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, 2009





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




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.





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







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





Class
              Shares
      Outstanding as of May 14, 2009Common
      Stock, $.01 par value per share
              10,618,297







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
                                  14Item
      3.
                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                  20Item
      4.
                                  Controls
      and Procedures
                                  21PART II. OTHER INFORMATIONItem
      1.
                                  Legal
      Proceedings
                                  21Item
      1A.
                                  Risk
      Factors
                                  21Item
      2.
                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                  21Item
      3.
                                  Defaults
      upon Senior Securities
                                  21Item
      4.
                                  Submission
      of Matters to a Vote of Security Holders
                                  21Item
      5.
                                  Other
      Information
                                  22Item
      6.
                                  Exhibits
                                  22Signatures
                                  23





(*) All
of the financial statements contained in this Quarterly Report are unaudited
with the exception of the financial information at June 30, 2008, which has been
derived from our audited financial statements at that date and should be read in
conjunction therewith. Our audited financial statements as of June 30, 2008 and
for the year then ended, and the notes thereto, can be found in our Annual
Report on Form 10-KSB, which was filed with the Securities and Exchange
Commission on September 5, 2008.







PART
I.  FINANCIAL INFORMATION




Item 1.FINANCIAL STATEMENTS




ZBB
ENERGY CORPORATION
 Consolidated
Balance Sheets
 
 March31,2009
                  
                  
                  June30,2008(unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents
                  
                  $
                  3,896,560
                  
                  
                  $
                  8,451,320Bank
      certificate of deposit
                  
                  
                  1,016,325
                  
                  
                  
                  -Accounts
      receivable
                  
                  
                  2,445
                  
                  
                  
                  4,167Interest
      receivable
                  
                  
                  53,860
                  
                  
                  
                  80,829Inventories-net of $165,950 and $234,000
      allowance
                  
                  
                  1,566,636
                  
                  
                  
                  1,312,885Prepaids
      and other current assets
                  
                  
                  101,699
                  
                  
                  
                  316,274Total
      current assets
                  
                  
                  6,637,525
                  
                  
                  
                  10,165,475Long-term
      assets:Property,
      plant and equipment, net
                  
                  
                  4,598,378
                  
                  
                  
                  4,240,640Investment
      in joint venture
                  
                  
                  -
                  
                  
                  
                  242,350Goodwill
                  
                  
                  803,079
                  
                  
                  
                  803,079Total
      assets
                  
                  $
                  12,038,982
                  
                  
                  $
                  15,451,544Liabilities
      and Shareholders' EquityCurrent
      liabilities:Bank
      loans
                  
                  
                  390,503
                  
                  
                  
                  171,634Accounts
      payable
                  
                  
                  809,827
                  
                  
                  
                  607,520Deferred
      revenues
                  
                  
                  345,385
                  
                  
                  
                  644,700Accrued
      compensation and benefits
                  
                  
                  81,518
                  
                  
                  
                  129,749Total
      current liabilites
                  
                  
                  1,627,233
                  
                  
                  
                  1,553,603Long-term
      liabilities:Bank
      loans
                  
                  
                  2,529,387
                  
                  
                  
                  1,881,823Total
      liabilities
                  
                  $
                  4,156,620
                  
                  
                  $
                  3,435,426Shareholders'
      equityCommon
      stock ($0.01 par value);
      150,000,000 authorized 10,618,297 shares issued and
      outstanding
                  
                  
                  106,183
                  
                  
                  
                  105,123Additional
      paid-in capital
                  
                  
                  45,820,115
                  
                  
                  
                  45,619,608Note
      receivable from shareholders
                  
                  
                  (458,333
                  )
                  
                  
                  (608,333
                  )Accumulated
      other comprehensive (loss)
                  
                  
                  (1,707,685
                  )
                  
                  
                  (1,373,485
                  )Accumulated
      (deficit)
                  
                  
                  (35,877,918
                  )
                  
                  
                  (31,726,795
                  )Total
      shareholders' equity
                  
                  $
                  7,882,362
                  
                  
                  $
                  12,016,118Total
      liabilities and shareholders' equity
                  
                  $
                  12,038,982
                  
                  
                  $
                  15,451,544
 
 See
accompanying notes to consolidated financial statements




ZBB
ENERGY CORPORATION
 Consolidated
Statements of Operations
 
 ThreemonthsendedMarch31,
                    
                    
                    NinemonthsendedMarch31,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008(unaudited)
                    
                    
                    (unaudited)
                    
                    
                    (unaudited)
                    
                    
                    (unaudited)RevenuesProduct
      sales and revenues
                    
                    $
                    -
                    
                    
                    $
                    181,708
                    
                    
                    $
                    -
                    
                    
                    $
                    303,063Engineering
      and development revenues
                    
                    
                    219,853
                    
                    
                    
                    371,148
                    
                    
                    
                    733,738
                    
                    
                    
                    811,474Total
      Revenues
                    
                    
                    219,853
                    
                    
                    
                    552,856
                    
                    
                    
                    733,738
                    
                    
                    
                    1,114,537Costs
      and ExpensesCost
      of product sales
                    
                    
                    -
                    
                    
                    
                    180,862
                    
                    
                    
                    -
                    
                    
                    
                    283,837Advanced
      engineering and development
                    
                    
                    757,680
                    
                    
                    
                    823,509
                    
                    
                    
                    2,118,346
                    
                    
                    
                    1,662,163Selling,
      general, and administrative
                    
                    
                    887,523
                    
                    
                    
                    729,495
                    
                    
                    
                    2,554,341
                    
                    
                    
                    2,197,326Depreciation
                    
                    
                    51,837
                    
                    
                    
                    100,387
                    
                    
                    
                    186,703
                    
                    
                    
                    253,718Total
      Costs and Expenses
                    
                    
                    1,697,040
                    
                    
                    
                    1,834,253
                    
                    
                    
                    4,859,390
                    
                    
                    
                    4,397,044Loss
      from Operations
                    
                    
                    (1,477,187
                    )
                    
                    
                    (1,281,397
                    )
                    
                    
                    (4,125,652
                    )
                    
                    
                    (3,282,507
                    )Other
      Income (Expense)Interest
      income
                    
                    
                    23,689
                    
                    
                    
                    107,371
                    
                    
                    
                    119,030
                    
                    
                    
                    432,295Interest
      expense
                    
                    
                    (59,889
                    )
                    
                    
                    (35,827
                    )
                    
                    
                    (119,987
                    )
                    
                    
                    (130,161
                    )Currency
      translation gain (loss)
                    
                    
                    (11,685
                    )
                    
                    
                    -
                    
                    
                    
                    (11,685
                    )
                    
                    
                    -Finance
      costs
                    
                    
                    -
                    
                    
                    
                    (28
                    )
                    
                    
                    -
                    
                    
                    
                    (52,813
                    )Other
      income (expense)
                    
                    
                    739
                    
                    
                    
                    12,500
                    
                    
                    
                    (12,829
                    )
                    
                    
                    37,500Total
      Other Income (Expense)
                    
                    
                    (47,146
                    )
                    
                    
                    84,016
                    
                    
                    
