10-Q

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, 2011

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.      þ Yes   o 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).    o Yes   þ No

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

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   o Accelerated filer             o Non-accelerated filer o      Smaller reporting company þ

(Do not check if a smaller reporting company)

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

Class	Shares Outstanding as of November 14, 2011
Common Stock, $.01 par value per share	32,519,942

ZBB Energy Corporation

Form 10-Q

TABLE OF CONTENTS

	PART I. FINANCIAL INFORMATION (*)	Page
Item 1.	Condensed Consolidated Financial Statements	1
	Condensed Consolidated Balance Sheets (unaudited), September 30, 2011 and June 30, 2011	1
	Condensed Consolidated Statements of Operations (unaudited), Three Months Ended September 30, 2011 and 2010	2
	Condensed Consolidated Statements of Changes in Shareholders' Equity (unaudited), Three Months Ended September 30, 2011 and year ended June 30, 2011	3
	Condensed Consolidated Statements of Cash Flows (unaudited), Three Months Ended September 30, 2011 and 2010	4
	Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4.	Controls and Procedures	34
	PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults upon Senior Securities	36
Item 4.	(Removed and Reserved)	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
	Signatures	37

(*) All of the financial statements contained in this Quarterly Report are unaudited with the exception of the financial information at June 30, 2011, 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, 2011 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 8, 2011.

ZBB ENERGY CORPORATION
Condensed Consolidated Balance Sheets
	September 30, 2011 (Unaudited)			June 30, 2011
Assets
Current assets:
Cash and cash equivalents	$	1,968,368		$	2,910,595
Accounts receivable, net		1,443,531			171,622
Inventories		1,829,011			1,662,850
Prepaid and other current assets		51,433			56,462
Refundable income tax credit		221,350			164,640
Total current assets		5,513,693			4,966,169
Long-term assets:
Property, plant and equipment, net		5,230,768			4,766,871
Intangible assets, net		1,634,750			1,811,507
Goodwill		803,079			803,079
Total assets	$	13,182,290		$	12,347,626
Liabilities and Shareholders' Equity
Current liabilities:
Bank loans and notes payable	$	844,637		$	779,088
Accounts payable		1,623,101			961,221
Accrued expenses		777,203			695,273
Deferred revenues		1,791,715			1,528,482
Accrued compensation and benefits		208,908			289,996
Total current liabilities		5,245,564			4,254,060
Long-term liabilities:
Bank loans and notes payable		3,796,006			3,937,056
Total liabilities		9,041,570			8,191,116
Shareholders' equity
Series A preferred stock ($0.01 par value, $10,000 face value)
10,000,000 authorized, 500.1280 and 355.4678 issued, preference in liquidation of $5,251,390 and $3,715,470 as of September 30, 2011 and June 30, 2011, respectively		5,251,390			3,715,470
Common stock ($0.01 par value); 150,000,000 authorized
32,533,574 and 29,912,415 shares issued		325,338			299,124
Additional paid-in capital		62,432,372			60,777,286
Notes receivable - common stock		(5,242,855	)		(3,707,799	)
Treasury stock - 13,833 shares		(11,136	)		(11,136	)
Accumulated other comprehensive loss		(1,595,258	)		(1,572,752	)
Accumulated deficit		(57,019,131	)		(55,343,683	)
Total shareholders' equity		4,140,720			4,156,510
Total liabilities and shareholders' equity	$	13,182,290		$	12,347,626
See accompanying notes to condensed consolidated financial statements

1

ZBB ENERGY CORPORATION
Condensed Consolidated Statements of Operations (Unaudited)
	Three months ended September 30,
	2011			2010
Revenues
Product sales	$	226,107		$	-
Engineering and development		1,411,750			-
Total Revenues		1,637,857			-
Costs and Expenses
Cost of product sales		156,671			-
Cost of engineering and development		481,107			-
Advanced engineering and development		699,383			839,273
Selling, general, and administrative		1,677,997			1,078,729
Depreciation and amortization		319,181			86,083
Total Costs and Expenses		3,334,339			2,004,085
Loss from Operations		(1,696,482	)		(2,004,085	)
Other Income (Expense)
Interest income		6,689			1,790
Interest expense		(59,668	)		(32,007	)
Other income (expense)		4,013			-
Total Other Income (Expense)		(48,966	)		(30,217	)
Loss before provision (benefit) for Income Taxes		(1,745,448	)		(2,034,302	)
Provision (benefit) for Income Taxes		(70,000	)		-
Net Loss	$	(1,675,448	)	$	(2,034,302	)
Net Loss per share-
Basic and diluted	$	(0.05	)	$	(0.13	)
Weighted average shares-basic and diluted:
Basic		30,496,936			15,410,384
Diluted		30,496,936			15,410,384
See accompanying notes to condensed consolidated financial statements.

2

ZBB Energy Corporation
Condensed Consolidated Statements of Changes in Shareholders' Equity (Unaudited)
	Number of Shares		Series A Preferred Stock		Number of Shares		Common Stock		Additional Paid-in Capital			Notes Receivable - Common Stock			Treasury Stock			Accumulated Other Comprehensive (Loss)			Accumulated Deficit			Total Shareholders'  Equity			Comprehensive Loss
Balance: July 1, 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						13,123,929		131,239		9,137,291		$	(3,529,644	)											5,738,886
Issuance of commitment fee shares						893,097		8,930		579,306															588,236
Issuance of common stock for acquisition of net assets of Tier Electronics						800,000		8,000		912,000															920,000
Equity issuance costs						180,000		1,800		(833,840	)														(832,040	)
Conversion of debenture notes payable to preferred stock		52.4678	$	524,678																					524,678
Issuance of preferred stock, net of issuance costs		303.0000		3,030,000																					3,030,000
Conversion of cash settled RSU's to stock settled RSU's										315,833															315,833
Stock-based compensation										866,512															866,512
Interest on notes receivable - common stock										178,155			(178,155	)											-
Accretion of dividends on preferred stock				160,792						(160,792	)														-
Issuance of warrants										11,834															11,834
Net loss																						(8,449,006	)		(8,449,006	)		(8,449,006	)
Net translation adjustment																			(9,700	)					(9,700	)		(9,700	)
Balance: June 30, 2011		355.4678		3,715,470		29,912,415		299,124		60,777,286			(3,707,799	)		(11,136	)		(1,572,752	)		(55,343,683	)		4,156,510			(8,458,706	)
Issuance of preferred and common stock, net of issuance costs		144.6602		1,447,240		2,621,359		26,214		1,349,442			(1,440,960	)											1,381,936
Stock-based compensation										300,228															300,228
Interest on notes receivable - common stock										94,096			(94,096	)											-
Accretion of dividends on preferred stock				88,680						(88,680	)														-
Net loss																						(1,675,448	)		(1,675,448	)		(1,675,448	)
Net translation adjustment																			(22,506	)					(22,506	)		(22,506	)
Balance: September 30, 2011		500.1280	$	5,251,390		32,533,774	$	325,338	$	62,432,372		$	(5,242,855	)	$	(11,136	)	$	(1,595,258	)	$	(57,019,131	)	$	4,140,720		$	(1,697,954	)
See accompanying notes to condensed consolidated financial statements.

3

ZBB ENERGY CORPORATION
Condensed Consolidated Statements of Cash Flows (Unaudited)
	Three months ended September 30,
	2011			2010
Cash flows from operating activities
Net loss	$	(1,675,448	)	$	(2,034,302	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property, plant and equipment		137,907			86,083
Amortization of intangible assets		176,757			-
Stock-based compensation		300,228			103,598
Changes in assets and liabilities
Accounts receivable		(1,271,909	)		234
Inventories		(166,161	)		(100,710	)
Prepaids and other current assets		5,029			31,613
Refundable income taxes		(56,710	)		-
Accounts payable		661,880			213,142
Accrued compensation and benefits		(81,088	)		(188,314	)
Accrued expenses		111,823			(16,390	)
Deferred revenues		263,233			60,513
Net cash used in operating activities		(1,594,459	)		(1,844,533	)
Cash flows from investing activities
Expenditures for property and equipment		(601,804	)		(75,755	)
Net cash used in investing activities		(601,804	)		(75,755	)
Cash flows from financing activities
Proceeds from bank loans and notes payable		-			1,156,128
Repayments of bank loans and notes payable		(75,501	)		(114,853	)
Proceeds from issuance of debenture notes payable		-			517,168
Proceeds from issuance of Series A preferred stock		1,447,240			-
Common stock issuance costs		(65,304	)		(157,311	)
Net cash provided by financing activities		1,306,435			1,401,132
Effect of exchange rate changes on cash and cash equivalents		(52,399	)		6,202
Net decrease in cash and cash equivalents		(942,227	)		(512,954	)
Cash and cash equivalents - beginning of period		2,910,595			1,235,635
Cash and cash equivalents - end of period	$	1,968,368		$	722,681
Cash paid for interest	$	59,668		$	32,007
Supplemental non-cash investing and financing activities:
Issuance of common stock for discounted notes receivable	$	1,440,960		$	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, 2011

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

ZBB Energy Corporation (“ZBB” or the “Company”) develops and manufactures distributed energy storage solutions based upon the Company’s proprietary zinc bromide rechargeable electrical energy storage technology.  A developer and manufacturer of modular, scalable and environmentally friendly power systems (“ZBB Enersystem™”), ZBB Energy was founded in 1998 and is headquartered in Wisconsin, USA with offices also located in Perth, Western Australia. As described in Note 2 in January 2011 the Company acquired substantially all of the net assets of Tier Electronics LLC.

The Company provides advanced electrical power management platforms targeted at the growing global need for distributed renewable energy, energy efficiency, power quality, and grid modernization.  The Company and its power electronics subsidiary, Tier Electronics LLC, have developed a portfolio of intelligent power management platforms that directly integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technology. The Company also offers advanced systems to directly connect wind and solar equipment to the grid and systems that can form various levels of micro-grids.  Tier Electronics participates in the energy efficiency markets through its hybrid vehicle control systems, and power quality markets with its line of regulation solutions. Together, these platforms solve a wide range of electrical system challenges in global markets for utility, governmental, commercial, industrial and residential end customers.

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

Interim Financial Data

The accompanying unaudited condensed consolidated 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, 2011 are not necessarily indicative of the results that might be expected for the year ending June 30, 2012.

The condensed consolidated balance sheet at June 30, 2011 has been derived from audited financial statements at that date, but does 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, 2011.

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.

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 at financial institutions predominately in the United States and Australia.  At times such balances may exceed insurable limits.  The Company has not experienced any losses in such accounts.

Accounts Receivable

The Company records allowances for doubtful accounts based on customer-specific analysis and general matters such as current assessments of past due balances and economic conditions.  The Company writes off accounts receivable against the allowance when they become uncollectible.  Accounts receivable are stated net of an allowance for doubtful accounts of $80,000, as of September 30, 2011 and June 30, 2011.

5

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.

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.

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

	Estimated Useful Lives
Manufacturing equipment	3 - 7 years
Office equipment	3 - 7 years
Building and improvements	7 - 40 years

Intangible Assets

Intangible assets generally result from business acquisitions.  The Company accounted for the January 21, 2011 acquisition of Tier Electronics LLC by assigning the purchase price to identifiable tangible and intangible assets and liabilities.  Assets acquired and liabilities assumed were recorded at their estimated fair values.  Intangible assets consist of a non-compete agreement, license agreement, and trade secrets.

Amortization is recorded for intangible assets with determinable lives. Intangible assets are amortized using the straight line method over the three year estimated useful lives of the respective assets.

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 each year 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.  The Company has determined that it has two reporting units – ZBB Energy Storage and Power Electronics Systems and Tier Electronics Power Conversion Systems.

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, 2011 and June 30, 2011.

6

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 and intangible assets 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 in 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 were $0 and $219,213 long-lived assets impaired as of September 30, 2011 and June 30, 2011, respectively (see Note 6).

Warranty Obligations

The Company typically warrants its products for twelve months after installation or eighteen months after date of shipment, whichever first occurs. Warranty obligations 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 liability for warranty obligations.  In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise.

During the year ended June 30, 2010, battery stack manufacturing issues were discovered as a 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 has adjusted its warranty obligations accordingly.  We will adjust our warranty rates in future periods as these processes are implemented and tested.

As of September 30, 2011 and June 30, 2011, included in the Company’s accrued expenses were $413,203 and $413,203, respectively, related to warranty obligations.  Such amounts are included in accrued expenses in the accompanying consolidated balance sheets.

The following is a summary of accrued warranty activity:

	Three Months and Year Ended
	September 30, 2011			June 30, 2011
Beginning balance	$	413,203		$	520,000
Accruals for warranties during the period		-			176,662
Settlements during the perioid		(38,911	)		(283,459	)
Adjustments relating to preexisting warranties		38,911			-
Ending balance	$	413,203		$	413,203

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.

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.

7

The portion of revenue related to engineering and development is recognized ratably upon delivery of the goods or services pertaining to the underlying contractual arrangement or revenue is recognized as certain activities are performed by the Company over the estimated performance period.

The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net revenues. The Company reports its revenues net of estimated returns and allowances.

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 $1,637,857 and $0 were recognized for the three months ended September 30, 2011 and 2010, respectively, and were comprised of one significant customer (85% of total revenues).  The Company had two significant customers with outstanding accounts receivable balances of $1,200,000 and $179,377 (83% and 12% of accounts receivable, respectively) at September 30, 2011.

Engineering and Development Revenues

On April 8, 2011, the Company entered into a Collaboration Agreement (the “Collaboration Agreement”) with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which the Company agreed with Honam to collaborate on the further technical development of the Company’s third generation Zinc Bromide flow battery module (the “Version 3 Battery Module”).  Pursuant to the Collaboration Agreement, Honam is required to pay us a total of $3,000,000 dollars as follows:  (1) $1,000,000 within 10 days following the execution of the Collaboration Agreement (subsequently received on April 9, 2011); (2) $500,000 by June 30, 2011 (subsequently received on June 30, 2011); (3) $1,200,000 by October 10, 2011 (subsequently received on October 10, 2011) and (4) $300,000 within 10 days after a single V3 Battery Module is set up at Honam’s research and development center.  The Company has recognized $2,100,000 as revenue as of September 30, 2011based on performance milestones achieved and deferred the balance of the $1,000,000 payment which is being recognized as certain activities are performed by the Company over the estimated 15 month performance period.  The unamortized balance of deferred revenue will be recognized over the estimated remaining performance period (9 months).  Pursuant to the Collaboration Agreement, the parties are required to negotiate a license agreement under which upon the completion of the collaboration project and the receipt by the Company of all payments due under the Collaboration Agreement, the Company shall grant to Honam: (1) a fully paid-up, exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in Korea and (2) non-exclusive rights to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore.  In connection with such non-exclusive rights, Honam is required to pay a royalty to the Company.

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 “AEST agreement”) whereby the Department agreed to provide funding to ZBB Technologies for the development of an energy storage system to 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 AEST agreement provided for a three year term under which the Commonwealth provided $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” were met by ZBB Technologies to the satisfaction 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 had 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) was the value of any cash and in-kind contributions provided to the project by the Company in undertaking the project activities. The Australian Government provided the project funding of approximately $2.6 million (A$3.1 million) that was 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 had been fully spent or would 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 December 31, 2010.  As of December 31, 2010, the Company had received the full $2.6 million of payments due from the Commonwealth under the Agreement.

8

Included in engineering and development revenues and costs were $1,400,000 and $481,107, respectively, for the year three months ended September 30, 2011 related to the Collaboration Agreement.  The financial statements for the year ended June 30, 2011 included engineering and development revenue and costs of $700,000 and $536,715, respectively related to the Collaboration Agreement.

As of September 30, 2011 and June 30, 2011, the Company had no unbilled amounts from engineering and development contracts. The Company had $684,448 and $800,000 in customer payments from engineering and development contract revenue, representing deposits in advance of performance of the allowable work, as of September 30, 2011 and June 30, 2011, respectively.

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.”

Stock-Based Compensation

The Company measures all “Share-Based Payments", including grants of stock options, restricted shares and restricted stock units, 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 the shares at grant, and calculated based on the Black-Scholes valuation model.

The Company compensates its outside directors primarily with restricted stock units (“RSUs”) rather than cash.  The RSUs were classified as liability awards as of June 30, 2010 because the RSUs were to be paid in cash upon vesting. As of November 10, 2010, the June 30, 2010 RSUs were converted to stock based RSUs and were credited to additional paid-in capital. The grant date fair value of the restricted stock unit awards was determined using the closing stock price of the Company’s common stock on the day prior to the date of the grant, with the compensation expense amortized over the vesting period of restricted stock unit awards, net of estimated forfeitures.

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 10.

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, 2011 and June 30, 2011.

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, 2011 and June 30, 2011.

The Company’s U.S. Federal income tax returns for the years ended June 30, 2008 through June 30, 2011 and the Company’s Wisconsin and Australian income tax returns for the years ended June 30, 2007 through June 30, 2011 are subject to examination by taxing authorities.

9

Foreign Currency

The Company uses the United States dollar as its functional and reporting currency, while the Australian dollar is the functional currency of its foreign subsidiary. 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 in the consolidated balance sheets. No gain or loss on translation is included in the net loss.

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.  For the three months ended September 30, 2011 and September 30, 2010 there were 7,031,696 and 4,104,823 of underlying options, restricted stock units and warrants that are excluded, respectively.

Concentrations of Credit Risk and Fair Value

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.

The Company maintains significant cash deposits primarily with three or four financial institutions, which at times may exceed 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.

The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of bank loans and notes payable approximate fair value based on their terms which reflect market conditions existing as of September 30, 2011 and June 30, 2011.

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, 2011 and September 30, 2010 is presented as follows:

	Three months ended September 30,
	2011			2010
Net loss	$	(1,675,448	)	$	(2,034,302	)
Net translation adjustment		(22,506	)		(19,439	)
Comprehensive loss	$	(1,697,954	)	$	(2,053,741	)

Reclassifications

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

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP 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:

10

●   the timing of revenue recognition;

●   the allowance for doubtful accounts;

●   provisions for excess and obsolete inventory;

●   the lives and recoverability of property, plant and equipment and other long-lived assets, including goodwill and other intangible assets;

●   contract costs and reserves;

●   warranty obligations;

●   income tax valuation allowances;

●   stock-based compensation; and

●   fair values of assets acquired and liabilities assumed in a business combination.

Recent Accounting Pronouncements

In September 2011, the FASB issued an update to ASC 350, Intangibles — Goodwill and Other. This ASU amends the guidance in ASC 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test annually for impairment. The ASU is limited to goodwill and does not amend the annual requirement for testing other indefinite-lived intangible assets for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We will adopt this ASU for our 2012 goodwill impairment testing. We do not expect this ASU to have a material impact, if any, on our consolidated condensed financial statements.

In June 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to the presentation of comprehensive income that eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or two consecutive statements. This guidance is effective for us beginning July 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the application of existing fair value measurements and disclosures, in addition to other amendments that change principles or requirements for fair value measurements or disclosures. This guidance is effective for us beginning January 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

NOTE 2 – BUSINESS ACQUISITION

On January 21, 2011 (“Closing Date”), the Company entered into an Asset Purchase Agreement under which the Company acquired substantially all of the net assets of Tier Electronics LLC (“Seller”) used in connection with the Seller’s business of developing, manufacturing, marketing and selling power electronics products for and to original equipment manufacturers in various industries.  The purchase price was comprised of (1) a $1.35 million promissory note issued by the Company, (2) 800,000 shares of the Company’s common stock, and (3) payment of approximately $245,000 of the Seller’s obligations.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the Closing Date.  Accrued interest is payable monthly.  If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note.  The following table reconciles the purchase price to the cash consideration paid:

11

Total purchase price	$	2,515,071
Less debt and equity issued to Seller:
Note payable		(1,350,000	)
Common stock		(920,000	)
Total debt and equity issued to Seller		(2,270,000	)
Total cash paid		245,071
Less cash acquired		(19,149	)
Acquisition of business, net of cash acquired	$	225,922

The primary reason for the acquisition was to add a base of business so that the Company now offers a full range of energy storage, utilization, and management solutions that range from wind and solar converters to power quality, micro-grid systems, and hybrid electric drives for vehicles.

The Company accounted for the acquisition using the purchase method under U.S. GAAP.  The purchase method requires that assets acquired and liabilities assumed in a business combination be recognized at fair value.  A summary of the preliminary allocation of the assets acquired and the liabilities assumed in connection with the acquisition based on their estimated fair values is as follows:

Cash and cash equivalents	$	19,149
Accounts receivable		225,081
Inventories		849,932
Property and equipment		4,500
Other intangible assets		2,121,097
Accounts payable		(141,003	)
Accrued expenses		(203,823	)
Deferred revenue		(359,862	)
Net assets acquired	$	2,515,071

The Company expects to finalize the purchase price allocation during the three month period ended December 31, 2011.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of the assets and liabilities has been determined by management, with the assistance of an independent valuation firm, and are based on significant inputs that are generally not observable in the market (level 3 measurements).  Key assumptions that were used by management are as follows:

Financial Assets and Liabilities

Accounts receivable, accounts payable and accrued expenses, were valued at stated value, which approximates fair value.

Inventories were valued at fair value based on estimated net realizable value less costs to complete and sales costs.  Deferred revenues were valued at fair value based on the amounts that will be applied as customer credits to future shipments.

Property and Equipment

Property and equipment were valued based on the estimated market value of similar equipment.

Other Intangible Assets

The Company acquired certain identifiable intangible assets as part of the transaction which included:   $300,000 in a non-compete agreement, $278,000 in a license agreement, and $1,543,097 in a trade secrets agreement.  The fair values of these intangibles were estimated based upon an income approach methodology. Critical inputs into the valuation model for these intangibles include estimations of expected revenue and attrition rates, expected operating margins and capital requirements.  The other intangible assets were assigned an estimated useful life of three years.

Acquisition Related Expenses

Included in the consolidated statement of operations for the period from January 21, 2011 (date of acquisition) to June 30, 2011 were transaction expenses aggregating approximately $150,000 for advisory and legal costs incurred in connection with the business acquisition.

12

Tier Electronics LLC operates as a wholly owned subsidiary of the Company.  Tier Electronics LLC leases its facility from the former owner of the Seller under a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI adjustment.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.

In connection with this acquisition the Company awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics, LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets and (2) 330,000 vest in three equal annual installments beginning on January 21, 2012.

Unaudited Pro Forma Information

The following unaudited pro forma financial information summarizes the results of operations for the period indicated as if the acquisition had been completed as of July 1, 2010.

These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of July 1, 2010 or that may be obtained in the future.

	Three Months Ended
	September 30, 2010
Revenues	$	559,895
Loss from Operations		(2,030,633	)
Net loss		(2,089,640	)
Net Loss per share-
Basic and diluted	$	(0.13	)
Weighted average shares-basic and diluted:
Basic		16,210,384

Pro forma information primarily reflects adjustments relating to interest on the promissory note and the amortization of the intangible assets acquired in the acquisition.

NOTE 3 – CHINA JOINT VENTURE

On August 30, 2011, the Company entered into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage batteries and power electronics in China (the “Joint Venture”).  Joint venture partners include PowerSav, Inc., AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission & Transformation Engineering Co.  The Joint Venture will be established upon receipt of certain governmental approvals from China which are anticipated to be received in November 2011.

The Joint Venture will operate through a jointly-owned Chinese company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (the “JV Company”).  The JV Company intends to initially assemble and ultimately manufacture the Company’s products for sale in the power management industry on an exclusive basis in mainland China and on a non-exclusive basis in Hong Kong and Taiwan.

In connection with the Joint Venture, on August 30, 2011 the Company and certain of its subsidiaries entered into the following agreements:

● Joint Venture Agreement of Anhui Meineng Store Energy Co., Ltd. (the “China JV Agreement”) by and between ZBB PowerSav Holdings Limited, a Hong Kong limited liability company (“Hong Kong Holdco”), and Anhui Xinrui Investment Co., Ltd, a Chinese limited liability company; and

● Limited Liability Company Agreement of ZBB PowerSav Holdings Limited by and between ZBB Cayman Corporation and PowerSav, Inc. (the “Holdco Agreement”).

In connection with the Joint Venture, upon establishment of the JV Company, the Company and certain of its subsidiaries will enter into the following agreements:

13

● Management Services Agreement by and between the JV Company and Hong Kong Holdco (the “Management Services Agreement”);

● License Agreement by and between Hong Kong Holdco and the JV Company (the “License Agreement”); and

● Research and Development Agreement by and between the Company and the JV Company (the “Research and Development Agreement”).

Pursuant to the China JV Agreement, it is anticipated that the JV Company will be capitalized with approximately $13.4 million of equity capital.  The Company’s only capital contributions to the Joint Venture will be a contribution of technology to the JV Company via the License Agreement valued at approximately $4.0 million.  The Company’s indirect interest in the JV Company will equal approximately 33%.

The Company’s investment in the JV Company will be made through Hong Kong Holdco, a holding company being formed with PowerSav and to which the Company is required to make a cash capital contribution of $200,000.  The Company will own 60% of Hong Kong Holdco’s equity interests.  The Company will have the right to appoint a majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco will have the right to appoint a majority of the members of the Board of Directors of the JV Company.

Pursuant to the Management Services Agreement Hong Kong Holdco will provide certain management services to the JV Company in exchange for a management services fee equal to five percent of the JV Company’s net sales for the first five years and three percent of the JV Company’s net sales for the subsequent three years.

Pursuant to the License Agreement, Hong Kong Holdco will grant to the JV Company (1) an exclusive royalty-free license to manufacture and distribute the Company’s ZBB Enerstore™, Zinc Bromide flow battery, version three (v3) battery (50KW) and ZBB Enersection™, POWR PECC (up to 250KW) (the “Products”) in mainland China in the power supply management industry and (2) a non-exclusive royalty-free license to manufacture and distribute the Products in Hong Kong and Taiwan in the power supply management industry.

Pursuant to the Research and Development Agreement, the JV Company may request the Company to provide research and development services upon commercially reasonable terms and conditions.  The JV Company would pay the Company’s fully-loaded costs and expense incurred in providing such services.

NOTE 4 - GOING CONCERN

The consolidated financial statements as of September 30, 2011 and for the three months then ended have been prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. The Company incurred a net loss of $1,675,488 for the three months ended September 30, 2011 and as of September 30, 2011 has an accumulated deficit of $57,019,131 and shareholders’ equity of $4,140,720.  The ability of the Company to meet its total liabilities of $9,041,570 and 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 sources in place and with other potential financing sources, that it will be able to raise the capital necessary to fund operations through at least June 30, 2012.  The Company’s sources of additional capital in the year ending June 30, 2012 include the raising of additional capital pursuant to an agreement with Socius CG II, Ltd. (“Socius”), as described in Note 12. As of September 30, 2011, there was approximately $5.1 million of availability under this facility.  However, this facility places certain restrictions on our ability to draw on it.  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 has successfully utilized this facility and believes it will continue to be able to do so.  As described in Note 12, during the three months ended September 30, 2011, the Company delivered two tranche notices to Socius pursuant to which Socius purchased $1,477,240 of Series A preferred stock.  However, there can be no assurances that unforeseen circumstances will not jeopardize the Company’s ability to draw on this and other potential financing sources.

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.  As described in Note 1, in April 2011, the Company entered into a Collaboration Agreement with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which through September 30, 2011 Honam paid the Company a total of $1.5 million.  Pursuant to the Collaboration Agreement Honam is required to pay an additional (1) $1.2 million by October 10, 2011 (subsequently received on October 10, 2011) and (2) $300,000 within 10 days after a V3 single stack is set up at Honam’s research and development center.

14

As described in Note 12, in the year ended June 30, 2011 the Company raised approximately $5.5 million through the sale of shares of Company common stock to certain investors.  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.

NOTE 5 - INVENTORIES

Inventories are comprised of the following as of September 30, 2011 and June 30, 2011:

	September 30, 2011		June 30, 2011
Raw materials	$	1,268,178	$	1,170,700
Work in progress		560,833		492,150
Total	$	1,829,011	$	1,662,850

NOTE 6– PROPERTY, PLANT & EQUIPMENT

Property, plant, and equipment are comprised of the following as of September 30, 2011 and June 30, 2011:

	September 30, 2011			June 30, 2011
Land	$	217,000		$	217,000
Building and improvements		2,598,999			2,559,266
Manufacturing equipment		3,024,859			2,901,912
Office equipment		226,688			217,074
Construction in process		1,644,910			1,215,400
Total, at cost		7,712,456			7,110,652
Less, accumulated depreciation		(2,481,688	)		(2,343,781	)
Property, Plant & Equipment, Net	$	5,230,768		$	4,766,871

During the year ended June 30, 2011, manufacturing equipment previously used in production and development activities were identified as impaired or had reached the end of their respective useful lives due to changing product and manufacturing technologies.  Upon write-down the manufacturing equipment and accumulated depreciation accounts were adjusted accordingly and $219,213 was charged to operations during the years ended June 30, 2011.  The adjustments were reported as impairment and other equipment charges.  For the three months ended September 30, 2011 the Company has not identified any equipment as impaired or having reached the end of its respective life.

NOTE 7– INTANGIBLE ASSETS

Intangible assets are comprised of the following as of September 30, 2011 and June 30, 2011:

	September 30, 2011			June 30, 2011
Non-compete agreement	$	300,000		$	300,000
License agreement		278,000			278,000
Trade secrets		1,543,922			1,543,922
Total, at cost		2,121,922			2,121,922
Less, accumulated amortization		(487,172	)		(310,415	)
Intangible Assets, Net	$	1,634,750		$	1,811,507

15

Estimated amortization expense for fiscal periods subsequent to September 30, 2011 are as follows:
2012	$	530,550
2013		707,307
2014		396,893
	$	1,634,750

NOTE 8 – GOODWILL

The Company acquired ZBB Technologies, Inc., a wholly-owned subsidiary, through a series of transactions in March 1996.  The goodwill amount of $1.134 million, the difference between the price paid for ZBB Technologies, Inc. and the net assets of the acquisition, amortized through fiscal 2002, resulted in the net goodwill amount of $803,079 as of September 30, 2011 and June 30, 2011.

The Company accounts for goodwill in accordance with FASB ASC topic 350-20, “Intangibles - Goodwill and Other - Goodwill” under which goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess.

NOTE 9 – BANK LOANS AND NOTES PAYABLE

The Company's debt consisted of the following as of September 30, 2011 and June 30, 2011:

	September 30, 2011		June 30, 2011
Bank loans and notes payable-current	$	844,637	$	779,088
Bank loans and notes payable-long term		3,796,006		3,937,056
Total	$	4,640,643	$	4,716,144

On January 21, 2011 the Company entered into a promissory note for $1,350,000 with TE Holdings Group, LLC in connection with the acquisition of the net assets of Tier Electronics LLC.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the promissory note.  Accrued interest is payable monthly. If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note The outstanding principal balance was $1,350,000 at September 30, 2011 and June 30, 2011.

On April 7, 2010 the Company entered into a loan agreement for $1,300,000 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.  Borrowings were not received until July 2010.  The loan is collateralized by the equipment purchased with the loan proceeds and substantially all assets of the Company not otherwise collateralized.  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.  The outstanding principal balance was $1,300,000 at September 30, 2011 and June 30, 2011 respectively.

On July 1, 2009 the Company entered into a loan agreement to finance new production equipment.  The $156,000 bank note was collateralized by specific equipment, interest at 5.99%.  The note with a balance of $107,155 as of June 30, 2010 was paid off during June 2011.

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 floor of 5% as of June 30, 2011 and 2010 with any principal balance due at maturity on June 1, 2018 and collateralized by the building and land.  The outstanding principal balance was $752,645 and $763,338 at September 30, 2011 and June 30, 2011, respectively.

16

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.   The outstanding principal balance was $786,951and $794,074 at September 30, 2011 and June 30, 2011, respectively.  The loan is collateralized by a mortgage on the building and land.

On November 28, 2008 the Company entered into a loan agreement with a bank.  The note is collateralized by specific equipment, requiring monthly payments of $21,000 of principal and interest; rate equal to the prime rate subject to a floor of 4.25%; maturity date of July 1, 2012. The outstanding principal balance was $451,045and $508,733 at September 30, 2011 and June 30, 2011, respectively.

An equipment loan with a balance of $48,900 as of June 30, 2010 was paid in full in November 2010.

Maximum aggregate annual principal payments for periods subsequent to September 30, 2011 are as follows:

2012	$	703,243
2013		993,785
2014		789,299
2015		798,904
2016		358,852
2017 and thereafter		996,560
	$	4,640,643

The loan agreements with the bank require the Company to meet certain operating ratios.  The Company was not in compliance with such covenants as of September 30, 2011, for which a waiver was obtained from the bank on June 27, 2011 which waived the covenants through June 29, 2012.

NOTE 10 – EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

During the three months ended September 30, 2011 and 2010, 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 $300,228 and $103,598, based on the amortized grant date fair value of options during the three months ended September 30, 2011 and 2010, respectively.

At the annual meeting of shareholders held on November 10, 2010, the Company’s shareholders approved the Company’s 2010 Omnibus Long-Term Incentive Plan (the “Omnibus Plan”). 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. Four million shares of common stock are reserved for issuance under the Omnibus Plan.  In connection with the adoption of the Omnibus Plan the Company’s Board of Directors froze the Company’s other stock option plans and no further grants may be made under those plans.

On November 10, 2010, (1) a total of 511,143 RSUs were granted to the Company’s directors in payment of directors fees through November 2011 pursuant to the Company’s Director Compensation Policy, (2) a total of 574,242 RSUs previously issued to the Company’s directors pursuant to this policy and which provided for cash settlement were converted to stock settled RSUs, and (3) 315,000 RSUs were granted in total to a consultant and to the Company’s President and CEO.

During the three months ended September 30, 2011 options to purchase 543,000 shares were granted to employees exercisable at prices from $0.59 to $1.16 and exercisable at various dates through September 2019.  As of September 30, 2011, an additional 1,650,615 shares are available to be issued under the Omnibus Plan.

On January 21, 2011, the Compensation Committee of the Company’s Board of Directors awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets, (2) 330,000 vest in three equal annual installments beginning on the one-year anniversary of the grant date.

