ZBB ENERGY CORP (Form: SB-2, Received: 10/27/2006 11:35:55)

As filed with the Securities and Exchange Commission on October 27, 2006

File No. 333-________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM SB-2

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

ZBB ENERGY CORPORATION
(Name of small business issuer in its charter)

Wisconsin	4911	39-1987014
(State or other jurisdiction of	(Primary Standard Industrial	(I.R.S. Employer
incorporation or organization)	Classification Code Number)	Identification No.)

N93 W14475 Whittaker Way
Menomonee Falls, Wisconsin 53051
(262) 253 - 9800
(Address, and telephone number, of principal executive offices)

Robert J. Parry
President
ZBB Energy Corporation
N93 W14475 Whittaker Way
Menomonee Falls, Wisconsin 53051
(262) 253 - 9800
(Address of principal place of business or intended place of business)

(Name, address, and telephone number, of agent for service)

Copies to:

Stephen Weiss, Esq.
Hodgson Russ, LLP
60 East 42 ^nd Street, 37 ^th Floor
New York, New York 10017
(212) 661-3535
(212) 972-1677 – Facsimile

Ernest Stern, Esq.
Seyfarth Shaw LLP
815 Connecticut Avenue, N.W. Suite 500
Washington, D.C. 20006-4004
(202) 828-5360
(202) 828-5393 – Facsimile

Approximate date of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.

If delivery of the prospectus is expected to be made pursuant to Rule 434 check the following box.

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CALCULATION OF REGISTRATION FEE


Title of each class of securities to be registered	Amount to be registered ⁽¹⁾		Proposed maximum offering price per share ⁽²⁾		Proposed maximum aggregate offering price ⁽²⁾		Amount of registration fee

common stock, $.01 par value	7,500,000	$	2.00	$	15,000,000	$	1,899.00

common stock, $.01 par value ⁽³⁾	1,125,000	$	2.00	$	2,250,000	$	284.85

common stock, $.01 par value ⁽⁴⁾	862,500	$	2.40	$	2,070,000	$	227.88


common stock, $.01 par value ⁽⁵⁾	1,113,333	$	2.00	$	2,226,666	$	281.90

common stock, $.01 par value ⁽⁶⁾	393,750	$	2.00	$	787,500		99.70

common stock, $.01 par value ⁽⁷⁾	375,000	$	3.00	$	1,125,000	$	141.64

common stock, $.01 par value ⁽⁸⁾	625,000	$	2.00		1,250,000	$	158.25

common stock, $.01 par value ⁽⁹⁾	3,708,750	$	2.00	$	7,417,500	$	939.01

common stock, $.01 par value ⁽¹⁰⁾	255,049	$	1.52	$	387,675	$	49.08
Total -	15,958,382			$	32,514,371	$	4,083

⁽¹⁾	All numbers take into account a 1- for -8 reverse stock split to be consummated immediately prior to the effective date of this registration statement. This registration statement shall also cover any additional shares of common stock that shall become issuable by reason of any stock dividend, stock split or other similar transaction effected without the receipt of consideration that results in an increase in the number of the outstanding shares of common stock.
⁽²⁾	Prices are based on the higher of the exercise or conversion price or the offering price of the common stock herein solely for purposes of computing the amount of the registration fee in accordance with Rule 457(g).
⁽³⁾	Issuable upon exercise by underwriters of their over-allotment option.
⁽⁴⁾	Issuable to the managing underwriter upon exercise of warrants of the registrant, exercisable at $2.40 per share and expiring five years from the effective date of this registration statement.
⁽⁵⁾	Issuable to certain selling security holders upon exercise of warrants of the registrant, exercisable at $2.00 and expiring on June 14, 2010 .
⁽⁶⁾	Issuable to a selling security holder upon repayment of a promissory note, presuming repayment amount of $1,260,000 and a conversion price of $1.60 per share.
⁽⁷⁾	Issuable upon exercise of publicly held options trading on the ASX which expire on December 14, 2007.
⁽⁸⁾	Indicates shares held by selling security holders as a result of a share issuance to 41 Broadway Associates LLC.
⁽⁹⁾	Indicates maximum number of shares that may be sold by certain security holders that own an aggregate of $1,687,500 principal amount of convertible notes who may each elect at closing to either (i) receive repayment of an aggregate of $1,687,500 of promissory notes and receipt of warrants to purchase such number of shares as equals the dollar amount of principal and interest outstanding, or (ii) convert their notes at a conversion price of $1.00 per share based on 50% of the offering price.
⁽¹⁰⁾	Issuable upon exercise by the managing underwriter or certain of its affiliates of warrants exercisable at $1.52 per share and expiring March 2, 2011.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.


Preliminary Prospectus:	Subject to Completion, October 27, 2006

PROSPECTUS

7,500,000 Shares

ZBB ENERGY CORPORATION

Common Stock, Par Value $.01

We are offering 7,500,000 shares of our common stock. The selling shareholders identified in this prospectus are offering an additional 6,470,882 shares of common stock, including shares underlying notes and warrants held by certain of them. We will not receive any of the proceeds from the sale of shares by these selling shareholders.

Prior to this offering there was no public market for our securities in the United States. However, securities known as CHESS Units of Foreign Securities (“CUFS”) that reflect an indirect ownership interest in our shares of common stock and options to purchase shares have been trading on the Australian Stock Exchange under the symbol “ZBB” since March 2005. We have applied to have all shares offered hereby to be listed for trading on the American Stock Exchange (the “AMEX”) under the symbol ZBBE on or promptly after the date of this prospectus. The initial public offering price of the shares we are offering is not directly related to the equivalent per share price at which our shares currently trade on the Australian Stock Exchange.

Investing in our securities involves a high degree of risk. See “Risk Factors” beginning on page 5 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

		Per Share	Total

Public Offering Price	$	2.00	15,000,000

Underwriting Discounts	$	.16	1,200,000

Proceeds, before expenses to ZBB Energy Corporation (1)	$	1.84	13,800,000

(1) Excludes a non-accountable expense allowance in the amount of 2% of the gross proceeds, per share ($300,000 in total) payable to the Empire Financial Group, Inc., as representative of the several underwriters, and other expenses of this offering estimated at $609,333. We have also agreed to issue to the underwriters warrants to purchase up to 862,500 shares of our common stock at an exercise price equal to $2.40 per share.

We have granted the underwriters a 45-day option to purchase up to 1,125,000 additional shares from us to cover over-allotments, if any (over and above the 7,500,000 shares being offered by our company). If the underwriters exercise the over-allotment option in full, the net proceeds to us will be $15,870,000.

We are offering the shares for sale on a firm-commitment basis. The underwriters expect to deliver our securities to investors in the offering on or about [ ] , 2006.

Empire Financial Group, Inc.

The date of this Prospectus is _________ __ , 2006

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TABLE OF CONTENTS

			Page

Prospectus Summary			1

The Offering			2

Summary Financial Data			4

Risk Factors			5

Determination of Offering Price			9

Use of Proceeds			10

Capitalization			12

Dilution			13

Management’s Discussion and Analysis of Financial Condition and Results of Operations			14

Business			22

Management			30

Certain Relationships and Related Transactions			34

Principal Stockholders			36

Underwriting			37

Description of Securities			46

Legal Matters			52

Experts			52

Where You Can Find Additional Information			53

Index to Financial Statements			F-1

You should rely only on the information contained or incorporated by reference in this prospectus. We have not authorized anyone to provide you with different information. We are not making an offer of these securities in any jurisdiction where the offer is not permitted.

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PROSPECTUS SUMMARY

This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of this offering, you should read the entire prospectus carefully, including the risk factors, our business description and the financial statements. Unless otherwise stated in this prospectus, references to “we,” “us,” “our company” or “the company” refer to ZBB Energy Corporation and its subsidiaries. The term “selling shareholders” means certain holders of our common stock and those holders of our notes and warrants convertible into or exercisable for our common stock which is being registered for resale simultaneously. Unless we tell you otherwise, all share and per share data in this prospectus, other then information in our financial statements, assumes an initial offering price of $2.00 per share and has been adjusted to give retroactive effect to a one-for-eight (1:8) reverse stock split to be effected by our company as of the date of this prospectus. All dollar amounts reflect U.S. dollars unless otherwise stated. Where we show the U.S. dollar equivalency to the Australian dollar amount, we have presumed a conversion rate of $.75 U.S. dollars for each Australian dollar. Unless we tell you otherwise, all references to “year” or “fiscal year” means our fiscal year ending June 30.

ZBB Energy Corporation

Our Company

We design, develop, manufacture and distribute energy storage systems that can be used by utility companies, renewable energy generators and commercial and industrial customers.

Our systems are based upon our proprietary zinc-bromine rechargeable electrical energy storage technology.

Our products are designed to store surplus energy for use at later times when energy demand is higher than the utility company or other generator can provide. Our products also provide a steady source of power quality protection from voltage, current or frequency deviations, or power “spikes,” that lead to brownouts or power interruptions. The modular construction of our core products enables us to customize the size of our energy storage systems.

In fiscal year 2005, we started to generate revenues. Prior to that time, we focused on research and development for our products. We have never been profitable.

In May 2004, we entered into a sales contract for approximately $1.8 million to provide four 500kWh energy storage systems to our first commercial customer, the California Energy Commission. The California Energy Commission purchased our energy storage system to demonstrate the efficiency and reliability benefits of our systems. We delivered the first of these systems in February 2006 to the San Ramon testing facility of Pacific Gas and Electric (“PG&E”). We expect to deliver the remaining three energy storage systems over the next eight months to PG&E’s San Ramon facility.

In March 2005, we formed ZBB China Pty Ltd., a joint venture company with China Century Group, of which we own 49%. The joint venture is intended to sell energy storage systems to our target customer base in the Peoples Republic of China. The joint venture has contracted to purchase one of our 500kWh systems for $300,000 to demonstrate our products to potential customers. The joint venture is exploring local sources of manufacturing for certain components and the ultimate assembly of the final product.

In April 2006 our company was awarded The Frost & Sullivan 2006 Technology Innovation of the Year Award in the large capacity electricity storage sector. Frost & Sullivan is a global growth consulting company headquartered in San Antonio, Texas. The award was granted for our introduction of innovative zinc-bromine battery technology that offers a modular, environmentally friendly, cost effective, plug and play way to provide high volume reserve power for peak electricity periods to utilities, industry and renewable energy applications.

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Our Business History

ZBB Technologies, Limited, our Australian subsidiary (formerly known as ZBB (Australia) Limited), was formed in 1981 to develop commercial applications for the zinc-bromine research being conducted by Murdoch University in Western Australia. ZBB Technologies, Inc., our U.S. subsidiary, was established in 1994 in Wisconsin to acquire the zinc-bromine technology assets of Johnson Controls, Inc. which was engaged in research to manufacture energy storage systems based upon the zinc-bromine technology. ZBB Energy Corporation was formed in 1998 in Wisconsin as a holding company for ZBB Technologies, Limited and ZBB Technologies, Inc. (ZBB Wisconsin).

Our principal executive, administrative and manufacturing offices in the United States are located at N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin 53051, and our phone number is (262) 253-9800. Certain additional information about us can be obtained from our website at www.zbbenergy.com .

The Offering


Securities being offered	7,500,000 shares of common stock

Securities offered by selling shareholders ⁽¹⁾⁽²⁾	6,470,882 shares of common stock

Over-allotment option	Up to an additional 1,125,000 shares of common stock may be issued in the event that the underwriters exercise their over-allotment option within 45 days of effective date.

Use of proceeds		•	Capital expenditures of approximately $3.8 million;
		•	Repayment of approximately $3.04 million of debt;
		•	Purchase of approximately $2.5 million of inventory;
		•	Approximately $1.0 million to obtain UL and ISO9001 certifications;
		•	Approximately $1.2 million for marketing; and
		•	The balance for working capital, debt reserves and general corporate purposes.

Common Stock
Outstanding before this offering ⁽²⁾	11,155,451 shares

Outstanding after this offering	18,655,451 shares

Outstanding after sales by selling shareholders ⁽¹⁾⁽²⁾	24,501,333 shares

Underlying options trading on ASX	375,000 shares

Underlying other options	547,733 shares

ASX symbol for CUFS representing common stock ⁽³⁾	ZBB
ASX symbol for CUFS representing options ⁽³⁾	ZBBO

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Proposed symbol for our common stock on AMEX	ZBBE

Underwriter’s Compensation		•	8% discount off the public offering price
		•	2% non-accountable expense allowance
		•	Warrants to purchase up to 862,500 shares of common stock at an exercise price of $2.40 per share, or 120% of the public offering price, expiring on the fifth anniversary of the offering

⁽¹⁾ We are registering for resale herein, the following shares held by certain selling shareholders:

			•	up to 375,000 shares issuable upon exercise of options expiring December 15, 2007 issued in connection with our initial public offering in Australia;

			•	up to 393,750 shares issuable upon repayment of the $1,206,000 required to be repaid under the loan made by Montgomery Capital Partners, LP (“Montgomery Loan”);

			•	up to 3,708,750 shares issuable to certain selling security holders that hold convertible notes in the aggregate initial principal amount of $1,687,500. These selling security holders may elect to either convert all principal and interest into common stock at a conversion price of 50% of our offering price herein (i.e. $1.00), or to receive half as many two year warrants to purchase common stock at a price equal to $2.40 (based on the current proposed offering price of $2.00 per share);

•

up to 1,113,333 shares issuable upon exercise of warrants (“Bushido Warrants”) issued in June 2006 to Bushido Capital Master Fund, L.P., ABS SOS-Plus Partners, Ltd. and Pierce Diversified Strategy Master Fund (the “Bushido Loan”) which are exercisable at $2.00 per share, and expire on June 14, 2010.


