**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




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


**OF
      1934**


**For
      the quarterly period ended September 30, 2008**




or




** ̈** **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**







(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**


(Registrant’s
      telephone number)




Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the preceding 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. R Yes £ No




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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company.





Large
                accelerated filer ̈
            Accelerated
                filer ̈
            Non-accelerated
                filer ̈
            Smaller
                reporting company  R




Indicate
      the number of shares outstanding of each of the issuer’s classes of common
      stock, as of the latest practicable date.





**Class**
            **Shares
                Outstanding as of November 12, 2008**Common
                Stock, $.01 par value per share
            10,512,283












ZBB
      Energy Corporation




Form
      10-Q




TABLE
      OF
      CONTENTS




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





(*)
      All
      of the financial statements contained in this Quarterly Report are unaudited
      with the exception of the financial information at June 30, 2008, 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, 2008
      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 September 5, 2008.









**PART
      I. FINANCIAL INFORMATION**




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


**ZBB
        ENERGY CORPORATION**
 Consolidated
        Balance Sheets
 
 **September 30,**
              
              **June 30,****2008**
              
              **2008***(unaudited)***Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              6,681,736
              
              $
              8,451,320Accounts
                  receivable
              
              
              6,390
              
              
              4,167Interest
                  receivable
              
              
              73,954
              
              
              80,829Inventories*-net
                  of $223,000 and $234,000 allowance*
              
              
              1,433,011
              
              
              1,312,885Prepaids
                  and other current assets
              
              
              128,650
              
              
              316,274**Total
                  current assets**
              
              
              **8,323,741**
              
              
              **10,165,475**Long-term
                  assets:Property,
                  plant and equipment, net
              
              
              4,450,599
              
              
              4,240,640Investment
                  in joint venture
              
              
              -
              
              
              242,350Goodwill
              
              
              803,079
              
              
              803,079**Total
                  assets**
              
              
              **13,577,419**
              
              **$**
              **15,451,544****Liabilities
                  and Shareholders' Equity**Current
                  liabilities:Bank
                  loans
              
              
              161,978
              
              
              171,634Accounts
                  payable
              
              
              726,371
              
              
              607,520Deferred
                  revenues
              
              
              142,573
              
              
              644,700Accrued
                  compensation and benefits
              
              
              94,081
              
              
              129,749**Total
                  current liabilites**
              
              
              **1,125,003**
              
              
              **1,553,603**Long-term
                  liabilities:Bank
                  loans
              
              
              1,849,032
              
              
              1,881,823**Total
                  liabilities**
              
              **$**
              **2,974,035**
              
              **$**
              **3,435,426**Shareholders'
                  equityCommon
                  stock *($0.01 par value); 150,000,000 authorized**10,512,283
                  shares issued and outstanding*
              
              
              105,123
              
              
              105,123Additional
                  paid-in capital
              
              
              45,674,079
              
              
              45,619,608Note
                  receivable from shareholders
              
              
              (558,333
              )
              
              (608,333
              )Accumulated
                  other comprehensive (loss)
              
              
              (1,596,681
              )
              
              (1,373,485
              )Accumulated
                  (deficit)
              
              
              (33,020,804
              )
              
              (31,726,795
              )**Total
                  shareholders' equity**
              
              **$**
              **10,603,384**
              
              **$**
              **12,016,118****Total
                  liabilities and shareholders' equity**
              
              **$**
              **13,577,419**
              
              **$**
              **15,451,544**
 
 *See
        accompanying notes to consolidated financial statements*




-1-


**ZBB
        ENERGY CORPORATION**
 Consolidated
        Statements of Operations
 
 *Three months ended September 30,***2008**
              
              **2007***(unaudited)*
              
              *(unaudited)***Revenues**Product
                  sales and revenues
              
              $
              -
              
              $
              108,937Engineering
                  and development revenues
              
              
              291,697
              
              
              277,485**Total
                  Revenues**
              
              
              **291,697**
              
              
              **386,422****Costs
                  and Expenses**Cost
                  of product sales
              
              
              -
              
              
              89,413Advanced
                  engineering and development
              
              
              737,145
              
              
              352,782Selling,
                  general, and administrative
              
              
              785,081
              
              
              615,362Depreciation
              
              
              74,901
              
              
              70,927**Total
                  Costs and Expenses**
              
              
              **1,597,127**
              
              
              **1,128,484****Loss
                  from Operations**
              
              
              (1,305,430
              )
              
              (742,062
              )**Other
                  Income (Expense)**Interest
                  income
              
              
              53,952
              
              
              178,862Interest
                  expense
              
              
              (27,401
              )
              
              (52,822
              )Finance
                  costs
              
              
              -
              
              
              (52,785
              )Other
                  income (expense)
              
              
              (15,130
              )
              
              12,500**Total
                  Other Income (Expense)**
              
              
              **11,421**
              
              
              **85,755**Loss
                  before provision for Income Taxes
              
              
              (1,294,009
              )
              
              (656,307
              )Provision
                  for Income Taxes
              
              
              -
              
              
              -**Net
                  Loss**
              
              **$**
              **(1,294,009**
              **)**
              **$**
              **(656,307**
              **)****Net
                  Loss per share-**Basic
                  and diluted
              
              **$**
              **(0.12**
              **)**
              **$**
              **(0.06**
              **)****Weighted
                  average shares-basic and diluted:**Basic
              
              
              10,512,283
              
              
              10,317,467Diluted
              
              
              10,512,283
              
              
              10,317,467


*See
        accompanying notes to consolidated financial statements.*





-2-


**ZBB
        Energy Corporation**
 **Consolidated
        Statements of Changes in Shareholders' Equity**


NoteReceivable
              
              Accumulated Other
              
              
              