During March 2011, the expiration date of 75,000 options held by a former director of the Company was extended from March 31, 2011 to April 30, 2011, and the expiration date of 125,000 options was extended from March 31, 2011 to December 31, 2011.  The Company recorded an expense of $45,676 in connection with these extensions.

17

During 2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”) that authorized 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.  No options were issued under the 2007 Plan during the 3 months ended September 30, 2011.  During the year ended June 30, 2011, 74,500 options were granted to employees at exercise prices from $0.46 to $0.64 and expiration dates from August 2018 to October 2018 and 150,189 options were forfeited.  As of September 30, 2011, there were no options available to be issued under the 2007 Plan.

During 2005, the Company established an Employee Stock Option Scheme (the “2005 Plan”) that authorized the board of directors or a committee thereof to grant options to employees and directors of the Company. The maximum number of options available to be granted in aggregate at any time under the 2005 Plan was 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. No options were issued under the 2005 Plan during the three months ended September 30, 2011 and 2010.  At September 30, 2011, options to purchase 50,000 shares with an exercise price of $3.82 and an expiration date of June 20, 2012 were outstanding.  As of September 30, 2011, there were no options available to be issued under the 2005 Plan.

In 2002 the Company established the 2002 Stock Option Plan (the “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.  No options were issued under the 2005 Plan during the three months ended September 30, 2011 and 2010.  During the year ended June 30, 2011 there were 100,000 options forfeited.   At September 30, 2011 there were 375,000 options outstanding with exercise prices from $0.49 to $3.59 and exercise dates up to June 2018.  As of September 30, 2011, there were no options available to be issued under the SOP.

The Compensation Committee of the Company’s Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new President and CEO in January 2010.  The first grant is an option to purchase 400,000 shares of common stock with the following vesting terms: one third of the shares vested on January 7, 2011 and the balance vest in 24 monthly installments beginning on January 31, 2011 and ending on December 31, 2012.  The second grant is an option to purchase 100,000 shares of common stock which  vested in two equal installments on June 30, 2010 and December 31, 2010, respectively, based on the satisfaction of certain performance targets for the six-month periods then ended.  Both options have an exercise price of $1.33 per share which was equal to the closing price of the Company’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, 2011, the Company has a total of 3,865,303 options outstanding, 1,400,385 RSUs outstanding, and 1,650,615 shares available for future grant under the Omnibus Plan.

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

	Number of Options			Weighted-Average Exercise Price Per Share
Balance at July 1, 2010		2,316,992		$	1.92
Options granted		1,230,500			1.02
Options forfeited		(150,189	)		2.51
Options exercised		(75,000	)		1.09
Balance at June 30, 2011		3,322,303			1.55
Options granted		543,000			0.90
Balance at September 30, 2011		3,865,303		$	1.46

18

The following table summarizes information relating to the stock options outstanding at September 30, 2011:

		Outstanding						Exercisable
Range of Exercise Prices		Number of Options		Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
	$0.49 to $1.69		3,340,303		6.6		$1.12		1,090,413		$1.29
	$3.59 to $3.82		525,000		3.3		$3.61		525,000		$3.61
Balance at September 30, 2011			3,865,303		6.1		$1.46		1,615,413		$2.05

During the three months ended September 30, 2011 options to purchase 543,000 shares were granted to employees  exercisable at prices from $0.59 to $1.16 per share based on various service and performance based vesting terms from July 2011 through September 2014 and exercisable at various dates through September 2019. 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 and performance based vesting terms from August 2010 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, 2011 using the Black-Scholes option-pricing model:

	2012		2011
Expected life of option (years)		2.5		.001 - 2.5
Risk-free interest rate		.24 - .55		.24 - 1.34%
Assumed volatility		106 - 107%		53 - 153%
Expected dividend rate		0		0
Expected forfeiture rate		6.3 - 6.8%		0 - 7.760%

Time-vested and performance-based stock awards, including stock options, restricted stock and restricted stock units, 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, 2011 and June 30, 2011 and changes during the year ended, is presented below:

	Number of  Options			Weighted-Average Grant Date Fair Value Per Share
Balance at July 1, 2010		987,500		$	0.77
Granted		1,230,500			0.58
Vested		(476,526	)		0.49
Forfeited		(6,250	)		0.29
Balance at June 30, 2011		1,735,224			0.65
Granted		543,000			0.54
Vested		(28,334	)		0.46
Balance at September 30, 2011		2,249,890		$	0.62

Total fair value of options granted in the three months ended September 30, 2011 and 2010 was $292,759 and $22,305, respectively.  At September 30, 2011 there was $673,816 in unrecognized compensation cost related to unvested stock options, which is expected to be recognized over the next 3 years.

19

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 June 30, 2010 was $182,500 related to these awards. The RSUs were classified as liability awards because the RSUs were expected to be paid in cash upon vesting. These RSUs were converted to 574,242 stock settled RSUs in November 2010 and $182,500 was transferred from accrued compensation and benefits to additional paid-in capital.  The cash settled RSUs that were converted to stock settled RSUs were 100% vested upon conversion.  There were also $89,450 in directors’ fees expense and $7,000 in consulting fees expense settled with RSUs for the three months ended September 30, 2011.   As of September 30, 2011 there were 275,000 unvested RSUs outstanding which will vest through May 6, 2014.  At September 30, 2011 there was $278,500 in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized through May 6, 2014.  Vested RSUs are payable six months after the holder’s separation from service with the Company.

The table below summarizes the status of restricted stock unit balances:

	Number of Restricted Stock Units		Weighted-Average Valuation Price Per Unit
Conversion of cash settled RSUs		574,242	$	0.55
RSUs granted		826,143		0.80
RSUs forfeited		-		-
Balance at June 30, 2011		1,400,385		0.70
RSUs granted		-		-
RSUs forfeited		-		-
Balance at September 30, 2011		1,400,385	$	0.70

NOTE 11 - NON RELATED PARTY WARRANTS

At September 30, 2011 there were outstanding warrants to purchase 40,000 common shares issued by the Company to an equipment supplier in November 2010 exercisable at $0.56 per share and which expire in January 2014.  The fair value of the warrants was $11,834 and is included in the cost of the equipment.

At September 30, 2011 there were outstanding warrants to purchase 1,121,875 common 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, 2011 there were outstanding warrants to purchase 358,333 common 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, 2011 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, 2011 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 September 2011 and September 2012 and with exercise prices of between $3.75 and $7.20.

Warrants to purchase 120,023 common shares acquired by Empire Financial Group, Ltd. in 2006 exercisable at $3.23 per share expired during September 2011.

20

The table below summarizes non-related party warrant balances:

	Number of Warrants			Weighted-Average Exercise Price Per Share
Balance at July 1, 2010		1,846,031		$	1.76
Warrants granted		3,067,797			1.24
Warrants expired		-			-
Warrants exercised		(3,027,797	)		(1.25	)
Balance at June 30, 2011		1,886,031			1.73
Warrants granted (See Note 12)		2,621,359			0.55
Warrants expired		(120,023	)		3.23
Warrants exercised (See Note 12)		(2,621,359	)		(0.55	)
Balance at September 30, 2011		1,766,008		$	1.86

NOTE 12 – SHAREHOLDERS’ EQUITY

On August 30, 2010, the Company entered into an amended and restated securities purchase agreement (“Socius Agreement”) with Socius CG II, Ltd. (“Socius”). Pursuant to the Socius Agreement the Company has 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 the Company’s 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.

On November 10, 2010, the Company’s Board of Directors approved a certificate of designation of preferences, rights and limitations to authorize shares of Series A preferred stock in accordance with the terms of the Socius Agreement.  Upon the authorization of Series A preferred stock and in accordance with the terms of the Socius Agreement, the $517,168 of outstanding debentures issued by the Company to Socius CG II, Ltd. on September 2, 2010, and $7,510 of accrued interest were exchanged into 52.468 shares of Series A preferred stock.  In addition, in accordance with the Socius Agreement, any future tranches under the Socius Agreement will involve shares of Series A preferred stock instead of debentures.

Under the Socius Agreement, in connection with each tranche Socius is 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.  Socius may pay for the shares it purchases at its option, in cash or a collateralized promissory note.  Any such promissory note will bear interest at 2.0% per year and is collateralized 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 the Series A preferred stock issued by us to Socius under the Socius Agreement, and may be applied by us toward the redemption of the 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 Agreement, the Company was obligated to pay Socius a commitment fee in the form of shares of common stock or cash, at the option of the Company, in the amount of $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 occurred 50% at the closing of the first tranche and 50% at the closing of the second tranche.

On September 2, 2010 the Company delivered the first tranche notice under the Socius Agreement pursuant to which on September 20, 2010 Socius purchased $517,168 of debentures.  In connection with this 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) the Company issued to Socius 490,196 shares of common stock in payment of the commitment fee payable in connection with the tranche. As consideration for the common stock it purchased, Socius issued a collateralized promissory note maturing, the later of September 2, 2014 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Series A preferred stock on September 20, 2014.  The promissory note was recorded at a discount of $183,922 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

21

On November 12, 2010 the Company delivered the second tranche notice under the Socius Agreement pursuant to which on November 29, 2010 Socius purchased $490,000 of Series A preferred stock.  In connection with this tranche, (1) Socius purchased 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) the Company issued to Socius 402,901 shares of common stock in payment of the commitment fee payable in connection with the tranche. As consideration for the common stock it purchased, Socius issued a collateralized promissory note maturing, the later of November 15, 2014 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on November 29, 2014.  The promissory note was recorded at a discount of $173,872 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On January 12, 2011 the Company delivered the third tranche notice under the Socius Agreement pursuant to which on January 27, 2011 Socius purchased from the Company $2,020,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 1,934,042 shares of common stock for a total purchase price of $2,727,000 and at a per share purchase price of $1.41. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of January 14, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on January 27, 2015. The promissory note was recorded at a discount of $716,777 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On March 16, 2011 the Company delivered the fourth tranche notice under the Socius Agreement pursuant to which on March 31, 2011 Socius purchased from the Company $520,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 557,142 shares of common stock for a total purchase price of $702,000 and at a per share purchase price of $1.26. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of March 16, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on March 31, 2015. The promissory note was recorded at a discount of $184,461determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On September 8, 2011 the Company delivered the fifth and sixth tranche notices under the Socius Agreement pursuant to which on September  30, 2011 Socius purchased from the Company $1,447,240 of Series A preferred stock.  In connection with the tranches, Socius purchased 2,621,359 shares of common stock for a total purchase price of $1,953,775 and at an average per share purchase price of $0.75. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory notes maturing, the later of September 8, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on September 30, 2015. The promissory notes were recorded at a discount of $512,815 determined by discounting the promissory notes at a rate of 10%.  The promissory notes are included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory notes were received in exchange for the issuance of common stock.

The Company’s accounting for the 2% notes receivable – common stock is to accrue interest on the discounted notes receivable at 10% as a credit to additional paid in capital.  The Company’s accounting for the Series A preferred stock is to accrete dividends at 10% as a charge to additional paid in capital.

In the event of liquidation, dissolution or winding up (whether voluntary or involuntary) of the Company, the holders of shares of Series A preferred stock shall be entitled to be paid the full amount payable on such shares upon the liquidation, dissolution or winding up of the corporation fixed by the Board of Directors with respect to such shares, if any, before any amount shall be paid to the holders of the Common Stock.  The liquidation preference of the outstanding Series A preferred stock was $5,251,390 and $3,715,470 as of September 30, 2011 and June 30, 2011, respectively.  Redemption or liquidation may be paid by application of the Socius notes receivable.

On June 14 and 15, 2011 we entered into Stock Purchase Agreements with certain investors providing for the issuance of a total of 3,049,463 shares of the Company’s common stock for an aggregate purchase price of $2,527,000 at a weighted average price per share of $0.83.  The closing took place on June 17, 2011.  The net proceeds to the Company, after deducting $153,000 of offering costs, were $2,374,000.

On December 29, 2010 and January 3, 2011 the Company entered into Stock Purchase Agreements with certain investors providing for the issuance of a total of 2,103,532 shares of the Company’s common stock for an aggregate purchase price of $2,000,000 at a weighted average price per share of $0.95.  The closing took place on January 12, 2011.  The net proceeds to the Company, after deducting $57,000 of offering costs, were $1,943,000.

22

On October 12, 2010, the Company entered into Stock Purchase Agreements with certain investors providing for the sale of a total of 3,329,467 shares of the Company’s common stock for an aggregate purchase price of $1,435,000 at a price per share of $0.431.  The closing took place on October 15, 2010.  The net proceeds to the Company after deducting $60,000 of offering costs, were $1,375,000.

NOTE 13 – COMMITMENTS

Leasing Activities

The Company leases its Australian research and development facility from a non-related Australian company under the terms of a lease that expired October 31, 2011.  The rental rate was $75,596 per annum (A$72,431) and is subject to an annual CPI adjustment. Rent expense was $20,193 and $20,592 for the three months ended September 30, 2011 and September 30, 2010, respectively.  The Company renewed the lease on its Australian research and development facility through October 31, 2016 at rental rate of $95,855 per annum (A$95,000) subject to an annual CPI adjustment.  The Company also leases a building from an officer of its subsidiary, Tier Electronics LLC, who is also a shareholder and director, under a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI adjustment.  The rent expense for the three months ended September 30, 2011 was $21,000.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.  The future payments required under the terms of the leases for fiscal periods subsequent to September 30, 2011are as follows:

2012	$	132,994
2013		179,855
2014		137,855
2015		95,855
	$	546,559

Employment Contracts

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 nine 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 14 - RETIREMENT PLANS

All Australian based employees are entitled to varying degrees of benefits on retirement, disability, or death.  The Company contributes to an accumulation fund on behalf of the employees under an award which is legally enforceable.  For U.S. employees, the Company has a 401(k) plan.  All active participants are 100% vested immediately.  Expenses under these plans were $15,460 and $9,855 for the three months ended September 30, 2011 and September 30, 2010 respectively.

NOTE 15— INCOME TAXES

The provision (benefit) for income taxes consists of the following:

	Three months ended September 30,
	2011			2010
Current	$	(70,000	)	$	-
Deferred		-			-
Provision (benefit) for income taxes	$	(70,000	)	$	-

The Company accounts for income taxes using an asset and liability approach which generally requires the recognition of deferred income tax assets and liabilities based on the expected future income tax consequences of events that have previously been recognized in the Company’s financial statements or tax returns. In addition, a valuation allowance is recognized if it is more likely than not that some or all of the deferred income tax assets will not be realized in the foreseeable future. Deferred income tax assets are reviewed for recoverability based on historical taxable income, the expected reversals of existing temporary differences, tax-planning strategies and projections of future taxable income. As a result of this analysis, the Company has provided for a valuation allowance against its net deferred income tax assets as of September 30, 2011 and 2010.

During the three months ended September 30, 2011, the Company recorded a $70,000 credit (benefit) for income taxes which represents a pro rata portion of an estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2012 based on the qualified expenditures the Company incurred during the three months ended September 30, 2011.The Company recorded an estimated income tax refund receivable of $164,640 for the year ended June 30, 2011 for the estimated refund related to qualified expenditures during the year ended June 30, 2011, related to a refundable Australian research and development tax credit for the year ended June 30, 2011.  The Company recognized a refund of $415,315 for expenditures incurred during the year ended June 30, 2010 for a refund claim filed in March 2011.  The Company became aware of the refund opportunity in March 2011and as a result had not provided for a benefit during the six month period ended December 31, 2010.  The Company has provided a valuation allowance against all deferred income tax assets as it is more likely than not that its deferred income tax assets are not currently realizable due to the net operating losses incurred by the Company since its inception.

23

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

	Three months ended September 30,
	2011		2010
Income tax benefit computed at the U.S. federal statutory rate		-34%		-34%
Australia research and development credit		-4		0
Change in valuation allowance		34		34
Total		-4%		0%

Significant components of the Company’s net deferred income tax assets as of September 30, 2011 and June 30, 2011 were as follows:

	Three months ended September 30, 2011			Year ended June 30, 2011
Federal net operating loss carryforwards		14,036,302		$	13,600,000
Wisconsin net operating loss carryforwards		1,626,474			1,559,566
Australia net operating loss carryforwards		1,434,084			1,560,010
Deferred income tax asset valuation allowance		(17,096,860	)		(16,719,576	)
Total deferred income tax assets	$	-		$	-

The Company has U.S. federal net operating loss carryforwards of approximately $41 million as of September 30, 2011, that expire at various dates between June 30, 2015 and 2032.  The Company has U.S. federal research and development tax credit carryforwards of approximately $48,000 as of September 30, 2011 that expire at various dates through June 30, 2030.  As of September 30, 2011, the Company has approximately $31 million of Wisconsin net operating loss carryforwards that expire at various dates between June 30, 2013 and 2027.  As of September 30, 2011, the Company also has approximately $4.78 million of Australian net operating loss carryforwards available to reduce future taxable income of its Australian subsidiaries with an indefinite carryforward period.

A reconciliation of the beginning and ending balance of unrecognized income tax benefits is as follows:

	Three Months Ended September 30, 2011			Year Ended June 30, 2011
Beginning balance	$	219,500		$	-
Additions based on tax positions related to the current period		-			219,500
Additions for tax positions of prior years		-			-
Reductions for tax positions of prior years		-			-
Settlements		-			-
Lapses of statutes of limitations		-			-
Effect of foreign currency translation		(17,700	)
Ending balance	$	201,800		$	219,500

The unrecognized income tax benefits relate to the credit the Company claimed during fiscal 2011 related to a refundable Australian research and development tax credit for qualified expenditures incurred during fiscal years 2010, 2011 and the quarter ended September 30, 2011. If recognized, it would favorably affect the effective income tax rate.  The amount is included in accrued expenses in the accompanying condensed consolidated balance sheets.

24

NOTE 16 – BUSINESS SEGMENT INFORMATION

The Company reports its financial results in two reportable business segments: ZBB Energy Storage and Power Electronic Systems and Tier Electronics Power Conversion Systems.

The ZBB Energy Storage and Power Electronics Systems business segment designs and manufactures advanced electrical power management platforms enabling the growing global need for distributed renewable energy, energy storage, energy efficiency, power quality, and grid modernization. The Company’s intelligent power management platforms integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technologies to ensure optimal energy availability for on grid and off grid applications, while maximizing the use of renewable energy sources.  The Company solves a wide range of global electrical system challenges for diverse applications in commercial building, telecommunications, defense, utility and industrial markets.

The Tier Electronics Power Conversion Systems business segment designs and manufactures state of the art digital power converters for power quality, alternative energy, and military markets.  These power converters are designed to be fully programmable and feature DSP controls with very high levels of integration that reduce costs while increasing performance.

The operating results for the two business segments are as follows:

	Three months ended September 30,
	2011			2010
Revenues:
ZBB Energy Storage and Power Electronics Systems	$	1,411,750		$	-
Tier Electronics Power Conversion Systems		226,107			-
Total	$	1,637,857		$	-
	Three months ended September 30,
		2011			2010
Loss from Operations:
ZBB Energy Storage and Power Electronics Systems	$	(1,276,454	)	$	(2,004,085	)
Tier Electronics Power Conversion Systems		(420,028	)		-
Total	$	(1,696,482	)	$	(2,004,085	)

The accounting policies of the business segments are the same as those for the consolidated Company.

Total assets for the two business segments are as follows:

	September 30, 2011		June 30, 2011
ZBB Energy Storage and Power Electronics Systems	$	10,723,762	$	10,161,151
Tier Electronics Power Conversion Systems		2,458,528		2,186,475
Total	$	13,182,290	$	12,347,626

NOTE 17 — SUBSEQUENT EVENTS

On November 9, 2011 the Company issued 548,051 RSUs in connection with the annual compensation of directors’ fees.  The RSUs vest quarterly on November 9, 2011, March 31, 2012, June 30, 2012 and September 30, 2012.

25

ZBB ENERGY CORPORATION

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

Overview

ZBB Energy Corporation (“We,” “Us,” “Our,” “ZBB” or the “Company”) develops and manufactures modular, scalable and environmentally friendly power systems (ZBB Enersystem™) based upon the Company’s proprietary zinc bromide rechargeable electrical energy storage technology.  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, 2011 as filed by us with the SEC on September 8, 2011.

We provide advanced electrical power management platforms targeted at the growing global need for distributed renewable energy, energy efficiency, power quality, and grid modernization.  We and our power electronics subsidiary, Tier Electronics LLC, have developed a portfolio of intelligent power management platforms that directly integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technology. We also offer advanced systems to directly connect wind and solar equipment to the grid and systems that can form various levels of micro-grids.  Tier Electronics LLC participates in the energy efficiency markets through its hybrid vehicle control systems, and power quality markets with its line of regulation solutions. Together, these platforms solve a wide range of electrical system challenges in global markets for utility, governmental, commercial, industrial and residential end customers.  The Company was founded in 1998 and is headquartered in Wisconsin, USA with offices also located in Perth, Western Australia.

On January 21, 2011 (“Closing Date”), we entered into an Asset Purchase Agreement under which we acquired substantially all of the net assets of Tier Electronics LLC (“Seller”) used in connection with the Seller’s business of developing, manufacturing, marketing and selling power electronics products for and to original equipment manufacturers in various industries.  The purchase price was comprised of (1) a $1.35 million promissory note issued by the Company, (2) 800,000 shares of the Company’s common stock, and (3) payment of approximately $245,000 of Seller’s obligations.  The promissory note is in the principal amount of $1,350,000 and bears interest at a fixed annual rate equal to eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the Closing Date.  Accrued interest is payable monthly.  If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note.  Tier Electronics LLC operates as a wholly-owned subsidiary of the Company.

On April 8, 2011, we entered into a Collaboration Agreement (the “Collaboration Agreement”) with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which we agreed with Honam to collaborate on the further technical development of our third generation ZBB Enerstore™, Zinc Bromide flow battery module (the “Version 3 Battery Module”).  Pursuant to the Collaboration Agreement, Honam is required to pay us a total of $3 million dollars as follows: (1) $1 million within 10 days following execution of the Collaboration Agreement (subsequently received on April 19, 2011); (2) $500,000 by June 30, 2011 (subsequently received on June 30, 2011); (3) $1.2 million by October 10, 2011 (subsequently received on October 10, 2011) and (4) $300,000 within 10 days after a single Version 3 Battery Module is set up at Honam’s research and development center.  Pursuant to the Collaboration Agreement, the parties are required to negotiate a license agreement under which upon the completion of the collaboration project and the receipt by the Company of all payments due under the Collaboration Agreement, the Company shall grant to Honam: (1) a fully paid-up, exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in Korea and (2) non-exclusive rights to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore.  In connection with such non-exclusive rights, Honam is required to pay a royalty to the Company.

On August 30, 2011, we entered into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage batteries and power electronics in China (the “Joint Venture”).  Joint venture partners include PowerSav, Inc., AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission & Transformation Engineering Co.

The Joint Venture will be established upon receipt of certain governmental approvals from China which are anticipated to be received in November 2011. The Joint Venture will operate through a jointly-owned Chinese company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (the “JV Company”).  The JV Company will initially assemble and ultimately manufacture the Company’s products for sale in the power management industry on an exclusive basis in mainland China and on a non-exclusive basis in Hong Kong and Taiwan.

26

In connection with the Joint Venture, on August 30, 2011 the Company and certain of its subsidiaries entered into the following agreements:

● Joint Venture Agreement of Anhui Meineng Store Energy Co., Ltd. (the “China JV Agreement”) by and between ZBB PowerSav Holdings Limited, a Hong Kong limited liability company (“Hong Kong Holdco”), and Anhui Xinrui Investment Co., Ltd, a Chinese limited liability company; and

● Limited Liability Company Agreement of ZBB PowerSav Holdings Limited by and between ZBB Cayman Corporation and PowerSav, Inc. (the “Holdco Agreement”).

In connection with the Joint Venture, upon establishment of the JV Company, the Company and certain of its subsidiaries will enter into the following agreements:

● Management Services Agreement by and between the JV Company and Hong Kong Holdco (the “Management Services Agreement”);

● License Agreement by and between Hong Kong Holdco and the JV Company (the “License Agreement”); and

● Research and Development Agreement by and between the Company and the JV Company (the “Research and Development Agreement”).

Pursuant to the China JV Agreement, it is anticipated that the JV Company will be capitalized with approximately $13.4 million of equity capital.  The Company’s only capital contributions to the Joint Venture will be a contribution of technology to the JV Company via the License Agreement valued at approximately $4.0 million.  The Company’s indirect interest in the JV Company will equal approximately 33%.

The Company’s investment in the JV Company will be made through Hong Kong Holdco, a holding company being formed with PowerSav and to which the Company will make a cash capital contribution of $200,000.  The Company will own 60% of Hong Kong Holdco’s equity interests.  The Company will have the right to appoint a majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco will have the right to appoint a majority of the members of the Board of Directors of the JV Company.

Pursuant to the Management Services Agreement Hong Kong Holdco will provide certain management services to the JV Company in exchange for a management services fee equal to five percent of the JV Company’s net sales for the first five years and three percent of the JV Company’s net sales for the subsequent three years.

Pursuant to the License Agreement, Hong Kong Holdco will grant to the JV Company (1) an exclusive royalty-free license to manufacture and distribute the Company’s ZBB Enerstore™, Zinc Bromide flow battery, version three (v3) battery (50KW) and (ZBB Enersection™, POWR PECC (up to 250KW) (the “Products”) in mainland China in the power supply management industry and (2) a non-exclusive royalty-free license to manufacture and distribute the Products in Hong Kong and Taiwan in the power supply management industry.

Pursuant to the Research and Development Agreement, the JV Company may request the Company to provide research and development services upon commercially reasonable terms and conditions.  The JV Company would pay the Company’s fully-loaded costs and expense incurred in providing such services.

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, 2011. 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.

27

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.

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

●   Successful commercialization of our next generation ZBB Enerstore™,  Zinc Bromide flow battery, version three (V3) and receipt of UL 1741 certification for the ZBB Enersection™ POWR PECC are critical component of our growth plans.

●   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 manufacturing facilities.

●   We may experience difficulties in integrating the business of Tier Electronics LLC and could fail to realize the potential benefits of the acquisition.

●   Our China joint venture could be adversely affected by the laws and regulations of the Chinese government, our lack of decision-making authority and disputes between us and the Joint Venture.

●   Business practices in Asia may entail greater risk and dependence upon the personal relationships of senior management than is common in North America, and therefore some of our agreements with other parties in China and South Korea could be difficult or impossible to enforce.

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

●   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.

●   Our financial results may vary significantly from period-to-period due to long and unpredictable sales cycles for some of our products and the cyclical nature of certain end-markets into which we sell our products, which may in turn lead to volatility in our stock price.

●   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.

●   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 shareholders’ 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.

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

For further information concerning these risks and uncertainties see the Risk Factors sections of our Annual Report on Form 10-K for the year ended June 30, 2011 and in any subsequently filed Quarterly Reports on Form 10-Q.

New Accounting Pronouncements

In September 2011, the FASB issued an update to ASC 350, Intangibles — Goodwill and Other. This ASU amends the guidance in ASC 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test annually for impairment. The ASU is limited to goodwill and does not amend the annual requirement for testing other indefinite-lived intangible assets for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We will adopt this ASU for our 2012 goodwill impairment testing. We do not expect this ASU to have a material impact, if any, on our consolidated condensed financial statements.

In June 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to the presentation of comprehensive income that eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or two consecutive statements. This guidance is effective for us beginning July 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

28

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between accounting principles generally accepted in the United States (U.S. GAAP) and International Financial Reporting Standards. This guidance includes amendments that clarify the application of existing fair value measurements and disclosures, in addition to other amendments that change principles or requirements for fair value measurements or disclosures. This guidance is effective for us beginning January 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

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:

Accounts Receivable

The Company records allowances for doubtful accounts based on customer-specific analysis and general matters such as current assessments of past due balances and economic conditions.

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.

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.

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

	Estimated Useful Lives
Manufacturing equipment	3 - 7 years
Office equipment	3 - 7 years
Building and improvements	7 - 40 years

Intangible Assets

Intangible assets generally result from business acquisitions.  The Company accounted for the January 21, 2011 acquisition of Tier Electronics LLC by assigning the purchase price to identifiable tangible and intangible assets and liabilities.  Assets acquired and liabilities assumed were recorded at their estimated fair values.  Other intangible assets consist of a non-compete agreement, license agreement, and trade secrets.

Amortization is recorded for other intangible assets with determinable lives. Other intangible assets are amortized using the straight line method over the three year estimated useful lives of the respective assets.

29

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.

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 and intangible assets 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 in 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.

Warranty Obligations

The Company typically warrants its products for twelve months after installation or eighteen months after date of shipment, whichever first occurs. Warranty obligations 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 liability for warranty obligations.  In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise.

During the year ended June 30, 2010, battery stack manufacturing issues were discovered as a 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 has adjusted its warranty obligations accordingly.  We will adjust our warranty rates in future periods as these processes are implemented and tested.

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.

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.

The portion of revenue related to engineering and development is recognized ratably upon delivery of the goods or services pertaining to the underlying contractual arrangement or revenue is recognized as certain activities are performed by the Company over the estimated performance period.

The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net revenues. The Company reports its revenues net of estimated returns and allowances.

30

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.

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.

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 June 30, 2011 and June 30, 2010.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP 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;

●   provisions for excess and obsolete inventory;

●   the lives and recoverability of property, plant and equipment and other long-lived assets such as goodwill and other intangible assets;

●   contract costs and reserves;

●   warranty obligations;

●   income tax valuation allowances;

●   stock-based compensation; and

●   fair values of assets acquired and liabilities assumed in a business combination.

Results of Operations

Three months ended September 30, 2011 compared with the three months ended September 30, 2010:

Revenue and Other income:

Our revenues for the three months ended September 30, 2011 and September 30, 2010 were $1,637,857 and $0, respectively.  This increase of $1,637,857 was the result of a $266,107 increase in commercial product sales and revenues and a $1,411,750 increase in engineering and development revenues as compared to the three months ended September 30, 2010.  The increase in commercial product sales and revenues consisted of sales attributable to our Tier Electronics Power Conversion Systems business which we acquired in January 2011.  Engineering and development revenues  for the 2011 period consisted primarily of revenue recognized under the Honam Collaboration agreement which is being recognized over the estimated performance period.

Other income for the three months ended September 30, 2011 reflects an increase in interest income of $4,899 compared to the three months ended September 30, 2010, due primarily to increasing investment balances.

31

Cost and Expenses and Other Expense:

Total costs and expenses for the three months ended September 30, 2011 and 2010 were $3,334,339 and $2,004,085, respectively. This increase of $1,330,254 in the three months ended September 30, 2011 was primarily due to the following factors:

●   $156,671 of costs of product sales during the 2011 period compared to $0 of costs of products sales during the 2010 period;

●   $481,107 of costs of engineering and development revenues during the 2011 period compared to $0 of costs of engineering and development revenues during the 2010 period;

●   Decrease in advanced engineering and development expenses of approximately $139,890 due to a decrease in the Company’s engineering and development activities for its next generation battery module and PECC systems;

●   Increase in selling, general, and administrative expenses of $599,268 due primarily to the inclusion of $280,000 related to Tier Electronics in the 2011 period, and  increases in legal fees related to the China Joint Venture and stock based compensation of $135,000 and $100,000, respectively;

●   Increase in depreciation and amortization expenses of $233,098 primarily due to the amortization of intangible assets related to the Tier acquisition beginning in January 2011.

Other expenses for the three months ended September 30, 2011 and 2010 consisted primarily of interest expenses of $59,668 and $32,007, respectively.

Income Taxes (Benefit):

During the three months ended September 30, 2011, we recorded a $70,000 benefit for income taxes which represents a pro rata estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2012 related to the qualified expenditures we incurred during the three months ended September 30, 2011.

Net Loss:

Our net loss for the three months ended September 30, 2011 decreased by $358,854 to $1,675,448 from the $2,034,302 net loss for the three months ended September 30, 2010.

Liquidity and Capital Resources

Since our inception, our research, advanced engineering and development, and operations have been primarily financed through debt and equity financings, and government and other research and development contracts.  Total paid in capital as of September 30, 2011 was $62,432,372 and $60,777,286 as of June 30, 2011.   We had a cumulative deficit of $57,019,131 as of September 30, 2011 compared to a cumulative deficit of $55,343,683 as of June 30, 2011.  At September 30, 2011 we had a working capital surplus of $268,129 compared to a June 30, 2011 working capital surplus of $712,109.  Our shareholders’ equity as of September 30, 2011 and June 30, 2011 was $4,140,720 and $4,156,510, respectively.  We expect capital expenditures for property and equipment during fiscal 2012 to approximate $2,000,000.

On August 30, 2010 we entered into an amended and restated securities purchase agreement (the “Socius Agreement”) with Socius CG II, Ltd. (“Socius”). Pursuant to the Socius 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 authorized in November 2010.  Upon authorization, the outstanding debentures were automatically converted into shares of Series A preferred stock. Under the Socius Agreement, in connection with each tranche Socius is 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. 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.  As of September 30, 2011, there was approximately $5.1 million available on this facility.

32

During the three months ended September 30, 2011 we delivered a total of two tranche notices under the Socius Agreement pursuant to which Socius purchased from us $1,447,240 of preferred stock.   In connection with the tranches, Socius purchased 2,621,359 shares of common stock for a total purchase price of $1,953,775 and at a per share weighted average purchase price of $0.75. Socius paid for the shares of common stock it purchased with collateralized promissory notes maturing the later of four years or when we have redeemed all preferred stock issued by us to Socius under the Socius Agreement.

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 2011 include: 1) execute an overall reduction in controllable expenses to preserve cash resources including continuing our revised non-employee director compensation policy under which fees are paid primarily with equity 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; 4) file a new $25 million universal shelf registration statement with the SEC as described in further detail below; and 5) pursue potential strategic transactions such as the Tier acquisition, Honam collaboration and China joint venture transaction through which we may grow our business and/or obtain non-dilutive financing.

On January 31, 2011 we filed with the SEC a universal shelf registration statement on Form S-3 covering the offer and sale from time to time of up to $25 million of securities, which may include additional securities issued pursuant to the Socius Agreement as well as other equity, debt and other securities as described in the registration statement. The SEC declared this registration statement effective on March 21, 2011.  While we do not have any immediate plans to offer securities under this shelf registration, it is intended to give the Company the flexibility to take advantage of financing opportunities as needed or deemed desirable in light of market or other conditions.