                    (25,471
                    )
                    
                    
                    286,821Loss
      before provision for Income Taxes
                    
                    
                    (1,524,333
                    )
                    
                    
                    (1,197,381
                    )
                    
                    
                    (4,151,123
                    )
                    
                    
                    (2,995,686
                    )Provision
      for Income Taxes
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Net
      Loss
                    
                    $
                    (1,524,333
                    )
                    
                    $
                    (1,197,381
                    )
                    
                    $
                    (4,151,123
                    )
                    
                    $
                    (2,995,686
                    )Net
      Loss per share-Basic
      and diluted
                    
                    $
                    (0.14
                    )
                    
                    $
                    (0.11
                    )
                    
                    $
                    (0.39
                    )
                    
                    $
                    (0.29
                    )Weighted
      average shares-basic and diluted:Basic
                    
                    
                    10,547,621
                    
                    
                    
                    10,512,283
                    
                    
                    
                    10,524,062
                    
                    
                    
                    10,447,344Diluted
                    
                    
                    10,547,621
                    
                    
                    
                    10,512,283
                    
                    
                    
                    10,524,062
                    
                    
                    
                    10,447,344
 
 See
accompanying notes to consolidated financial
statements.




-2-




ZBB Energy Corporation
 Consolidated
Statements of Changes in Shareholders' Equity
 
 Number of
                        Shares
                      
                      
                      Common
                        Stock
                      
                      
                      Add'l Paid-in
                        Capital
                      
                      
                      Note
                        Receivable
                        from
                        Shareholders
                      
                      
                      Accumulated
                        Other
                        Comprehensive
                        (Loss)
                      
                      
                      AccumulatedDeficit
                      
                      
                      TOTAL
                        Shareholders'
                        Equity
                      
                      
                      Comprehensive
                        (Loss)Balance:
      June 30, 2007
                      
                      
                      10,087,090
                      
                      
                      $
                      100,871
                      
                      
                      $
                      44,994,333
                      
                      
                      $
                      (808,333
                      )
                      
                      $
                      (1,546,537
                      )
                      
                      $
                      (26,822,131.49
                      )
                      
                      $
                      15,918,203
                      
                      
                      $
                      (9,538,360
                      )Issuance
      of common stockpursuant
      to note conversions
                      
                      
                      159,256
                      
                      
                      
                      1,593
                      
                      
                      
                      473,644
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      475,237Issuance
      of common stockMontgomery
      warrants
                      
                      
                      265,937
                      
                      
                      
                      2,659
                      
                      
                      
                      (2,659
                      )Reduction
      of note receivablefrom
      stockholder
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      200,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      200,000Public
      offering costs
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (100,000
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (100,000
                      )Stock
      based compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      254,290
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      254,290Net
      Loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (4,904,663
                      )
                      
                      
                      (4,904,663
                      )
                      
                      $
                      (4,904,663
                      )Net
      Translation Adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      173,051
                      
                      
                      
                      
                      
                      
                      
                      173,051
                      
                      
                      
                      173,051Balance:
      June 30, 2008
                      
                      
                      10,512,283
                      
                      
                      $
                      105,123
                      
                      
                      $
                      45,619,608
                      
                      
                      $
                      (608,333
                      )
                      
                      $
                      (1,373,485
                      )
                      
                      $
                      (31,726,795
                      )
                      
                      $
                      12,016,118
                      
                      
                      $
                      (4,731,612
                      )Reduction
      of note receivablefrom
      stockholder
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      150,000
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      150,000Stock
      based compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      175,111
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      175,111Issuance
      of restricted stock in  payment
      of compensation
                      
                      
                      101,014
                      
                      
                      
                      1,010
                      
                      
                      
                      72,167
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      73,177Deferred
      stock compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (72,167
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (72,167
                      )Amortization
      of deferredstock
      compensation
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      12,196
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      12,196Issuance
      of restricted stock in   payment
      of consulting fees
                      
                      
                      5,000
                      
                      
                      
                      50
                      
                      
                      
                      13,200
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      13,250Net
      Loss
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (4,151,123
                      )
                      
                      
                      (4,151,123
                      )
                      
                      $
                      (4,151,123
                      )Net
      Translation Adjustment
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (334,200
                      )
                      
                      
                      
                      
                      
                      
                      (334,200
                      )
                      
                      
                      (334,200
                      )Balance:
      March 31, 2009
                      
                      
                      10,618,297
                      
                      
                      $
                      106,183
                      
                      
                      $
                      45,820,115
                      
                      
                      $
                      (458,333
                      )
                      
                      
                      (1,707,685
                      )
                      
                      
                      (35,877,918
                      )
                      
                      $
                      7,882,362
                      
                      
                      $
                      (4,485,323
                      )
 
 See
accompanying notes to consolidated financial
statements.




-3-





ZBB Energy Corporation
                  
                  Nine months ended March 31,Consolidated Statements of Cash
      Flows
                  
                  2009
                  
                  
                  2008Cash
      flows from operating activities:Net
      loss
                  
                  $
                  (4,151,123
                  )
                  
                  $
                  (2,995,686
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                  
                  
                  186,703
                  
                  
                  
                  253,718Change
      in inventory allowance
                  
                  
                  68,050
                  
                  
                  
                  -Equipment
      costs reclassified to expenses
                  
                  
                  210,855
                  
                  
                  
                  118,000Payments
      applied to note receivable for consulting fees
                  
                  
                  150,000
                  
                  
                  
                  150,000Stock
      based compensation
                  
                  
                  201,567
                  
                  
                  
                  -Prepaids
      and other assets reclassed to property, plant and
equipment
                  
                  
                  
                  
                  
                  
                  (239,000
                  )(Increase)
      decrease in operating assets:Accounts
      receivable
                  
                  
                  1,722
                  
                  
                  
                  (284,195
                  )Inventories
                  
                  
                  (321,801
                  )
                  
                  
                  (633,423
                  )Prepaids
      and other current assets
                  
                  
                  (325
                  )
                  
                  
                  (94,266
                  )Other
      receivables-interest, other
                  
                  
                  26,970
                  
                  
                  
                  (128,538
                  )Increase
      (decrease) in operating liabilities:Accounts
      payable
                  
                  
                  230,325
                  
                  
                  
                  (125,240
                  )Accrued
      compensation and benefits
                  
                  
                  (48,231
                  )
                  
                  
                  (4,506
                  )Accrued
      loss on contracts
                  
                  
                  -
                  
                  
                  
                  (89,250
                  )Deferred
      revenues
                  
                  
                  (2,415
                  )
                  
                  
                  (176,305
                  )Net
      cash (used) in operating activities
                  
                  
                  (3,447,703
                  )
                  
                  
                  (4,248,690
                  )Cash
      flows from investing activitiesCapital
      expenditures
                  
                  
                  (713,470
                  )
                  
                  
                  (345,281
                  )Bank
      certificates of deposit
                  
                  
                  (1,016,325
                  )
                  
                  
                  -Net
      cash (used) in investing activities
                  
                  
                  (1,729,795
                  )
                  