              **TOTAL**Number of
              
              Common
              
              Add'l Paid-in
              
              from
              
              Comprehensive
              
              
              
              **Shareholders'**
              
              ComprehensiveShares
              
              Stock
              
              Capital
              
              Shareholders
              
              (Loss)
              
              Accumulated Deficit
              
              **Equity**
              
              (Loss)**Balance:
                  June 30, 2007**
              
              
              **10,087,090**
              
              **$**
              **100,871**
              
              **$**
              **44,994,333**
              
              **$**
              **(808,333**
              **)**
              **$**
              **(1,546,537**
              **)**
              **$**
              **(26,822,131.49**
              **)**
              **$**
              **15,918,203**
              
              **$**
              **(9,538,360**
              **)**Issuance
                  of common stock pursuant to note conversions
              
              
              159,256
              
              
              1,593
              
              
              473,644
              
              
              
              
              
              
              
              
              
              
              
              475,237Issuance
                  of common stock Montgomery warrants
              
              
              265,937
              
              
              2,659
              
              
              (2,659
              )Reduction
                  of note receivable from stockholder
              
              
              
              
              
              
              
              
              
              
              
              200,000
              
              
              
              
              
              
              
              
              200,000Public
                  offering costs
              
              
              
              
              
              
              
              
              (100,000
              )
              
              
              
              
              
              
              
              
              
              
              (100,000
              )Stock
                  based compensation
              
              
              
              
              
              
              
              
              254,290
              
              
              
              
              
              
              
              
              
              
              
              254,290Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (4,904,663
              )
              
              (4,904,663
              )
              $
              (4,904,663
              )Net
                  Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              173,051
              
              
              
              
              
              173,051
              
              
              173,051**Balance:
                  June 30, 2008**
              
              
              **10,512,283**
              
              **$**
              **105,123**
              
              **$**
              **45,619,608**
              
              **$**
              **(608,333**
              **)**
              **$**
              **(1,373,485**
              **)**
              **$**
              **(31,726,795**
              **)**
              **$**
              **12,016,118**
              
              **$**
              **(4,731,612**
              **)**Reduction
                  of note receivablefrom
                  stockholder
              
              
              
              
              
              
              
              
              
              
              
              50,000
              
              
              
              
              
              
              
              
              50,000Stock
                  based compensation
              
              
              
              
              
              
              
              
              54,471
              
              
              
              
              
              
              
              
              
              
              
              54,471Net
                  Loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (1,294,009
              )
              
              (1,294,009
              )
              $
              (1,294,009
              )Net
                  Translation Adjustment
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (223,196
              )
              
              
              
              
              (223,196
              )
              
              (223,196
              )**Balance:
                  September 30, 2008**
              
              
              **10,512,283**
              
              **$**
              **105,123**
              
              **$**
              **45,674,079**
              
              **$**
              **(558,333**
              **)**
              
              **(1,596,681**
              **)**
              **$**
              **(33,020,804**
              **)**
              **$**
              **10,603,384**
              
              **$**
              **(1,517,205**
              **)**




-3-




**ZBB
        Energy Corporation**


Consolidated
        Statements of Cash Flows
  **Three months ended September 30,****2008**
              
              **2007****Cash flows from
                  operating activities:**Net
                  loss
              
              **$**
              **(1,294,009**
              **)**
              **$**
              **(656,307**
              **)**Adjustments
                  to reconcile net loss to net cash used in operating activities:Depreciation
              
              
              74,901
              
              
              70,927Change
                  in inventory allowance
              
              
              11,000
              
              
              -Equipment
                  costs reclassified to expenses
              
              
              210,855
              
              
              -Payments
                  applied to note receivable for consulting fees
              
              
              50,000
              
              
              50,000Stock
                  based compensation
              
              
              54,471
              
              
              -(Increase)
                  decrease in operating assets:Accounts
                  receivable
              
              
              (2,223
              )
              
              40,408Inventories
              
              
              (131,125
              )
              
              (187,016
              )Prepaids
                  and other current assets
              
              
              (27,275
              )
              
              (110,614
              )Other
                  receivables-interest, other
              
              
              6,875
              
              
              -Increase
                  (decrease) in operating liabilities:Accounts
                  payable
              
              
              146,869
              
              
              (408,129
              )Accrued
                  expenses
              
              
              (35,667
              )
              
              (2,324
              )Accrued
                  loss on contracts
              
              
              -
              
              
              (89,250
              )Deferred
                  revenues
              
              
              (244,862
              )
              
              (102,937
              )Net
                  cash (used) in operating activities
              
              
              **(1,180,192**
              **)**
              
              **(1,395,243**
              **)****Cash
                  flows from investing activities**Capital
                  expenditures
              
              
              (407,207
              )
              
              (89,669
              )Net
                  cash (used) in investing activities
              
              
              **(407,207**
              **)**
              
              **(89,669**
              **)****Cash
                  flows from financing activities**Proceeds
                  from refinancing of bank loan
              
              
              
              
              
              (22,647
              )Repayment
                  of bank loans
              
              
              (42,447
              )
              
              -Repayments
                  of notes payable
              
              
              -
              
              
              (4,047,823
              )Additional
                  public offering costs
              
              
              -
              
              
              (100,000
              )Net
                  cash provided (used) by financing activities
              
              
              **(42,447**
              **)**
              
              **(4,170,470**
              **)**Effect
                  of exchange rate changes on cash
              
              
              (139,737
              )
              