			•	255,049 shares underlying warrants issued to Empire Financial Group, Inc., our managing underwriter of this offering, in connection with capital raising activities. These warrants are exercisable at $1.52 and expire on March 2, 2011.

⁽²⁾ Includes 625,000 shares held by the members of 41 Broadway Associates LLC, a consultant to the company, which shares are being registered herein.

⁽³⁾ We have applied to the ASX to delist our securities from the ASX effective as soon as practicable after the Closing of this offering.

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SUMMARY FINANCIAL DATA

The following table summarizes the relevant financial data for our business and should be read with our financial statements, which are included in this prospectus.

Statement of Operations				Fiscal Year Ended June 30, (audited)

				2006			2005

Total revenues				$	540,399		$	324,220
Gross profit (loss)					2,487			(86,781	)
Selling, general and administrative expenses					1,341,578			1,453,899
Research and development expenses ¹					676,948			600,608
Loss on contracts					357,250			-0-
Total costs and expenses					3,053,119			2,607,484
Gain (Loss) from operations					(2,512,720	)		(2,283,264	)
Other Income (Expenses)					(421,672	)		(403,363	)
Net Loss					(2,934,392	)		(2,686,627	)

				June 30

				2006 (audited)			2005


Balance Sheet Data:
Total assets					7,903,859			4,293,691
Total liabilities					6,572,905			1,226,799
Working capital (deficit)					(774,314	)		1,598,258
Shareholders’ equity					1,330,954			3,066,892

Pro Forma Balance Sheet Data:					As of June 30, 2006

	Actual			Pro Forma After Offering ⁽²⁾			Pro Forma As Adjusted ⁽²⁾⁽³⁾

Total assets		7,903,859			21,094,826			24,446,492
Total liabilities		6,572,905			6,572,905			6,572,905
Working capital (deficit)		(774,314	)		12,416,653			15,768,319
Shareholders’ equity		1,330,954			14,521,921			17,873,587

⁽¹⁾ Indicates losses on development contracts relating to the unperformed portion of sales contract with California Energy Commission.

⁽²⁾ Gives effect to sale of an aggregate of 7,500,000 Shares in this offering at a proposed offering price of $2.00 per Share. Does not include repayment of Montgomery Loan and redemption of related warrants and repayment of Empire Notes and October Notes.

⁽³⁾ Gives effect to exercise by selling stockholders of the 1,113,333 Bushido Warrants and 375,000 listed options.

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RISK FACTORS

An investment in our securities involves a high degree of risk. Before making an investment decision, you should carefully consider these risks as well as other information we include in this prospectus and any prospectus supplement. The risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business operations.

Risks Associated with Our Business

The market for our products is new and evolving and a viable market may never develop or may take longer to develop than we anticipate.

Our energy storage systems represent an emerging market, and we do not know the extent to which our targeted customers will want to purchase them. There is no industry based historical financial data to determine whether we will be successful in achieving our anticipated sales. The development of a viable market for our products may be impacted by many factors which are out of our control, including:

•

customer reluctance to try a new product;

•

the existence and emergence of newer, more competitive technologies and products; and

•

cost competitiveness of our products.

If a viable market fails to develop or develops more slowly than we anticipate, we may be unable to recover the losses we will have incurred to develop our products and may be unable to achieve profitability.

We expect utility companies to be the most significant purchasers of our energy storage systems, but we have not made any direct sales to utility companies and there can be no assurance that we will be able to make the anticipated sales.

Based upon our discussions during the last two years with prospective utility customers throughout the United States and Australia, including our negotiations relating to the sale of four 500kWh systems to the California Energy Commission for installation at PG&E, we believe that our energy storage systems meet the needs of utility companies to meet peak energy demands. However the utility industry is generally slow to adopt new technologies, is very cost conscious, and is characterized by long purchasing cycles. In addition, new or competing technologies, some of which are currently being evaluated by the utility companies, could further discourage them from purchasing our energy storage systems.

Our ability to sell our energy storage systems to utility companies will be adversely affected if our systems now installed at PG&E fail to meet performance specifications.

We have installed one of four 500kWh systems at the PG&E facility for evaluation by the California Energy Commission and PG&E. We expect to deliver the next three 500kWh systems in early 2007. If our systems fail to meet performance specifications during evaluation, our ability to sell energy support systems will be adversely affected. Any problem or perceived problem with our field evaluations could materially harm our reputation and impair market acceptance of, and demand for, our products.

Until 2004 we were primarily a research and development company with no commercial sales.

We made our first commercial sale in fiscal year 2005 to the California Energy Commission and we have entered into a limited number of contracts since then. Therefore, there is no historic basis on which to determine whether we will be successful in achieving our business plan, a significant factor of which will be the ability of our sales staff to make the anticipated sales.

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We have incurred losses and anticipate to incur continuing losses .

As of our year ended June 30, 2006 we had an accumulated deficit of $17.2 million. We have not achieved profitability in any quarter since our formation and expect to continue to incur net losses until we can generate sufficient revenue to cover our costs, which is not expected to occur for the next 18 to 24 months. We anticipate that we will continue to incur losses until we can produce and sell a sufficient number of our products to be profitable. However, we cannot predict when we will operate profitably, if ever. Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.

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

Our energy storage systems have only recently been employed in limited commercial applications. In the light of the limited operating history, our systems may malfunction or fail as a result of undetected or unanticipated defects. Should these new technologies and components fail to perform in accordance with contractual requirements, it could harm our reputation and adversely affect our future sales.

Our products are evolving and there is no assurance that we will be able to make improvements to achieve our anticipated sales to our target customers or to remain competitive with new technologies.

Our energy storage systems must meet certain performance goals, including power output, useful life and reliability. We have tested our energy storage systems at Detroit Edison between 2000 and 2004 and they are now being evaluated at PG&E. While the result of these applications of our energy storage systems under actual commercial conditions established that these systems can function in accordance with our specifications, the product is being improved based upon suggestions from these target customers. Our existing and potential customers (as well as our competitors) will consider and continue to evaluate the reliability, cost and serviceability of our products. There is no assurance that we will be able to meet the increasingly higher standards of desired performance or be able to improve the necessary level or with the required speed to meet new competitive threats.

We have a limited number of employees dedicated to sales and our success is dependent on increasing our staff with the requisite skills to increase our sales .

We are still in the early stages of developing our sales staff. We currently have only our senior executives dedicated to sales and we need to establish an internal sales staff to initiate and increase our sales efforts. We need to employ sales people with engineering expertise who understand our products and the demands of our target customers. There can be no assurance that even with such sales people we will be successful in achieving our business plan.

Our products must compete against existing and newly developed technologies.

Our target customers that employ energy storage systems now rely on conventional technologies, primarily conventional technologies, primarily lead-acid and nickel-cadmium storage systems. Our zinc-bromine flow technology is new and lacks the years of commercial use of these existing technologies and their familiarity to present and prospective users of energy storage systems. We must prove that our products are superior to these existing technologies in terms of cost and performance. There is no certainty that we can ever do so successfully or that we can achieve these goals in the time frame necessary for us to achieve our business plan. There are a number of companies that are developing energy storage technologies, delivery and regulating products that may compete with our products. Some of our competitors are much larger than we are, have proven products and technologies and may have the manufacturing, marketing and sales capabilities to complete research, development and commercialization of commercially viable energy storage products more quickly and effectively than we can.

We may be unable to establish relationships, or we may lose existing relationships, with third parties for the distribution of our products.

Our success depends upon creating and maintaining relationships with resellers and joint venture partners. If we are unable to identify and enter into satisfactory agreements with resellers or to maintain our existing reseller relationships, we will not be able to achieve the level of sales in our business plan on schedule or at all. We are also relying on the existing joint venture in China to assist with our sales goals under our business plan. If the joint

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venture with our Chinese partner is abandoned for any reason, our ability to achieve those sales goals will be adversely affected.

We may not be able to protect important intellectual property, and we could incur substantial costs defending against claims that our products infringe on the proprietary rights of others.

Our technologies were first developed in the 1980’s, and energy storage technology has been practiced on a large scale for decades. To date, we have been granted a total of 15 patents and have an additional four patent applications pending. While we believe that we have established a proprietary position in component technologies for zinc-bromine energy storage systems, our ability to compete effectively will depend, in part, on our ability to protect our proprietary technologies, systems designs and manufacturing processes and those patents that we have secured. We rely on patents, trademarks, trade secrets and certain policies and procedures related to confidentiality to protect our intellectual property. We do not know whether any of our pending patent applications in the U.S. or abroad will issue or, if issued, that the claims allowed are or will be sufficiently broad to protect our technology or processes. Even if all of our patent applications are issued and are sufficiently broad, our patents may be challenged or invalidated in one or more countries.

We could incur substantial costs in prosecuting or defending patent infringement suits or otherwise protecting our intellectual property rights. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so. Moreover, patent applications filed in foreign countries are subject to laws, rules and procedures that in some cases are substantially different from those of the United States, and any resulting foreign patents may be difficult and expensive to enforce.

A portion of our core technology is protected only as a trade secret and not under patent law. If we lose that trade secret protection we could be significantly harmed.

We have not applied for any patents to protect aspects of our core technology because management believed that the benefits of patent protection would be outweighed by the risk that the disclosure of the processes and know-how underlying the technology would enable competitors to use or modify this technology for their own uses. We believe that we have taken adequate measures to protect our trade secrets, including the use of confidentiality agreements, however, despite these measures it is possible for competitors to independently develop such information. Accordingly, we may not be able to prevent others from utilizing this technology and to receive any revenues through licensing fees.

Competitors could develop equivalent or superior patented technologies .

Competitors may independently develop or patent technologies or processes that are substantially equivalent or superior to ours. If we are found to be infringing third party patents, we could be required to pay substantial royalties and/or damages, and we do not know whether we will be able to obtain licenses to use such patents on acceptable terms, if at all. Failure to obtain needed licenses could delay or prevent the development, manufacture or sale of our products, and could necessitate the expenditure of significant resources to develop or acquire non-infringing intellectual property.

Our future sales and growth will be harmed if we are unable to attract or retain key personnel.

We have attracted a highly skilled management team and specialized workforce, including scientists, engineers, researchers and manufacturing professionals. Our future success will depend, in part, on our ability to attract and retain qualified management, sales and technical personnel. We do not know whether we will be successful in hiring or retaining qualified personnel. Our inability to hire qualified personnel on a timely basis, or the departure of key employees, would materially and adversely affect our ability to achieve our business plan.

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

To date, we have focused on low volume manufacturing and have no experience manufacturing our products on a large-scale commercial basis. In February 2006 we acquired a building we were previously leasing in Menomonee Falls, Wisconsin which provides up to 72,000 square feet for use as a manufacturing facility. This facility is currently producing at 20% of its expected capacity when fully staffed and equipped. We do not know

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whether our current manufacturing capacities will enable us to produce the increased quantities needed to meet our business plan. Our failure to manufacture our products on a large-scale commercial basis will have a material adverse effect on our business, financial condition and results of operations.

We may have difficulty managing the anticipated growth of our operations.

We expect to rapidly increase our operations, including increasing production and the number of employees. Such rapid change is likely to place a significant strain on our senior management team and other resources. We will be required to make significant investments in our engineering, logistics, financial and management information systems and to motivate and effectively manage our employees. We could be adversely affected if we experience growth that we are unable to manage.

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

We intend to market, distribute and service our products internationally. We have limited experience developing and no experience manufacturing our products to comply with the commercial and legal requirements of markets other than Australia and the United States. Our success in international markets will depend, in part, on our ability and that of our partners to secure relationships with foreign joint venture partners and distributors, and our ability to manufacture products that meet foreign regulatory and commercial requirements. Additionally, our planned international operations are subject to other inherent risks, including, without limitation:

•

potential difficulties in enforcing contractual obligations;

•

difficulties protecting our intellectual property rights;

•

repatriating funds; and

•

fluctuations in currency exchange rates.

Risks Associated with this Offering

Our outstanding options and convertible notes may have an adverse effect on the market price of common stock.

In connection with the Australian offering in early 2005, we issued options to acquire 375,000 shares of common stock with an additional 186,803 (1,494,424 pre reverse split) shares of common stock issuable upon exercise of options issued under our 2002 Stock Option Scheme. In addition, we have:

•

$1,687,500 principal amount of promissory notes held by selling shareholders which may, at the direction of the holders thereof be converted with interest into approximately 3,708,750 shares of common stock (based on interest accrued through December 31, 2006) and sold by the selling shareholders or alternatively, be repaid along with the issuance of warrants to purchase such number of shares of common stock as equals the dollar amount of principal and interest outstanding, at an exercise price of 2.40, presuming a $2.00 offering price of our shares in this offering;

•

393,750 shares that must be issued under the terms of the Montgomery Loan upon repayment thereof. Montgomery Capital Partners, L.P., has requested repayment of this loan and redemption of 250,000 warrants issued to them under this loan;

•

1,113,333 shares may be issued upon the exercise of warrants at $2.00, which were issued to the lenders under the Bushido Loan; and

•

255,049 warrants issued to the managing underwriter as consideration for acting as placement agent to the company in connection with the Empire Notes, which notes are exercisable at $1.52 per share, with a cashless exercise right and which expire on March 2, 2011.

The sale, or even the possibility of sale, of the shares underlying the options, warrants and notes are likely to have an adverse effect on the market price for our securities and on our ability to obtain future public financing. If and to the extent these options and warrants are exercised or the notes converted, you may experience dilution to your holdings.

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If our common stock is not accepted for listing and trading on the AMEX or if our common stock is ever de-listed from the AMEX, the common stock will become less liquid.