We believe we have the necessary financing vehicles in place, including the Socius Agreement described above, to fund the Company through the end of fiscal 2012.  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

Our operating activities used net cash of $1,594,459 for the three months ended September 30, 2011.  Cash used in operations resulted from a net loss of $1,675,448 reduced by $614,892 in non-cash adjustments and increased by $533,903 in net changes to working capital.  Non-cash adjustments included $300,228 of stock based compensation expense, and $314,664 of depreciation and amortization expense.  Net changes in working capital was primarily due to an  increase in accounts receivable of $1,271,909 offset by an increase in accounts payable of $661,880.

Investing Activities

Our investing activities used net cash of $601,804 for the three months ended September 30, 2011, resulting from cash used for the purchase of property and equipment.

Financing Activities

Our financing activities provided net cash of $1,306,435 for the three months ended September 30, 2011.  Net cash provided by financing activities was comprised of $1,447,240 in proceeds from issuance of preferred stock under the Socius Agreement, offset by repayments of $75,501 of principal on bank loans and notes payable and $65,304 in common stock issuance costs.

Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements as of September 30, 2011.

Item 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for smaller reporting companies.

33

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 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.

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 31.1 and 31.2 filed with this report) that have materially affected, or are reasonably likely to affect the Company’s internal control over financial reporting.

34

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Not applicable.

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.

35

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

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

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

36

SIGNATURES

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

	ZBB ENERGY CORPORATION
November 14, 2011	By:	/s/Eric C. Apfelbach
	Name:	Eric C. Apfelbach
	Title:	Chief Executive Officer
		(Principal Executive Officer)
November 14, 2011	By:	/s/ Will Hogoboom
	Name:	Will Hogoboom
	Title:	Chief Financial Officer
		(Principal financial officer and
		Principal accounting officer)

37

EXHIBIT INDEX

Item 15(c) Exhibits:

Exhibit No.	Description	Incorporated by Reference to
10.1	Joint Venture Agreement of Anhui MeiXin Store Energy Co., Ltd. by and between ZBB PowerSav Holdings Limited and Anhui Xinrui Investment Co., Ltd, dated August 30, 2011
10.2	Limited Liability Company Agreement of ZBB PowerSav Holdings Limited by and between ZBB Cayman Corporation and PowerSav, Inc., dated August 30, 2011
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive Data Files
	38

EX-10.1

Exhibit 10.1

JOINT VENTURE AGREEMENT

ANHUI MEINENG STORE ENERGY CO., LTD.

BY AND BETWEEN

ZBB POWERSAV HOLDINGS LIMITED

AND

ANHUI XINDONG INVESTMENT MANAGEMENT CO., LTD.

_______________________, 2011

TABLE OF CONTENTS

Page

1. DEFINITIONS. 2

1.1 Certain Definitions 2

1.2 Other Definitions 4

2. GENERAL COMPANY INFORMATION 4

2.1 Company, Generally 4

2.2 JV Investors, Generally 4

3. COMPANY STRUCTURE AND STRATEGY 4

3.1 Business Scope 4

3.2 Structure 5

3.3 Strategy 5

4. OWNERSHIP OF THE COMPANY 5

4.1 Registered Capital 5

4.2 Use of Registered Capital 5

4.3 Payment Schedule of Initial Registered Capital Contributions 5

4.4 Decrease or Increase of Registered Capital 6

4.5 Distribution of Net Profits 6

5. OPERATIVE AGREEMENTS; VOTING AGREEMENT 6

5.1 Operative Agreements 6

5.2 Voting Agreement; Operation of the Company 7

6. BOARD OF DIRECTORS 7

6.1 Composition of the Board of Directors 7

6.2 Removal; Reappointment of Directors 7

6.3 Board Meetings 8

6.4 Board Quorum: Resolutions 8

6.5 Action by the Board Without a Meeting 9

6.6 Board Unanimous Approval Rights 9

6.7 Board Supermajority Approval Rights 9

6.8 Deadlock 10

7.10 BOARD OF SUPERVISORS 10

7.1 Composition of the Board of Supervisors 10

- i -

7.2 Removal; Reappointment of Supervisors 11

7.3 Meetings of the Board of Supervisors 11

7.4 Quorum: Resolutions 12

7.5 Action by the Board of Supervisors Without a Meeting 12

7.6 Deadlock 12

8. JV INVESTORS 12

8.1 Meetings 12

8.2 Voting Rights; Actions of JV Investors; Quorum 13

8.3 Action by JV Investors Without a Meeting 13

8.4 JV Investor Unanimous Approval Rights 13

8.5 JV Investor Supermajority Rights 13

8.6 Deadlock 14

9. OFFICERS 14

9.1 Appointment and Term of Office 14

9.2 Removal 14

9.3 Vacancies 14

9.4 Compensation 15

9.5 Powers and Duties 15

10. BUSINESS PLANS; FINANCIAL AND OTHER RECORDS 16

10.1 Business Plans 16

10.2 Accounting and Management Information Systems 16

10.3 Financial Statements, Accounting and Other Reports 16

10.4 Right of Inspection 17

11. INSURANCE; INDEMNIFICATION 17

11.1 Liability 17

11.2 Indemnification of Directors, Supervisors and Officers 17

11.3 Indemnification of JV Investors 18

11.4 Advancement 19

11.5 Insurance 19

12. COMPLIANCE WITH LAWS 20

12.1 General 20

12.2 Anti-Corruption 20

13. TRANSFERS AND SALES OF INTERESTS 20

- ii -

13.1 Transfers of Interests 20

13.2 Unauthorized Transfers 21

13.3 Withdrawal of a JV Investor 21

13.4 Transfers Pursuant to a Bona Fide Offer; Rights of First Refusal 21

13.5 Acknowledgment of Liquidity 22

13.6 Buy/Sell Provisions 22

13.7 Sale of the Company 24

14. CONFIDENTIALITY 24

15. REPRESENTATIONS AND WARRANTIES OF THE JV INVESTORS 25

15.1 Warranties of the JV Investors 25

16. TERM AND TERMINATION 26

16.1 Term 26

16.2 Termination 26

16.3 Survival 26

16.4 Continuing Liability 27

17. GOVERNING LAW; DISPUTE RESOLUTION 27

17.1 Governing Law 27

17.2 Discussions and Arbitration 27

18. GENERAL PROVISIONS 27

18.1 Non-Competition; Business Opportunities 27

18.2 Notices and Other Communications 28

18.3 Severability 29

18.4 References to this Agreement; Headings 30

18.5 Further Assurances 30

18.6 No Waiver 30

18.7 Entire Agreement; Amendments 30

18.8 Expenses 30

18.9 Assignment 30

18.10 No Agency 31

18.11 No Third Party Beneficiaries 31

18.12 Incidental and Consequential Damages 31

18.13 Counterparts 31

18.14 Execution by the Company 31

- iii -

ANHUI MEINENG STORE ENERGY CO., LTD.

JOINT VENTURE AGREEMENT

This JOINT VENTURE AGREEMENT (this “Agreement”)is made and entered into as of August 17, 2011 (the “Effective Date”), by and between (i) ZBB POWERSAV HOLDINGS LIMITED, a Hong Kong limited liability company (“Hong Kong Holdco”) and (ii) ANHUI XINDONG INVESTMENT MANAGEMENT CO., LTD. (Chinese name: 安徽鑫东投资管理有限公司), a Chinese limited liability company (“China JV”).  Hong Kong Holdco and the China JV are sometimes referred to collectively herein as the “Parties”and individually as a “Party.”

STATEMENT OF PURPOSE

WHEREAS, ZBB Cayman Corporation, a Cayman Islands exempted company (“ZBB Energy”), and PowerSav Inc., a Cayman Islands exempted company (“PowerSav”), formed Hong Kong Holdco for the purposes of forming and investing in a Sino – foreign equity joint venture company (the “Company”), the name of which is temporarily Anhui Meineng Store Energy Co., Ltd. (Chinese name: 安徽美能储能有限公司) and subsequently shall be what is verified on the Name Verification Notification by the Approval Authority as defined below.

WHEREAS, AnHui Xinlong Electrical Co., Ltd. a Chinese corporation (“AnHui Xinlong”), and Wuhu Huarui Power Transmission & Transformation Engineering Co., Ltd. a Chinese corporation (“Wuhu Huarui”), formed the China JV for the purposes of forming and investing in the Company.

WHEREAS, the Parties desire to form the Company to (i) source, market and distribute (A) certain advanced energy storage and power control technology product families (the “ZBB Products”) of ZBB Energy’s Affiliates and (B) certain new products that may be developed by the Company (the “Company Products,” and together with the ZBB Products, the “Products”), (ii) integrate the Products into other technologies and (iii) render other services in support of such Products (the “Services”), as applicable, all as more fully described on Exhibit B hereto.

WHEREAS, the Parties intend for the Company to bring the Products into large-scale production in the People’s Republic of China (excluding Hong Kong, Macau and Taiwan) (“Mainland China”), for distribution in Mainland China, Hong Kong, Macau and Taiwan (collectively, the “Territory”), in accordance with the terms and conditions of the License Agreement (as defined below).

WHEREAS, the Parties intend for the Company upon its establishment to enter into the following agreements: (i) that certain License Agreement by and between the Company and ZBB Energy Corporation, Inc., a Wisconsin corporation (“ZBB Corp.”), in the form attached hereto as Exhibit C (the “License Agreement”); (ii) that certain Management Services Agreement by and between the Company and Hong Kong Holdco, in the form attached hereto as Exhibit D (the “Management Services Agreement”) and (iii) that certain Research and Development Agreement by and between the Company and ZBB Corp. in the form attached hereto as Exhibit E (the “R&D Agreement”, collectively with the License Agreement and the Management Services Agreement, the “Related Agreements”).

WHEREAS, the Parties desire to enter into this Agreement for the purpose of setting forth the rights and obligations of the Parties (including their rights and obligations as JV Investors, as defined below) with respect to the Company.

NOW THEREFORE, in consideration of the aforesaid Statement of Purpose, the mutual terms, provisions, covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

AGREEMENT

1.DEFINITIONS.

1.1Certain Definitions.  For the purposes of this Agreement, the following capitalized terms have the respective meanings set forth below:

“Accounting Principles” means, collectively, the China Accounting Principles and the U.S. Accounting Principles.

“Affiliate”means, as to any Person, any other Person that directly, or indirectly through one or more intermediaries, (i) Controls, (ii) is Controlled by or (iii) is under common Control with such Person.

“Applicable Law”means, as to any Person, any statute, law, rule, regulation, directive, treaty, judgment, order, decree or injunction of any Governmental Authority that is applicable to or binding upon such Person.

“Approval Authority” means the Ministry of Commerce of the People's Republic of China (or its local branch office with competent authority and jurisdiction) and the Wuhu City, Anhui Province government (and its relevant departments).

“Board” means the Board of Directors of the Company.

“Business Day”means a day on which commercial banks in Shanghai, China generally are open to conduct their regular banking business.

“Business Plans”means, collectively, (i) the Initial Business Plan and (ii) any subsequent business plan of the Company, as approved by the Board pursuant to the terms of this Agreement, and in effect from time to time.

“China Accounting Principles” means generally accepted accounting principles in the People’s Republic of China (or any other country which the JV Investors may agree to in writing) as set forth in pronouncements of the Chinese Institute of Certified Public Accountants, as consistently applied.

- 2 -

“China JV Change of Control” means any one, or a series of any one, of the following: (i) a merger, consolidation, security exchange, issuance or sale of equity securities or other reorganization of, or involving, the China JV pursuant to which the China JV’s interest holders (determined immediately prior to the time at which such transaction is effected) collectively have beneficial ownership of less than 51% of the total outstanding ownership interest of the China JV, or comparable equity securities of the surviving entity if the China JV is not the surviving entity, immediately following such transaction; (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions), of all or substantially all of the assets of the China JV; (iii) the interest holders’ or board’s approval of any plan or proposal for the liquidation or dissolution of the China JV or (iv) the China JV’s submission or becoming subject to any bankruptcy proceeding, the appointment of a trustee, custodian or conservator or any other similar voluntary or involuntary creditors’ right proceeding.

“Company Documents” means this Agreement, the Related Agreements, the Business Plans and the Articles of Association of the Company, as amended from time to time.

“Control”means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person (whether through the ownership of securities, by contract, or otherwise).

“Director”means a member of the Board.

“Effective Date”means the date set forth in the first paragraph of this Agreement.

“Encumbrance” means any lien, mortgage, deed of trust, pledge, collateral assignment, security interest, hypothecation, option, right of first refusal or other encumbrance.

“Entity”means a corporation, partnership, limited liability company, firm or other business association or entity.

“Fiscal Year”means the twelve (12) month period ending June 30 of each year, or such other fiscal year as the Board may designate from time to time.

“Governmental Authority”means any domestic or foreign government, governmental authority, court, tribunal, agency or other regulatory, administrative or judicial agency, commission or organization, and any subdivision, branch or department of any of the foregoing.

“Initial Business Plan”means the initial business plan of the Company, covering the period running from the Effective Date through the end of the fifth full Fiscal Year after the Effective Date, as agreed upon by the JV Investors and adopted by the Board.

“Interests”means the equity interests of the Company.

“IPO” means an initial public offering on a nationally recognized securities exchange.

- 3 -

“JV Investor” means a Person that owns Interests in the Company.  A list of the initial JV Investors is set forth on Exhibit A, which may be amended from time to time.

“Party”and “Parties”are defined in the opening paragraph of this Agreement.

“Percentage Ownership Interest”means the percentage of Interests of the Company owned by a particular JV Investor, determined based on the following formula: the percentage that corresponds to (i) the quotient of (A) the JV Investor’s committed registered capital divided by (B) the aggregate registered capital contributed to the Company by all of the JV Investors.

“Person”means a natural individual, Governmental Authority or Entity.

“Transfer” means, as a noun, the transfer of legal, beneficial or equitable ownership by sale, exchange, assignment, gift, donation, grant or other transfer of any kind, whether voluntary or involuntary, including transfers by operation of law or legal process.  As a verb, the term means the act of making any Transfer.

“Supervisor” means a member of the Board of Supervisors.

“U.S. Accounting Principles”means generally accepted accounting principles in the United States (or any other country which the JV Investors may agree to in writing) as set forth in pronouncements of the Financial Accounting Standards Board (and its predecessors) and the American Institute of Certified Public Accountants, as consistently applied.

1.2Other Definitions.  Terms not otherwise defined, but used, herein that are defined in any Related Agreement shall have the same meaning as in the Related Agreement when used in this Agreement, unless the context otherwise requires.

2.GENERAL COMPANY INFORMATION

2.1Company, Generally.  The name of the Company is Anhui Meineng Store Energy Co., Ltd. (Chinese name: ___________________________).  The Company’s principal office shall be located at such location within Wuhu City, Anhui Province, the People’s Republic of China (or such other location within the People’s Republic of China as may be determined, from time to time, by the Board).

2.2JV Investors, Generally.  Exhibit A hereto, which may be amended from time to time by the Board, as required, sets forth the following information pertaining to each of the initial JV Investors: (i) the name of the JV Investor, (ii) the address of the principal office of the JV Investor, (iii) information for the legal representative of the JV Investor, (iv) the committed registered capital of the JV Investor and (v) the Percentage Ownership Interest of the JV Investor.

3.COMPANY STRUCTURE AND STRATEGY

3.1Business Scope.  The Company shall (a) source, market and distribute the Products, (b) integrate the Products into other technologies and (c) render Services to customers within the Territory.  A more detailed description of the initial scope of the Company’s business, including (i) stages of development of the Company; (ii) the Products to be sourced, marketed and distributed by the Company and (iii) the Services to be provided by the Company, is set forth on Exhibit B hereto.

- 4 -

3.2Structure.  The Company shall be formed as a Chinese limited liability company.  The liability of any JV Investor with respect to the Company shall be limited to the amount of such JV Investor’s respective registered capital contribution made to the Company pursuant to this Agreement and no JV Investor shall have any liability to the Company or any third party in excess of such JV Investor’s registered capital contribution.  The JV Investors shall share the profits, risks and losses in proportion to their respective registered capital contributions, which are set forth on Exhibit A.

3.3Strategy.  The Company will pursue its objectives as set forth in Section 3.1 above only with respect to certain sectors and regions within the Territory, as more fully described in the License Agreement, which is attached hereto as Exhibit C, all in accordance with the terms and conditions of the Company Documents.

4.OWNERSHIP OF THE COMPANY

4.1Registered Capital.  The initial registered capital of the Company shall be Eighty Seven Million Two Hundred Thousand Renminbi (RMB 87,200,000) (“Registered Capital”), which will be contributed by the Parties in the amounts, and forms, as set forth on Exhibit A; provided, however, that if (i) upon an assessment of the initial assets to be contributed by the Parties hereunder, the relevant People’s Republic of China Governmental Authority determines under Applicable Law that certain assets do not warrant the valuations set forth on Exhibit A and (ii) whereupon, unless the JV Investors contribute such amount of funds as is necessary to maintain the Percentage Ownership Interests of the JV Investors as set forth on Exhibit A within ten (10) Business Days of the JV Investors’ receipt of notice of the occurrence of (i) hereof, this Agreement shall terminate automatically without any further actions by the Parties and all previous contributions to the Company shall be returned promptly to the relevant JV Investor who made such contribution originally.

4.2Use of Registered Capital.  The registered capital of the Company shall be used (a) for the purchase of production equipment and raw materials and (b) for working capital and other purposes as deemed appropriate by the Board, from time to time.

4.3Payment Schedule of Initial Registered Capital Contributions.  Each of the JV Investors shall contribute to the Company its corresponding portion of the initial registered capital of the Company in two (2) installments:

(a)First Installment.  The JV Investors shall contribute the respective amounts listed below within thirty (30) days following the issuance of the Business License to the Company by the Approval Authority:

(i)   Hong Kong Holdco shall contribute an aggregate amount of Thirty Six Million Seven Hundred Thousand Renminbi (RMB 36,700,000), of which Ten Million Five Hundred Thousand Renminbi (RMB 10,500,000) will be contributed in cash and Twenty Six Million Two Hundred Thousand Renminbi (RMB 26,200,000) will be credited to Hong Kong Holdco for the intellectual property rights granted to the Company by ZBB Corp., an Affiliate of Hong Kong Holdco member, ZBB Energy; and

- 5 -

(ii)   the China JV shall contribute an aggregate amount in cash of Twenty Million Renminbi (RMB 20,000,000).

(b)Second Installment.  The JV Investors shall contribute the respective amounts listed below by June 1, 2012:

(i)   Hong Kong Holdco shall contribute an aggregate amount in cash of Ten Million Five Hundred Thousand Renminbi (RMB 10,500,000); and

(ii)   the China JV shall contribute an aggregate amount in cash of Twenty Million Renminbi (RMB 20,000,000).

4.4Decrease or Increase of Registered Capital.  During the Term (as defined below) of this Agreement, the Company may increase or decrease the amount of its registered capital; provided, that any increase or decrease in the registered capital of the Company shall require the unanimous approval of the Board and the approval and registration of the Approval Authority.

4.5Distribution of Net Profits.  Subject to any restrictions imposed by Applicable Law, the Company will distribute the net profits it receives to the JV Investors, on a pro-rata basis, in amounts corresponding to their respective Percentage Ownership Interest.  The distribution of net profits, in each instance, will be subject to (a) the approval of the Board, (b) the establishment of reasonable reserves and (c) the payment of any associated fees and taxes.

5.OPERATIVE AGREEMENTS; VOTING AGREEMENT

5.1Operative Agreements.

(a)License Agreement.  As of the date of establishment of the Company, the Company and ZBB Corp. shall enter into the License Agreement, as set forth on Exhibit C hereto.

(b)Management Services Agreement.  As of the date of establishment of the Company, the Company and Hong Kong Holdco shall enter into the Management Services Agreement, as set forth on Exhibit D hereto.

(c)R&D Agreement.  As of the date of establishment of the Company, the Company and ZBB Corp. shall enter into the R&D Agreement, as set forth on Exhibit E hereto.

(d)Supply Agreements.  Additionally, as promptly as practicable following the date of establishment of the Company, the Company and ZBB Corp. shall enter into supply agreements of a fixed term on an arms-length basis, subject to commercially reasonable terms and conditions, pursuant to which (i) the Company shall purchase from ZBB Corp. certain Products manufactured by ZBB Corp. at a cost equal to One Hundred Twenty Percent (120%) of ZBB Corp.’s fully absorbed costs in manufacturing the same, as calculated in accordance with the terms of such supply agreement and (ii) ZBB Corp. may purchase from the Company certain Products manufactured by the Company, priced in a manner corresponding with the above.

- 6 -

5.2Voting Agreement; Operation of the Company.  Each JV Investor agrees (a) to hold all of the Interests of the Company registered in its name or beneficially owned by such JV Investor as of the Effective Date (and any and all other Interests of the Company legally or beneficially acquired by such JV Investor after the Effective Date) in accordance with the terms and conditions of this Agreement; (b) to vote such Interests in accordance with the provisions of this Agreement and (c) to cause the Directors and Supervisors nominated by such JV Investor, within the bounds of the fiduciary duties of the Directors and Supervisors to the Company under the Company Documents or Applicable Law, to vote to effect the terms hereof.

6.BOARD OF DIRECTORS

6.1Composition of the Board of Directors.

(a)Initial Composition; Term.  The Company shall be managed by the Board in accordance with this Agreement, the applicable provisions of the Company Documents and Applicable Law.  The Board shall initially consist of five (5) Directors, of which (i) Hong Kong Holdco shall appoint three (3) Directors and (ii) the China JV shall appoint two (2) Directors.  The initial Directors appointed by the Parties are set forth on Exhibit F.  Any change to the number, or representative composition, of Directors shall require the unanimous vote of the JV Investors, as set forth in Section 8.4.  The Directors shall serve for such term, or terms, as the JV Investors shall determine.

(b)Removal; Vacancies.  Each Director shall remain in office until such Director’s death, disability, retirement resignation or removal.  In the event of a vacancy on the Board (as a result of the death, disability, retirement, resignation or removal of the Director, or otherwise), the JV Investor that appointed such Director shall be entitled to appoint a replacement Director.  At any time the JV Investors must elect a Director, the JV Investors shall vote all of their respective Interests so as to elect the Director appointed by the applicable JV Investor in accordance herewith.

6.2Removal; Reappointment of Directors.  Any Director may be removed for cause in accordance with the applicable provisions of this Agreement and Applicable Law; provided, however, that any JV Investor proposing to remove any Director for cause shall first consult with the other JV Investors so that the JV Investors may, in good faith, attempt to resolve the matter without a formal vote.  In addition, any vote taken to remove any Director elected pursuant to Section 6.1, or to fill any vacancy created by the death, disability, retirement, resignation or removal of a Director elected pursuant to Section 6.1, shall also be subject to the provisions of this Section 6.2.  In the event of the death, disability, retirement, resignation or removal of any Director (a “Former Director”),and pending the replacement of such Former Director, the remaining members of the Board shall give effect to the vote of the other Directors appointed by the same JV Investor as if the Former Director still served on the Board and had cast such Director’s vote in the same way as such other Directors.

- 7 -

6.3Board Meetings.

(a)Convention of Meetings.  Any single Director shall have the authority to convene a meeting of the Board.  The Board shall meet at least quarterly and written notice of each Board meeting shall be given no less than thirty (30) Business Days in advance of the proposed meeting (which period may be waived by Directors sufficient to represent a quorum under the terms hereof, either through a written waiver or by actual attendance, without objection, at such Board meeting).

(b)Participation by Other Means.  Members of the Board may participate in any meeting of the Board, or any committee of the Board, by any means permitted under Applicable Law, including by videoconference or teleconference.

(c)Conduction of Meetings.  Board meetings shall be conducted in English and minutes of each meeting shall be prepared by the Company in English and distributed to each Director promptly following such meeting.  Proposals or reports brought before any Board meeting for information or action (including, without limitation, the Company’s financial statements) shall be prepared in English.

(d)Chairman of the Board.  The Board shall designate a Director to serve as the “Chairman” of the Board, who shall preside over all meetings of the Board.  The initial Chairman of the Board is the person so appointed and set forth on Exhibit F.  The Chairman of the Board shall be the legal representative of the Company and shall represent the Company in accordance with the Applicable Laws of the People’s Republic of China and the Articles of Association of the Company.  Acts of the Chairman that are either (i) not authorized by the Board or (ii) beyond the Chairman’s authority, as the legal representative, as set forth in the Articles of Association of the Company, shall not bind the Company.  If the Chairman of the Board is unable to perform the Chairman’s duties, the Chairman of the Board shall appoint, in writing, another Director to fulfill such duties in the absence of the Chairman of the Board.  If the Chairman of the Board is unable to appoint a temporary replacement, the Board shall appoint one of the Directors to act as the same.

(e)Reimbursements.  Each Director shall be reimbursed by the Company for coach class airfare, hotel and food expenses related to such Director’s attendance at Board meetings; provided, that such expenses shall be properly documented, with receipts provided to the Company, and the associated reimbursements for each Director shall not exceed Nineteen Thousand Renminbi (RMB 19,000) per quarter.

6.4Board Quorum: Resolutions.  A quorum shall be deemed to exist for the purposes of Board action as long as at least four (4) of the members of the Board are present, including at least one (1) Director appointed by each JV Investor; provided, that all Directors have received notice of such meeting as is required by Applicable Law and the terms of Section 6.3.  Except as provided herein, including in Sections 6.6 and 6.7, any action, determination or resolution of the Board shall require the affirmative vote of a majority of the Directors at a duly constituted meeting of the Board.

- 8 -

6.5Action by the Board Without a Meeting.  Any action required or permitted to be taken at a meeting of the Board may be taken without a meeting, if a proposed written consent, setting forth the action so taken or to be taken (i) is sent to all Directors, (ii) is signed by the number of Directors needed to approve such action and (iii) once signed, is delivered to the Board.  Action taken under this Section shall be effective when all of the Directors needed to approve such action have signed the proposed written consent or counterpart thereof, unless the written consent specifies that it is to be effective as of an earlier or later date and time.  Such a written consent shall have the same force and effect as if the subject matter was voted upon at a duly called and constituted meeting of the Board and may be described as such in any document or instrument.

6.6Board Unanimous Approval Rights.  Notwithstanding any other provision of this Agreement or the Company Documents, the affirmative vote of all of the members of the Board shall be required for any of the following Company actions:

(i)   amendment of the Articles of Association of the Company;

(ii)   termination, dissolution or extension of the Term of the Company, except as otherwise provided under Section 16;

(iii)   increase, decrease or transfer of the registered capital;

(iv)   merger of the Company with another Entity; or

(v)   reorganization of the Company into several Entities.

6.7Board Supermajority Approval Rights.  Notwithstanding any other provision of this Agreement or the Company Documents, the affirmative vote of at least four (4) Directors shall be required for any of the following Company actions:

(i)   approval of the Company’s annual budget or any material changes thereto;

(ii)   entry into any agreement or arrangement by the Company with any Affiliate of any JV Investor;

(iii)   the hiring or termination of any employee or consultant with annual compensation in excess of Six Hundred Forty Five Thousand Renminbi (RMB 645,000) or with executive responsibilities, and the adoption of any employee benefit plan;

(iv)   entry into, termination, cancellation or material modification of any contract involving payments to or from the Company in excess of Two Million Renminbi (RMB 2,000,000);

(v)   the introduction of new Products or Services;

- 9 -

(vi)   the Company’s entry into a line of business outside of the production, marketing and distribution of Products or the provision of the Services;

(vii)   the creation of marketing materials for the Company bearing the logos, names or other intellectual property of ZBB Corp. pursuant to the License Agreement;

(viii)   a change in auditors or Accounting Principles; or

(ix)   the issuance of additional Company Interests.

6.8Deadlock.  In the event that (a) the Board is deadlocked with an equal number of votes in favor and opposed on any matter requiring majority approval, or (b) any action requiring supermajority or unanimous approval of the Board fails to pass and such action is necessary for the immediate continued operation of the Company, then the chief executive officers of Hong Kong Holdco and the China JV shall confer over a thirty (30) day period in an attempt to resolve the deadlock.  If such discussions do not resolve the deadlock, then, upon the expiration of the abovementioned thirty (30) day period, the Parties shall submit the dispute for resolution pursuant to the dispute resolution procedures set forth in Section 17.2 below.  If within one hundred and thirty (130) days from the expiration of the abovementioned thirty (30) day period, either (i) the dispute is not submitted for resolution pursuant to this Section 6.8; (ii) the HKIAC (as defined in Section 17.2) does not accept the arbitration application; or (iii) the HKIAC does not render an arbitral award, Hong Kong Holdco may elect to exercise its rights pursuant to Section 13 below, and, on the date on which Hong Kong Holdco exercises its rights under Section 13 pursuant to this Section 6.8, Hong Kong Holdco and the China JV shall immediately apply to, and use their best efforts to cause, the arbitral tribunal to terminate the arbitration proceedings immediately.  Any arbitral award issued after the date on which Hong Kong Holdco exercises its rights under Section 13 shall be nonbinding against the Parties.

7.BOARD OF SUPERVISORS

7.1Composition of the Board of Supervisors.

(a)Initial Composition; Term.The Board of Supervisors shall oversee the accounting and financial activities of the Company and monitor the conduct of the members of the Board and senior executives, in accordance with the terms of this Agreement, the applicable provisions of the Company Documents and Applicable Law.  The Board of Supervisors shall initially consist of three (3) Supervisors, of which (i) Hong Kong Holdco will appoint two (2) Supervisors and (ii) the China JV will appoint one (1) Supervisor.  Any change to the number, or representative composition, of Supervisors shall require the unanimous vote of the JV Investors, as set forth in Section 8.4.  The Supervisors shall serve for such term, or terms, as the JV Investors shall determine.

(b)Removal; Vacancies.  Each Supervisor shall remain in office until such Supervisor’s death, disability, retirement resignation or removal.  In the event of a vacancy on the Board of Supervisors (as a result of the death, disability, retirement, resignation or removal of the Supervisor, or otherwise), the JV Investor that appointed such Supervisor shall be entitled to appoint a replacement Supervisor.  At any time the JV Investors must elect a Supervisor, the JV Investors shall vote all of their respective Interests so as to elect the Supervisor appointed by the applicable JV Investor in accordance herewith.

- 10 -

7.2Removal; Reappointment of Supervisors.  Any Supervisor may be removed for cause in accordance with the applicable provisions of this Agreement and Applicable Law; provided, however, that any JV Investor proposing to remove any Supervisor for cause shall first consult with the other JV Investors so that the JV Investors may, in good faith, attempt to resolve the matter without a formal vote.  In addition, any vote taken to remove any Supervisor elected pursuant to Section 7.1, or to fill any vacancy created by the death, disability, retirement, resignation or removal of a Supervisor elected pursuant to Section 7.1, shall also be subject to the provisions of Section 7.1 and this Section 7.2.  In the event of the death, disability, retirement, resignation or removal of any Supervisor (a “Former Supervisor”),and pending the replacement of such Former Supervisor, the remaining members of the Board of Supervisors shall give effect to the vote of the other Supervisors appointed by the same JV Investor as if the Former Supervisor still served on the Board of Supervisors and had cast his or her vote in the same way as such other Supervisors.

7.3Meetings of the Board of Supervisors.

(a)Convention of Meetings.  Any Supervisor shall have the authority to convene a meeting of the Board of Supervisors.  The Board of Supervisors shall meet at least twice a year and written notice of each meeting of the Board of Supervisors shall be given no less than thirty (30) Business Days in advance of the proposed meeting (which period may be waived by Supervisors sufficient to represent a quorum under the terms hereof, either through a written waiver or by actual attendance, without objection, at such meeting of the Board of Supervisors).

(b)Participation by Other Means.  Members of the Board of Supervisors may participate in any meeting of the Board of Supervisors, by any means permitted under Applicable Law, including by videoconference or teleconference.

(c)Conduction of Meetings.  Meetings of the Board of Supervisors shall be conducted in English and minutes of each meeting shall be prepared by the Company in English and distributed to each Supervisor promptly following such meeting.  Proposals or reports brought before any meeting of the Board of Supervisors for information or action (including, without limitation, the Company’s financial statements) shall be prepared in English.  The Board of Supervisors shall designate a Supervisor to serve as the “Chairman” of the Board of Supervisors, who shall preside over meetings of the Board of Supervisors.  The initial Chairman of the Board of Supervisors is the person so appointed and set forth on Exhibit F.

(d)Reimbursements.  Each Supervisor shall be reimbursed by the Company for coach class airfare, hotel and food expenses related to such Supervisor’s attendance at meetings of the Board of Supervisors; provided, that such expenses shall be properly documented, with receipts provided to the Company, and the associated reimbursements for each Supervisor shall not exceed Nineteen Thousand Renminbi (RMB 19,000) per quarter.

- 11 -

7.4Quorum: Resolutions.  A quorum shall be deemed to exist for the purposes of Board of Supervisors action as long as all members of the Board of Supervisors are present.  Except as provided herein, any action, determination or resolution of the Board of Supervisors shall require the unanimous vote of the Supervisors at a duly constituted meeting of the Board of Supervisors.

7.5Action by the Board of Supervisors without a Meeting.  Any action required or permitted to be taken at a meeting of the Board of Supervisors may be taken without a meeting, if a proposed written consent, setting forth the action so taken or to be taken (i) is sent to all Supervisors, (ii) is signed by all Supervisors and (iii) once signed, is delivered to the Board of Supervisors.  Action taken under this Section shall be effective when all of the Supervisors needed to approve such action have signed the proposed written consent or counterpart thereof, unless the written consent specifies that it is to be effective as of an earlier or later date and time.  Such a written consent shall have the same force and effect as if the subject matter was voted upon at a duly called and constituted meeting of the Board of Supervisors and may be described as such in any document or instrument.

