital expenditures and operational
      purposes and from lower interest rates on the funds invested, based on current
      market rates.




-15-




*Cost and Expenses and Other expense:*




Total
      operating expenses for the three and six months ended December 31, 2007 and
      2006
      were $1,434,307, $2,562,791, $876,695 and $1,921,687 respectively. The total
      operating expense increase in six months ended December 31, 2007 was due to
      increased expenditures subsequent to our initial U.S. public offering (including
      legal and other compliance costs) and included increases of $469,943 in selling,
      general and administrative expense, $24,595 in depreciation; and a decrease
      in
      advanced engineering and development costs of $196,177.





Other
      expenses for the three and six months ended December 31, 2007 and 2006 were
      $41,512, $147,119, $658,411 and $1,126,525 respectively. The decrease of
      $979,406 in the six month period ending December 31, 2007 was primarily due
      to
      the significant finance related costs incurred during the prior fiscal year
      and
      leading up to the our US public offering in June 2007.





During
      the six months ended December 31, 2007, except for the building and equipment
      bank loans, all debt was converted to shares of our common stock or repaid
      which
      has reduced interest expense during the current period and is expected to
      significantly reduce interest and finance expense in future periods.





Cost
      of Contracts .
      Our
      cost of contracts for three and six months ended December 31, 2007 and 2006
      were
      $156,782, $421,873, $277,994 and $471,484 respectively. The decrease in expense
      in the three and six month periods ended December 31, 2007 resulted from lower
      cost of sales on the final tasks related to the CEC contract, partially offset
      by the July 2007 start of the AEST contract in Australia which resulted in
      $318,898 of costs during the six months ending December 31, 2007.




Selling,
      General and Administrative .
      Our
      selling, general and administrative expense for the three and six months ended
      December 31, 2007 and 2006 were $852,469, $1,467,831, $400,377 and $997,888
      respectively. This expense during the current six month period was $469,943
      higher than the six month period ending December 31, 2006 and included increases
      of approximately $300,000 in costs directly related to our initial U.S. public
      offering, Australian Stock Exchange de-listing, and compliance costs. The
      remaining balance of the increase is mostly attributable to additional
      engineering personnel, and overall cost increases.





Travel
      costs were approximately $160,000 and $130,000 for the six month periods ending
      December 2007 and 2006, respectively, related to installation and maintenance
      of
      an energy storage system sold to the CEC and increases in marketing and investor
      relations activities. We expect travel related to marketing and business
      development to increase as our sales efforts and installations
      increase.





Insurance
      costs include insurance benefits for employees of $62,505 and general liability
      insurance of $28,858. We acquired a $5,000,000 Directors and Officers policy
      in
      July 2007 costing $39,500 in annual premiums and expensed $19,750 in the six
      months ended December 31, 2007.




Advanced
      engineering and development .
      Our
      engineering and development costs for the three and six months ended December
      31, 2007 and 2006 were $342,652, $519,756, $133,759 and $323,579 respectively.
      The increase during the six month period ending December 31, 2007 of $196,177
      from the comparable 2006 was primary due to additional engineering staffing
      and
      materials costs incurred under the AEST project contract, as well as further
      development and improvements to the energy storage system manufacturing
      processes. This project will affect future expenditures through the term of
      the
      contract to the extent the costs are allowable under the contract. We intend
      to
      maintain our Australian staff and facility for the purposes of facilitating
      further marketing in Australia and Asia and for advanced engineering and
      development projects as needed.





Net
      Loss. Our net
      loss for the three
      and
      six months ended December 31, 2007 and 2006 was $1,141,998,
      $1,798,305, $1,181,891 and $2,478,547 respectively. In the
      three months ended December 31, 2007 there was a $39,893 reduction in net loss,
      and for the six
      months ended December 31, 2007 a
      decrease in net loss of $680,242 as
      compared to the six months ended December 31, 2006.




**Liquidity
      and Capital Resources**





Since
      our
      inception, our research, advanced engineering and development, and operations
      were primarily financed through debt and equity financings, government grants
      and joint ventures. Total paid in capital as of December 31, 2007 was
      $45,470,441. We had a cumulative deficit of $28,620,436 as of December 31,
      2007
      compared to a cumulative deficit of $26,822,131 as of June 30, 2007. At December
      31, 2007 we had a working capital surplus of $10,022,284 and as of June 30,
      2007
      a working capital surplus of $11,617,425. Our shareholders’ equity as of
      December 31, 2007 and June 30, 2007 was $14,642,141 and $15,918,203,
      respectively.





As
      a
      result of consummation of our initial United States public offering and our
      receipt of $18,410,000 (net of underwriter’s costs) proceeds on June 20, 2007,
      our working capital increased by $17,267,365 (net proceeds less $1,142,635
      in
      capital raising costs).







-16-




Additional
      funding will be generated with funding from the AEST agreement entered into
      on
      June 29, 2007 by ZBB Technologies, Ltd, our subsidiary based in Western
      Australia, and the Department of Environment and Water Resources (Australia),
      whereby, among other things, the Department has agreed to provide funding to
      us
      for the development and delivery of an energy storage system to be used to
      store
      and supply renewable energy generated from photovoltaic solar panels and wind
      turbines already operational at the Commonwealth Scientific and Industrial
      Research Organization’s Newcastle Energy Centre in New South Wales.




