Document:

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                       1998 KEY EMPLOYEE STOCK OPTION PLAN

                                       OF

                             ZBB ENERGY CORPORATION

                                    ARTICLE 1

                      Establishment and Purpose of the Plan

     1.1 Establishment of Plan. ZBB Energy Corporation (the "Corporation")
hereby establishes the 1998 Key Employee Stock Option Plan of ZBB Energy
Corporation (the "Plan"). The effective date of this Plan shall be July 3, 1998.

     1.2 Purpose of Plan. The purpose of the Plan is to promote the growth and
development of the Corporation by providing certain key employees of the
Corporation with an opportunity to purchase shares of the Corporation's common
stock (the "Common Stock") to serve as an incentive to advance the interests of
the Corporation and to otherwise facilitate the efforts of the Corporation to
obtain and retain employees of outstanding ability.

                                   ARTICLE II

                                Legal Compliance

     It is the intent of the Corporation that all options granted under this
Plan (the "Options") shall be non-qualified stock options. It is the further
intent of the Corporation that the Plan conform in all respects with the
requirements of Rule 16b-3 of the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended ("Rule 16b-3"). To the extent that
any aspect of the Plan or its administration shall at any time be viewed as
inconsistent with the requirements of Rule 16b-3, as the same shall be amended
from time to time, such aspect shall be deemed to be modified, deleted or
otherwise changed as necessary to ensure continued compliance with such
provisions.

                                   ARTICLE III

                                 Administration

     This Plan shall be administered by the Option Committee of the Board of
Directors of the Corporation (the "Committee") consisting of Thomas Folliard,
Phillip Eidler and Robert Parry or such other members as the Board of Directors
of the Corporation may from time to time appoint; provided, however, that this
Plan shall be administered in accordance with the provisions hereinafter set
forth, and provided that if any key employee of the Corporation is also a member
of the Board of Directors of the Corporation then the number of options and the
other terms in relation to such options will be determined by the Board of
Directors of the Corporation and not the Committee.

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                                   ARTICLE IV

                            Stock Subject to the Plan

     4.1 Aggregate Shares. The aggregate number of shares of Common Stock which
may be issued upon the exercise of Options granted at any time under this Plan
shall be one million six hundred thousand (1,600,000) shares.

     4.2 Availability. The shares of Common Stock to be issued or delivered upon
the exercise of Options shall be made available, at the discretion of the
Committee, either from authorized but unissued shares or shares issued and
reacquired by the Corporation.

     4.3 Nonacquired Shares. In the event any Option shall, for any reason,
terminate or expire or be surrendered without having been exercised in full, the
shares subject to such Option but not acquired thereunder shall again be
available for Options to be granted under this Plan.

                                    ARTICLE V

                            Eligibility of Recipients

     5.1 Eligibility. Participation under this Plan will be limited to persons
who are key salaried employees, including officers, of the Corporation.

     5.2 Designation of Participants. The Participants under this Plan shall be
those eligible employees of the Corporation who are from time to time designated
by the Committee (the "Participants"). Options shall be awarded to the
Participants under Article VI, below, and the designation as a Participant does
not ensure that any particular Participant will be awarded Options hereunder.
Each Participant shall be notified in writing of his designation as a
Participant and, in connection therewith, each Participant shall be required to
execute an acknowledgment in the form attached hereto as Exhibit A. The initial
Participants under the Plan shall be Robert Parry and Phillip Eidler, and the
number of shares subject to Option for the initial Participants shall be as
listed on Exhibit B.

                                   ARTICLE VI

                                 Grant of Option

     The Committee shall from time to time determine the Options to be granted
to the Participants hereunder, it being understood that Options may be granted
at different times to the Participants. In addition, the Committee shall
determine (a) the number of shares subject to each Option, (b) the time or times
when the Options will be granted, and (c) the criteria for earning the Options
based upon the Corporation's financial performance, which criteria shall be
communicated in writing to the Participants.

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                                   ARTICLE VII

                         Purchase Price of Option Shares

     The exercise price per share of Common Stock for each Option granted
hereunder shall be $0.75 for Robert Parry and Phillip Eidler and, for all other
Participants, shall be an amount determined by the Committee in good faith in
its sole discretion.

                                  ARTICLE VIII

                             Payment of Option Price

     8.1 Notice of Exercise. A Participant electing to exercise an Option then
exercisable shall give written notice to the Corporation of such election and of
the number of shares of Common Stock such Participant has elected to purchase.
An Option may be exercised at any time or times after the date such Option has
vested in accordance with the terms of Article X hereof. An Option may be
exercised with respect to all, or any portion of the shares of Common Stock
subject to such Option. Written notice by a Participant of the exercise of an
Option shall be irrevocable and shall bind such Participant to purchase, and
require the Corporation to sell the shares for the consideration and in the
manner specified in this Plan.