                  
                  (345,281
                  )Cash
      flows from financing activitiesProceeds
      from refinancing of bank loan
                  
                  
                  1,070,000
                  
                  
                  
                  (71,598
                  )Repayment
      of bank loans
                  
                  
                  (203,567
                  )
                  
                  
                  -Repayments
      of notes payable
                  
                  
                  -
                  
                  
                  
                  (4,047,822
                  )Additional
      public offering costs
                  
                  
                  -
                  
                  
                  
                  (100,000
                  )Net
      cash provided (used) by financing activities
                  
                  
                  866,433
                  
                  
                  
                  (4,219,420
                  )Effect
      of exchange rate changes on cash
                  
                  
                  (243,694
                  )
                  
                  
                  -Net
      increase (decrease) in cash and cash equivalents
                  
                  
                  (4,554,760
                  )
                  
                  
                  (8,813,391
                  )Cash
      and cash equivalents -beginning of year
                  
                  
                  8,451,320
                  
                  
                  
                  17,823,022Cash
      and cash equivalents -end of period
                  
                  $
                  3,896,560
                  
                  
                  $
                  9,009,631Cash
      paid for interest
                  
                  $
                  92,952
                  
                  
                  $
                  182,974Supplemental
      schedule of non-cash investing and financing activities:Issuance
      of common stock pursuant to conversion of convertible
notes
                  
                  
                  -
                  
                  
                  
                  475,237Investment
      in joint venture offset by unfulfilled deferred revenue
                  
                  
                  160,000
                  
                  
                  
                  -Prepaids
      and inventory reclassed to property, plant and equipment
                  
                  
                  214,900
                  
                  
                  
                  239,000Equipment
      expensed to cost of contracts
                  
                  
                  210,855
                  
                  
                  
                  118,000Stock
      based compensation
                  
                  
                  201,567
                  
                  
                  
                  -
 
 See
accompanying notes to consolidated financial
statements.




-4-


ZBB
ENERGY CORPORATION


Notes
to Unaudited Consolidated Financial Statements


March
31, 2009




NOTE
1 - Basis of Presentation




The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and disclosures required for annual financial
statements. These financial statements should be read in conjunction with the
financial statements and related footnotes for the year ended June 30,
2008.




In
the opinion of the Company’s management, all adjustments (consisting of normal
recurring accruals) necessary to make the Company’s financial position as of
March 31, 2009 and the results of operations and statements of cash flows for
the periods shown not misleading, have been included.  Operating
results for the three and nine periods ended March 31, 2009 are not necessarily
indicative of the results that may be expected for the year-ended June 30,
2009.




The
accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries and have been prepared in accordance
with accounting principles generally accepted in the United States of America
(GAAP).  All significant intercompany accounts and transactions have
been eliminated upon consolidation.





NOTE
2 - Nature of Organization




ZBB
Energy Corporation (“ZBB” or the “Company”) develops and manufactures
distributed energy storage solutions based upon the Company’s proprietary
zinc-bromine renewable electrical energy storage technology.  The
Company was incorporated under the laws of Wisconsin in 1998.




The
Company develops, manufactures and markets energy storage systems with electric
utility and renewable energy applications as its initial market. 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.




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




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




The
consolidated financial statements include the accounts of the Company and those
of its wholly owned subsidiaries, ZBB Technologies, Inc. which operates a
manufacturing facility in Menomonee Falls, Wisconsin, and ZBB Technologies, Ltd.
which has its advanced engineering and development facility in Perth,
Australia.





NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Foreign
Currency




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




Use
of Estimates




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


-5-




Income
Tax




Provisions
for income taxes are based on taxes payable or refundable for the current year
and deferred tax assets and liabilities are included in the financial statements
at currently enacted income tax rates applicable to the period in which the
deferred tax assets and liabilities are expected to be realized or settled as
prescribed in FASB Statement No. 109, “Accounting for Income Taxes”. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes.  There were no
deferred tax assets recorded as of March 31, 2009.




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 RateManufacturing
      Equipment
              3 –
      15 yearsOffice
      Equipment
              3 –
      8 yearsBuilding
              40
      years





Impairment
of Long-Lived Assets





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





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





Goodwill





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





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




Cash
and Cash Equivalents





The
Company considers all highly liquid investments with maturities of 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.


-6-




Inventories





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





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





·
            Raw
      materials – purchased cost of direct
material


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





Revenue
Recognition





The
Company currently contracts with its customers to develop, manufacture, install
and service its energy storage systems under long-term
contracts.  These contracts have resulted in two distinct arrangements
and revenue recognition policies. The first type of contract is for the
production, delivery and installation of energy storage systems.  The
second type of contract is for product engineering and development
activities.





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 and has
been the predominant method used in sales contracts through the current
period.





Customer
sales orders that have relatively short duration (typically less than 6-12
months) will use the completed-contract method of revenue recognition rather
than the percentage-of-completion method. As the Company transitions from
long-term contracts utilizing percentage-of-completion method to completed
contracts on shorter term contracts, there may be some reporting periods with
larger than expected fluctuations in revenue recognized.





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





In July
2007 the Company commenced engineering and product development activities
pursuant to 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,
2009 and 2008, $733,738 and $811,474, respectively, was recognized as revenue
based on progress toward completion of the nine performance milestones specified
in the contract.





Total
revenues of $733,738 and $1,114,537 were recognized for the nine month periods
ended March 31, 2009 and 2008, respectively.




Loss
per Share





The
Company follows the provisions of SFAS No. 128 which requires the reporting of
both basic and diluted earnings (loss) per share.  Basic earnings
(loss) per share is computed by dividing net income (loss) available to common
stockholders by the weighted average number of common
shares  outstanding for the period.  Diluted earnings (net
loss) per share reflect the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock.   In accordance with FASB 128, any anti-dilutive effects
on net income (loss) per share are excluded (as of March 31, 2009 there were
1,830,130 underlying options and warrants that are excluded).





Stock-Based
Compensation





The
Company follows the provisions of "Share-Based Payment" ("SFAS No. 123(R)"),
which requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their
fair values.





Accordingly,
the Company under SFAS 123R 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 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.


-7-


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 15
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 SFAS No. 130,
“Reporting Comprehensive Income”, which requires presentation of the components
of comprehensive earnings. Comprehensive income (loss) consists of net income
(loss) for the period plus or minus any net currency translation adjustments
applicable for the periods ended March 31, 2009 and 2008 and is presented in the
Consolidated Statements of Changes in Shareholders’ Equity.





Recent
Accounting Pronouncements





In
December 2007, the FASB issued SFAS No. 141R (revised 2007), “Business
Combinations. SFAS No.141R among other things, establishes principles and
requirements for how the acquirer in a business combination (i) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquired business, (ii) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase and (iii) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS No.141R is
effective for fiscal years beginning on or after December 15, 2008, with early
adoption prohibited. The adoption of this statement is not expected to have a
material effect on the Company's financial statements.





