UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


FORM
10-Q




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


For
the quarterly period ended September 30, 2010


or


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


For the
transition period from _________ to________




Commission
File Number 001-33540









(Exact
name of registrant as specified in its charter)




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




N93
W14475 Whittaker Way, Menomonee Falls, WI  53051


(Address
of principal executive offices)


(262)
253-9800


(Registrant’s
telephone number)




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




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




Indicate
by check whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.)   Yes  ̈     
No R




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




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


(Do not
check if a smaller reporting company)




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




Class
            Shares
      Outstanding as ofNovember
      11,
      2010Common
      Stock, $.01 par value per share
            19,890,336










ZBB
Energy Corporation




Form
10-Q




TABLE OF
CONTENTS




PagePART I. FINANCIAL INFORMATION
      (*)Item 1.
              Condensed
      Consolidated Financial Statements
              
              1Condensed
      Consolidated Balance Sheets (unaudited), September 30, 2010 and June 30,
      2009
              
              1Condensed
      Consolidated Statements of Operations (unaudited), Three Months Ended
      September 30, 2010 and 2009
              
              2Condensed
      Consolidated Statements of Changes in Shareholders' Equity (unaudited),
      Three Months Ended September 30, 2010 and year ended June 30,
      2010
              
              3Condensed
      Consolidated Statements of Cash Flows (unaudited), Three Months Ended
      September 30, 2010 and 2009
              
              4Notes
      to Condensed Consolidated Financial Statements (unaudited)
              
              5Item
      2.
              Management’s
      Discussion and Analysis and Results of Operations
              
              18Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              
              25Item
      4.
              Controls
      and Procedures
              
              25PART
      II. OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              
              25Item
      1A.
              Risk
      Factors
              
              25Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              
              26Item
      3.
              Defaults
      upon Senior Securities
              
              26Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              
              26Item
      5.
              Other
      Information
              
              26Item
      6.
              Exhibits
              
              26Signatures
              
              27


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







ZBB
ENERGY CORPORATION
 Condensed
Consolidated Balance Sheets
  September30,
                                            2010(Unaudited)
                                          
                                          
                                          June 30, 2010AssetsCurrent
      assets:Cash
      and cash equivalents
                                          
                                          $
                                          722,681
                                          
                                          
                                          $
                                          1,235,635Accounts
      receivable
                                          
                                          
                                          7,319
                                          
                                          
                                          
                                          7,553Inventories
                                          
                                          
                                          724,246
                                          
                                          
                                          
                                          702,536Prepaid
      and other current assets
                                          
                                          
                                          117,485
                                          
                                          
                                          
                                          149,098Total
      current assets
                                          
                                          
                                          1,571,731
                                          
                                          
                                          
                                          2,094,822Long-term
      assets:Property,
      plant and equipment, net
                                          
                                          
                                          3,558,495
                                          
                                          
                                          
                                          3,568,823Goodwill
                                          
                                          
                                          803,079
                                          
                                          
                                          
                                          803,079Total
      assets
                                          
                                          $
                                          5,933,305
                                          
                                          
                                          $
                                          6,466,724Liabilities
      and Shareholders' Equity (deficiency in assets)Current
      liabilities:Bank
      loans and notes payable
                                          
                                          $
                                          370,039
                                          
                                          
                                          $
                                          395,849Accounts
      payable
                                          
                                          
                                          1,082,321
                                          
                                          
                                          
                                          869,179Accrued
      expenses
                                          
                                          
                                          469,350
                                          
                                          
                                          
                                          539,100Commitment
      fee payable
                                          
                                          
                                          294,118
                                          
                                          
                                          
                                          -Deferred
      revenues
                                          
                                          
                                          386,305
                                          
                                          
                                          
                                          325,792Accrued
      compensation and benefits
                                          
                                          
                                          576,792
                                          
                                          
                                          
                                          765,106Total
      current liabilities
                                          
                                          
                                          3,178,925
                                          
                                          
                                          
                                          2,895,026Long-term
      liabilities:Bank
      loans and notes payable
                                          
                                          
                                          3,187,506
                                          
                                          
                                          
                                          2,120,421Debenture
      notes payable
                                          
                                          
                                          517,168
                                          
                                          
                                          
                                          -Total
      liabilities
                                          
                                          
                                          6,883,599
                                          
                                          
                                          
                                          5,015,447Shareholders'
      equity (deficiency in assets)Common
      stock($0.01 par value);
      150,000,000 authorized 16,574,703 and 14,915,389
      shares issued
                                          
                                          
                                          165,748
                                          
                                          
                                          
                                          149,155Additional
      paid-in capital
                                          
                                          
                                          49,920,819
                                          
                                          
                                          
                                          49,770,987Note
      receivable - common stock
                                          
                                          
                                          (514,255
                                          )
                                          
                                          
                                          -Treasury
      stock - 13,833 shares
                                          
                                          
                                          (11,136
                                          )
                                          
                                          
                                          (11,136
                                          )Accumulated
      other comprehensive (loss)
                                          
                                          
                                          (1,582,491
                                          )
                                          
                                          
                                          (1,563,052
                                          )Accumulated
      (deficit)
                                          
                                          
                                          (48,928,979
                                          )
                                          
                                          
                                          (46,894,677
                                          )Total
      shareholders' equity (deficiency in assets)
                                          
                                          
                                          (950,294
                                          )
                                          
                                          
                                          1,451,277Total
      liabilities and shareholders' equity  (deficiency in
      assets)
                                          
                                          $
                                          5,933,305
                                          
                                          
                                          $
                                          6,466,724
 
 See
accompanying notes to condensed consolidated financial statements
 
 -1-
 
 ZBB
ENERGY CORPORATION
 Condensed
Consolidated Statements of Operations (Unaudited)
 
 Three months ended September 30,2010
                        
                        
                        2009RevenuesProduct
      sales and revenues
                        
                        $
                        -
                        
                        
                        $
                        666,726Engineering
      and development revenues
                        
                        
                        -
                        
                        
                        
                        145,187Total
      Revenues
                        
                        
                        -
                        
                        
                        
                        811,913Costs
      and ExpensesCost
      of product sales
                        
                        
                        -
                        
                        
                        
                        646,102Cost
      of engineering and development revenues
                        
                        
                        -
                        
                        
                        
                        294,455Advanced
      engineering and development
                        
                        
                        839,273
                        
                        
                        
                        324,707Selling,
      general, and administrative
                        
                        
                        1,078,729
                        
                        
                        
                        873,367Depreciation
                        
                        
                        86,083
                        
                        
                        
                        124,217Total
      Costs and Expenses
                        
                        
                        2,004,085
                        
                        
                        
                        2,262,848Loss
      from Operations
                        
                        
                        (2,004,085
                        )
                        
                        
                        (1,450,935
                        )Other
      (Expense) IncomeInterest
      income
                        
                        
                        1,790
                        
                        
                        
                        26,496Interest
      expense
                        
                        
                        (32,007
                        )
                        
                        
                        (32,032
                        )Other
      expense
                        
                        
                        -
                        
                        
                        
                        (19,760
                        )Total
      Other (Expense) Income
                        
                        
                        (30,217
                        )
                        
                        
                        (25,296
                        )Loss
      before provision for Income Taxes
                        
                        
                        (2,034,302
                        )
                        
                        
                        (1,476,231
                        )Provision
      for Income Taxes
                        
                        
                        -
                        
                        
                        
                        -Net
      Loss
                        
                        $
                        (2,034,302
                        )
                        
                        $
                        (1,476,231
                        )Net
      Loss per share-Basic
      and diluted
                        
                        $
                        (0.13
                        )
                        
                        $
                        (0.13
                        )Weighted
      average shares-basic and diluted:Basic
                        
                        
                        15,410,384
                        
                        
                        
                        11,514,131Diluted
                        
                        
                        15,410,384
                        
                        
                        
                        11,514,131
 
 See
accompanying notes to condensed consolidated financial statements.
 
 -2-
 
 ZBB
Energy Corporation
 Condensed
Consolidated Statements of Changes in Shareholders' Equity
(unaudited)
 
 Numberof
                                                          Shares
                                                        
                                                        CommonStock
                                                        
                                                        AdditionalPaid-
                                                          inCapital
                                                        
                                                        
                                                        TreasuryStock
                                                        
                                                        
                                                        Note
                                                          Receivable -
                                                          CommonStock
                                                        
                                                        
                                                        Accumulated
                                                          Other
                                                          Comprehensive
                                                          (Loss)
                                                        
                                                        
                                                        Accumulated
                                                          Deficit
                                                        
                                                        
                                                        Total
                                                          Shareholders'
                                                          Equity
                                                          (deficiency in
                                                          assets)
                                                        
                                                        
                                                        Comprehensive
                                                          LossBalance:
      July 1, 2009
                                                        
                                                        
                                                        10,618,297
                                                        
                                                        $
                                                        106,183
                                                        
                                                        $
                                                        45,549,079
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        -
                                                        
                                                        
                                                        $
                                                        (1,601,576
                                                        )
                                                        
                                                        $
                                                        (37,287,851
                                                        )
                                                        
                                                        $
                                                        6,765,835Issuance
      of common stock, net of costs and underwriting fees
                                                        
                                                        
                                                        4,035,417
                                                        
                                                        
                                                        40,355
                                                        
                                                        
                                                        3,661,495
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        3,701,850Equity
      offering costs
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (244,409
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (244,409
                                                        )Sdtock-based
      compensation
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        527,439
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        527,439Settlement
      of stock purchase agreement
                                                        
                                                        
                                                        (28,750
                                                        )
                                                        
                                                        (287
                                                        )
                                                        
                                                        287Retired
      restricted stock
                                                        
                                                        
                                                        (46,921
                                                        )
                                                        
                                                        (469
                                                        )
                                                        
                                                        469Issuance
      of restricted common stock offering
                                                        
                                                        
                                                        337,346
                                                        
                                                        
                                                        3,373
                                                        
                                                        
                                                        276,627
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        280,000Purchase
      of treasury stock
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (11,136
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (11,136
                                                        )Net
      loss
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (9,606,826
                                                        )
                                                        
                                                        
                                                        (9,606,826
                                                        )
                                                        
