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 March 31, 2010


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 registrant 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




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the Registrant was required to submit and post such files).  £
Yes   £
No




Indicate
by check whether the registrant 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. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.  (Check
one):





Large
      accelerated filer   £
                        Accelerated
      filer  £
                        Non-accelerated
      filer £
                        Smaller reporting company R(Do
      not check if a smaller reporting
company)




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 May 17, 2010Common
      Stock, $.01 par value per share
            14,915,389










ZBB
Energy Corporation




Form
10-Q




TABLE OF
CONTENTS




PagePART I. FINANCIAL INFORMATION
      (*)Item 1.
                    Consolidated
      Financial Statements
                    
                    1Balance
      Sheets
                    
                    1Statements
      of Operations
                    
                    2Statements
      of Changes in Shareholders’ Equity
                    
                    3Statements
      of Cash Flows
                    
                    4Notes
      to Financial Statements
                    
                    5Item
      2.
                    Management’s
      Discussion and Analysis and Results of Operations
                    
                    15Item
      3.
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    21Item
      4.
                    Controls
      and Procedures
                    
                    22PART II. OTHER INFORMATIONItem
      1.
                    Legal
      Proceedings
                    
                    22Item
      1A.
                    Risk
      Factors
                    
                    22Item
      2.
                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                    
                    22Item
      3.
                    Defaults
      upon Senior Securities
                    
                    22Item
      4.
                    Reserved
                    
                    22Item
      5.
                    Other
      Information
                    
                    23Item
      6.
                    Exhibits
                    
                    23Signatures
                    
                    24





(*) All
of the financial statements contained in this Quarterly Report are unaudited
with the exception of the financial information at June 30, 2009, 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, 2009 and
for the year then ended, and the notes thereto, can be found in our Annual
Report on Form 10-K/A, which was filed with the Securities and Exchange
Commission on February 12, 2010.







PART
I.  FINANCIAL INFORMATION




Item 1. FINANCIAL
STATEMENTS




ZBB
ENERGY CORPORATION


Consolidated
Balance Sheets





March 31, 2010
                    
                    
                    June 30, 2009(unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                    
                    $
                    2,925,150
                    
                    
                    $
                    2,970,009Bank
      certificate of deposit
                    
                    
                    -
                    
                    
                    
                    1,000,000Accounts
      receivable
                    
                    
                    325,408
                    
                    
                    
                    614,154Interest
      receivable
                    
                    
                    -
                    
                    
                    
                    19,746Inventories-net of $175,000 and $145,301
      allowance
                    
                    
                    995,397
                    
                    
                    
                    1,587,113Prepaids
      and other current assets
                    
                    
                    53,763
                    
                    
                    
                    143,173Total
      current assets
                    
                    
                    4,299,718
                    
                    
                    
                    6,334,195Long-term
      assets:Property,
      plant and equipment, net
                    
                    
                    3,573,105
                    
                    
                    
                    4,578,180Goodwill
                    
                    
                    803,079
                    
                    
                    
                    803,079Total
      assets
                    
                    $
                    8,675,902
                    
                    
                    $
                    11,715,454Liabilities
      and Shareholders' EquityCurrent
      liabilities:Bank
      loans
                    
                    
                    420,428
                    
                    
                    
                    416,558Accounts
      payable
                    
                    
                    553,009
                    
                    
                    
                    827,001Accrued
      expenses
                    
                    
                    449,600
                    
                    
                    
                    25,765Deferred
      revenues
                    
                    
                    472,720
                    
                    
                    
                    1,128,539Accrued
      compensation and benefits
                    
                    
                    554,201
                    
                    
                    
                    151,841Total
      current liabilities
                    
                    
                    2,449,958
                    
                    
                    
                    2,549,704Long-term
      liabilities:Bank
      loans
                    
                    
                    2,209,678
                    
                    
                    
                    2,399,915Total
      liabilities
                    
                    $
                    4,659,636
                    
                    
                    $
                    4,949,619Shareholders'
      equityCommon
      stock($0.01 par value);
      150,000,000 authorized14,915,389
      and 10,618,297 shares issued and outstanding
                    
                    
                    149,155
                    
                    
                    
                    106,183Additional
      paid-in capital
                    
                    
                    49,587,568
                    
                    
                    
                    45,549,079Treasury
      stock - 13,833 shares
                    
                    
                    (11,136
                    )
                    
                    
                    -Accumulated
      other comprehensive (loss)
                    
                    
                    (1,562,385
                    )
                    
                    
                    (1,601,576
                    )Accumulated
      (deficit)
                    
                    
                    (44,146,936
                    )
                    
                    
                    (37,287,851
                    )Total
      shareholders' equity
                    
                    $
                    4,016,266
                    
                    
                    $
                    6,765,835Total
      liabilities and shareholders' equity
                    
                    $
                    8,675,902
                    
                    
                    $
                    11,715,454





See
accompanying notes to consolidated financial statements


-1-


ZBB
ENERGY CORPORATION


Consolidated
Statements of Operations





Three months ended March 31,
                      
                      
                      Nine months ended March 31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009(unaudited)
                      
                      
                      (unaudited)
                      
                      
                      (unaudited)
                      
                      
                      (unaudited)RevenuesProduct
      sales and revenues
                      
                      $
                      29,669
                      
                      
                      $
                      -
                      
                      
                      $
                      967,455
                      
                      
                      $
                      -Engineering
      and development revenues
                      
                      
                      159,111
                      
                      
                      
                      219,853
                      
                      
                      
                      588,693
                      
                      
                      
                      733,738Total
      Revenues
                      
                      
                      188,780
                      
                      
                      
                      219,853
                      
                      
                      
                      1,556,148
                      
                      
                      
                      733,738Costs
      and ExpensesCost
      of product sales
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      899,287
                      
                      
                      
                      -Advanced
      engineering and development
                      
                      
                      905,949
                      
                      
                      
                      757,680
                      
                      
                      
                      2,538,197
                      
                      
                      
                      2,118,346Selling,
      general, and administrative
                      
                      
                      1,141,069
                      
                      
                      
                      887,523
                      
                      
                      
                      3,748,839
                      
                      
                      
                      2,554,341Depreciation
                      
                      
                      83,622
                      
                      
                      
                      51,837
                      
                      
                      
                      333,270
                      
                      
                      
                      186,703Impairment
      and other equipment charges
                      
                      
                      47,858
                      
                      
                      
                      -
                      
                      
                      
                      828,089
                      
                      
                      
                      -Total
      Costs and Expenses
                      
                      
                      2,178,498
                      
                      
                      
                      1,697,040
                      
                      
                      
                      8,347,682
                      
                      
                      
                      4,859,390Loss
      from Operations
                      
                      
                      (1,989,718
                      )
                      
                      
                      (1,477,187
                      )
                      
                      
                      (6,791,534
                      )
                      
                      
                      (4,125,652
                      )Other
      Income (Expense)Interest
      income
                      
                      
                      8,074
                      
                      
                      
                      23,689
                      
                      
                      
                      55,163
                      
                      
                      
                      119,030Interest
      (expense)
                      
                      
                      (54,261
                      )
                      
                      
                      (59,889
                      )
                      
                      
                      (117,155
                      )
                      
                      
                      (119,987
                      )Other
      income (expense)
                      
                      
                      14,201
                      
                      
                      
                      (10,946
                      )
                      
                      
                      (5,559
                      )
                      
                      
                      (24,514
                      )Total
      Other Income (Expense)
                      
                      
                      (31,986
                      )
                      
                      
                      (47,146
                      )
                      
                      
                      (67,551
                      )
                      
                      
                      (25,471
                      )Loss
      before provision for Income Taxes
                      
                      
                      (2,021,704
                      )
                      
                      
                      (1,524,333
                      )
                      
                      
                      (6,859,085
                      )
                      
                      
                      (4,151,123
                      )Provision
      for Income Taxes
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      Loss
                      
                      $
                      (2,021,704
                      )
                      
                      $
                      (1,524,333
                      )
                      
                      $
                      (6,859,085
                      )
                      
                      $
                      (4,151,123
                      )Net
      Loss per share-Basic
      and diluted
                      
                      $
                      (0.16
                      )
                      
                      $
                      (0.14
                      )
                      
                      $
                      (0.56
                      )
                      
                      $
                      (0.39
                      )Weighted
      average shares-basic and diluted:Basic
                      
                      
                      12,933,506
                      
                      
                      
                      10,547,621
                      
                      
                      
                      12,285,867
                      
                      
                      
                      10,524,062Diluted
                      
                      
                      12,933,506
                      
                      
                      
                      10,547,621
                      
                      
                      
                      12,285,867
                      
                      
                      
                      10,524,062





See
accompanying notes to consolidated financial statements.