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





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”(“SFAS 162”).  SFAS No. 162 is intended
to improve financial reporting by identifying a consistent framework, or
hierarchy, for selecting accounting principles to be used in preparing financial
statements that are presented in conformity with U.S. Generally Accepted
Accounting Principles for nongovernmental entities.   SFAS 162 is
effective 60 days following the SEC’s approval of the Public
Company





Accounting
Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles”.  The
Company does not expect SFAS 162 to have a material effect on its financial
statements.


-8-


NOTE
4 - INVENTORIES





Inventory
balances are comprised of the following amounts as of March 31,
2009:





Raw
      materials
                  
                  $
                  1,023,842Work
      in progress
                  
                  
                  581,796Finished
      goods
                  
                  
                  126,948Inventory
      valuation allowance
                  
                  
                  (165,950
                  )TOTAL
                  
                  $
                  1,566,636





NOTE
5– PROPERTY, PLANT & EQUIPMENT





Office
      equipment
                  
                  $
                  106,041Manufacturing
      equipment
                  
                  
                  4,334,212Test
      units
                  
                  
                  175,527Building
                  
                  
                  1,996,134Land
                  
                  
                  217,0006,828,914Less,
      accumulated depreciation
                  
                  
                  (2,230,536
                  )Net
      Property, Plant & Equipment
                  
                  $
                  4,598,378





NOTE
6 – INVESTMENT IN JOINT VENTURE




In March
2005, the Company acquired a 49% interest in ZBB China Pty Ltd for a cost of
$175,000 (estimated for current period foreign exchange rates). The joint
venture company was licensed to distribute ZBB energy storage systems into the
Chinese market.





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





During
the nine months ended March 31, 2009 the Company dissolved the joint venture,
realizing a loss on the investment of $15,369 (included in other
expenses).





NOTE
7 – GOODWILL




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





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





The
goodwill amount of $1.134 million, the difference between the price paid for ZBB
Technologies, Inc. and the net assets of the acquisition, amortized through
fiscal 2002, results in the net goodwill amount of $803,079 as of March 31,
2009.





NOTE
8 – NOTE RECEIVABLE-Shareholder




In July
2006, the Company agreed to a stock sale agreement with 41 Broadway Associates,
LLC.  Under the terms of the agreement the Company sold to 41 Broadway
Associates, LLC a total of 294,118 shares in consideration for a 4% $1,000,000
promissory note payable in installments over five years.  As of March
31, 2009 the Company is owed $458,333 on the note, which is reflected as a
reduction to Shareholders’ equity and $27,035 in accrued
interest.


-9-


NOTE
9 – BANK LOANS AND NOTES PAYABLE





At March
31, 2009 the Company's debt consisted of the following:
 
 Bank
      loans-current
                  
                  $
                  390,503Bank
      loans-long term
                  
                  
                  2,529,387Total
                  
                  $
                  2,919,890
 
 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 December 1, 2013. Principal balance is
$1,000,994 at March 31, 2009.
 
 On May
14, 2008 the Company entered into two loan agreements to refinance the building
and land in Menomonee Falls, Wisconsin:
 —The
first loan requires a fixed monthly payment of principal and interest at a rate
of .25% below the prime rate, with any principal balance due at maturity on June
1, 2018, and secured by the building and land. Principal balance is $869,403 at
March 31, 2009.
 —The
second loan is a secured promissary note guaranteed by the U.S. Small Business
Administration, requiring monthly  payments of principal and interest at a
rate of 5.5% until May 1, 2028. Principal balance is $853,914 at March 31, 2009.
 
 On
January 22, 2007 the Company refinanced its equipment loan. The new loan term
requires monthly payments of principal and an interest rate equal to the prime
rate, maturity date of February 1, 2011. The loan is secured by a first lien on
all business personal property. Principal balance is $195,579 at March 31,
2009.
 
 Maximum
aggregate annual principal payments for the 12 month periods subsequent to March
31, 2009 are as follows:
 
 2010
                    
                    $
                    390,5032011
                    
                    
                    345,9982012
                    
                    
                    301,8882013
                    
                    
                    316,9562014
                    
                    
                    208,1452015
      and thereafter:
                    
                    
                    1,326,400$
                    2,919,890





NOTE
10- EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS





In 1998
the Company adopted a Key Employee Stock Option Plan (the “KESOP”) pursuant to
which up to 268,927 shares of common stock were authorized for grants of
options, rights, and stock awards.  The exercise price of all options
granted under the Plan was determined by the Board of Directors at an amount no
less than the estimated fair value of the Company’s common stock at the date of
grant.  As of March 31, 2009 there were no options or other awards
outstanding under the KESOP and there were no additional shares available for
grant.





In 1998
the Company adopted an Outside (Non-Executive) Directors Stock Option Plan (the
“ODSOP”) whereby 67,231 options were issued to Non-Executive Directors over a
five year period commencing on January 2, 1999.  At June 30, 2003, all
ODSOP options had been granted.  As of March 31, 2009 there were no
options outstanding under the ODSOP.





In 2002
the Company established the 2002 Stock Option Plan (“SOP”) whereby a stock
option committee was given the discretion to grant up to 882,353 options to
purchase shares to key employees of the Company at exercise prices and dates to
be determined by the directors. During the year ended June 30, 2008 400,000
options to purchase shares were granted to employees and directors exercisable
at $3.59 (110% of the market closing price on June 6, 2008) based on vesting
terms of June 2008 through January 2009, and exercisable at various dates
through June 2014.  No options were exercised and 16,793 options
expired during the nine months ended March 31, 2009.  At March 31,
2009 there remain 487,907 options outstanding with exercise prices of not less
than $3.59 and exercise dates up to June 30, 2014.  A further 91,200
options are available to be issued under the SOP.





During
2005 the Company established an Employee Stock Option Scheme (the “2005 Plan”)
that authorizes the board of directors or a committee thereof, to grant options
to employees and directors of the Company or any affiliate of the Company. The
maximum number of options that may be granted in aggregate at any time under
this option scheme or under any other employee option or share plan is the
number equivalent to 5% of the total number of issued shares of the Company
including all shares underlying options under the KESOP, the ODSOP and the SOP.
Options issued expire five years after the vesting date. During the year ended
June 30, 2007 250,000 options were granted. No options were exercised in
fiscal 2008 or during the nine months ended March 31, 2009.  At March
31, 2009, options to purchase 250,000 shares with an exercise price of $3.82 and
an expiration date of June 12, 2012 remain outstanding.  Options to
purchase 205,838 additional shares are available to be issued under this
plan.


-10-


During
2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”)
that authorizes the board of directors or a committee thereof, to grant options
to purchase up to a maximum of 1,500,000 shares to employees and directors of
the Company at exercise prices to be determined by the administrator but not
less than 100% (110% for a 10% shareholder) of the market value on the date
granted.  The maximum number of shares subject to options granted to
any one employee during any fiscal year shall not exceed
300,000.  During the year ended June 30, 2008 options to purchase
275,000 shares were granted to employees and directors exercisable at $3.59
(110% of the market closing price on June 6, 2008) based on vesting terms of
June 2008 through January 2011, and exercisable at various dates through January
2016.  During the nine months ended March 31, 2009 options to purchase
451,400 shares were granted to employees and  directors exercisable at
prices from $1.35 to $1.69  based on vesting terms of October 2009
through January 2012, and exercisable at various dates through December 2016,
and contingent on various continuous service or  performance
measurements.  In addition 106,014 restricted shares were issued as
payment of compensation and consulting services during the nine months ended
March 31, 2009. Options to purchase an additional 667,586 shares are available
to be issued under the 2007 plan.