                                                        $
                                                        (9,606,826
                                                        )Net
      translation adjustment
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        38,524
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        38,524
                                                        
                                                        
                                                        
                                                        38,524Balance:
      June 30, 2010
                                                        
                                                        
                                                        14,915,389
                                                        
                                                        
                                                        149,155
                                                        
                                                        
                                                        49,770,987
                                                        
                                                        
                                                        
                                                        (11,136
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,563,052
                                                        )
                                                        
                                                        
                                                        (46,894,677
                                                        )
                                                        
                                                        
                                                        1,451,277
                                                        
                                                        
                                                        
                                                        (9,568,302
                                                        )Issuance
      of common stock, net of costs and underwriting fees
                                                        
                                                        
                                                        1,163,628
                                                        
                                                        
                                                        11,636
                                                        
                                                        
                                                        502,619
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (514,255
                                                        )Issuance
      of commitment fee shares
                                                        
                                                        
                                                        490,196
                                                        
                                                        
                                                        4,902
                                                        
                                                        
                                                        289,216
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        294,118Equity
      issuance costs
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (745,546
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (745,546
                                                        )Stock-based
      compensation
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        103,598
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        103,598Other
                                                        
                                                        
                                                        5,490
                                                        
                                                        
                                                        55
                                                        
                                                        
                                                        (55
                                                        )Net
      loss
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (2,034,302
                                                        )
                                                        
                                                        
                                                        (2,034,302
                                                        )
                                                        
                                                        
                                                        (2,034,302
                                                        )Net
      translation adjustment
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (19,439
                                                        )
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        (19,439
                                                        )
                                                        
                                                        
                                                        (19,439
                                                        )Balance:
      September 30, 2010
                                                        
                                                        
                                                        16,574,703
                                                        
                                                        $
                                                        165,748
                                                        
                                                        $
                                                        49,920,819
                                                        
                                                        
                                                        $
                                                        (11,136
                                                        )
                                                        
                                                        $
                                                        (514,255
                                                        )
                                                        
                                                        $
                                                        (1,582,491
                                                        )
                                                        
                                                        $
                                                        (48,928,979
                                                        )
                                                        
                                                        $
                                                        (950,294
                                                        )
                                                        
                                                        $
                                                        (2,053,741
                                                        )
 
 See
accompanying notes to consolidated financial statements
 
 -3-
 
 ZBB
ENERGY CORPORATION
 Condensed
Consolidated Statements of Cash Flows (Unaudited)
  Three months ended September 30,2010
                  
                  
                  2009Cash
      flows from operating activitiesNet
      loss
                  
                  $
                  (2,034,302
                  )
                  
                  $
                  (1,476,231
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
                  
                  
                  86,083
                  
                  
                  
                  124,217Stock-based
      compensation
                  
                  
                  103,598
                  
                  
                  
                  54,894(Increase)
      decrease in operating assets:Accounts
      receivable
                  
                  
                  234
                  
                  
                  
                  561,066Inventories
                  
                  
                  (100,710
                  )
                  
                  
                  376,983Prepaids
      and other current assets
                  
                  
                  31,613
                  
                  
                  
                  57,211Other
      receivables-interest
                  
                  
                  -
                  
                  
                  
                  19,746Increase
      (decrease) in operating liabilities:Accounts
      payable
                  
                  
                  213,142
                  
                  
                  
                  (108,365
                  )Accrued
      compensation and benefits
                  
                  
                  (188,314
                  )
                  
                  
                  68,588Accrued
      expenses
                  
                  
                  (16,390
                  )
                  
                  
                  45,145Deferred
      revenues
                  
                  
                  60,513
                  
                  
                  
                  (686,795
                  )Net
      cash used in operating activities
                  
                  
                  (1,844,533
                  )
                  
                  
                  (963,541
                  )Cash
      flows from investing activitiesCapital
      expenditures
                  
                  
                  (75,755
                  )
                  
                  
                  -Bank
      certificate of deposit
                  
                  
                  -
                  
                  
                  
                  1,000,000Net
      cash (used in) provided by investing activities
                  
                  
                  (75,755
                  )
                  
                  
                  1,000,000Cash
      flows from financing activitiesProceeds
      from bank loans and notes payable
                  
                  
                  1,156,128
                  
                  
                  
                  156,000Repayments
      of bank loans and notes payable
                  
                  
                  (114,853
                  )
                  
                  
                  (114,168
                  )Proceeds
      from issuance of debenture notes payable
                  
                  
                  517,168
                  
                  
                  
                  -Issuance
      of common stock net of costs and underwriting fees
                  
                  
                  -
                  
                  
                  
                  1,875,276Equity
      issuance costs
                  
                  
                  (157,311
                  )
                  
                  
                  0Net
      cash provided by financing activities
                  
                  
                  1,401,132
                  
                  
                  
                  1,917,108Effect
      of exchange rate changes on cash and cash equivalents
                  
                  
                  6,202
                  
                  
                  
                  9,511Net
      (decrease) increase in cash and cash equivalents
                  
                  
                  (512,954
                  )
                  
                  
                  1,963,078Cash
      and cash equivalents - beginning of period
                  
                  
                  1,235,635
                  
                  
                  
                  2,970,009Cash
      and cash equivalents - end of period
                  
                  $
                  722,681
                  
                  
                  $
                  4,933,087Cash
      paid for interest
                  
                  $
                  32,007
                  
                  
                  $
                  32,032Supplemental
      schedule of non-cash investing and financing activities:Issuance
      of common stock for discounted note receivable
                  
                  $
                  514,255
                  
                  
                  
                  -Issuance
      of common stock as consideration for equity issuance costs
                  
                  $
                  294,117
                  
                  
                  
                  -
 
 See
accompanying notes to condensed consolidated financial statements.
  -4-


ZBB
ENERGY CORPORATION


Notes
to Condensed Consolidated Financial Statements (unaudited)


September
30, 2010





NOTE 1 —
NATURE OF ORGANIZATION




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




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




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




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




·
            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
condensed 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
2 – GOING CONCERN





The
consolidated financial statements as of September 30, 2010 and for the three
months then ended have been prepared on the basis of a going concern which
contemplates that ZBB Energy Corporation and subsidiaries will be able to
realize assets and discharge liabilities in the normal course of business.
Accordingly, they do not give effect to adjustments that would be necessary
should the Company be required to liquidate its assets. The Company incurred a
net loss of $2,034,302for the
three months ended September 30, 2010 and as of September 30, 2010 has an
accumulated deficit of $48,928,979 and a shareholders’ deficiency in assets of
$950,294. The ability of the Company to meet its total liabilities of $7,052,599and to
continue as a going concern is dependent upon the availability of future funding
and achieving profitability.  The accompanying financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.




The
Company believes, with the financing vehicles now in place and with other
potential financing sources, that it will be able to raise the capital necessary
to fund operations through fiscal year 2011.  The Company’s sources of
capital in the year ending June 30, 2011 include the raising of up to $10
million from Socius CG II, Ltd., as described in Note 9 and $1.3 million under
the Wisconsin Department of Commerce loan, as described in Note 6. However,
these facilities place certain restrictions on our ability to draw on
them.  For example, our ability to submit a tranche notice under the
Socius Agreement is subject to certain conditions including that: (1) a
registration statement covering our sale of shares of common stock to Socius in
connection with the tranche is effective and (2) the issuance of such shares
would not result in Socius and its affiliates beneficially owning more than
9.99% of our common stock.  These limitations have been carefully
considered by the Company and notwithstanding such limitations management
believes it will be able to successfully utilize them.  However, there
can be no assurances that unforeseen circumstances will not jeopardize the
Company’s ability to draw on these financing vehicles.




Accordingly,
the Company is currently exploring various alternatives including debt and
equity financing vehicles, strategic partnerships, and/or government programs
that may be available to the Company, as well as trying to generate additional
sales and increase margins.  However, the Company has no commitments
to obtain any additional funds, and there can be no assurance such funds will be
available on acceptable terms or at all.  If the Company is unable to
obtain additional funding and improve its operations, the Company’s financial
condition and results of operations may be materially adversely affected and the
Company may not be able to continue operations.


-5-


NOTE 3 —
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Interim
Financial Data




The
accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(“GAAP”) for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting only of adjustments of a
normal and recurring nature) considered necessary for fair presentation of the
results of operations have been included. Operating results for the three month
period ended September 30, 2010 are not necessarily indicative of the results
that might be expected for the year ending June 30, 2011.




The
condensed consolidated balance sheet at June 30, 2010 has been derived from
audited financial statements at that date, but do not include all of the
information and disclosures required by GAAP. For a more complete discussion of
accounting policies and certain other information, refer to the Company’s annual
report filed on Form 10-K for the fiscal year ended June 30, 2010.




Basis
of Presentation




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




Foreign
Currency




The
Company uses the United States dollar as its functional and reporting currency,
while the Australian dollar is the functional currency of one of its foreign
subsidiaries. Assets and liabilities of the Company’s foreign subsidiary are
translated into United States dollars at exchange rates that are in effect 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 (Deficiency in Assets) in the consolidated balance
sheets. No gain or loss on translation is included in the net
loss.




Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. It is reasonably possible that the
estimates we have made may change in the near future. Significant estimates
underlying the accompanying consolidated financial statements include those
related to:
  ·
              the
      timing of revenue recognition;
 ·
              the
      allowance for doubtful accounts;
 ·
              valuations
      of excess and obsolete inventory;
 ·
              the
      lives and recoverability of equipment and other long-lived assets such as
      goodwill;
 ·
              restructuring,
      reorganization, relocation and severance
costs;
 ·
              warranty
      liabilities;
 ·
              tax
      valuation allowances; and
 ·
              stock-based
      compensation.


Income
Taxes




The
Company records deferred income taxes in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740,
“Accounting for Income Taxes.” This ASC requires recognition of deferred income
tax assets and liabilities for temporary differences between the tax basis of
assets and liabilities and the amounts at which they are carried in the
financial statements, based upon the enacted tax rates in effect for the year in
which the differences are expected to reverse. The Company establishes a
valuation allowance when necessary to reduce deferred income tax assets to the
amount expected to be realized.  There were no net deferred income tax
assets recorded as of September 30, 2010.