We are applying to have our common stock traded on the AMEX. We may not be accepted for listing if we do not meet the listing standards, such as a minimum price per share of our common stock, $2.00. Even if we meet the listing standard AMEX may in the future, delist our common stock from trading on the AMEX market if we fail to satisfy their ongoing listing requirements including, without limitation, corporate governance, financial condition, and financial reporting rules. There can be no assurance that our securities will remain eligible for trading on the AMEX. If our common stock is not listed on the Amex or is delisted, our stockholders would not be able to sell the common stock on the AMEX, and their ability to sell any of their common stock would be severely if not completely limited. Additionally, if we lose our listing on the AMEX our ability to raise capital in the future may be adversely affected.

If our common stock becomes subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.

If at any time we have net tangible assets of $5,000,000 or less or we get de-listed from the AMEX for any reason and our common stock has a market price per share of less than $5.00, transactions in our common stock may be subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:

•

make a special written suitability determination for the purchaser;

•

receive the purchaser’s written agreement to a transaction prior to sale;

•

provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and

•

obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.

If our common stock becomes subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, any prospectus supplement and the documents we incorporate by reference in this prospectus contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Securities Exchange Act, and Section 27A of the Securities Act of 1933, or the Securities Act. For purposes of these statutes, any statement that is not a statement of historical fact may be deemed a forward-looking statement. For example, statements containing the words “believes,” “anticipates,” “estimates,” “plans,” “expects,” “intends,” “may,” “projects,” “will,” “would” and similar expressions may be forward-looking statements. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. There are a number of important factors that could cause our actual results to differ materially from those indicated by these forward-looking statements, including the factors referred to above under the caption “Risk Factors.” These important factors include the factors that we identify in the documents we incorporate by reference in this prospectus. You should read these factors and the other cautionary statements made in this prospectus, any prospectus supplement and in the documents we incorporate by reference as being applicable to all related forward-looking statements wherever they appear in this prospectus, any prospectus supplement and in the documents incorporated by reference. We do not assume any obligation to update any forward-looking statements made by us.

DETERMINATION OF OFFERING PRICE

The offering price of our shares was determined by our management after consultation with our underwriters and was based upon consideration of various factors, including the market price of the CUFS on the ASX at the time of the proposed listing on the AMEX, the AMEX listing requirements, our history and prospects, the background of our management and current conditions in the securities markets. The price of our shares does not bear any relationship to our assets, book value, net worth or other economic or recognized criteria of value. In no event should the offering price of our shares be regarded as an indicator of any future market price of our securities.

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USE OF PROCEEDS

We estimate that the net proceeds of this offering will be as set forth in the following table:

	Without Over- Allotment Option		Over-Allotment Option Exercised

Gross proceeds	$	15,000,000	$	17,250,000
Offering expenses
Underwriting discount (8% of gross proceeds)		1,200,000		1,380,000
Underwriting non-accountable expense allowance (2% of gross proceeds)		300,000		345,000
Issuer’s legal fees and expenses (including blue sky services and expenses)		125,000		125,000
Miscellaneous expenses		15,000		15,000
Printing and engraving expenses		35,000		35,000
Accounting fees and expenses		60,000		60,000
SEC registration fee		4,033		4,033
AMEX listing application fee and NASD Fee		70,000		70,000

Net proceeds		13,190,967		15,215,967


Use of net proceeds
Capital expenditures (1)		3,750,000		3,750,000
Repayment of debt		3,042,500		3,042,500
Purchase of inventory		2,500,000		2,500,000
UL and ISO9001 certifications		1,000,000		1,000,000
Marketing		1,200,000		1,200,000
Working capital and general corporate purposes		1,698,467		3,723,467

Total		13,190,967		15,215,967


(1) Capital expenditures include acquisition of vibration welders, infrared welders, assembly stations, engineering workshop, test stations and production molds.

We believe that, upon consummation of this offering, we will have sufficient available funds to operate for at least the next 18 months, assuming that a business combination is not consummated during that time.

We intend to repay an aggregate of approximately $3,042,500 from the proceeds of the offering to eliminate the following debt, interest and warrant redemption obligations:

			•	approximately $1,205,000 of principal and interest accrued through December 31, 2006 date on the Montgomery Loan at a rate of 10% per annum on the remaining balance of our outstanding note, dated February 28, 2006, held by Montgomery Capital Partners, LP, which matures on the earlier of the close of a major financing or February 28, 2008. Montgomery has also requested redemption of 250,000 warrants issuable under the Montgomery Loan at the time of repayment thereof at an aggregate redemption price of $150,000; and

			•	up to $1,187,500 in principal amount of our outstanding 15% notes issued on between April and September 2006 to certain accredited investors introduced through the Empire Financial Group, Inc., the managing underwriter (the “Empire Notes”);

•

up to $500,000 in principal amount of our outstanding 15% notes issued in October of 2006 to two investors which are identical to the Empire Notes (the “October Notes”).

The proceeds of the Montgomery Loan and the Empire Notes were used for working capital purposes. Montgomery Capital Partners, LP has requested repayment of the Montgomery Loan and redemption of 250,000 warrants at $.60 per warrant, or $150,000. Upon the Closing of the Offering, the terms of the Montgomery Loan

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require that we issue shares to Montgomery upon repayment of the Loan on the dollar amount being repaid. We intend to issue approximately of our common stock 393,750 shares to Montgomery, based upon amounts estimated to be outstanding at the time of repayment. To the extent that the holders of the Empire Notes elect to convert their notes, the proceeds otherwise allocated to their repayment will instead be used for working capital and general expenses.

MARKET FOR COMMON STOCK
AND RELATED SHAREHOLDER MATTERS

The company has completed a public offering on the Australian Stock Exchange (the ASX) in March of 2005. As we are not incorporated in Australia, we issued securities known as CHESS Depository Interests (or CDIs) in the form of CHESS Units of Foreign Securities (or CUFS) representing a beneficial interest in shares of common stock and options which trade separately. The CUFS are held by CHESS Depository Nominees Pty Limited, a wholly owned subsidiary of ASTC Settlement and Transfer Corporation Pty Limited, which is in turn a wholly owned subsidiary of ASX. While the shares of common stock and the options are quoted on ASX, trades are settled in CHESS by the delivery of CUFSs. Holders of CUFS are entitled to all the economic benefits of the underlying shares of common stock and the options, as though they were the holders of the legal title.

Our securities have not traded on any exchange other then the ASX. We intend to list our shares on the AMEX upon completion of this offering and to delist the CUFS from trading on the ASX as soon as practical thereafter. We do not intend to list our 375,000 listed options on either exchange. The following table sets forth the high and low sales prices for the CUFSs representing common stock on the ASX for the periods indicated as adjusted to reflect the 1-for 8 reverse stock split effective contemporaneously with the effective date of this prospectus and reflect U.S. Dollar equivalent prices. These prices represent high and low sales prices without retail markups, markdowns or commissions. Investors should not rely on historical stock price performance as an indication of future price performance. The closing price of our CUFS representing the common stock on October 16, 2006 was $.173 per share.

Period
2006	High		Low

July-September	$	1.52	$	1.12
April – June		2.24		1.20
January – March		2.48		1.60

2005
October – December		3.04		1.44
July – September		3.68		1.92
March – June		3.44		1.74

Shareholders

As of October 16, 2006, there were 297 holders of record of our common stock and approximately 1,023 beneficial owners of our CUFS shares representing our common stock. A significant number of shares of our common stock are held in either nominee name or street name brokerage accounts.

Equity Compensation Plan

The following table presents information as of June 30, 2006 with respect to compensation plans under which equity securities were authorized for issuance, including the 1998 Key Employee Stock Option Plan, the 1998 Outside Directors Stock Option Plan, the 2002 Stock Option Plan and 2005 Executive Share Option Plan.

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	Number of securities to be issued upon exercise of outstanding options (a)		Weighted- average exercise price of outstanding options (b)		Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a)) (c)

Equity compensation plans approved by securityholders	0	$	0	$	0
Equity compensation plans not approved by securityholders	547,733	$	2.72	$	2.72
Total	547,733	$	2.72	$	2.72

Other than as set forth above, we do not have any stock option, bonus, profit sharing, pension or similar plan. However, we may adopt such a plan in the future to attract and retain members of management or key employees.

DIVIDEND POLICY

We have never paid cash dividends or distributions to our equity owners. We do not expect to pay cash dividends on our common stock, but instead, intend to utilize available cash to support the development and expansion of our business. Any future determination relating to our dividend policy will be made at the discretion of our Board of Directors and will depend on a number of factors, including but not limited to, future operating results, capital requirements, financial condition and the terms of any credit facility or other financing arrangements we may obtain or enter into, future prospects and in other factors our Board of Directors may deem relevant at the time such payment is considered. There is no assurance that we will be able or will desire to pay dividends in the near future or, if dividends are paid, in what amount.

CAPITALIZATION

The following table sets forth our capitalization at June 30, 2006 and as adjusted to give effect to the reverse stock split and the sale of our shares and the application of the estimated net proceeds derived from the sale of our shares:

	June 30, 2006

	Actual			As Adjusted

Notes outstanding, including notes convertible into common stock(1)
Short term borrowings	$	3,058,868		$	2,058,858
Long-term borrowings		3,176,666		$	2,226,667
Shareholders’ equity:
Common stock, $.01 par value, 150,000,000 shares authorized and 10,452,063 shares issued and outstanding as of June 30, 2006		83,617			158,617
Additional paid-in capital		20,077,645			33,193,612
Accumulated deficit		(17,192,399	)		(17,192,399	)
Accumulated other comprehensive (loss)		(1,637,909	)		(1,637,909	)
Total shareholders’ equity	$	1,330,954			14,521,921

(1) Amounts reflected are exclusive of short term debt discount of $250,215 and long term debt discounts of $790,967 at June 30, 2006.

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DILUTION

The difference between the public offering price per share of common stock, and the pro forma net tangible book value per share of our common stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is our total tangible assets less total liabilities (including the value of common stock which may be converted into cash), by the number of outstanding shares of our common stock. Our executive officers and directors have not acquired securities directly from the company in the previous three years at prices below $2.00 per share.

At June 30, 2006, our net tangible book value was $527,875, or approximately $.05 per share of common stock. After giving effect to the sale of our shares of common stock, and the deduction of underwriting discounts and estimated expenses of this offering, our pro forma net tangible book value at June 30, 2006 would have been $13,71884 or $.74 per share, representing an immediate increase in net tangible book value of $.69 per share to the existing stockholders and an immediate dilution of $1.26 per share, or 63%, to new investors.

The following table illustrates the dilution to the new investors on a per-share basis, assuming no value is attributed to the exercise of the warrants or options:

Public offering price		$	2.00
Net tangible book value before this offering	.05
Increase attributable to new investors	.69

Pro forma net tangible book value after this offering (1)			.74

Dilution to new investors (1)		$	1.26


(1) Does not include exercise of any warrants or of the 375,000 listed options.

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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We urge you to read the following discussion in conjunction with our consolidated financial statements and the notes thereto beginning on page F-1. This discussion may contain forward-looking statements that involve substantial risks and uncertainties. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements as a result of a number of factors, including but not limited to the risks and uncertainties discussed under the heading “Risk Factors” beginning on page 4 of this prospectus, and in our other filings with the SEC. See “Special Note Regarding Forward-Looking Statements .”

Overview

Since our inception in 1981 we have been a research and development company with little or no revenues. We have historically funded our operations primarily from the sale of notes or other securities and from government grants and joint ventures. We commenced commercial sales in May 2004.

We are applying for listing of our shares on the American Stock Exchange upon completion of this offering and to delist our CUFS from the Australian Stock Exchange as soon as practicable after we are listed on the American Stock Exchange. We expect to allocate the net proceeds of the offering towards purchase of plant equipment and inventory, repayment of indebtedness and hiring of a dedicated sales staff, with the balance to be used for general capital purposes.

After the offering, our production capacity will still be limited. Our business model involves marketing primarily to large utility companies and renewable energy customers. In order for these customers to make the most efficient use of our products in their electricity production and delivery operations, they would likely purchase our energy storage systems in quantities that could exceed our current production capacity. If our sales are successful, we may be required to get additional financing to meet demand.

Results of Operations

Year ended June 30, 2006 as compared to the Year ended June 30, 2005

Revenue and other income

Our revenues during 2006 were $540,399 which reflected an increase of $216,179 from $324,220 in 2005. This increase was primarily attributable to our contract with the California Energy Commission.

Interest income for the year 2006 was $4,287, down from $21,680 in 2005. The higher interest income in 2005 was attributable to the investment of proceeds from our initial public offering on the ASX in March of 2005.

Other income in early 2006 included a lease termination fee of $160,000 paid to us by a tenant in our Wisconsin property.

Cost and Expenses and other expenses

Our total expenses in 2006 were $3,053,119, which represents an increase of $445,635 from expenses of $2,607,484 in 2005.

Our costs and expenses relate to costs of contracts, selling, general and administrative expenses, research and development, depreciation and amortization and other costs.

Cost of Contracts . Our cost of contracts in 2006 was $524,320, which represented an increase of $113,319 from 2005 expenses of $411,001. The increase in our cost of contracts related primarily to an increase in our performance requirements under the California Energy Commission contract. In 2006, materials and labor comprised an aggregate of $198,027 and $281,401, respectively, of our costs of contracts, as compared to $283,773 and $127,228 for 2005.

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Selling, General and Administrative . Our selling, general and administrative expenses in 2006 were $1,341,578, which represented a decrease of $112,321 from said expenses in 2005 of $1,453,899. This decrease was a result of higher accounting, legal, printing and other expenses and costs incurred in connection with our public offering on the ASX in March 2005. Pending completion of the offering, we expect to incur “one time” expenses relating to staffing and equipping our production facility and obtaining Underwriter Laboratories certification and ISO 9001 “best practices” certification.