-2-


ZBB
Energy Corporation


Consolidated
Statements of Changes in Shareholders' Equity (unaudited)





Note
                      
                      
                      AccumulatedReceivable
                      
                      
                      Other
                      
                      
                      
                      
                      
                      TOTALNumber of
                      
                      
                      Common
                      
                      
                      Add'l Paid-in
                      
                      
                      Treasury
                      
                      
                      from
                      
                      
                      Comprehensive
                      
                      
                      Accumulated
                      
                      
                      Shareholders'
                      
                      
                      ComprehensiveShares
                      
                      
                      Stock
                      
                      
                      Capital
                      
                      
                      Stock
                      
                      
                      Shareholders
                      
                      
                      (Loss)
                      
                      
                      Deficit
                      
                      
                      Equity
                      
                      
                      (Loss)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
                      )Stock
      options expensed
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      294,114
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      294,114Issuance
      of restricted stock in payment of compensation
                      
                      
                      101,014
                      
                      
                      
                      1,010
                      
                      
                      
                      72,167
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      73,177Deferred
      stock compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (72,167
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (72,167
                      )Amortization
      of deferred stock compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      30,490
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      30,490Issuance
      of restricted stock - in payment of consulting fees
                      
                      
                      5,000
                      
                      
                      
                      50
                      
                      
                      
                      13,200
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,250Reduction
      of note receivable
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (408,333
                      )
                      
                      
                      
                      
                      
                      
                      608,333
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      200,000Net
      Loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (5,561,056
                      )
                      
                      
                      (5,561,056
                      )
                      
                      $
                      (5,561,056
                      )Net
      Translation Adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (228,091
                      )
                      
                      
                      
                      
                      
                      
                      (228,091
                      )
                      
                      
                      (228,091
                      )Balance:
      June 30, 2009
                      
                      
                      10,618,297
                      
                      
                      $
                      106,183
                      
                      
                      $
                      45,549,079
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      (1,601,576
                      )
                      
                      $
                      (37,287,851
                      )
                      
                      $
                      6,765,835
                      
                      
                      $
                      (5,789,147
                      )Issuance
      of common stock equity offering net of underwriting fees
                      
                      
                      1,791,667
                      
                      
                      
                      17,917
                      
                      
                      
                      2,024,583
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      2,042,500Equity
      offering costs
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (142,224
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (142,224
                      )Amortization
      of deferred equity compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      303,791
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      303,791Settlement
      of stock purchase agreement
                      
                      
                      (28,750
                      )
                      
                      
                      (287
                      )
                      
                      
                      287Issuance
      of common stock equity offering net of net of underwriting
      fees
                      
                      
                      2,243,750
                      
                      
                      
                      22,438
                      
                      
                      
                      1,636,912
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      1,659,350Equity
      offering costs
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (61,956
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (61,956
                      )Retired
      restricted stock
                      
                      
                      (46,921
                      )
                      
                      
                      (469
                      )
                      
                      
                      469Issuance
      of restricted common stock offering
                      
                      
                      337,346
                      
                      
                      
                      3,373
                      
                      
                      
                      276,627
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      280,000Purchase
      of treasury stock
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (11,136
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (11,136
                      )Net
      Loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (6,859,085
                      )
                      
                      
                      (6,859,085
                      )
                      
                      
                      (6,859,085
                      )Net
      Translation Adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      39,191
                      
                      
                      
                      
                      
                      
                      
                      39,191
                      
                      
                      
                      39,191Balance:
      March 31, 2010
                      
                      
                      14,915,389
                      
                      
                      $
                      149,155
                      
                      
                      $
                      49,587,568
                      
                      
                      $
                      (11,136
                      )
                      
                      $
                      -
                      
                      
                      $
                      (1,562,385
                      )
                      
                      $
                      (44,146,936
                      )
                      
                      $
                      4,016,266
                      
                      
                      $
                      (6,819,895
                      )





See
accompanying notes to consolidated financial statements


-3-




ZBB
      Energy Corporation
                
                Nine
      months ended March 31,Consolidated Statements of Cash
      Flows
                
                2010
                
                
                2009(unaudited)
                
                
                (unaudited)Cash
      flows from operating activitiesNet
      loss
                
                $
                (6,859,085
                )
                
                $
                (4,151,123
                )Adjustments
      to reconcile net loss to net cash (used) in operating
      activities:Depreciation
                
                
                333,270
                
                
                
                186,703Change
      in inventory allowance
                
                
                29,699
                
                
                
                68,050Equipment
      costs reclassified to expenses
                
                
                -
                
                
                
                210,855Impairment
      and other equipment charges
                
                
                828,089
                
                
                
                -Payments
      applied to note receivable for consulting fees
                
                
                -
                
                
                
                150,000Stock
      based compensation
                
                
                303,791
                
                
                
                201,567(Increase)
      decrease in operating assets:Accounts
      receivable
                
                
                288,746
                
                
                
                1,722Inventories
                
                
                562,017
                
                
                
                (321,801
                )Prepaids
      and other current assets
                
                
                89,410
                
                
                
                (325
                )Other
      receivables-interest
                
                
                19,746
                
                
                
                26,970Increase
      (decrease) in operating liabilities:Accounts
      payable
                
                
                (252,245
                )
                
                
                230,324Accrued
      compensation and benefits
                
                
                402,360
                
                
                
                (48,231
                )Accrued
      expenses
                
                
                423,835
                
                
                
                -Deferred
      revenues
                
                
                (655,819
                )
                
                
                (2,415
                )Net
      cash (used) in operating activities
                
                
                (4,486,186
                )
                
                
                (3,447,704
                )Cash
      flows from investing activitiesCapital
      expenditures
                
                
                (156,284
                )
                
                
                (713,470
                )Bank
      certificate of deposit
                
                
                1,000,000
                
                
                
                (1,016,325
                )Net
      cash provided (used) in investing activities
                
                
                843,716
                
                
                
                (1,729,795
                )Cash
      flows from financing activitiesProceeds
      from bank loan
                
                
                156,000
                
                
                
                1,070,000Repayments
      of bank loans
                
                
                (342,367
                )
                
                
                (203,567
                )Proceeds
      from stock issuance - net of underwriter fees
                
                
                3,981,850
                
                
                
                -Additional
      public offering costs
                
                
                (204,180
                )
                
                
                -Purchase
      of treasury stock
                
                
                (11,136
                )
                
                
                -Net
      cash provided by financing activities
                
                
                3,580,167
                
                
                
                866,433Effect
      of exchange rate changes on cash and cash equivalents
                
                
                17,444
                
                
                
                (243,694
                )Net
      (decrease) in cash and cash equivalents
                
                
                (44,859
                )
                
                
                (4,554,760
                )Cash
      and cash equivalents - beginning of period
                
                
                2,970,009
                
                
                
                8,451,320Cash
      and cash equivalents - end of period
                
                $
                2,925,150
                
                
                $
                3,896,560Cash
      paid for interest
                
                $
                111,927
                
                
                $
                92,952Supplemental
      schedule of non-cash investing and financing activities:Investment
      in joint venture offset by unfulfilled deferred revenue
                
                
                -
                
                
                
                160,000Prepaids
      and inventory reclassed to property, plant and equipment
                
                
                -
                
                
                
                214,900Equipment
      costs reclassified to expenses
                
                
                -
                
                
                
                210,855





See
accompanying notes to consolidated financial statements.


-4-




ZBB
ENERGY CORPORATION




Notes
to Unaudited Consolidated Financial Statements


March
31, 2010





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,
2009.





In the
opinion of the ZBB Energy Corporation (“ZBB” or the “Company”) management, all
adjustments (consisting of normal recurring accruals) necessary to make the
Company’s financial position as of March 31, 2010 and the results of operations
and statements of cash flows for the periods shown not misleading, have been
included.  Operating results for the nine months ended March 31, 2010 are
not necessarily indicative of the results that may be expected for the
year-ended June 30, 2010.


The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated upon consolidation.





NOTE
2 – Going Concern





The
unaudited consolidated financial statements as of March 31, 2010 and for the
nine months then ended have been prepared on the basis of a going concern which
contemplates that ZBB Energy Corporation and subsidiaries (the “Company”) will
be able to realize assets and discharge liabilities in the normal course of
business. Accordingly, they do not give effect to adjustments that would be
necessary should the Company be required to liquidate its assets. The Company
incurred a net loss of $6,859,085 for the nine months ended March 31, 2010. The
ability of the Company to meet its total liabilities of $4,659,636 and to
continue as a going concern is dependent upon the availability of future funding
and achieving profitability.  The financial statements do not include any
adjustments that might result from the outcome of these
uncertainties.





NOTE
3 - Nature of Organization





The
Company designs, develops, manufactures and distributes energy storage systems
under the product name ZESS 50. The Company also develops and distributes
proprietary system integration power electronics under the product name ZESS
POWR PECC.  The Company was incorporated under the laws of Wisconsin in
1998.


The
Company develops, manufactures and markets energy storage systems with telecom
and renewable energy applications, and energy integrators for both of and on
grid applications as its initial markets. This scalable, mobile system is
ideally suited for a number of market applications including:


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


—
Backup power supply for grid connected units.