7.6Deadlock.  In the event that any action requiring the approval of the Board of Supervisors fails to pass and such action is necessary for the immediate continued operation of the Company, then the chief executive officers of Hong Kong Holdco and the China JV shall confer over a thirty (30) day period in an attempt to resolve the deadlock.  If such discussions do not resolve the deadlock, then, upon the expiration of the abovementioned thirty (30) day period, the Parties shall submit the dispute for resolution pursuant to the dispute resolution procedures set forth in Section 17.2 below.  If within one hundred and thirty (130) days from the expiration of the abovementioned thirty (30) day period, either (i) the dispute is not submitted for resolution pursuant to this Section 7.6; (ii) the HKIAC (as defined in Section 17.2) does not accept the arbitration application; or (iii) the HKIAC does not render an arbitral award, Hong Kong Holdco may elect to exercise its rights pursuant to Section 13 below, and, on the date on which Hong Kong Holdco exercises its rights under Section 13 pursuant to this Section 7.6, Hong Kong Holdco and the China JV shall immediately apply to, and use their best efforts to cause, the arbitral tribunal to terminate the arbitration proceedings immediately.  Any arbitral award issued after the date on which Hong Kong Holdco exercises its rights under Section 13 shall be nonbinding against the Parties.

8.JV INVESTORS

8.1Meetings.

(a)Convention of Meetings.  The Board may call for meetings of the JV Investors at such times as it determines to be necessary or appropriate and shall call a meeting upon the written request of any single JV Investor.  A JV Investor requesting a meeting must sign the request, deliver the same to the Board and specify therein the purposes of the proposed meeting.  There shall be no requirement that annual or other periodic meetings of the JV Investors be held.  The Board shall give all JV Investors notice stating the date, time and place of a meeting of the JV Investors, which date shall not be less than fifteen (15) Business Days after the date such notice is given (which period may be waived by the JV Investors sufficient to represent a quorum under the terms hereof, either through a written waiver or by actual attendance, without objection, at such meeting of the JV Investors).

- 12 -

(b)Participation by Other Means.  JV Investors may participate in any meeting of the JV Investors, by any means permitted under Applicable Law, including by videoconference or teleconference.

(c)Conduction of Meetings.  Meetings of the JV Investors shall be conducted in English and minutes of each meeting shall be prepared by the Company in English and distributed to each JV Investor and the Board promptly following such meeting.  Proposals or reports brought before any meeting of the JV Investors for information or action (including, without limitation, the Company’s financial statements) shall be prepared in English.

8.2Voting Rights; Actions of JV Investors; Quorum.  Each JV Investor shall be entitled to vote, and to cast a number of votes equal to the product of (i) one hundred (100) multiplied by (ii) that JV Investor’s Percentage Ownership Interest (for the avoidance of doubt, the JV Investors have an aggregate of one hundred (100) votes) on any matter submitted to a vote of the JV Investors in accordance with applicable provisions of this Agreement and Applicable Law.  A quorum shall be deemed to exist for purposes of JV Investor action as long as a majority in interest of the JV Investors are present.  Except as provided herein, any action, determination or resolution of the JV Investors shall require the majority vote of the JV Investors at a duly constituted meeting of the JV Investors.

8.3Action by JV Investors Without a Meeting.  Any action required or permitted to be taken at a meeting of the JV Investors may be taken without a meeting, if a proposed written consent, setting forth the action so taken or to be taken (i) is sent to all JV Investors, (ii) is signed by the JV Investors holding the number of Interests needed to approve the action and (iii) once signed, is delivered to the Board.  Action taken under this Section shall be effective when all of the JV Investors needed to approve such action have signed the proposed written consent or counterpart thereof, unless the written consent specifies that it is to be effective as of an earlier or later date and time.  Such a written consent shall have the same force and effect as if the subject matter was voted upon at a duly called and constituted meeting of the JV Investors and may be described as such in any document or instrument.

8.4JV Investor Unanimous Approval Rights.  Notwithstanding any other provision of this Agreement or the Company Documents, the affirmative vote of all of the Interests held by the JV Investors shall be required for any of the following Company actions:

(i)   Any change to the number (or representative composition) of Directors on the Board of Directors; or

(ii)   Any change to the number (or representative composition) of Supervisors on the Board of Supervisors.

8.5JV Investor Supermajority Rights.  Notwithstanding any other provision of this Agreement or the Company Documents, the affirmative vote of JV Investors holding at least eighty (80) votes (as described in Section 8.2 hereof) shall be required for any of the following Company actions:

- 13 -

(i)   the borrowing of or the incurrence of any indebtedness by the Company or the granting by the Company of any liens (other than those arising by the operation of law) or encumbrances on a material amount of its assets;

(ii)   the amendment of the constitutive documents of the Company;

(iii)   the issuance of additional Interests, or securities convertible into shares, in the Company; or

(iv)   the filing of a voluntary winding up petition by, or the liquidation or dissolution of, the Company.

8.6Deadlock.  In the event that (a) the JV Investors are deadlocked with an equal number of votes in favor and opposed on any matter requiring majority approval, or (b) any action requiring supermajority or unanimous approval of the JV Investors fails to pass and such action is necessary for the immediate continued operation of the Company, then the chief executive officers of Hong Kong Holdco and the China JV shall confer over a thirty (30) day period in an attempt to resolve the deadlock.  If such discussions do not resolve the deadlock, then, upon the expiration of the abovementioned thirty (30) day period, the Parties shall submit the dispute for resolution pursuant to the dispute resolution procedures set forth in Section 17.2 below. If, within one hundred and thirty (130) days from the expiration of the abovementioned thirty (30) day period, either (i) the dispute is not submitted for resolution pursuant to this Section 8.6; (ii) the HKIAC (as defined in Section 17.2) does not accept the arbitration application; or (iii) the HKIAC does not render an arbitral award, Hong Kong Holdco may elect to exercise its rights pursuant to Section 13 below, and, on the date on which Hong Kong Holdco exercises its rights under Section 13 pursuant to this Section 8.6, Hong Kong Holdco and the China JV shall immediately apply to, and use their best efforts to cause, the arbitral tribunal to terminate the arbitration proceedings immediately.  Any arbitral award issued after the date on which Hong Kong Holdco exercises its rights under Section 13 shall be nonbinding against the Parties.

9.OFFICERS

.

9.1Appointment and Term of Office.  The officers of the Company (a) shall consist of the chief executive officer, chief financial officer and administrative assistant to the Board and (b) may consist of other officers, all as may be appointed from time to time by the Board.  Such officers will hold office until the earlier of that officer’s death, resignation, retirement, disqualification, or removal from office by the Board and until that officer’s successor has been duly elected and qualified.  Two or more offices may be held by the same person.

9.2Removal.  Any officer appointed hereunder may be removed from office at any time by the Board, with or without cause.  Such removal will be without prejudice to the contract rights, if any, of the person so removed.  Election or appointment of an officer will not of itself create contract rights.

9.3Vacancies.  Any vacancy in an officer position shall be filled by the Board.

- 14 -

9.4Compensation.  The compensation of all officers of the Company shall be determined by the Board and may be altered by the Board from time to time, except as otherwise provided by contract, and no officer shall be prevented from receiving such compensation by reason of the fact such officer is also a Director or Supervisor.  All officers shall be entitled to be paid or reimbursed for all costs and expenditures incurred in conjunction with carrying out the Company’s business.

9.5Powers and Duties.  Officers shall have such powers and duties as are provided herein and as may otherwise be established or delegated to them, from time to time, by the Board.  The officers of the Company shall possess such powers and duties as customarily are associated with their respective offices, subject to the general direction and supervision of the Board.  Such powers and duties will include the following:

(a)Chief Executive Officer.  Except as otherwise provided in the Company Documents, the Company’s day-to-day operations will be managed by the chief executive officer of the Company.  The interim chief executive officer, as appointed by Hong Kong Holdco, is set forth on Exhibit F.  The interim chief executive officer shall be responsible for initially identifying and recruiting candidates to serve as the chief executive officer, the chief financial officer and the administrative assistant to the Board of the Company, and shall submit such candidates to the Board for approval.  The person holding the office of chief executive officer also shall perform, under the direction and subject to the control of the Board, such other duties as may be assigned by the Board, from time to time.

(b)Chief Financial Officer.  The chief financial officer shall be the principal accounting and financial officer of the Company and will have active control of and shall be responsible for all matters pertaining to the accounts and finances of the Company.  The chief financial officer will have charge of Company funds and securities and will keep a record of the property and indebtedness of the Company.  The chief financial officer shall be prepared at all times to give information as to the condition of the Company and shall make a detailed annual report of the entire business and financial condition of the Company.  The person holding the office of chief financial officer shall also perform, under the direction and subject to the control of the Board, such other duties as may be assigned by the Board, from time to time.

(c)Administrative Assistant to the Board.  The administrative assistant to the Board shall give notice to, attend, and keep the minutes of all of the proceedings at all meetings of the Board, the Board of Supervisors and the JV Investors and will be the custodian of such minutes and all other legal records of the Company.  The administrative assistant to the Board will see that all notices required to be given to the Directors, Supervisors and the JV Investors are duly given in accordance with this Agreement or as required by Applicable Law.  It shall also be the duty of the administrative assistant to the Board to keep a ledger, in which shall be correctly recorded, all transactions pertaining to the Interests of the Company.  The person holding the office of administrative assistant to the Board also shall perform, under the direction and subject to the control of the Board, such other duties as may be assigned by the Board, from time to time.

(d)Other Officers.  The Board may appoint such other officers, with such titles, powers, duties and compensation, as they may deem necessary for the conduct of the business of the Company.  In addition, the Board may authorize the chief executive officer (or other officers) to appoint such agents or employees as the Board deems necessary for the conduct of the business of the Company.

- 15 -

10.BUSINESS PLANS; FINANCIAL AND OTHER RECORDS

10.1Business Plans.  The JV Investors will agree to, and the Board will adopt an Initial Business Plan.  The Initial Business Plan and each subsequent Business Plan shall set forth, among other things: (i) the scope of the Company’s business; (ii) the growth needs of the Company, including personnel requirements, working capital and investment capital; (iii) marketing plans for the Company; (iv) capital and operational budgets for the transactions and entities contemplated by the Company Documents and (v) plans regarding interacting with the appropriate regulatory authorities in connection with the approval of the Products for production and sale, and the Services for provision, in the Territory.  After adoption of the Initial Business Plan, the chief executive officer shall submit a proposed Business Plan to the Board for approval at least sixty (60) days prior to the start of each Fiscal Year.  Each such Business Plan shall cover one Fiscal Year of the Company’s operations and shall contain the matters set forth in this Section.

10.2Accounting and Management Information Systems.  In the conduct of its business, the Company shall pursue a policy of adopting and maintaining accounting and management information systems that facilitate the Company’s compliance with the Reporting Requirements (as defined below), the Accounting Principles and are otherwise consistent with sound business practices and corporate governance in the context of the Company’s business and operations.  The Company shall engage a reputable, international accounting firm to provide accounting services in conjunction with the Reporting Requirements; the initial accounting firm shall be Deloitte LLP.  Two (2) sets of books and records will be kept, one in accordance with China Accounting Principles and one in accordance with U.S. Accounting Principles.

10.3Financial Statements, Accounting and Other Reports.  The Company shall cause (i) two (2) sets of the following financial statements to be prepared (one in accordance with China Accounting Principles and one in accordance with U.S. Accounting Principles) and (ii) such financial statements to be provided to each JV Investor (the following requirements being referred to collectively as the “Reporting Requirements”):

(a)Annual Financial Statements.  As soon as available, but in any event within forty five (45) days after the end of each Fiscal Year, a copy of the annual financial statements of the Company, including, a balance sheet, income statement, statement of cash flows and statement of the JV Investors’ equity as of the end of the Fiscal Year, setting forth in each case in comparative form the figures for the previous year, and audited and certified by the Company’s accounting firm.

(b)Quarterly Financial Statements.  As soon as available, but in any event within thirty (30) days after the end of each fiscal quarter, a copy of the Company’s unaudited financial statements for such fiscal quarter including a balance sheet, income statement, statement of cash flows and statement of the JV Investors’ equity as of the end of such quarter, setting forth in comparative form the figures for the corresponding quarter in the previous Fiscal Year, and certified by the chief financial officer of the Company as being fairly stated in all material respects (subject to normal year-end audit adjustments).

- 16 -

(c)Quarterly Management Reports.  On a quarterly basis, the Company’s management shall report to the Board: (i) the Company’s current business objectives and compliance with the Business Plan then in effect, (ii) notice of any new clients, and (iii) such other reasonable information as the Board may request.

10.4Right of Inspection.  During the regular office hours at the location of the Company, and upon reasonable notice to the Company, each JV Investor shall have (a) full access to all properties, books of account, and records of the Company, (b) the right to make copies from such books and records at its own expense and (c) the right to discuss with the Company’s executive officers the affairs, finances and accounts of the Company.  Any information obtained by a JV Investor through exercise of rights granted under this Section shall, to the extent constituting Confidential Information hereunder, be subject to the confidentiality provisions set forth in Section 14.  Any JV Investor having rights under this Section shall also have the right to confer, upon reasonable notice and during normal business hours, with the auditors of the Company, and with the accounting firm which has prepared or is preparing any of the financial statements required to be delivered by the Company, as a part of the Reporting Requirements and the Company shall grant, or use commercially reasonable efforts to provide for, any permission requested by such auditors to permit such conferences to take place.

11.INSURANCE; INDEMNIFICATION

11.1Liability.  To the fullest extent permitted by Applicable Law, each Director, Supervisor and officer of the Company shall not be personally liable to the Company or the JV Investors for monetary damages for breach of any duty owed as a Director, Supervisor or officer of the Company, and the Company’s Articles of Association shall so provide.

11.2Indemnification of Directors, Supervisors and Officers.

(a)Generally.  Except to the extent limited hereunder, each Director, Supervisor or officer of the Company (each a “Company Representative”) who is made a party or is threatened to be made a party to or is involved in any proceeding by reason of the fact that such Company Representative, or the legal representative of such Company Representative, is or was a Company Representative, shall be indemnified and held harmless by the Company to the fullest extent authorized by Applicable Law, as the same exists or may hereafter be amended (but, in case of any such amendment, only to the extent that such amendment permits the Company to provide broader indemnification rights than said law permitted the Company to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a Company Representative, and shall inure to the benefit of such Company Representative’s heirs, executors and administrators.  The right to indemnification conferred herein shall be a contract right based upon an offer from the Company, which offer shall be deemed to be accepted by such person’s service or continued service as a Company Representative.  The Company may, by action of the Board, provide indemnification to employees or agents of the Company, to the extent permitted by Applicable Law, with the same scope and effect as the foregoing indemnification of Company Representatives.

- 17 -

(b)Limitations.  Notwithstanding the foregoing, the provisions of 11.2(a) shall not eliminate or limit the liability of, or provide indemnity to, a Company Representative for or in connection with any act, inaction or omission of such Company Representative that (i) constitutes a breach by Company Representative of that Company Representative’s duties of loyalty or care to the Company or the JV Investors (other than as expressly excepted under this Agreement; (ii) was detrimental to the Company and not in good faith; (iii) involved intentional misconduct or a knowing violation of the law: (iv) clearly was in conflict with the interests of the Company or (v) results in such Company Representative deriving an improper personal benefit.  The right to indemnification conferred in this Section 11.2 shall not be exclusive of any other right that a Company Representative may have or hereafter acquire under law or equity, provision of this Agreement or otherwise.

11.3Indemnification of JV Investors.

(a)Generally.  To the extent permitted by law, the Company will indemnify and hold harmless each JV Investor, the partners, officers and directors of each JV Investor and each person, if any, who Controls such JV Investor (each an “Indemnified Party”) against all liability, loss, damage, penalty, action, claim, judgment, settlement, cost and expense of any kind or nature whatsoever (including all reasonable attorneys’ fees) (collectively referred to as “Losses”) that arise under applicable securities laws, that in any way relate to, or arise out of, or are alleged to relate to or arise out of any of the following statements, omissions or violations (collectively a “Violation”) by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or otherwise, (ii) the omission or alleged omission to state therein a material fact required to be stated therein or otherwise, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of any applicable securities laws; and the Company will pay to each such Indemnified Party any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such Loss; provided,however, that the indemnity agreement contained in this Section 11.3 shall not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such Loss to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with any registration of the Company’s Interests by such Indemnified Party.

(b)Indemnity Claims.Promptly after receipt by an Indemnified Party under this Section 11.3 of notice of the commencement of any action (including any governmental action), such Indemnified Party will, if a claim in respect thereof is to be made against the Company under this Section 11.3, deliver to the Company a written notice of the commencement thereof and the Company shall have the right to participate in, and, to the extent the Company so desires, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnified Party shall have the right to retain its own counsel, with the fees and expenses to be paid by the Company, if representation of such Indemnified Party by the counsel retained by the Company would be inappropriate due to actual or potential differing interests between such Indemnified Party and the Company.  The failure to deliver written notice to the Company within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve the Company of any liability to the Indemnified Party under this Section 11.3, but the omission so to deliver written notice to the Company will not relieve it of any liability that it may have to any Indemnified Party otherwise than under this Section 11.3.

- 18 -

(c)Unavailability of Indemnification.  If the indemnification provided for under this Section 11.3 is held by a court of competent jurisdiction or by an arbitral tribunal to which an Indemnified Party has submitted the matter to be unavailable to an Indemnified Party with respect to any Losses referred to herein, the Company, in lieu of indemnifying such Indemnified Party thereunder, shall to the extent permitted by Applicable Law contribute to the amount paid or payable by such Indemnified Party as a result of such Loss in such proportion as is appropriate to reflect the relative fault of the Company on the one hand and of the Indemnified Party on the other in connection with the Violations that resulted in such Loss, as well as any other relevant equitable considerations.  The relative fault of the Company and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the Company or by the Indemnified Party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by a JV Investor hereunder exceed the registered capital contributed by such JV Investor.

11.4Advancement.  The Company shall reimburse, promptly following request therefor, all reasonable expenses incurred by a Person indemnified by the Company pursuant to Section 11.2 or 11.3 hereof (an “Indemnitee”) in connection with any threatened, pending or completed action, suit, arbitration, investigation or other proceeding (“Claim”) arising out of, or relating to the matters identified in this Article 11; provided, however, that prior to such advancement, the Indemnitee shall have agreed in writing (determined to be sufficient by the Board to protect the interests of the Company) to repay such advancement in connection with acts, conduct or omissions as to which it shall be determined by a court of competent jurisdiction or an arbitrator that such Indemnitee engaged in intentional misconduct or in a knowing and culpable violation of the law.

11.5Insurance.  The Company shall obtain and maintain, and will continue to maintain at all times during the terms of this Agreement, the insurance listed below, in commercially reasonable amounts, at its own expense, from an insurer that is A.M. Best Company rated A- or higher.  Any such policy shall be endorsed to name specifically each of the Parties and their respective subsidiaries, affiliates, successors and assigns as additional insureds.  The Company shall provide any certificate of insurance to the Parties upon request and all such certificates shall indicate that thirty (30) days prior written notice to the Parties of cancellation or non-renewal is required.

(a)General liability insurance;

- 19 -

(b)Product liability insurance;

(c)Errors & omissions insurance; and

(d)Director & officer insurance, to protect the Company and its Directors, Supervisors and officers, against any such expense, liability or loss, whether or not the Company would have the power to indemnify such person against such expense, liability or loss under the Related Agreements.

12.COMPLIANCE WITH LAWS

12.1General.  In the conduct of its business, the Company shall comply with all Applicable Laws and maintaining all franchises, permits, licenses and similar authorities necessary for the conduct of its business; provided further, that the Company shall comply with all statutes, laws, rules, regulations, directives, treaties, judgments, orders, decrees or injunctions of any Governmental Authority that are applicable to ZBB Corp. as a publicly-traded U.S. company, including without limitation relevant provisions of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act, to the extent reasonably requested by Hong Kong Holdco.

12.2Anti-Corruption.  Neither the Company, nor any of its Directors, Supervisors, officers, employees, agents or other Person associated with or acting for or on behalf of the Company, will take any action that would cause the Company to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any similar state or local Applicable Law, the Anti-Kickback Act of 1986 or any state or local/municipality anti-kickback Applicable Law, Applicable Laws restricting the payment of contingent fee arrangements, or any Applicable Laws of similar effect.

13.TRANSFERS AND SALES OF INTERESTS

13.1Transfers of Interests.

(a)General Restriction on Transfers.  Except to the extent otherwise provided in this Section 13, no JV Investor shall Transfer (or create or suffer to exist any Encumbrance against) all or any portion of that JV Investor’s Interest, except with the advance approval of all JV Investors.  Such approval may specify the rights and obligations the transferee shall have, including whether the proposed transferee is to be admitted as a full substituted JV Investor.  The grant or denial of a JV Investor’s approval for a proposed Transfer or Encumbrance may be made in such JV Investor’s sole and absolute discretion.

(b)Rights and Obligations of Substituted JV Investor.  A substituted JV Investor shall have all the rights and powers, and shall be subject to all the restrictions and liabilities, of the Transferring JV Investor (as defined below), relative to such transferred Interest.

(c)Continuing Obligations of Transferor.  Any Transferring JV Investor (as defined below) who Transfers all of such JV Investor’s Interest shall cease to be a JV Investor; provided, however, that such Transfer, without more, shall not release the Transferring JV Investor from any liability with respect to the transferred Interest or any other obligation that such Transferring JV Investor may have to the Company.

- 20 -

13.2Unauthorized TransfersAny purported Transfer or Encumbrance of an Interest of any JV Investor that does not comply with the conditions set forth in this Section 13 shall be null, void and of no effect.

13.3Withdrawal of a JV Investor.  A JV Investor shall have no right to withdraw, dissociate or withdraw such JV Investor’s registered capital from the Company.

13.4Transfers Pursuant to a Bona Fide Offer; Rights of First Refusal.

(a)Notice of Bona Fide Offer.  Notwithstanding the general restrictions on Transfers in Section 13.1, if a JV Investor desires to Transfer all or any portion of that JV Investor’s Interest pursuant to a Bona Fide Offer (as defined below) made to that JV Investor by a third-party, and such JV Investor is unable to obtain the approval of the other JV Investors to such Transfer, as provided in Section 13.1(a) above, then such JV Investor desiring to so transfer (a “Transferring JV Investor”) shall give written notice thereof (which shall include a copy of such bona fide offer) to the other JV Investors (the “Receiving JV Investors”).  As used herein, the term “Bona Fide Offer” means a legally binding offer made in good faith (in writing) by a third party, who the Transferring JV Investor reasonably believes has the financial means to consummate the proposed Transfer, which offer includes (i) the Interests to be transferred; (ii) the name and address of the proposed transferee; (iii) in the case of a proposed transferee that is an entity (i.e., not a natural Person), the identity of all direct and indirect owners of the proposed transferee; (iv) the proposed consideration for the Transfer and (v) the other terms of the proposed Transfer.

(b)Receiving JV Investors’ Right of First Refusal.  The Receiving JV Investors shall have the right to purchase all, but not less than all, of the subject Interest from the Transferring JV Investor on the terms and conditions contained in the Bona Fide Offer.

(c)Exercise of Right of First Refusal; Closing.The Receiving JV Investors shall have sixty (60) calendar days from the date of receipt of the notice referenced in Section 13.4(a) (the “Election Period”) to elect to exercise their purchase rights by sending written notice thereof to the Transferring JV Investor.  Those Receiving JV Investors exercising said purchase right (the “Electing JV Investors”) may divide the Interests to be purchased by them in any amounts or proportions that they may mutually agree upon.  In the event that they cannot or do not agree upon the Interests to be purchased by each, then each such Electing JV Investor shall purchase that percentage of the subject Interests proportionate to that Electing JV Investor’s respective Interest relative to the aggregate Interests of all Electing JV Investors.  The Electing JV Investors must purchase all of the Interests described in the Bona Fide Offer.  The closing of such a purchase shall occur at a date, time and place determined by the Electing JV Investors, which date shall be no later than thirty (30) days following the end of the Election Period.

(d)Transfer to Third-Party Transferee.  If the Receiving JV Investors do not elect to purchase all of the Interests within the Election Period, then the Receiving JV Investors shall have no right to purchase any of the Interests, and the Transferring JV Investor may Transfer, within a period of thirty (30) calendar days beginning at the end of the Election Period, all of the Interests described in the Bona Fide Offer to the proposed third-party transferee on the terms and conditions contained in the Bona Fide Offer; provided, however, that the proposed third-party transferee must have delivered to the Company, prior to such Transfer, an agreement, in form and substance reasonably satisfactory to the JV Investors, duly executed by the proposed third-party transferee, under the terms of which such third-party transferee joins in the execution of this Agreement, becomes a substituted JV Investor and agrees to be bound by all of the terms and provisions of this Agreement.  If the Transferring JV Investor does not Transfer such Interests by the end of such thirty (30) day period, the subject Interests, and the Interest represented thereby, shall again become subject to the restrictions of this Agreement, as though they had never been so offered.

- 21 -

13.5Acknowledgment of Liquidity.  The JV Investors (a) acknowledge and agree that the provisions of this Agreement provide reasonable methods of exiting the Company and an adequate means for obtaining liquidity with respect to their investment in the Company and (b) agree not to assert any claim in any legal proceeding that the provisions of this Section 13 are unreasonable, unlawful or unenforceable.

13.6Buy/Sell Provisions.

(a)Hong Kong Holdco Call Right.  Notwithstanding the foregoing, Hong Kong Holdco shall have the right to require the China JV to sell the China JV’s Interests in the Company to Hong Kong Holdco at any time following any of the circumstances listed below, upon written notice to the China JV:

(i)   in the event of a deadlock by the Company’s Board that cannot be resolved or a failure to approve an action requiring a unanimous or supermajority vote of the Directors, in any case with respect to a matter that seriously impairs the Company’s operations;

(ii)   in the event that the Board of Supervisors fails to approve an action requiring a unanimous vote, in any case with respect to a matter that seriously impairs the Company’s operations;

(iii)   in the event of a deadlock on a JV Investor vote that cannot be resolved or a failure to approve an action requiring a supermajority or unanimous vote of the JV Investors, in any case with respect to a matter that seriously impairs the Company’s operations;

(iv)   a private equity fund or other financial sponsor acquires an equity interest in, or loans money to, the China JV (a “China JV Change in Structure”);

(v)   a China JV Change of Control; or

(vi)   a material breach or default of this Agreement by the China JV (a “China JV Breach”).

- 22 -

(b)Hong Kong Holdco Put Right.  Notwithstanding the foregoing, Hong Kong Holdco shall have the right to require the China JV to purchase Hong Kong Holdco’s Interests in the Company at any time following any of the circumstances listed below, upon written notice to the China JV:

(i)   in the event of a deadlock by the Company’s Board that cannot be resolved or a failure to approve an action requiring a unanimous or supermajority vote of the Directors, in any case with respect to a matter that seriously impairs the Company’s operations;

(ii)   in the event that the Board of Supervisors fails to approve an action requiring a unanimous vote, in any case with respect to a matter that seriously impairs the Company’s operations;

(iii)   in the event of a deadlock on a JV Investor vote that cannot be resolved or a failure to approve an action requiring a supermajority or unanimous vote of the JV Investors, in any case with respect to a matter that seriously impairs the Company’s operations;

(iv)   a China JV Change in Structure;

(v)   a China JV Change of Control; or

(vi)   a China JV Breach.

(c)China JV Call Right.  Notwithstanding the foregoing, the China JV shall have the right to require Hong Kong Holdco to sell Hong Kong Holdco’s Interests in the Company to the China JV at any time following a material breach or default of this Agreement by Hong Kong Holdco (a “Hong Kong Holdco Breach”), upon written notice to Hong Kong Holdco.

(d)China JV Put Right.  Notwithstanding the foregoing, the China JV shall have the right to require Hong Kong Holdco to purchase the China JV’s Interests in the Company at any time following a Hong Kong Holdco Breach, upon written notice to Hong Kong Holdco.

(e)Buy/Sell Arrangements.  The value of the Interests in the Company being purchased under this Section 13.6 shall be determined as follows:

(i)   In the event that either Hong Kong Holdco or the China JV exercises its put right due to a China JV Breach or a Hong Kong Holdco Breach, respectively, an amount equal to (i) 1.15 multiplied by (ii) the Interest Value (as defined below);

(ii)   In the event that either Hong Kong Holdco or the China JV exercises its call right due to a China JV Breach or a Hong Kong Holdco Breach, respectively, an amount equal to (i) .85 multiplied by (ii) the Interest Value (as defined below); or

- 23 -

(iii)   In all other cases (for example, if Hong Kong Holdco exercises its put right due to a China JV Change in Control), an amount equal to the Interest Value.  For purposes hereof, the “Interest Value” shall mean the amount equal to the appraised value of the Company, as determined by an independent third party mutually selected by the Parties, multiplied by a fraction equal to the percentage of equity interest represented by the Interest being sold.

The closing of any purchase or sale pursuant to this Section 13.6 shall occur at a date, time and place determined by the JV Investor initiating the same, which date shall be no later than thirty (30) days following the determination of the Interest Value.

13.7Sale of the Company.  In the event that all of the Interests of the Company are sold to a third party, Hong Kong Holdco shall work with the buyer of those Interests to transfer cell stack manufacturing knowledge to the purchaser’s chosen location in a manner mutually agreed by such purchaser and Hong Kong Holdco.

14.CONFIDENTIALITY

Each Party (the "Receiving Party") undertakes to retain in confidence the terms of this Agreement and all other non-public information, technology, materials and know-how of the other Party (“Disclosing Party”) disclosed or acquired by the Receiving Party pursuant to or in connection with this Agreement that is either designated as proprietary and/or confidential or, by the nature of the circumstances surrounding disclosure, ought in good faith to be treated as proprietary and/or confidential ("Confidential Information"); provided, that each Party may disclose the terms and conditions of this Agreement to its immediate legal and financial consultants in the ordinary course of its business.  Neither Party may use any Confidential Information with respect to which it is the Receiving Party for any purpose other than to carry out the activities contemplated by this Agreement.  Each Party agrees to use commercially reasonable efforts to protect Confidential Information of the other Party, and in any event, to take precautions at least as great as those taken to protect its own confidential information of a similar nature.  Each Party will also notify the other promptly in writing if such Party learns of any unauthorized use or disclosure of any Confidential Information that it has received from the other Party, and will cooperate in good faith to remedy the occurrence to the extent reasonably possible.  The restrictions set forth in this Section do not apply to any information that: (a) was known by the Receiving Party without obligation of confidentiality prior to disclosure thereof by the other Party; (b) was in or entered the public domain through no fault of the Receiving Party; (c) is disclosed to the Receiving Party by a third party legally entitled to make the disclosure without violation of any obligation of confidentiality; (d) is required to be disclosed by applicable laws or regulations (but in that event, only to the extent required to be disclosed, and provided that the Disclosing Party is given the opportunity to review and redact the Agreement prior to disclosure); or (e) is independently developed by the Receiving Party without reference to any Confidential Information of the other Party.  Upon request of the Disclosing Party, the Receiving Party will return to the Disclosing Party all materials, in any medium, that contain or reveal all or any part of any Confidential Information of the Disclosing Party.  Each Party acknowledges that breach of this provision by it would result in irreparable harm to the other Party, for which money damages would be an insufficient remedy, and therefore that the other Party will be entitled to seek injunctive relief to enforce the provisions of this Section.

- 24 -

15.REPRESENTATIONS AND WARRANTIES OF THE JV INVESTORS

15.1Warranties of the JV Investors.  Each of the JV Investors hereby represents and warrants that, as of the date of the execution and delivery hereof, the following statements are true and correct:

(a)Organization; Good Standing.  The JV Investor is a legal entity, organized and validly existing under the laws of the applicable jurisdiction, with full power to own its assets and conduct its business as conducted and as proposed to be conducted.  The JV Investor is registered or qualified to do business and in good standing in each jurisdiction in which it owns or leases property or transacts business and where the failure to be so qualified would have a material adverse effect on the ability of the JV Investor or the Company to consummate the transactions contemplated by this Agreement or the Related Agreements, and no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification.  Each of the JV Investors will provide, upon request of any other JV Investor, a copy of its formation and governing documents, as are then currently in effect.

(b)Authorization.  The JV Investor has all requisite corporate power and authority to execute and deliver this Agreement, to perform fully its obligations hereunder and to consummate the transactions contemplated by this Agreement or the Related Agreements.  All corporate action on the part of the JV Investor necessary for the authorization, execution and delivery of this Agreement and for the performance of all of its obligations hereunder has been taken, and this Agreement when fully executed and delivered shall constitute a valid, legally binding and enforceable obligation of the JV Investor (except as the enforceability thereof may be limited by any laws affecting creditors’ rights generally, by general principles of equity, regardless of whether such enforceability is considered in equity or at law).

(c)Government and Other Consents.  No consent, authorization, license, permit, registration or approval of, or exemption or other action by, any Governmental Authority, or any other Person, is required in connection with the JV Investor’s execution, delivery and performance of this Agreement, or if any such consent is required, the JV Investor has satisfied the applicable requirement, except for any matters that would not have a material adverse effect on the ability of the JV Investor or the Company to consummate the transactions contemplated by this Agreement or the Related Agreements.

(d)Effect of Agreement.  The JV Investor’s execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby will not result in a breach or violation of any of the terms, conditions or provisions of, or constitute a default (or with notice or lapse of time or both constitute) or require the consent of any other Person under (i) any indenture, mortgage, agreement or other instrument or arrangement to which the JV Investor is a party; (ii) any of the terms or provisions of the formation or governing documents of the JV Investor or any provision of Applicable Law; (iii) any judgment, order, writ, injunction or decree applicable to the JV Investor; or (iv) or have any effect on the compliance by the JV Investor with, any applicable licenses, permits or authorizations, except in each case under clauses (i), (ii), (iii) or (iv) where such breach, violation or default would not have a material adverse effect on the ability of the JV Investor or the Company to consummate the transactions contemplated by this Agreement or the Related Agreements.

- 25 -

(e)Proceedings.  There is no action, suit or proceeding at law or in equity or otherwise in, before or by any Governmental Authority or, to the JV Investor’s knowledge, threatened by or against the JV Investor which question the validity of, or which question the JV Investor’s right to enter into or perform this Agreement, or which would prevent or restrict its ability to enter into and perform its obligations under this Agreement, except where such action, suit or proceeding could not reasonably be expected to have a material adverse effect on the ability of the JV Investor or the Company to consummate the transactions contemplated by this Agreement or the Related Agreements.

(f)Anti-Corruption.  Neither the JV Investor, nor any of its directors, supervisors, officers, employees, agents or other Person associated with or acting for or on behalf of the JV Investor, has taken, or will take, any action that would cause the JV Investor or the Company to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any similar state or local Applicable Law, the Anti-Kickback Act of 1986 or any state or local/municipality anti-kickback Applicable Law, Applicable Laws restricting the payment of contingent fee arrangements, or any Applicable Laws of similar effect.