The
Company applies a more-likely-than-not recognition threshold for all tax
uncertainties as required under ASC Topic 740, which only allows the recognition
of those tax benefits that have a greater than fifty percent likelihood of being
sustained upon examination by the taxing authorities. The Company’s management
has reviewed the Company’s tax positions and determined there were no
outstanding or retroactive tax positions with less than a 50% likelihood of
being sustained upon examination by the taxing authorities as of September 30,
2010 and June 30, 2010.




The
Company’s U.S. Federal, Wisconsin, and Australian income tax returns for the
years ended June 30, 2005 through June 30, 2010 are subject to examination by
major taxing authorities.




-6-




Property,
Plant and Equipment




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




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:





EstimatedUseful
                LivesManufacturing
      Equipment
              3 -
      7 yearsOffice
      Equipment
              3 -
      7 yearsBuilding
      and improvements
              7 -
      40 years





Impairment
of Long-Lived Assets




In
accordance with FASB ASC topic 360, "Impairment or Disposal of Long-Lived
Assets," the Company assesses potential impairments to its long-lived assets
including property, plant and equipment when there is evidence that events or
changes in circumstances indicate that the carrying value may not be
recoverable.





If such
an indication exists, the recoverable amount of the asset 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.  Management has determined that
there are no long-lived assets impaired as of September 30, 2010 and June 30,
2010.





Goodwill





Goodwill
is recognized as the excess cost of an acquired entity over the net amount
assigned to assets acquired and liabilities assumed. Goodwill is not amortized
but reviewed for impairment annually as of June 30, 2010 or more frequently if
events or changes in circumstances indicate that its carrying value may be
impaired.  These conditions could include a significant change in the
business climate, legal factors, operating performance indicators, competition,
or sale or disposition of a significant portion of a reporting
unit.





Testing
for the impairment of goodwill involves a two step process. The first step of
the impairment test requires the comparing of a reporting units fair value to
its carrying value. If the carrying value is less than the fair value, no
impairment exists and the second step is not performed. If the carrying value is
higher than the fair value, there is an indication that impairment may exist and
the second step must be performed to compute the amount of the impairment. In
the second step, the impairment is computed by estimating the fair values of all
recognized and unrecognized assets and liabilities of the reporting unit and
comparing the implied fair value of reporting unit goodwill with the carrying
amount of that unit’s goodwill.  Based on this method, the Company
determined fair value as evidenced by market capitalization, and concluded that
there was no need for an impairment charge as of September 30, 2010 and June 30,
2010.





Cash
and Cash Equivalents





The
Company considers all highly liquid investments with maturities of three months
or less to be cash equivalents.  The Company maintains its cash
deposits with a few high credit quality financial institutions predominately in
the United States.  At times such balances may exceed federally
insurable limits.  The Company has not experienced any losses in such
accounts.




Inventories





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





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





·
            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.


-7-





The
Company evaluates the recoverability of its slow moving or obsolete inventories
at least quarterly. The Company estimates the recoverable cost of such inventory
by product type while considering factors such as its age, historic and current
demand trends, the physical condition of the inventory as well as assumptions
regarding future demand. The Company’s ability to recover its cost for slow
moving or obsolete inventory can be affected by such factors as general market
conditions, future customer demand and relationships with
suppliers.





Revenue
Recognition





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





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





Revenues
from government funded research and development contracts are recognized
proportionally as costs are incurred and compared to the estimated total
research and development costs for each contract. In many cases, the Company is
reimbursed only a portion of the costs incurred or to be incurred on the
contract. Government funded research and development contracts are generally
multi-year, cost-reimbursement and/or cost-share type contracts. The Company is
reimbursed for reasonable and allocable costs up to the reimbursement limits set
by the contract.





Total
revenues of $0 and $811,913 were recognized for the three months ended September
30, 2010 and 2009, respectively, and were comprised of two significant customers
in 2009 (94% of total revenues).





Advanced
Engineering and Development Expenses





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 costs are separately identifiable, incurred and funded by advanced
engineering and development type agreements with outside parties; they will be
shown separately on the consolidated statements of operations as a “cost of
engineering and development revenues”.





Engineering
and Development Revenues





On June
29, 2007, ZBB Technologies Ltd (“ZBB Technologies”), an Australian subsidiary of
the Company, and the Commonwealth of Australia (the “Commonwealth”) represented
by and acting through the Department of Environment and Water Resources (the
“Department”), entered into an agreement for project funding under the Advanced
Electricity Storage Technologies (“AEST”) program (the “Agreement”) whereby the
Department agreed to provide funding to ZBB Technologies for the development of
an energy storage system that will be used to demonstrate the storage and supply
of renewable energy generated from photovoltaic solar panels and wind turbines
already operational at the Commonwealth Scientific and Industrial Research
Organization’s (“CSIRO”) Newcastle Energy Centre in New South Wales,
Australia.





The
Agreement provides for a three year term under which the Commonwealth will
provide $2.6 million (A$3.1 million) in project funding over several periods,
totaling $1.35 million in year one, $1.01 million in year two and $0.24 million
in year three, as certain development progress “milestones” are met by ZBB
Technologies to the satisfaction of the Commonwealth.





The
Agreement is subject to early termination or a reduction in scope by the
Commonwealth at any time or in the event of a default by ZBB
Technologies.  If the Commonwealth decides to terminate early or
reduce the scope of the Agreement, the Commonwealth will be liable to ZBB
Technologies for the amount of funds that have been legally committed by ZBB
Technologies in accordance with the Agreement.  However, the
Commonwealth is entitled to recover any part of the funds which have not been
legally committed by ZBB Technologies.  The Commonwealth will also be
liable for reasonable costs of termination or reduction in scope incurred by ZBB
Technologies attributable to such action.


-8-





ZBB
Technologies has agreed to indemnify the Commonwealth against any loss or
liability incurred by the Commonwealth, including loss or expenses incurred in
dealing with any claim against the Commonwealth arising from the use of
materials provided by ZBB Technologies under the Agreement and any breach of the
Agreement by ZBB Technologies.  The extent of liability is reduced
proportionately by any fault of the Commonwealth.





The
Company owns any assets, including battery storage systems, acquired with the
funding from the contract.  The Company grants the government of
Australia a free, non-exclusive license to intellectual property created in the
project for their own internal use.





The AEST
project has total budgeted expenditure for operating and capital items of
approximately $4.7 million (A$5.9 million) exclusive of any Australian taxes.
The Company’s contribution of approximately $2.3 million (A$2.8 million) is the
value of any cash and in-kind contributions provided to the project by the
Company in undertaking the project activities. The Australian Government is
providing the project funding of approximately $2.6 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.  Management of the Company
believes it has fulfilled its required contributions to the project in cash and
in-kind contributions as of September 30, 2010.  As of September 30,
2010, the Company has received $2,414,677 in total payments from the Australian
Government for milestones achieved to date. The Company expects to receive the
final payment of approximately $150,000 from AEST during the three months ending
December 31, 2010, pending approval from the Australian government.





Included
in Engineering and Development revenues and costs of Engineering and development
revenues were $294,455 for the three months ended September 30, 2009, related to
the AEST contract.  There are no additional costs for the Company to
incur subsequent to June 30, 2010.





At
September 30, 2010 and 2009, the Company had no unbilled amounts from
engineering and development contracts. The Company had customer payments from
engineering and development contract revenue, representing deposits in advance
of performance of the allowable work, in the amount of $0 and $205,275 as of
September 30, 2010 and 2009, respectively.  These amounts are included
in deferred revenues on the condensed consolidated balance sheets.





Warranty
and Contract Reserves





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





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





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





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





As of
September 30, 2010 and June 30, 2010, included in the Company’s accrued expenses
were approximately $440,000 and $520,000, respectively, in warranty
reserves.


-9-




Loss
per Share





The
Company follows the FASB ASC topic 260, “Earnings per Share,” provisions which
require the reporting of both basic and diluted earnings (loss) per
share.  Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted average number of
common shares  outstanding for the period.  Diluted earnings
(net loss) per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. In accordance with the FASB ASC topic 260, any anti-dilutive
effects on net income (loss) per share are excluded (as of the three months
ended September 30, 2010 and 2009 there were 4,104,823 and 2,448,510,
respectively, of underlying options and warrants that are
excluded).





Stock-Based
Compensation





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





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





The
Company only recognizes expense to its statements 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, for all other awards. See Note 7 below.





The
Company has agreed to compensate its directors with restricted stock units
(“RSUs”) rather than cash.  The RSUs are classified as liability
awards because the RSUs will be paid in cash upon vesting. The RSU award
liability is measured at its fair value at the end of each reporting period and,
therefore, will fluctuate based on the performance of the Company’s
stock.





Comprehensive
income (loss)





The
Company reports its comprehensive income (loss) in accordance with the FASB
ASCtopic 220
“Comprehensive Income”, which requires presentation of the components of
comprehensive earnings. Comprehensive income (loss) consists of net income
(loss) for the period plus or minus any net currency translation adjustments
applicable for the three months ended September 30, 2010 and 2009 and is
presented in the Consolidated Statements of Changes in Shareholders’
Equity.





Concentrations
of Credit Risk and Fair Value





Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash and U.S. treasury investments, and bank
certificates of deposit, and accounts receivable.





The
Company maintains significant cash deposits primarily with three or four
financial institutions, which at times may exceed federally insured limits. The
Company has not previously experienced any losses on such deposits.
Additionally, the Company performs periodic evaluations of the relative credit
rating of these institutions as part of its investment strategy.





Concentrations
of credit risk with respect to accounts receivable are limited due to
accelerated payment terms in current customer contracts and creditworthiness of
the current customer base. At September 30, 2010, primarily all of the Company’s
receivables pertain to one customer. During the three months ended September 30,
2009 revenues were concentrated among two customers.





The
carrying amounts of cash and cash equivalents, short-term investments, trade
receivables, other current assets and accounts payable approximate fair value
due to the short-term nature of these instruments. The carrying value of bank
loans and debenture notes payable approximate fair value based on their terms
which reflect market conditions existing as of September 30, 2010.





Reclassifications





Certain
amounts previously reported have been reclassified to conform to the current
presentation.