—
Power electronic systems in conjunction for both storage and nonstorage
applications.


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
4 - 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
U.S. 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





The
Company records deferred taxes in accordance with FASB Accounting Standard
Codification (“ASC”) topic 740, “Accounting for Income Taxes.” This ASC requires
recognition of deferred tax assets and liabilities for temporary differences
between the tax basis of assets and liabilities and the amounts at which they
are carried in the financial statements, based upon the enacted tax rates in
effect for the year in which the differences are expected to reverse. The
Company establishes a valuation allowance when necessary to reduce deferred tax
assets to the amount expected to be realized. There was no deferred tax assets
recorded as of March 31, 2010.





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 plant and equipment on a straight line basis over estimated
useful lives of the assets.  The depreciation rate used for each class of
depreciable asset is:




Depreciation LifeManufacturing
      Equipment
                  3 -
      7 yearsOffice
      Equipment
                  3 -
      7 yearsBuilding
      and improvements
                  7 -
      40 years





Impairment
of Long-Lived Assets





In
accordance with FASB ASC topic 360, "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, 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 three months
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.





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:


-6-


·
            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





Revenues
are recognized when persuasive evidence of a contractual arrangement exits,
delivery has occurred or services have been rendered, the seller’s price to
buyer is fixed and determinable, and collectability is reasonably assured. The
portion of revenue related to installation and final acceptance, is deferred
until such installation and final customer acceptance are completed. The Company
charges shipping and handling fees when products are shipped or delivered to a
customer, and includes such amounts in net sales. The Company reports its sales
net of actual sales returns.





For sales
arrangements containing multiple elements (products or services), revenue
relating to undelivered elements is deferred at the estimated fair value until
delivery of the deferred elements. To be considered a separate element, the
product or service in question must represent a separate unit under Staff
Accounting Bulletin 104, and fulfill the following criteria: the delivered
item(s) has value to the customer on a standalone basis; there is objective and
reliable evidence of the fair value of the undelivered item(s); and, if the
arrangement includes a general right of return relative to the delivered
item(s), delivery or performance of the undelivered item(s) is considered
probable and substantially in our control. If the arrangement does not meet all
criteria above, the entire amount of the transaction is deferred until all
elements are delivered. Revenue from time and materials based service
arrangements is recognized as the service is performed.





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. 
This has been the predominant method used in estimating revenues recognized in
past reporting periods.





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. Often
multi-year agreements which 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 these types of contracts are
typically of longer duration and recognized under the percentage-of-completion
method.





These
policies as discussed herein are not intended to be a comprehensive list of
policies to encompass the accounting for all customer contracts. Occasionally,
contracts terms may not be specifically discussed or anticipated as dictated by
U.S. GAAP and may require managements’ judgment in selecting an available
revenue recognition alternative that would not produce a materially different
result.





In July
2007 the Company commenced engineering and product development activities
pursuant to the collaborative Advanced Electricity Storage Technologies project
(“AEST”) with the Commonwealth of Australia through July 2010 which terms
include the receipt of funding of A$3.1 million (approximately US$2.3 million)
toward future development costs which include the production and delivery of one
500kWh energy storage system.  During the nine months ended March 31, 2010
and 2009, $588,693 and $733,738, respectively, was recognized as revenue based
on progress toward completion of the nine performance milestones specified in
the contract.




On
February 4, 2010 the Company announced that its Audit Committee and Management
determined a customer contract recorded in June 2009 did not properly meet the
delivery criteria under Staff Accounting Bulletin No. 101 to qualify for revenue
recognition and that other contract arrangements were not considered when
revenue was recorded.  As a result, the Company reported the revenues of
approximately $600,000 and costs associated with this shipment in the
consolidated financial statements for the fiscal quarter ended September 30,
2009.




Total
revenues of $1,556,148 and $733,738 were recognized for the nine months ended
March 31, 2010 and 2009, respectively.





Warranty
and Contract Reserves





The
Company typically warrants its products for twelve months after installation or
eighteen months after date of shipment, whichever first occurs. Warranty
reserves are evaluated quarterly to determine a reasonable estimate for the
replacement of potentially defective materials of all energy storage systems
that have been shipped to customers.





While the
Company actively engages in monitoring and improving its evolving battery and
production technologies, there is only a limited product history and relatively
short time frame available to test and evaluate the rate of product
failure.  Should actual product failure rates differ from the Company’s
estimates, revisions are made to the estimated rate of product failures and
resulting changes to the warranty reserve.  In addition, from time to time,
specific warranty accruals may be made if unforeseen technical problems
arise.


-7-





During
the quarter ended December 31, 2009, battery stack manufacturing issues were
discovered as result of an internal test failure.  As a result, the Company
has implemented several manufacturing process changes to eliminate the potential
for future failures and will adjust its warranty reserves accordingly.  We
will adjust our warranty rates in future periods as these processes are
implemented and tested.





Management
also reviews the status of all active contracts to determine if there are any
conditions due to warranty, costs to complete, and other commitments to
completing the contract.  If indications are an adverse net financial
outcome is likely, a provision is made for the total loss
anticipated.





As of
March 31, 2010, included in the Company’s accrued expenses were approximately
$350,000 in warranty reserves and $100,000 in provision for anticipated contract
losses.




Net
Loss per Share





The
Company follows the FASB ASC topic 260 “Earnings per Share” provisions which
require 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.
Anti-dilutive effects on net income (loss) per share are excluded (as of March
31, 2010 there were 2,896,523 underlying options and warrants that are
excluded).





Stock-Based
Compensation





The
Company measures all “Share-Based Payments", including grants of stock options
and restricted shares, to be recognized in the income statement based on their
fair values on the grant date, consistent with FASB ASC topic 718 “Stock
Compensation” guidelines.





Accordingly,
the Company measures share-based compensation cost for all share-based awards at
the fair value on the grant date and recognition of share-based compensation
over the service period for awards that are expected to vest. The fair value of
stock options is determined based on the number of shares granted and the price
of our ordinary shares, and calculated based on the Black-Scholes valuation
model.





The
Company only recognizes expense to its consolidated statement of operations for
those options or shares that are expected ultimately to vest, using two
attribution methods to record expense, the straight-line method for grants with
only service-based vesting or the graded-vesting method, which considers each
performance period or tranche separately, for all other awards. See Note 13
below.




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, they will be shown separately on the statement of operations as
a “cost of engineering and development contract.”





Costs
related to the AEST project were presented in the prior fiscal year‘s statement
of operations as  “cost of engineering and development contracts” and
have subsequently been reclassified and presented as “advanced engineering and
development” costs to conform with the current fiscal year presentation. 
 The Company determined the AEST project agreement did not contain adequate
specificity to reasonably allocate revenues and related expenditures between
product sales, engineering and development revenues, and general engineering and
development costs to allow for separate classification in the statement of
operations.





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 the FASB
ASCtopic 220
“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 March 31, 2010 and 2009 and is presented in the
Consolidated Statements of Changes in Shareholders’ Equity.


-8-


Fair
Value Measurements





The
Company considers the carrying values reported in the consolidated balance
sheets for current assets and current liabilities qualifying as financial
instruments which approximate their fair values due to the short-term maturity
of such instruments.  It is the management’s opinion that the Company is
not exposed to significant interest, price, and foreign currency or credit risks
arising from these financial instruments.





Recent
Accounting Pronouncements





On July
1, 2009, the Company adopted the FASB Accounting Standards Codification ("ASC").
 FASB ASC topic 105, “Generally Accepted Accounting Principles”, does not
alter current U.S. GAAP but rather integrated existing accounting standards with
other authoritative guidance.  The ASC provides a single source of
authoritative U.S. GAAP for nongovernmental entities and supersedes all other
previously issued non-SEC accounting and reporting guidance.  The adoption
of the ASC did not change our accounting principles.  All prior references
to U.S. GAAP have been revised to conform to the ASC. Updates to the ASC are
issued in the form of Accounting Standards
Updates   ("ASU").





In
October 2009, the FASB issued ASU No. 2009-13 “Revenue Recognition (Topic 605):
Multiple Deliverable Revenue Arrangements - A Consensus of the FASB Emerging
Issues Task Force.” This update provides application guidance on whether
multiple deliverables exist, how the deliverables should be separated and how
the consideration should be allocated to one or more units of accounting. This
update establishes a selling price hierarchy for determining the selling price
of a deliverable. The selling price used for each deliverable will be based on
vendor-specific objective evidence, if available, third-party evidence if
vendor-specific objective evidence is not available, or estimated selling price
if neither vendor-specific or third-party evidence is available. The Company
will be required to apply this guidance prospectively for revenue arrangements
entered into or materially modified after January 1, 2011; however, earlier
application is permitted. The management is in the process of evaluating the
impact of adopting this ASU on the Company’s consolidated financial
statements.