     8.2 Payment of Option Price. The exercise price of an Option shall be paid
in full to the Corporation at the time of the exercise in cash or other
immediately available funds or, by the offset of any undisputed, liquidated,
non-contingent obligations then owed by the Corporation to the Participant, or
subject to the approval of the Committee, in whole or in part by any other
lawful consideration.

     8.3 No Delivery Until Payment in Full. The Corporation shall have no
obligation to deliver shares of Common Stock pursuant to the exercise of any
Option, in whole or in part, until payment in full of the purchase price
therefor is received by the Corporation.

                                   ARTICLE IX

                                 Term of Option

     9.1 Expiration of Option. No Option shall be exercisable after it expires.
Each Option shall expire upon the earlier of:

          (a) the five (5) year anniversary of the date the Option vests
     pursuant to the provisions of Article X; or

          (b) the date stipulated in Paragraph 9.2 or 9.3, as the case may be,
     in the case of a Participant whose employment with the Corporation ceases.

     9.2 Termination of Employment. In the case of a Participant whose
employment with the Corporation is terminated by reason of death, Disability, or
by the Corporation without Cause (all as hereinafter defined) or voluntarily by
the Participant and the Participant has attained age

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sixty five (65) or such earlier age as may be approved by the Board, each Option
shall expire as provided in Paragraph 9.1(a). For purposes hereof, the terms
"Disability" and "Cause" shall be defined as follows:

          (a) The term "Disability" shall be determined pursuant to the
     Corporation's disability insurance plan, or is no such insurance plan is in
     effect, "Disability" shall be defined as the inability of the Participant
     to perform his normal duties as a full-time employee of the Corporation for
     a period of one hundred eighty (180) consecutive days by reason of physical
     or mental illness or incapacity, or for periods of physical or mental
     illness or incapacity aggregating two hundred ten (210) days in any
     consecutive twelve (12) month period. A physical or mental disability shall
     be deemed to include the written direction by a physician that the
     Participant shall, for medical reasons, terminate or substantially reduce
     his serves to the Corporation. If there is any dispute as to whether the
     termination of the Participant's employment was due to his physical or
     mental illness or incapacity, such question shall be submitted to a
     licensed physician for the purpose of making such determination. An
     examination of the Participant shall be made within thirty (30) days after
     written notice by the Corporation or the Participant. The Participant shall
     submit to such examination and provide such information that such physician
     may request. The determination of such physician as to the question of the
     Participant's physical or mental condition shall be binding and conclusive
     on all parties concerned for purposes of this Agreement. A Disability shall
     be deemed to be continuing unless the Participant performs his regular
     duties for the Corporation for a continuous period of one (1) month. For
     purposes hereof, the date of Disability shall be the earlier of either (i)
     the date the Corporation and the Participant agree that the Participant is
     disabled or (ii) the expiration of the 180 or 210 day period, as
     applicable.

          (b) The term "Cause" shall be defined in the then current written
     employment agreement, if any, between the Participant and the Corporation.
     If there is no written employment agreement between the Corporation and the
     Participant, then "Cause" shall be defined as the Participant's termination
     by the Corporation upon the commission of any of the following:

               (i) The continued failure of the Participant to substantially
          perform his duties for the Corporation (other than by reason of
          illness or Disability) after a demand for performance is delivered to
          the Participant that specifically identifies the manner in which the
          Corporation believes the Participant has failed to perform his duties,
          and the Participant fails to resume substantial performance of his
          duties within fourteen (14) days of receiving such demand.

               (ii) Use of alcohol or drugs by the Participant in such a manner
          as to interfere with the performance of the Participant's duties for
          the Corporation.

               (iii) Willful conduct by the Participant which is demonstrably
          and materially injurious to the Corporation, monetarily or otherwise.

               (iv) Conviction of the Participant of a felony or misdemeanor
          which, in the reasonable judgment of the Committee, is likely to have
          a material adverse

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          effect upon the business or reputation of the Participant or the
          Corporation, or which substantially impairs the Participant's ability
          to perform his duties for the Corporation.

               (v) Breach by the Participant of any agreement with the
          Corporation concerning noncompetition or the confidentiality of trade
          secrets or proprietary or other information.

     9.3 Other Termination. In the case of a Participant whose employment with
the Corporation is terminated for any reason other than as set forth in
Paragraph 9.2, above, each Option shall immediately expire.

     9.4 Dispute. Any questions as to whether and when there has been a
cessation of employment and the reason therefor shall be determined by the
Committee in its sole discretion, and any such determination shall be final and
binding upon the parties.

                                    ARTICLE X

                                     Vesting

     10.1 Limitation. Except as specifically providedin Paragraph 9.2, each
Option granted under this Plan may be exercised only while a Participant is an
employee of the Corporation.

     10.2 Vesting. Each Option granted hereunder shall not be considered earned,
vested or exercisable as of the date of such grant. Unless otherwise vested
earlier or terminated pursuant to the provisions of the Plan, an Option shall be
deemed vested only upon the terms and conditions contained in Exhibit C hereto.