We expect selling, general and administrative expenses to increase as we grow our business, including an increase in salaries primarily attributable to the hiring of additional marketing and production personnel. However, we expect that these expenses will decrease as a percentage of sales if we are successful in expanding our business.

We expect our advertising and marketing expenses to increase as a result of attending and exhibiting our products at certain energy trade shows. In addition, we intend to manufacture several of our energy storage systems to be used as display and demonstration models in connection with our marketing efforts. We expect to incur a one time cost for these products of up to $1,000,000.

Travel costs were $156,694 and $147,101 in 2006 and 2005, respectively, due to installation and maintenance of our product sold to the California Energy Commission and our marketing and capital raising efforts. We expect these costs to increase as our sales efforts and installations increase.

Insurance costs include insurance benefits for employees of $63,759 and general liability insurance of $43,115. We expect to acquire directors and officers insurance from the proceeds of this offering of $10,000,000 which will cost approximately $65,000 per year.

Finances Charges . We incurred finance charges of $408,925 in 2006 an increase of $208,449 from $200,476 in 2005. Our finance charges in 2006 included discounts, sales commissions in connection with the Montgomery Loan and Empire Notes in the combined principal amount of $2,000,000.

Interest Expenses . Interest expense for 2006 was $148,534 compared to $232,125 of interest expenses for fiscal 2005. This decrease was due to conversion of $2,297,700 of indebtedness into equity in fiscal 2005. However, in the second half of fiscal 2006, we incurred approximately $2 million of indebtedness to acquire property, plant and equipment in Wisconsin.

Research and Development . Our research and development costs in 2006 were $676, 948 which represented an increase of $76,340 from 2005 expenses of $600,608. The increase in our research and development costs related to severance and salary increases for our employees in our Perth, Australia facility. We do not believe that we are dependent on further research and development of our core products for our success. However, in the future we may apply for government grants, allocate our resources or enter into joint ventures to develop new products or improve existing products.

Loss on Contracts . In 2006 we incurred a loss on the California Energy Commission contract of $357,250. This loss relates to the unfunded portion of the contract purchase price. This contract provides that additional entities that become a party to the contract will be required to contribute to these costs. We are currently negotiating with other parties to become parties to this contract and with California Energy Commission to increase its participation to absorb these unfunded costs.

Losses

Our net loss in 2006 was $2,934,392, an increase of $247,765 from $2,686,627 in 2005. This increase was a result primarily from financing charges and recognition of a loss on the California Energy Commission contract.

Issuance of Stock Options

1998 Key Employee Stock Option Plan

In 1998 we adopted a Key Employees Stock Option Plan (the “KESOP”), pursuant to which up to 600,000 shares of common stock were authorized for grants of options, rights, and stock awards. The KESOP was administered by the board. The exercise price of all options granted under the Plan was determined by the Board of Directors at an amount no less than the estimated fair value of our common stock at the date of grant. Options were

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granted with terms not exceeding five years. All options available under the KESOP have been granted. As of June 30, 2006, 31,875 options remain outstanding with an exercise price of $4.00 per share, which expire between March 15, 2007 and March 15, 2008. No KESOP options were exercised in fiscal 2006 or 2005.

1998 Outside (Non-Executive) Directors Stock Option Plan

In 1998 we adopted an Outside Directors Stock Option Plan (the “ODSOP”) pursuant to which 150,000 shares of our common stock were made available for issuance to non- executive members of the board of directors in the form of options, rights and stock awards. The ODSOP permitted options to be issued between January 2, 1999 and January 2, 2004 by the board of directors only. The ODSOP plan required that all options be issued with expiration dates of no greater then five years from the date of issuance. All 150,000 options have been issued under this plan. As of June 30, 2006, 60,000 options remain outstanding under this plan, with an exercise price of $2.00 per share and with expiration dates between January 2, 2007 and January 2, 2008. No options were exercised under this plan in 2006 and 9,000 options were exercised in fiscal 2005.

2002 Stock Option Plan

In 2002 we have adopted a stock option plan (the “2002 Plan”) which authorizes the board of directors or a committee thereof to grant up to 1,312,500 shares of common stock in the form of options, rights and stock awards. The 2002 Plan is administered by the board of directors or a compensation committee of the board of directors. The 2002 Plan requires that all options be issued with expiration dates of no greater then five years from the date of issuance. As of June 30, 2006, 901,922 options have been issued under this plan with 410,578 options remaining available for issuance. As of June 30, 2006, there were 455,858 options outstanding with exercise prices between $2.64 and $3.00 and with expiration dates between February 4, 2007 and March 30, 2010. No options were exercised under this plan in 2006 and 21,000 options were exercised in fiscal 2005.

2005 Employee Option Scheme

During 2005 the Company established an Employee Stock Option Scheme that authorizes the board of directors or a committee thereof to grant options to employees and directors of the company or any affiliate of the company. The maximum number of options that may be granted in aggregate at any time under this option scheme or under any other employee option or share plan is the number equivalent to 5% of the total number of issued shares of the Company including all shares underlying options under the KESOP, the ODSOP and the 2002 Plan. No options or shares have been issued under this option scheme, Options issued shall expire five years after the grant. The exercise price for options issued under this scheme shall be an amount determined by the board of directors provided that for so long as the company’s shares are trading on the ASX, in no event shall the exercise price be a price less than 10% higher than the weighted average market price for shares on ASX over the last 20 days on which sales in shares were recorded on ASX immediately preceding the date of grant of the option.

Broker Options issued in connection with public offering in Australia

In connection with our initial public offering on the ASX in March of 2005, we issued to the brokers selling our securities options to acquire 667,625 shares of our common stock at an exercise price of A$4.00 (US$3.00) per share. These options expire on December 15, 2007. None of the options have been exercised.

Options issued to convertible note holders prior to public offering in Australia

In connection with our public offering in Australia on the ASX in March of 2005, we issued to certain convertible note holders who converted their notes into common stock, an additional 234,375 options to purchase common stock at an exercise price of $3.00 per share. These options expire on December 10, 2007. None of these options have been exercised.

Options issued in connection with financings

In connection with recent financings of the Company in 2005 and 2006, we also issued options or convertible notes to acquire shares of common stock, as follows:

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375,000 options have been issued in connection with our initial public offering on the ASX in March 2005. These options are listed on the ASX, are exercisable at A$4.00 (US$3.00) per share and expire on December 14, 2007.

255,049 warrants have been issued to Empire Financial Group, Inc., the managing underwriter of this offering, and certain of its affiliates in connection with their assistance with our capital raising activities. These warrants are exercisable at $1.52 per share and expire on April 31, 2008

In addition, warrants exercisable at prices between $2.00 and $2.40 per share have been issued under the Bushido Loan and the Montgomery Loan and may be issued to the holders of the Empire Notes and other lenders, as more fully described below.

Liquidity and Capital Resources

Since our inception, our research and development and operations were primarily financed through debt and equity financings, government grants and joint ventures. Through June of 2006, we have financed our operations through the sale of our common stock and convertible notes for gross proceeds of $20,161,262. We had a cumulative deficit of $17,192,399 through June 30, 2006. At June 30, 2006 we had a working capital deficit of $774,314.

We believe that, after consummation of the offering, we will have sufficient capital necessary to meet our operating and capital commitments for at least the next eighteen months. However, if sales increase substantially, we will require additional capital in order to expand our production capacity.

Operating Activities

Net cash used in operations was $2,805,219 for the fiscal year ended June 30, 2006. Cash was consumed by the net loss of $2,934,392, less non-cash expenses of $150,362 for depreciation and amortization, $512,790 of amortization of debt discounts and finance fees, increases in accrued loss on contract in process of $357,250 and accrued interest of $49,785 and accounts payable of $131,140. Cash was also consumed by increases in accounts receivable of $121,317, deposits and prepaid expenses of $204,161, and inventory of $469,069, and a decrease in deferred revenue of $274,159.

Net cash used in operations was $1,865,347 for the fiscal year ended June 30, 2005. Cash was consumed by the net loss of $2,686,627, less non-cash expenses of $141,976 for depreciation and amortization, $195,496 of amortization of debt discounts, and decrease to accounts receivable of $812,179 and increase in deferred revenues of $172,757 during the period. Cash was also consumed by increases in prepaid expense of $166,349 and inventory of $75,953 and a decrease in accrued expenses of $43,230 and accounts payable of $146,722.

Investing Activities

For the year ended June 2006, net cash outflows from investing activities of $ 2,281,497 was primarily attributable to the purchases of our building and land from which we operate out of in Wisconsin. The purchase price for the Wisconsin property was $2.2 million, for which we made cash down payment of $400,000.

For the year ended June 30, 2005 net cash outflows from investing activities of $354,904 was primarily attributable to our investment in ZBB China Pty. Ltd. of $191,475, and capital expenditures of $94,556.

Financing Activities

$1,000,000 Montgomery Capital Partners LP Convertible Loan Financing

The Montgomery Loan also provides that the holders will receive up to 250,000 warrants to purchase common stock, the exercise price of which is set at the time notice is given with respect to such warrants. The warrant rights are redeemable upon request of Montgomery Capital at $.60 per warrant, or $150,000.

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Effective as of October 2006, we have entered into a letter agreement with Montgomery Capital wherein Montgomery Capital has agreed not to convert any portion of the Montgomery Loan until January 2007, in exchange for $20,000 per month. Additionally, Montgomery Capital has requested repayment of the loan at the closing of the offering, rather than conversion and has requested redemption of the warrants for $150,000 at the closing of the offering. If we repay this loan on December 31, 2006 we will be required to pay approximately $1,250,000 under the loan, $150,000 for redemption of the warrants and to issue approximately 393,750 shares to Montgomery Capital.

$2,226,666 Bushido Loan

$1,187,500 Convertible Promissory Notes

Between April and September of 2006 we issued $1,187,500 of convertible promissory notes to 25 accredited investors in a private placement transaction for which Empire Financial Group, the managing underwriter in this offering, acted as placement agent (the “Empire Notes”). The Empire Notes accrue interest at the rate of 15% per annum and are due on the earlier of April 15, 2007 or the closing of an equity based offering of no less then $6 million. Each lender has the right to receive payment in full along with a warrant to purchase such number of shares of common stock equal to 50% of the principal amount of the Note at an exercise price equal to 120% of the equity offering price. Alternatively, each lender may choose to convert the principal and interest owed under the Empire Note into common stock at a conversion price equal to 50% of the equity offering price without receiving any warrants. Empire Financial Group received a placement fee of $111,250 and 255,049 warrants to purchase common stock in connection with the sale of the Empire Notes, which warrants are exercisable at $1.52 per share and expire on March 2, 2011.

$500,000 Convertible Promissory Notes

In October 2006, we issued an aggregate of $500,000 of 15% Convertible Promissory Notes (the “October Notes”) to two investors. The October Notes are identical to the Empire Notes in all material respects except that no placement agent was used in connection with such sales and no commission or fees were paid in connection with the sale of such notes.

$1,800,000 Mortgage on Wisconsin Facility

In February of 2006 we acquired the building and property in Menomonee Falls, Wisconsin that we previously leased space in for a purchase price of $2.2 million. Our purchase of this facility was acquired with a cash down payment of $400,000 and mortgage financing from Investors Bank in Milwaukee in the amount of $1.8 million dollars. This mortgage is to be guaranteed in part by the U.S. Small Business Administration and bears

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interest at 8%, with interest only payable monthly until the U.S. Small Business Administration securitizes and sells their 50% share of the loan, at which time the loan will become repayable at the then stated interest rate over a period of 20 years.

Certain Recent Agreements

Effective as of December 22, 2005, we entered into a share exchange agreement with Wharton Equity Partners, LLC and their affiliates (the “Wharton Group”). Under the terms of the agreement, we agreed to exchange 653,334 shares of our common stock for 4,722,222 shares of common stock of either Idea One, Inc., a privately-owned Delaware corporation, or its publicly traded successor-in- interest, if Idea One consummates a merger with an inactive publicly traded corporation prior to the scheduled closing date. If issued, such shares would have represented approximately 15% of the fully-diluted capital stock of Idea One or its successor. Idea One is a development stage company based in Israel that is engaged in the design and development of a magnesium cell battery. None of the officers, directors or shareholders of Idea One or their affiliates are officers, directors or otherwise affiliated with us. By letter dated August 22, 2006, we agreed with the Wharton Group to terminate the share exchange agreement.

Effective January 31, 2006, we entered into a stock purchase and business development agreement with 41 Broadway Associates LLC, a Delaware limited liability company. Under this agreement we agreed to sell, for $62,500 up to 1,250,000 of our shares to such entity or its members, in consideration for their providing business and consulting services to our company, including preparation of business plans, introduction to potential customers and strategic relationships, and consultation in connection with corporate finance and/or investment banking arrangements. Since January 31, 2006, 41 Broadway Associates has introduced our company to potential joint venture or business partners in India and Africa, introduced us to Empire Financial Group, Inc. and assisted us in negotiation of the terms of our various financing activities in calendar 2006. In addition, one of the members of 41 Broadway Associates provided us with a short-term $500,000 loan in February 2006 that enabled us to consummate the purchase of our principal facility located in Menomonee Falls, Wisconsin. Such loan has since been repaid in full.

In July 2006, we mutually agreed to amend and restate the agreement with 41 Broadway Associates LLC. Under the terms of such restated agreement, we sold to the members of 41 Broadway Associates a total of 625,000 of our shares in consideration for a 6% $1,000,000 promissory note of 41 Broadway Associates guaranteed by its members and payable in equal annual installments over 5 years. In addition, we paid 41 Broadway Associates $100,000 for its services rendered to date and agreed to extend the term of our consulting agreement with 41 Broadway Associates through December 31, 2010, at a consulting fee of $200,000 per annum, payable quarterly. None of the six members of 41 Broadway Associates are affiliated with each other or were or are officers, directors or otherwise affiliated with our company. The members of 41 Broadway Associates do not own, individually or in the aggregate, of record or beneficially 5% or more of our shares.