In April
2009, new guidance, FASB ASC topic 825 “Financial Instruments” was issued which
amends the requirements for disclosures about fair value of financial
instruments in interim financial statements as well as in annual financial
statements. This guidance became effective for the Company on July 1, 2009 and
did not have a material impact on the Company’s consolidated financial
statements.





NOTE
5 – INVENTORIES





Inventory
balances are comprised of the following amounts as of March 31,
2010:





Raw
      materials
                  
                  $
                  853,605Work
      in progress
                  
                  
                  253,388Finished
      goods
                  
                  
                  63,404Inventory
      valuation allowance
                  
                  
                  (175,000
                  )Total
                  
                  $
                  995,397





NOTE
6– PROPERTY, PLANT & EQUIPMENT





Property,
plant & equipment balances are comprised of the following amounts as of
March 31, 2010:





Office
      equipment
                  
                  $
                  125,287Manufacturing
      equipment
                  
                  
                  3,530,008Building
                  
                  
                  1,996,134Land
                  
                  
                  217,0005,868,429Less,
      accumulated depreciation
                  
                  
                  (2,295,324
                  )Net
      Property, Plant & Equipment
                  
                  $
                  3,573,105





During
the nine month period ended March 31, 2010, manufacturing equipment previously
used in production and development activities were identified as impaired or had
reached the end of their respective useful lives due to changing product and
manufacturing technologies.  Upon write-down the manufacturing equipment
and accumulated depreciation accounts were adjusted accordingly and $828,089 in
charges to operations for the nine months ended March 31, 2010, including a
charge to operations of $47,858 for the three months ended March 31, 2010, were
reported as impairment and other equipment charges.


-9-


NOTE
7 – NOTE RECEIVABLE-Shareholder




In July
2006, the Company entered into a common stock purchase 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 common shares for a total
consideration of $1,000,000, paid through issuance of a promissory note. Both
parties also entered into a five year consulting agreement.  During 2009
the Company determined the service agreement to be a minimal future value and
effectively cancelled the agreement as of June 30, 2009.





In
accordance with the terms of the note agreement, the cancellation of the service
agreement, in effect relieved the remaining balance of the note
receivable.  Accordingly, the $408,333 remaining balance of the note
receivable was written off and applied to additional paid in capital at June 30,
2009.  The cancellation agreement also required 41 Broadway Associates, LLC
to forfeit 28,750 of the Company’s common shares, reducing the Company’s common
shares issued and outstanding during the current period.





NOTE
8 – COMMON STOCK AND WARRANT OFFERINGS




On April
30, 2009 the Company filed a Registration Statement on Form S-3 with the SEC for
a $10 million universal shelf, which was declared effective by the SEC on May
13, 2009.  The Company took this action as a proactive measure in
anticipation of our possible future needs to raise additional investment capital
to fund additional working capital and further capital expenditures.  On
August 18, 2009, the Company completed a registered direct sale of 1,791,667
units at $1.20 per unit, consisting of an aggregate of 1,791,667 shares of its
common stock and warrants to purchase 358,333 shares of its common stock at an
exercise price of $1.33 per share.  The proceeds to ZBB after deducting
placement agent fees and offering expenses were approximately $1.9
million.    Proceeds are to be used for capital expenditures and
general corporate purposes.





On March
9, 2010, the Company completed a registered direct sale of 2,243,750 units at
$.80 per unit, consisting of an aggregate of 2,243,750 shares of its common
stock and warrants to purchase 1,121,875 shares of its common stock at an
exercise price of $1.04 per share.  The proceeds to ZBB after deducting
placement agent fees and offering expenses were approximately $1.6
million.    Proceeds are to be used for general corporate
purposes.





On March
31, 2010, the Company completed the closing of a private placement of
unregistered common stock.  The purchasers of the stock were the company’s
Directors, Officers, and key employees.  The Company sold 337,346 shares at
$.83 per share.  The proceeds to ZBB were $280,000. 
  Proceeds are to be used for general corporate purposes.





NOTE
9 – BANK LOANS





The
Company's debt consisted of the following as of March 31, 2010:





Bank
      loans-current
                    
                    $
                    420,428Bank
      loans-long term
                    
                    
                    2,209,678Total
                    
                    $
                    2,630,106





On July
1, 2009 the Company entered into a loan agreement to finance new production
equipment.  The $156,000 bank note is secured by specific equipment,
requiring monthly payments of $4,736 of principal and interest; rate equal to
5.99% per annum; maturity date of December 1, 2013. Principal balance is
$119,645 at March 31, 2010.





On
November 28, 2008 the Company entered into a loan agreement to finance new
production equipment.  The $1,070,000 bank note is secured by specific
equipment, requiring monthly payments of $21,000 of principal and interest; rate
equal to the prime rate; maturity date of July 1, 2012. Principal balance is
$788,269 at March 31, 2010.





On May
14, 2008 the Company entered into two loan agreements to refinance its 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, subject to a prime rate floor of 5.25%, with any
principal balance due at maturity on June 1, 2018 and secured by the building
and land.  Principal balance is $815,223 at March 31, 2010.


The
second loan is a secured promissory 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 $828,239 at March
31, 2010.





On
January 22, 2007 the Company refinanced its equipment loan.  The new loan
term requires monthly principal payments and interest rate at a 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
$78,730 at March 31, 2010.


-10-


Maximum
aggregate annual principal payments for the 12 month periods subsequent to March
31, 2010 are as follows:





2010
                    
                    $
                    420,4282011
                    
                    
                    358,1352012
                    
                    
                    332,6482013
                    
                    
                    183,3202014
                    
                    
                    84,7072015
      and thereafter
                    
                    
                    1,250,868$
                    2,630,106





NOTE
10 - EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS





In 2002
the Company established the 2002 Stock Option Plan (“SOP”) whereby a stock
option committee was given the discretion to grant up to 579,107 options to
purchase shares to key employees of the Company at exercise prices and dates to
be determined by the committee.  During the nine month period ended March
31, 2010 no options were issued or exercised, options for 87,907 shares expired,
and options for 75,000 shares were cancelled.  At March 31, 2010 there were
325,000 options outstanding with an exercise price of $3.59 and expiration dates
through June 30, 2014.  A further 254,107 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 the
2005 Plan is the number equivalent to 5% of the total number of issued shares of
the Company including all shares underlying options under the Company’s stock
option and incentive plans. Options issued expire five years after the vesting
date.  During the nine month period ended March 31, 2010 no options were
issued, exercised or expired, and options for 260,000 shares were
cancelled.  At March 31, 2010, options to purchase 50,000 shares with an
exercise price of $3.82 and an expiration date of June 2012 are outstanding. A
further 405,838 options are available to be issued under the 2005
Plan.





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.  During the nine month period ended March 31, 2010 options to
purchase 816,500 shares were granted to directors and employees exercisable at
prices from $1.02 to $1.39 per share based on various service based vesting
terms from November 2009 through February 2013 and exercisable at various dates
through February 2018, and 195,918 options were retired or forfeited. 
 At March 31, 2010, options to purchase 1,286,992 shares with an exercise
price of $1.02 - $3.59 and expiration dates from January 1, 2015 to November 2,
2019 are outstanding.  Options to purchase an additional 213,008 shares are
available to be issued under the 2007 plan.





The
Compensation Committee of the Company’s Board of Directors awarded two
inducement option grants to the Company’s new CEO in January 2010.  The
first grant is an option to purchase 400,000 shares which vests as to one-third
of the shares on January 7, 2011 and as to the balance in 24 monthly
installments beginning on January 31, 2011 and ending on December 31,
2012.  This option vests in full upon a “change of control.” The second
grant is an option to purchase 100,000 shares of ZBB common stock which vests in
two equal installments based on the achievement of certain performance targets
as of June 30, 2010 and December 31, 2010.  Both options have an exercise
price of $1.33 per share which was equal to the closing price of ZBB’s common
stock on January 7, 2010 and are not exercisable as to any portion of the option
after the fifth anniversary of the date on which that portion vests.  The
options are subject to other terms and conditions specified in the related
option agreements.





In
aggregate for all plans, at March 31, 2010, the Company has a total of 2,161,992
options outstanding and 872,953 options available for future grant under the
SOP, 2005 and the 2007 Plans.





The
following table summarizes information relating to the stock options outstanding
at March 31, 2010:





Outstanding
                                
                                
                                ExercisableAverageRemaining
                                
                                
                                Weighted
                                
                                
                                
                                
                                
                                WeightedNumber of
                                
                                
                                Contractual Life
                                
                                
                                Average
                                
                                
                                Number of
                                
                                
                                AverageRange of Exercise Prices
                                
                                
                                Options
                                
                                
                                (in years)
                                
                                
                                Exercise Price
                                
                                
                                Options
                                
                                
                                Exercise Price$1.02
      to $1.69
                                
                                
                                
                                1,511,992
                                
                                
                                
                                7.5
                                
                                
                                $
                                1.32
                                
                                
                                
                                317,159
                                
                                
                                $
                                1.26$3.59
      to $3.82
                                
                                
                                
                                650,000
                                
                                
                                
                                4.8
                                
                                
                                $
                                3.61
                                
                                
                                
                                633,333
                                
                                
                                $
                                3.61Balance at March 31, 2010
                                
                                
                                
                                2,161,992
                                
                                
                                
                                
                                
                                
                                $
                                2.01
                                
                                
                                
                                950,492
                                
                                
                                $
                                2.82


-11-





In
addition, under the 2007 Plan and in conjunction with a salary reduction plan
implemented during 2009, 101,014 restricted shares were granted as payment of
compensation, of which vesting is 75% service based and 25% performance
based.  During the nine month period ended March 31, 2010, $29,284 (net of
$19,500 in forfeitures) was recognized as expense.