-10-


Recent
Accounting Pronouncements





In
September 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13,
“Multiple-Deliverable Revenue Arrangements” (“ASU 2009-13”), and ASU 2009-14,
“Certain Revenue Arrangements That Include Software Elements” (“ASU 2009-14”).
ASU 2009-13 amends the revenue guidance under Subtopic 605-25, “Multiple Element
Arrangements,” and addresses how to determine whether an arrangement involving
multiple deliverables contains more than one unit of accounting and how
arrangement consideration shall be measured and allocated to the separate units
of accounting in the arrangement. ASU 2009-14 excludes tangible products
containing software components and non-software components that function
together to deliver the product’s essential functionality from the scope of
Subtopic 985-605, “Revenue Recognition.” ASU 2009-13 and ASU 2009-14 are
effective for fiscal periods beginning on or after June 15, 2010, which for
the Company is the first quarter of fiscal 2011. The adoption of ASU 2009-13 and
ASU 2009-14 had no impact on the Company’s consolidated financial
statements.





In April
2010, the FASB issued ASU 2010-17, Revenue Recognition - Milestone Method (Topic
605): Milestone Method of Revenue Recognition.  This ASU codifies the
consensus reached in EITF Issue No. 08-9, “Milestone Method of Revenue
Recognition.” The amendments to the Codification provide guidance on defining a
milestone and determining when it may be appropriate to apply the milestone
method of revenue recognition for research or development transactions.
Consideration that is contingent on achievement of a milestone in its entirety
may be recognized as revenue in the period in which the milestone is achieved
only if the milestone is judged to meet certain criteria to be considered
substantive. Milestones should be considered substantive in their entirety and
may not be bifurcated. An arrangement may contain both substantive and
nonsubstantive milestones, and each milestone should be evaluated individually
to determine if it is substantive. The Company adopted ASU 2010-17 during the
three months ended September 30, 2010.  The adoption had no impact on
the Company’s consolidated financial statements.





NOTE
4 - INVENTORIES





Inventory
balances are comprised of the following amounts as of September 30, 2010 and
June 30, 2010:





September 30,
                      2010
                    
                    
                    June 30, 2010Raw
      materials
                    
                    $
                    415,709
                    
                    
                    $
                    417,456Work
      in progress
                    
                    
                    308,537
                    
                    
                    
                    285,080Total
                    
                    $
                    724,246
                    
                    
                    $
                    702,536





NOTE
5– PROPERTY, PLANT & EQUIPMENT





Property,
plant, and equipment balances are comprised of the following amounts as of
September 30, 2010 and June 30, 2010:





September
      30,
                        2010
                      
                      
                      June
      30, 2010Office
      equipment
                      
                      $
                      129,282
                      
                      
                      $
                      119,779Manufacturing
      equipment
                      
                      
                      3,685,491
                      
                      
                      
                      3,591,508Building
      and improvements
                      
                      
                      1,996,134
                      
                      
                      
                      1,996,134Land
                      
                      
                      217,000
                      
                      
                      
                      217,0006,027,907
                      
                      
                      
                      5,924,421Less,
      accumulated depreciation
                      
                      
                      (2,469,412
                      )
                      
                      
                      (2,355,598
                      )Net
      Property, Plant & Equipment
                      
                      $
                      3,558,495
                      
                      
                      $
                      3,568,823





NOTE
6 – BANK LOANS AND NOTES PAYABLE




The
Company's debt consisted of the following as of September 30, 2010 and June 30,
2010:





September30,
                        2010
                      
                      
                      June 30, 2010Bank
      loans-current
                      
                      $
                      370,039
                      
                      
                      $
                      395,849Bank
      loans-long term
                      
                      
                      3,187,506
                      
                      
                      
                      2,120,421Total
                      
                      $
                      3,557,545
                      
                      
                      $
                      2,516,270





On April
7, 2010 the Company entered a loan agreement for $1.3 million with the Wisconsin
Department of Commerce. Payments of principal and interest under this loan are
deferred until May 31, 2012. The interest rate is 2%. Payments of $22,800 per
month are required starting June 1, 2012 with a final payment due on May 1,
2017. The loan is secured by equipment purchased with loan proceeds and with a
General Business Security Agreement on all assets of the Company. The Company is
required to maintain and increase a specified number of employees, and the
interest rate is increased in certain cases for failure to meet this
requirement. This loan commitment expires October 31, 2010. Principal balance is
$1,156,128 at September 30, 2010.


-11-





On July
1, 2009 the Company entered into a loan agreement to finance new production
equipment.  The $156,000 bank note is secured by specific equipment,
requiring monthly payments of $4,736 of principal and interest; rate equal to
5.99% per annum; maturity date of December 1, 2013. Principal balance is $94,493
at September 30, 2010.





On May
14, 2008 the Company entered into two loan agreements to refinance its building
and land in Menomonee Falls, Wisconsin:





The first
loan requires a fixed monthly payment of principal and interest at a rate of
..25% below the prime rate, subject to a prime rate floor of 5.25%, with any
principal balance due at maturity on June 1, 2018 and secured by the building
and land.  Principal balance is $794,929 at September 30,
2010.





The
second loan is a secured promissory note guaranteed by the U.S. Small Business
Administration, requiring monthly payments of principal and interest at a rate
of 5.5% until May 1, 2028.   Principal balance is $814,857 at
September 30, 2010.





On
November 28, 2008 the Company entered into a loan agreement to finance new
production equipment.  The $1,070,000 bank note is secured by specific
equipment, requiring monthly payments of $21,000 of principal and interest; rate
equal to the prime rate; maturity date of July 1, 2012. Principal balance is
$678,307 at September 30, 2010.





On
January 22, 2007 the Company refinanced its equipment loan.  The new
loan term requires monthly principal payments and interest at a rate equal to
the prime rate, maturity date of February 1, 2011.  The loan is
secured by a first lien on all business personal property.  Principal
balance is $18,831 at September 30, 2010.





Maximum
aggregate annual principal paymentsfor
years subsequentto
September 30, 2010 are as follows:





2012
                        
                        
                        437,4212013
                        
                        
                        546,2842014
                        
                        
                        342,6182016
      and thereafter
                        
                        
                        1,509,197$
                        3,557,545





The loan
agreements with the bank require the Company to maintain a minimum amount of
tangible net worth and meet certain operating ratios.  The Company was
not in compliance with such covenants as of September 30, 2010, for which a
waiver was obtained from the bank on November 9, 2010 which waived the covenants
through June 29, 2011.


NOTE
7 – EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS





For the
three months ended September 30, 2010 and 2009, the Company’s results of
operations include compensation expense for stock options granted and restricted
shares vested under its equity incentive plans. The amount recognized in the
financial statements related to stock-based compensation was $103,598 and
$54,894, based on the grant date fair value of all options vested during the
three months ended September 30, 2010 and 2009 respectively.





In 2002
the Company established the 2002 Stock Option Plan (“SOP”) whereby a stock
option committee was given the discretion to grant up to 579,107 options to
purchase shares to key employees of the Company at exercise prices and dates to
be determined by the directors.  During the year ended June 30, 2010,
150,000 options to purchase shares were granted to employees exercisable at
prices from $0.49 to $0.75 based on vesting terms of April 2011 through June
2013, and exercisable through June 2018, options for 87,907 shares expired, and
options for 75,000 shares were cancelled.  During the three month
period ended September 30, 2010 there were 100,000 options
cancelled.  No options to purchase shares were to employees during the
three month period ended September 30, 2010. At September 30, 2010 there were
375,000 options outstanding with exercise prices from $0.49 to $3.59 and
exercise dates up to June 2018.  A further 204,107 options are
available to be issued under the SOP.





During
2005 the Company established an Employee Stock Option Scheme (the “2005 Plan”)
that authorizes the board of directors or a committee thereof, to grant options
to employees and directors of the Company or any affiliate of the Company. The
maximum number of options that may be granted in aggregate at any time under
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 in underlying options under the Company’s stock option and
incentive plans. Options issued expire five years after the vesting date. No
options were issued or exercised during year ended June 30, 2010 and the three
months ended September 30, 2010.  During the year ended June 30, 2010,
200,000 options were cancelled.  At September 30, 2010, options to
purchase 50,000 shares with an exercise price of $3.82 and an expiration date of
June 2012 are outstanding.  A further 405,838 options are available to
be issued under the 2005 Plan.


-12-





During
2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”)
that authorizes the board of directors or a committee thereof, to grant options
to purchase up to a maximum of 1,500,000 shares to employees and directors of
the Company at exercise prices to be determined by the administrator but not
less than 100% (110% for a 10% shareholder) of the market value on the date
granted.  During the year ended June 30, 2010 options to purchase
821,500 shares were granted to employees and directors exercisable at prices
from $0.95 to $1.39 based on vesting terms of September 2010 through April 2013
and exercisable at various dates through April 2018.  During the three
months ended September 30, 2010, 60,000 options were granted to employees and
18,200 options were cancelled.  Options to purchase an additional
166,208 shares are available to be issued under the 2007 plan.





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





In
aggregate for all plans, at September 30, 2010, the Company has a total of
2,258,792 options outstanding and 776,153 options available for future grant
under the SOP, 2005 and the 2007 Plans.