In November of 2005 we entered into a consulting and investment banking agreement with Empire Financial Group, Inc., the managing underwriter. Pursuant to this agreement, we have agreed to pay to Empire a fee of 10% on capital raised in private transactions with their assistance along with warrants to purchase 10% of the number of shares (or shares underlying warrants and convertible securities) issued in such private transactions.

Critical Accounting Policies

Revenue recognition

The company contracts with its customers to research and develop, manufacture, and install energy storage systems under long-term contracts. The company recognizes revenue on the percentage-of-completion method. Revenues are recognized proportionally as costs are incurred and compared to the estimated total costs for each contract. The amount deferred as of June 30, 2006 is $673,074, based on the $1,581,851 billed under the terms of the current contract, less the $908,777 recognized to revenue to date (since the 2004 contract began) under the percentage-of-completion method.

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As the company’s energy storage systems are in their initial stages of development, actual costs incurred could differ materially from those previously estimated. Once the company has established that its costs can be reasonably estimated, then costs to complete an individual contract, in excess of revenue, will be accrued upon identification. As of June 30, 2006 provisions of $357,250 have been identified and accrued on existing contracts.

For the years ended June 30, 2006 and 2005, substantially all of the company’s revenue is from a multi-year contract with one customer. Deferred revenue at June 30, 2006 represents the excess of billings over revenues recognized under the percentage of completion method.

Property, Plant and Equipment

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

Finished goods, normally held for sale to customers, may be used in demonstration and testing by customers. During these periods, the units are transferred from Inventory to Property, Plant and Equipment and depreciated over the period in use. Since the intent is for these units to be eventually sold, they are returned to Inventory upon the completion of customer demonstration and testing at book value.

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 good 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 – purchase cost of direct material plus direct labor plus a proportion of manufacturing overheads.

Impairment of Long Lived Assets

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

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

Goodwill

Goodwill represents the cost of acquisition in excess of the net fair value of the identifiable assets, liabilities and contingent liabilities.

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

Convertible Notes

We account for conversion options embedded in convertible notes in accordance with SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and Emerging Issues Task Force ("EITF") 00-19, "Accounting for Derivative Financial Instruments Indexed to, and potentially settled in, a Company's Own Stock" ("EITF 00-19"). SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative

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financial instruments in accordance with EITF 00-19. SFAS 133 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional as that term is described in the implementation guidance under Appendix A to SFAS 133 and further clarified in EITF 05-2 "The Meaning of "Conventional Convertible Debt Instrument" in Issue No. 00-19.

We account for convertible notes deemed conventional and conversion options embedded in non-convertible notes which qualify as equity under EITF 00-19, in accordance with the provisions of Emerging Issues Task Force Issue ("EITF") 98-5 "Accounting for Convertible Securities with Beneficial Conversion Features," and EITF 00-27 "Application of EITF 98-5 to Certain Convertible Instruments," Accordingly, we record, as a discount to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption.

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BUSINESS

Our Energy Storage Business

We design, develop, manufacture and distribute energy storage systems. Our systems are built using a proprietary process based upon our zinc-bromine rechargeable electrical energy storage technology. The modular nature of our zinc-bromine battery allows it to be sized and packaged into fully customized, large format energy storage systems. Our systems combine our zinc-bromine batteries with computer hardware and software that interface with a customer’s power source to discharge power as needed and recharge during off peak times.

We have designed this system to meet a number of significant market applications, including:

•

Load management for generation, transmission and distribution utilities, energy service companies and large commercial and industrial customers, allowing the use of stored energy to meet peak demands and deferral of capital expenditures that otherwise would be required to alleviate utility system constraints


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


	•	Uninterruptible power supply and power quality protection from voltage, current or frequency deviations for both commercial and industrial customers

We currently do not have a dedicated sales and marketing staff. Following completion of the offering, we expect to employ two dedicated direct sales engineers and to establish relationships with resellers. We expect to focus our sales efforts on utilities, large commercial and industrial customers and wind and other renewable energy companies.

Our energy storage systems are protected by U.S. and international patents and trade secrets law covering certain aspects of our manufacturing process and our zinc-bromine technology. We have been granted 15 patents to date and have four additional patent applications pending.

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

	•	Superior technical attributes in terms of energy density (sometimes measured in Watt Hours per Kilogram or Wh/kg), recharge cycle and overall cycle life

	•	Competitive cost, based on dollars per Kilowatt Hours (kWh), as well as life of the battery component

	•	Proven commercial manufacturing capability

•

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

Products and Technology

The building block for our core energy storage systems is a 50 kWh module. Each 50kWh module consists of three of our “F2500” 60 cell battery stacks connected in parallel, a pair of zinc-bromine electrolyte storage reservoirs, an electrolyte circulation system and a computerized module control system.

These modules function either as stand-alone units or serve as the building blocks that larger storage systems require. Any number of modules can be placed in multiple parallel and series arrangements to meet the varying energy capacity needs of our target customers. The first products we developed were “turnkey” 400 kWh energy storage systems that consisted of eight 50 kWh modules. We manufactured and conducted successful trials of two 400 kWh systems in power utility applications in both the United States and Australia. We have recently increased the system size to a standardized 500 kWh system (comprised of 10 50 kWh modules), which we believe is a readily acceptable base product for the utilities market. We believe that our systems meet all the requirements to allow connection directly to a utility grid.

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The customers we target will typically require the energy storage systems to recharge and deep discharge on a regular basis. Generally, the more energy that can be utilized from an energy storage system of a given size on a single charge, the more efficient it is to the user. One of the characteristics of our zinc bromine based systems is that they can be fully charged in 4.5 hours and can then discharge 100% of the stored energy, typically at rates from two to eight hours, and sometimes longer, depending on the customers’ demand for energy. By comparison, lead-acid based systems typically take longer to charge and can only discharge approximately 65% of their stored energy without degradation to the battery during regular cycling.

ZBB F-2500 Flowing Electrolyte Zinc-Bromine Battery Stack Assembly

Market Information

Industry Overview

We believe that our F2500 product is available at a time when major changes are occurring in electricity supply and demand. Modern economies are highly dependent on the performance and reliability of the electricity grid. Electric utilities now face real and immediate challenges in providing reliable power. These challenges exist mainly because of aged centralized electric utility grids that are increasingly unable to accommodate increasing consumption and customer requirements. Refurbishment by utility companies of their infrastructures would take years and require major capital expenditures. Additionally, while expensive long term refurbishment of the systems may increase reliability of the energy supply, it would not necessarily solve problems associated with spikes in energy demand that can only be satisfied by the release of excess energy that has been previously stored from the generation source.

Primary Market Opportunities

We anticipate that the primary users of our energy storage systems will be utility companies and renewable energy (solar, wind and hydro electric power generators) providers with space or capital constraints for the reasons stated above. Energy storage itself is not new for the utility companies and storage systems in the form of hydro-electric have been utilized in the industry for some time. However, use of these technologies require significant capital and space resources. In light of the capacity constraints and aging infrastructure of electricity grids in the United States and many other countries, electricity can be delivered most efficiently by placing energy storage systems near customers with variable power demands and at substations closest to the areas of greatest electricity usage. The modular design of our systems also allows them to be portable and to be placed on the utility company’s transmission and distribution network at or near the energy user, or to be combined with other modules for large

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scale storage. According to The Electric Power Research Institute (EPRI) energy storage devices may be the most important element of power systems of the future ² .

Benefits to Utility Companies

Distributed Energy Applications

Performance problems in electricity distribution grids vary in nature and severity. One way for a utility company to address deficiencies in the electricity grid is by using the back-up energy provided by energy storage systems to provide uninterrupted power supply. We believe that electricity utilities are now showing more interest in distributed energy solutions as a means to address a range of power quality and supply issues arising from increasing demands on the electricity grid. Distributed energy generally refers to the deployment of energy generation and energy storage resources in the transmission and distribution networks of the electricity grid. For electric utilities our products provide a means to augment the functionality and performance of the electricity grid on a localized and “as needed” basis. Typically, distributed energy solutions are deployed close to the customer base, at the utility substation level or at the lower voltage levels in the distribution network. This allows deployment of optimized equipment to address the local supply problem, rather than relying on large scale centralized solutions.

Capital deferment

We believe that increases in demand will necessitate expensive modernization and capacity upgrade programs for the infrastructure of aging electricity grids. We believe that the use of our energy storage systems postpones the need for major capital expenditures by utility companies that would otherwise be needed to meet increased demand for energy.

Load management

Utility companies attempt to even-out the on-demand supply of electricity from the grid by the storage of electricity during low-load (low demand) periods, and the subsequent supply of stored electricity during high-load (high demand) periods. In the industry, these techniques are known as load shifting, peak shaving and peaking capacity. Our energy storage systems are designed to be used by utility companies to manage demand for energy in the above applications.

Power quality

Energy storage systems provide a means to alleviate or eliminate power quality problems by supplying power locally to either in-fill or compensate line disturbances on the utility (rather than the customer’s) side. The scale of the avoided costs provides an indicator of the potential value of using distributed energy systems in the grid to address power quality problems.

Benefits to “green power” energy providers

Renewable energy providers would use our products to store as much power as possible during times of peak generation. This energy is then re-sold or distributed at a later time as needed.

Typically, renewable energy sources such as wind and solar and hydro are interconnected to the utility company’s grid for the subsequent purchase of this green power by customers. Alternatively, renewable generation is installed at customer sites, with arrangements to purchase excess power exported from the customer to the grid. Distributed energy storage enhances the value of the renewable resource by time-shifting the use of the energy and by reducing the fluctuation of power delivered to the grid.

2	Unless otherwise stated, all statements in this section are based on Chapter 2 of the EPRI-DOE Handbook on Energy Storage for Transmission and Distribution Applications, EPRI, Palo Alto, CA, and the U.S. Department of Energy, Washington, D.C. 2003, 1001834, available on www.EPRI.org.

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Benefits to industrial and commercial users

Large factory and industrial operators that are energy intensive or energy users that rely on an uninterrupted power supply may utilize our products for both back up and power management. Industrial users also use energy storage systems to employ a technique known as demand charge management, to reduce the amount of energy drawn from utility companies during peak times.

Competition

Our business is subject to competition from companies with similar as well as dissimilar technologies and business philosophies. The competing technologies are in various stages of development or manufacture. Some of the companies that compete with us have far more capital and market exposure and have already attained some market acceptance in the United States and abroad. We believe that our energy storage system competes on the basis of size, energy storage density, discharge rates and overall costs of ownership during the life cycle of the product.

Competing Technologies

The Electricity Storage Association (ESA) identifies eleven specific energy storage technologies. Our summary below is based on the more detailed information available about these technologies on the ESA’s website at www.electricitystorage.org .

Lead-acid - Lead-acid is one of the oldest and most developed battery technologies. It is a low cost and popular choice for energy storage, but its suitability for energy management is very limited in applications that require deep discharge, long cycle life and longer term energy storage.

Compared to modern lead-acid battery technology, we believe the zinc-bromine battery provides superior technical performance at a significantly lower overall cost. We believe that our product has certain superior functionality characteristics over the leading lead acid technology of comparable 50kWh system, including:

	Zinc-Bromine	Lead-Acid

Discharge	Ability to discharge 100% of its power	Discharges approximately 65% of its power

Recharge	4 to 4-1/2 hours for full recharge	Up to 20 hours for full recharge

Cycle Life	2,000 full charge/deep discharge cycles,	750 full charge/regular discharge cycles,
	maintains some functionality after	almost no functionality at end of cycle
	cycle life, requires replacement of	life; requires complete field replacement
	battery stack components only

Composition	Plastic components	Lead
	(corrosion free, lower weight)	(heavy weight, corrosion of grids)

Space Requirements	Less	Substantially more

Design Format	Modular	Not modular, requires large balance of plant

Environmental	Recyclable; zinc-bromine is a non-toxic, water based solution,	Contains lead; difficult to recycle and dispose of; toxicity issues,

Maintenance	Negligible, modular configuration allows easy replacement of parts	10%-15% (estimated) of capital cost per annum

Zinc Bromine - This technology uses two different electrolytes that flow past carbon-plastic composite electrodes in two compartments separated by a microporous polyolefin membrane. This is the technology that we utilize for our energy storage systems. We are not aware of any competitor who has successfully commercialized this technology.

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Vanadium Redox - A flow battery that stores energy by use of vanadium redox, stored in sulfuric acid solutions.

Sodium Sulphur (NaS) – A battery consisting of molten liquid sulphur at the positive electrode and molten metallic sodium at the negative electrode, separated by a solid beta alumina ceramic electrolyte. The battery for this device must be always be maintained at high temperatures of approximately 300° C to allow the process to occur.

Polysulfide Bromide (PSB) - A flow battery system based on a regenerative fuel cell technology that provides a reversible electrochemical reaction between two salt solution electrolytes (sodium bromide and sodium polysulphide).

Metal - Air - Potential high energy density and low cost battery, but electrical recharging is very difficult and is still in development.

Lithium Ion – also known as Li-ion, these batteries offer high energy density, high efficiency and a long cycle life. Li-ion is widely used in small portable markets, but high manufacturing cost presently prohibits large scale industrial applications.

Flywheels - These primarily consist of a massive rotating cylinder operating in a low vacuum environment to improve efficiency. The main use for flywheels is for short-term uninterruptible power supply (UPS) and aerospace applications. Large scale applications would require a flywheel “farm” approach.