              (69,363
              )**Net
                  increase (decrease) in cash and cash equivalents**
              
              
              (1,769,584
              )
              
              (5,724,745
              )**Cash
                  and cash equivalents - beginning of year**
              
              
              8,451,320
              
              
              17,823,022**Cash
                  and cash equivalents - end of period**
              
              $
              **6,681,736**
              
              **$**
              **12,098,277**Cash
                  paid for interest
              
              $
              27,401
              
              $
              104,928Supplemental
                  schedule of non-cash investing and financing activities:Issuance
                  of common stock pursuant to conversion of convertible notes
              
              
              -
              
              
              475,237Investment
                  in joint venture offset by unfulfilled deferred revenue
              
              
              160,000
              
              
              -Stock
                  options granted to directors and employees at fair value
              
              
              54,471
              
              
              -


*See
        accompanying notes to consolidated financial statements.*




-4-




**ZBB
      ENERGY CORPORATION**


**Notes
      to Unaudited Consolidated Financial Statements**


**September
      30, 2008**





**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-Q. 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,
      2008.




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
      September 30, 2008 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.





**NOTE
      2 - Nature of Organization**




ZBB
      Energy Corporation (“ZBB” or 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.




— Power
      quality to alleviate downtime caused by voltage sags, voltage swells, frequency
      fluctuations, and combined with uninterruptible power supply (UPS) to eliminate
      power outages.




— 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. which operates a
      manufacturing facility in Menomonee Falls, Wisconsin, and ZBB Technologies,
      Ltd.
      which has its advanced engineering and development facility in Perth,
      Australia.





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




**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.




**Use
      of Estimates**




The
      preparation of financial statements and related disclosures in conformity with
      GAAP 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 covered by the report. 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 and realizability of assets, depreciation, and
      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.




-5-




**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.




In
      July,
      2006, the FASB issued Interpretation (FIN) 48, “Accounting for Uncertainty in
      Income Taxes - an interpretation of FASB Statement No.109". FIN 48, prescribes
      a
      recognition threshold and measurement attribute for tax positions. The Company
      adopted FIN 48 at the beginning of fiscal year 2008 and it did not have a
      material impact on the Company’s financial statements. There were no deferred
      tax assets recorded as of September 30, 2008.




**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.




**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.




-6-




**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 long-term 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
      only long-term contract which involved revenue recognition estimates was with
      the California Energy Commission (“CEC”) for the three month period ended
      September 30, 2007, as the contract was completed on March 31, 2008. During
      the
      three months ended September 30, 2008 and 2007, $-0- and $108,937 respectively
      was recognized as revenue on an energy storage system contract with the
      CEC.





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 the Commonwealth of Australian through July 2010 which terms
      include the receipt of funding of A$3.1 million (approximately US$2.5 million)
      toward future development costs which include the production and delivery of
      one
      500kWh energy storage system. During the three months ended September 30, 2008
      and 2007, $291,697 and $277,485, respectively, was recognized as revenue based
      on progress toward completion of the nine performance milestones specified
      in
      the contract.





Total
      revenues of $291,697 and $386,422 were recognized for the three month period
      ended September 30, 2008 and 2007, respectively.




**Loss
      per Share**





The
      Company follows the provisions of SFAS 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 (as of September 30, 2008
      there were 1,395,523 options underlying shares of common stock and warrants
      that
      are excluded).




-7-





**Stock-Based
      Compensation**





The
      Company follows the provisions of SFAS No. 123, "Share-Based Payment" ("SFAS
      No.
      123(R)"), which is a revision of SFAS No. 123. 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.




**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. 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.


The
      revenue recognition accounting policy note above contains additional information
      on these types of agreements.





Intellectual
      property, including internally generated patents and know-how is carried at
      no
      value.





**Comprehensive
      income (loss)**





The
      Company reports its comprehensive income (loss) in accordance with SFAS No.
      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 currency translation adjustments
      applicable for the periods ended September 30, 2008 and 2007 and is presented
      in
      the Consolidated Statements of Changes in Shareholders’ Equity.





**Recent
      Accounting Pronouncements**





In
      December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business
      Combinations. 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. The adoption of this
      statement is not expected to have a material effect on the Company's financial
      statements.





In
      December 2007, 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. The adoption of this statement is not expected to
      have
      a material effect on the Company's financial statements.








In
      March
      2008, the FASB issued SFAS No. 161 “Disclosure about Derivative Instruments and
      Hedging Activities”. SFAS 161 changes the disclosure requirements for derivative
      instruments and hedging activities. The guidance will become effective for
      the
      fiscal year beginning after November 15, 2008. This statement encourages, but
      does not require, comparative disclosures for earlier periods at initial
      adoption. 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 September 30,
      2008:





Raw
                materials
            
            $
            995,440Work
                in progress
            
            
            191,394Finished
                goods
            
            
            469,177Inventory
                valuation allowance
            
            
            (223,000
            )**TOTAL**
            
            **$**
            **1,433,011**




-8-





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





Office
                equipment
            
            $
            115,065Manufacturing
                equipment
            
            
            4,110,140Test
                units
            
            
            205,000Building
            
            
            1,996,134Land
            
            
            217,000**6,643,339**Less,
                accumulated depreciation
            
            
            (2,192,740
            )Net
                Property, Plant & Equipment
            
            **$**
            **4,450,599**





**NOTE
      6 – INVESTMENT IN JOINT VENTURE**


In
      March
      2005, the Company acquired a 49% interest in ZBB China Pty Ltd for a cost of
      $203,100 (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 three months ended September 30, 2008 the Company wrote-off the investment
      and recorded a loss on the investment of $15,130 (include in other expenses),
      after reclassifying deferred revenue deposits from prior periods of $160,000,
      and foreign currency translation adjustments. Included in prepaids and other
      assets is an estimated $27,800 expected in net cash liquidation value as result
      of the Company’s plans to dissolve the joint venture (the joint venture was
      dissolved on October 3, 2008, see subsequent event Note 15). There was no other
      no other significant activity in the joint venture company during the
      period.