                                   ARTICLE XI

                         Adjustments - Change in Shares

     In the event that the outstanding shares of Common Stock of the Corporation
are hereafter increased or decreased, or changed into or exchanged for a
different number or kind of shares or other securities of the Corporation or of
another corporation, by reason of a recapitaization, reclassification, merger,
or consolidation in which the Corporation is the surviving parent corporation,
stock split, reverse stock split, combination of shares, or dividend or other
distribution payable in capital stock, appropriate adjustment shall be made by
the Committee in the number and kind of shares for which Options may be granted
under the Plan. In addition, the Committee shall make appropriate adjustments in
the number and kind of shares as to which outstanding and unexercised Options
shall be exercisable, to the end that the proportionate interest of the holder
of the Option shall, to the extent practicable, be maintained as before the
occurrence of such event. Such adjustment in outstanding Options shall be made
without change in the total price applicable to the unexercised portion of the
Option but with a corresponding adjustment to the exercise price per share.

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                                   ARTICLE XII

                           Transferability of Options

     An Option granted under the Plan may not be transferred except by will or
the laws of descent and distribution and, except as specifically set forth
herein, may be exercised during the lifetime of a Participant only by him or by
his guardian or legal representative. The Option and any rights and privileges
pertaining thereto shall not, except as described above, he transferred,
assigned, pledged or hypothecated by him in any way whether by operation of law
or otherwise and shall not be subject to execution, attachment or similar
process. Notwithstanding the foregoing, a Participant may, during his lifetime,
transfer an Option to a member or members of a group consisting of his issue or
a trust consisting of his issue created for the primary benefit of himself and
his issue (a "Permitted Transferee"), provided, however, that all provisions of
this Plan, including those relating to forfeiture, expiration and vesting of
options shall continue to apply to such Permitted Transferee and provided
further that such Permitted Transferee shall agree to be bound by the terms of
this Plan by executing an acknowledgment substantially in the form of Exhibit A
hereto.

                                  ARTICLE XIII

                                Withholding Taxes

     Pursuant to applicable federal and state laws, the Corporation may be
required to collect withholding taxes upon the exercise of an Option granted
under the Plan. The Corporation may require, as a condition to the exercise of
an Option, that the Participant concurrently pay to the Corporation (either in
cash or, at the request of the Participant, but in the discretion of the
Committee and subject to such rules and regulations as the Committee may adopt
from time to time, in shares of the Corporation's Common Stock) the entire
amount or a portion of any taxes which the Corporation is required to withhold,
in such amount as the Committee or the Corporation in is discretion may
determine.

                                   ARTICLE XIV

                                 Administration

     14.1 The Committee. The Committee shall have the authority to establish,
adopt or revise such rules and regulations as it deems necessary or appropriate
for administration of the Plan, provided that such rules and regulations are not
inconsistent with the provisions or original intent of the Plan.

     14.2 Amendment or Discontinuance. The Committee may, at any time, without
the approval of the stockholders of the Corporation, alter, amend, modify,
suspend or discontinue the Plan, but may not, without the consent of the
Participant or holder, make any alteration which would adversely affect an
Option previously granted under the Plan.

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     14.3 Determination of the Board. All determinations of the Committee,
irrespective of their character or nature, including, but not limited to, all
questions of construction and interpretation of the Plan, shall be final,
binding and conclusive upon all parties.

     14.4 Advice of Counsel. The Corporation and the Committee may each consult
with legal counsel with respect to their obligations and duties hereunder or
with respect to any action or proceeding or any other question of law and shall
not be liable for any action taken or omitted by it in good faith pursuant to
the advice of such counsel.

     14.5 Books and Records. The Secretary of the Corporation shall be
responsible for maintaining the books and records for the Plan. Such books and
records shall only be open for examination by a Participant or his duly
designated beneficiary.

     14.6 No Personal Liability. Neither the Committee, any member thereof, the
Corporation or any other person who is acting on behalf of the Committee, any
member thereof, or the Corporation shall be liable for any act or failure to act
hereunder except for gross negligence or fraud.

                                   ARTICLE XV

                 Certain Rights and Obligations of Participants

     15.1 Copies of Plan. Each Participant shall be entitled to receive a copy
of the Plan upon his designation as a Participant.

     15.2 No Right to Employment. The designation of an employee of the
Corporation as a Participant under the Plan shall not be construed as conferring
upon such employee any right to remain in the employ of the Corporation. The
right of the Corporation to discipline or discharge an employee shall not be
affected in any manner by reason of the designation of such employee as a
Participant under the Plan.