NOTE 11 - NON RELATED PARTY
WARRANTS





At March
31, 2010 there were outstanding warrants to purchase 1,121,875 shares acquired
by certain purchasers of Company shares in March 2010 exercisable at $1.04 per
share and which expire in September 2015.





At March
31, 2010 there were outstanding warrants to purchase 358,333 shares acquired by
certain purchasers of Company shares in August 2009 exercisable at $1.33 per
share and which expire in August 2015.





At March
31, 2010 there were outstanding warrants to purchase 120,023 shares acquired by
Empire Financial Group, Ltd. in 2006 exercisable at $3.23 per share and which
expire on in September 2011.





At March
31, 2010 there were outstanding warrants to purchase 50,000 shares acquired by
Empire Financial Group, Ltd. as part of the underwriting compensation in
connection with our United States public offering which are exercisable at $7.20
per share and which expire in June 2012.





At March
31, 2010 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:





Weighted-AverageStock Warrants
                      
                      Number of
                      
                      
                      Exercise PriceNon-related parties
                      
                      Warrants
                      
                      
                      Per ShareBalance
      at June 30, 2008
                      
                      
                      365,823
                      
                      
                      $
                      4.41Warrants
      granted
                      
                      
                      -Warrants
      expired
                      
                      
                      -Warants
      exercised
                      
                      
                      -Balance
      at June 30, 2009
                      
                      
                      365,823
                      
                      
                      $
                      4.41Warrants
      granted
                      
                      
                      1,480,208
                      
                      
                      $
                      1.11Warrants
      expired
                      
                      
                      -Warants
      exercised
                      
                      
                      -Balance
      at March 31, 2010
                      
                      
                      1,846,031
                      
                      
                      $
                      1.76





NOTE
12 – COMMITMENTS





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 $4.7 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 $100,000 in contributions due by the Company to the project in
cash and in-kind contributions as of March 31, 2010.





The
Company leases its Australian research and development facility from a
non-related Australian company.  The current rental is $64,415 per annum
(A$71,572) and is subject to an annual CPI adjustment.





Rent
expense was $48,827 and $39,618 for the nine months ended March 31, 2010 and
2009.


-12-


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





For
      the twelve months ending June 30:2010
                    
                    $
                    68,4442011
                    
                    
                    38,178Total
                    
                    $
                    106,622





The
Company has entered into employment contracts with executives and management
personnel. The contracts provide for salaries, bonuses and stock option grants,
along with other employee benefits. The employment contracts generally have no
set term and can be terminated by either party. There is a provision for
payments of three months to eighteen months of annual salary as severance if we
terminate a contract without cause, along with the acceleration of certain
unvested stock option grants.





On
October 31, 2009, the Company entered into a Resignation and Indemnification
Agreement (the “Indemnification Agreement”) with Robert J. Parry, its outgoing
CEO.  As of March 31, 2010 the Company has accrued the entire $225,000 of
future severance payments to be paid to Mr. Parry, in connection with his
retirement.





NOTE
13 - RETIREMENT PLANS





All
Australian based employees are entitled to varying degrees of benefits on
retirement, disability, or death.  Retirement plan contributions, mandated
at 9% of the employee’s gross compensation, are paid by the Company on behalf of
all Australian based employees.





For U.S.
employees, the Company has a 401(k) plan.  The Company contributes a
maximum of a 4% in matching funds, based on the level of contributions made by
the active participants, all of which are 100% vested immediately.





Expenses
under these plans were $63,950 and $57,674 for the nine months ended March 31,
2010 and 2009.





NOTE 14 —
STOCK-BASED COMPENSATION





The
Company issues stock options and other stock-based awards to executive
management, key employees, and directors under its stock-based compensation
plans (see Note 9).





For the
nine months ended March 31, 2010 and 2009, the Company’s results of operations
reflect compensation expense for stock options granted and restricted shares
vested under its equity incentive plans. The amount recognized in the financial
statements related to stock-based compensation was $303,791 and $201,567, based
on the grant date fair value of all options vested during the nine months ended
March 31, 2010 and 2009 respectively.





During
the nine month period ended March 31, 2010 options to purchase 1,316,500 shares
were granted to directors and employees  exercisable at prices from
$1.02 to $1.39 per share based on various service based vesting terms from
November 2009 through February 2013 and exercisable at various dates through
February 2018.





The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing method. The Company uses historical data to
estimate the expected price volatility, the expected option life and the
expected forfeiture rate. The Company has not made any dividend payments nor
does it have plans to pay dividends in the foreseeable future. The following
assumptions were used to estimate the fair value of options granted during the
nine months ended March 31, 2010 using the Black-Scholes option-pricing
model:





Expected
      life of option (years)
                    
                    
                    2.5-4.75Risk-free
      interest rate
                    
                    
                    1.2
      - 1.4
                    %Assumed
      volatility
                    
                    
                    62
      - 70
                    %Expected
      dividend rate
                    
                    
                    0.00Expected
      forfeiture rate
                    
                    
                    0.00





The
weighted-average fair value of the 1,316,500 options granted during the nine
months ended March 31, 2010 was approximately $.60 per option using the Black
Scholes option-pricing method as of the date of the grant.





Time-vested
and performance-based stock awards, including stock options and restricted
stock, are accounted for at fair value at date of grant.  Compensation
expense is recognized over the requisite service and performance
periods.





As of
March 31, 2010, there remains a  total of $590,713 in unrecognized
compensation cost related to unvested stock options with various service based
vending dates through 2012.


-13-





NOTE
15— INCOME TAXES





The
Company did not record a provision for federal, state or foreign income taxes
for the years ended June 30, 2009 and 2008.  The Company has not
recorded a benefit for deferred tax assets as its realizability is
uncertain.





The
Company’s combined effective income tax rate differed from the U.S. federal
statutory income tax rate as follows:





2009
                  
                  
                  2008Income
      tax benefit computed at the federal statutory rate
                  
                  
                  -34
                  %
                  
                  
                  -34
                  %Foreign
      rate differential
                  
                  
                  4
                  %
                  
                  
                  4
                  %Change
      in valuation allowance
                  
                  
                  30
                  %
                  
                  
                  30
                  %Total
                  
                  
                  0
                  %
                  
                  
                  0
                  %





Significant
components of the Company's net deferred tax assets as of June 30, 2009 and 2008
were as follows:





2009
                  
                  
                  2008Net
      operating loss carryforwards
                  
                  $
                  9,812,303
                  
                  
                  $
                  8,255,175Foreign
      loss carryforwards
                  
                  
                  1,114,442
                  
                  
                  
                  971,952Deferred
      tax asset valuation allowance
                  
                  
                  (10,926,745
                  )
                  
                  
                  (9,227,127
                  )Total
      deferred tax assets
                  
                  $
                  -
                  
                  
                  $
                  -





As of
June 30, 2009, the Company had U.S net operating loss carry forwards of
approximately $28,900,000 which begins to expire in 2014 for federal tax
purposes. The Company also has gross foreign tax loss carry forwards of
approximately $3,700,000 that are available to offset future liabilities for
foreign income taxes. Substantially all of the foreign tax losses are carried
forward indefinitely, subject to certain limitations.





A
valuation allowance has been established for certain future income tax benefits
related to income tax loss carry forwards and temporary tax adjustments based on
an assessment that it is more likely than not that these benefits will not be
realized. During the twelve months ended June 30, 2009 the valuation allowance
increased by $1,699,618.


-14-




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
the audited financial statements and note thereto and Management’s Discussion
and Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K/A for the fiscal year ended June 30, 2009 as filed by
us with the SEC on February 12, 2010.