In
aggregate for all plans, at March 31, 2009, the Company has a total of 1,464,307
options outstanding and 964,624 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, 2009:





Outstanding
                                
                                
                                ExercisableWeighted-Average
                                
                                
                                Weighted-
                                
                                
                                
                                
                                
                                Weighted-Number of
                                
                                
                                Remaining
                                
                                
                                Average
                                
                                
                                
                                
                                
                                AverageOptions
                                
                                
                                Contractual Life
                                
                                
                                Exercise
                                
                                
                                Number of
                                
                                
                                ExerciseRange of Exercise Prices
                                
                                
                                Outstanding
                                
                                
                                (in years)
                                
                                
                                Price
                                
                                
                                Options
                                
                                
                                Priceless
      than $3.59
                                
                                
                                
                                451,400
                                
                                
                                
                                7.2
                                
                                
                                $
                                1.49
                                
                                
                                -
                                
                                
                                $
                                -$3.59-5.61
                                
                                
                                
                                925,000
                                
                                
                                
                                4.3
                                
                                
                                $
                                3.65
                                
                                
                                
                                657,666
                                
                                
                                $
                                3.68$5.62
      and higher
                                
                                
                                
                                87,907
                                
                                
                                
                                1.0
                                
                                
                                $
                                7.65
                                
                                
                                
                                87,907
                                
                                
                                $
                                7.65Balance
      at March 31, 2009
                                
                                
                                
                                1,464,307
                                
                                
                                
                                5.0
                                
                                
                                $
                                3.23
                                
                                
                                
                                745,573
                                
                                
                                $
                                4.15




NOTE
11 - NON RELATED PARTY WARRANTS





At March
31, 2009 there are warrants to purchase 120,023 shares issued and outstanding to
Empire Financial Group, Ltd. in connection with certain capital raising
activities in 2006, exercisable at $3.23 per share and which expire on September
30, 2011.





At March
31, 2009 there are warrants to purchase 50,000 shares issued and outstanding to
Empire Financial Group, Ltd. as part of the underwriting compensation in
connection with our recent United States public offering which are exercisable
at $7.20 per share and which expire on June 20, 2012.





At March
31, 2009 there are warrants to purchase 195,800 shares issued and outstanding to
Strategic Growth International in connection with capital raising activities in
2006 and 2007, with expiration dates between March 2011 and June 2012 and
exercise prices of between $3.75 and $7.20.





The table
below summarizes non-related party warrant balances:





Stock Warrants
                      
                      
                      
                      
                      Weighted-AverageNon-related party activity
                      
                      Number of Warrants
                      
                      
                      Exercise Price Per ShareBalance
      at June 30, 2007
                      
                      
                      1,084,411
                      
                      
                      $
                      5.41Warrants
      expired
                      
                      
                      (
      600,941
                      )
                      
                      
                      8.50Warants
      exercised
                      
                      
                      ( 117,647
                      )
                      
                      
                      3.40Balance
      at June 30, 2008
                      
                      
                      365,823
                      
                      
                      $
                      4.54Warrants
      granted
                      
                      
                      -
                      
                      
                      
                      -Warrants
      expired
                      
                      
                      -
                      
                      
                      
                      -Warants
      exercised
                      
                      
                      -
                      
                      
                      
                      -Balance
      at March 31, 2009
                      
                      
                      365,823
                      
                      
                      $
                      4.54
 -11-


NOTE
12 – COMMITMENTS





In July
2006, the Company entered into a business development agreement with 41 Broadway
Associates, whereby 41 Broadway Associates, LLC is to provide consulting
services including business planning and facilitation of introductions to
strategic relationships and customers, corporate financiers and investment
bankers at a fee of $200,000 per year payable quarterly until June 2011. During
the nine months ended March 31, 2009 fees of $150,000 were incurred by the
Company.





In July
2007 the Company commenced engineering and product development activities
pursuant to a collaborative project entitled the Advanced Electricity Storage
Technologies (“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 $4.2 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 $2.3 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 $0.9 million in contributions due by the Company to the project in
cash and in-kind contributions as of March 31, 2009.





NOTE
13 - RELATED PARTY TRANSACTIONS





The
Company had leased its Australian office facility from an entity affiliated with
three of the Company’s officers.  In January 2008 the facility was
sold to a non-related Australian company, eliminating the related party
relationship between the Company and its landlord.  The current rental
is $54,484 per annum (A$68,230) and is subject to an annual CPI
adjustment.





Rent
expense was $39,618 and $45,475 for the nine months ended March 31, 2009 and
2008.





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





For the twelve months ending March 31,2010
                  
                  $
                  54,5842011
                  
                  $
                  54,5842012
                  
                  $
                  33,164TOTAL:
                  
                  $
                  142,332





NOTE
14 - RETIREMENT PLANS




All
Australian based employees are entitled to varying degrees of benefits on
retirement, disability, or death.  The Company contributes to an
accumulation fund on behalf of the employees under an award which is legally
enforceable.  For U.S. employees, the Company has a 401(k)
plan.  All active participants are 100% vested
immediately.




Expenses
under these plans were $57,674 and $45,093 for the nine months ending March 31,
2009 and 2008.


-12-





NOTE 15 —
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 10).





For the
nine month periods ended March 31, 2009 and 2008, the Company’s results of
operations reflect compensation expense for new stock options granted and vested
under its stock incentive plans. The amount recognized in the financial
statements related to stock-based compensation was $201,567 and $-0, based on
the fair value of all options vested during the nine months ended March 31, 2009
and 2008 respectively.





During
the nine months ended March 31, 2009 options to purchase 451,400 shares were
granted to employees and  directors exercisable at prices from $1.35
to $1.69  based on vesting terms of October 2009 through January 2012,
and exercisable at various dates through December 2016, and contingent on
various continuous service and  performance
measurements.  In addition 106,014 restricted shares were issued as
payment of compensation and consulting services during the nine months ended
March 31, 2009.





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
three months ended March 31, 2009 using the Black-Scholes option-pricing
model:





Expected
      life of option (years)
                
                
                2.5Risk-free
      interest rate
                
                
                1.2
                %Assumed
      volatility
                
                
                70
                %Expected
      dividend rate
                
                
                0
                %Expected
      forfeiture rate
                
                
                0
                %





The
weighted-average fair value of the 451,410 options granted during the nine
months ended March 31, 2009 was $.30 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, 2009, the total remaining unrecognized
compensation cost related to unvested stock options amounted to $149,894, net of
estimated forfeitures.





NOTE 16 —
SUBSEQUENT EVENTS





On May 5,
2009 the Company announced that it has attained ISO 9001:2008 certification. The
International Organization for Standardization (“ISO”) specifies standards for a
quality management system and is an important milestone in the roll out of the
Company’s manufacturing and commercialization process.