                                   ARTICLE XVI

                                 Indemnification

     Each person who is a member of the Committee shall be indemnified and held
harmless by the Corporation against and for any loss, cost, liability or expense
that may be imposed upon him or reasonably incurred by him in connection with or
resulting from any claim, action, suit or proceeding to which he may be a parity
or in which he may be involved by reason of any action taken or failure to act
under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Corporation's approval, or paid by him in
satisfaction of any judgment in any such action, suit or proceeding against him,
provided that he shall give the Corporation an opportunity, at its own expense,
to handle and defend the same before he undertakes to handle and defend it on
his own behalf. The foregoing right of indemnification shall not be exclusive of
any other rights of indemnification to which such person shall be entitled under
the Corporation's Articles of Incorporation or By-laws or as a matter of law or
otherwise or any power that the Corporation may have to indemnify him and hold
him harmless.

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                                  ARTICLE XVII

                                  Miscellaneous

     17.1 Expenses. All expenses of administering the Plan shall be paid by the
Corporation, except as expressly provided herein to the contrary.

     17.2 Governing Law. The Plan shall be construed, administered and governed
in all respects under and by the applicable laws of the State of Wisconsin.

     17.3 Use of Words. Wherever the context so requires, words in the masculine
gender include the feminine and words in the feminine include the masculine, and
the definition of any terms in the singular may include the plural and the
plural may include the singular.

     17.4 Binding Effect. In consideration of the benefits conferred hereunder,
each Participant shall be conclusively presumed to have agreed to be bound by
all of the terms and conditions of the Plan as presently constituted and as it
may be amended from time to time.

     17.5 Independence of Plan. It is intended that the Plan be construed and
administered independent of any and all other employee benefit plans, fringe
benefit programs or compensation arrangements of the Corporation. Accordingly,
except as otherwise determined by the Board, neither the Plan nor any of the
benefits payable hereunder shall be construed, administered or considered so as
to have any effect on any existing or future pension, profit sharing, incentive
compensation or other employee benefit program or plan of the Corporation and no
such program or plan of the Corporation shall be construed or administered to
have any effect on the Plan.

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                                    EXHIBIT A

                          ACKNOWLEDGMENT OF PARTICIPANT

     The undersigned hereby acknowledges receipt of notice that he has been
selected as a Participant in the 1998 Key Employee Stock Option Plan of ZBB
Energy Corporation. In connection therewith, the undersigned acknowledges that
he has received and reviewed a copy of the Plan, and he agrees to be bound by
the terms and conditions thereof.

     IN WITNESS WHEREOF, the undersigned has executed this Acknowledgment as of
the _____ day of _______________, 1998.

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                                    EXHIBIT B

                            INITIAL PLAN PARTICIPANTS

                                          SHARES SUBJECT
                           PARTICIPANT       TO OPTION
                         --------------   --------------
                         Robert Parry         400,000
                         Phillip Eidler       400,000

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                                    EXHIBIT C

                             CONDITIONS FOR VESTING

1.   Key Person or Employment Contracts

          In accordance with specific terms and conditions contained in any
          relavent Key Person or other Employment Contract.

2.   Grant by the Option Committee

          In accordance with the terms for vesting determined by the Option
          Committee as provided in Article VI.

2.   Death of a participant

               a) Upon the death of Robert Parry or Phillip Eidler, all Options
          previously granted to either Robert Parry or Phillip Eidler shall
          fully vest.

               b) Upon the death of any other Participant, all options granted
          to such Participant which would vest in the year of such Participant's
          death shall immediately vest.

3.   Disability of Participant

               a) Upon the Disability of Robert Parry or Phillip Eidler all
          options previously granted to either Robert Parry or Phillip Eidler
          shall fully vest.

               b) Upon the Disability of any other Participant, all options
          granted to such Participant which would vest in the year of such
          Participant's Disability shall immediately vest.

4.   Termination of Employment of Participant Without Cause

               a) Upon the termination of employment of Robert Parry or Phillip
          Eidler without Cause, all options previously granted to either Robert
          Parry or Phillip Eidler shall fully vest.

               b) Upon the termination of employment of any other Participant
          without Cause, all options granted to such Participant which would
          vest in the year of such Participant's termination of employment
          without Cause shall immediately vest.

5.   Termination of Participant for Cause

          In the event the employment of any Participant is terminated for
          Cause, all unvested options granted to such Participant shall be
          immediately forfeited.

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                             TERMS AND CONDITIONS OF
                  ZBB ENERGY CORPORATION EMPLOYEE OPTION SCHEME

     The terms and conditions of ZBB ENERGY CORPORATION Employee Option scheme
     are as follows:

1.   DEFINITIONS

     (1)  "APPLICATION FOR OPTIONS" means an application form substantially in
          the form of Schedule 1;

     (2)  "ASTC OPERATING RULES" means the operating rules of ASX Settlement and
          Transfer Corporation Pty Limited ACN 008 504 532;

     (3)  "BOARD" means the board of directors of the Company or, for the
          purposes of the Option Scheme, a committee of the Board appointed for
          that purpose;

     (4)  "BUSINESS DAY" has the meaning given to that term in the Listing Rules
          of the Exchange;