Information
with respect to stock option activity under the employee and director plans is
as follows:


Stock Option Activity
                              
                              Number of
                                Options
                              
                              
                              Weighted-
                                Average
                                Exercise Price
                                Per ShareBalance
      at June 30, 2009
                              
                              
                              1,424,354
                              
                              
                              $
                              3.24Options
      granted
                              
                              
                              1,471,500
                              
                              
                              
                              1.22Options
      forfeited
                              
                              
                              (578,862
                              )
                              
                              
                              3.49Options
      exercised
                              
                              
                              -Balance
      at June 30, 2010
                              
                              
                              2,316,992
                              
                              
                              
                              1.92Options
      granted
                              
                              
                              60,000
                              
                              
                              
                              0.63Options
      forfeited
                              
                              
                              (118,200
                              )
                              
                              
                              3.25Options
      exercised
                              
                              
                              -Balance
      at September 30, 2010
                              
                              
                              2,258,792
                              
                              
                              $
                              1.82





The
following table summarizes information relating to the stock options outstanding
at September 30, 2010:





Outstanding
                          
                          
                          ExercisableRange of Exercise Prices
                          
                          Number of
                            Options
                          
                          
                          Average
                            Remaining
                            ContractualLife
                            (in years)
                          
                          
                          Weighted
                            Average
                            Exercise Price
                          
                          
                          Number of
                            Options
                          
                          
                          Weighted
                            Average
                            Exercise Price$0.49
      to $1.69
                          
                          
                          1,708,792
                          
                          
                          
                          6.3
                          
                          
                          $
                          1.24
                          
                          
                          
                          711,292
                          
                          
                          $
                          1.36$3.59
      to $3.82
                          
                          
                          550,000
                          
                          
                          
                          3.5
                          
                          
                          $
                          3.61
                          
                          
                          
                          500,000
                          
                          
                          $
                          3.61Balance
      at September 30, 2010
                          
                          
                          2,258,792
                          
                          
                          
                          
                          
                          
                          $
                          1.82
                          
                          
                          
                          1,211,292
                          
                          
                          $
                          2.29





During
the three months ended September 30, 2010 options to purchase 60,000 shares were
granted to employees exercisable at prices from $0.60 to $0.64 per share based
on various service based vesting terms from August 2011 through August 2013 and
exercisable at various dates through August 2018.





The fair
value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing method. The Company uses historical data to
estimate the expected price volatility, the expected option life and the
expected forfeiture rate. The Company has not made any dividend payments nor
does it have plans to pay dividends in the foreseeable future. The following
assumptions were used to estimate the fair value of options granted during the
three months ended September 30 using the Black-Scholes option-pricing
model:


-13-





2010
                      
                      
                      2009Expected
      life of option (years)
                      
                      2.5-4.75
                      
                      
                      2.5-4.75Risk-free
      interest rate
                      
                      .64
      - 1.4%
                      
                      
                      1.2
      - 1.4%Assumed
      volatility
                      
                      62
      - 108%
                      
                      
                      62
      - 70%Expected
      dividend rate
                      
                      0
                      
                      
                      0Expected
      forfeiture rate
                      
                      0
                      
                      
                      0





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.





A summary
of the status of unvested employee stock options as of September 30, 2010 and
June 30, 2009 and changes during the three months and year then ended, is
presented below:


Unvested Stock Option Activity
                        
                        Number of
                          Options
                        
                        
                        Weighted-
                          Average
                          Grant Date
                          Fair Value Per
                          ShareBalance
      at June 30, 2009
                        
                        
                        371,533
                        
                        
                        $
                        0.77Granted
                        
                        
                        1,471,500
                        
                        
                        
                        0.58Vested
                        
                        
                        (662,328
                        )
                        
                        
                        0.49Forfeited
                        
                        
                        (193,205
                        )
                        
                        
                        0.29Balance
      at June 30, 2010
                        
                        
                        987,500
                        
                        
                        
                        0.62Granted
                        
                        
                        60,000
                        
                        
                        
                        0.39Vested
                        
                        
                        -
                        
                        
                        
                        -Forfeited
                        
                        
                        (118,200
                        )
                        
                        
                        0.69Balance
      at September 30, 2010
                        
                        
                        929,300
                        
                        
                        $
                        0.61





Total
fair value of options granted in the three months ended September 30, 2010 and
2009 was $22,305 and $151,420, respectively.  At September 30, 2010
there was $316,927 in unrecognized compensation cost related to unvested stock
options, which is expected to be recognized over the next 3 years.





During
the fourth quarter of fiscal 2010 the Company agreed to compensate its directors
with restricted stock units (“RSUs”) rather than cash.  As a result
included in accrued compensation and benefits at September 30, 2010 is $182,500
related to these awards. The RSUs are classified as liability awards because the
RSUs will be paid in cash upon vesting. The RSU award liability is measured at
its fair value at the end of each reporting period and, therefore, will
fluctuate based on the performance of the Company’s common stock.





NOTE
8 - NON RELATED PARTY WARRANTS





At
September 30, 2010 there were outstanding warrants to purchase 1,121,875 shares
acquired by certain purchasers of Company shares in March 2010 exercisable at
$1.04 per share and which expire in September 2015.





At
September 30, 2010 there were outstanding warrants to purchase 358,333 shares
acquired by certain purchasers of Company shares in August 2009 exercisable at
$1.33 per share and which expire in August 2015.





At
September 30, 2010 there were outstanding warrants to purchase 120,023 shares
acquired by Empire Financial Group, Ltd. in 2006 exercisable at $3.23 per share
and which expire on in September 2011.





At
September 30, 2010 there were outstanding warrants to purchase 50,000 shares
acquired by Empire Financial Group, Ltd. as part of the underwriting
compensation in connection with our United States public offering which are
exercisable at $7.20 per share and which expire in September 2012.





At
September 30, 2010 there are warrants to purchase 195,800 shares issued and
outstanding to Strategic Growth International in connection with capital raising
activities in 2006 and 2007, with expiration dates between March 2011 and
September 2012 and with exercise prices of between $3.75 and
$7.20.


-14-


The table
below summarizes non-related party warrant balances:





Stock Warrants
                      Non-related parties
                    
                    Number of
                      Warrants
                    
                    
                    Weighted-
                      Average
                      Exercise Price
                      Per ShareBalance
      at June 30, 2009
                    
                    
                    365,823
                    
                    
                    $
                    4.41Warrants
      granted
                    
                    
                    1,480,208
                    
                    
                    $
                    1.11Warrants
      expired
                    
                    
                    -Warants
      exercised
                    
                    
                    -Balance
      at June 30, 2010
                    
                    
                    1,846,031
                    
                    
                    $
                    1.76Warrants
      granted
                    
                    
                    -Warrants
      expired
                    
                    
                    -Warants
      exercised
                    
                    
                    -Balance
      at September 30, 2010
                    
                    
                    1,846,031
                    
                    
                    $
                    1.76





NOTE
9 – SECURITIES PURCHASE AGREEMENT and DEBENTURE NOTES RECEIVABLE AND
PAYABLE





On August
30, 2010, the Company entered into an amended and restated securities purchase
agreement (“Socius Securities Purchase Agreement”) with Socius CG II, Ltd.
(“Socius”). Pursuant to the Socius Securities Purchase Agreement we have the
right over a term of two years, subject to certain conditions, to require Socius
to purchase up to $10 million of redeemable subordinated debentures and/or
shares of redeemable Series A preferred stock in one or more tranches. The
debentures bear interest at an annual rate of 10% and the shares of Series A
preferred stock accumulate dividends at the same rate. Both the debentures and
the shares of Series A preferred stock are redeemable at our election at any
time after the one year anniversary of issuance. Neither the debentures nor the
Series A preferred shares are convertible into common stock. Shares of Series A
preferred stock were subsequently authorized on November 10, 2010 (see Note 12).
Upon authorization, the outstanding debentures were automatically converted into
shares of Series A preferred stock.


Under the
Socius Securities Purchase Agreement, in connection with each tranche Socius
will be obligated to purchase that number of shares of our common stock equal in
value to 135% of the amount of the tranche at a per share price equal to the
closing bid price of the common stock on the trading day preceding our delivery
of the tranche notice (the “Investment Price”).  Socius may pay for
the shares it elects to purchase under this investment right at its option, in
cash or a secured promissory note.  Any such promissory note will bear
interest at 2.0% per year and be secured by securities owned by Socius with a
fair market value equal to the principal amount of the promissory note. The
entire principal balance and interest on the promissory note is due and payable
on the later of the fourth anniversary of the date of the promissory note or
when we have redeemed all debentures issued by us to Socius under the Socius
Securities Purchase Agreement, and may be applied by us toward the redemption of
debentures or shares of Series A preferred stock held by Socius.





Our
ability to submit a tranche notice is subject to certain conditions including
that: (1) a registration statement covering our sale of shares of common stock
to Socius in connection with the tranche is effective and (2) the issuance of
such shares would not result in Socius and its affiliates beneficially owning
more than 9.99% of our common stock.





Under the
terms of the Socius Securities Purchase Agreement, the Company is obligated to
pay Socius a commitment fee in the form of shares of common stock or cash, at
the option of the Company. The amount of the commitment fee was $500,000 if it
is paid in cash and $588,235 if it is paid in shares of common stock. Payment of
the commitment fee will occur 50% at the time of the first tranche and 50% at
the time of the second tranche. If not earlier paid, the commitment fee is
payable in full on the six-month anniversary of the effective date of the Socius
Securities Purchase Agreement.





On
September 2, 2010 the Company delivered the first tranche notice under the
Socius Securities Purchase Agreement pursuant to which Socius purchased from us
$517,168 of debentures.  The closing of the sale of debentures
occurred on September 20, 2010.  In connection with the tranche, (1)
Socius purchased 1,163,629 shares of common stock for a total purchase price of
$698,177 and at a per share purchase price of $0.60 and (2) we issued to Socius
490,196 shares of common stock in payment of the commitment fee payable by us to
Socius in connection with the initial tranche under the securities purchase
agreement. As consideration for the common stock it purchased, Socius issued a
secured promissory note maturing, the later of September 2, 2014 or when all
debenture notes payable or Series A preferred shares are
redeemed.  Management expects to redeem the Preferred Shares on
September 2, 2014.  The promissory note is recorded at a discount of
$183,922 determined by discounting the promissory note at a rate of
10%.  The promissory note is reported in the stockholders equity
section of the Company’s September 30, 2010 balance sheet because the promissory
note was received in exchange for the issuance of common stock.
 There is
an additional commitment fee of $294,218 due to Socius under the Socius
Securities Purchase Agreement as of September 30, 2010.
  -15-


NOTE
10 – COMMITMENTS





The
Company leases its Australian research and development facility from a
non-related Australian company expiring October 31, 2011.  The current
rental is $72,170 per annum (A$72,431) and is subject to an annual CPI
adjustment. Rent expense was $20,592 and $15,188 for the three months ended
September 30, 2010 and 2009, respectively.  The future payments
required under the terms of the lease are as follows:





Fiscal
      Year 2011
                    
                    $
                    72,170Fiscal
      Year 2012
                    
                    
                    6,014Total
                    
                    $
                    78,184





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





NOTE
11 - 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 $9,855 and $22,695 for
the three months ended September 30, 2010 and 2009, respectively.