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 and the other potential risks and
uncertainties discussed in the Risk Factors section of our Annual Report on Form
10-K/A for the year ended June 30, 2009 and in our other SEC filings from time
to time, 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:




·
              Our
      stock price could be volatile and our trading volume may fluctuate
      substantially.
 ·
              We
      have incurred losses and anticipate incurring continuing
      losses.
 ·
              We
      will need additional financing.
 ·
              If
      we fail to adequately manage our resources, it could have a severe
      negative impact on our financial results or stock
  price.
 ·
              Our
      success depends on our ability to retain our managerial personnel and to
      attract additional personnel.
 ·
              Businesses
      and consumers might not adopt alternative energy solutions as a means for
      obtaining their electricity and power needs, and therefore our revenues
      may not increase, and we may be unable to achieve and then sustain
      profitability.
 ·
              Our
      industry is highly competitive and we may be unable to successfully
      compete.
 ·
              Unless
      we keep pace with changing technologies, we could lose existing customers
      and fail to win new customers.
 ·
              If
      our products do not perform as promised, we could experience increased
      costs, lower margins and harm to our
reputation.
 ·
              Shortages
      or delay of supplies of component parts may adversely affect our operating
      results until alternate sources can be
  developed.
 ·
              We
      have no experience manufacturing our products on a large-scale basis and
      may be unable to do so at our current
facility.
 ·
              We
      market and sell, and plan to market and sell, our products in numerous
      international markets. Our inability to manage our international
      operations effectively and/or currency translation and transaction risk
      could adversely affect our business, financial condition and results of
      operations.
 ·
              We
      may be subject to claims that we infringe the intellectual property rights
      of others, and unfavorable outcomes could harm our
    business.·
              If
      our common stock is de-listed from the AMEX, the common stock will become
      less liquid.


-15-


Overview





Company
Background


ZBB
Energy Corporation was formed in 1998 in Wisconsin as a holding company for ZBB
Technologies, Limited and ZBB Technologies, Inc. ZBB Technologies, Limited, our
Australian subsidiary, was formed in 1982 to develop commercial applications for
the zinc-bromide research being conducted by Murdoch University in Western
Australia. ZBB Technologies, Inc., our U.S. operating subsidiary, was
established in 1994 in Wisconsin to acquire the zinc-bromide technology assets
of Johnson Controls, Inc. which was engaged in research to manufacture energy
storage systems based upon the zinc-bromide technology.




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.




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 NYSE:AMEX (formerly the
American Stock Exchange) under the symbol “ZBB”.




We
design, develop, manufacture and distribute energy storage systems under the
trademarked product names, ZESS 50. We also develop and distribute proprietary
system integration power electronics trademarked under the name ZESS POWR PECC
(power and energy control center).  Our ZESS energy storage devices are
built using a proprietary process based upon our zinc-bromide rechargeable
electrical energy storage technology. The modular nature of our zinc-bromide
storage device and the ZESS POWR PECC allow systems to be sized to fit
applications up to about 500 kWh in storage capacity. Our systems combine these
storage devices with ZESS POWR or other power electronics, computer software
that interface with a customer’s power source(s) and distribution system to
store electricity during off peak times and deliver the stored power as
desired.




Our
production capacity has been increased through the acquisition of new production
equipment received in the last fiscal year.  This new equipment, along with
our automation plans would enable a significant increase in production
capability with the addition of manufacturing personnel.  Since our initial
public offering we have continued implementation of our business plan including
updating the functionality of our ZESS 50 module, development of our ZESS POWER
PECC, initiating manufacturing capacity increases, ISO certification,
application for UL listings, and commenced commercial marketing of our products
into target markets.




We are
actively involved in submitting proposals to the Federal Government in response
to Funding Opportunity announcements issued as a result of the American Recovery
and Reinvestment Act. These proposals included opportunities for plant
expansion, Smart Grid initiative, Renewable Energy Initiatives as well as
research and development opportunities for applications where the Company’s
technology could bring a transformational change to market applications that we
currently do not address.




We are
also continuing our initiatives to establish an integrated solar and storage
village power system for off-grid applications in Africa and other strategic
locations, through our relationship with Likusasa and their capabilities to
handle installation, maintenance and monitoring throughout regional Africa. Our
sample unit installed at Future House USA in Beijing continues to give us a
promotional presence in China.  Units are currently in the process of being
manufactured, shipped and/or installed in South Africa, Ireland, British
Columbia(Canada), California, Oregon, and Pennsylvania.




Manufacturing
operations were suspended for most of the quarter ended March 31, 2010 for
retooling of the stack manufacturing process related to our Version 2 module
(V2).  V2 is our next generation module encompassing improvement in
efficiencies and stack life and which we expect to begin manufacturing during
the quarter ending June 30, 2010.




Known
Trends, Market Opportunities and Challenges





We
believe that there are specific existing and rapidly emerging market
opportunities for our energy storage and hybrid power electronic
products.





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
companies involved in renewable energy; renewable energy integrators involved in
on-grid and off-grid applications, government facilities, telecom, and other
commercial and industrial opportunities.


-16-





We have
advanced the ZBB presence and awareness in the market through involvement in
various market conferences (energy storage, wind, and solar, electric utility),
direct marketing, marketing materials and web content, as well as continued
efforts in media channels and highly visible applications.  For example,
the development of a prototype off grid system consisting of ZESS 50 energy
storage and ZESS POWR PECC hybrid for cell tower application in Africa via ZBB
partner Likusasa, and the shipment of the first large scale wind/storage
facility on a college campus at the Dundalk Institute of Technology in the
Republic of Ireland as well as the deployment of the ZBB Hybrid ZESS POWR PECC
and ZESS 50 energy storage to Oregon State University for the advanced study of
energy storage with Wind power and the scheduled deployment of ZBB Hybrid ZESS
POWR PECC and  ZESS 50 for an off-grid application that optimizes the
use of Solar PV, Wind, and conventional Diesel Generator as a single power
plant.  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 have
designed our products so that they can be combined for use in larger storage
applications and/or integrated with renewable energy sources through the use of
the ZBB hybrid power electronics.  Federal and State Government initiatives
to lessen the United States greenhouse gas emissions and dependency on oil and
increasing concerns surrounding CO2emissions
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 and in many cases the energy storage devices are a necessity for
the utilization of renewable energy.





We are
currently addressing opportunities and engaged in fulfilling orders targeted to
renewable energy markets in the United States, Europe, Australia, and Africa
with the intention of introducing products and services into these
markets.  The United States and governments throughout the world are
implementing renewable energy mandates, tax credits, investments, and other
incentives related to renewable energy and energy efficiency including the
energy storage sector.





In
conjunction with our strategic partners we are actively involved in submitting
proposals to the Federal Government in response to Funding Opportunity
announcements issued as a result of the American Recovery and Reinvestment Act.
These proposals cover opportunities for plant expansion, Smart Grid initiative,
Renewable Energy Initiatives as well as research and development opportunities
for applications where the Company’s technology could bring a transformational
change to market applications that we currently do not address.





Our
current contracts include a collaborative project (Advanced Electricity Storage
Technologies project) with the Commonwealth of Australia which commenced July
2007 and running through June 2010, which includes the payment to the Company of
$2.7 million for 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 December 2008 we received an order for a ZESS 500
system that was installed in conjunction with existing wind energy assets at the
Dundalk Institute of Technology in the Republic of Ireland.





A
$230,000 funded project with the Wisconsin Energy Independence Fund for the
development of our own proprietary power conversion systems for both AC to DC
and DC to DC renewable energy applications has been completed. We contracted
with a Wisconsin based partner to build and package the power electronics
components for two units for evaluation with two ZESS 50 systems manufactured
under this grant.





We have
received and executed the order for Oregon State University for a system
consisting of ZBB ZESS 50 energy storage and it’s proprietary Hybrid Power
Electronics (ZESS POWR PECC) for the advanced study of wind power and energy
storage integration.





We have
shipped and installed an order for Envinity, a renewable system integrator, for
the delivery of two ZESS 50 energy storage devices and  ZESS POWR PECC
designed to integrate two solar PV arrays, ten wind turbines, a hydro generator,
a conventional generator to provide a single output power plant for an off grid
application.





We have
received an order for ZESS 50 Energy storage device and ZESS POWR PECC from SEI
for the integration of solar PV with energy storage for an on grid dispatchable
power plant.





In
addition to the other risk factors stated above, we believe that some of the
biggest challenges we face will be gaining market acceptance for our newer
products and reaching the renewable energy, utility and other markets that we
target. In order to be successful we must also develop a reputation of
reliability and quality service.





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:





•           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)
relative to lead acid, recharge cycle and overall cycle
life.




-17-





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





•           Modular
system configuration for permanently fixed installation with minimal
installation requirements.





•           Complete
integrated system offering of products for overall system optimization in
performance and site integration when combining the modularity of the ZESS
energy storage products (ZESS 50) and the modularity aspect of the ZESS POWR
PECC to allow complete integration of ZESS and other energy storage as well as
renewable and traditional energy generators.




Presentation
of Financial Statements




On
February 4, 2010 we announced that our audit committee and management determined
a customer contract recorded in June 2009 did not properly meet the delivery
criteria under Staff Accounting Bulletin No. 101 to qualify for revenue
recognition and that other contract arrangements were not considered when
revenue was recorded. As a result, the Company restated its previously issued
consolidated financial statements for the fiscal year ended June 30, 2009
included in the Company's fiscal 2009 Form 10-K, and the consolidated financial
statements for the fiscal quarter ended September 30, 2009 included in the
Company's first quarter Form 10-Q.