     (5)  "COMPANY" means ZBB ENERGY CORPORATION ARBN 082 338 789;

     (6)  "CORPORATIONS ACT" means the Corporations Act 2001 of Australia;

     (7)  "EMPLOYEE" means any person who is employed by the Company or a
          Related Body Corporate, or a director of the Company or a Related Body
          Corporate and whom the Board determines is eligible to participate in
          the Option Scheme;

     (8)  "EXCHANGE" means the Australian Stock Exchange Limited;

     (9)  "EXERCISE NOTICE", means a notice substantially in the form of
          Schedule 2;

     (10) "LISTING RULES" means the official listing rules of the Exchange;

     (11) "OPTION CERTIFICATE" means the certificate issued by the Company to
          the upon the issue of Options in accordance with this Option Scheme;

     (12) "OPTIONHOLDER" means a person registered in the Company's register of
          options as the holder of Options issued under this Option Scheme;

     (13) "OPTIONS" means the options over Shares contemplated in this Option
          Scheme;

     (14) "OPTION SCHEME" means the ZBB ENERGY CORPORATION Employee Option
          Scheme constituted by these terms and conditions;

     (15) "OUTSTANDING OPTIONS" means, in relation to an Optionholder, Options
          which remain unexercised from time to time;

     (16) "RELATED BODY CORPORATE" has the meaning ascribed to that term in the
          Corporations Act; and

     (17) "SHARES" means fully paid shares of common stock in the Company, each
          of which has a par value of US$0.01.

     (18) "WBCL" means the Wisconsin Business Corporations Law.

2.   INTERPRETATION

     In these terms and conditions, unless the context otherwise requires:

     (1)  headings and underlinings are for convenience only and do not affect
          the interpretation of these terms and conditions;

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     (2)  the singular includes the plural and vice versa;

     (3)  the word person includes a firm, a body corporate, an unincorporated
          association or an authority;

     (4)  a reference to any statute, ordinance, code or other law includes
          regulations and other instruments under it and consolidations,
          amendments, re-enactments or replacements of any of them;

     (5)  a reference to a document includes an amendment or supplement to, or
          replacement or novation of, that document;

     (6)  a reference to a person includes a reference to the person's
          executors, administrators, successors, substitutes (including, without
          limitation, persons taking by novation) and assigns;

     (7)  an agreement, representation or warranty on the part of or in favour
          of two or more persons binds or is for the benefit of them jointly and
          severally;

     (8)  if a period of time is specified and dates from a given day or the day
          of an act or event, it is to be calculated exclusive of that day;

     (9)  a reference to a currency is a reference to Australian currency unless
          otherwise indicated; and

     (10) a reference to time is a reference to Western Standard Time (WST) in
          Perth, Australia.

3.   NO EFFECT ON CONTRACT OF EMPLOYMENT

3.1  This Option Scheme shall not form any part of any contract of employment
     between the Company and the Employee unless expressly incorporated in the
     contract of employment by reference or otherwise.

3.2  Nothing in this Option Scheme:

     (1)  confers on the Employee any right to continue as an Employee of the
          Company;

     (2)  affects the rights which the Company may have to terminate the
          employment of the Employee; or

     (3)  may be used to increase any compensation or damages in any action
          brought against the Company in relation to the termination of
          employment of the Employee.

4.   OPTION ENTITLEMENT

4.1  The Board may, from time to time, determine who is entitled to participate
     in the Option Scheme and may grant Options in accordance with these terms
     and conditions.

4.2  Upon offer of Options to an Employee the Company will send the Employee an
     Application for Options which must be signed by the Optionholder and
     returned to the Company within 5 Business Days. Upon the Company receiving
     the Application for Options in accordance with this clause the Company will
     grant the relevant number of Options to the Optionholder and issue the
     Optionholder with an Option Certificate.

4.3  Options issued pursuant to the Option Scheme shall be issued for nil
     consideration.

4.4  The Board may, in its absolute discretion, impose performance hurdles on
     the exercise of Options by an Optionholder. Performance hurdles must be
     specified in the offer of Options made under clause 4.2 and state that the

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     relevant Options cannot be exercised unless the performance hurdles are
     satisfied.

4.5  Options will only be issued under the Option Scheme to an Employee after
     the members of the Company have approved the proposed issue, if such
     approval is required by the WBCL, Corporations Act or the Listing Rules.

4.6  The Company must not make offers under the Scheme when the number of Shares
     to be received on exercise of the Options offered, when aggregated with:

     (1)  the number of Shares which would be issued if each outstanding offer
          of Shares and options made under an employee or executive share or
          option scheme of the Company were accepted and in the case of options,
          the options exercised; and

     (2)  the number of Shares that have been issued pursuant to an employee or
          executive share or option scheme of the Company (including as a result
          of the exercise of options issued under such any such scheme) during
          the previous 5 years,

     disregarding any offer made, or options acquired or Share issued by way of
     or as a result of an offer to a person outside Australia and offers that
     did not need disclosure to investors because of section 708 of the
     Corporations Act, would exceed 5% of the total number of Shares on issue
     from time to time.