The
      AEST
      agreement provides for $2.6 million (A$3.1 million) in project funding through
      June 2010 totaling $1.35 million in year one, $1.01 million in year two and
      $0.24 million in year three, as certain development progress “milestones” are
      met by us. The AEST project has total budgeted expenditure for operating and
      capital items of approximately $5.1M (A$5.9M) exclusive of any Australian taxes.
      The Company’s contribution of approximately $2.5M (A$2.8M) is the value of any
      cash and in-kind contributions provided to the project by the Company in
      undertaking the project activities.





We
      believe that we will have sufficient capital necessary to meet our operating
      and
      capital commitments for at least the next 18 to 24 months. However, if sales
      increase substantially, we believe we will require additional capital in order
      to expand our production capacity.




*Material
      Commitments for Capital Expenditures*




From
      the
      proceeds of our June 2007 United States initial public offering, we retired
      an
      aggregate of $4,523,060 in indebtedness (including conversions of debt) in
      July
      and August 2007. In addition, we intend to apply approximately $2,750,000
      towards the acquisition of new vibration welding and production equipment
      ($2,000,000), infra-red welding equipment ($250,000) and other production line
      tools and sundry equipment ($500,000) over the next 24 months.




*Operating
      Activities*





For
      the
      six months ended December 31, 2007, net cash used in operations was $2,660,215.
      Cash used in operations resulted from decreases in accounts payable of $412,917;
      accrued expenses of $78,919; deferred revenues of $102,937; increase to
      inventory of $422,565; and an increase in accounts receivable of $40,700. Cash
      provided from operations resulted from a decrease in prepaids and other current
      assets of $63,798.





For
      the
      six months ended December 31, 2006, net cash used in operations was $1,377,545
      after adding back non-cash items of $1,184,689 consisting primarily of
      depreciation, issuances and amortizations of financial assets, deferred finance
      fees and discounts and increases in accrued interest expense. Sources of cash
      provided by operations resulted from increases in accounts payable of $386,375
      and accrued expenses of $24,401. Cash used by operations included increases
      in
      inventory of $168,284; accounts receivable of $50,785, and other current assets
      of $7,330; and a decrease in deferred revenue of $268,064.




*Investing
      Activities*




For
      the
      six months ended December 31, 2007, net cash used in investing activities was
      $186,233 due to purchases of manufacturing equipment and computer
      hardware.





For
      the
      six months ended December 31, 2006, net cash used in investing activities was
      $16,968 in other equipment purchases **.**




*Financing
      Activities*





For
      the
      six months ended December 31, 2007, net cash used in financing activities was
      $4,194,149 consisting primarily of $4,047,822 in repayments of interest and
      principal on notes payable, additional public offering costs of $100,000 and
      $46,327 reduction in principal on bank loans. The conversion of $475,237 in
      notes payable for shares of the Company’s common stock during the first quarter
      significantly reduced all debt balances leaving only the bank loan debt
      remaining at December 31, 2007.





For
      the
      six months ended December 31, 2006, net cash provided from financing activities
      was $597,884 resulting from $787,500 in convertible note proceeds, bank loans
      of
      $24,870, less deferred finance fees of $214,485.





-17-




**Known
      Trends, Market Opportunities and Challenges**





We
      believe that there are specific existing and rapidly emerging market
      opportunities for the Company’s energy storage products.





We
      believe that the electric utilities market’s increasing energy demands on an
      increasingly fragile transmission and distribution networks are forcing both
      utilities and commercial and industrial customers to adopt distributed storage
      and delivery systems to increase the reliability and the capacity of the
      electrical grid. Network reliability depends on both energy storage systems,
      and
      delivery products that are lower in cost, have greater life span and are lower
      in emission with minimal disposal costs. We have designed our products to meet
      these needs in that they can be combined for use in larger storage applications
      and we believe that our products will cost less with competing products, based
      on a life of product basis and on energy density and delivery.




We
      believe that the increasing importance of renewable energy generating sources
      for future energy supply is now being enhanced with Federal and State Government
      initiatives to lessen the United States greenhouse gas emissions and dependency
      on oil. Increasing concerns surrounding CO 2 emissions are also driving this market sector. We believe that solar and wind
      energy has grown over the past five years and will continue to grow for so
      long
      as fossil fuel prices are increasing. Because both solar and wind are
      intermittent primary energy sources, both grid connected and off-grid
      installations require energy storage devices to optimize their capabilities.





We
      are
      already working in the California energy market, in association with the CEC,
      Pacific Gas & Electric and the U.S. Department of Energy amongst others, to
      install products into the local transmission and distribution network. In
      addition we are currently addressing opportunities in the renewable energy
      markets in both the United States and Australia with the intention of
      introducing products and services into these markets.




**Off-Balance
      Sheet Arrangements**




We
      have
      no off-balance sheet arrangements.