Pumped Hydro Storage - Pumped hydro storage is not a battery device, but rather, uses two reservoirs to create a limited amount of energy on demand. During off peak hours water is pumped from the lower reservoir to the upper; the water flow is reversed to generate electricity. This method is widely used but characterized by long construction times and high capital expenditure and requires a large geographic area and water supply.

CAES - A peaking gas turbine power plant using compressed air stored in large underground caverns inside salt rocks.

Super Capacitor Storage - These are devices with high energy density. Large scale applications are still under development.

Intellectual Property

In 1994, ZBB Wisconsin acquired outright ownership of all of the intellectual property and, fixed assets associated with Johnson Controls, Inc.’s zinc-bromine battery development program. Our continued research and development activities have enabled us to develop a commercially available zinc bromine battery that operates in conjunction with a power grid. It has also successfully demonstrated a commercially available product that also operates on a stand-alone basis. We have invested a significant amount of capital and resources in developing the zinc bromine technology to its current, commercially viable level. We currently possess a number of United States, Australian and international patents. We believe that we have sufficient documentation to demonstrate our ownership over all of our intellectual property. To date we have not received any claims for infringement of patent or intellectual property usage. In total, apart from the original Exxon patents that have expired, there are more than 60 separate processes or designs within our consolidated company’s intellectual property portfolio, including 15 current patents and 4 patent applications.

A description of the current patented technologies, process number of patents and patent applications, along with the jurisdiction of patent application/grant is as follows:

Description of Patents and Patent Applications	Jurisdiction(s)	Date of Grant or Application	Expiration Date

Issued Patents and patent applications

Battery Circulation System with improved four-way valve	Australia	June 19, 2003
Carbon Coating for an Electrode	United States	May 6, 1997	October 12, 2015
Compact Energy Storage System	Australia	November 26, 1998	May 21, 2016

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Description of Patents and Patent Applications	Jurisdiction(s)	Date of Grant or Application	Expiration Date

	Japan	May 21, 1996	(pending)
	United States	March 11, 1997	May 23, 2015
Composite End Block for a Battery	United States	March 26, 1991	January 10, 2010
End Block Constructions for Batteries	United States	May 3, 1994	January 15, 2013
Friction Welded Battery Component	United States	July 31, 1990	September 20, 2008
Method of Electrode Reconditioning	Australia	November 5, 1998	June 4, 2016
	Japan	June 4, 1996	(pending)
	United States	July 22, 1997	June 7, 2015
Method of Joining Bipolar Battery Frames	United States	July 30, 1991	September 10, 2010
Spill and Leak Containment System for zinc bromine battery	Australia	February 2, 2004	May 3, 2019
	United States	July 17, 2001	May 4, 2019
Terminal Electrode	United States	August 14, 1990	June 30, 2009
Zinc Bromine Battery with Non-Flowing Electrolyte	Australia	July 2, 1996	July 2, 2016
	Japan	July 2, 2006	(pending)
	Malaysia	March 31, 2006	March 31, 2021
	United States	January 7, 1997	July 7, 2015

While we have not patented our flow channel technology, management believes that the technology is sufficiently difficult to develop and would require years of research to replicate. Therefore, we have elected not to file a patent for our flow channel technology at this time as we believe that the public disclosure of the details relating to this technology that would have to be made in connection with applying for such patent would be detrimental to the proprietary nature of our know-how and would provide potential competitors with insight into our technology and manufacturing processes. We believe that our continued in-house research and development relating to the zinc bromine technology will provide an on-going source of competitive advantage.

Management revisits its patent application process from time to time and may in the future file one or more patents relating to our flow channel technology as well as other technologies that we develop if it determines that the risks of disclosure are outweighed by the risks of non-protection of the patent in question.

Sales and Marketing Strategy

The technical characteristics of the F2500 flowing electrolyte zinc bromine battery make it a strong candidate for a wide range of energy markets. Some markets are well established and clearly defined, and others are still developing. Our strategy in reaching these markets is based on exceeding performance and cost thresholds of competing technologies. We plan to continue pursuing appropriate distribution and sales arrangements with suitably qualified channel partners with established operations capable of selling, installing and maintaining our products.

Sources and Availability of Raw Materials

We have developed products composed of low-cost components and materials. We believe that our components are assembled using well-understood manufacturing concepts that require relatively low capital cost and are readily scaleable to achieve high quality reproducibility. With the exception of the electrolyte and microporous separator which are purchased, all other ZBB product components are either injection molded according to our proprietary designs or are standard off-the-shelf pieces. Currently, zinc and bromine, the elements used in our electrolyte, are widely available commodity minerals with numerous alternate suppliers.

To improve manufacturing process efficiency, we outsource all basic manufacturing processes, such as injection and rotational molding for elementary component parts, and the mixing of our zinc bromine electrolyte solution, and devote our production capacity to the proprietary “value added” manufacturing of the battery stacks. We have patented designs and own all molds for all of the major parts of our battery stacks and tanks. All companies to which we outsource our manufacturing work are subject to confidentiality agreements.

We have developed unique, and in several cases, proprietary process technology and equipment for high volume automated manufacturing of our battery products, the principal product components of which are electrodes, separators, flow frames and endblocks. The core manufacturing undertaken by us is the construction of hermetically

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sealed, leak proof battery stacks, which consist of nearly 100% plastic materials. The equipment and general techniques used by our manufacturers are generally well-known manufacturing techniques employed in several fields, including the automotive industry, and we believe that alternative sources of manufacturing are available.

Other Products in Development

We have also used our zinc bromine and manufacturing technologies to develop a non-flow battery product that, unlike the F2500, does not require a circulating electrolyte system. This non-flow battery product is known as the N-F800 battery. The N-F800 provides less power and is much simpler in its construction as it does not require the electrolyte storage and circulation systems of the F2500.

Prototypes of the NF-800 currently on life cycle tests have passed the 3,000 cycle mark and still achieve total return energy efficiency of over 70%. However, sales of a viable commercial product require further refinements in the manufacture and design of this product. This battery is designed for use in small electric vehicles such as golf carts, materials handling equipment, wheel chairs, electric scooters and lawn mowers and in other applications such as telecommunication applications.

We are not marketing this product as we have elected to allocate our resources towards the manufacture and sale of our F2500 flow batteries. We are currently reviewing strategic alternatives to commercialize the N-F800 battery.

Description of Properties

Wisconsin U.S.A. Property

ZBB Energy Corporation recently acquired the property on which its manufacturing facility is located at N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin. The company has occupied a portion of this space since 2002 pursuant to a sub-lease arrangement and acquired the property in February 2006 for $2.2 million pursuant to a land purchase option with the owner. The appraised fair market value of this property at the time of acquisition was $2.4 million dollars. In connection with the purchase of this property, the company incurred mortgage indebtedness from Investors Bank in Milwaukee in the amount of $1.8 million dollars which is to be guaranteed in part by the US Small Business Administration and which bears interest at 8%, payable with interest only payable monthly until the US Small Business Administration securitizes and sells their 50% share of the loan, at which time the loan will become repayable at the then stated interest rate over a period of 20 years.

The property is approximately 3.4 acres and has a facility with approximately 72,000 square feet of rentable manufacturing space, of which the company occupied approximately 35,000 square feet at the time of its acquisition. This property is used to house our U.S. production, assembly and administration headquarters. In 2005 we ordered new manufacturing equipment which will be installed and commissioned in 2006 to expand our battery cell stack production capacity to 20MWh annually. We intend to apply approximately $6,250,000 from the proceeds of this offering towards the acquisition of machinery, equipment and inventory that will increase manufacturing capacity to up to 100MWh annually. The existing facility in Menomonee Falls is suitable to accommodate further expansion of capacity to at least 100MWh annually.

Bibra Lake, Western Australia (Leasehold)

In 2001 our Australian subsidiary, moved into new, leased, self-contained research and development facilities in Bibra Lake, Western Australia after previously occupying sub-leased laboratory and workshop facilities. This facility also provides the engineering support for Australian and South East Asia sales as well as a marketing base for the company in this region. This facility is owned by a four person partnership of which three of our directors, Richard Payne, Robert Parry and Geoffrey Hann are partners. The current rental is A$54,600 (US$40,950) per annum which was based on a rental valuation obtained in June 2004 by an independent certified real estate appraisal company. Commencing November 1, 2006, the rental price has been increased in accordance with an independent market review of rental rates as provided for under the terms of the lease. ZBB Technologies Limited has exercised its option to renew the lease for four years, expiring on October 31, 2011. ZBB Technologies has one additional option for renewal of the lease for an additional five year lease term and also has an option of purchasing the property for a price equal to then current market value during the term and any extended term of the lease.

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We currently have an aggregate of 18 full time and 7 part time employees in the U.S., and 4 full time and 1 part time employees in Australia.

Legal Proceedings

There are no pending legal proceedings against us.

Recent Developments

In fiscal 2005, we entered into a sales contract for approximately $1.8 million to provide four 500kWh energy storage systems to our first commercial customer, the California Energy Commission. The California Energy Commission purchased our energy storage system to demonstrate the efficiency and reliability benefits of our systems. We delivered the first of these systems in February 2006 to the San Ramon testing facility of Pacific Gas and Electric (“PG&E”). We expect to deliver the remaining three energy storage systems over the next eight months to PG&E’s San Ramon facility.

In fiscal 2005, we formed ZBB China Pty Ltd., a joint venture company with China Century Group, of which we own 49%. The joint venture is intended to sell our energy storage systems to our target customer base in the Peoples Republic of China. The joint venture has contracted to purchased one of our 500kWh systems for $300,000 to demonstrate our products to potential customers. The joint venture is exploring local sources of manufacturing for certain components and the ultimate assembly of the final product. In this coming year, we intend is to secure a contract for the sale of an initial system similar in size and application to the California Energy Commission system.

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MANAGEMENT

Directors and Executive Officers

Our current directors and executive officers are as follows:

Name	Age	Position


Richard A. Payne	51	Chairman and Director Class I

Robert J. Parry	56	Chief Executive Officer and Director Class I

Geoffrey D. Hann	45	Chief Financial Officer and Director Class II

William Mundell	46	Director

Manfred E. Birnbaum	73	Director

Steven A. Seeker	56	Chief Operating Officer

Richard Andrew Payne has been a director of the company since 1998 and chairman of the board since 2004. Mr. Payne is a director serving on Class I of our board whose term expires in 2008. Mr. Payne has been a director of our subsidiaries since 1994. Mr. Payne is the principal of Richard Payne & Associates and is a commercial lawyer who has practiced as a corporate and commercial attorney in Australia for over 25 years. Mr. Payne has been a director of Australian Ethanol Limited since 2002 and of the Broome International Airport Group of companies since 2001. Richard Payne & Associates has acted as a legal adviser to the company and its predecessor between 1993 and 2005. Mr. Payne received his Bachelor of Jurisprudence (Hons) in 1980 and a Bachelor of Law in 1981 from the University of Western Australia.

Robert John Parry has been a director and chief executive officer of the company since 1998, and has held similar positions with our subsidiaries since co-founding the company in 1982. Mr. Parry is a director serving on Class I of our board and his term expires in 2008. In 1990 Mr. Parry formed, in partnership with Mr. Hann, the accounting practice of Parry Hann & Associates. Mr. Parry obtained an accounting degree from The Western Australia Institute of Technology (Curtin University) in 1973 and he is a Fellow of CPA Australia.

Geoffrey David Hann has been our director, audit committee member, Secretary and Chief Financial Officer since 1998 and has held similar positions with our subsidiaries since 1992. Mr. Hann is a director in Class II of our board and his term expires in 2007. Since 1990, Mr. Hann has been a partner with Mr. Parry in the accounting practice of Parry Hann & Associates. Prior to that Mr. Hann spent two years as a financial analyst with the Midland Banking Group in the United Kingdom. Mr. Hann holds a Bachelor of Business Studies degree with a triple major in Accounting, Finance and Business Administration earned from Churchlands College of Advanced Education (currently known as Edith Cowen University) in Western Australia in 1981 and is an Associate of CPA Australia.

William Mundell has consented to be appointed as an independent director after the close of the offering. Currently, and since 2003, Mr. Mundell was an executive of Vidyah Corp. Between 1998 and 2003, Mr. Mundell was Chairman of Trade, Inc., a joint venture controlled by Bain Capital and Sutter Hill. Between 1987 and 1998, Mr. Mundell served as an officer of WEFA, an economic forecasting company. Mr. Mundell received a B.A. degree in Economics and Political Science from Carlton University in Canada, and an MBA in finance and Masters Degree in International Economics and Public Finance in 1982 and 1984, respectively, from Columbia University.

Manfred E. Birnbaum has consented to be appointed as a director upon the closing of the offering. Prior to such time and since 1994, Mr. Brinbaum has been an independent management consultant in the energy and power industries. Mr. Birnbaum was Chief Executive Officer of English Electric Corp., a wholly-owned subsidiary of General Electric Company of England. Mr. Birnbaum held various senior management positions at Westinghouse Electric Corporation between 1958 and 1982. Mr. Birnbaum earned a B.A. in mechanical engineering from Polytechnic Institute, of the City University of New York in 1957 and a Masters Degree in electrical engineering from the University of Pennsylvania.

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Steven A. Seeker was appointed as our chief operating officer in June 2006. Prior to such time and since 2000, Mr. Seeker was Vice President, International Sales and Operations, of Cooper Power Systems, Inc., in Waukesha, Wisconsin where he was responsible for Cooper Power’s international shipments, four international plants, and a network of sales representatives and direct employees in more than 75 countries. Prior to being appointed as Vice President and since 1974, Mr. Seeker held various other executive and non executive positions with Cooper Power and its predecessor company, McGraw-Edison. Mr. Seeker was President of the US National Committee of the International Electrotechnology Commission (IEC) (2000-2005), an American National Standards Institute (ANSI) Board of Directors, Executive Committee, and International Committee member (2000-2005) and a representative on the IEEE Standards Association Board of Governors (2001). Mr. Seeker was most recently awarded the 2006 Astin-Polk International Standards Medal by ANSI. Mr. Seeker obtained both Bachelors and Masters degrees in Electrical Engineering received from New Mexico State University, Las Cruces NM in 1973 and 1974, respectively.