5.   EXERCISE OF OPTIONS

     An Optionholder whose exercise of the Options would not be in breach of
     clause 7 may at any time prior to the expiry of the Options exercise
     Outstanding Options, in whole or in part, by lodging with the Company at
     its registered office:

     (1)  the Option Certificate;

     (2)  a duly completed and signed Exercise Notice; and

     (3)  the subscription monies for the relevant Shares.

6.   TERMS OF THE OPTIONS

     The Options will have the following terms:

     (1)  Each Option entitles the registered holder to subscribe for and be
          allotted 1 fully paid ordinary share in the capital of the Company.

     (2)  The Options expire:

          (a)  at 5.00pm (WST) on the fifth anniversary of the date on which the
               Options vest in accordance with clause 6(3); or

          (b)  the date stipulated in subparagraph (i) or (ii) below, as the
               case may be, in the case of an Employee whose employment with or
               membership on the Board ceases:

               (i)  (TERMINATION OF SERVICE) in the case of an Employee whose
                    employment with or membership on the Board is terminated by
                    reason of death, Disability (as defined Exhibit A hereto),
                    or by the Company (or its shareholders in the case of a
                    Director that is not also an employee of the Company)
                    without Cause (as defined Exhibit A hereto), or voluntarily
                    by the Employee at the request of the Board or voluntarily
                    by the Employee after the Employee has attained age 65 or
                    such earlier age as may be approved by the Board, each
                    Option shall expire as provided in paragraph 6(2)(a).

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               (ii) (OTHER TERMINATION) in the case of an Employee whose
                    employment with or membership on the Board is terminated for
                    any reason other than as set forth in subparagraph
                    6(2)(b)(i), each Option which has not vested in accordance
                    with the provisions of clause 6(3) shall immediately be
                    forfeited, and each Option which has vested in accordance
                    with the provisions of clause 6(3) shall expire as provided
                    in paragraph 6(2)(a).

               Any questions as to whether and when there has been a cessation
               of employment or service and the reason therefor shall be
               determined by the Board (or the other Directors in the case of a
               Director that is not also an employee of the Company) in its sole
               discretion, and any such determination shall be final and binding
               upon the parties.

     (3)  Each Option granted hereunder shall not be considered earned, vested
          or exercisable as of the date of such grant. Unless otherwise vested
          earlier or terminated pursuant to the provisions of the Option Scheme,
          an Option shall be deemed vested only upon the terms and conditions
          contained in Exhibit A hereto.

     (4)  The Options are not transferable.

     (5)  The exercise price for each Option shall be an amount determined by
          the Board in good faith in its sole discretion, provided that whilst
          the Company is on the official list of ASX in no event shall the
          exercise price be a price less than 10% higher than the weighted
          average market price for Shares on ASX over the last 20 days on which
          sales in the Shares were recorded on ASX immediately preceding the
          date of grant of the Option.

     (6)  The Company will make an application to ASX for quotation of the
          Shares issued upon the exercise of an Option within 10 Business Days
          after issue of those Shares.

     (7)  All shares issued upon exercise of the Options will rank pari passu in
          all respects with the Company's then existing ordinary shares.

     (8)  There are no participating rights or entitlements inherent in the
          Options and holders will not be entitled to participate in new offers
          of capital offered to Shareholders during the currency of the Options.
          However, the Company will send a notice to each holder of options at
          least 9 Business Days before the relevant record date.

     (9)  If from time to time or prior to the expiry of the Options the Company
          makes a pro rata offer of shares to the holders of Shares by way of a
          capitalisation of profits or reserves ("BONUS OFFER"), then upon
          exercise of their Options, an Optionholder will be entitled to have
          issued to them (in addition to the shares which would otherwise be
          issued to them upon such exercise) the number of shares of the class
          which would have been issued to them under that Bonus Offer ("BONUS
          SHARES") if on the record date for the Bonus Offer they had been
          registered as the holder of the number of shares of which they would
          have been registered as holder, if immediately prior to that date,
          they had duly exercised their Options and the shares the subject of
          such exercise had been duly allotted and issued to them. The Bonus
          Shares will be paid up by the Company out of profits or reserves (as
          the case may be) in the same manner as was applied in relation to the
          Bonus Offer.

     (10) In the event of any reorganisation of capital of the Company on or
          prior to the expiry of the Options, the rights of an Optionholder will
          be

                                                                          Page 4

<PAGE>

          changed to the extent necessary to comply with the applicable Listing
          Rules in force at the time of the reorganisation.