In
recording the revenue transaction for the fiscal year ended June 30, 2009
management analyzed the customer contract and used the following judgments in
considering if the revenue recognition criteria was met 1) the equipment was
shipped on or prior to June 30, 2009, 2) the customer had paid for the equipment
in full prior to shipment and 3) the customer had signed off on the
functionality of the equipment prior to shipment. However, transfer of risk and
title had not been achieved based on contracted freight terms and as required
per Staff Accounting Bulletin 101 prior to the recognition of revenue.  In
addition, the Company's procedures failed to identify the existence of a
maintenance agreement and a commissioning charge that were separately stated in
the customer agreement.




During
the nine month period ended March 31, 2010, manufacturing equipment previously
used in production and development activities were identified as impaired or had
reached the end of their respective useful lives due to changing product and
manufacturing technologies. Upon write-down the manufacturing equipment and
accumulated depreciation accounts were adjusted accordingly and $828,089 in
charges to operations were reported as impairment and other equipment
charges.





Results
of Operations





Three
months ended March 31, 2010 and 2009:





Revenue:





Our
revenues for the three months ended March 31, 2010 and 2009 were $188,780 and
$219,853, respectively, a decrease of $31,073.  The decrease is related to
the upcoming completion of the Australian AEST project as of June 30,
2010.  Revenues for both periods include estimates based on the
percentage-of-completion method of accounting for long-term contracts, and
revenue for the three months ended March 31, 2010 includes $29,669 revenue from
product commissioning.





Cost
and Expenses and Other Income (Expense):





Total costs and
expenses.   Total costs and expenses for the three months ended
March 31, 2010 and 2009 were $2,178,498 and $1,697,040, respectively. The
increase of $481,458 in the three months ended March 31, 2010 was primarily due
to increased advanced engineering and development (AE&D) expenses of
$148,269 and an increase in selling, general, and administrative (SG&A)
expenses of $253,546.  AE&D expenses increased due to further
development of product technology.  SG&A expenses increased due to an
increase in executive officer salaries and expenses related to DOE ARPAE
proposal preparation.





Other expense. 
 Other expense for the three months ended March 31, 2010 and 2009
was $31,986 and $47,146, respectively. Interest income for the three months
ended March 31, 2010 was $8,074 compared to $23,689 in the three months ended
March 31, 2009, a $15,615 decrease.  The decrease in other expenses for
three month period ended March 31, 2010 was primarily due to other income
of $14,201 from the sale of scrap materials and freight charges to customers in
the three month period ended March 31, 2010.





Cost of product
sales.   Our cost of product sales for three months ended March
31, 2010 and 2009 were $0 in both periods.  The costs of product
commissioning in the three months ended March 31, 2010 are included in AE&D
expenses.


-18-





Advanced engineering and
development.Our engineering and development costs for the three months
ended March 31, 2010 and 2009 were $905,949 and $757,680, respectively. 
The increase during the three month period ended March 31, 2010 of $148,269
from the comparable 2009 period was primarily due to increased costs related to
the further development of our battery and modular power electronics in the
newly developed POWR PECCTM
complete energy storage systems, including contracted non-recurring engineering
and testing costs, baseline testing and focused efforts to improve the
reliability, efficiency, and commercial production of the battery stack. 
In addition, during the three months ended March 31, 2010 costs were incurred
relating to the development of our next generation (V2) module which we expect
to begin manufacturing in the quarter ending June 30, 2010.





Selling, General and
Administrative.  Our selling, general and administrative expense for
the three months ended March 31, 2010 and 2009 was $1,141,069 and $887,523,
respectively.  The current period included increases in expenses for
executive officer salaries and expenses related to the preparation of government
grant proposals.





Impairment and other
equipment charges.During the three month period ended March
31, 2010 management determined that certain test equipment was impaired by
the amount of $47,858 due to technological obsolescence.





Net Loss.Our
net loss for the three months ended March 31, 2010 was $2,021,704, representing
a $497,371 increase in net loss as compared to a net loss of $1,524,333 for the
three months ended March 31, 2009.




Nine
months ended March 31, 2010 and 2009:





Revenue
and Other income:


Our
revenues for the nine months ended March 31, 2010 and 2009 were $1,556,148 and
$733,738, respectively, an increase of $822,410.  This was result of an
increase in revenues of $967,455 from product sales and revenues as compared to
the nine month period ended March 31, 2009 and a $145,045 decrease from
engineering and development revenues.  Revenues include estimates based on
the percentage-of-completion method of accounting for long-term contracts and
units completed and shipped during the period.


The
increase in product sales was substantially related to the ZESS 500 Dundalk
system shipment.





Cost
and Expenses and Other Income (Expense):





Total costs and
expenses.   Total costs and expenses for the nine months ended
March 31, 2010 and 2009 were $8,347,682 and $4,859,390, respectively. The
increase of $3,488,292 in the nine months ended March 31, 2010 was primarily due
to increased cost of product sales of $899,287, increases in advanced
engineering and development costs of $419,851, increases in selling, general,
and administrative costs of $1,194,498, impairments and other equipment charges
of $828,089 and increase in depreciation expense of $146,567.





Other expense. 
 Other expense for the nine months ended March 31, 2010 and 2009 was
$67,551 and $25,471, respectively, a net increase of $42,080 compared to the
nine month period ended March 31, 2009. The increase is primarily due to a
decrease in interest income of $63,867





Cost of product
sales.   Our cost of product sales for nine months ended March
31, 2010 and 2009 were $899,287 and $-0-, respectively.  The increase in
expense in the nine month period ended March 31, 2010 was due an increase in
energy storage system shipments in the current period.  There were no
product sales recognized during the nine month period ended March 31, 2009. The
cost of product sales remains relatively high in relation to sales due to the
limited levels of commercial activity, resulting in less than optimal economies
of scale and limited ability to obtain favorable terms from
vendors.





Advanced engineering and
development.Our engineering and development costs for the nine months
ended March 31, 2010 and 2009 were $2,538,197 and $2,118,346,
respectively.  The increase during the nine month period ended March
31, 2010 of $419,851 from the comparable 2009 period was primarily due increased
costs related to the further development of our battery and modular power
electronics in the newly developed POWR PECCTM
complete energy storage systems, including contracted non-recurring engineering
and testing costs, baseline testing and focused efforts to improve the
reliability, efficiency, and commercial production of the battery
stack.





Selling, General and
Administrative.  Our selling, general and administrative expense for
the nine months ended March 31, 2010 and 2009 was $3,748,839 and $2,554,341,
respectively.  The current period included significant corporate charges
related to the resignation of the previous CEO, related tax, legal, and interim
CEO costs, financial and tax consultants, government grant proposal preparation
expenses, fund raising activities and two additional paid directorship positions
compared to the nine month period ended March 31, 2009.





Included
in the $1,194,498 SG&A expense increase was approximately $390,000 in
severance pay, $180,000 in increased legal fees, $123,000 in increased fund
raising expenses, $102,000 in increased stock compensation expense, $67,000 in
increase directors fees and $210,000 in increased marketing, advertising and
promotion costs, as compared to the nine month period ended March 31,
2009.


-19-





Impairment and other
equipment charges.During the nine month period ended March
31, 2010 management and our audit committee determined, based on a
impairment evaluation conducted by management and an onsite observation of
inventory and property, plant, and equipment conducted by the Company’s
independent auditors, equipment held by our Australian subsidiary was impaired
and would require the Company to recognize an impairment loss of approximately
$425,000. Long-term manufacturing assets at the Wisconsin operation were also
identified to have reached the end of their useful lives. The net charge to
operations, after adjusting the carrying values of these assets, was $828,089
during this period.





Net Loss.Our
net loss for the nine months ended March 31, 2010 was $6,859,085 representing a
$2,707,962 increase in net loss as compared to a net loss of $4,151,123 for the
nine months ended March 31, 2009.





Liquidity and Capital
Resources





Since our
inception, our research, advanced engineering and development, and operations
were primarily financed through debt and equity financings, and government
grants.  Total paid in capital as of March 31, 2010 was $49,736,723. 
 We had a cumulative deficit of $44,146,936 as of March 31, 2010
compared to a cumulative deficit of $37,287,851 as of June 30, 2009.  At
March 31, 2010 we had a working capital surplus of $1,849,760 compared to a June
30, 2009 working capital surplus of $3,784,491.  Our shareholders’ equity
as of March 31, 2010 and June 30, 2009 was $4,016,266 and $6,765,835,
respectively.





On April
30, 2009 we filed a Registration Statement on Form S-3 with the SEC for a $10
million universal shelf, which was declared effective by the SEC on May 13,
2009.  We took this action as a proactive measure in anticipation of our
possible future needs to raise additional investment capital to fund additional
working capital and further capital expenditures.  On August 18, 2009, we
completed a registered direct sale of 1,791,667 units at $1.20 per unit
consisting of an aggregate of 1,791,667 shares of common stock and warrants to
purchase 358,333 shares of common stock at an exercise price of $1.33 per
share.  The proceeds to ZBB after deducting placement agent fees and
offering expenses were approximately $1.9 million.