On the
same day the Company announced that is has achieved Underwriters Laboratory (UL)
listing 508A for its energy storage control system. This is in addition to the
recently received UL1741 compliance or both the power conditioning systems and
AC disconnect switching.


-13-




ZBB
ENERGY CORPORATION




Item 2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




Introduction




The
following information should be read in conjunction with the financial
statements and notes thereto in Part I,


Item 1 of
this Quarterly Report and with Management’s Discussion and Analysis of Financial
Condition and Results of


Operations
contained in our Annual Report on Form 10-KSB for the year ended June 30,
2008.




Forward-Looking
and Cautionary Statements




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




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


the
following risks and uncertainties:





·
            We have incurred losses and
      anticipate incurring continuing losses for the immediate
      future.


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


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


·
            The market for our products is
      currently evolving and may take longer to develop than we
      anticipate.


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


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


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


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


·
            Sales of our common stock by a
      major stockholder may have an adverse effect on the market price of our
      common stock.


-14-




Overview




Company
Background




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





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”.





Since our
inception, until fiscal 2005, when we completed the Australian public offering
and began our first major production contract, we were primarily a research and
development company with little or no revenues.   We have
historically funded our operations primarily through debt and equity financings,
government grants and joint ventures.





In 2008
we completed production under a multi-year contract with the California Energy
Commission (“CEC”) to produce the first two ZESS 500 kWh commercial energy
storage systems for utility use.  We also developed, produced, and
shipped the first ZESS 50, a smaller capacity modular version of the ZESS 500
energy storage system.





In the
current quarter we are in production on multiple ZESS 50 and ZESS 500 kWh
renewable energy systems for delivery under various domestic contracts as well
as international contracts to ship systems to destinations in Ireland, South
Africa, and Australia within the next few months.





Wisconsin
based initiatives include an agreement signed during the quarter with the
Wisconsin Energy Independence Fund to secure $230,000 in support grant funding
for the development of our own proprietary power conversion systems for both AC
to DC and DC to DC renewable energy applications. We have contracted with a
Wisconsin based partner to build and package the power electronics components
for two ZESS 50 units that are required to be built under this
grant.





Our
production capacity has substantially increased through the delivery of new
production equipment received in the last two quarters.  This new
equipment, along with manufacturing ramp-up and automation plans are underway
that would enable a significant increase in production capability within several
months.  Since our IPO we have continued implementation of our
business plan including the repayment of certain indebtedness, initiating
manufacturing commercialization and capacity increases, ISO certification and UL
listings, and commenced initial commercial marketing of our products into target
markets.





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





The
Company is 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.




On
January 26, 2009 we filed an S-3 Registration Statement with the Securities and
Exchange Commission.  We took this action as a proactive measure in
anticipation of our possible future needs for additional working capital and
further capital expenditures.  Although the registration statement has
yet to be declared effective, it will provide us with some flexibility when we
come to consider various debt and equity financing arrangements.




-15-





Results
of Operations





Nine months
ended March 31, 2009 and 2008:





Revenue and Other
income:





Our
revenues for the nine months ended March 31, 2009 and 2008 were $733,738
and $1,114,537, respectively, a decrease of $380,799.  This was result of a
decrease in revenues of $303,063 from the CEC contract which was completed in
March 2008, and a $77,737 decrease in revenues resulting from the Australian
AEST project as compared to the nine month period ending March 31,
2009.  Revenues include estimates based on the
percentage-of-completion method of accounting for long-term
contracts.





Other
income for the nine months ended March 31, 2009 reflects a decrease
in  interest income of $313,265 compared to the nine months ended
March 31, 2008, and a decrease of $50,329 in other income, primarily due to a
reduction of $37,500 in rental income.  The decrease in interest
income is a result of decreasing cash balances invested from the proceeds of the
Company’s U.S. public offering in June 2007.    Interest
income is expected to continue to decrease in future periods as proceeds from
the public offering are utilized for capital expenditures and operational
purposes and from lower interest rates on the funds invested.





Cost
and Expenses and Other Expense:





Total costs
and expenses for the nine months ended March 31, 2009 and 2008 were
$4,859,390 and $4,397,044, respectively. This increase of $462,346 in the nine
months ended March 31, 2009 was primarily due to
increased  Australian (AEST) contract activities which began in July
2007 resulting in increases of $456,183 in advanced engineering and development
expenses compared to the nine month period ended March 31, 2008 and increases in
selling, general, and administrative costs of $357,015.  These
increases in costs were offset by a $283,837 reduction in cost of product sales
and a decrease of $67,015 in depreciation expense.





Other
expenses for the nine months ended March 31, 2009 and 2008 were $144,501
and $182,974, respectively. The decrease of $38,473 in other expenses for nine
month period ending March 31, 2009 was primarily due to the decrease in
finance costs incurred during the comparable nine month period of the prior
fiscal year which included a early debt retirement charges from the proceeds of
the public offering. Also, there were increases to interest expense of $10,174
in the period ending March 31, 2009 resulting from additional equipment
financing.  A foreign currency translation loss of $11,685 was
realized during the March 31, 2009 period resulting from the application of the
proceeds from an Euros based contract.





Cost ofproduct
sales.   Our cost of product sales for the nine
months ended March 31, 2009 and 2008 were $-0- and $283,837,
respectively. The decrease in expense in the nine month period ended March
31, 2009 was due to the completion of the CEC sales contract which expired
March 31, 2008.





Selling, General and
Administrative.  Our selling, general and administrative
expense for the nine months ended March 31, 2009 and 2008 was $2,554,341
and $2,197,326, respectively.  The expense during the current nine
month period reflected an increase of $357,015 compared to the nine month
period ending March 31, 2008.   This was primarily result of
establishing a sales and marketing department,  and non-cash charges
related to share based compensation to key management and directors, in addition
to overall cost increases.





Travel
costs were approximately $175,307 and $238,292 for the nine month periods
ending March 2009 and 2008, respectively.  The 2008 costs included
travel related to installation and testing of energy storage systems sold in
California, investor relations activities, and additional travel between
Australian and U.S. operations. We expect overall travel related to marketing
and business development to increase as our sales efforts and installations
increase, but decrease as a percentage of sales.





Insurance
costs include insurance benefits for employees of $94,435, general insurance of
$41,355, and directors and officers insurance of $30,375. During the comparable
nine month period ending March 31, 2008, insurance costs include insurance
benefits for employees of $91,005, general insurance of $45,946 and $29,625 in
directors and officers insurance costs were incurred.


Advanced engineering and
development.Our engineering and
development costs for the nine months ended March 31, 2009 and 2008 were
$2,118,346 and $1,662,163, respectively.  The increase during the nine
month period ending March 31, 2009 of $456,183 from the comparable 2008 period
was primary due to the increase in advanced engineering and development costs
and materials under the AEST project contract which commenced in July
2007.  Expenses were partially offset by $126,997 received from the
Australian government during the nine months ended March 31, 2009 as tax
concession funding for research and development expenditures.  The
costs incurred under the current AEST contract have been classified as advanced
engineering and development expenditures, and have not been allocated or
included in cost of sales.