7.   COMPLIANCE WITH LAW AND ORDERS

     As the Company is a Wisconsin corporation, it is the intent of the Company
     that all Options granted under this Option Scheme shall be non-qualified
     stock options. An Optionholder must not exercise any of its Options to have
     Shares issued to it and no purported exercise shall have any effect, if in
     doing so it would be in breach of, or would cause the Company or its
     affiliates to be in breach of:

     (1)  any provision of the Foreign Acquisitions and Takeovers Act 1975, as
          amended, modified or replaced from time to time;

     (2)  any undertaking given by the Company to the Foreign Investment Review
          Board at the request of the Foreign Investment Review Board from time
          to time;

     (3)  the ASX Listing Rules or the ASTC Operating Rules; or

     (4)  any other applicable law including, but not limited to, the WBCL.

8.   REPLACEMENT OF CERTIFICATES

     If any Option Certificate is lost, stolen, mutilated, defaced or destroyed,
     it may be replaced at the registered office of the Company on payment by
     the claimant of the expenses incurred in connection with the replacement
     and on such terms as to evidence, indemnity an security as the Company may
     reasonably require. Mutilated or defaced Option Certificates must be
     surrendered before replacements will be issued.

9.   AMENDMENT OF TERMS AND CONDITIONS

     The Option Scheme may be amended from time to time by resolution of the
     Board subject to the requirements from time to time of the WBCL, the
     Corporations Act and the Listing Rules including approval by the Company's
     shareholders of any such amendment to the Option Scheme. Any such amendment
     however shall not adversely affect the rights of Optionholders who are
     granted Options prior to such amendment without the consent of the
     Optionholder, unless such amendment is required by, or necessitated by
     amendments to, either the WBCL, the Corporations Act or the Listing Rules.

10.  NOTICES

     Any notice regarding the Options will be sent to the registered address of
     the Optionholder as recorded in the register of options maintained by the
     Company.

11.  GOVERNING LAWS

     This Option Scheme is governed by and shall be construed in accordance with
     the laws of Western Australia.

12.  DUTIES AND TAXES

12.1 The Company is not responsible for any duties or taxes which may become
     payable in connection with the issue and allotment of Shares pursuant to an
     exercise of the Options or any other dealing with the Options or Shares
     issued pursuant to exercise of the Options and the Company does not
     represent or warrant that any person will gain any taxation advantage by
     participating in the Option Scheme.

                                                                          Page 5

<PAGE>

12.2 Eligible employees should obtain their own independent advice at their own
     expense on the financial, taxation and other consequences to them of or
     relating to participation in the Option Scheme.

                                                                          Page 6

<PAGE>

                                   SCHEDULE 1

                             APPLICATION FOR OPTIONS

The Secretary

ZBB ENERGY CORPORATION

Mr.

Mrs.

Miss. ________________________________
         (PLEASE USE BLOCK LETTERS)

Full Address:

        ________________________________

        ________________________________

        ____________Postcode____________

Tax File Number: _______________________

hereby apply for:

________________________________________ (Number in Words)

________________________________________ (Number in Figures)

options in the ZBB ENERGY CORPORATION Employee Option Scheme.

I request you to grant those options and I agree to accept them subject to the
terms of the ZBB ENERGY CORPORATION Employee Option Scheme and the terms set out
in the letter of offer of options dated _____/_____/200__

Signature:
           ----------------------------------

Date:
      ---------------------------------------

<PAGE>

                                   SCHEDULE 2

                                 EXERCISE NOTICE

I, _____________________________________________ being the registered holder of
the Options specified below, elect to exercise the Options as specified below in
accordance with clause 5 of the Terms and Conditions of the Options.

Number of Options being exercised: ________________________________________

Name and address of the Shareholder to be entered into the Share register in
respect of Shares issued:

________________________________

________________________________

____________Postcode____________

Name and address to which certificates evidencing the Shares should be sent:

________________________________

________________________________

____________Postcode____________

Enclosed with this notice is the certificate for the Options referred to above
together with the relevant subscription monies being $________________

In exercising the Options in relation to the Shares, I agreed to be bound by the
provisions of the Articles of Incorporation and the By-laws of ZBB ENERGY
CORPORATION.

-------------------------------
Signed by the Optionholder

Date:
      ------------------------

<PAGE>

                                    EXHIBIT A

                             CONDITIONS FOR VESTING

1.   EMPLOYMENT AGREEMENT

     In accordance with any specific terms and conditions with respect to the
     vesting of the Options contained in any agreement regarding the employment
     of the Employee by the Company approved by the Board (EMPLOYMENT
     AGREEMENT).

2.   GRANT BY THE BOARD

     If the Employee is not a party to an Employment Agreement containing any
     such terms and conditions with respect to the vesting of the Options, then
     in accordance with the terms and conditions with respect to the vesting of
     the Options determined by the Board and delivered in writing to the
     Employee at the time of the grant of the Options.