Significant Employees

Bjorn Jonshagen. Senior Engineer. Mr. Jonshagen has been managing our Australian research and development since 1992, and was part of the Australian research and development team since 1986. Mr. Jonshagen is a co-developer of some of our intellectual property. Prior to joining the Company in 1986, Mr. Jonshagen gained extensive experience as a design engineer for wind turbine generators, plate heat exchangers and various valve products. Mr. Jonshagen holds a Masters of Science degree in Mechanical Engineering which he received in 1979 from Lund University of Technology, Sweden, and a Masters of Science degree in Mechanical Engineering Materials Science which he received in 1980 from the University of Hawaii, Honolulu.

Peter Lex. Vice President, Manufacturing. Mr. Lex joined Johnson Controls Battery Group in 1990 and has been our senior systems engineer since we acquired this division from Johnson Controls in 1994. He has coordinated extensive laboratory testing and qualification of zinc-bromine batteries and electrochemical capacitors. He has organized the research in materials development and conducted electrochemical testing of battery components, developed electrode and separator materials and processing techniques that improved the performance and life expectancy of the batteries. He has been the principal US research and development scientist for the Company since 1994 and coordinates the entire group’s materials research activities. He is a co-developer of the Company’s US intellectual property. Mr. Lex holds a Bachelor of Science degree in Chemical Engineering from The University of Wisconsin-Madison obtained in 1984 and Master of Science degree in Chemical Engineering from The University of Connecticut, Storrs obtained in 1988.

Michael Hughes. Vice President, Systems Engineering. Mr. Hughes joined Johnson Controls’ zinc bromine battery research division in 1991 and has been our senior systems engineer since we acquired this division from Johnson Controls in 1994. He managed the eight member development team that built, tested and demonstrated the initial 100kWh system utilizing on-board computers, PC-based controls and automated communication systems. Mr. Hughes was also a core team member of the Johnson Controls Inc. electric vehicle race team that demonstrated a zinc-bromine battery powered car capable of a top speed of 95 mph. Prior to joining the zinc-bromine research group at Johnson Controls Inc, he held positions as a research assistant and then project assistant at University of Wisconsin-Milwaukee Department of Physics. Mr. Hughes holds a Bachelor of Science degree obtained in 1987 and a Masters of Science in Physics on 1991, both obtained from the University of Wisconsin-Milwaukee.

Classified Board of Directors

Articles of Incorporation provide for a classified board staggered into three classes. Directors are appointed to a class having three year terms and shareholders may only appoint up to two new directors in any year. As a result of this classified board structure, a maximum of only one-third of directors can be replaced in any year which will discourage any attempted takeover, and would delay a change of control in our board that was not appointed by our existing board members.

Mr. Parry and Mr. Payne are directors in Class I and were re-elected in 2006, whose term will expire 2009. Mr. Hann is a director in Class II and his term expires in 2007. Messrs. Birnbaum and Mudell will, at the closing of this offering, be appointed to Class II and Class III of our board of directors, with terms expiring in 2010 and 2011, respectively.

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Board Committees

Audit Committee . We have established an audit committee of the Board of Directors. The Audit Committee assists the board of directors in the oversight of the audit of our consolidated financials statements and the quality and integrity of our accounting, auditing and financial reporting process. The Audit Committee is responsible for making recommendations to the board concerning the selection and engagement of independent registered public accountants and for reviewing the scope of the annual audit, audit fees, results of the audit and auditor independence. The Audit Committee also reviews and discusses with management and the board of directors, such matters as accounting policies, internal accounting controls and procedures for preparation of financial statements. The Audit Committee is required, at all times, to be composed exclusively of directors who, in the opinion of our board of directors, are free from any relationship that would interfere with the exercise of independent judgment as a committee member and who posses an understanding of financial statements and generally accepted accounting principles. Our Audit Committee is currently composed of Mr. Hann and Mr. Payne. After the closing of the offering and the appointment of Mr. Mundell and Mr. Birnbaum to our Board of Directors, both of such persons will be appointed to the Audit Committee along with Mr. Hann and Mr. Payne. We believe that Messrs. Payne, Mundell and Birnbaum are independent directors as required by the listing requirements for the AMEX stock market. Our board has determined that Mr. Geoffrey Hann qualifies as an “audit committee financial expert” as defined under Item 401(e) of Regulation S-B.

Compensation Committee . The Compensation Committee evaluates the performance of our senior executives, considers design and competitiveness of our compensation plans, reviews and approves senior executive compensation and administers our equity and stock option plans. In September of 2006, the Company appointed Mr. Hann and Mr. Payne to serve on this committee. After the closing of the offering Messrs. Mundell and Birnbaum, will be appointed to the Compensation Committee along with Messrs. Hann and Payne. Prior to September of 2006, there was no compensation committee of the board of directors and compensation related matters were instead handled by the board.

Code of Ethics

Our Board of directors adopted a Code of Business Conduct. The Code of Business Conduct , in accordance with Section 406 of the Sarbanes Oxley Act of 2002 and Item 406 of Regulation S-B, constitutes our Code of Ethics for senior financial officers. The Code of Business Conduct codifies the business and ethical principles that govern our business.

The Code of Ethics is designed, among other things, to deter wrongdoing and to promote:

•

Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;

•

Compliance with applicable governmental laws, rules and regulations;

•

The prompt internal reporting violations of the ethics code to an appropriate person or persons identified in the code of ethics; and

•

Accountability for adherence to the Code.

Executive Compensation

The following table sets forth all compensation for each of the last three fiscal years awarded to, or earned by, our Chief Executive Officer and all other executive officers serving as such at the end of 2006 whose salary and bonus exceeded $100,000 for the year ended June 30, 2006 or who, as of June 30, 2006, was being paid a salary at a rate of at least $100,000 per year.

Summary Compensation Table

Name and Principal Position(s)	Year		Salary		Bonus		Other Annual Compensation	Securities Underlying Options

Robert J. Parry	2006	$	187,620	$	0	$	0	0
Chief Executive Officer	2005	$	187,620	$	0	$	0	186,802	(1)
	2004	$	187,620	$	0		0	0
Geoffrey D. Hann	2006	$	160,000	$	0	$	0	0

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Chief Financial Officer	2005	$	160,000		$	0	$ 0	0
(and Principal Financial Officer)	2004	$	160,000		$	0	$ 0	0

Stephen Seeker	2006	$	150,000	(2)		-0-	$ 0	0
Chief Operating Officer

(1)	Indicates options held in escrow, issued on March 30, 2005, exercisable at $3.00, and expiring on March 30, 2010.

(2)	Mr. Seeker commenced employment with the company in June of 2006. Salary amount indicates annualized salary.

In accordance with the rules of the SEC, other compensation in the form of perquisites and other personal benefits has been omitted for the named executive officers because the aggregate amount of these perquisites and other personal benefits was less than the lesser of $50,000 or 10% of annual salary and bonuses for the named executive officers.

Options Granted During Fiscal Year

There were no options or other stock grants to any named executive officers during Fiscal 2006. During Fiscal 2005 Mr. Parry received options to purchase 186,803 shares of common stock which were exercisable immediately at an exercise price of $3.00, and expire on March 30, 2010. No other options or stock awards were made during Fiscal 2005.

Name	Number Of Securities Underlying Options/SARS Granted (#)	Percent Of Total Options/ SARs Granted To Employees In Fiscal Year	Exercise Or Base Price ($/Sh)	Expiration Date

Robert J. Parry Chief Executive Officer	186,802	%	$3.00	3/30/10
Other Named Executive Oficers	0	N/A	N/A	N/A

Aggregate Option Exercises in Fiscal 2006 and Fiscal Year End Option Values

No options were exercised by any executive officers or directors in Fiscal 2006 and no options held by any executive officers or directors are exercisable at prices below the trading price of our CUFS representing common stock as of June 30, 2006.

Options Granted Subsequent to end of Fiscal Year 2006

Subsequent to the end of Fiscal 2006, the following stock options were proposed to be granted by the compensation committee of the board on September 29, 2006 to Messrs Payne, Parry and Hann under the 2005 Stock Option Plan. These proposed option grants are all subject to shareholder approval in Australia and, if granted, vest only at the closing of the offering and listing of the securities on the AMEX:

If shareholders approve these option grants, Mr. Parry and Mr. Hann will each be granted 200,000 options expiring 5 years from date of issuance exercisable at a price 20% higher than the weighted average market price for shares on ASX over the last 20 days on which sales in shares were recorded on ASX immediately preceding the date of grant of the options and not to vest until the company completes this offering and lists on AMEX.

If shareholders approve these option grants, Richard Payne will be granted 100,000 options for a term of five years from the date of issuance exercisable at a price 20% higher than the weighted average market price for shares on ASX over the last 20 days on which sales in shares were recorded on ASX immediately preceding the date of grant of the options and not to vest until the company completes this offering and lists on AMEX.

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Employment Agreements

Robert Parry has entered into an employment agreement with the company to act as Chief Executive Officer for a period expiring on June 30, 2009 on normal commercial terms and conditions and is paid a remuneration package totaling $187,620 per annum exclusive of any options granted to him.

The employment agreement contains covenants prohibiting the employee competing with the company during his employment and at any time during 18 months following termination for any reason and a requirement for the employee to keep all information strictly confidential.

Geoffrey Hann has entered into an employment agreement with the company to act as Chief Financial Officer for a period expiring on June 30, 2009 on normal commercial terms and conditions and is paid a remuneration package totaling $160,000 per annum exclusive of any options granted to him.

The employment agreements with Mr. Hann and Mr. Parry each also provide that effective upon our listing on the AMEX and delisting from the ASX, if we terminate the employment agreement prior to its expiration for any reason other than for cause, we must pay the employee his annual remuneration for the greater of 18 months or the remaining term of the agreement and all unvested options shall vest and become immediately exercisable. On the expiration of the term of each employment agreement, the company shall pay the employee an amount equal to the employee’s annual remuneration for a further period of 18 months in 18 equal consecutive monthly installments commencing on the date of such expiration.

We will reimburse our officers and directors for any reasonable out-of-pocket business expenses incurred by them in connection with certain activities on our behalf such as identifying and investigating possible target businesses and business combinations. There is no limit on the amount of accountable out-of-pocket expenses reimbursable by us, which will be reviewed only by our board or a court of competent jurisdiction if such reimbursement is challenged.

Other than the reimbursable out-of-pocket expenses payable to our officers and directors, no compensation or fees of any kind, including finders and consulting fees, will be paid to any of our existing stockholders, officers or directors who owned our common stock prior to this offering, or to any of their respective affiliates for services rendered to us prior to or with respect to the business combination.

All ongoing and future transactions between us and any of our officers and directors or their respective affiliates, including loans by our officers and directors, will be on terms believed by us to be no less favorable than are available from unaffiliated third parties and such transactions or loans, including any forgiveness of loans, will require prior approval in each instance by a majority of our uninterested “independent” directors (to the extent we have any) or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. Moreover, it is our intention to obtain estimates from unaffiliated third parties for similar goods or services to ascertain whether such transactions with affiliates are on terms that are no less favorable to us than are otherwise available from unaffiliated third parties.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

During fiscal 2005 and 2006 to date the following related party transactions occurred in addition to the transactions disclosed elsewhere in this prospectus.

Richard Payne & Associates, a legal firm associated with Richard Payne, has provided general legal services to the company in fiscal 2005. The company has paid $51,367 in fees (inclusive of GST) to Richard Payne & Associates under normal commercial terms and conditions in fiscal 2005 and 2006.

By a lease dated October 31, 2001 between the Barrington Street Partnership (in respect of which Robert Parry, Geoffrey Hann and Richard Payne comprise three of the four partners) as landlord, ZBB Technologies, Ltd. as tenant and the company as guarantor, as varied by a deed of variation between such parties dated June 15, 2002,

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the premises at 240 Barrington Street, Bibra Lake, Western Australia are leased by ZBB Technologies Ltd for a period of 5 years commencing November 1, 2001. The current rental is $40,950 per annum based on an independent rental valuation in June 2004. ZBB Technologies, Ltd. has two options of renewal, each of five years and an option to buy the property at any time during the term or any extended term after July 31, 2006 at the then current market value. ZBB Technologies, Ltd. has exercised its option to renew the lease for the first five year term commencing November 1, 2006.

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PRINCIPAL STOCKHOLDERS

The following table sets forth information regarding the beneficial ownership of our common stock as of October 17, 2006 and as adjusted to reflect the sale of our common stock included in the shares offered by this prospectus (assuming the individuals listed do not purchase shares in this offering), by:

• each person known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock;

• each of our officers and directors; and

• all our officers and directors as a group.

Based on information available to the us, all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them, unless otherwise indicated. Beneficial ownership is determined in accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as amended. In computing the number of shares beneficially owned by a person or a group and the percentage ownership of that person or group, shares of our common stock subject to options or warrants currently exercisable or exercisable within 60 days after the date of this prospectus are deemed outstanding, but are not deemed outstanding for the purpose of computing the percentage of ownership of any other person. The following table assumes 18,655,451 shares of common stock are outstanding after the closing of this offering based on the 11,155,451 shares of common stock outstanding as of the date of this prospectus as calculated above, and no exercise of the over-allotment option.

Unless otherwise indicated, the address of each individual named below is our address in the U.S. located at N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin, 53051.