NOTE 12 -
SUBSEQUENT EVENTS





Subsequent
to the end of the period covered by this Quarterly Report on Form 10-Q, on
October 12, 2010, the Company entered into Stock Purchase Agreements with
certain investors providing for the sale of a total of 3,329,466 shares of the
Company’s common stock for an aggregate purchase price of $1,435,000 at a price
per share of $0.431 which was the closing price of the Company’s common stock on
October 12, 2010.  $425,000 of these shares were purchased by members
of the Company’s board of directors.  2,111,369 of these shares were
offered by the Company pursuant to it universal shelf registration statement on
Form S-3.  The balance of the shares were sold in a private placement
transaction.  The net proceeds to ZBB, after deducting $20,000 of
offering expenses, were $1,415,000.  Proceeds are to be used for general
corporate purposes.


At the
annual of meeting of shareholder held on November 10, 2010, the Company’s
shareholders approved the Company’s 2010 Omnibus Long-Term Incentive Plan (the
“Omnibus Plan”) and approved an amendment to the Company’s Articles of
Incorporation to authorize a class of undesignated preferred
stock.
 The
Omnibus Plan authorizes the board of directors or a committee thereof, to grant
the following types of equity awards under the Omnibus
Plan:  Incentive Stock Options (“ISOs”), Non-qualified Stock Options
(“NSOs”), Stock Appreciation Rights (“SARs”), Restricted Stock, Restricted Stock
Units (“RSUs”), cash- or stock-based Performance awards (as defined in the
Omnibus Plan) and other stock-based awards.The number of shares of
our common stock reserved for issuance under the Omnibus Plan is 4,000,000
shares.
 On
November 10, 2010, in accordance with the Company’s Director Compensation Policy
a total of 511,143 RSUs were granted to the Company’s directors in payment of
directors fees through November 2011, a total of 574,242 RSUs previously issued
to the Company’s directors pursuant to the Company’s Director Compensation Plan
and which provided for share settlement were converted to stock settled RSUs,
and 75,000 RSUs were granted to the Company’s President.




The
amendment to the Company’s Articles of Incorporation authorized a class of
undesignated preferred stock and  gives the Board “blank check”
preferred stock authority (the “Amendment”).  The term “blank check”
preferred stock refers to undesignated preferred stock for which the Board of
Directors has discretion to designate one or more series of the preferred stock,
with the powers, preferences and rights of each series to be fixed by the Board
in their discretion from time to time in the future.  The Amendment
authorizes a class of undesignated preferred stock with a par value of $0.01 and
grants our Board of Directors the authority to issue up to 10,000,000 shares of
preferred stock with such powers, preferences and rights as our Board of
Directors may fix and determine.





On
November 10, 2010, the Company’s board of directors approved a certificate of
designation of preferences, rights and limitations (the “Certificate of
Designations”) to authorize shares of Series A preferred stock in accordance
with the terms of the Amended and Restated Securities Purchase Agreement dated
August 31, 2010 between the Company and Socius CG II, Ltd. (the “Socius
Securities Purchase Agreement”).  Upon the authorization of Series A
preferred stock and in accordance with the terms of the Socius Securities
Purchase Agreement, the $517,168 of outstanding debentures issued by the Company
to Socius CG II, Ltd. on September 2, 2010 were converted into shares of Series
A preferred stock.  In addition, in accordance with the Socius
Securities Purchase Agreement, any future tranches under the Socius Securities
Purchase Agreement will involve shares of Series A preferred stock instead of
debentures.


-16-





On
November 12, 2010 the Company delivered the second tranche notice under the
Socius Securities Purchase Agreement (see Note 9) pursuant to which Socius will
be required to purchase from us $490,000 of Series A preferred
stock.  The closing of the sale of preferred stock is expected to
occur on November 29, 2010.  In connection with the tranche, (1)
Socius is expected to purchase 906,165 shares of common stock for a total
purchase price of $661,500 and at a per share purchase price of $0.73 and (2) we
expect to issue to Socius 402,901 shares of common stock in payment of the
commitment fee payable by us to Socius in connection with the second tranche
under the securities purchase agreement. As consideration for the Common Stock
Socius is expected to purchase, it is anticipated that Socius will issue a
secured promissory note maturing, the later of November 12, 2014 or when Series
A preferred shares are expected to be redeemed by the Company.
  -17-




ZBB
ENERGY CORPORATION




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




Introduction




The
following information should be read in conjunction with the financial
statements and notes thereto in Part I, Item 1 of this Quarterly Report and with
the audited financial statements and notes thereto and Management’s Discussion
and Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the fiscal year ended June 30, 2010 as filed by
us with the SEC on September 10, 2010.




Risks
and Uncertainties




The
following discussion of the consolidated financial position and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and notes thereto included elsewhere in this form 10-Q and
the Company’s annual report filed on form 10-K for the fiscal year ended June
30, 2010. In addition to historical information, this discussion contains
forward-looking statements such as statements of the Company’s expectations,
plans, objectives and beliefs. These statements use such words as “may,” “will,”
“expect,” “anticipate,” “believe,” “plan,” and other similar
terminology.





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


·
            Our
      stock price could be volatile and our trading volume may fluctuate
      substantially.


·
            We
      have incurred losses and anticipate incurring continuing
      losses.


·
            We
      will need additional financing.


·
            If
      we fail to adequately manage our resources, it could have a severe
      negative impact on our financial results or stock
  price.


·
            We
      may be unsuccessful in our efforts to obtain federal government grants
      which could harm our business and results of operations.  We
      also may be unsuccessful in our efforts to monetize government tax credits
      and other off balance sheet assets.


·
            Our
      success depends on our ability to retain our managerial personnel and to
      attract additional personnel.


·
            Businesses
      and consumers might not adopt alternative energy solutions as a means for
      obtaining their electricity and power needs, and therefore our revenues
      may not increase, and we may be unable to achieve and then sustain
      profitability.


·
            Our
      industry is highly competitive and we may be unable to successfully
      compete.


·
            Unless
      we keep pace with changing technologies, we could lose existing customers
      and fail to win new customers.


·
            If
      our products do not perform as promised, we could experience increased
      costs, lower margins and harm to our
reputation.


·
            Our
      relationships with our strategic partners may not be successful and we may
      not be successful in establishing additional partnerships, which could
      adversely affect our ability to commercialize our products and
      services.


·
            Shortages
      or delay of supplies of component parts may adversely affect our operating
      results until alternate sources can be
  developed.


·
            We
      have no experience manufacturing our products on a large-scale basis and
      may be unable to do so at our current
facility.


·
            We
      market and sell, and plan to market and sell, our products in numerous
      international markets. If we are unable to manage our international
      operations effectively, our business, financial condition and results of
      operations could be adversely
affected.


·
            Currency
      translation and transaction risk may adversely affect our business,
      financial condition and results of
operations.


·
            The
      success of our business depends on our ability to develop and protect our
      intellectual property rights, which could be
  expensive.


·
            We
      may be subject to claims that we infringe the intellectual property rights
      of others, and unfavorable outcomes could harm our
    business.


·
            If
      our common stock is de-listed from the NYSE AMEX, the common stock will
      become less liquid.


·
            We
      have never paid cash dividends and do not intend to do
  so.





New
Accounting Pronouncements




None


-18-





Critical
Accounting Policies and Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America and related disclosures
require management to make estimates and assumptions.




We
believe that the following are our most critical accounting estimates and
assumptions the Company must make in the preparation of its consolidated
financial statements and related disclosures:




Use
of Estimates




The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions. These estimates and assumptions affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. It is reasonably possible that the
estimates we have made may change in the near future. Significant estimates
underlying the accompanying consolidated financial statements include those
related to:
  ·
              the
      timing of revenue recognition;
 ·
              the
      allowance for doubtful accounts;
 ·
              valuations
      of excess and obsolete inventory;
 ·
              the
      lives and recoverability of equipment and other long-lived assets such as
      goodwill;
 ·
              restructuring,
      reorganization, relocation and severance
costs;
 ·
              warranty
      liabilities;
 ·
              tax
      valuation allowances; and
 ·
              stock-based
      compensation.




Income
Taxes




The
Company records deferred income taxes in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 740,
“Accounting for Income Taxes.” This ASC requires recognition of deferred income
tax assets and liabilities for temporary differences between the tax basis of
assets and liabilities and the amounts at which they are carried in the
financial statements, based upon the enacted tax rates in effect for the year in
which the differences are expected to reverse. The Company establishes a
valuation allowance when necessary to reduce deferred income tax assets to the
amount expected to be realized.  There were no net deferred income tax
assets recorded as of September 30, 2010.




The
Company applies a more-likely-than-not recognition threshold for all tax
uncertainties as required under ASC Topic 740, which only allows the recognition
of those tax benefits that have a greater than fifty percent likelihood of being
sustained upon examination by the taxing authorities. The Company’s management
has reviewed the Company’s tax positions and determined there were no
outstanding or retroactive tax positions with less than a 50% likelihood of
being sustained upon examination by the taxing authorities as of September 30,
2010 and June 30, 2010.




The
Company’s U.S. Federal, Wisconsin, and Australian income tax returns for the
years ended June 30, 2005 through June 30, 2010 are subject to examination by
major taxing authorities.


-19-




Property,
Plant and Equipment




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




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:





EstimatedUseful
                LivesManufacturing
      Equipment
              3 -
      7 yearsOffice
      Equipment
              3 -
      7 yearsBuilding
      and improvements
              7 -
      40 years





Impairment
of Long-Lived Assets




In
accordance with FASB ASC topic 360, "Impairment or Disposal of Long-Lived
Assets," the Company assesses potential impairments to its long-lived assets
including property, plant and equipment when there is evidence that events or
changes in circumstances indicate that the carrying value may not be
recoverable.





If such
an indication exists, the recoverable amount of the asset 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.  Management has determined that
there are no long-lived assets impaired as of September 30, 2010 and June 30,
2010.