3.   NO SPECIFIC TERMS

     If the Employee is not a party to an Employment Agreement containing any
     such terms and conditions with respect to the vesting of the Options, and
     the Board did not specify any such terms and conditions with respect to the
     vesting of the Options at the time of the grant of the Options, then the
     terms and conditions with respect to the vesting of the Options shall be as
     follows:

     (a)  (DEATH OF EMPLOYEE) Upon the death of the Employee, all Options
          granted to such Employee which would vest in the financial year of
          such Employee's death shall immediately vest.

     (b)  (DISABILITY OF EMPLOYEE) Upon the Disability of the Employee, all
          Options granted to such Employee which would vest in the financial
          year of such Employee's Disability shall immediately vest.

     (c)  (TERMINATION OF EMPLOYEE WITHOUT CAUSE) Upon the termination of
          employment or service of the Employee without Cause, all Options
          granted to such Employee which would vest in the financial year of
          such Employee's termination of employment or service without Cause
          shall immediately vest.

     (d)  (TERMINATION OF EMPLOYEE FOR CAUSE) Upon the termination of employment
          or service of the Employee with Cause, all unvested Options granted to
          such Employee shall be immediately forfeited.

     (e)  (RESIGNATION OF THE EMPLOYEE) Upon the resignation of the Employee
          prior to attaining age sixty-five (65) or such earlier age as may be
          approved by the Board, all unvested Options granted to the Employee
          shall be immediately forfeited.

3.   DEFINITIONS

     In this Exhibit A:

     "DISABILITY" shall be defined as in the then current written employment
     agreement, if any, between the Employee and the Company approved by the
     Board of Directors of the Company, and if there is no such written
     employment agreement, the term "DISABILITY" shall be determined pursuant to
     the Company's disability insurance plan, and if there is no such insurance
     plan in effect, "DISABILITY" shall be defined as the inability of the
     Employee to perform his or her normal duties as a full-time employee of the
     Company or member of the Board for a period of 180 consecutive days by
     reason of physical or mental illness or incapacity, or for periods of
     physical or mental illness or incapacity aggregating 210 days in any
     consecutive 12 month period. A physical or mental disability shall be
     deemed to include the written direction by a physician

                                                                          Page 1

<PAGE>

     that the Employee shall, for medical reasons, terminate or substantially
     reduce his service to the Company or as a member of the Board. If there is
     any dispute as to whether the termination of the Employee's employment or
     membership on the Board was due to his physical or mental illness or
     incapacity, such question shall be submitted to a qualified and practicing
     medical practitioner for the purpose of making such determination. An
     examination of the Employee shall be made within 30 days after written
     notice by the Company or the Employee. The Employee shall submit to such
     examination and provide such information that such medical practitioner may
     request. The determination of such medical practitioner as to the question
     of the Employee's physical or mental condition shall be binding and
     conclusive on all parties concerned. A Disability shall be deemed to be
     continuing unless the Employee performs his regular duties for the Company
     or as a member of the Board for a continuous period of one month. For
     purposes hereof, the date of Disability shall be the earlier of either (i)
     the date the Company and the Employee agree that the Employee is disabled,
     or (ii) the expiration of the 180 or 210 day period, as applicable.

     The term "CAUSE" shall be defined as in the then current written employment
     agreement, if any, between the Employee and the Company approved by the
     Board of Directors of the Company. If there is no such written employment
     agreement between the Company and the Employee, then "CAUSE" shall be
     defined as the Employee's termination by the Company (or its shareholders
     in the case of a Director that is not also an employee of the Company) upon
     the commission of any of the following:

     (i)   The continued failure of the Employee to substantially perform his or
           her duties for the Company or as a member of the Board (other than by
           reason of illness or Disability) after a demand for performance is
           delivered to the Employee that specifically identifies the manner in
           which the Company (or the other Directors in the case of a Director
           that is not also an employee of the Company) believes the Employee
           has failed to perform his or her duties, and the Employee fails to
           resume substantial performance of his or her duties within 14 days
           (30 days in the case of a Director that is not also an employee of
           the Company) of receiving such demand.

     (ii)  Use of alcohol or drugs by the Employee in such a manner as to
           interfere with the performance of the Employee's duties for the
           Company or for the Board.

     (iii) Willful conduct by the Employee which is demonstrably and materially
           injurious to the Company, monetarily or otherwise.

     (iv)  Conviction of the Employee of an indictable offence, felony or
           misdemeanor which, in the reasonable judgment of the Board (or the
           other Directors in the case of a Director that is not also an
           employee of the Company), is likely to have a material adverse effect
           upon the business or reputation of the Employee or the Company, or
           which substantially impairs the Employee's ability to perform his
           duties for the Company or for the Board.

     (v)   Breach by the Employee of any agreement with the Company concerning
           non-competition, non-solicitation or the confidentiality of trade
           secrets or proprietary or other information.

                                                                          Page 2

<PAGE>

                             ZBB ENERGY CORPORATION
                                ARBN 082 338 789

                                 EMPLOYEE OPTION
                                     SCHEME

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