On March
9, 2010, we completed a registered direct sale 2,243,750 units at $.80 per unit
consisting of an aggregate of 2,243,750 shares of common stock and warrants to
purchase 1,121,875 shares of common stock at an exercise price of $1.04 per
share.  The proceeds to ZBB after deducting placement agent fees and
offering expenses were approximately $1.6 million.





On March
31, 2010, we completed the closing of a private placement of unregistered common
stock.  The purchasers of the stock were certain of the Company’s
directors, officers, and key employees.  The Company sold 337,346 shares at
$.83 per share.  The proceeds to ZBB were $280,000.




In
December 2009 we were awarded a $1.3 million Wisconsin Clean Energy Business
Loan through the American Recovery and Reinvestment Act.  We
anticipate closing this loan transaction in May 2010.  During the
quarter ended March 31, 2010 we received a $1.5 million financing commitment
from our bank to supplement the Wisconsin Clean Energy Business
Loan.




In
connection with Mr. Parry’s retirement as director and Chief Executive Officer
of the Company, we have accrued the entire remaining $225,000 of severance
expense to be paid to Mr. Parry. Under his employment agreement, his
compensation will continue to be paid monthly by the Company for up to eighteen
months.  Certain payments could be accelerated to pay for any U.S. based
tax liabilities that are incurred by the Company.   There were also
significant legal and compliance costs incurred during the quarter ended
December 31, 2009 related to the retirement of Mr. Parry.




In
conjunction with our strategic partners we are actively involved in submitting
proposals to the Federal Government in response to Funding Opportunity
announcements issued as a result of the American Recovery and Reinvestment Act.
These proposals cover opportunities for plant expansion, Smart Grid initiative,
and renewable energy initiatives as well as research and development
opportunities for applications where the Company’s technology could bring a
transformational change to market applications that we currently do not
address.  However, there can be no assurance we will receive any government
funding through these activities.




We also
have $29 million of net operating loss carryforwards tax loss carryforwards and
$14.675 million of Department of Energy sponsored tax credits.  We are
exploring ways to monetize or to use these off balance sheet assets. 
However, there can be no assurance that these efforts will prove
successful.




We
believe we have sufficient capital to pursue our current operations through the
first quarter of fiscal year 2011.  We will need to raise additional debt
and equity capital to support our current business and growth plan.  Our
investment capital requirements will depend upon numerous factors, including our
ability to control expenses, the progress of our engineering and development
programs, the success of our marketing and sales efforts and our ability to
obtain alternative funding sources such as government grants.  In order to
actively manage financing risk, the board of directors has worked with
management to carefully consider financing alternatives and to implement cost
containment measures.  Actions taken by the board of directors and
management in the previous fiscal year and continuing into the current quarter
include: 1) execute an overall reduction in controllable expenses to preserve
cash resources including revising our non-employee director compensation policy
so that fees are paid in equity compensation instead of cash; 2) actively pursue
additional sources of capital to fund working capital and operating needs; 3)
pursue government grant and federal stimulus package
opportunities;  and 4) leverage the $1.3 million Wisconsin Clean
Energy Business Loan that was awarded in December, 2009 through the American
Recovery and Reinvestment Act.
  -20-





We are
currently exploring various possible financing options that may be available to
us, which may include a sale of our securities.  We have no commitments to
obtain any additional funds, and there can be no assurance such funds will be
available on acceptable terms or at all.  If we are unable to obtain such
needed capital, our financial condition and results of operations may be
materially adversely affected and we may not be able to continue
operations.





Operating
Activities





For the
nine months ended March 31, 2010, net cash used in operations was
$4,486,186.  Cash used in operations resulted from a net loss of
$6,859,085, reduced by $1,494,849 in non-cash adjustments and $878,050 in net
changes to working capital. The following working capital changes increased the
cash used in operations: decreases in accounts payable of $252,245 and deferred
revenues of $655,819.  Cash used in operations was reduced by: decreases in
accounts receivable of $288,746, inventory of $591,716, prepaid and other
current assets of $89,410, and other receivables-interest of $19,746,
and increases in accrued compensation and benefits $402,360, and accrued
expenses of $423,835.  Non-cash adjustments to operations included $303,791
of stock based compensation expense, $333,270 of depreciation expense, a $29,699
change in inventory allowance, and impairment and other equipment charges of
$828,089.





For the
nine months ended March 31, 2009, net cash used in operations was
$3,447,704.  Cash used in operations resulted primarily from a net loss of
$4,151,123.  Net working capital changes increased the cash used in
operations by $113,756 resulting from decreases in accrued compensation and
benefits of $48,231, deferred revenues of $2,415; and increases to inventory of
$321,801, and in other receivables of $26,970.  Cash used in operations was
reduced by an increase in accounts payable of $230,324.  Other non-cash
adjustments to cash included equipment of $210,855 charged to advanced
engineering and development costs, $150,000 of non-cash consulting fees,
$201,567 of stock options compensation expense,  a $68,050 change in
inventory allowance, and $186,703 of depreciation expense.





Investing
Activities





For the nine months ended March 31,
2010, net cash provided by investing activities was $843,716, resulting from an
increase of $1,000,000 due to a decrease in bank certificates of deposits with
maturities greater than three months, and reduced by cash used in purchase of
property and equipment of $156,284.





For the
nine months ended March 31, 2009, net cash used in investing activities was
$1,729,795.  Cash used in investing activities resulted from $713,470 in
purchases of property and equipment, and $1,016,325 in net increases in bank
certificates of deposits with maturities greater than three
months.





Financing
Activities





For the
nine months ended March 31, 2010, net cash provided by financing activities was
$3,580,167 resulting from $3,981,850 in proceeds from  public
offering, net of underwriting fees, and $156,000 in additional financing on
manufacturing equipment, less $204,181 in additional public offering costs
and  repayments of $342,367 of principal on notes
payable.





For the
nine months ended March 31, 2009, net cash used in financing activities was
$866,433 consisting of repayments of $203,567 principal on notes payable,
and $1,070,000 in additional financing on manufacturing
equipment.




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.


-21-


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, as amended
(the “Exchange Act”). 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.




Except as
described below, there were no changes in internal control over financial
reporting during the quarter ended March 31, 2010 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.




As
discussed in Item 9A of our annual report on Form 10-K/A for fiscal 2009 and in
Item 4 of Part I of our quarterly report on Form 10-Q for the quarter ended
December 31, 2009, as of June 30, 2009 and December 31, 2009, respectively,
management determined that there existed control deficiencies in our internal
controls associated with revenue recognition processes that constitute a
material weakness.  During the quarter ended March 31, 2010, in an effort
to remediate this material weakness management implemented procedures to improve
the identification, capture, review, approval, and recording of all customer
contracts in the appropriate accounting period.  The Company contracted
with an independent accounting consultant to assist in implementing revenue
recognition procedures which has since been instituted.




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.




Item
1A.       Risk Factors




Not applicable for smaller reporting
companies.




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.





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 $5 million in indebtedness.  The balance 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,
additional manufacturing capacity, and improvements to the product and
manufacturing operations.





Item
3.          Defaults Upon Senior
Securities




This Item
is not applicable.




Item
4. 
        Reserved.


-22-


Item 5. 
        Other Information





This
Item is not applicable.





Item
6.     Exhibits





The
exhibits required to be filed as a part of this report are listed in the Exhibit
Index.


-23-


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 CORPORATIONMay
      17, 2010
              By:
              /s/Eric C. ApfelbachName:
              Eric
      C. ApfelbachTitle:
              Chief
      Executive Officer(Principal
      Executive Officer)May
      17, 2010
              By:
              /s/ Scott W. ScampiniName:
              Scott
      W. ScampiniTitle:
              Executive
      Vice President and Chief Financial Officer(Principal
      financial officer andPrincipal
      accounting officer)


-24-


EXHIBIT
INDEX


Item 15(c)
Exhibits:




Exhibit
                No.
              
              Description
              
              Incorporated by Reference
  to4
              
              Form
      of Warrant
              
              Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on March 9,
      201010.1
              
              Securities
      Purchase Agreement, dated March 8, 2010, by and between ZBB Energy
      Corporation and the purchasers signatory thereto
              
              Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on March 9,
      201010.2
              
              Placement
      Agent Agreement, dated March 1, 2010, by and between ZBB Energy
      Corporation and Sutter Securities Incorporated
              
              Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on March 9,
      201010.3
              
              Form
      Stock Purchase Agreement, dated March 19, 2010
              
              Incorporated
      by reference to the Company’s Current Report on Form 8-K filed on March
      22, 201031.1
              
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              
              Certification
      of Principal Financial and Accounting Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
              
              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 200232.2
              
              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


-25-