16.TERM AND TERMINATION

16.1Term.  This Agreement shall be effective as of the Effective Date and shall continue in effect until the earlier of (a) the expiration of the Agreement on the tenth (10th) anniversary of the Effective Date or (b) upon the date of termination of this Agreement pursuant to Section 16.2 (the “Term”).

16.2Termination.  This Agreement shall terminate:

(i)   Upon the mutual written agreement of the JV Investors;

(ii)   Upon the material breach (or default in the performance of the terms) of this Agreement by any JV Investor;

(iii)   As to any JV Investor, upon the permitted Transfer of all Interests of the Company held by such JV Investor;

(iv)   Upon either Party’s exercise of its buy/sell options under Section 13.6 of this Agreement; or

(v)   Upon the occurrence of an IPO or purchase by a third party of all of the Interests of the Company.

16.3Survival.  The rights and obligations of the Parties under Section 14 (Confidentiality), Section 16.4 (Continuing Liability), Section 17 (Governing Law and Dispute Resolution) and Section 18 (General Provisions) (except for Section 18.5 (Further Assurances)) shall survive any termination of this Agreement.

- 26 -

16.4Continuing Liability.  Termination of this Agreement for any reason shall not release a Party from any liability or obligation which has already accrued as of the effective date of such termination, and shall not constitute a waiver or release of, or otherwise be deemed to prejudice or adversely affect, any rights, remedies or claims, whether for damages or otherwise, which a Party may have hereunder, at law, equity or otherwise or which may arise out of or in connection with such termination.

17.GOVERNING LAW; DISPUTE RESOLUTION

17.1Governing Law.  The validity, construction and enforceability of this Agreement shall be governed by and construed in accordance with the laws of the People’s Republic of China.

17.2Discussions and Arbitration.  The Parties will discuss and finally settle all disputes between them, and among them and the Company, arising out of this Agreement (including with respect to this Section 17), in accordance with the Domestic Arbitration Rules of Hong Kong International Arbitration Centre (“HKIAC”).  The Company and the Parties shall at all times maintain authorized agents in each of the United States and Wuhu City, Anhui Province, the People’s Republic of China to receive, for and on its behalf service of any summons, complaint or other legal process.

18.GENERAL PROVISIONS

18.1Non-Competition; Business Opportunities.

(a)Non-Competition.  The JV Investors agree that, as applicable, they will not (and will cause the Company and their respective members, including AnHui Xinlong and Wuhu Huarui, not to) compete, either directly or indirectly, with ZBB Energy or its Affiliates, or with the Company, as applicable, with respect to the sourcing, production, marketing and distribution of any products sourced, produced, marketed or distributed by ZBB Energy or its Affiliates or the Company, as applicable, during the Term of this Agreement and for five (5) years thereafter, anywhere in the world, except as explicitly provided herein or in the Company Documents.

(b)Business Opportunities.  The JV Investors agree that they will cause the Company, and the Directors, Supervisors and officers of the Company, to refer any new business opportunities within the scope of this Agreement to the JV Investors for determination as to whether those opportunities are best explored in the Company or through one or more of the JV Investors or their respective Affiliates.

- 27 -

(c)Opportunities Outside the Agreement.  The fact that a JV Investor or Affiliate takes advantage of an opportunity that is not within the scope of this Agreement (either alone or with other Persons, including Entities in which such JV Investor or Affiliate has an interest) and does not offer such opportunity to the Company or to the other JV Investors shall not subject such JV Investor or Affiliate to liability to the Company or to the other JV Investors on account of any lost opportunity.

(d)Exceptions.  Notwithstanding the foregoing, the Company will renounce, and not accept or be involved in, any interest or expectancy in any business opportunity presented to, or which came to the attention of, any Director or Supervisor who also is an employee or director of ZBB Energy or its Affiliates (other than the Company, the Parties or PowerSav) in the course of performing such Person’s official duties for ZBB Energy or its Affiliates.

18.2Notices and Other Communications.  Any and all notices, requests, demands and other communications required by or otherwise contemplated to be made under this Agreement or Applicable Law shall be in writing and in English and shall be provided by one or more of the following means and shall be deemed to have been duly given (a) if delivered personally, when received; (b) if transmitted by facsimile, on the date of transmission with receipt of a transmittal confirmation or (c) if by international courier service, on the fourth (4th) Business Day following the date of deposit with such courier service, or such earlier delivery date as may be confirmed in writing to the sender by such courier service. All such notices, requests, demands and other communications shall be addressed as follows:

If to the Company:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

with a copy (which copy shall not constitute notice) to:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

- 28 -

If toHong Kong Holdco:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

with a copy (which copy shall not constitute notice) to:

Mr. Mark Busch and Mr. Eliab Erulkar

K&L Gates LLP

Hearst Tower, 47th Floor

214 North Tryon Street

Charlotte, North Carolina, USA 28202

If to the China JV:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

with a copy (which copy shall not constitute notice) to:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

or to such other address or facsimile number as a Party may specify to the other Party from time to time in writing.

18.3Severability.  If any provision in this Agreement shall be found or be held to be invalid or unenforceable then the meaning of said provision shall be construed, to the extent feasible, so as to render the provision enforceable, and if no feasible interpretation would save such provision, it shall be severed from the remainder of this Agreement which shall remain in full force and effect.  In such event, the Parties shall use their respective best efforts to negotiate in good faith a substitute, valid and enforceable provision or agreement that most nearly affects the Parties’ intent in entering into this Agreement.

- 29 -

18.4References to this Agreement; Headings.  Unless otherwise indicated, references to sections and exhibits herein are to sections of, and exhibits to, this Agreement.  Words such as “herein,” “hereby,” “hereinafter,” “hereof,” “hereto,” and “hereunder” refer to this Agreement as a whole, unless the context otherwise requires.  The subject headings of the sections of this Agreement are for reference only, and shall not affect the construction or interpretation of any of the provisions of this Agreement.

18.5Further Assurances.  The Parties shall each perform such acts, execute and deliver such instruments and documents, and do all such other things as may be reasonably necessary to carry out the provisions of this Agreement.

18.6No Waiver.  No waiver of any term or condition of this Agreement shall be valid or binding on a Party unless the same shall have been set forth in a written document, specifically referring to this Agreement and duly signed by the waiving Party.  The failure of a Party to enforce at any time any of the provisions of this Agreement, or the failure to require at anytime performance by the other Party of any of the provisions of this Agreement, shall in no way; be construed to be a present or future waiver of such provisions, nor in any way affect the ability of a Party to enforce each and every such provision thereafter.

18.7Entire Agreement; Amendments.  The terms and conditions contained in this Agreement and the Related Agreements (including the exhibits hereto and thereto) constitute the entire agreement between the Parties and supersede all previous agreements and understandings, whether oral or written, between the Parties with respect to the subject matter hereof and thereof.  No agreement or understanding amending this Agreement shall be binding upon any Party unless set forth in a written document which expressly refers to this Agreement and which is signed and delivered by duly authorized representatives of each Party.

18.8Expenses.  Except as otherwise described in this Agreement or the Related Agreements, each Party shall bear its own legal and other costs and expenses in connection with this Agreement, and the Related Agreements; provided, however, that upon execution of this Agreement and the issuance of a business license by the Approval Authority, the Company will reimburse each Party for all direct expenses incurred by each Party in connection with this Agreement or the formation of the Company, including without limitation all reasonable travel expenses, legal fees and accounting fees.

18.9Assignment.  No Party shall have the right to assign its rights or obligations under this Agreement except in connection with a transfer of all of a JV Investor’s Interests in a manner permitted hereunder, under terms reasonably acceptable to the non-assigning JV Investor and providing for the assignee to be bound by the terms hereof, and for the assigning JV Investor to remain liable for the assignee’s performance of its obligations hereunder.  Any assignment or purported assignment not made in accordance with this Section and Section 13, as applicable, shall be void and of no force and effect.  This Agreement shall inure to the benefit of, and shall be binding upon, the Parties and their respective successors and permitted assigns.

- 30 -

18.10No Agency.  The authority of each Party hereunder is limited to that which explicitly is set forth herein and the Company Documents.  Neither Party has, and shall not hold itself out as having, any right, power or authority in any manner, (i) to accept, any offer, proposal or negotiated terms solicited by that Party pursuant to the terms hereof on behalf of the other Party, or otherwise commit or bind the other Party, without the other Party’s advance written consent, (ii) to otherwise create any contract or obligation, either express or implied, on behalf of, in the name of, or binding upon the other Party or (iii) to accept legal process on behalf of the other Party.

18.11No Third Party Beneficiaries.  This Agreement is made solely and specifically between and for the benefit of the Parties and their respective successors and assigns, and no other Person, unless express provision is made herein to the contrary, shall have any rights, interests or claims hereunder or be entitled to any benefits under or on account of this Agreement as a third party beneficiary or otherwise.

18.12Incidental and Consequential Damages.  No Party will be liable to any other Party under any contract, negligence, strict liability or other theory for any indirect, incidental or consequential damages (including without limitation lost profits) with respect to a breach of this Agreement.

18.13Counterparts.  This Agreement may be executed in any number of counterparts, and each counterpart shall constitute an original instrument, but all such separate counterparts shall constitute one and the same instrument.

18.14Execution by the Company.  Each of the Parties shall cause (i) the Company to be formed as a Sino-foreign joint venture company and (ii) the Company to enter into this Agreement and other Related Agreements to which it is a party as soon as possible after its formation.

18.15Approval by the Approval Authority. Notwithstanding any other provision herein, this Joint Venture Agreement shall come into effect upon approval by the Approval Authority.

[SIGNATURES APPEAR ON NEXT PAGE]

- 31 -

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.

“Hong Kong Holdco” ZBB PowerSav Holdings Limited		“China JV” Anhui Xindong Investment Management Co., Ltd.
By:	__________________________ Name: Title:	By:	__________________________ Name: Title:

EX-10.2

Exhibit 10.2

LIMITED LIABILITY COMPANY AGREEMENT

OF

ZBB POWERSAV HOLDINGS LIMITED

BY AND BETWEEN

ZBB CAYMAN CORPORATION

AND

POWERSAV INC.

(August __, 2011)

LIMITED LIABILITY COMPANY AGREEMENT

OF

ZBB POWERSAV HOLDINGS LIMITED

- i -

TABLE OF CONTENTS

Page

1.	DEFINITIONS		1
	1.1	Certain Definitions	1
	1.2	Other Definitions	3
2.	GENERAL HONG KONG HOLDCO INFORMATION		3
	2.1	Hong Kong Holdco, Generally	3
	2.2	Investors, Generally	3
3.	COMPANY STRUCTURE		3
	3.1	Purpose	3
	3.2	Structure	4
	3.3	Limitations on Liability and Capital Contributions	4
4.	OWNERSHIP OF HONG KONG HOLDCO		4
	4.1	Registered Capital	4
	4.2	Use of Registered Capital	4
	4.3	Payment Schedule of Initial Registered Capital Contributions	4
	4.4	Additional Capital Contributions	5
	4.5	Distribution of Net Profits	5
	4.6	Distribution of Fees Received under the Company Services Agreement	5
5.	OPERATIVE AGREEMENTS; VOTING AGREEMENT		5
	5.1	Other Operative Agreements	5
	5.2	Voting Agreement; Operation of Hong Kong Holdco	6
6.	BOARD OF DIRECTORS		6
	6.1	Composition of the Board of Directors	6
	6.2	Removal; Reappointment of Directors	6
	6.3	Board Meetings	6
	6.4	Board Quorum; Resolutions	7
	6.5	Action by the Board without a Meeting	7
	6.6	Board Unanimous Approval Rights	7
	6.7	Deadlock	8
7.	INVESTORS		8
	7.1	Meetings	8
	7.2	Voting Rights; Actions of the Investors; Quorum	9
	7.3	Action by the Investors without a Meeting	9

- i -

	7.4	Investor Unanimous Approval Rights	9
	7.5	Investor Supermajority Rights	9
	7.6	Deadlock	10
8.	OFFICERS		10
	8.1	Appointment and Term of Office	10
	8.2	Removal	10
	8.3	Vacancies	10
	8.4	Compensation	10
	8.5	Powers and Duties	10
9.	ANNUAL BUDGETS; FINANCIAL AND OTHER RECORDS		11
	9.1	Annual Budgets	11
	9.2	Accounting and Management Information Systems	11
	9.3	Financial Statements, Accounting and Other Reports	11
	9.4	Right of Inspection	12
10.	INSURANCE; INDEMNIFICATION		12
	10.1	Liability	12
	10.2	Indemnification of Directors and Officers	12
	10.3	Indemnification of the Investors	13
	10.4	Advancement	14
	10.5	Insurance	15
11.	COMPLIANCE WITH LAWS		15
	11.1	General	15
	11.2	Anti-Corruption	15
12.	TRANSFERS AND SALES OF INTERESTS		16
	12.1	Transfers of Interests	16
	12.2	Unauthorized Transfers	16
	12.3	Withdrawal of an Investor	16
	12.4	Transfers Pursuant to a Bona Fide Offer; Rights of First Refusal	16
	12.5	Acknowledgment of Liquidity	17
	12.6	Buy/Sell Provisions	17
13.			18
14.			19
	14.1	Warranties of the Investors	19
	14.2	Representations and Warranties of PowerSav	21
15.			21
	15.1	Term	21
	15.2	Termination	21
	15.3	Survival	21
	15.4	Continuing Liability	21
	15.5	Effect of Termination	22

- ii -

16.	GOVERNING LAW; DISPUTE RESOLUTION		22
	16.1	Governing Law	22
	16.2	Discussions and Arbitration	23
17.	GENERAL PROVISIONS		23
	17.1	Assignment	23
	17.2	Non-Competition; Non-Solicitation; Business Opportunities	23
	17.3	Notices and Other Communications	24
	17.4	Severability	25
	17.5	References to this Agreement; Headings	25
	17.6	Further Assurances	26
	17.7	No Waiver	26
	17.8	Entire Agreement; Amendments	26
	17.9	Expenses	26
	17.10	Currency	26
	17.11	No Agency	26
	17.12	No Third Party Beneficiaries	26
	17.13	Incidental and Consequential Damages	27
	17.14	Counterparts	27
	17.15	Execution by Hong Kong Holdco	27

- iii -

ZBB POWERSAV HOLDINGS LIMITED

LIMITED LIABILITY COMPANY AGREEMENT

This LIMITED LIABILITY COMPANY AGREEMENT (the “Agreement”)is made and entered into as of August __, 2011 (the “Effective Date”), by and between (i) ZBB CAYMAN CORPORATION, a Cayman Islands exempted company (“ZBB Energy”), and (ii) POWERSAV INC., a Cayman Islands exempted company (“PowerSav”).  ZBB Energy and PowerSav sometimes are referred to collectively herein as the “Parties”and individually as a “Party.”

STATEMENT OF PURPOSE

ZBB Energy designs and manufactures advanced energy storage and power control platforms.  PowerSav provides renewable energy solutions to the marketplace in China.

The Parties desire to form a Hong Kong limited liability company (“Hong Kong Holdco”) for the purposes of forming and investing in Anhui MeiXin Store Energy Co., Ltd. (or such other name given to the entity), a Sino – foreign equity joint venture company (the “Company”).

The Parties desire to enter into this Agreement for the purposes of setting forth the rights and obligations of the Parties (including their rights and obligations as Investors, as defined below) with respect to Hong Kong Holdco.

NOW THEREFORE, in consideration of the aforesaid Statement of Purpose, the mutual terms, provisions, covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

AGREEMENT

1.DEFINITIONS.

1.1Certain Definitions.  For the purposes of this Agreement, the following capitalized terms have the respective meanings set forth below:

“Accounting Principles”means generally accepted accounting principles (“GAAP”) in the United States (or any other country which the Investors may agree to in writing) as set forth in pronouncements of the Financial Accounting Standards Board (and its predecessors) and the American Institute of Certified Public Accountants, as consistently applied.

“Affiliate”means, as to any Person, any other Person that directly, or indirectly through one or more intermediaries, (i) Controls, (ii) is Controlled by or (iii) is under common Control with such Person.

“Applicable Law”means, as to any Person, any statute, law, rule, regulation, directive, treaty, judgment, order, decree or injunction of any Governmental Authority that is applicable to or binding upon such Person.

“Approval Authority” means the Ministry of Commerce of the People’s Republic of China (or its local branch office with competent authority and jurisdiction) and the Wuhu City, Anhui Province government (and its relevant departments).

“Board” means the Board of Directors of Hong Kong Holdco.

“Business Day”means a day on which commercial banks in Hong Kong generally are open to conduct their regular banking business.

“Control”means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person (whether through the ownership of securities, by contract, or otherwise).

“Director”means a member of the Board.

“Effective Date”means the date set forth in the first paragraph of this Agreement.

“Encumbrance” means any lien, mortgage, deed of trust, pledge, collateral assignment, security interest, hypothecation, option, right of first refusal or other encumbrance.

“Entity”means a corporation, partnership, limited liability company, firm or other business association or entity.

“Fiscal Year”means the twelve (12) month period ending June 30 of each year, or such other fiscal year as the Board may designate from time to time.

“Governmental Authority”means any domestic or foreign government, governmental authority, court, tribunal, agency or other regulatory, administrative or judicial agency, commission or organization, and any subdivision, branch or department of any of the foregoing.

“Interests”means the equity interests of Hong Kong Holdco.

“IPO” means an initial public offering on a nationally recognized securities exchange.

“Investor” means a Person that owns Interests in Hong Kong Holdco.  A list of the initial Investors is set forth on Exhibit A, which may be amended from time to time.

“Joint Venture Agreement” means that certain Joint Venture Agreement entered into by (i) Hong Kong Holdco and (ii) Anhui Xinrui Investment Co., Ltd. a Chinese limited liability company.

“Party”and “Parties”are defined in the opening paragraph of this Agreement.

- 2 -

“Percentage Ownership Interest”means the percentage of Interests of Hong Kong Holdco owned by a particular Investor, as set forth on Exhibit A, as may be amended from time to time.

“Person”means a natural individual, Governmental Authority or Entity.

“PowerSav Change of Control” means any one, or a series of any one, of the following: (i) a merger, consolidation, security exchange, issuance or sale of equity securities or other reorganization of, or involving, PowerSav pursuant to which PowerSav’s interest holders (determined immediately prior to the time at which such transaction is effected) collectively have beneficial ownership of less than 51% of the total outstanding ownership interest of PowerSav, or comparable equity securities of the surviving entity if PowerSav is not the surviving entity, immediately following such transaction; (ii) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions), of all or substantially all of the assets of PowerSav; (iii) the interest holders’ or board’s approval of any plan or proposal for the liquidation or dissolution of PowerSav or (iv) PowerSav’s submission or becoming subject to any bankruptcy proceeding, the appointment of a trustee, custodian or conservator or any other similar voluntary or involuntary creditors’ right proceeding.

“Pro Rata” means in proportion to the Investors’ respective Percentage Ownership Interests.

“Transfer” means, as a noun, the transfer of legal, beneficial or equitable ownership by sale, exchange, assignment, gift, donation, grant or other transfer of any kind, whether voluntary or involuntary, including transfers by operation of law or legal process.  As a verb, the term means the act of making any Transfer.

1.2Other Definitions.  Terms not otherwise defined, but used, herein that are defined in the Joint Venture Agreement shall have the same meaning as in the Joint Venture Agreement when used in this Agreement, unless the context otherwise requires.

2.GENERAL HONG KONG HOLDCO INFORMATION.

2.1Hong Kong Holdco, Generally.  The name of Hong Kong Holdco is ZBB PowerSav Holdings Limited.  Hong Kong Holdco’s principal office shall be located in such location as may be determined, from time to time, by the Board.

2.2Investors, Generally.  Exhibit A hereto, which may be amended from time to time by the Board, as required, sets forth the following information pertaining to each of the initial Investors: (i) the name of the Investor, (ii) the address of the principal office of the Investor, (iii) information for the legal representative of the Investor, (iv) the committed registered capital of the Investor and (v) the Percentage Ownership Interest of the Investor.

3.COMPANY STRUCTURE.

3.1Purpose.  The purpose of Hong Kong Holdco is to engage in any lawful business for which a limited liability company may be organized under Applicable Laws, as determined from time to time by the Investors; provided, however, that any such business must be conducted in accordance with the terms and conditions of this Agreement.

- 3 -

3.2Structure.  Hong Kong Holdco shall be formed as a Hong Kong limited liability company.  The liability of any Investor with respect to Hong Kong Holdco shall be limited to the amount of such Investor’s respective registered capital contribution made to Hong Kong Holdco pursuant to this Agreement and no Investor shall have any liability to Hong Kong Holdco or any third party in excess of such Investor’s registered capital contribution.  The Investors shall share the profits, risks and losses in proportion to their respective registered capital contributions, which are set forth on Exhibit A.

3.3Limitations on Liability and Capital Contributions.  Except as otherwise provided herein, required by Applicable Laws or provided in a prior written consent of all Investors that specifically references this Section 3.3, no Investor (or former Investor), as such, shall be (a) bound by, or be personally liable for, the liabilities or obligations of Hong Kong Holdco or other Investors or (b) required to lend any funds to, or provide any guarantees or credit enhancements on behalf of, Hong Kong Holdco.  No Investor shall have any obligation to make contributions to the capital of Hong Kong Holdco, except capital contributions required pursuant to the provisions hereof.

4.OWNERSHIP OF HONG KONG HOLDCO.

4.1Registered Capital.  The initial registered capital of Hong Kong Holdco shall be Three Million Two Hundred Thousand US Dollars (USD $3,200,000) (“Registered Capital”), which will be contributed by the Parties in the amounts set forth on Exhibit A.  The Parties agree that (i) adjustments may need to be made to the amount of the initial registered capital to be contributed by each Party based on the currency exchange rate in effect at the time of the Parties’ respective contributions and (ii) such adjustments shall not affect the Percentage Ownership Interests of the Investors, as set forth on Exhibit A.

4.2Use of Registered Capital.  The registered capital of Hong Kong Holdco shall be used for making capital contributions to the Company, as agreed by Hong Kong Holdco through the approval of the Board pursuant to Section 6.6(iii) hereof, and such other purposes as deemed appropriate by the Board, from time to time.

4.3Payment Schedule of Initial Registered Capital Contributions.  Each of the Investors shall pay its corresponding portion of the initial registered capital of Hong Kong Holdco as follows:

(a)First Installment.  The Investors shall contribute the respective amounts listed below within thirty (30) days following the issuance of the Business License to the Company by the Approval Authority:

(i)   ZBB Energy (1) shall contribute to Hong Kong Holdco an aggregate amount in cash of Two Hundred Thousand US Dollars (USD $200,000) and (2) for the purposes of this Agreement and calculating the Percentage Ownership Interests of the Investors hereunder only, will be credited with an additional contribution of Four Million Three Hundred Thousand US Dollars (USD $4,300,000) for the intellectual property rights granted to the Company by ZBB Energy Corporation, a Wisconsin corporation that is an Affiliate of ZBB Energy; and

(ii)   PowerSav shall contribute to Hong Kong Holdco an aggregate amount in cash of One Million Five Hundred Thousand US Dollars (USD $1,500,000).

- 4 -

(b)Second Installment.  PowerSav shall contribute to Hong Kong Holdco an aggregate amount in cash of One Million Five Hundred Thousand US Dollars (USD $1,500,000) no later than June 1, 2012; provided, however, that if the Board determines in accordance with the terms hereof that such second installment (or portion thereof) is needed prior to June 1, 2012, PowerSav shall make such second installment (or portion thereof) to Hong Kong Holdco as directed by the Board.

4.4Additional Capital Contributions.  In addition to the capital contributions referenced in Section 4.3 above, the Investors agree to make additional capital contributions to Hong Kong Holdco, on a Pro Rata basis, to Hong Kong Holdco in such amounts as the Board unanimously determines to be necessary, from time to time, in order to conduct Hong Kong’s business, maintain Hong Kong Holdco’s assets or discharge Hong Kong Holdco’s liabilities.

4.5Distribution of Net Profits.  Subject to any restrictions imposed by Applicable Law, Hong Kong Holdco will distribute the net profits Hong Kong Holdco receives to the Investors on a Pro Rata basis.  The distribution of net profits, in each instance, will be subject to (a) the approval of the Board, (b) the establishment of reasonable reserves and (c) the payment of any associated fees and taxes.

4.6Distribution of Fees Received under the Company Services Agreement.  Hong Kong Holdco and the Company intend to enter into a management services agreement (the “Company Services Agreement”) as soon as commercially practicable, under the terms of which Hong Kong Holdco (a) receives a service fee in an amount equal to five percent (5%) of the net sales revenue of the Company and (b) such percentage is reduced to three percent (3%) if the Company does not conclude an IPO within the first five (5) years immediately following the effective date of the Company Services Agreement.  The Investors agree that all amounts paid to Hong Kong Holdco under the Company Services Agreement will be distributed to the Investors on a Pro Rata basis (except as otherwise determined by the Board pursuant to Section 6.6 of this Agreement); provided, however, that if the Company does not conclude an IPO within the first five (5) years immediately following the effective date of the Company Services Agreement, then all such amounts paid to Hong Kong Holdco by the Company under the Company Services Agreement shall be distributed solely to ZBB Energy.

5.OPERATIVE AGREEMENTS; VOTING AGREEMENT.

5.1Other Operative Agreements.  As of the Effective Date, Hong Kong Holdco and ZBB Energy shall enter into that certain Management Services Agreement, as set forth on Exhibit B hereto.

- 5 -

5.2Voting Agreement; Operation of Hong Kong Holdco.  Each Investor agrees (a) to hold all of the Interests of Hong Kong Holdco registered in its name or beneficially owned by such Investor as of the Effective Date (and any and all other Interests of Hong Kong Holdco legally or beneficially acquired by such Investor after the Effective Date) in accordance with the terms and conditions of this Agreement; (b) to vote such Interests in accordance with the provisions of this Agreement and (c) to cause the Directors nominated by such Investor, within the bounds of the fiduciary duties of the Directors to Hong Kong Holdco under this Agreement or Applicable Law, to vote to effect the terms hereof.

6.BOARD OF DIRECTORS.

6.1Composition of the Board of Directors.

(a)Initial Composition; Term.  Hong Kong Holdco shall be managed by the Board in accordance with this Agreement and Applicable Law.  The Board shall initially consist of three (3) Directors, of which (i) ZBB Energy shall appoint two (2) Directors and (ii) PowerSav shall appoint one (1) Director.  The initial Directors appointed by the Parties are set forth on Exhibit C.  Any change to the number, or representative composition, of Directors shall require the unanimous vote of the Investors, as set forth in Section 7.4.  The Directors shall serve for such term, or terms, as the Investors shall determine, from time to time.

(b)Removal; Vacancies.  Each Director shall remain in office until such Director’s death, disability, retirement resignation or removal.  In the event of a vacancy on the Board (as a result of the death, disability, retirement, resignation or removal of the Director, or otherwise), the Investor that appointed such Director shall be entitled to appoint a replacement Director.  At any time the Investors must elect a Director, the Investors shall vote all of their respective Interests so as to elect the Director appointed by the applicable Investor in accordance herewith.

6.2Removal; Reappointment of Directors.  Any Director may be removed for cause in accordance with the applicable provisions of this Agreement and Applicable Law; provided, however, that any Investor proposing to remove any Director for cause shall first consult with the other Investors so that the Investors may, in good faith, attempt to resolve the matter without a formal vote.  In addition, any vote taken to remove any Director elected pursuant to Section 6.1, or to fill any vacancy created by the death, disability, retirement, resignation or removal of a Director elected pursuant to Section 6.1, shall also be subject to the provisions of this Section 6.2.  In the event of the death, disability, retirement, resignation or removal of any Director (a “Former Director”),and pending the replacement of such Former Director, the remaining members of the Board shall give effect to the vote of the other Directors appointed by the same Investor as if the Former Director still served on the Board and had cast such Director’s vote in the same way as such other Directors.

6.3Board Meetings.

(a)Convention of Meetings.  Any single Director shall have the authority to convene a meeting of the Board.  The Board shall meet at least monthly (or as often as the business may require) and written notice of each Board meeting shall be given no less than thirty (30) Business Days in advance of the proposed meeting (which period may be waived by Directors sufficient to represent a quorum under the terms hereof, either through a written waiver or by actual attendance, without objection, at such Board meeting).

- 6 -

(b)Participation by Other Means.  Members of the Board may participate in any meeting of the Board, or any committee of the Board, by any means permitted under Applicable Law, including by videoconference or teleconference.

(c)Conduction of Meetings.  Board meetings shall be conducted in English and minutes of each meeting shall be prepared by Hong Kong Holdco in English and distributed to each Director promptly following such meeting.  Proposals or reports brought before any Board meeting for information or action (including, without limitation, Hong Kong Holdco’s financial statements) shall be prepared in English.  ZBB Energy shall designate a Director to serve as the “Chairman” of the Board, who shall preside over all meetings of the Board.  The initial Chairman of the Board is the person so appointed and set forth on Exhibit C.

(d)Reimbursements.  Each Director shall be reimbursed by Hong Kong Holdco for coach class airfare, hotel and food expenses related to such Director’s attendance at Board meetings; provided, that such expenses shall be properly documented, with receipts provided to Hong Kong Holdco, and the associated reimbursements shall be subject to such policies as may be imposed by the Board, from time to time.

6.4Board Quorum; Resolutions.  A quorum shall be deemed to exist for the purposes of Board action as long as at least two (2) of the members of the Board are present, including at least one (1) Director appointed by each Investor; provided, that all Directors have received notice of such meeting as is required by Applicable Law and the terms of Section 6.3.  Except as provided herein, including in Section 6.6, any action, determination or resolution of the Board shall require the affirmative vote of a majority of the Directors at a duly constituted meeting of the Board.

6.5Action by the Board without a Meeting.  Any action required or permitted to be taken at a meeting of the Board may be taken without a meeting, if a proposed written consent, setting forth the action so taken or to be taken (i) is sent to all Directors, (ii) is signed by the number of Directors needed to approve such action and (iii) once signed, is delivered to the Board.  Action taken under this Section shall be effective when all of the Directors needed to approve such action have signed the proposed written consent or counterpart thereof, unless the written consent specifies that it is to be effective as of an earlier or later date and time.  Such a written consent shall have the same force and effect as if the subject matter was voted upon at a duly called and constituted meeting of the Board and may be described as such in any document or instrument.

6.6Board Unanimous Approval Rights.  Notwithstanding any other provision of this Agreement, the affirmative vote of all of the members of the Board shall be required for any of the following Hong Kong Holdco actions:

(i)   the borrowing of or the incurrence of any indebtedness by Hong Kong Holdco or the granting by Hong Kong Holdco of any liens (other than those arising by the operation of law) or Encumbrances on a material amount of Hong Kong Holdco’s assets;

- 7 -

(ii)   amendment of the constitutive documents of Hong Kong Holdco;

(iii)   additional capital contributions to be made by Hong Kong Holdco to the Company;

(iv)   increase, decrease or transfer of the registered capital of Hong Kong Holdco;

(v)   merger of Hong Kong Holdco with another Entity;

(vi)   reorganization of Hong Kong Holdco into several Entities;

(vii)   the issuance of additional Interests, or securities convertible into shares, in Hong Kong Holdco; or

(viii)   the filing of a voluntary winding up petition by, or the liquidation or dissolution of, Hong Kong Holdco.

6.7Deadlock.  In the event that (a) the Board is deadlocked with an equal number of votes in favor and opposed on any matter requiring majority approval, or (b) any action requiring unanimous approval of the Board fails to pass and such action is necessary for the immediate continued operation of Hong Kong Holdco or the Company, then the chief executive officers of ZBB Energy and PowerSav shall confer over a thirty (30) day period in an attempt to resolve the deadlock.  If such discussions do not resolve the deadlock, then the Parties shall proceed with the dispute resolution procedures set forth in Section 16.2 below; provided, however, that either Party may elect alternatively to exercise its rights pursuant to Section 12.6(c) if such mediation is unsuccessful within a succeeding sixty (60) day period.

7.INVESTORS.

7.1Meetings.

(a)Convention of Meetings.  The Board may call for meetings of the Investors at such times as it determines to be necessary or appropriate and shall call a meeting upon the written request of any single Investor.  An Investor requesting a meeting must sign the request, deliver the same to the Board and specify therein the purposes of the proposed meeting.  There shall be no requirement that annual or other periodic meetings of the Investors be held.  The Board shall give all Investors notice stating the date, time and place of a meeting of the Investors, which date shall not be less than fifteen (15) Business Days after the date such notice is given (which period may be waived by the Investors sufficient to represent a quorum under the terms hereof, either through a written waiver or by actual attendance, without objection, at such meeting of the Investors).

- 8 -

(b)Participation by Other Means.  Investors may participate in any meeting of the Investors, by any means permitted under Applicable Law, including by videoconference or teleconference.

(c)Conduction of Meetings.  Meetings of the Investors shall be conducted in English and minutes of each meeting shall be prepared by Hong Kong Holdco in English and distributed to each Investor and the Board promptly following such meeting.  Proposals or reports brought before any meeting of the Investors for information or action (including, without limitation, Hong Kong Holdco’s financial statements) shall be prepared in English.  The Chairman of the Board shall preside over meetings of the Investors.

7.2Voting Rights; Actions of the Investors; Quorum.  Each Investor shall be entitled to vote, and to cast a number of votes equal to the product of (i) one hundred (100) multiplied by (ii) that Investor’s Percentage Ownership Interest (for the avoidance of doubt, the Investors have an aggregate of one hundred (100) votes) on any matter submitted to a vote of the Investors in accordance with applicable provisions of this Agreement and Applicable Law.  A quorum shall be deemed to exist for purposes of Investor action as long as two (2) individual Investors are present.  Except as provided herein, any action, determination or resolution of the Investors shall require the majority vote of the Investors at a duly constituted meeting of the Investors.