**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 SFAS No. 142, “Goodwill and Other Intangible
      Assets”. Under SFAS No. 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 September
      30,
      2008.





**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, LLC a total of 294,118 shares in consideration for a 4% $1,000,000
      promissory note payable in installments over five years.





As
      of
      September 30, 2008 the Company is owed $558,333 on the note, which is reflected
      as a reduction to Shareholders’ equity and $67,142 in accrued interest.





-9-





**NOTE
      9 – BANK LOANS AND NOTES PAYABLE**


At
                  September 30, 2008 the Company's debt consisted of the following:
  Bank
                  loans-current
              
              $
              161,978Bank
                  loans-long term
              
              
              1,849,032**Total**
              
              **$**
              **2,011,010**
 
 On
        May
        14, 2008 the Company entered into two loan agreements to refinance the building
        and land in Menomonee Falls, Wisconsin:
 —The
        first loan requires a fixed monthly payment of principal and interest at
        a rate
        of .25% below the prime rate, with any principal balance due at maturity
        on June
        1, 2018, and secured by the building and land. Principal balance is $892,662
        at
        September 30, 2008.
 —The
        second loan is a secured promissary note guaranteed by the U.S. Small Business
        Administration, requiring monthly payments of principal and interest at a
        rate
        of 5.5% until May 1, 2028. Principal balance is $866,227 at September 30,
        2008.
 
 On
        January 22, 2007 the Company refinanced its equipment loan. The new loan
        term
        requires monthly payments of principal and an interest
        rate equal to the prime rate, maturity date of February 1, 2011. The loan
        is
        secured by a first lien on all business personal property.
        Principal balance is $252,121 at September 30, 2008.
 
 Maximum
        aggregate annual principal payments for the 12 month periods subsequent to
        September 30, 2008 are as follows:
 
 2009
              
              
              $
              161,9782010
              
              
              
              184,2422011
              
              
              
              99,1382012
              
              
              
              75,0282013
              
              
              
              77,6652014
                  and thereafter:
              
              
              
              1,412,959**$**
              **2,011,010**





**NOTE
      10- 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. As of September 30, 2008 there were no options or other awards
      outstanding under the KESOP and there were no additional shares available for
      grant.





In
      1998
      the Company adopted an Outside (Non-Executive) Directors Stock Option Plan
      (the
“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. As of September 30, 2008 there were no options
      outstanding under the ODSOP.





In
      2002
      the Company established the 2002 Stock Option Plan (“SOP”) whereby a stock
      option committee was given the discretion to grant up to 882,353 options to
      purchase shares to key employees of the Company at exercise prices and dates
      to
      be determined by the directors. During the year ended June 30, 2008 400,000
      options to purchase shares were granted to employees and directors exercisable
      at $3.59 (110% of the market closing price on June 6, 2008) based on vesting
      terms of June 2008 through January 2009, and exercisable at various dates
      through June 2014. No options were exercised and 93,028 options expired during
      the twelve months ended June 30, 2008. At September 30, 2008 there remain
      504,700 options outstanding with exercise prices of not less than $3.59 and
      exercise dates up to June 30, 2014. A further 74,407 options are available
      to be
      issued under the SOP.





During
      2005 the Company established an Employee Stock Option Scheme (the “2005 Plan”)
      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
      SOP.
      Options issued expire five years after the vesting date. During the year ended
      June 30, 2007 250,000 options were granted. No options were exercised in
      fiscal 2008 or through September 30 of fiscal 2009. At September 30, 2008,
      options to purchase 250,000 shares with an exercise price of $3.82 and an
      expiration date of June 12, 2012 remain outstanding. Options to purchase 205,838
      additional shares are available to be issued under this plan.





-10-





During
      2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”)
      that authorizes the board of directors or a committee thereof, to grant options
      to purchase up to a maximum of 1,500,000 shares to employees and directors
      of
      the Company at exercise prices to be determined by the administrator but not
      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. During the year ended
      June 30, 2008 options to purchase 275,000 shares were granted to employees
      and
      directors exercisable at $3.59 (110% of the market closing price on June 6,
      2008) based on vesting terms of June 2008 through January 2011, and exercisable
      at various dates through January 2016. Options to purchase an additional
      1,225,000 shares are available to be issued under the 2007 plan.





In
      aggregate for all plans, at September 30, 2008, the Company has a total of
      1,029,700 options outstanding and 1,505,245 options available for future grant
      under the SOP, the Employee Stock Option Scheme, 2005 and the 2007 Plans.