Goodwill





Goodwill
is recognized as the excess cost of an acquired entity over the net amount
assigned to assets acquired and liabilities assumed. Goodwill is not amortized
but reviewed for impairment annually as of June 30 or more frequently if events
or changes in circumstances indicate that its carrying value may be
impaired.  These conditions could include a significant change in the
business climate, legal factors, operating performance indicators, competition,
or sale or disposition of a significant portion of a reporting
unit.





Testing
for the impairment of goodwill involves a two step process. The first step of
the impairment test requires the comparing of a reporting units fair value to
its carrying value. If the carrying value is less than the fair value, no
impairment exists and the second step is not performed. If the carrying value is
higher than the fair value, there is an indication that impairment may exist and
the second step must be performed to compute the amount of the impairment. In
the second step, the impairment is computed by estimating the fair values of all
recognized and unrecognized assets and liabilities of the reporting unit and
comparing the implied fair value of reporting unit goodwill with the carrying
amount of that unit’s goodwill.  Based on this method, the Company
determined fair value as evidenced by market capitalization, and concluded that
there was no need for an impairment charge as of September 30, 2010 and June 30,
2010.




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.


-20-





The
Company evaluates the recoverability of its slow moving or obsolete inventories
at least quarterly. The Company estimates the recoverable cost of such inventory
by product type while considering factors such as its age, historic and current
demand trends, the physical condition of the inventory as well as assumptions
regarding future demand. The Company’s ability to recover its cost for slow
moving or obsolete inventory can be affected by such factors as general market
conditions, future customer demand and relationships with
suppliers.





Revenue
Recognition





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





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





Revenues
from government funded research and development contracts are recognized
proportionally as costs are incurred and compared to the estimated total
research and development costs for each contract. In many cases, the Company is
reimbursed only a portion of the costs incurred or to be incurred on the
contract. Government funded research and development contracts are generally
multi-year, cost-reimbursement and/or cost-share type contracts. The Company is
reimbursed for reasonable and allocable costs up to the reimbursement limits set
by the contract.





Advanced
Engineering and Development Expenses





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 costs are separately identifiable, incurred and funded by advanced
engineering and development type agreements with outside parties; they will be
shown separately on the consolidated statements of operations as a “cost of
engineering and development revenues”.





Warranty
and Contract Reserves





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





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





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





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


-21-





Loss
per Share





The
Company follows the FASB ASC topic 260, “Earnings per Share,” provisions which
require the reporting of both basic and diluted earnings (loss) per
share.  Basic earnings (loss) per share is computed by dividing net
income (loss) available to common stockholders by the weighted average number of
common shares  outstanding for the period.  Diluted earnings
(net loss) per share reflect the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. In accordance with the FASB ASC topic 260, any anti-dilutive
effects on net income (loss) per share are excluded (as of the three months
ended September 30, 2010 and 2009 there were 4,104,823 and 2,448,510,
respectively, of underlying options and warrants that are
excluded).





Stock-Based
Compensation





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





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





The
Company only recognizes expense to its statements 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, for all other awards. See Note 7 below.





The
Company has agreed to compensate its directors with restricted stock units
(“RSUs”) rather than cash.  The RSUs are classified as liability
awards because the RSUs will be paid in cash upon vesting. The RSU award
liability is measured at its fair value at the end of each reporting period and,
therefore, will fluctuate based on the performance of the Company’s
stock.





Results
of Operations





Three
months ended September 30, 2010 compared with the three months ended September
30, 2009:




Revenue
and Other income:




Our
revenues for the three months ended September 30, 2010 and 2009 were $0 and
$811,913. This was the result of a decrease in revenues of $666,726 from
commercial product sales and revenues, and a $145,187 decrease in engineering
and development revenues as compared to the three months ended September 30,
2009. The decrease in commercial product sales and revenues is primarily the
result of the need for PECC inverter certification to UL standard 1741 for
certain orders, which is expected in early calendar year 2011, and some
temporary installation issues with an order shipped during the quarter. The
decrease in engineering and development revenues for this quarter is due to the
Company completing all final accounting and the final research report to
complete the entire Advanced Electricity Storage Technologies project ("AEST")
with the Commonwealth of Australia. Final submission of the required financial
information to the Commonwealth of Australia is expected to be completed in
November 2010. The Company anticipates it will receive additional revenues from
the Commonwealth of Australia in fiscal 2011 of approximately $181,000, upon
acceptance by the Commonwealth of Australia.




Other
income for the three months ended September 30, 2010 reflects a decrease in
interest income of $24,706 compared to the three months ended September 30,
2009, due primarily to decreasing investment balances and lower interest rates
on invested funds.




Cost
and Expenses and Other Expense:




Total
costs and expenses for the three months ended September 30, 2010 and 2009 were
$2,004,085 and $2,262,848, respectively. This decrease of $258,763 in the three
months ended September 30, 2010 was primarily due to the following:




·
              decreased
      costs of product sales of $646,102 because products that shipped in the
      quarter ended September 30, 2010 were not fully commissioned and accepted
      by the customer and a decrease in cost of engineering and development
      revenues of $294,455 due to a decrease in activities required under the
      AEST contract; and




-22-


·
            increases
      in advanced engineering and development expenses of approximately $514,000
      primarily due to an increase in the Company’s engineering and development
      activities for its next generation battery module and the PECC systems;
      and


·
            legal
      and accounting fees increase of approximately $180,000 related to certain
      accounting matters.





Other
expenses for the three months ended September 30, 2010 and 2009 consisted
primarily of interest expenses of $32,007 and $32,032,
respectively.




Net
Loss:




Our net
loss for the three months ended September 30, 2010 and 2009 was $2,034,032 and
$1,476,231, respectively, resulting in a $558,071 increase in net loss as
compared to the three months ended September 30, 2009.  This increase
in loss was primarily the result of the lack of revenues in the three months
ended September 30, 2010, and increases in advanced engineering and development
expenses and selling, general and administrative expenses, as described
above.




Liquidity
and Capital Resources:




Since our
inception, our research, advanced engineering and development, and operations
were primarily financed through debt and equity financings, and government
research contracts.  Total paid in capital as of September 30, 2010
was $49.5 million.   We had a cumulative deficit of $48,928,979
as of September 30, 2010 compared to a cumulative deficit of $46,894,677 as of
June 30, 2010.  At September 30, 2010 we had a working capital deficit
of $1,607,194 compared to a June 30, 2010 working capital deficit of
$800,204.  Our shareholders’ equity (deficiency in assets) as of
September 30, 2010 and June 30, 2010 was ($950,294) and $1,451,277,
respectively.


On August
30, 2010 we entered into an amended and restated securities purchase agreement
(“Socius Securities Purchase Agreement”) with Socius CG II, Ltd. (“Socius”).
Pursuant to the Socius Securities Purchase Agreement we have the right over a
term of two years, subject to certain conditions, to require Socius to purchase
up to $10 million of redeemable subordinated debentures and/or shares of
redeemable Series A preferred stock in one or more tranches.  The
debentures bear interest at an annual rate of 10% and the shares of Series A
preferred stock accumulate dividends at the same rate.  Both the
debentures and the shares of Series A preferred stock are redeemable at our
election at any time after the one year anniversary of
issuance.  Neither the debentures nor the Series A preferred shares
are convertible into common stock.  Shares of Series A preferred stock
were subsequently authorized.  Upon authorization, the outstanding
debentures were automatically converted into shares of Series A preferred stock.
Under the Socius Securities Purchase Agreement, in connection with each tranche
Socius will be obligated to purchase that number of shares of our common stock
equal in value to 135% of the amount of the tranche at a per share price equal
to the closing bid price of the common stock on the trading day preceding our
delivery of the tranche notice (the “Investment Price”). Socius may pay for the
shares it purchases at its option, in cash or with a secured promissory note.
Our ability to submit a tranche notice is subject to certain conditions
including that: (1) a registration statement covering our sale of shares of
common stock to Socius in connection with the tranche is effective and (2) the
issuance of such shares would not result in Socius and its affiliates
beneficially owning more than 9.99% of our common
stock.


On
September 2, 2010 we delivered the first tranche notice under the Socius
Securities Purchase Agreement pursuant to which Socius purchased from us
$517,168 of debentures.  The closing of the sale of debentures
occurred on September 20, 2010.  In connection with the tranche, (1)
Socius purchased 1,163,629 shares of common stock for a total purchase price of
$698,177 and at a per share purchase price of $0.60 and (2) we issued to Socius
490,196 shares of common stock in payment of the commitment fee payable by us to
Socius in connection with the initial tranche under the securities purchase
agreement Socius paid for the shares of common stock it purchased with a secured
promissory note maturing the later of September 2, 2014 or we have redeemed all
debentures issued by us to Socius under the Socius Securities Purchase
Agreement.





On May 1,
2009 we filed a Registration Statement on Form S-3 with the Securities and
Exchange Commission (SEC) for a $10 million universal shelf, which was declared
effective by the SEC on May 13, 2009.  We took this action as a
measure in anticipation of our possible future needs to raise additional
investment capital to fund additional working capital and further capital
expenditures.  On August 18, 2009, we used this universal shelf
registration statement to complete a registered direct sale of 1,791,667 units
at $1.20 per unit consisting of an aggregate of 1,791,667 shares of common stock
and warrants to purchase 358,333 shares of common stock at an exercise price of
$1.33 per share.  The proceeds to ZBB after deducting placement agent
fees and offering expenses were approximately $1.9 million.  On March
9, 2010, we used this universal shelf registration statement to complete a
registered direct sale 2,243,750 units at $.80 per unit consisting of an
aggregate of 2,243,750 shares of common stock and warrants to purchase 1,121,875
shares of common stock at an exercise price of $1.04 per share.  The
proceeds to ZBB after deducting placement agent fees and offering expenses were
approximately $1.6 million.





In
December 2009 we were awarded a $1.3 million Wisconsin Clean Energy Business
Loan through the American Recovery and Reinvestment Act.  We closed
this loan transaction in May 2010 and we received $1,149,000 on the loan as of
September 30, 2010, with $141,000 remaining to draw.