7.3Action by the Investors without a Meeting.  Any action required or permitted to be taken at a meeting of the Investors may be taken without a meeting, if a proposed written consent, setting forth the action so taken or to be taken (i) is sent to all Investors, (ii) is signed by the Investors holding the number of Interests needed to approve the action and (iii) once signed, is delivered to the Board.  Action taken under this Section shall be effective when all of the Investors needed to approve such action have signed the proposed written consent or counterpart thereof, unless the written consent specifies that it is to be effective as of an earlier or later date and time.  Such a written consent shall have the same force and effect as if the subject matter was voted upon at a duly called and constituted meeting of the Investors and may be described as such in any document or instrument.

7.4Investor Unanimous Approval Rights.  Notwithstanding any other provision of this Agreement, the affirmative vote of all of the Interests held by the Investors shall be required to change the number (or representative composition) of Directors on the Board of Directors.

7.5Investor Supermajority Rights.  Notwithstanding any other provision of this Agreement, the affirmative vote of Investors holding at least eighty (80) votes (as described in Section 7.2 hereof) shall be required for any of the following Hong Kong Holdco actions:

(i)   the borrowing of or the incurrence of any indebtedness by Hong Kong Holdco or the granting by Hong Kong Holdco of any liens (other than those arising by the operation of law) or Encumbrances on a material amount of Hong Kong Holdco’s assets;

(ii)   the amendment of the constitutive documents of Hong Kong Holdco;

- 9 -

(iii)   the issuance of additional Interests, or securities convertible into shares, in Hong Kong Holdco; or

(iv)   the filing of a voluntary winding up petition by, or the liquidation or dissolution of, Hong Kong Holdco.

7.6Deadlock.  In the event that (a) the Investors are deadlocked with an equal number of votes in favor and opposed on any matter requiring majority approval, or (b) any action requiring supermajority or unanimous approval of the Investors fails to pass and such action is necessary for the immediate continued operation of Hong Kong Holdco or the Company, then the chief executive officers of ZBB Energy and PowerSav shall confer over a thirty (30) day period in an attempt to resolve the deadlock.  If such discussions do not resolve the deadlock, then the Parties shall proceed with the dispute resolution procedures set forth in Section 16.2 below provided, however, that either Party may elect alternatively to exercise its rights pursuant to Section 12.6(c) if such mediation is unsuccessful within a succeeding sixty (60) day period.

8.OFFICERS.

8.1Appointment and Term of Office.  The officers of the Company (a) shall consist of the chief executive officer, chief financial officer and secretary and (b) may consist of other officers, all as may be appointed from time to time by the Board.  Such officers will hold office until the earlier of that officer’s death, resignation, retirement, disqualification, or removal from office by the Board and until that officer’s successor has been duly elected and qualified.  The same person may hold two or more offices.

8.2Removal.  Any officer appointed hereunder may be removed from office at any time by the Board, with or without cause.  Such removal will be without prejudice to the contract rights, if any, of the person so removed.  Election or appointment of an officer will not of itself create contract rights.

8.3Vacancies.  Any vacancy in an officer position shall be filled by the Board.

8.4Compensation.  The compensation of all officers of Hong Kong Holdco shall be determined by the Board and may be altered by the Board from time to time, except as otherwise provided by contract, and no officer shall be prevented from receiving such compensation by reason of the fact such officer is also a Director.  All officers shall be entitled to be paid or reimbursed for all costs and expenditures incurred in conjunction with carrying out Hong Kong Holdco’s business.

8.5Powers and Duties.  Officers shall have such powers and duties as are provided herein and as may otherwise be established or delegated to them, from time to time, by the Board.  The officers of Hong Kong Holdco shall possess such powers and duties as customarily are associated with their respective offices, subject to the general direction and supervision of the Board.  Such powers and duties will include the following:

(a)Chief Executive Officer.  Except as otherwise provided herein, Hong Kong Holdco’s day-to-day operations will be managed by the chief executive officer of Hong Kong Holdco.  The person holding the office of chief executive officer also shall perform, under the direction and subject to the control of the Board, such other duties as may be assigned by the Board, from time to time.

- 10 -

(b)Chief Financial Officer.  The chief financial officer shall be the principal accounting and financial officer of Hong Kong Holdco and will have active control of, and shall be responsible for, all matters pertaining to the accounts and finances of Hong Kong Holdco.  The chief financial officer will have charge of Hong Kong Holdco funds and securities and will keep a record of the property and indebtedness of Hong Kong Holdco.  The chief financial officer shall be prepared at all times to give information as to the condition of Hong Kong Holdco and shall make a detailed annual report of the entire business and financial condition of Hong Kong Holdco.  The person holding the office of chief financial officer shall also perform, under the direction and subject to the control of the Board, such other duties as may be assigned by the Board, from time to time.

(c)Secretary.  The secretary shall give notice to, attend, and keep the minutes of all of the proceedings at all meetings of the Board and the Investors and will be the custodian of such minutes and all other legal records of Hong Kong Holdco.  The secretary will see that all notices required to be given to the Directors and the Investors are duly given in accordance with this Agreement or as required by Applicable Law.  It shall also be the duty of the secretary to keep a ledger, in which shall be correctly recorded all transactions pertaining to the Interests of Hong Kong Holdco.  The person holding the office of secretary also shall perform, under the direction and subject to the control of the Board, such other duties as may be assigned by the Board, from time to time.

(d)Other Officers.  The Board may appoint such other officers, with such titles, powers, duties and compensation, as they may deem necessary for the conduct of the business of Hong Kong Holdco.  In addition, the Board may authorize the chief executive officer or other officers to appoint such agents or employees, as the Board deems necessary for the conduct of the business of Hong Kong Holdco.

9.ANNUAL BUDGETS; FINANCIAL AND OTHER RECORDS.

9.1Annual Budgets.  The Parties shall agree upon annual budgets for Hong Kong Holdco not later than (i) with respect to the first annual budget of Hong Kong Holdco, prior to the formation of Hong Kong Holdco and (ii) with respect to each set of subsequent annual budgets, not later than thirty (30) days prior to the start of the next fiscal year of Hong Kong Holdco.

9.2Accounting and Management Information Systems.  In the conduct of its business, Hong Kong Holdco shall pursue a policy of adopting and maintaining accounting and management information systems that facilitate Hong Kong Holdco’s compliance with the Reporting Requirements (as defined below), the Accounting Principles and are otherwise consistent with sound business practices and corporate governance in the context of Hong Kong Holdco’s business and operations.

9.3Financial Statements, Accounting and Other Reports.  Hong Kong Holdco shall cause the following financial statements to be prepared in accordance with the Accounting Principles and provided to each Investor (the following requirements being referred to collectively as the “Reporting Requirements”):

- 11 -

(a)Annual Financial Statements.  As soon as available, but in any event within forty five (45) days after the end of each Fiscal Year, a copy of the annual financial statements of Hong Kong Holdco, prepared in accordance with the Accounting Principles, including, a balance sheet, income statement, statement of cash flows and statement of the Investors’ equity as of the end of the Fiscal Year, setting forth in each case in comparative form the figures for the previous year, and audited and certified by Hong Kong Holdco’s accounting firm.

(b)Quarterly Financial Statements.  As soon as available, but in any event within thirty (30) days after the end of each fiscal quarter, a copy of Hong Kong Holdco’s unaudited financial statements for such fiscal quarter including a balance sheet, income statement, statement of cash flows and statement of the Investors’ equity as of the end of such quarter, setting forth in comparative form the figures for the corresponding quarter in the previous Fiscal Year, and certified by the chief financial officer of Hong Kong Holdco as being fairly stated in all material respects (subject to normal year-end audit adjustments).

(c)Quarterly Management Reports.  On a quarterly basis, Hong Kong Holdco’s management shall report to the Board: (i) Hong Kong Holdco’s current business objectives and compliance with any business plan then in effect, (ii) notice of any new clients, and (iii) such other reasonable information as the Board may request.

9.4Right of Inspection.  During the regular office hours at the location of Hong Kong Holdco, and upon reasonable notice to Hong Kong Holdco, each Investor shall have (a) full access to all properties, books of account and records of Hong Kong Holdco; (b) the right to make copies from such books and records at such Investor’s own expense and (c) the right to discuss with Hong Kong Holdco’s executive officers the affairs, finances and accounts of Hong Kong Holdco.  Any information obtained by an Investor through exercise of rights granted under this Section shall, to the extent constituting Confidential Information hereunder, be subject to the confidentiality provisions set forth in Section 13.  Any Investor having rights under this Section shall also have the right to confer, upon reasonable notice and during normal business hours, with the auditors of Hong Kong Holdco, and with the accounting firm which has prepared or is preparing any of the financial statements required to be delivered by Hong Kong Holdco, as a part of the Reporting Requirements and Hong Kong Holdco shall grant, or use commercially reasonable efforts to provide for, any permission requested by such auditors to permit such conferences to take place.

10.INSURANCE; INDEMNIFICATION.

10.1Liability.  To the fullest extent permitted by Applicable Law, each Director and officer of Hong Kong Holdco shall not be personally liable to Hong Kong Holdco or the Investors for monetary damages for breach of any duty owed as a Director or officer of Hong Kong Holdco, and Hong Kong Holdco’s constitutive documents shall so provide.

10.2Indemnification of Directors and Officers.

- 12 -

(a)Generally.  Except to the extent limited hereunder, each Director or officer of Hong Kong Holdco (each a “Company Representative”)who is made a party or is threatened to be made a party to or is involved in any proceeding by reason of the fact that such Company Representative, or the legal representative of such Company Representative, is or was a Company Representative, shall be indemnified and held harmless by Hong Kong Holdco to the fullest extent authorized by Applicable Law, as the same exists or may hereafter be amended (but, in case of any such amendment, only to the extent that such amendment permits Hong Kong Holdco to provide broader indemnification rights than said law permitted Hong Kong Holdco to provide prior to such amendment), against all expense, liability and loss (including attorneys’ fees, judgments, fines, excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a Company Representative, and shall inure to the benefit of such Company Representative’s heirs, executors and administrators.  The right to indemnification conferred herein shall be a contract right based upon an offer from Hong Kong Holdco, which offer shall be deemed to be accepted by such person’s service or continued service as a Company Representative.  Hong Kong Holdco may, by action of the Board, provide indemnification to employees or agents of Hong Kong Holdco, to the extent permitted by Applicable Law, with the same scope and effect as the foregoing indemnification of Company Representatives.

(b)Limitations.  Notwithstanding the foregoing, the provisions of 10.2(a) shall not eliminate or limit the liability of, or provide indemnity to, a Company Representative for or in connection with any act, inaction or omission of such Company Representative that (i) constitutes a breach by Company Representative of that Company Representative’s duties of loyalty or care to Hong Kong Holdco or the Investors (other than as expressly excepted under this Agreement; (ii) was detrimental to Hong Kong Holdco and not in good faith; (iii) involved intentional misconduct or a knowing violation of the law; (iv) clearly was in conflict with the interests of Hong Kong Holdco or (v) results in such Company Representative deriving an improper personal benefit.  The right to indemnification conferred in this Section 10.2 shall not be exclusive of any other right that a Company Representative may have or hereafter acquire under law or equity, provision of this Agreement or otherwise.

10.3Indemnification of the Investors.

(a)Generally.  To the extent permitted by law, Hong Kong Holdco will indemnify and hold harmless each Investor, the partners, officers and directors of each Investor and each person, if any, who Controls such Investor (each an “Indemnified Party”) against all liability, loss, damage, penalty, action, claim, judgment, settlement, cost and expense of any kind or nature whatsoever (including all reasonable attorneys’ fees) (collectively referred to as “Losses”) that arise under applicable securities laws, that in any way relate to, or arise out of, or are alleged to relate to or arise out of any of the following statements, omissions or violations (collectively a “Violation”) by Hong Kong Holdco: (i) any untrue statement or alleged untrue statement of a material fact contained in any registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, or otherwise; (ii) the omission or alleged omission to state therein a material fact required to be stated therein or otherwise, or necessary to make the statements therein not misleading; or (iii) any violation or alleged violation by Hong Kong Holdco of any applicable securities laws; and Hong Kong Holdco will pay to each such Indemnified Party any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such Loss; provided,however, that the indemnity agreement contained in this Section 10.3 shall not apply to amounts paid in settlement of any such Loss if such settlement is effected without the consent of Hong Kong Holdco, which consent shall not be unreasonably withheld, nor shall Hong Kong Holdco be liable in any such case for any such Loss to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with any registration of Hong Kong Holdco’s Interests by such Indemnified Party.

- 13 -

(b)Indemnity Claims.Promptly after receipt by an Indemnified Party under this Section 10.3 of notice of the commencement of any action (including any governmental action), such Indemnified Party will, if a claim in respect thereof is to be made against Hong Kong Holdco under this Section 10.3, deliver to Hong Kong Holdco a written notice of the commencement thereof and Hong Kong Holdco shall have the right to participate in, and, to the extent Hong Kong Holdco so desires, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an Indemnified Party shall have the right to retain its own counsel, with the fees and expenses to be paid by Hong Kong Holdco, if representation of such Indemnified Party by the counsel retained by Hong Kong Holdco would be inappropriate due to actual or potential differing interests between such Indemnified Party and Hong Kong Holdco.  The failure to deliver written notice to Hong Kong Holdco within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve Hong Kong Holdco of any liability to the Indemnified Party under this Section 10.3, but the omission so to deliver written notice to Hong Kong Holdco will not relieve it of any liability that it may have to any Indemnified Party otherwise than under this Section 10.3.

(c)Unavailability of Indemnification.  If the indemnification provided for under this Section 10.3 is held by a court of competent jurisdiction or by an arbitral tribunal to which an Indemnified Party has submitted the matter to be unavailable to an Indemnified Party with respect to any Losses referred to herein, Hong Kong Holdco, in lieu of indemnifying such Indemnified Party thereunder, shall to the extent permitted by Applicable Law contribute to the amount paid or payable by such Indemnified Party as a result of such Loss in such proportion as is appropriate to reflect the relative fault of Hong Kong Holdco on the one hand and of the Indemnified Party on the other in connection with the Violations that resulted in such Loss, as well as any other relevant equitable considerations.  The relative fault of Hong Kong Holdco and of the Indemnified Party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by Hong Kong Holdco or by the Indemnified Party and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by an Investor hereunder exceed the registered capital contributed by such Investor.

10.4Advancement.  Hong Kong Holdco shall reimburse, promptly following request therefor, all reasonable expenses incurred by a Person indemnified by Hong Kong Holdco pursuant to Section 10.2 or 10.3 hereof (an “Indemnitee”) in connection with any threatened, pending or completed action, suit, arbitration, investigation or other proceeding (“Claim”) arising out of, or relating to the matters identified in this Article 10; provided, however, that prior to such advancement, the Indemnitee shall have agreed in writing (determined to be sufficient by the Board to protect the interests of Hong Kong Holdco) to repay such advancement in connection with acts, conduct or omissions as to which it shall be determined by a court of competent jurisdiction or an arbitrator that such Indemnitee engaged in intentional misconduct or in a knowing and culpable violation of the law.

- 14 -

10.5Insurance.  Hong Kong Holdco shall obtain and maintain, and will continue to maintain at all times during the terms of this Agreement, the insurance listed below, in commercially reasonable amounts, at its own expense, from an insurer that is A.M. Best Company rated A- or higher.  Any such policy shall be endorsed to name specifically each of the Parties and their respective subsidiaries, affiliates, successors and assigns as additional insureds.  Hong Kong Holdco shall provide any certificate of insurance to the Parties upon request and all such certificates shall indicate that thirty (30) days prior written notice to the Parties of cancellation or non-renewal is required:

(a)General liability insurance;

(b)Product liability insurance;

(c)Errors & omissions insurance; and

(d)Director & officer insurance, to protect Hong Kong Holdco and its Directors and officers, against any such expense, liability or loss, whether or not Hong Kong Holdco would have the power to indemnify such person against such expense, liability or loss under this Agreement.

11.COMPLIANCE WITH LAWS.

11.1General.  In the conduct of its business, Hong Kong Holdco shall comply with all Applicable Laws and maintaining all franchises, permits, licenses and similar authorities necessary for the conduct of its business; provided further, that Hong Kong Holdco shall comply with all statutes, laws, rules, regulations, directives, treaties, judgments, orders, decrees or injunctions of any Governmental Authority that are applicable to ZBB Energy Corporation, a Wisconsin corporation that is the parent of ZBB Cayman Corporation, as a publicly-traded U.S. company, including without limitation relevant provisions of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act, to the extent reasonably requested by ZBB Energy.

11.2Anti-Corruption.  Neither Hong Kong Holdco, nor any of its Directors, officers, employees, agents or other Person associated with or acting for or on behalf of Hong Kong Holdco, will take any action that would cause Hong Kong Holdco to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any similar state or local Applicable Law, the Anti-Kickback Act of 1986 or any state or local/municipality anti-kickback Applicable Law, Applicable Laws restricting the payment of contingent fee arrangements, or any Applicable Laws of similar effect.

- 15 -

12.TRANSFERS AND SALES OF INTERESTS

12.1Transfers of Interests

(a)General Restriction on Transfers.  Except to the extent otherwise explicitly provided in this Section 12 or Section 17.1, no Investor shall Transfer (or create or suffer to exist any Encumbrance against) all or any portion of that Investor’s Interest, except with the advance approval of all Investors.  Such approval may specify the rights and obligations the transferee shall have, including whether the proposed transferee is to be admitted as a full substituted Investor.  The grant or denial of an Investor’s approval for a proposed Transfer or Encumbrance may be made in such Investor’s sole and absolute discretion.

(b)Rights and Obligations of Substituted Investor.  A substituted Investor shall have all the rights and powers, and shall be subject to all the restrictions and liabilities, of the Transferring Investor (as defined below), relative to such transferred Interest.

(c)Continuing Obligations of Transferor.  Any Transferring Investor (as defined below) who Transfers all of such Investor’s Interest shall cease to be an Investor; provided, however, that such Transfer, without more, shall not release the Transferring Investor from any liability with respect to the transferred Interest or any other obligation that such Transferring Investor may have to Hong Kong Holdco.

12.2Unauthorized Transfers.  Any purported Transfer or Encumbrance of an Interest of any Investor that does not comply with the conditions set forth in this Section 12 shall be null, void and of no effect.

12.3Withdrawal of an Investor.  An Investor shall have no right to withdraw, dissociate withdraw such Investor’s registered capital from Hong Kong Holdco.

12.4Transfers Pursuant to a Bona Fide Offer; Rights of First Refusal.

(a)Notice of Bona Fide Offer.  Notwithstanding the general restrictions on Transfers in Section 12.1, if an Investor desires to Transfer all or any portion of that Investor’s Interest pursuant to a Bona Fide Offer (as defined below) made to that Investor by a third-party, and such Investor is unable to obtain the approval of the other Investors to such Transfer, as provided in Section 12.1(a) above, then such Investor desiring to so transfer (a “Transferring Investor”) shall give written notice thereof (which shall include a copy of such bona fide offer) to the other Investors (the “Receiving Investors”).  As used herein, the term “Bona Fide Offer” means a legally binding offer made in good faith (in writing) by a third party, who the Transferring Investor reasonably believes has the financial means to consummate the proposed Transfer, which offer includes (i) the Interests to be transferred; (ii) the name and address of the proposed transferee; (iii) in the case of a proposed transferee that is an entity (i.e., not a natural Person), the identity of all direct and indirect owners of the proposed transferee; (iv) the proposed consideration for the Transfer and (v) the other terms of the proposed Transfer.

(b)Receiving Investors’ Right of First Refusal.  The Receiving Investors shall have the right to purchase all, but not less than all, of the subject Interest from the Transferring Investor on the terms and conditions contained in the Bona Fide Offer.

- 16 -

(c)Exercise of Right of First Refusal; Closing.The Receiving Investors shall have sixty (60) calendar days from the date of receipt of the notice referenced in Section 12.4(a) (the “Election Period”) to elect to exercise their purchase rights by sending written notice thereof to the Transferring Investor.  Those Receiving Investors exercising said purchase right (the “Electing Investors”) may divide the Interests to be purchased by them in any amounts or proportions that they may mutually agree upon.  In the event that they cannot or do not agree upon the Interests to be purchased by each, then each such Electing Investor shall purchase that percentage of the subject Interests proportionate to that Electing Investor’s respective Interest relative to the aggregate Interests of all Electing Investors.  The Electing Investors must purchase all of the Interests described in the Bona Fide Offer.  The closing of such a purchase shall occur at a date, time and place determined by the Electing Investors, which date shall be no later than thirty (30) days following the end of the Election Period.

(d)Transfer to Third-Party Transferee.  If the Receiving Investors do not elect to purchase all of the Interests within the Election Period, then the Receiving Investors shall have no right to purchase any of the Interests, and the Transferring Investor may Transfer, within a period of thirty (30) calendar days beginning at the end of the Election Period, all of the Interests described in the Bona Fide Offer to the proposed third-party transferee on the terms and conditions contained in the Bona Fide Offer; provided, however, that the proposed third-party transferee must have delivered to Hong Kong Holdco, prior to such Transfer, an agreement, in form and substance reasonably satisfactory to the Investors, duly executed by the proposed third-party transferee, under the terms of which such third-party transferee joins in the execution of this Agreement, becomes a substituted Investor and agrees to be bound by all of the terms and provisions of this Agreement.  If the Transferring Investor does not Transfer such Interests by the end of such thirty (30) day period, the subject Interests, and the Interest represented thereby, shall again become subject to the restrictions of this Agreement, as though they had never been so offered.

12.5Acknowledgment of Liquidity.  The Investors (a) acknowledge and agree that the provisions of this Agreement provide reasonable methods of exiting Hong Kong Holdco and an adequate means for obtaining liquidity with respect to their investment in Hong Kong Holdco and (b) agree not to assert any claim in any legal proceeding that the provisions of this Section 12 are unreasonable, unlawful or unenforceable.

12.6Buy/Sell Provisions.

(a)ZBB Energy’s Put and Call Rights.  Notwithstanding the foregoing, ZBB Energy shall have the right, at any time following any of the circumstances listed below upon written notice to PowerSav, to require PowerSav to (1) sell PowerSav’s Interests in Hong Kong Holdco to ZBB Energy or (2) purchase ZBB Energy’s Interests in Hong Kong Holdco:

(i)   a PowerSav Change of Control; or

(ii)   a material breach or default of this Agreement by PowerSav (a “PowerSav Breach”).

- 17 -

(b)PowerSav’s Put and Call Rights.  Notwithstanding the foregoing, PowerSav shall have the right, at any time at any time following a material breach or default of this Agreement by ZBB Energy (a “ZBB Energy Breach”), upon written notice to ZBB Energy, to require ZBB Energy to (1) sell ZBB Energy’s Interests in Hong Kong Holdco to PowerSav or (2) purchase PowerSav’s Interests in Hong Kong Holdco.

(c)Additional Put Right for Both Parties.  Either Party (the “Selling Party”) may require the other Party, upon written notice, to purchase the Selling Party’s Interest in Hong Kong Holdco following any of the following circumstances:

(i)   in the event of a deadlock by the Board that cannot be resolved or a failure to approve an action requiring a unanimous vote of the Directors, in any case with respect to a matter that seriously impairs Hong Kong Holdco or the Company’s operations; or

(ii)   in the event of a deadlock on an Investor vote that cannot be resolved or a failure to approve an action requiring a supermajority or unanimous vote of the Investors, in any case with respect to a matter that seriously impairs Hong Kong Holdco or the Company’s operations.

(d)Buy/Sell Arrangements.  The value of the Interests in Hong Kong Holdco being purchased under this Section 12.6 shall be determined as follows:

(i)   In the event that either ZBB Energy or PowerSav exercises its put right due to a PowerSav Breach or a ZBB Energy Breach, respectively, an amount equal to (i) one and one half (1.50) multiplied by (ii) the Interest Value (as defined below);

(ii)   In the event that either ZBB Energy or PowerSav exercises its call right due to a PowerSav Breach or a ZBB Energy Breach, respectively, an amount equal to (i) one half (.5) multiplied by (ii) the Interest Value (as defined below); or

(iii)   In all other cases (for example, if ZBB Energy exercises its put right due to a PowerSav Change in Control), an amount equal to the Interest Value.  For purposes hereof, the “Interest Value” shall mean the amount equal to the appraised value of Hong Kong Holdco, as determined by an independent third party mutually selected by the Parties, multiplied by a fraction equal to the percentage of equity interest represented by the Interest being sold.

The closing of any purchase or sale pursuant to this Section 12.6 shall occur at a date, time and place determined by the Investor initiating the same, which date shall be no later than thirty (30) days following the determination of the Interest Value.

13.CONFIDENTIALITY

- 18 -

Each Party (the "Receiving Party") undertakes to retain in confidence the terms of this Agreement and all other non-public information, technology, materials and know-how of the other Party (“Disclosing Party”) disclosed or acquired by the Receiving Party pursuant to or in connection with this Agreement that is either designated as proprietary and/or confidential or, by the nature of the circumstances surrounding disclosure, ought in good faith to be treated as proprietary and/or confidential ("Confidential Information"); provided, that each Party may disclose the terms and conditions of this Agreement to its immediate legal and financial consultants in the ordinary course of its business.  Neither Party may use any Confidential Information with respect to which it is the Receiving Party for any purpose other than to carry out the activities contemplated by this Agreement.  Each Party agrees to use commercially reasonable efforts to protect Confidential Information of the other Party, and in any event, to take precautions at least as great as those taken to protect its own confidential information of a similar nature.  Each Party will also notify the other promptly in writing if such Party learns of any unauthorized use or disclosure of any Confidential Information that it has received from the other Party, and will cooperate in good faith to remedy the occurrence to the extent reasonably possible.  The restrictions set forth in this Section do not apply to any information that: (a) was known by the Receiving Party without obligation of confidentiality prior to disclosure thereof by the other Party; (b) was in or entered the public domain through no fault of the Receiving Party; (c) is disclosed to the Receiving Party by a third party legally entitled to make the disclosure without violation of any obligation of confidentiality; (d) is required to be disclosed by applicable laws or regulations (but in that event, only to the extent required to be disclosed, and provided that the Disclosing Party is given the opportunity to review and redact the Agreement prior to disclosure); or (e) is independently developed by the Receiving Party without reference to any Confidential Information of the other Party.  Upon request of the Disclosing Party, the Receiving Party will return to the Disclosing Party all materials, in any medium, that contain or reveal all or any part of any Confidential Information of the Disclosing Party.  Each Party acknowledges that breach of this provision by it would result in irreparable harm to the other Party, for which money damages would be an insufficient remedy, and therefore that the other Party will be entitled to seek injunctive relief to enforce the provisions of this Section.

14.REPRESENTATIONS AND WARRANTIES.

14.1Warranties of the Investors.  Each of the Investors hereby represents and warrants that, as of the date of the execution and delivery hereof, the following statements are true and correct:

(a)Organization; Good Standing.  The Investor is a legal entity, organized and validly existing under the laws of the applicable jurisdiction, with full power to own its assets and conduct its business as conducted and as proposed to be conducted.  The Investor is registered or qualified to do business and in good standing in each jurisdiction in which it owns or leases property or transacts business and where the failure to be so qualified would have a material adverse effect on the ability of the Investor or Hong Kong Holdco to consummate the transactions contemplated by this Agreement or the Related Agreements, and no proceeding has been instituted in any such jurisdiction, revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such power and authority or qualification.  Each of the Investors will provide, upon request of any other Investor, a copy of its formation and governing documents, as are then currently in effect.

- 19 -

(b)Authorization.  The Investor has all requisite corporate power and authority to execute and deliver this Agreement, to perform fully its obligations hereunder and to consummate the transactions contemplated by this Agreement or the Related Agreements.  All corporate action on the part of the Investor necessary for the authorization, execution and delivery of this Agreement and for the performance of all of its obligations hereunder has been taken, and this Agreement when fully executed and delivered shall constitute a valid, legally binding and enforceable obligation of the Investor (except as the enforceability thereof may be limited by any laws affecting creditors’ rights generally, by general principles of equity, regardless of whether such enforceability is considered in equity or at law).

(c)Government and Other Consents.  No consent, authorization, license, permit, registration or approval of, or exemption or other action by, any Governmental Authority, or any other Person, is required in connection with the Investor’s execution, delivery and performance of this Agreement, or if any such consent is required, the Investor has satisfied the applicable requirement, except for any matters that would not have a material adverse effect on the ability of the Investor or Hong Kong Holdco to consummate the transactions contemplated by this Agreement or the Related Agreements.

(d)Effect of Agreement.  The Investor’s execution, delivery and performance of this Agreement, and the consummation of the transactions contemplated hereby will not result in a breach or violation of any of the terms, conditions or provisions of, or constitute a default (or with notice or lapse of time or both constitute) or require the consent of any other Person under (i) any indenture, mortgage, agreement or other instrument or arrangement to which the Investor is a party; (ii) any of the terms or provisions of the formation or governing documents of the Investor or any provision of Applicable Law; (iii) any judgment, order, writ, injunction or decree applicable to the Investor; or (iv) or have any effect on the compliance by the Investor with, any applicable licenses, permits or authorizations, except in each case under clauses (i), (ii), (iii) or (iv) where such breach, violation or default would not have a material adverse effect on the ability of the Investor or Hong Kong Holdco to consummate the transactions contemplated by this Agreement or the Related Agreements.

(e)Proceedings.  There is no action, suit or proceeding at law or in equity or otherwise in, before or by any Governmental Authority or, to the Investor’s knowledge, threatened by or against the Investor which question the validity of, or which question the Investor’s right to enter into or perform this Agreement, or which would prevent or restrict its ability to enter into and perform its obligations under this Agreement, except where such action, suit or proceeding could not reasonably be expected to have a material adverse effect on the ability of the Investor or Hong Kong Holdco to consummate the transactions contemplated by this Agreement or the Related Agreements.

(f)Anti-Corruption.  Neither the Investor, nor any of its directors, officers, employees, agents or other Person associated with or acting for or on behalf of the Investor, has taken, or will take, any action that would cause the Investor or Hong Kong Holdco to be in violation of the Foreign Corrupt Practices Act of 1977, as amended, or any similar state or local Applicable Law, the Anti-Kickback Act of 1986 or any state or local/municipality anti-kickback Applicable Law, Applicable Laws restricting the payment of contingent fee arrangements, or any Applicable Laws of similar effect.

- 20 -

14.2Representations and Warranties of PowerSav.  PowerSav hereby represents and warrants that, as of the date of the execution and delivery hereof, the following statements are true and correct:

(a)PowerSav’s interest in Hong Kong Holdco is not, and will not be, beneficially owned by any person or entity other than PowerSav and that no competitor of ZBB Energy Corporation, financial sponsor or private equity fund beneficially owns, or will beneficially own, any interest in PowerSav or any of PowerSav’s interest in Hong Kong Holdco or the Company;

(b)PowerSav is the sole beneficial owner of all intellectual property claimed to be owned by PowerSav; and

(c)No person or entity other than PowerSav has any rights in PowerSav’s products or intellectual property.

15.TERM AND TERMINATION.

15.1Term.  This Agreement shall be effective as of the Effective Date and shall continue in effect until the earlier of (a) the expiration of the Agreement on the tenth (10th) anniversary of the Effective Date or (b) upon the date of termination of this Agreement pursuant to Section 15.2 (the “Term”).

15.2Termination.  This Agreement shall terminate:

(i)   Upon the mutual written agreement of the Investors;

(ii)   Upon the material breach (or default in the performance of the terms) of this Agreement by a Party; provided, that such breach (to the extent susceptible of cure) remains uncured for more than thirty (30) days after the non-breaching Party provides the breaching Party written notice of the same;

(iii)   As to any Investor, upon the permitted Transfer of all Interests of Hong Kong Holdco held by such Investor;

(iv)   If the Approval Authority has not issued a business license to the Company by December 31, 2011; or

(v)   Upon the termination of the Joint Venture Agreement.

15.3Survival.  The rights and obligations of the Parties under Section 14 (Confidentiality), Section 15.4 (Continuing Liability), Section 16 (Governing Law and Dispute Resolution) and Section 17 (General Provisions) (except for Section 17.6 (Further Assurances)) shall survive any termination of this Agreement.

15.4Continuing Liability.  Termination of this Agreement for any reason shall not release a Party from any liability or obligation which has already accrued as of the effective date of such termination, and shall not constitute a waiver or release of, or otherwise be deemed to prejudice or adversely affect, any rights, remedies or claims, whether for damages or otherwise, which a Party may have hereunder, at law, equity or otherwise or which may arise out of or in connection with such termination.

- 21 -

15.5Effect of Termination.  Upon termination of this Agreement pursuant to Subsections (i), (ii), (iv) or (v) of Section 15.2 (provided, that neither Party has exercised its rights pursuant to Section 12.6), Hong Kong Holdco shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets and satisfying the claims of its creditors and the Investors.  Under such circumstances, the Board shall not take any action that is inconsistent with, or not necessary or advisable for, the winding up of Hong Kong Holdco’s affairs.  The Board shall be responsible for overseeing the winding up and liquidation of Hong Kong Holdco and, in connection therewith, shall take full account of Hong Kong Holdco’s liabilities and assets, cause Hong Kong Holdco’s assets to be liquidated as promptly as is consistent with obtaining the fair value thereof and cause the proceeds therefrom, to the extent sufficient therefor, to be applied in the following order and priority:

(a)Creditors.  First, to the payment of all of Hong Kong Holdco’s debts and liabilities owed to the creditors of Hong Kong Holdco (including any Directors or Investors who are creditors) in the order of priority provided by contract or law, with the Board making reasonable provision for their payment or satisfaction (which may include the setting up of such reserves as the Board may deem necessary for the payment of any obligations or contingent liabilities of Hong Kong Holdco).  The Board may hold such reserves for such period that they reasonably deem advisable for the payment of such obligations and liabilities as they become due and, at the expiration of such period, the balance of such reserves, if any, shall be distributed as provided in Section 15.5(b);

(b)Return of Registered Capital.  Second, to each of the Investors in the amount of their respective registered capital, as set forth on Exhibit A, as may be amended from time to time; provided, that if Hong Kong Holdco does not have sufficient assets to return all such registered capital to the Investors, any such amounts will be distributed to the Investors on a pro rata basis in a ratio that corresponds to (i) the quotient of (A) the Investor’s committed registered capital divided by (B) the aggregate registered capital set forth on Exhibit A, as may be amended from time to time; and

(c)Liquidating Distributions.  The balance, if any, to the Investors in accordance with and in proportion to their respective Percentage Ownership Interest.