The
      following table summarizes information relating to the stock options outstanding
      at September 30, 2008:


**Outstanding**
              
              **Exercisable****Weighted-****Average**
              
              **Weighted-**
              
              
              
              **Weighted-****Number of**
              
              **Remaining**
              
              **Average**
              
              
              
              **Average****Options**
              
              **Contractual Life**
              
              **Exercise**
              
              **Number of**
              
              **Exercise****Range of Exercise Prices**
              
              **Outstanding**
              
              ***(in years)***
              
              **Price**
              
              **Options**
              
              **Price**$3.59-5.61
              
              
              941,793
              
              
              4.7
              
              $
              3.69
              
              
              657,793
              
              $
              4.19$5.61
                  and higher
              
              
              87,907
              
              
              1.5
              
              $
              7.65
              
              
              87,907
              
              $
              7.65**Balance
                  at September 30, 2008**
              
              
              1,029,700
              
              
              4.5
              
              $
              4.03
              
              
              745,700
              
              $
              4.19





**NOTE
      11 - NON RELATED PARTY WARRANTS**





At
      September 30, 2008 there are warrants to purchase 120,023 shares 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
      September 30, 2008 there are warrants to purchase 50,000 shares issued and
      outstanding to Empire Financial Group, Ltd. as part of the underwriting
      compensation in connection with our recent United States public offering which
      are exercisable at $7.20 per share.





At
      September 30, 2008 there are warrants to purchase 195,800 shares issued and
      outstanding to Strategic Growth International in connection with capital raising
      activities in 2006 and 2007, with expiration dates between March 2011 and June
      2012 and exercise prices of between $3.75 and $7.20.





The
      table
      below summarizes non-related party warrant balances:


**Stock Warrants**
              
              
              
              **Weighted-Average****Non-related party activity**
              
              **Number of Warrants**
              
              **Exercise Price Per Share****Balance
                  at June 30, 2007**
              
              
              **1,084,411**
              
              **$**
              **5.41**Warrants
                  expired
              
              
              (600,941
              )
              
              8.50Warants
                  exercised****
              
              
              (117,647
              )
              
              3.40**Balance
                  at June 30, 2008**
              
              
              **365,823**
              
              **$**
              **4.54**Warrants
                  granted
              
              
              -
              
              
              -Warrants
                  expired
              
              
              -
              
              
              -Warants
                  exercised****
              
              
              -
              
              
              -**Balance
                  at September 30, 2008**
              
              
              **365,823**
              
              **$**
              **4.54**





**NOTE
      12 – COMMITMENTS**





In
      July
      2006, the Company entered into a business development agreement with 41 Broadway
      Associates, whereby 41 Broadway Associates, LLC 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 three months ended September 30, 2008 fees of $50,000 were incurred
      by the Company.




-11-


In
      July
      2007 the Company commenced engineering and product development activities
      pursuant to a collaborative project entitled the Advanced Electricity Storage
      Technologies (“AEST”) project, with the Commonwealth of Australia, 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.





The
      AEST
      project has total budgeted expenditure for operating and capital items of
      approximately $4.8 million (A$5.9 million) exclusive of any Australian taxes.
      The Company’s contribution of approximately $2.3 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 $2.5 million (A$3.1 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
      demonstrating that the funds already provided to it have been fully spent or
      will be fully spent in the near future. There is a balance of approximately
      $1.5
      million in contributions due by the Company to the project in cash and in-kind
      contributions as of September 30, 2008.





**NOTE
      13 - RELATED PARTY TRANSACTIONS**





The
      Company had leased its Australian office facility from an entity affiliated
      with
      three of the Company’s officers. In January 2008 the facility was sold to a
      non-related Australian company, eliminating the related party relationship
      between the Company and its landlord. The current rental is $55,429 per annum
      (A$68,230) and is subject to an annual CPI adjustment.





Rent
      expense was $15,333 and $14,194 for the three months ended September 30, 2008
      and 2007.





The
      future payments required under the terms of the lease are as
      follows:




For the twelve months ending September 30,2009
            
            $
            55,4292010
            
            $
            55,4292011
            
            $
            55,4292012
            
            $
            4,619**TOTAL:**
            
            **$**
            **170,906**





In
      2007,
      the Company received a purchase order from its 49% owned joint venture company,
      ZBB China Pty Ltd, for delivery of an energy storage system. There was no
      significant operating activity during the three months ended September 30,
      2008.
      On October 2, 2008 (see additional discussion in Note 15, “Subsequent Events”)
      the Company came to an agreement with its joint venture partner to dissolve
      the
      relationship. The “Investment in joint venture” account has been offset by the
      $160,000 of unrecognized deferred income. The balance of the investment was
      written down to its estimated value of $27,800 which is included in the prepaid
      and other assets account at September 30, 2008.





**NOTE
      14 - 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 $22,047 and $10,553 for the three months ending September
      30, 2008 and 2007.





**NOTE
      15 - SUBSEQUENT EVENTS**




On
      October 2, 2008 a mutual agreement was reached to terminate the co-operative
      joint venture agreement between ZBB and China Century Capital Limited. The
      effect of this termination is to cancel the exclusive manufacturing, marketing,
      and distribution rights granted by ZBB to the joint venture company, ZBB China
      Pty Ltd, in which ZBB held a 49% interest. Each party has released the other
      from any claims. ZBB now regains control of 100% of these rights and equity
      interest in ZBB China Pty Ltd.




On
      October 3, 2008 the Company entered into a loan agreement to finance new
      production equipment. The $750,000 bank note is secured by specific equipment,
      requiring monthly payments of $14,500 of principal and interest adjustable
      to
      prime rate over the five year term of the note.


-12-


**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, 2008.




**Forward-Looking
      and Cautionary Statements**




Information
      provided by us or statements made by our employees may, from time to time,
      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”, “expect”,
“anticipate”, “believe”, “estimate”, “continue”, and similar words. You should
      read and use our 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.