-23-





In
conjunction with our strategic partners we are actively involved in submitting
proposals to the Federal Government in response to Funding Opportunity
announcements issued as a result of the American Recovery and Reinvestment Act.
These proposals cover opportunities for plant expansion, Smart Grid initiative,
and renewable energy initiatives as well as research and development
opportunities for applications where the Company’s technology could bring a
transformational change to market applications that we currently do not
address.  However, there can be no assurance we will receive any
government funding through these activities. We also
have $38 million of net operating loss carryforwards and $14.675 million of
Department of Energy sponsored tax credits. The tax credits require the Company
to invest approximately $50 million in plant and equipment, which the Company
has not done.  We are exploring ways to monetize or to use these
benefits.  However, there can be no assurance that these efforts will
prove successful.





On
October 12, 2010, we entered into Stock Purchase Agreements with certain
investors providing for the sale of a total of 3,329,466 shares of the Company’s
common stock for an aggregate purchase price of $1,435,000 at a price per share
of $0.431 which was the closing price of the Company’s common stock on October
12, 2010.  $425,000 of these shares were purchased by members of the
Company’s Board of Directors.  2,111,369 of these shares were offered
by the Company pursuant to it universal shelf registration statement on Form
S-3.  The balance of the shares were sold in a private placement
transaction. In addition, on November 12, 2010 we delivered the second tranche
notice under the Socius Securities Purchase Agreement pursuant to which Socius
will be required to purchase from us $490,000 of Series A preferred
stock.  The closing of the sale of preferred stock is expected to
occur on November 29, 2010.  In connection with the tranche, (1)
Socius is expected to purchase 906,165 shares of common stock for a total
purchase price of $661,500 and at a per share purchase price of $0.73 and (2) we
expect to issue to Socius 402,901 shares of common stock in payment of the
commitment fee payable by us to Socius in connection with the second tranche
under the securities purchase agreement. We anticipate that Socius will pay for
the shares of common stock it is expected to purchase with a secured promissory
note maturing, the later of November 12, 2014 or when all debenture notes
payable or series of preferred shares are redeemed


Our
investment capital requirements will depend upon numerous factors, including our
ability to control expenses, the progress of our engineering and development
programs, the success of our marketing and sales efforts and our ability to
obtain alternative funding sources such as government grants.  In
order to actively manage financing risk, the board of directors has worked with
management to carefully consider financing alternatives and to implement cost
containment measures.  Actions taken by the board of directors and
management in fiscal 2010 and continuing into the current quarter include: 1)
execute an overall reduction in controllable expenses to preserve cash resources
including revising our non-employee director compensation policy so that fees
are paid in equity compensation instead of cash; 2) actively pursue additional
sources of capital to fund working capital and operating needs; 3) pursue
government grant and federal stimulus package opportunities;  and 4)
leverage the $1.3 million Wisconsin Clean Energy Business Loan that was awarded
in December 2009 through the American Recovery and Reinvestment
Act.





We
believe we have the necessary financing vehicles in place, including the Socius
Securities Purchase Agreement described above, the remainder of the $1.3 million
dollar Wisconsin Clean Energy Business loan to fund the Company for the next
fiscal year, and the $1,435,000 proceeds from the October 12, 2010 stock
offering.  However, there can be no assurances that unforeseen
circumstances will not jeopardize the Company’s ability to draw on these
financing vehicles.  Therefore, we are continuing to seek additional
sources of funds to add to the financing vehicles already in
place.  However, we have no commitments to obtain any additional
funds, and there can be no assurance such funds will be available on acceptable
terms or at all.  If we are unable to obtain such needed capital, our
financial condition and results of operations may be materially adversely
affected and we may not be able to continue operations.




Operating
Activities




For the
three months ended September 30, 2010, net cash used in operations was
$1,844,533. Cash used in operations resulted from a net loss of $2,034,302,
reduced by $189,681 in non-cash adjustments and $88 in net changes to working
capital. Increases in inventories of $100,710 were required to restock for
production start-up, offset by an increase in accounts payable of $213,142 due
to the extension of payment terms with suppliers. Accrued compensation and
benefits decreased by $188,314, primarily due to the payment of the balance due
under the severance agreement to the Company’s former CEO. Accrued expenses
decreased by $16,390 resulting from payment of these accrued expenses. Working
capital increased by $60,513 due to a net increase in deferred revenue relating
to customer deposits. Non-cash adjustments to operations included $103,598 of
stock based compensation expense, $86,083 of depreciation expense.


Investing
Activities




For the
three months ended September 30, 2010, net cash used by investing activities was
$75,755, resulting from cash used for the purchase of property and
equipment.


Financing
Activities




For the
three months ended September 30, 2010, net cash provided by financing activities
was $1,401,132 resulting from $1,673,296 in net proceeds from the issuance of
bank loans and debentures notes payable, offset by repayments of $114,853 of
principal on bank loans and notes payable and equity issuance costs totaling
$157,311 related to the Socius Securities Purchase Agreement.




Off-Balance
Sheet Arrangements




We have
no off-balance sheet arrangements as of September 30, 2010.
 -24-




Item
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




Not applicable for smaller reporting
companies.




Item
      4.
            CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures





Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended) as of the end of the period covered by this
report.  Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures were not effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC, and that material information
relating to the Company is accumulated and communicated to management, including
our principal executive officer and our principal financial officer, as
appropriate to allow timely decisions regarding required disclosures because of
the identification of a significant deficiency in our disclosure controls and
procedures as described further below.


Specifically,
management determined that the Company did not have procedures in place as of
September 30, 2010 for the review of compliance with debt
covenants.  The Company has remediated this deficiency subsequent to
September 30, 2010, by establishing a procedure under which compliance with debt
covenants is reviewed at each financial reporting date.




Changes
in Internal Controls




During
the period covered by this quarterly report on Form 10-Q, the Company has not
made any changes to its internal control over financial reporting (as referred
to in Paragraph 4(b) of the Certifications of the Company’s principal executive
officer and principal financial officer included as exhibits to this report)
that have materially affected, or are reasonably likely to affect the Company’s
internal control over financial reporting.




PART
II


OTHER
INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS




None




ITEM
      1A.
            RISK
      FACTORS




We
operate in a rapidly changing environment that involves a number of risks that
could materially affect our business, financial condition or future results,
some of which are beyond our control.  In addition to the other
information set forth in this report, the risks and uncertainties that we
believe are most important for you to consider are discussed in Part I, “Item
1A. Risk Factors” in our most recent Annual Report on Form 10-K and in any
subsequent Quarterly Reports on Form 10-Q.  Other than the factors set
forth below, there have been no material changes to the risk factors described
in those reports.




If
our stockholders’ equity continues to remain below the minimum requirement, our
common stock may be delisted from the NYSE Amex, which would cause our common
stock to become less liquid.




Our
shares have been listed on the NYSE Amex (formerly the American Stock Exchange)
since June 18, 2007.  We are required to comply with all reporting and
listing requirements on a timely manner and maintain our corporate governance
and independent director standards. The NYSE Amex imposes, among other
requirements, listing maintenance standards including minimum stockholders’
equity, minimum price and market capitalization requirements.





On
October 8, 2010, we reported that based on a review of our financial statements
for the fiscal year ended June 30, 2010 and informal discussions with the staff
of the NYSE Amex, we expect to receive a letter from the NYSE Amex informing us
that as of June 30, 2010 our stockholders’ equity was below the minimum amount
required by the NYSE Amex’s continued listing standards.  Receipt of
this letter would not have any immediate effect upon the listing of our common
stock.  Upon receipt of this letter we intend to submit a plan to the
NYSE Amex staff which will outline the actions and timeframe by which we intend
to cure the listing deficiency and to regain our compliance with the NYSE Amex’s
continued listing requirements.  If the NYSE Amex accepts our plan, we
will be able to continue our listing during the plan period and will be subject
to continued periodic review by the NYSE Amex staff. If our plan is not accepted
or is accepted but we do not make progress consistent with our plan during the
plan period, the NYSE Amex could initiate delisting
proceedings.


-25-





If the
NYSE Amex delists our common stock from trading for this reason or for failing
to meet any other ongoing listing requirements, we will be adversely affected
and our stock will become less liquid. There can be no assurance that our
securities will remain eligible for trading on the NYSE Amex.




ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS




None




ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES




None




ITEM
      5.
            OTHER
      INFORMATION




None




ITEM
      6.
            EXHIBITS




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


-26-




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 CORPORATIONNovember
      15, 2010
              By:
              /s/ Eric
      C. ApfelbachName:
              Eric
      C. ApfelbachTitle:
              Chief
      Executive Officer(Principal
      Executive Officer)November
      15, 2010
              By:
              /s/
      Scott W. ScampiniName:
              Scott
      W. ScampiniTitle:
              Executive
      Vice President and Chief Financial
                Officer(Principal
      financial officer andPrincipal
      accounting officer)


-27-


EXHIBIT
INDEX


Item 15(c)
Exhibits:




Exhibit
                No.
              
              Description
              
              Incorporated by Reference to4.1
              
              Warrant
      to Purchase Common Stock Issued to Socius CG II, Ltd. dated August 30,
      2010
              
              Incorporated
      by reference to Exhibit A-1 attached to the Amended and Restated
      Securities Purchase Agreement filed herewith as Exhibit 10  to
      the Company’s Current Report on Form 8-K filed on August 31,
      20104.2
              
              Form
      of Redeemable Subordinated Debenture
              
              Incorporated
      by reference to Exhibit A-4 attached to the Amended and Restated
      Securities Purchase Agreement filed as Exhibit 10  to the
      Company’s Current Report on Form 8-K filed on August 31,
    201010.1
              
              Amended
      and Restated Securities Purchase Agreement, dated August 30, 2010, by and
      between ZBB Energy Corporation and Socius CG II, Ltd.
              
              Incorporated
      by reference to Exhibit 10 to the Company’s Current Report on Form 8-K
      filed on August 31, 201010.2
              
              Employment
      agreement dated August 18, 2010 between  ZBB Energy Corporation
      and Scott Scampini
              
              Incorporated
      by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K
      filed on August 23, 201031.1
              
              Certification
      of Principal Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
              
              Certification
      of Principal Financial and Accounting Officer pursuant to Section 302 of
      the Sarbanes-Oxley Act of 200232.1
              
              Certification
      of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
              
              Certification
      of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


-28-