The costs and expenses relating to the winding up of Hong Kong Holdco shall be borne by Hong Kong Holdco.  Unless otherwise approved by the Investors, no Investor shall receive compensation for any services performed pursuant to this Section 15.5.

16.GOVERNING LAW; DISPUTE RESOLUTION.

16.1Governing Law.  The validity, construction and enforceability of this Agreement shall be governed by and construed in accordance with the laws of Hong Kong.

- 22 -

16.2Discussions and Arbitration.  The Parties will discuss and finally settle all disputes between them, and among them and Hong Kong Holdco, arising out of this Agreement (including with respect to this Section 16), in accordance with the Domestic Arbitration Rules of Hong Kong International Arbitration Centre.  Hong Kong Holdco shall at all times maintain authorized agents in each of the United States and Wuhu City, Anhui Province, the People’s Republic of China to receive, for and on its behalf service of any summons, complaint or other legal process.

17.GENERAL PROVISIONS.

17.1Assignment.  Either Party may Transfer all of its Interest in Hong Kong Holdco to its wholly owned subsidiary; provided, that (i) such Party provides the other Party prior written notice of such Transfer; (ii) such assignment occurs within one (1) month of the execution of this Agreement and (iii) such subsidiary agrees in writing to be subject to all of the terms and conditions of the Agreement, including those applying specifically to the original Party Transferring its Interest; provided, however, that ZBB Energy may Transfer freely, at any time during the Term of this Agreement, its interest in Hong Kong Holdco to an Affiliate of ZBB Energy upon prior written notice to PowerSav.  Any Transfer or purported Transfer not made in accordance with this Section and Section 12, as applicable, shall be void and of no force and effect.

17.2Non-Competition; Non-Solicitation; Business Opportunities.

(a)Non-Competition.  The Investors agree that, as applicable, they will not (and will cause Hong Kong Holdco and their respective Affiliates and members not to) compete, either directly or indirectly, with ZBB Energy Corporation or its Affiliates, or with Hong Kong Holdco, with respect to the sourcing, production, marketing and distribution of any products sourced, produced, marketed or distributed by ZBB Energy Corporation or its Affiliates or Hong Kong Holdco, as applicable, during the Term of this Agreement and for five (5) years thereafter, anywhere in the world, except as explicitly provided herein.

(b)Non-Solicitation.  Each of the Parties and their respective Affiliates (other than Hong Kong Holdco and the Company, as applicable) agree not to solicit or hire any employee of the other Party or any employee of Hong Kong Holdco or the Company.  Hong Kong Holdco shall not solicit or hire any employee of ZBB Energy, PowerSav or their respective Affiliates (other than Hong Kong Holdco) unless Hong Kong Holdco receives the written consent of the applicable Party.  This covenant will extend for the Term of this Agreement and for five (5) year thereafter.

(c)Business Opportunities.  The Investors agree that each will cause Hong Kong Holdco and the Directors and officers of Hong Kong Holdco to refer any new business opportunities within the scope of this Agreement to the Investors for determination as to whether those opportunities are best explored in Hong Kong Holdco or through one or more of the Investors or their respective Affiliates.

(d)Opportunities outside the Agreement.  The fact that an Investor or Affiliate takes advantage of an opportunity that is not within the scope of this Agreement (either alone or with other Persons, including Entities in which such Investor or Affiliate has an interest) and does not offer such opportunity to Hong Kong Holdco or to the other Investors shall not subject such Investor or Affiliate to liability to Hong Kong Holdco or to the other Investors on account of any lost opportunity.

- 23 -

(e)Exceptions.  Notwithstanding the foregoing, Hong Kong Holdco will renounce, and not accept or be involved in, any interest or expectancy in any business opportunity presented to, or which came to the attention of, any Director who also is an employee or director of ZBB Energy Corporation or its Affiliates (other than Hong Kong Holdco, the Parties or PowerSav) in the course of performing such Person’s official duties for ZBB Energy Corporation or its Affiliates.

17.3Notices and Other Communications.  Any and all notices, requests, demands and other communications required by or otherwise contemplated to be made under this Agreement or Applicable Law shall be in writing and in English and shall be provided by one or more of the following means and shall be deemed to have been duly given (a) if delivered personally, when received; (b) if transmitted by facsimile, on the date of transmission with receipt of a transmittal confirmation or (c) if by international courier service, on the fourth (4th) Business Day following the date of deposit with such courier service, or such earlier delivery date as may be confirmed in writing to the sender by such courier service. All such notices, requests, demands and other communications shall be addressed as follows:

If to Hong Kong Holdco:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

with a copy (which copy shall not constitute notice) to:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

- 24 -

If toZBB Energy:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

with a copy (which copy shall not constitute notice) to:

Mr. Mark Busch and Mr. Eliab Erulkar

K&L Gates LLP

Hearst Tower, 47th Floor

214 North Tryon Street

Charlotte, North Carolina, USA 28202

If to PowerSav:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

with a copy (which copy shall not constitute notice) to:

____________________________________

____________________________________

____________________________________

____________________________________

____________________________________

or to such other address or facsimile number as a Party may specify to the other Party from time to time in writing.

17.4Severability.  If any provision in this Agreement shall be found or be held to be invalid or unenforceable then the meaning of said provision shall be construed, to the extent feasible, so as to render the provision enforceable, and if no feasible interpretation would save such provision, it shall be severed from the remainder of this Agreement which shall remain in full force and effect.  In such event, the Parties shall use their respective best efforts to negotiate in good faith a substitute, valid and enforceable provision or agreement that most nearly affects the Parties’ intent in entering into this Agreement.

17.5References to this Agreement; Headings.  Unless otherwise indicated, references to sections and exhibits herein are to sections of, and exhibits to, this Agreement.  Words such as “herein,” “hereby,” “hereinafter,” “hereof,” “hereto,” and “hereunder” refer to this Agreement as a whole, unless the context otherwise requires.  The subject headings of the sections of this Agreement are for reference only, and shall not affect the construction or interpretation of any of the provisions of this Agreement.

- 25 -

17.6Further Assurances.  The Parties shall each perform such acts, execute and deliver such instruments and documents, and do all such other things as may be reasonably necessary to carry out the provisions of this Agreement.

17.7No Waiver.  No waiver of any term or condition of this Agreement shall be valid or binding on a Party unless the same shall have been set forth in a written document, specifically referring to this Agreement and duly signed by the waiving Party.  The failure of a Party to enforce at any time any of the provisions of this Agreement, or the failure to require at anytime performance by the other Party of any of the provisions of this Agreement, shall in no way; be construed to be a present or future waiver of such provisions, nor in any way affect the ability of a Party to enforce each and every such provision thereafter.

17.8Entire Agreement; Amendments.  The terms and conditions contained in this Agreement and the Related Agreements (including the exhibits hereto and thereto) constitute the entire agreement between the Parties and supersede all previous agreements and understandings, whether oral or written, between the Parties with respect to the subject matter hereof and thereof.  No agreement or understanding amending this Agreement shall be binding upon any Party unless set forth in a written document which expressly refers to this Agreement and which is signed and delivered by duly authorized representatives of each Party.

17.9Expenses.  Hong Kong Holdco shall reimburse the Parties for any of their respective reasonable and documented out-of-pocket expenses incurred in connection with the formation and development of Hong Kong Holdco including, without limitation, related professional service provider fees (e.g., legal and accounting costs).

17.10Currency.  For the purposes of calculating any amounts payable to, or by, the Parties or Hong Kong Holdco hereunder, the Parties shall use, as necessary, the applicable exchange rate in effect as of the last day of the calendar month immediately preceding the date on which the same becomes payable (as published in The Wall Street Journal, Asia Edition).

17.11No Agency.  The authority of each Party hereunder is limited to that which explicitly is set forth herein.  Neither Party has, and shall not hold itself out as having, any right, power or authority in any manner, (i) to accept, any offer, proposal or negotiated terms solicited by that Party pursuant to the terms hereof on behalf of the other Party, or otherwise commit or bind the other Party, without the other Party’s advance written consent, (ii) to otherwise create any contract or obligation, either express or implied, on behalf of, in the name of, or binding upon the other Party or (iii) to accept legal process on behalf of the other Party.

17.12No Third Party Beneficiaries.  This Agreement is made solely and specifically between and for the benefit of the Parties and their respective successors and assigns, and no other Person, unless express provision is made herein to the contrary, shall have any rights, interests or claims hereunder or be entitled to any benefits under or on account of this Agreement as a third party beneficiary or otherwise.

- 26 -

17.13Incidental and Consequential Damages.  No Party will be liable to any other Party under any contract, negligence, strict liability or other theory for any indirect, incidental or consequential damages (including without limitation lost profits) with respect to a breach of this Agreement.

17.14Counterparts.  This Agreement may be executed in any number of counterparts, and each counterpart shall constitute an original instrument, but all such separate counterparts shall constitute one and the same instrument.

17.15Execution by Hong Kong Holdco.  Each of the Parties shall cause (i) Hong Kong Holdco to be formed as a limited liability company and (ii) Hong Kong Holdco to enter into any agreements to which it is contemplated to be a party hereunder as soon as possible after its formation.

[SIGNATURES APPEAR ON NEXT PAGE]

- 27 -

IN WITNESS WHEREOF, the Parties have caused their respective duly authorized representatives to execute this Agreement as of the Effective Date.

“ZBB Energy”	“PowerSav”
ZBB Cayman Corporation	PowerSav Inc.
By:  ______________________	By:  ______________________
Name:	Name:
Title:	Title:

EX-31.1

Exhibit 31.1

CERTIFICATION 

I, Eric C. Apfelbach, Chief Executive Officer of ZBB Energy Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ZBB Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s  internal control over financial reporting that occurred during the registrant’s  most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 14, 2011                                                                           /s/  Eric C. Apfelbach                                                      

Eric C. Apfelbach

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION 

I, Will Hogoboom, Chief Financial Officer of ZBB Energy Corporation, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ZBB Energy Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s  disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

November 14, 2011                                                                           /s/  Will Hogoboom                                           

Will Hogoboom

(Principal Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ZBB Energy Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric C. Apfelbach, Chief Executive Officer of the Company, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, to my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to ZBB Energy Corporation and will be retained by ZBB Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

November 14, 2011                                                                         

/s/  Eric C. Apfelbach

 Eric C. Apfelbach

 (Principal Executive Officer)

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of ZBB Energy Corporation (the “Company”) on Form 10-Q for the period ended September 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Will Hogoboom, Chief Financial Officer of the Company, certify, pursuant to section Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, to my knowledge, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

A signed original of this written statement required by Section 906 has been provided to ZBB Energy Corporation and will be retained by ZBB Energy Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

November 14, 2011                                                                           /s/  Will Hogoboom                                                                

Will Hogoboom

(Principal Financial Officer)

XML

Condensed Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2011	Jun. 30, 2011
Statement of Financial Position [Abstract]
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, face value	10,000	10,000
Preferred stock, authorized shares	10,000,000	10,000,000
Preferred stock, issued shares	500.1280	355.4678
Preferred stock, liquidation preference	$ 5,251,390	$ 3,715,470
Treasury stock, shares	13,833	13,833
Common stock, par value	$ 0.01	$ 0.01
Common stock, Authorized	150,000,000	150,000,000
Common stock, Issued	32,533,574	29,912,415

XML

Condensed Consolidated Statements of Operations (Unaudited) (USD $)	3 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Revenues
Product sales	$ 226,107	$ 0
Engineering and development	1,411,750	0
Total Revenues	1,637,857	0
Costs and Expenses
Cost of product sales	156,671	0
Cost of engineering and development	481,107	0
Advanced engineering and development	699,383	839,273
Selling, general, and administrative	1,677,997	1,078,729
Depreciation and amortization	319,181	86,083
Total Costs and Expenses	3,334,339	2,004,085
Loss from Operations	(1,696,482)	(2,004,085)
Other Income (Expense)
Interest income	6,689	1,790
Interest expense	(59,668)	(32,007)
Other income (expense)	4,013	0
Total Other Income (Expense)	(48,966)	(30,217)
Loss before provision for Income Taxes	(1,745,448)	(2,034,302)
Provision (benefit) for Income Taxes	(70,000)	0
Net Loss	$ (1,675,448)	$ (2,034,302)
Net Loss per share - Basic and diluted	$ (0.05)	$ (0.13)
Weighted average shares-basic and diluted:
Basic	30,496,936	15,410,384
Diluted	30,496,936	15,410,384

XML

SUBSEQUENT EVENTS

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

SUBSEQUENT EVENTS

On November 9, 2011 the Company issued 548,051 RSUs in connection with the annual compensation of directors’ fees.  The RSUs vest quarterly on November 9, 2011, March 31, 2012, June 30, 2012 and September 30, 2012.

XML

Document and Entity Information (USD $)	3 Months Ended
	Sep. 30, 2011	Nov. 14, 2011
Document And Entity Information
Entity Registrant Name	ZBB ENERGY CORP
Entity Central Index Key	0001140310
Document Type	10-Q
Document Period End Date	Sep. 30, 2011
Amendment Flag	false
Current Fiscal Year End Date	--06-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float		$ 21,268,046
Entity Common Stock, Shares Outstanding		32,519,942
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2012

XML

PROPERTY, PLANT & EQUIPMENT

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

PROPERTY, PLANT & EQUIPMENT

Property, plant, and equipment are comprised of the following as of September 30, 2011 and June 30, 2011:

	September 30, 2011			June 30, 2011
Land	$	217,000		$	217,000
Building and improvements		2,598,999			2,559,266
Manufacturing equipment		3,024,859			2,901,912
Office equipment		226,688			217,074
Construction in process		1,644,910			1,215,400
Total, at cost		7,712,456			7,110,652
Less, accumulated depreciation		(2,481,688	)		(2,343,781	)
Property, Plant & Equipment, Net	$	5,230,768		$	4,766,871

During the year ended June 30, 2011, manufacturing equipment previously used in production and development activities were identified as impaired or had reached the end of their respective useful lives due to changing product and manufacturing technologies.  Upon write-down the manufacturing equipment and accumulated depreciation accounts were adjusted accordingly and $219,213 was charged to operations during the years ended June 30, 2011.  The adjustments were reported as impairment and other equipment charges.  For the three months ended September 30, 2011 the Company has not identified any equipment as impaired or having reached the end of its respective life.

XML

NON RELATED PARTY WARRANTS

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

NON RELATED PARTY WARRANTS

At September 30, 2011 there were outstanding warrants to purchase 40,000 common shares issued by the Company to an equipment supplier in November 2010 exercisable at $0.56 per share and which expire in January 2014.  The fair value of the warrants was $11,834 and is included in the cost of the equipment.

At September 30, 2011 there were outstanding warrants to purchase 1,121,875 common 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, 2011 there were outstanding warrants to purchase 358,333 common 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, 2011 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, 2011 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 September 2011 and September 2012 and with exercise prices of between $3.75 and $7.20.

Warrants to purchase 120,023 common shares acquired by Empire Financial Group, Ltd. in 2006 exercisable at $3.23 per share expired during September 2011.

The table below summarizes non-related party warrant balances:

	Number of Warrants			Weighted-Average Exercise Price Per Share
Balance at July 1, 2010		1,846,031		$	1.76
Warrants granted		3,067,797			1.24
Warrants expired		-			-
Warrants exercised		(3,027,797	)		(1.25	)
Balance at June 30, 2011		1,886,031			1.73
Warrants granted (See Note 12)		2,621,359			0.55
Warrants expired		(120,023	)		3.23
Warrants exercised (See Note 12)		(2,621,359	)		(0.55	)
Balance at September 30, 2011		1,766,008		$	1.86

XML

BUSINESS ACQUISITION

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

BUSINESS ACQUISITION

On January 21, 2011 (“Closing Date”), the Company entered into an Asset Purchase Agreement under which the Company acquired substantially all of the net assets of Tier Electronics LLC (“Seller”) used in connection with the Seller’s business of developing, manufacturing, marketing and selling power electronics products for and to original equipment manufacturers in various industries.  The purchase price was comprised of (1) a $1.35 million promissory note issued by the Company, (2) 800,000 shares of the Company’s common stock, and (3) payment of approximately $245,000 of the Seller’s obligations.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the Closing Date.  Accrued interest is payable monthly.  If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note.  The following table reconciles the purchase price to the cash consideration paid: 

Total purchase price	$	2,515,071
Less debt and equity issued to Seller:
Note payable		(1,350,000	)
Common stock		(920,000	)
Total debt and equity issued to Seller		(2,270,000	)
Total cash paid		245,071
Less cash acquired		(19,149	)
Acquisition of business, net of cash acquired	$	225,922

The primary reason for the acquisition was to add a base of business so that the Company now offers a full range of energy storage, utilization, and management solutions that range from wind and solar converters to power quality, micro-grid systems, and hybrid electric drives for vehicles. 

The Company accounted for the acquisition using the purchase method under U.S. GAAP.  The purchase method requires that assets acquired and liabilities assumed in a business combination be recognized at fair value.  A summary of the preliminary allocation of the assets acquired and the liabilities assumed in connection with the acquisition based on their estimated fair values is as follows: 

Cash and cash equivalents	$	19,149
Accounts receivable		225,081
Inventories		849,932
Property and equipment		4,500
Other intangible assets		2,121,097
Accounts payable		(141,003	)
Accrued expenses		(203,823	)
Deferred revenue		(359,862	)
Net assets acquired	$	2,515,071

The Company expects to finalize the purchase price allocation during the three month period ended December 31, 2011.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of the assets and liabilities has been determined by management, with the assistance of an independent valuation firm, and are based on significant inputs that are generally not observable in the market (level 3 measurements).  Key assumptions that were used by management are as follows:

Financial Assets and Liabilities

Accounts receivable, accounts payable and accrued expenses, were valued at stated value, which approximates fair value.

Inventories were valued at fair value based on estimated net realizable value less costs to complete and sales costs.  Deferred revenues were valued at fair value based on the amounts that will be applied as customer credits to future shipments.

Property and Equipment

Property and equipment were valued based on the estimated market value of similar equipment.

Other Intangible Assets

The Company acquired certain identifiable intangible assets as part of the transaction which included:   $300,000 in a non-compete agreement, $278,000 in a license agreement, and $1,543,097 in a trade secrets agreement.  The fair values of these intangibles were estimated based upon an income approach methodology. Critical inputs into the valuation model for these intangibles include estimations of expected revenue and attrition rates, expected operating margins and capital requirements.  The other intangible assets were assigned an estimated useful life of three years.

Acquisition Related Expenses

Included in the consolidated statement of operations for the period from January 21, 2011 (date of acquisition) to June 30, 2011 were transaction expenses aggregating approximately $150,000 for advisory and legal costs incurred in connection with the business acquisition.

Tier Electronics LLC operates as a wholly owned subsidiary of the Company.  Tier Electronics LLC leases its facility from the former owner of the Seller under a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI adjustment.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.

In connection with this acquisition the Company awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics, LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets and (2) 330,000 vest in three equal annual installments beginning on January 21, 2012.

Unaudited Pro Forma Information

The following unaudited pro forma financial information summarizes the results of operations for the period indicated as if the acquisition had been completed as of July 1, 2010.

These pro forma amounts do not purport to be indicative of the results that would have actually been obtained if the acquisition occurred as of July 1, 2010 or that may be obtained in the future.

	Three Months Ended
	September 30, 2010
Revenues	$	559,895
Loss from Operations		(2,030,633	)
Net loss		(2,089,640	)
Net Loss per share-
Basic and diluted	$	(0.13	)
Weighted average shares-basic and diluted:
Basic		16,210,384

Pro forma information primarily reflects adjustments relating to interest on the promissory note and the amortization of the intangible assets acquired in the acquisition.

XML

GOODWILL

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

GOODWILL

The Company acquired ZBB Technologies, Inc., a wholly-owned subsidiary, through a series of transactions in March 1996.  The goodwill amount of $1.134 million, the difference between the price paid for ZBB Technologies, Inc. and the net assets of the acquisition, amortized through fiscal 2002, resulted in the net goodwill amount of $803,079 as of September 30, 2011 and June 30, 2011.

The Company accounts for goodwill in accordance with FASB ASC topic 350-20, “Intangibles - Goodwill and Other - Goodwill” under which goodwill and other intangible assets deemed to have indefinite lives are not amortized but are subject to annual impairment tests. The implied fair value of goodwill is the amount determined by deducting the estimated fair value of all tangible and identifiable intangible net assets of the reporting unit to which goodwill has been allocated from the estimated fair value of the reporting unit. If the recorded value of goodwill exceeds its implied value, an impairment charge is recorded for the excess.

XML

COMMITMENTS

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

COMMITMENTS

Leasing Activities

The Company leases its Australian research and development facility from a non-related Australian company under the terms of a lease that expired October 31, 2011.  The rental rate was $75,596 per annum (A$72,431) and is subject to an annual CPI adjustment. Rent expense was $20,193 and $20,592 for the three months ended September 30, 2011 and September 30, 2010, respectively.  The Company renewed the lease on its Australian research and development facility through October 31, 2016 at rental rate of $95,855 per annum (A$95,000) subject to an annual CPI adjustment.  The Company also leases a building from an officer of its subsidiary, Tier Electronics LLC, who is also a shareholder and director, under a lease agreement expiring December 31, 2014.  The first year rental is $84,000 per annum and is subject to an annual CPI adjustment.  The rent expense for the three months ended September 30, 2011 was $21,000.  The Company is required to pay real estate taxes and other occupancy costs related to the facility.  The future payments required under the terms of the leases for fiscal periods subsequent to September 30, 2011are as follows:

2012	$	132,994
2013		179,855
2014		137,855
2015		95,855
	$	546,559

Employment Contracts

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 nine 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.

XML

BANK LOANS AND NOTES PAYABLE

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

BANK LOANS AND NOTES PAYABLE

The Company's debt consisted of the following as of September 30, 2011 and June 30, 2011:

	September 30, 2011		June 30, 2011
Bank loans and notes payable-current	$	844,637	$	779,088
Bank loans and notes payable-long term		3,796,006		3,937,056
Total	$	4,640,643	$	4,716,144

On January 21, 2011 the Company entered into a promissory note for $1,350,000 with TE Holdings Group, LLC in connection with the acquisition of the net assets of Tier Electronics LLC.  The promissory note is in the principal amount of $1,350,000 and bears interest at eight percent.  The principal balance of the note is payable in three equal installments of $450,000 on the first, second and third anniversaries of the promissory note.  Accrued interest is payable monthly. If the federal capital gains tax rate exceeds 15% and or the State of Wisconsin capital gains tax rate exceeds 5.425% at any time prior to the payment in full of the unpaid principal balance and accrued interest on the promissory note, then the principal amount of the promissory note (retroactive to January 21, 2011) shall be increased by an amount equal to the product of (a) the aggregate amount of federal and state capital gain realized by the Seller or Seller’s sole member, as applicable, in connection with the acquisition, multiplied by (b) the difference between (i) the combined federal and State of Wisconsin capital gains tax rate as of the date of calculation, minus (ii) the combined federal and State of Wisconsin capital gains tax rate of 20.425% as of January 21, 2011.  Any adjustment to the principal amount of the promissory note shall be effected by increasing the amount of the last payment due under the promissory note without affecting the next regularly scheduled payment(s) under the promissory note The outstanding principal balance was $1,350,000 at September 30, 2011 and June 30, 2011.

On April 7, 2010 the Company entered into a loan agreement for $1,300,000 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.  Borrowings were not received until July 2010.  The loan is collateralized by the equipment purchased with the loan proceeds and substantially all assets of the Company not otherwise collateralized.  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.  The outstanding principal balance was $1,300,000 at September 30, 2011 and June 30, 2011 respectively.

On July 1, 2009 the Company entered into a loan agreement to finance new production equipment.  The $156,000 bank note was collateralized by specific equipment, interest at 5.99%.  The note with a balance of $107,155 as of June 30, 2010 was paid off during June 2011.

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 floor of 5% as of June 30, 2011 and 2010 with any principal balance due at maturity on June 1, 2018 and collateralized by the building and land.  The outstanding principal balance was $752,645 and $763,338 at September 30, 2011 and June 30, 2011, respectively. 

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.   The outstanding principal balance was $786,951and $794,074 at September 30, 2011 and June 30, 2011, respectively.  The loan is collateralized by a mortgage on the building and land.

On November 28, 2008 the Company entered into a loan agreement with a bank.  The note is collateralized by specific equipment, requiring monthly payments of $21,000 of principal and interest; rate equal to the prime rate subject to a floor of 4.25%; maturity date of July 1, 2012. The outstanding principal balance was $451,045and $508,733 at September 30, 2011 and June 30, 2011, respectively.

An equipment loan with a balance of $48,900 as of June 30, 2010 was paid in full in November 2010.

Maximum aggregate annual principal payments for periods subsequent to September 30, 2011 are as follows: 

2012	$	703,243
2013		993,785
2014		789,299
2015		798,904
2016		358,852
2017 and thereafter		996,560
	$	4,640,643

The loan agreements with the bank require the Company to meet certain operating ratios.  The Company was not in compliance with such covenants as of September 30, 2011, for which a waiver was obtained from the bank on June 27, 2011 which waived the covenants through June 29, 2012.

XML

INTANGIBLE ASSETS

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

INTANGIBLE ASSETS

Intangible assets are comprised of the following as of September 30, 2011 and June 30, 2011:

	September 30, 2011			June 30, 2011
Non-compete agreement	$	300,000		$	300,000
License agreement		278,000			278,000
Trade secrets		1,543,922			1,543,922
Total, at cost		2,121,922			2,121,922
Less, accumulated amortization		(487,172	)		(310,415	)
Intangible Assets, Net	$	1,634,750		$	1,811,507

Estimated amortization expense for fiscal periods subsequent to September 30, 2011 are as follows:
2012	$	530,550
2013		707,307
2014		396,893
	$	1,634,750

XML

Condensed Consolidated Statements of Shareholders' Equity (Unaudited) (USD $)	Preferred Stock	Common Stock	Additional Paid-In Capital	Notes Receivable - Common Stock	Treasury Stock	Accumulated Other Comprehensive (Loss)	Accumulated Deficit	Comprehensive Loss	Total
Beginning Balance Amount at Jun. 30, 2010		$ 149,155	$ 49,770,987		$ (11,136)	$ (1,563,052)	$ (46,894,677)	$ (9,568,302)	$ 1,451,277
Beginning Balance Shares at Jun. 30, 2010		14,915,389
Issuance of common stock, net of costs and underwriting fees, Shares		13,123,929
Issuance of common stock, net of costs and underwriting fees,Amount		131,239	9,137,291	(3,529,644)					5,738,886
Stock-based compensation			866,512						866,512
Net translation adjustment						(9,700)		(9,700)	(9,700)
Issuance of commitment fee shares,Shares		893,097
Issuance of commitment fee shares,Amount		8,930	579,306						588,236
Issuance of common stock for acquisition of net assets of TierElectronics,Shares		800,000
Issuance of common stock for acquisition of net assets of TierElectronics,Amount		8,000	912,000						920,000
Equity issuance costs,Shares		180,000
Equity issuance costs,Amount		1,800	(833,840)						(832,040)
Conversion of debenture notes payable to preferred stock,Shares	52.4678
Conversion of debenture notes payable to preferred stock,Amount	524,678								524,678
Issuance of preferred stock, net of issuance costs,Shares	303.0000
Issuance of preferred stock, net of issuance costs,Amount	3,030,000								3,030,000
Conversion of cash settled RSU's to stock settled RSU's			315,833						315,833
Interest on notes receivable - common stock			178,155	(178,155)					0
Accretion of dividends on preferred stock	160,792		(160,792)						0
Issuance of warrants			11,834						11,834
Net loss							(8,449,006)	(8,449,006)	(8,449,006)
Ending Balance Amount at Jun. 30, 2011	3,715,470	299,124	60,777,286	(3,707,799)	(11,136)	(1,572,752)	(55,343,683)	(8,458,706)	4,156,510
Ending Balance Shares at Jun. 30, 2011	355.4678	29,912,415
Stock-based compensation			300,228						300,228
Net translation adjustment						(22,506)		(22,506)	(22,506)
Interest on notes receivable - common stock			94,096	(94,096)
Accretion of dividends on preferred stock	88,680		88,680
Issuance of preferred and common stock, net of issuance costs, Shares	144.6602	2,621,359
Issuance of preferred and common stock, net of issuance costs, Amount	1,447,240	26,214	1,349,442	(1,440,960)					1,381,936
Net loss							(1,675,448)	(1,675,448)	(1,675,448)
Ending Balance Amount at Sep. 30, 2011	$ 5,251,390	$ 325,338	$ 62,432,372	$ (5,242,855)	$ (11,136)	$ (1,595,258)	$ (57,019,131)	$ (1,697,954)	$ 4,140,720
Ending Balance Shares at Sep. 30, 2011	500.1280	32,533,774

XML

CHINA JOINT VENTURE

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

CHINA JOINT VENTURE

On August 30, 2011, the Company entered into agreements providing for establishment of a joint venture to develop, produce, sell, distribute and service advanced storage batteries and power electronics in China (the “Joint Venture”).  Joint venture partners include PowerSav, Inc., AnHui Xinlong Electrical Co. and Wuhu Huarui Power Transmission & Transformation Engineering Co.  The Joint Venture will be established upon receipt of certain governmental approvals from China which are anticipated to be received in November 2011.

The Joint Venture will operate through a jointly-owned Chinese company located in Wuhu City, Anhui Province named Anhui Meineng Store Energy Co., Ltd. (the “JV Company”).  The JV Company intends to initially assemble and ultimately manufacture the Company’s products for sale in the power management industry on an exclusive basis in mainland China and on a non-exclusive basis in Hong Kong and Taiwan.

In connection with the Joint Venture, on August 30, 2011 the Company and certain of its subsidiaries entered into the following agreements:

● Joint Venture Agreement of Anhui Meineng Store Energy Co., Ltd. (the “China JV Agreement”) by and between ZBB PowerSav Holdings Limited, a Hong Kong limited liability company (“Hong Kong Holdco”), and Anhui Xinrui Investment Co., Ltd, a Chinese limited liability company; and

● Limited Liability Company Agreement of ZBB PowerSav Holdings Limited by and between ZBB Cayman Corporation and PowerSav, Inc. (the “Holdco Agreement”).

In connection with the Joint Venture, upon establishment of the JV Company, the Company and certain of its subsidiaries will enter into the following agreements:

● Management Services Agreement by and between the JV Company and Hong Kong Holdco (the “Management Services Agreement”);

● License Agreement by and between Hong Kong Holdco and the JV Company (the “License Agreement”); and

● Research and Development Agreement by and between the Company and the JV Company (the “Research and Development Agreement”).

Pursuant to the China JV Agreement, it is anticipated that the JV Company will be capitalized with approximately $13.4 million of equity capital.  The Company’s only capital contributions to the Joint Venture will be a contribution of technology to the JV Company via the License Agreement valued at approximately $4.0 million.  The Company’s indirect interest in the JV Company will equal approximately 33%.

The Company’s investment in the JV Company will be made through Hong Kong Holdco, a holding company being formed with PowerSav and to which the Company is required to make a cash capital contribution of $200,000.  The Company will own 60% of Hong Kong Holdco’s equity interests.  The Company will have the right to appoint a majority of the members of the Board of Directors of Hong Kong Holdco and Hong Kong Holdco will have the right to appoint a majority of the members of the Board of Directors of the JV Company.

Pursuant to the Management Services Agreement Hong Kong Holdco will provide certain management services to the JV Company in exchange for a management services fee equal to five percent of the JV Company’s net sales for the first five years and three percent of the JV Company’s net sales for the subsequent three years.

Pursuant to the License Agreement, Hong Kong Holdco will grant to the JV Company (1) an exclusive royalty-free license to manufacture and distribute the Company’s ZBB Enerstore™, Zinc Bromide flow battery, version three (v3) battery (50KW) and ZBB Enersection™, POWR PECC (up to 250KW) (the “Products”) in mainland China in the power supply management industry and (2) a non-exclusive royalty-free license to manufacture and distribute the Products in Hong Kong and Taiwan in the power supply management industry.

Pursuant to the Research and Development Agreement, the JV Company may request the Company to provide research and development services upon commercially reasonable terms and conditions.  The JV Company would pay the Company’s fully-loaded costs and expense incurred in providing such services.

XML

GOING CONCERN

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

GOING CONCERN

The consolidated financial statements as of September 30, 2011 and for the three months then ended have been prepared on the basis of a going concern which contemplates that the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not give effect to adjustments that would be necessary should the Company be required to liquidate its assets. The Company incurred a net loss of $1,675,488 for the three months ended September 30, 2011 and as of September 30, 2011 has an accumulated deficit of $57,019,131 and shareholders’ equity of $4,140,720.  The ability of the Company to meet its total liabilities of $9,041,570 and 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 sources in place and with other potential financing sources, that it will be able to raise the capital necessary to fund operations through at least June 30, 2012.  The Company’s sources of additional capital in the year ending June 30, 2012 include the raising of additional capital pursuant to an agreement with Socius CG II, Ltd. (“Socius”), as described in Note 12. As of September 30, 2011, there was approximately $5.1 million of availability under this facility.  However, this facility places certain restrictions on our ability to draw on it.  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 has successfully utilized this facility and believes it will continue to be able to do so.  As described in Note 12, during the three months ended September 30, 2011, the Company delivered two tranche notices to Socius pursuant to which Socius purchased $1,477,240 of Series A preferred stock.  However, there can be no assurances that unforeseen circumstances will not jeopardize the Company’s ability to draw on this and other potential financing sources.

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.  As described in Note 1, in April 2011, the Company entered into a Collaboration Agreement with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which through September 30, 2011 Honam paid the Company a total of $1.5 million.  Pursuant to the Collaboration Agreement Honam is required to pay an additional (1) $1.2 million by October 10, 2011 (subsequently received on October 10, 2011) and (2) $300,000 within 10 days after a V3 single stack is set up at Honam’s research and development center.

As described in Note 12, in the year ended June 30, 2011 the Company raised approximately $5.5 million through the sale of shares of Company common stock to certain investors.  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.

XML

SHAREHOLDERS’ EQUITY

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

SHAREHOLDERS’ EQUITY

On August 30, 2010, the Company entered into an amended and restated securities purchase agreement (“Socius Agreement”) with Socius CG II, Ltd. (“Socius”). Pursuant to the Socius Agreement the Company has 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 the Company’s 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.