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.**


·
            **Our
                initial customer focus is utilities and renewable energy companies
                which
                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 by a major stockholder may have an adverse effect
                on
                the market price of our common
                stock.**


-13-


**Overview**




**Company
      Background**




We
      design, develop, manufacture and distribute energy storage systems under the
      recently trademarked names, ZESS 50 and ZESS 500. Our ZESS systems are built
      using a proprietary process based upon our zinc-bromide rechargeable electrical
      energy storage technology. The modular nature of our zinc-bromide regenerative
      fuel cells allows it to be sized and packaged into fully customized, large
      format energy storage systems. Our systems combine these modules with computer
      hardware and software that interface with a customer’s power source to recharge
      during off peak times and discharge power as needed.





Since
      our
      inception in 1981, and through 2006, we have been primarily 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.





The
      Company completed a public offering on the Australian Stock Exchange (the “ASX”)
      in March of 2005. Our securities traded on the ASX from March 2005 to
      August 9, 2007 when they were delisted in connection with our United States
      public offering.





In
      2005
      we began production under a contract with the Department of Energy and the
      California Energy Commission (“CEC”) to produce our first commercial energy
      storage system.





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 began trading on the American Stock Exchange under
      the symbol “ZBB”.





Our
      production capacity currently remains limited, though we expect the delivery
      of
      new production equipment by December 2008 that will significantly increase
      capacity. Since our IPO we have commenced implementation of our business plan
      including the repayment of certain indebtedness, initiating manufacturing
      commercialization and capacity increases, and commenced initial commercial
      marketing of our products into target markets.





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





We
      are
      currently working in the California energy market, in association with the
      CEC,
      Pacific Gas & Electric and the US Department of Energy amongst others, to
      install products into the local transmission and distribution network. In
      addition we are currently addressing numerous opportunities in the renewable
      energy markets within the United States and Australia along with a diverse
      international marketplace with the intention of introducing products and
      services into these markets.




**Results
      of Operations**





***Three
      months ended September 30, 2008 and 2007:***





*Revenue
      and Other income:*





Our
      revenues for the three months ended September 30, 2008 and 2007 were $291,697
      and $386,422, respectively, a decrease of $94,725. This was result of a decrease
      in revenues of $108,937 from the CEC contract which was completed in March
      2007,
      offset by a $14,212 increase in revenues resulting from the Australian AEST
      project as compared to the three month period ending September 30, 2008.
      Revenues include estimates based on the percentage-of-completion method of
      accounting for long-term contracts.





Other
      income for the three months ended September 30, 2008 represents interest income
      of $53,952 compared to $191,362 in the three months ended September 30, 2007,
      which also included $12,500 of rental income. The decrease of $137,410 in the
      three months ended September 30, 2008 resulted from the rental income and a
      significant decrease in interest income from the investment of proceeds from
      the
      Company’s U.S. public offering in June 2007. Interest income is expected to
      continue 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.


-14-


*Cost
      and Expenses and Other expense:*





Total
      costs and expenses for the three months ended September 30, 2008 and 2007 were
      $1,724,123 and $1,128,484, respectively. The increase of $595,639 in the three
      months ended September 30, 2008 was primarily due to the Australian (AEST)
      contract activities which began in July 2007 incurring increased levels of
      expenses of $338,094 compared to the three month period ended September 30,
      2007. Increases in product engineering and development costs of $83,852,
      selling, general, and administrative costs of $169,719, and $3,974 in
      depreciation expense comprised the balance of the increase in costs and
      expenses.




Other
      expenses for the three months ended September 30, 2008 and 2007 were $42,531
      and
      $105,607, respectively. The decrease of $63,076 in other expenses for three
      month period ending September 30, 2008 was primarily due to the decrease in
      finance costs as compared to costs incurred during the first quarter of the
      prior fiscal year which included a significant reduction of the Company’s debt.
      Also, decreases in interest rates in the period ending September 30, 2008
      resulting in $25,421 less interest expense than was incurred in the three months
      ended September 30, 2007.





Cost
      of product sales .
      Our
      cost of contracts for three months ended September 30, 2008 and 2007 were $-0-
      and $89,413, respectively. The decrease in expense in the three month period
      ended September 30, 2008 was due to the completion of the CEC sales contract
      which expired March 31, 2008.




Selling,
      General and Administrative .
      Our
      selling, general and administrative expense for the three months ended September
      30, 2008 and 2007 was $785,081 and $615,362, respectively. The expense during
      the current three month period reflected an increase of $169,719 compared to
      the
      three month period ending September 30, 2007. This was primarily result of
      establishing a sales and marketing department, increased investor and public
      relations costs, additional financial and administrative personnel, and overall
      cost increases.





Travel
      costs were approximately $67,000 and $92,000 for the three month periods ending
      September 2008 and 2007, respectively. The prior period included travel costs
      related to installation and testing of energy storage systems sold in
      California. We expect overall travel related to marketing and business
      development to increase as our sales efforts and installations increase, but
      decrease as a percentage of sales.





Insurance
      costs include insurance benefits for employees of $26,336, general insurance
      of
      $9,191, and directors and officers insurance of $10,125.




**Advanced
      engineering and development** **.** Our
      engineering and development costs for the three months ended September 30,
      2008
      and 2007 were $737,145 and $352,782, respectively. The increase during the
      three
      month period ending September 30, 2008 of $384,363 from the comparable 2007
      period was primary due to the increase in engineering and materials costs
      incurred under the AEST project contract which commenced in July 2007. Expenses
      were partially offset by $126,997 received from the Australian government during
      the three months ended September 30, 2008 as tax concession funding for research
      and development expenditures.