**Item
      3.     CONTROLS AND PROCEDURES**




As
      of the
      end of the period covered by this report, we carried out an evaluation, under
      the supervision and with the participation of management, including our chief
      executive officer and principal financial officer, of the effectiveness of
      the
      design and operation of our disclosure controls and procedures as defined in
      Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based
      upon
      that evaluation, our chief executive officer and principal financial officer
      concluded that our disclosure controls and procedures are effective to cause
      the
      material information required to be disclosed by us in the reports that we
      file
      or submit under the Exchange Act to be recorded, processed, summarized and
      reported within the time periods specified in the SEC’s rules and forms.




It
      should
      be noted that any system of controls, however well designed and operated, can
      provide only reasonable, and not absolute, assurance that the objectives of
      the
      system are met. In addition, the design of any control system is based in part
      upon certain assumptions about the likelihood of future events. Because of
      these
      and other inherent limitations of control systems, there can be no assurance
      that any design will succeed in achieving its stated goals under all potential
      future conditions, regardless of how remote.




There
      have been no significant changes in our internal controls or in other factors
      which could significantly affect internal controls subsequent to the date we
      carried out our evaluation.




**PART
      II**




**Item
      1.     Legal Proceedings**




On
      July
      23, 2007, Thomas G. Folliard, a former director of the Company who last served
      in a board meeting in August of 2006, filed suit against the company for
      outstanding compensation as a director for 75,000 Australian dollars. This
      suit
      was settled in January 2008. The amount of the settlement was
      not material to results of operations or financial condition.





-18-




**Item
        2.     Unregistered Sales of Equity Securities and Use of
        Proceeds**
  Our
        initial United States public offering of 3,333,333 shares of our common stock,
        par value $0.01 was effected through a Registration Statement on Form SB-2
        (Reg.
        No. 333-138243) which was declared effective by the SEC on June 20, 2007.
        We
        paid the underwriters a commission of $1,590,000 and incurred additional
        offering expenses of approximately $1,200,000. No payments for such expenses
        were made directly or indirectly to (i) any of our directors, officers or
        any of
        their associates, (ii) any person(s) owning 10% or more of our common stock,
        or
        (iii) any of our affiliates. After deducting the underwriter’s commission and
        the offering expenses, we received net proceeds of approximately $17,200,000.
        The managing underwriter of our offer was Empire Financial Group,
        Inc.
 
 From
        the
        net proceeds we retired an aggregate of approximately $4.5 million in
        indebtedness. Approximately $2 million of the net proceeds has been used
        for
        working capital, including expanding our selling and marketing efforts and
        compliance costs, and additions and improvements to manufacturing operations.
        The remaining net proceeds have all been applied to temporary investments
        in
        bank certificates of deposits and money market funds.
  **Item
        3.     Defaults Upon Senior Securities**
  This
        Item
        is not applicable.
  **Item
        4** **.** **Submission
        of Matters to a Vote of Security Holders**
  On
        December 12, 2007, at our Annual Meeting of Shareholders (the “Annual Meeting”)
        our shareholders voted on proposals to: (1) elect one director to serve until
        2010 as a Class III director; (2) approve the 2007 Equity Incentive Plan
        of ZBB
        Energy Corporation; and (3) ratify the appointment of PKF as our independent
        auditors for fiscal 2008. In addition, Robert J. Parry and Richard A. Payne
        continued as Class I directors (term expiring 2008). Manfred E. Birnbaum
        continued as a Class II director (term expiring 2009). Geoffrey D. Hann
        continued as a Class II director until his resignation effective December
        31,
        2007. The results of the proposals voted upon at the Annual Meeting as are
        as
        follows:
  For
              
              Against
              
              Abstain
              
              Non-votes1.
              Election of William A.
                Mundell
              4,493,920
              
              -0-
              
              21,500
              
              -0-2.
              Approve the 2007 Equity Incentive
                Plan
              
              2,537,177
              
              468,088
              
              487
              
              1,509,6683.
              Ratify PKF as our auditors for 2008
              
              4,501,325
              
              14,095
              
              -0-
              
              -0-


**Item
      5.     Other Information**




This
      Item
      is not applicable.




**Item
      6.     Exhibits**




(a)   
      Exhibits:


Exhibit
        31.1
 Certification
        of C.E.O. Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  Exhibit
        31.2
 Certification
        of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley
        Act of 2002.
  Exhibit
        32.1
 Certification
        of C.E.O. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
        906
        of the Sarbanes-Oxley Act of 2002.
 
 Exhibit
        32.2
 Certification
        of Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted
        pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




-19-


**SIGNATURES**





In
      accordance with the requirements of the Securities Exchange Act of 1934, this
      Form 10- QSB Quarterly Report has been signed by the following persons in
      the capacities and on the dates indicated.





**ZBB
      ENERGY CORPORATION**





**Position**
            **Date**/s/  Scott
                W. Scampini
            
            Chief
                Financial Officer
            February
                14, 2008Scott
                W. Scampini
            
            (Signing
                on behalf of the Registrant and as the Principal financial officer
                and
                principal accounting officer)


-20-