On November 10, 2010, the Company’s Board of Directors approved a certificate of designation of preferences, rights and limitations to authorize shares of Series A preferred stock in accordance with the terms of the Socius Agreement.  Upon the authorization of Series A preferred stock and in accordance with the terms of the Socius Agreement, the $517,168 of outstanding debentures issued by the Company to Socius CG II, Ltd. on September 2, 2010, and $7,510 of accrued interest were exchanged into 52.468 shares of Series A preferred stock.  In addition, in accordance with the Socius Agreement, any future tranches under the Socius Agreement will involve shares of Series A preferred stock instead of debentures.

Under the Socius Agreement, in connection with each tranche Socius is 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.  Socius may pay for the shares it purchases at its option, in cash or a collateralized promissory note.  Any such promissory note will bear interest at 2.0% per year and is collateralized 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 the Series A preferred stock issued by us to Socius under the Socius Agreement, and may be applied by us toward the redemption of the 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 Agreement, the Company was obligated to pay Socius a commitment fee in the form of shares of common stock or cash, at the option of the Company, in the amount of $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 occurred 50% at the closing of the first tranche and 50% at the closing of the second tranche.

On September 2, 2010 the Company delivered the first tranche notice under the Socius Agreement pursuant to which on September 20, 2010 Socius purchased $517,168 of debentures.  In connection with this 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) the Company issued to Socius 490,196 shares of common stock in payment of the commitment fee payable in connection with the tranche. As consideration for the common stock it purchased, Socius issued a collateralized promissory note maturing, the later of September 2, 2014 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Series A preferred stock on September 20, 2014.  The promissory note was recorded at a discount of $183,922 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On November 12, 2010 the Company delivered the second tranche notice under the Socius Agreement pursuant to which on November 29, 2010 Socius purchased $490,000 of Series A preferred stock.  In connection with this tranche, (1) Socius purchased 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) the Company issued to Socius 402,901 shares of common stock in payment of the commitment fee payable in connection with the tranche. As consideration for the common stock it purchased, Socius issued a collateralized promissory note maturing, the later of November 15, 2014 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on November 29, 2014.  The promissory note was recorded at a discount of $173,872 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On January 12, 2011 the Company delivered the third tranche notice under the Socius Agreement pursuant to which on January 27, 2011 Socius purchased from the Company $2,020,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 1,934,042 shares of common stock for a total purchase price of $2,727,000 and at a per share purchase price of $1.41. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of January 14, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on January 27, 2015. The promissory note was recorded at a discount of $716,777 determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On March 16, 2011 the Company delivered the fourth tranche notice under the Socius Agreement pursuant to which on March 31, 2011 Socius purchased from the Company $520,000 of Series A preferred stock.  In connection with the tranche, (1) Socius purchased 557,142 shares of common stock for a total purchase price of $702,000 and at a per share purchase price of $1.26. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory note maturing, the later of March 16, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on March 31, 2015. The promissory note was recorded at a discount of $184,461determined by discounting the promissory note at a rate of 10%.  The promissory note is included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory note was received in exchange for the issuance of common stock.

On September 8, 2011 the Company delivered the fifth and sixth tranche notices under the Socius Agreement pursuant to which on September  30, 2011 Socius purchased from the Company $1,447,240 of Series A preferred stock.  In connection with the tranches, Socius purchased 2,621,359 shares of common stock for a total purchase price of $1,953,775 and at an average per share purchase price of $0.75. As consideration for the Common Stock Socius purchased, Socius issued a collateralized promissory notes maturing, the later of September 8, 2015 or when the Series A preferred shares are redeemed by the Company.  Management expects to redeem the Preferred Shares on September 30, 2015. The promissory notes were recorded at a discount of $512,815 determined by discounting the promissory notes at a rate of 10%.  The promissory notes are included in the stockholders equity section of the Company’s condensed consolidated balance sheets because the promissory notes were received in exchange for the issuance of common stock.

The Company’s accounting for the 2% notes receivable – common stock is to accrue interest on the discounted notes receivable at 10% as a credit to additional paid in capital.  The Company’s accounting for the Series A preferred stock is to accrete dividends at 10% as a charge to additional paid in capital.

In the event of liquidation, dissolution or winding up (whether voluntary or involuntary) of the Company, the holders of shares of Series A preferred stock shall be entitled to be paid the full amount payable on such shares upon the liquidation, dissolution or winding up of the corporation fixed by the Board of Directors with respect to such shares, if any, before any amount shall be paid to the holders of the Common Stock.  The liquidation preference of the outstanding Series A preferred stock was $5,251,390 and $3,715,470 as of September 30, 2011 and June 30, 2011, respectively.  Redemption or liquidation may be paid by application of the Socius notes receivable.

On June 14 and 15, 2011 we entered into Stock Purchase Agreements with certain investors providing for the issuance of a total of 3,049,463 shares of the Company’s common stock for an aggregate purchase price of $2,527,000 at a weighted average price per share of $0.83.  The closing took place on June 17, 2011.  The net proceeds to the Company, after deducting $153,000 of offering costs, were $2,374,000.

On December 29, 2010 and January 3, 2011 the Company entered into Stock Purchase Agreements with certain investors providing for the issuance of a total of 2,103,532 shares of the Company’s common stock for an aggregate purchase price of $2,000,000 at a weighted average price per share of $0.95.  The closing took place on January 12, 2011.  The net proceeds to the Company, after deducting $57,000 of offering costs, were $1,943,000.

On October 12, 2010, the Company entered into Stock Purchase Agreements with certain investors providing for the sale of a total of 3,329,467 shares of the Company’s common stock for an aggregate purchase price of $1,435,000 at a price per share of $0.431.  The closing took place on October 15, 2010.  The net proceeds to the Company after deducting $60,000 of offering costs, were $1,375,000.

XML

INVENTORIES

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

INVENTORIES

Inventories are comprised of the following as of September 30, 2011 and June 30, 2011:

	September 30, 2011		June 30, 2011
Raw materials	$	1,268,178	$	1,170,700
Work in progress		560,833		492,150
Total	$	1,829,011	$	1,662,850

XML

INCOME TAXES

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

INCOME TAXES

The provision (benefit) for income taxes consists of the following:

	Three months ended September 30,
	2011			2010
Current	$	(70,000	)	$	-
Deferred		-			-
Provision (benefit) for income taxes	$	(70,000	)	$	-

The Company accounts for income taxes using an asset and liability approach which generally requires the recognition of deferred income tax assets and liabilities based on the expected future income tax consequences of events that have previously been recognized in the Company’s financial statements or tax returns. In addition, a valuation allowance is recognized if it is more likely than not that some or all of the deferred income tax assets will not be realized in the foreseeable future. Deferred income tax assets are reviewed for recoverability based on historical taxable income, the expected reversals of existing temporary differences, tax-planning strategies and projections of future taxable income. As a result of this analysis, the Company has provided for a valuation allowance against its net deferred income tax assets as of September 30, 2011 and 2010.

During the three months ended September 30, 2011, the Company recorded a $70,000 credit (benefit) for income taxes which represents a pro rata portion of an estimate of a refundable research and development tax credit we expect to receive from the government of Australia for the fiscal year ending June 30, 2012 based on the qualified expenditures the Company incurred during the three months ended September 30, 2011. The Company recorded an estimated income tax refund receivable of $164,640 for the year ended June 30, 2011 for the estimated refund related to qualified expenditures during the year ended June 30, 2011, related to a refundable Australian research and development tax credit for the year ended June 30, 2011.  The Company recognized a refund of $415,315 for expenditures incurred during the year ended June 30, 2010 for a refund claim filed in March 2011.  The Company became aware of the refund opportunity in March 2011and as a result had not provided for a benefit during the six month period ended December 31, 2010.  The Company has provided a valuation allowance against all deferred income tax assets as it is more likely than not that its deferred income tax assets are not currently realizable due to the net operating losses incurred by the Company since its inception.

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

	Three months ended September 30,
	2011		2010
Income tax benefit computed at the U.S. federal statutory rate		-34%		-34%
Australia research and development credit		-4		0
Change in valuation allowance		34		34
Total		-4%		0%

Significant components of the Company’s net deferred income tax assets as of September 30, 2011 and June 30, 2011 were as follows:

	Three months ended September 30, 2011			Year ended June 30, 2011
Federal net operating loss carryforwards		14,036,302		$	13,600,000
Wisconsin net operating loss carryforwards		1,626,474			1,559,566
Australia net operating loss carryforwards		1,434,084			1,560,010
Deferred income tax asset valuation allowance		(17,096,860	)		(16,719,576	)
Total deferred income tax assets	$	-		$	-

The Company has U.S. federal net operating loss carryforwards of approximately $41 million as of September 30, 2011, that expire at various dates between June 30, 2015 and 2032.  The Company has U.S. federal research and development tax credit carryforwards of approximately $48,000 as of September 30, 2011 that expire at various dates through June 30, 2030.  As of September 30, 2011, the Company has approximately $31 million of Wisconsin net operating loss carryforwards that expire at various dates between June 30, 2013 and 2027.  As of September 30, 2011, the Company also has approximately $4.78 million of Australian net operating loss carryforwards available to reduce future taxable income of its Australian subsidiaries with an indefinite carryforward period.

A reconciliation of the beginning and ending balance of unrecognized income tax benefits is as follows:

	Three Months Ended September 30, 2011			Year Ended June 30, 2011
Beginning balance	$	219,500		$	-
Additions based on tax positions related to the current period		-			219,500
Additions for tax positions of prior years		-			-
Reductions for tax positions of prior years		-			-
Settlements		-			-
Lapses of statutes of limitations		-			-
Effect of foreign currency translation		(17,700	)
Ending balance	$	201,800		$	219,500

The unrecognized income tax benefits relate to the credit the Company claimed during fiscal 2011 related to a refundable Australian research and development tax credit for qualified expenditures incurred during fiscal years 2010, 2011 and the quarter ended September 30, 2011. If recognized, it would favorably affect the effective income tax rate.  The amount is included in accrued expenses in the accompanying condensed consolidated balance sheets.

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $)	3 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash flows from operating activities
Net loss	$ (1,675,448)	$ (2,034,302)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation of property, plant and equipment	137,907	86,083
Amortization of intangible assets	176,757	0
Stock-based compensation	300,228	103,598
Changes in assets and liabilities
Accounts receivable	(1,271,909)	234
Inventories	(166,161)	(100,710)
Prepaids and other current assets	5,029	31,613
Refundable income taxes	(56,710)	0
Accounts payable	661,880	213,142
Accrued compensation and benefits	(81,088)	(188,314)
Accrued expenses	111,823	(16,390)
Deferred revenues	263,233	60,513
Net cash used in operating activities	(1,594,459)	(1,844,533)
Cash flows from investing activities
Expenditures for property and equipment	(601,804)	(75,755)
Net used in investing activities	(601,804)	(75,755)
Cash flows from financing activities
Proceeds from bank loans and notes payable	0	1,156,128
Repayments of bank loans and notes payable	(75,501)	(114,853)
Proceeds from issuance of debenture notes payable	0	517,168
Proceeds from issuance of Series A preferred stock	1,447,240	0
Common stock issuance costs	(65,304)	(157,311)
Net cash provided by financing activities	1,306,435	1,401,132
Effect of exchange rate changes on cash and cash equivalents	(52,399)	6,202
Net decrease in cash and cash equivalents	(942,227)	(512,954)
Cash and cash equivalents - beginning of period	2,910,595	1,235,635
Cash and cash equivalents - end of period	1,968,368	722,681
Cash paid for interest	59,668	32,007
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for discounted notes receivable	1,440,960	514,255
Issuance of common stock as consideration for equity issuance costs	$ 0	$ 294,117

XML

BUSINESS SEGMENT INFORMATION

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

BUSINESS SEGMENT INFORMATION

The Company reports its financial results in two reportable business segments: ZBB Energy Storage and Power Electronic Systems and Tier Electronics Power Conversion Systems.

The ZBB Energy Storage and Power Electronics Systems business segment designs and manufactures advanced electrical power management platforms enabling the growing global need for distributed renewable energy, energy storage, energy efficiency, power quality, and grid modernization. The Company’s intelligent power management platforms integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technologies to ensure optimal energy availability for on grid and off grid applications, while maximizing the use of renewable energy sources.  The Company solves a wide range of global electrical system challenges for diverse applications in commercial building, telecommunications, defense, utility and industrial markets.

The Tier Electronics Power Conversion Systems business segment designs and manufactures state of the art digital power converters for power quality, alternative energy, and military markets.  These power converters are designed to be fully programmable and feature DSP controls with very high levels of integration that reduce costs while increasing performance.

The operating results for the two business segments are as follows:

	Three months ended September 30,
	2011			2010
Revenues:
ZBB Energy Storage and Power Electronics Systems	$	1,411,750		$	-
Tier Electronics Power Conversion Systems		226,107			-
Total	$	1,637,857		$	-
	Three months ended September 30,
		2011			2010
Loss from Operations:
ZBB Energy Storage and Power Electronics Systems	$	(1,276,454	)	$	(2,004,085	)
Tier Electronics Power Conversion Systems		(420,028	)		-
Total	$	(1,696,482	)	$	(2,004,085	)

The accounting policies of the business segments are the same as those for the consolidated Company.

Total assets for the two business segments are as follows:

	September 30, 2011		June 30, 2011
ZBB Energy Storage and Power Electronics Systems	$	10,723,762	$	10,161,151
Tier Electronics Power Conversion Systems		2,458,528		2,186,475
Total	$	13,182,290	$	12,347,626

XML

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

ZBB Energy Corporation (“ZBB” or the “Company”) develops and manufactures distributed energy storage solutions based upon the Company’s proprietary zinc bromide rechargeable electrical energy storage technology.  A developer and manufacturer of modular, scalable and environmentally friendly power systems (“ZBB Enersystem™”), ZBB Energy was founded in 1998 and is headquartered in Wisconsin, USA with offices also located in Perth, Western Australia. As described in Note 2 in January 2011 the Company acquired substantially all of the net assets of Tier Electronics LLC.

The Company provides advanced electrical power management platforms targeted at the growing global need for distributed renewable energy, energy efficiency, power quality, and grid modernization.  The Company and its power electronics subsidiary, Tier Electronics LLC, have developed a portfolio of intelligent power management platforms that directly integrate multiple renewable and conventional onsite generation sources with rechargeable zinc bromide flow batteries and other storage technology. The Company also offers advanced systems to directly connect wind and solar equipment to the grid and systems that can form various levels of micro-grids.  Tier Electronics participates in the energy efficiency markets through its hybrid vehicle control systems, and power quality markets with its line of regulation solutions. Together, these platforms solve a wide range of electrical system challenges in global markets for utility, governmental, commercial, industrial and residential end customers.

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

Interim Financial Data

The accompanying unaudited condensed consolidated 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, 2011 are not necessarily indicative of the results that might be expected for the year ending June 30, 2012.

The condensed consolidated balance sheet at June 30, 2011 has been derived from audited financial statements at that date, but does 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, 2011.

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.

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 at financial institutions predominately in the United States and Australia.  At times such balances may exceed insurable limits.  The Company has not experienced any losses in such accounts.

Accounts Receivable

The Company records allowances for doubtful accounts based on customer-specific analysis and general matters such as current assessments of past due balances and economic conditions.  The Company writes off accounts receivable against the allowance when they become uncollectible.  Accounts receivable are stated net of an allowance for doubtful accounts of $80,000, as of September 30, 2011 and June 30, 2011.

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.

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. 

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

	Estimated Useful Lives
Manufacturing equipment	3 - 7 years
Office equipment	3 - 7 years
Building and improvements	7 - 40 years

Intangible Assets

Intangible assets generally result from business acquisitions.  The Company accounted for the January 21, 2011 acquisition of Tier Electronics LLC by assigning the purchase price to identifiable tangible and intangible assets and liabilities.  Assets acquired and liabilities assumed were recorded at their estimated fair values.  Intangible assets consist of a non-compete agreement, license agreement, and trade secrets.

Amortization is recorded for intangible assets with determinable lives. Intangible assets are amortized using the straight line method over the three year estimated useful lives of the respective assets.

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 each year 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.  The Company has determined that it has two reporting units – ZBB Energy Storage and Power Electronics Systems and Tier Electronics Power Conversion Systems.

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, 2011 and June 30, 2011.

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 and intangible assets 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 in 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 were $0 and $219,213 long-lived assets impaired as of September 30, 2011 and June 30, 2011, respectively (see Note 6).

Warranty Obligations

The Company typically warrants its products for twelve months after installation or eighteen months after date of shipment, whichever first occurs. Warranty obligations 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 liability for warranty obligations.  In addition, from time to time, specific warranty accruals may be made if unforeseen technical problems arise.

During the year ended June 30, 2010, battery stack manufacturing issues were discovered as a 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 has adjusted its warranty obligations accordingly.  We will adjust our warranty rates in future periods as these processes are implemented and tested.

As of September 30, 2011 and June 30, 2011, included in the Company’s accrued expenses were $413,203 and $413,203, respectively, related to warranty obligations.  Such amounts are included in accrued expenses in the accompanying consolidated balance sheets.

The following is a summary of accrued warranty activity:

	Three Months and Year Ended
	September 30, 2011			June 30, 2011
Beginning balance	$	413,203		$	520,000
Accruals for warranties during the period		-			176,662
Settlements during the period		(38,911	)		(283,459	)
Adjustments relating to preexisting warranties		38,911			-
Ending balance	$	413,203		$	413,203

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.

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.

The portion of revenue related to engineering and development is recognized ratably upon delivery of the goods or services pertaining to the underlying contractual arrangement or revenue is recognized as certain activities are performed by the Company over the estimated performance period.

The Company charges shipping and handling fees when products are shipped or delivered to a customer, and includes such amounts in net revenues. The Company reports its revenues net of estimated returns and allowances.

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 $1,637,857 and $0 were recognized for the three months ended September 30, 2011 and 2010, respectively, and were comprised of one significant customer (85% of total revenues).  The Company had two significant customers with outstanding accounts receivable balances of $1,200,000 and $179,377 (83% and 12% of accounts receivable, respectively) at September 30, 2011.

Engineering and Development Revenues

On April 8, 2011, the Company entered into a Collaboration Agreement (the “Collaboration Agreement”) with Honam Petrochemical Corporation (“Honam”), a division of LOTTE Petrochemical, pursuant to which the Company agreed with Honam to collaborate on the further technical development of the Company’s third generation Zinc Bromide flow battery module (the “Version 3 Battery Module”).  Pursuant to the Collaboration Agreement, Honam is required to pay us a total of $3,000,000 dollars as follows:  (1) $1,000,000 within 10 days following the execution of the Collaboration Agreement (subsequently received on April 9, 2011); (2) $500,000 by June 30, 2011 (subsequently received on June 30, 2011); (3) $1,200,000 by October 10, 2011 (subsequently received on October 10, 2011) and (4) $300,000 within 10 days after a single V3 Battery Module is set up at Honam’s research and development center.  The Company has recognized $2,100,000 as revenue as of September 30, 2011based on performance milestones achieved and deferred the balance of the $1,000,000 payment which is being recognized as certain activities are performed by the Company over the estimated 15 month performance period.  The unamortized balance of deferred revenue will be recognized over the estimated remaining performance period (9 months).  Pursuant to the Collaboration Agreement, the parties are required to negotiate a license agreement under which upon the completion of the collaboration project and the receipt by the Company of all payments due under the Collaboration Agreement, the Company shall grant to Honam: (1) a fully paid-up, exclusive and royalty-free license to sell and manufacture the Version 3 Battery Module in Korea and (2) non-exclusive rights to sell the Version 3 Battery Module in Japan, Thailand, Taiwan, Malaysia, Vietnam and Singapore.  In connection with such non-exclusive rights, Honam is required to pay a royalty to the Company.

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 “AEST agreement”) whereby the Department agreed to provide funding to ZBB Technologies for the development of an energy storage system to 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 AEST agreement provided for a three year term under which the Commonwealth provided $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” were met by ZBB Technologies to the satisfaction 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 had 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) was the value of any cash and in-kind contributions provided to the project by the Company in undertaking the project activities. The Australian Government provided the project funding of approximately $2.6 million (A$3.1 million) that was 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 had been fully spent or would 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 December 31, 2010.  As of December 31, 2010, the Company had received the full $2.6 million of payments due from the Commonwealth under the Agreement.

Included in engineering and development revenues and costs were $1,400,000 and $481,107, respectively, for the year three months ended September 30, 2011 related to the Collaboration Agreement.  The financial statements for the year ended June 30, 2011 included engineering and development revenue and costs of $700,000 and $536,715, respectively related to the Collaboration Agreement.

As of September 30, 2011 and June 30, 2011, the Company had no unbilled amounts from engineering and development contracts. The Company had $684,448 and $800,000 in customer payments from engineering and development contract revenue, representing deposits in advance of performance of the allowable work, as of September 30, 2011 and June 30, 2011, respectively.

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.”

Stock-Based Compensation

The Company measures all “Share-Based Payments", including grants of stock options, restricted shares and restricted stock units, 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 the shares at grant, and calculated based on the Black-Scholes valuation model.

The Company compensates its outside directors primarily with restricted stock units (“RSUs”) rather than cash.  The RSUs were classified as liability awards as of June 30, 2010 because the RSUs were to be paid in cash upon vesting. As of November 10, 2010, the June 30, 2010 RSUs were converted to stock based RSUs and were credited to additional paid-in capital. The grant date fair value of the restricted stock unit awards was determined using the closing stock price of the Company’s common stock on the day prior to the date of the grant, with the compensation expense amortized over the vesting period of restricted stock unit awards, net of estimated forfeitures.

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 10.

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, 2011 and June 30, 2011.

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, 2011 and June 30, 2011.

The Company’s U.S. Federal income tax returns for the years ended June 30, 2008 through June 30, 2011 and the Company’s Wisconsin and Australian income tax returns for the years ended June 30, 2007 through June 30, 2011 are subject to examination by taxing authorities.

Foreign Currency

The Company uses the United States dollar as its functional and reporting currency, while the Australian dollar is the functional currency of its foreign subsidiary. 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 in the consolidated balance sheets. No gain or loss on translation is included in the net loss.

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.  For the three months ended September 30, 2011 and September 30, 2010 there were 7,031,696 and 4,104,823 of underlying options, restricted stock units and warrants that are excluded, respectively.

Concentrations of Credit Risk and Fair Value

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivable.

The Company maintains significant cash deposits primarily with three or four financial institutions, which at times may exceed 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.

The carrying amounts of cash and cash equivalents, accounts receivable, other current assets, accounts payable and accrued expenses approximate fair value due to the short-term nature of these instruments. The carrying value of bank loans and notes payable approximate fair value based on their terms which reflect market conditions existing as of September 30, 2011 and June 30, 2011.

Comprehensive income (loss)

The Company reports its comprehensive income (loss) in accordance with the FASB ASC topic 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, 2011 and September 30, 2010 is presented as follows:

	Three months ended September 30,
	2011			2010
Net loss	$	(1,675,448	)	$	(2,034,302	)
Net translation adjustment		(22,506	)		(19,439	)
Comprehensive loss	$	(1,697,954	)	$	(2,053,741	)

Reclassifications

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

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP 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;

● provisions for excess and obsolete inventory;

● the lives and recoverability of property, plant and equipment and other long-lived assets, including goodwill and other intangible assets;

● contract costs and reserves;

● warranty obligations;

● income tax valuation allowances;

● stock-based compensation; and

● fair values of assets acquired and liabilities assumed in a business combination.

Recent Accounting Pronouncements

In September 2011, the FASB issued an update to ASC 350, Intangibles — Goodwill and Other. This ASU amends the guidance in ASC 350-20 on testing for goodwill impairment. The revised guidance allows entities testing for goodwill impairment to have the option of performing a qualitative assessment before calculating the fair value of the reporting unit. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test annually for impairment. The ASU is limited to goodwill and does not amend the annual requirement for testing other indefinite-lived intangible assets for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We will adopt this ASU for our 2012 goodwill impairment testing. We do not expect this ASU to have a material impact, if any, on our consolidated condensed financial statements.

In June 2011, the Financial Accounting Standards Board (FASB) issued new accounting guidance related to the presentation of comprehensive income that eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Under this guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or two consecutive statements. This guidance is effective for us beginning July 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

In May 2011, the FASB issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. GAAP and International Financial Reporting Standards. This guidance includes amendments that clarify the application of existing fair value measurements and disclosures, in addition to other amendments that change principles or requirements for fair value measurements or disclosures. This guidance is effective for us beginning January 1, 2012. We do not believe the adoption of this guidance will have a material effect on our consolidated financial statements and related disclosures.

XML

EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

EMPLOYEE/DIRECTOR EQUITY INCENTIVE PLANS

During the three months ended September 30, 2011 and 2010, 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 $300,228 and $103,598, based on the amortized grant date fair value of options during the three months ended September 30, 2011 and 2010, respectively.

At the annual meeting of shareholders held on November 10, 2010, the Company’s shareholders approved the Company’s 2010 Omnibus Long-Term Incentive Plan (the “Omnibus Plan”). 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. Four million shares of common stock are reserved for issuance under the Omnibus Plan.  In connection with the adoption of the Omnibus Plan the Company’s Board of Directors froze the Company’s other stock option plans and no further grants may be made under those plans.

On November 10, 2010, (1) a total of 511,143 RSUs were granted to the Company’s directors in payment of directors fees through November 2011 pursuant to the Company’s Director Compensation Policy, (2) a total of 574,242 RSUs previously issued to the Company’s directors pursuant to this policy and which provided for cash settlement were converted to stock settled RSUs, and (3) 315,000 RSUs were granted in total to a consultant and to the Company’s President and CEO.

During the three months ended September 30, 2011 options to purchase 543,000 shares were granted to employees exercisable at prices from $0.59 to $1.16 and exercisable at various dates through September 2019.  As of September 30, 2011, an additional 1,650,615 shares are available to be issued under the Omnibus Plan.

On January 21, 2011, the Compensation Committee of the Company’s Board of Directors awarded inducement options to purchase a total of 750,000 shares of the Company’s common stock at an exercise price of $1.15 to certain members of management of Tier Electronics LLC.  The options vest as follows: (1) 420,000 will vest in three equal annual installments beginning on December 31, 2011 based on achievement of certain revenue targets, (2) 330,000 vest in three equal annual installments beginning on the one-year anniversary of the grant date.

During March 2011, the expiration date of 75,000 options held by a former director of the Company was extended from March 31, 2011 to April 30, 2011, and the expiration date of 125,000 options was extended from March 31, 2011 to December 31, 2011.  The Company recorded an expense of $45,676 in connection with these extensions.

During 2007 the Company established the 2007 Equity Incentive Plan (the “2007 Plan”) that authorized 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.  No options were issued under the 2007 Plan during the 3 months ended September 30, 2011.  During the year ended June 30, 2011, 74,500 options were granted to employees at exercise prices from $0.46 to $0.64 and expiration dates from August 2018 to October 2018 and 150,189 options were forfeited.  As of September 30, 2011, there were no options available to be issued under the 2007 Plan.

During 2005, the Company established an Employee Stock Option Scheme (the “2005 Plan”) that authorized the board of directors or a committee thereof to grant options to employees and directors of the Company. The maximum number of options available to be granted in aggregate at any time under the 2005 Plan was 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. No options were issued under the 2005 Plan during the three months ended September 30, 2011 and 2010.  At September 30, 2011, options to purchase 50,000 shares with an exercise price of $3.82 and an expiration date of June 20, 2012 were outstanding.  As of September 30, 2011, there were no options available to be issued under the 2005 Plan.

In 2002 the Company established the 2002 Stock Option Plan (the “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.  No options were issued under the 2005 Plan during the three months ended September 30, 2011 and 2010.  During the year ended June 30, 2011 there were 100,000 options forfeited.   At September 30, 2011 there were 375,000 options outstanding with exercise prices from $0.49 to $3.59 and exercise dates up to June 2018.  As of September 30, 2011, there were no options available to be issued under the SOP.

The Compensation Committee of the Company’s Board of Directors awarded two inducement option grants covering a total of 500,000 shares to the Company’s new President and CEO in January 2010.  The first grant is an option to purchase 400,000 shares of common stock with the following vesting terms: one third of the shares vested on January 7, 2011 and the balance vest in 24 monthly installments beginning on January 31, 2011 and ending on December 31, 2012.  The second grant is an option to purchase 100,000 shares of common stock which  vested in two equal installments on June 30, 2010 and December 31, 2010, respectively, based on the satisfaction of certain performance targets for the six-month periods then ended.  Both options have an exercise price of $1.33 per share which was equal to the closing price of the Company’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, 2011, the Company has a total of 3,865,303 options outstanding, 1,400,385 RSUs outstanding, and 1,650,615 shares available for future grant under the Omnibus Plan.

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

	Number of Options			Weighted-Average Exercise Price Per Share
Balance at July 1, 2010		2,316,992		$	1.92
Options granted		1,230,500			1.02
Options forfeited		(150,189	)		2.51
Options exercised		(75,000	)		1.09
Balance at June 30, 2011		3,322,303			1.55
Options granted		543,000			0.90
Balance at September 30, 2011		3,865,303		$	1.46

The following table summarizes information relating to the stock options outstanding at September 30, 2011:

		Outstanding						Exercisable
Range of Exercise Prices		Number of Options		Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price
	$0.49 to $1.69		3,340,303		6.6		$1.12		1,090,413		$1.29
	$3.59 to $3.82		525,000		3.3		$3.61		525,000		$3.61
Balance at September 30, 2011			3,865,303		6.1		$1.46		1,615,413		$2.05

During the three months ended September 30, 2011 options to purchase 543,000 shares were granted to employees  exercisable at prices from $0.59 to $1.16 per share based on various service and performance based vesting terms from July 2011 through September 2014 and exercisable at various dates through September 2019. 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 and performance based vesting terms from August 2010 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, 2011 using the Black-Scholes option-pricing model:

	2012		2011
Expected life of option (years)		2.5		.001 - 2.5
Risk-free interest rate		.24 - .55		.24 - 1.34%
Assumed volatility		106 - 107%		53 - 153%
Expected dividend rate		0		0
Expected forfeiture rate		6.3 - 6.8%		0 - 7.760%

Time-vested and performance-based stock awards, including stock options, restricted stock and restricted stock units, 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, 2011 and June 30, 2011 and changes during the year ended, is presented below:

	Number of  Options			Weighted-Average Grant Date Fair Value Per Share
Balance at July 1, 2010		987,500		$	0.77
Granted		1,230,500			0.58
Vested		(476,526	)		0.49
Forfeited		(6,250	)		0.29
Balance at June 30, 2011		1,735,224			0.65
Granted		543,000			0.54
Vested		(28,334	)		0.46
Balance at September 30, 2011		2,249,890		$	0.62

Total fair value of options granted in the three months ended September 30, 2011 and 2010 was $292,759 and $22,305, respectively.  At September 30, 2011 there was $673,816 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 June 30, 2010 was $182,500 related to these awards. The RSUs were classified as liability awards because the RSUs were expected to be paid in cash upon vesting. These RSUs were converted to 574,242 stock settled RSUs in November 2010 and $182,500 was transferred from accrued compensation and benefits to additional paid-in capital.  The cash settled RSUs that were converted to stock settled RSUs were 100% vested upon conversion.  There were also $89,450 in directors’ fees expense and $7,000 in consulting fees expense settled with RSUs for the three months ended September 30, 2011.   As of September 30, 2011 there were 275,000 unvested RSUs outstanding which will vest through May 6, 2014.  At September 30, 2011 there was $278,500 in unrecognized compensation cost related to unvested RSUs, which is expected to be recognized through May 6, 2014.  Vested RSUs are payable six months after the holder’s separation from service with the Company.

The table below summarizes the status of restricted stock unit balances:

	Number of Restricted Stock Units		Weighted-Average Valuation Price Per Unit
Conversion of cash settled RSUs		574,242	$	0.55
RSUs granted		826,143		0.80
RSUs forfeited		-		-
Balance at June 30, 2011		1,400,385		0.70
RSUs granted		-		-
RSUs forfeited		-		-
Balance at September 30, 2011		1,400,385	$	0.70

XML

RETIREMENT PLANS

3 Months Ended

Sep. 30, 2011

Notes to Financial Statements

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 $15,460 and $9,855 for the three months ended September 30, 2011 and September 30, 2010 respectively.

XML

Condensed Consolidated Balance Sheets (USD $)	Sep. 30, 2011	Jun. 30, 2011
Assets
Cash and cash equivalents	$ 1,968,368	$ 2,910,595
Accounts receivable, net	1,443,531	171,622
Inventories	1,829,011	1,662,850
Prepaid and other current assets	51,433	56,462
Refundable income tax credit	221,350	164,640
Total current assets	5,513,693	4,966,169
Long-term assets:
Property, plant and equipment, net	5,230,768	4,766,871
Intangible assets, net	1,634,750	1,811,507
Goodwill	803,079	803,079
Total assets	13,182,290	12,347,626
Liabilities and Shareholders' Equity
Bank loans and notes payable	844,637	779,088
Accounts payable	1,623,101	961,221
Accrued expenses	777,203	695,273
Deferred revenues	1,791,715	1,528,482
Accrued compensation and benefits	208,908	289,996
Total current liabilities	5,245,564	4,254,060
Long-term liabilities:
Bank loans and notes payable	3,796,006	3,937,056
Total liabilities	9,041,570	8,191,116
Shareholders' equity
Series A preferred stock ($0.01 par value, $10,000 face value) 10,000,000 authorized, 500.1280 and 355.4678 issued, preference in liquidation of $5,251,390 and $3,715,470 as of September 30, 2011 and June 30, 2011, respectively	5,251,390	3,715,470
Common stock ($0.01 par value); 150,000,000 authorized 32,533,574 and 29,912,415 shares issued	325,338	299,124
Additional paid-in capital	62,432,372	60,777,286
Notes receivable - common stock	(5,242,855)	(3,707,799)
Treasury stock - 13,833 shares	(11,136)	(11,136)
Accumulated other comprehensive loss	(1,595,258)	(1,572,752)
Accumulated deficit	(57,019,131)	(55,343,683)
Total shareholders' equity	4,140,720	4,156,510
Total liabilities and shareholders' equity	$ 13,182,290	$ 12,347,626