The
      materials component of the AEST contract, which requires delivery of a 500kWh
      storage system, has not been separately charged or disclosed under cost of
      product sales resulting in a materials increase of $203,647 over the three
      months ending September 30, 2007. This project will continue to affect
      expenditures through June 2010 to the extent the costs are required or allowable
      under the AEST contract. Also directly related to the AEST contract were
      engineering consultants and scientists which resulted in increases of $115,477
      over the July 2007 period. Other increases of $62,568, net of $126,997 received
      in government concessions received during the period, were primarily due to
      a
      reallocation of engineering staffing and other resources subsequent to the
      completion of the CEC contract to further the development and improvements
      of
      the energy storage systems and manufacturing capacity, quality control, and
      cost
      improvement processes.





Net
      Loss. Our net
      loss for the three months ended September 30, 2008 and 2007 was $1,294,009
      and
      $656,307, respectively, resulting in a $637,702 increase in net loss as compared
      to the three months ended September 30, 2007.





**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 September 30, 2008 was
      $45,220,869. We had a cumulative deficit of $33,020,804 as of September 30,
      2008
      compared to a cumulative deficit of $31,726,795 as of June 30, 2008. At
      September 30, 2008 we had a working capital surplus of $7,198,738 and as of
      June
      30, 2008 a working capital surplus of $8,611,872. Our shareholders’ equity as of
      September 30, 2008 and June 30, 2008 was $10,603,384 and $12,016,118,
      respectively.


-15-





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




Additional
      funding continues to 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 Commonwealth of Australia (administered by the Department
      of
      Environment and Water Resources), 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 provided for $2.5 million (A$3.1 million) in project funding through
      June 2010 totaling $1.3 million in year one, $1.0 million in year two and $0.2
      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 $4.8 million (A$5.9 million) exclusive of any Australian
      taxes. The Company’s contribution of approximately $2.3 million (A$2.8 million)
      is the value of any cash and in-kind contributions to be provided to the project
      by the Company (balance remaining in Company contributions is approximately
      $1.5
      million as of September 30, 2008) in undertaking the project activities.




We
      believe that we will have sufficient capital necessary to meet our operating
      and
      capital commitments through at least December 2009. This is based on a
      conservative business plan that does not include any new sales contracts and
      a
      rate of expenditure that supports our current operations, including product
      development and production readiness without additional funding from project
      financing or equity transactions. However, if sales do increase substantially,
      we believe additional capital is required in order to expand our production
      capacity and inventory levels. Conversely, under current economic conditions
      and
      absent a substantial increase in new orders, the board of directors has
      requested that management implement increased cost containment
      measures.




*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 in July and August 2007. In addition
      to
      investing in plant improvements and increased capacity, we intend to apply
      approximately $1,100,000 towards the acquisition of new vibration welding and
      production equipment ($750,000), infra-red welding equipment ($150,000) and
      other production line tools and sundry equipment ($200,000) over the next twelve
      months.





*Operating
      Activities*





For
      the
      three months ended September 30, 2008, net cash used in operations was
      $1,180,192. Cash used in operations resulted primarily from a net loss of
      $1,294,009. Changes in working capital impacted cash used in operations with
      a
      net $287,408 in additional cash used in operations from decreases in accrued
      expenses of 35,667; deferred revenues of $244,862; increase to inventory of
      $131,125; increase in accounts receivable of $2,223; and prepaid and other
      current assets of $27,275. This was offset by increases in accounts payable
      of
      $146,869 and a reduction in interest receivable of $6,875.Other non-cash
      adjustments to cash included long-term assets of $210,855 expensed to costs
      of
      engineering and development, $50,000 of non-cash consulting fees, $54,471 of
      stock options compensation expense, a $11,000 change in inventory allowance,
      and
      $74,901 of depreciation expense.





For
      the
      three months ended September 30, 2007, net cash used in operations was
      $1,395,243 after adding back non-cash items of $70,927 of depreciation and
      other
      non-cash sources of $50,000. Cash used in operations resulted from decreases
      in
      accounts payable of $408,129; accrued expenses of $91,574; deferred revenues
      of
      $102,937; and increase to inventory of $187,016; prepaid and other current
      assets of $110,614. Cash provided from operations was generated from a decrease
      in accounts receivable of $40,408.





*Investing
      Activities*




For
      the
      three months ended September 30, 2008, net cash used in investing activities
      was
      $407,207. All of the net cash used in investing activities related to purchases
      of property and equipment.





For
      the
      three months ended September 30, 2007, net cash used in investing activities
      was
      $89,669 due to purchases of manufacturing equipment and computer
      hardware.


-16-


*Financing
      Activities*





For
      the
      three months ended September 30, 2008, net cash used in financing activities
      was
      $42,447 consisting of repayments of principal on notes payable.





For
      the
      three months ended September 30, 2007, net cash used in financing activities
      was
      $4,170,470 consisting primarily of $4,047,822 in repayments of principal on
      notes payable, additional public offering costs of $100,000 and $22,647
      reduction in principal on bank loans. Additional conversion of $475,237 in
      notes
      payable for shares of the Company’s common stock resulted in only the bank loan
      debt remaining at September 30, 2007.





**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 in North America the electric utilities markets’ increasing energy
      demands on an increasingly fragile transmission and distribution network is
      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 CO2 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
      continue to advance the sales and marketing process in the areas of sales
      network structure, direct key accounts, strategic relationships, marketing
      and
      industry/policy involvement.




We
      continue to build a direct market pipeline of opportunities which include
      several electric utilities; various oil companies involved in renewable energy;
      large renewable energy integrators involved in on-grid and off-grid
      applications, government facilities and other commercial and industrial
      opportunities such as “big box” store chains.