-16-


Net
Loss.  Our net loss for the nine months ended March 31, 2009
and 2008 was $4,151,123 and $2,995,686, respectively, resulting in a
$1,155,437 increase in net loss as compared to the nine months ended March 31,
2008.  In summary, this increase in loss was primarily the result of a
$380,799 decrease in revenues, a $462,346 increase in operating costs, and a
reduction of $313,265 in interest income.





Three
months ended March 31, 2009 and 2008:





Revenue and Other
income:





Our
revenues for the three months ended March 31, 2009 and 2008 were $219,853
and $552,856, respectively.  The decrease in revenues of $333,003 in
the three months ended March 31, 2009 is attributable to a $151,295 decrease in
revenues from the AEST project with an Australian government agency which began
in July 2007 and a reduction in revenues of $181,708 in the contract with CEC
was substantially completed in prior periods.  Revenues include
estimates based on the percentage-of-completion method of accounting for
long-term contracts.





Other
income for the three months ended March 31, 2009 and 2008 was $24,428 and
$119,871, respectively.  The decrease of $95,443 in the three
months ended March 31, 2009 resulted primarily from a decrease of $83,682 in
interest income from the investment of proceeds from the Company’s public
offering in June 2007 and a $12,500 reduction in rental
income.   Interest income is expected to decrease in future
periods as proceeds from the public offering are utilized for capital
expenditures and operational purposes and from lower interest rates on the funds
invested, based on current market rates.





Cost
and Expenses and Other expense:





Total operating
expenses for the three months ended March 31, 2009 and 2008 were $1,697,040
and $1,834,253, respectively. The total operating expense decrease of $137,213
in three months ended March 31, 2009 included increases of $158,028 in
selling, general and administrative expense, and offset by decreases in
advanced engineering and development costs of $65,829, a decrease of $180,862 in
the cost of products sales, and  a decrease of  $48,550 in
depreciation expense.





Other
expenses for the three months ended March 31, 2009 and 2008 were $71,574
and $35,855, respectively. The increase of $35,719 in the three month period
ending March 31, 2009 was primarily due to increased interest expense of
$24,062 on additional equipment financings, and $11,685 in realized losses on
foreign currency transactions.





Cost ofproduct
sales.   Our cost of product sales for three months ended
March 31, 2009 and 2008 was $-0- and $180,862, respectively. The
decrease in expense in the three month period ended March 31, 2009 resulted
from completion of the final tasks related to the CEC contract in prior
periods.





Selling,general andadministrative.  Our
selling, general and administrative expense for the three months ended
March 31, 2009 and 2008 was $887,523 and $729,495, respectively. This expense
during the current three month period was $158,028 higher than the three month
period ending March 31, 2008 primarily due to implementation of our equity
incentive plans, start-up of the sales and marketing department, and overall
cost increases.





Travel
costs were approximately $50,000 and $78,000 for the three month periods ending
March 2009 and 2008, respectively. Decreases are related to reductions in
investor relations activities, and reduced travel to the “CEC” contract
installation.  We expect travel related to marketing and business
development to increase as our sales efforts and installations
increase.





Insurance
costs include insurance benefits for employees of $33,550, general liability
insurance of $18,384 and $10,125 in directors and officers insurance during the
three months ended March 31, 2009. During the comparable three month period
ending March 31, 2008, insurance costs include insurance benefits for employees
of $28,500, general liability insurance of $17,088 and $9,875 in directors and
officers insurance costs were incurred.





Advanced engineeringanddevelopment. Our
engineering and development costs for the three months ended March 31, 2009 and
2008 were $757,680 and $823,509, respectively.  The decrease
during the three month period ending March 31, 2009 of $65,829 from
the comparable 2008 period was primary due to decreased materials
costs consumed under the AEST project contract.   The AEST
project will continue to affect future expenditures through June 2010, the term
of the contract; to the extent the costs are allowable and required under the
contract.   We intend to maintain our Australian staff and
facility for the purposes of facilitating further marketing in Australia and
Asia and for advanced engineering and development projects as
needed.





Net
loss.  Our net loss for the three months ended March 31, 2009
and 2008 was $1,524,333 and $1,197,381, respectively.  In the three
months ended March 31, 2009 there was a $326,952 increase in net loss, resulting
from a $333,003 decrease in revenues, a 131,162 decrease in other income; offset
by a $137,213 decrease in costs and expenses.


-17-


Liquidity and Capital
Resources





Since our
inception, our research, advanced engineering and development, and operations
were primarily financed through debt and equity financings, government grants
and joint ventures.  Total paid in capital as of March 31, 2009
was $45,467,965.   We had a cumulative deficit of $35,877,918 as
of March 31, 2009 compared to a cumulative deficit of
$31,726,795 as of June 30, 2008.  At March 31, 2009 we
had a working capital surplus of $5,010,292 and as of June 30, 2008 a
working capital surplus of $8,611,872.  Our shareholders’ equity
as of March 31, 2009 and June 30, 2008 was $7,882,362 and $12,016,118,
respectively.





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




Other
sources of funding have been provided by research and development grants such as
the funding which continues to be generated from the AEST agreement entered into
on June 29, 2007 by ZBB Technologies, Ltd, our subsidiary based in Western
Australia, and the Commonwealth of Australia (administered by the Department of
Environment and Water Resources),  whereby, among other things, the
Department  has agreed to provide funding to us for the development
and delivery of an energy storage system to be used to store and supply
renewable energy generated from photovoltaic solar panels and wind turbines. The
AEST  agreement provides for $2.2 million (A$3.1 million) in project
funding through June 2010 totaling $1.1 million in year one,
$0.9  million in year  two and $0.2 million in year three,
as certain development progress “milestones” are met by us.




We believe that we will have
sufficient capital necessary to meet our immediate future operating and capital
commitments.  This is based on our conservative business plan that
includes current sales contracts which generate positive cash flows, and a rate
of expenditure that supports our current operations, including product
development and production readiness without additional funding from project
financing or equity transactions. However, we believe additional capital is
necessary to continue our mid-to-long term growth plans.  Under
current economic conditions and absent a substantial increase in new orders, the
board of directors has requested that management implement increased cost
containment measures.  Actions taken by the board of directors and
management in this quarter include: 1.) increase in cost saving measures to
preserve cash resources; 2.) actively pursue fund raising arrangements,
including engaging investment bankers to assist with equity based financing; 3.)
focusing the Chief Executive Officer efforts on fund raising and federal
stimulus spending plan opportunities; and 4.) filing a “shelf” S-3 Registration
Statement to assist in fund raising efforts.




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.




On
January 26, 2009 we filed an S-3 Registration Statement with the Securities and
Exchange Commission.  We took this action as a proactive measure in
anticipation of our possible future needs for additional working capital and
further capital expenditures.  Although the registration statement has
yet to be declared effective, it will provide us with some flexibility when we
come to consider various debt and equity financing arrangements.




Operating
Activities





For
the nine months ended March 31, 2009, net cash used in operations was
$3,447,703. Cash used in operations resulted from a net loss of $4,151,123,
reduced by $817,175 in non-cash adjustments.  Net working capital
changes increased the cash used in operations by $113,755 from decreases in
accrued compensation of $48,231, deferred revenues of $2,415; and increases to
inventory of $321,801, and prepaid and other current assets of $325. Cash used
in operations was reduced by an increase in accounts payable of $230,325; and
reductions in other receivables of $26,970, and accounts receivable of
$1,722.  Non-cash adjustments to operations included equipment of
$210,855 charged to advanced engineering and development costs, $150,000 of
non-cash consulting fees, $201,567 of stock based compensation
expense,  a $68,050 change in inventory allowance, and $186,703 of
depreciation expense.





For the
nine months ended March 31, 2008, net cash used in operations was $4,248,690.
Cash used in operations resulted from decreases in accounts payable of $125,240;
accrued expenses and loss on contracts of $93,756; deferred revenues of
$176,305; increase to inventory of $633,423; an increase in accounts receivable
of $284,195; and an increase in other assets of $128,538. Other non-cash
adjustments to cash included long-term assets of $118,000 expensed to costs of
engineering and development contracts and $150,000 of non-cash consulting
fees.


-18-


Investing
Activities





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.





For the
nine months ended March 31, 2008, net cash used in investing activities was
$345,281 due to purchases of manufacturing equipment and computer
hardware.


Financing
Activities





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.





For the
nine months ended March 31, 2008, net cash used in financing activities was
$4,219,420 consisting primarily of $4,047,823 in repayments of principal on
notes payable, additional public offering costs of $100,000 and $71,598
reduction in principal on bank loans.





Known
Trends, Market Opportunities and Challenges





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


We
believe that in North America the electric utilities markets’ increasing energy
demands on an increasingly fragile transmission and distribution network is
forcing both utilities and commercial and industrial customers to adopt
distributed storage and delivery systems to increase the reliability and the
capacity of the electrical grid. We have designed our products to meet these
needs in that they can be combined for use in larger storage applications.
Federal and State Government initiatives to lessen the United States greenhouse
gas emissions and dependency on oil and increasing concerns surrounding CO2
emissions are also driving this market sector. We believe that solar and wind
energy has grown over the past five years and will continue to grow for so long
as fossil fuel prices are increasing. Because both solar and wind are
intermittent primary energy sources, both grid connected and off-grid
installations require energy storage devices to optimize their
capabilities.





We
continue to advance the sales and marketing process in the areas of sales
network structure, direct key accounts, strategic relationships, marketing and
industry/policy involvement.





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





We have
advanced the ZBB presence and awareness in the market through 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 such as the Future House USA installation in  Beijing,
China, the LifeVillage power systems to remote areas in Central and West Africa,
and the sale of the first large scale wind/storage facility on a college campus
at the Dundalk Institute of Technology in the Republic of
Ireland.  ZBB is in the process of furthering these marketing and
networking efforts with additional marketing activities that will continue to
raise the profile of ZBB and the ZESS brands.





We
continue to work in the California energy and utility markets through the
California Energy Commission and pursue opportunities with Pacific Gas &
Electric and the U.S. Department of Energy amongst others, to install products
into the local transmission and distribution network. In November 2008 the State
of California amended certain renewable energy rebate programs to include energy
storage systems, such as those manufactured and sold by us, when our systems are
incorporated as part of either new or existing renewable energy
installation.





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.  As of this report, the current Senate version
of The American Recovery and Reinvestment Act of 2009 includes provisions for
over $14 billion in amounts to be available for “Energy Efficiency and Renewable
Energy” until September 30, 2010, with $2 billion targeted towards grants for
the manufacturing of advanced batteries and components.


-19-


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.





We have
substantially increased production capacity through the delivery of new
production equipment received in the last two quarters.  This new
equipment, along with manufacturing ramp-up and automation plans are underway
that will enable a significant increase in production capability within several
months.





Our
current contracts include a collaborative project (Advanced Electricity Storage
Technologies project) with the Commonwealth of Australia which commenced July
2007 and running through July 2010, which includes the payment to the Company of
$2.7 million for future development costs and which includes the production and
delivery of one 500kWh energy storage system for installation into a renewable
energy site in Australia. In December 2008 we received an order for a Zess 500
system to be installed in conjunction with existing wind energy assets at the
Dundalk Institute of Technology in the Republic of Ireland.





During
the current quarter we signed a contract with the Wisconsin Energy Independence
Fund to secure $230,000 in support grant funding for the development of our own
proprietary power conversion systems for both AC to DC and DC to DC renewable
energy applications. We have contracted with a Wisconsin based partner to build
and package the power electronics components for two units for evaluation with
two ZESS 50 systems contracted to be built under this grant.





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





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





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





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





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





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





We
believe additional capital is necessary to continue our mid-to-long term growth
plans.  Actions taken by the board of directors and management in the
current fiscal year  include: 1.) increase in cost saving measures to
ensure adequate cash resources to continue growing the company, assuming no new
sources of capital funding; 2.) actively pursue various fund raising
arrangements including engaging investment bankers to assist with equity based
financing; 3.) focusing the Chief Executive Officer efforts on fund raising and
federal stimulus package opportunities; and 4.) filing a “shelf” S-3
Registration Statement as a potential vehicle and to assist in fund raising
efforts.




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.


-20-


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.




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




PART
II




Item
1.          Legal
Proceedings




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




Item
1A.      Risk Factors




Not applicable for smaller reporting
companies.




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




As a
result of consummation of our initial United States public offering 3,333,333
shares of our common stock, par value $0.01 was effected through a Registration
Statement on Form SB-2 (Reg. No. 333-138243) which was declared effective by the
SEC on June 20, 2007 resulting in receipt of $18,410,000 (net of
underwriter’s costs) proceeds on June 20, 2007.  The managing
underwriter of our offer was Empire Financial Group, Inc.




From the
proceeds of our June 2007 United States initial public offering, we incurred
approximately $1.2 million in additional offering expenses and retired an
aggregate of $4.5 million in indebtedness.  Approximately
$9  million of the net proceeds has been used for working capital and
investments in manufacturing assets, including expanding our selling and
marketing efforts and compliance costs, additional manufacturing capacity, and
improvements to the product and manufacturing operations.  The
remaining net proceeds have all been applied to temporary investments in bank
certificates of deposits and money market
funds.




Item
3.     Defaults Upon Senior Securities




This Item
is not applicable.




Item
4.     Submission of Matters to a Vote of Security
Holders




This Item
is not applicable.


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Item 5.     Other
Information




This Item
is not applicable.




Item 6.    
Exhibits  -Filed herewith:




Exhibit
31.1


Certification
of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.




Exhibit
31.2


Certification
of Principal Financial and Accounting Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.




Exhibit
32.1


Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




Exhibit
32.2


Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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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
      13, 2009
              By:
              /s/ Robert J. ParryName:
              Robert
      J. ParryTitle:
              Chief
      Executive Officer and(Principal
      Executive Officer)May
      13, 2009
              By:
              /s/
      Scott W. ScampiniName:
              Scott
      W. ScampiniTitle:
              Chief
      Financial Officer and(Principal
      financial officer andPrincipal
      accounting officer)


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