We
      have
      advanced the ZBB presence and awareness in the market through increased
      involvement in various market conferences (energy storage, wind, and solar,
      electric utility), increased direct marketing, advancing the marketing materials
      and web content, as well as continued efforts in media channels and highly
      visible applications such as the Future House USA installation at the Beijing
      Olympic Games in China and the LifeVillage project with Envision Solar
      International for the purpose of transporting village power systems to remote
      areas in Central and West Africa. ZBB is in the process of furthering these
      marketing and networking efforts with additional marketing activities that
      will
      continue to raise the profile of ZBB and the ZESS brands.





We
      continue to work in the California energy and utility markets through the CEC
      (under a new May 2008 agreement), and pursue opportunities with 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, Australia, and Africa with the intention of introducing
      products and services into these markets.





Our
      recent efforts also include a collaborative project (Advanced Electricity
      Storage Technologies project) with the Commonwealth of Australia which commenced
      July 2007 and running through July 2010, which includes the payment to the
      Company of $2.7 million for future development costs and which includes the
      production and delivery of one 500kWh energy storage system for installation
      into a renewable energy site in Australia.




In
      addition to the other risk factors stated above, and other information relating
      to our business as referenced in our “Company Background” section, we believe
      that some of the biggest challenges we face will be gaining market acceptance
      for our newer products and reaching the utility and renewable energy companies
      that we target. In order to be successful we must also develop a reputation
      of
      reliability and quality service.


-17-


Our
      systems compete with both traditional energy storage technologies, such as
      lead
      acid batteries, as well as emerging energy storage technologies, such as
      vanadium redox and sodium sulfur batteries. For our target markets, we believe
      our product has a significant advantage over competing products and technologies
      in terms of:





•
            Superior
                technical attributes in terms of the amount of energy that can be
                stored
                in a system of a given weight and size or “energy density” (sometimes
                measured in Watt Hours per Kilogram or Wh/kg), recharge cycle and
                overall
                cycle life





•
            Competitive
                cost, based on dollars per Kilowatt Hours (kWh), as well as life
                of the
                module components





•
            Demonstrated
                commercial manufacturing capability of functioning product in the
                United
                States





•
            Modular
                construction allowing portable applications of varying size, as compared
                to the large scale, fixed site emerging
                alternatives.




**Off-Balance
      Sheet Arrangements**




*We
      have no off-balance sheet arrangements.*




**Item
              3.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**




*Not
      applicable for smaller reporting companies.*




**Item
              4.**
            **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 chief 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 chief 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 changes in our internal controls over financial reporting or in
      other factors which could significantly affect internal controls over financial
      reporting subsequent to the date we carried out our evaluation.




**PART
      II**




**Item
              1.**
            **Legal
                Proceedings**




We
      are
      not a party to, and none of our property is the subject of, any pending legal
      proceedings other than routine litigation that is incidental to our business.
       To our knowledge, no governmental authority is contemplating initiating
      any such proceedings.




**Item
              1A.**
            **Risk
                Factors**




**** *Not
      applicable for smaller reporting companies.*


-18-




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




As
      a
      result of consummation of our initial United States public offering 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 resulting in receipt of $18,410,000 (net of underwriter’s
      costs) proceeds on June 20, 2007. The managing underwriter of our offer was
      Empire Financial Group, Inc.





From
      the
      proceeds of our June 2007 United States initial public offering, we incurred
      approximately $1.2 million in additional offering expenses and retired an
      aggregate of $4.5 million in indebtedness. Approximately $7 million of the
      net
      proceeds has been used for working capital and investments in manufacturing
      assets, 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
      September 25, 2008, at our Annual Meeting of Shareholders (the “Annual Meeting”)
      our shareholders voted on proposals to: (1) elect Robert J. Parry to serve
      as
      Class I director until the 2011 Annual Meeting of Shareholders; 2) elect Richard
      A. Payne to serve as Class I director until the 2011 Annual Meeting of
      Shareholders; and (3) ratify the appointment of PKF as our independent auditors
      for fiscal 2009. In addition, Manfred E. Birnbaum continued as a Class II
      director (term expiring 2009), and William A. Mundell continued as Class III
      director (term expiring 2010). The results of the proposals voted upon at the
      Annual Meeting as are as follows:




For
            
            Against
            
            Abstain
            
            Non-votes1.
            
            
            Election of Robert
                J. Parry
            
            
            3,510,082
            
            
            -0-
            
            
            199,697
            
            
            -0-2.
            
            
            Election
                of Richard A. Payne
            
            
            3,401,850
            
            
            -0-
            
            
            307,929
            
            
            -0-3.
            
            
            Ratify
                PKF as our auditors for 2009
            
            
            3,709,455
            
            
            4
            
            
            320
            
            
            -0-




**Item
              5.**
            **Other
                Information**




This
      Item
      is not applicable.




**Item
              6.**
            **Exhibits
                -**Filed
                herewith:


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


-19-




**SIGNATURES**




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


**ZBB
                  ENERGY CORPORATION**November
                  12, 2008
              By:
              /s/
                  Robert J. ParryName:
              Robert
                  J. ParryTitle:
              Chief
                  Executive Officer and(Principal
                  Executive Officer)November
                  12, 2008
              By:
              /s/
                  Scott W. ScampiniName:
              Scott
                  W. ScampiniTitle:
              Chief
                  Financial Officer and(Principal
                  financial officer andPrincipal
                  accounting officer)


-20-