	Amount and Nature of Beneficial Ownership ⁽¹⁾		Approximate Percentage of Outstanding common stock
Name and Address of Beneficial Owner	Amount and Nature of Beneficial Ownership ⁽¹⁾		Before Offering		After Offering

Richard A. Payne	252,717	⁽²⁾	2.3	%	1.4	%

Robert J. Parry	964,512	⁽³⁾	8.5	%	5.1	%

Geoffrey D. Hann	203,588	⁽⁴⁾	1.74	%	1.1*	%

William Mundell	0		*		*

Manfred E. Birnbaum	0		*		*

Stephen Seeker	20,000		*		*

WA Local Government Superannuation Plan ⁽⁵⁾	755,432		6.8		4.0

Baytree Holdings Limited ⁽⁶⁾	701,307		6.2		3.7

All directors and executive officers as a group	1,453,117		12.54	%	7.6	%


*			Less than one percent.

(1)			All references to “Escrow Shares” indicates shares, or shares issuable upon exercise of options, that are held in escrow by Computer Share Registry Services pursuant to which such shares may not be sold until March 30, 2007. All such shares were deposited into escrow in March of 2005 in accordance with the ASX listing requirements. The beneficial owner of any Escrow Shares indicated as owning such shares has full voting and disposition rights over said shares.
(2)			Includes (i) 3,006 Escrow Shares, (ii) 9,000 shares issuable upon exercise of options at $2.00 per share which expire on January 2, 2007, (iii) 9,000 shares issuable upon exercise of options at $2.00 per share which expire on

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			on January 2, 2008, and (iv) 37,500 Escrow Shares issuable upon exercise of options at $2.64 per share which expire on May 6, 2008. Also includes (i) 75,150 shares (ii) 75,150 Escrow Shares, and (iii) 3,438 ASX Options held by the an affiliate of Mr. Payne, Geizo Pty. Ltd, as trustee for the RA Payne Family Trust (the “Payne Family Trust”); and 12,631 shares and 22,931 Escrow Shares held by Geizo Pty Ltd. as trustee for the RA Payne Super Fund. Does not include shares issuable pending shareholder approval and the closing of this offering. Does not include 100,000 shares underlying options pending shareholder approval and the closing of this offering.
(3)			Includes 5,750 ASX options and options to purchase 186,802 Escrow Shares at A$4.00 per share. Also includes (i) 701,249 shares held by Mr. Robert Parry and his son, Gareth Parry, as trustee for the FEIM Trust (the “FEIM Trust”), the beneficiaries of which include the heirs of Frank Ernest Parry, Mr. Robert Parry’s father, of which 468,382 are Escrow Shares, (ii) 859 shares and 641 Escrow Shares held by Mr. Parry’s spouse, (ii) 591 shares and 1002.25 Escrow Shares held in partnership by the Hewitt, Parry Edwards and Rodgers and (iii) 474 shares and 838 Escrow Shares held in partnership by Hewitt, Parry, Edwards. Mr. Parry has voting and disposition control over all shares held by the Feim Trust or in partnership with others. Does not include 200,000 shares underlying options pending shareholder approval and the closing of this offering.
(4)			Includes 7,119 ASX Options. Also includes (i) 14,842 shares, (ii) 5,158 Escrow Shares and (iii) 1,469 ASX Options held in Mr. Hann’s Australian superannuation fund accounts (retirement account). Does not include 200,000 shares underlying options pending shareholder approval and the closing of this offering.
(5)			The address for the WA Local Government Superannuation Plan is 105 St. Georges Terrace, Perth Western Australia 6000.
(6)			The address for Baytree Holdings Limited is P.O. Box 456, Portman House, Hue Street St. Helier, Jersey Je4 5rp Channel Islands.

UNDERWRITING

In accordance with the terms and conditions contained in the underwriting agreement, we have agreed to sell to each of the underwriters named below, and each of the underwriters, for which Empire Financial Group, Inc. is acting as representative, have severally, and not jointly, agreed to purchase on a firm commitment basis the number of shares of common stock offered in this offering set forth opposite their respective names below:

	Underwriters		Number of Shares

	Empire Financial Group, Inc.		7,500,000

A copy of the underwriting agreement has been filed as an exhibit to the registration statement of which this prospectus forms a part.

We have been advised by the representative that the underwriters propose to offer the shares to the public at the initial offering price set forth on the cover page of this prospectus. They may allow some dealers concessions not in excess of $ per share and the dealers may reallow a concession not in excess of $ per share to other dealers.

The public offering price of the shares were negotiated between us and the representative of the underwriters. Factors considered in determining the prices and terms of the common stock include:

•

the prices at which the CUFS representing our common stock have recently traded on the ASX;


	•	comparable per share prices of United States publicly traded companies in the alternative energy sector; and


	•	the perceived value of our technology and assessment of our future prospects.

Over-Allotment Option

We have also granted to the underwriters an option, exercisable during the 60-day period commencing on the date of this prospectus, to purchase from us at the offering price, less underwriting discounts, up to an aggregate of 1,125,000 additional shares for the sole purpose of covering over-allotments, if any. The over-allotment option

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will only be used to cover the net syndicate short position resulting from the initial distribution. The underwriters may exercise that option if the underwriters sell more shares than the total number set forth in the table above. If any shares underlying the option are purchased, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.

Commissions and Discounts

The following table shows the public offering price, underwriting discount to be paid by us to the underwriters and the proceeds, before expenses, to us. This information assumes either no exercise or full exercise by the underwriters of their over-allotment option.

	Per share		Without Option		With Option


Public offering price	$	2.00	$	15,000,000	$	16,500,000
Discount	$	.16	$	1,200,000	$	1,320,000
Non-accountable Expense Allowance ⁽¹⁾	$	.04	$	300,000	$	300,000
Proceeds before expenses ⁽²⁾	$		$	13,500,000	$	14,880,000

(1) The non-accountable expense allowance is not payable with respect to the shares sold upon exercise of the underwriters’ over-allotment option.

(2) The offering expenses after the underwriter’s discount and non-accountable expense allowance are estimated at $609,033.

Underwriter’s Warrant

We have agreed to sell to the representative of the underwriters, for a purchase price of $100, warrants to purchase up to a total of 750,000 (or up to 862,500, if the warrant allotment is extended) shares of common stock. These underwriter’s warrants are exercisable at a price of $2.40 per share of common stock, which is based on 120% of the public offering price, and may be exercised on a cashless basis, commencing on one year from the date of this prospectus and expiring five years from the date of this prospectus. The underwriter’s warrants and the shares of common stock underlying such warrants have been deemed compensation by the NASD and are therefore subject to a 180-day lock-up pursuant to Rule 2710(g)(1) of the NASD Conduct Rules. Additionally, the underwriter’s warrants may not be sold, transferred, assigned, pledged or hypothecated for a one-year period (including the foregoing 180-day period) following the date of this prospectus. However, the warrants may be transferred in whole or in part to any underwriter and selected dealer participating in the offering and their bona fide officers or partners. Although the shares of common stock underlying the underwriter’s warrants have been registered under the registration statement of which this prospectus forms a part, the warrants grant to holders demand and “piggy back” rights for periods of five and seven years, respectively, from the date of this prospectus with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the option. We will bear all fees and expenses attendant to registering the securities, other than underwriting commissions which will be paid for by the holders themselves. The exercise price and number of shares issuable upon exercise of the underwriter’s warrants may be adjusted in certain circumstances, including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the underwriter’s warrants will not be adjusted for our issuances of common stock at a price below the exercise price.

Regulatory Restrictions on Purchase of Securities

Rules of the SEC may limit the ability of the underwriters to bid for or purchase our securities before the distribution of the securities is completed. However, the underwriters may engage in the following activities in accordance with the rules:

•

Stabilizing Transactions . The underwriters may make bids or purchases for the purpose of pegging, fixing or maintaining the price of our securities, so long as stabilizing bids do not exceed a specified maximum.


	•	Over-Allotments and Syndicate Coverage Transactions . The underwriters may create a short position in our securities by selling more of our securities than are set forth on the cover page of this prospectus. If the underwriters create a short position during the offering, the representative

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may engage in syndicate coverage transactions by purchasing our securities in the open market. The representative may also elect to reduce any short position by exercising all or part of the over-allotment option.


	•	Penalty Bids . The representative may reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate coverage transaction to cover syndicate short positions.

Stabilizing and syndicate coverage transactions may cause the price of the securities to be higher than they would be in the absence of these transactions. The imposition of a penalty bid might also have an effect on the prices of the securities if it discourages resales of the securities.

Neither we nor the underwriters makes any representation or prediction as to the effect that the transactions described above may have on the prices of the securities. These transactions may occur on the American Stock Exchange, in the over-the-counter market or on any trading market. If any of these transactions are commenced, they may be discontinued without notice at any time.

Lock-Up Agreements

All our officers and directors and all of our stockholders who beneficially owned, prior to the offering, 5% or more of our outstanding common stock have agreed that, for a period of one year from the effective date of the registration statement of which this prospectus forms a part, they will not sell, contract to sell, grant any option for the sale or otherwise dispose of any of our equity securities, or any securities convertible into or exercisable or exchangeable for our equity securities, without the consent of the representative except for an aggregate of 500,000 shares of common stock beneficially owned by certain of our non-executive employees whom we have identified to the representative. The representative may consent to an early release from the lock-up periods if, in its opinion, the market for the common stock would not be adversely impacted by sales and in cases of a financial emergency of an officer, director or other stockholder. We are unaware of any officer, director or current shareholder who intends to ask for consent to dispose of any of our equity securities during the lock-up period.

Additionally, certain members of management have consented to lock-up their shares under an escrow agreement in connection with our Australian public offering in 2005. All options and shares held under this escrow agreement will be released in March 2007, however, to the extent that such shares are held by our officers and directors, such registered securities will continue to be restricted in accordance with the parties agreement.

Other Terms

We have granted the representative the right to have its designee present at all meetings of our board of directors for a period of two years from the date this registration statement (of which this prospectus forms a part) becomes effective. The designee will be entitled to the same notices and communications sent by us to our directors and to attend directors’ meetings, but will not have voting rights. The representative has not named a designee as of the date of this prospectus.

We have agreed to engage Empire Financial Group, Inc. to provide financial advisory services for us for a period of two years from the date this registration statement (of which this prospectus forms a part) becomes effective. We have agreed to pay Empire Financial Group a monthly fee of $5,000 for their services and to pay them a “Lehman formula” finder’s fee if they originate any merger, acquisition, joint venture or similar transaction.

Relationships

Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, in addition to the financial advisory agreement with Empire Financial Group described above, for which they received or will receive customary fees and expenses.

Electronic Delivery

A prospectus in electronic format may be made available on the websites maintained by one or more of the underwriters. The representative may agree to allocate a number of shares to underwriters for sale to their online

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brokerage account holders. The representative will allocate shares to underwriters that may make Internet distributions on the same basis as other allocations. In addition, shares may be sold by the underwriters to securities dealers who resell shares to online brokerage account holders.

Indemnification

We and the selling shareholder have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act of 1933, or to contribute to payments the underwriters may be required to make in this respect.

SELLING SHAREHOLDERS

We are registering this offering under the terms of registration rights agreements between us and the holders of certain of our securities. Such securities were issued by us in transactions that were exempt from the registration requirements of the Securities Act to persons reasonably believed by us to be "accredited investors" as defined in Regulation D under the Securities Act. We are registering these securities in order to permit the selling shareholders who purchased them from us to dispose of the shares of common stock, or interests therein, from time to time.

Because the conversion prices of the Montgomery Loan may be adjusted, and because various holders of notes under the Empire Loans may either convert their loan at 50% of the offering price or elect to receive repayment of their loan and warrants to purchase common stock equal to the dollar amount outstanding under the loan exercisable at $$2.40 per share, the number of shares common stock that will actually be issued to the holders of those securities may be more than or less than the number of shares being offered by this prospectus. The selling shareholders may sell all, some, or none of their shares in this offering. See "Plan of Distribution."

At the closing of this offering we intend to delist 375,000 listed options from trading on the ASX and we do not intend to apply for trading of these options on the AMEX. However, we are applying to have any common stock issued upon exercise of these options listed on the AMEX. Accordingly, the selling shareholders herein includes such indeterminate number of holders of our 375,000 listed options.

We are also registering for re-sale 393,750 shares of common stock issuable upon conversion of the Montgomery Loan. Pursuant to the terms of the loan agreement, the loan is convertible at 80% of the per share trading price of the common stock and the exercise price of the warrants will be set based on the trading price per share prior to the time of exercise. Montgomery Capital has requested repayment of this loan and redemption of all warrants under this loan.

The table below lists the selling shareholders and other information regarding the beneficial ownership of the shares of common stock by each of the selling shareholders. The second column lists the number of shares of common stock beneficially owned by each selling stockholder as of October 16, 2006, assuming the exercise of all of the warrants held by the selling shareholders on that date, without regard to any limitations on conversion or exercise. The third column lists the shares of common stock covered by this prospectus that may be disposed of by each of the selling shareholders. The fourth column lists the number of shares that will be beneficially owned by the selling shareholders assuming all of the shares covered by this prospectus are sold.

The inclusion of any securities in the following table does not constitute an admission of beneficial ownership by the persons named below. Except as indicated in the footnotes to the table, no selling stockholder has had any material relationship with us or our predecessors or affiliates during the last three years. Except for Ron Berg, who is a registered representative employed by Empire Financial Group, no selling stockholder is a registered broker-dealer or an affiliate of a broker-dealer.

The selling shareholders may decide to sell all, some, or none of the shares of common stock listed below. We cannot provide you with any estimate of the number of shares of common stock that any of the selling shareholders will hold in the future. For purposes of this table, beneficial ownership is determined in accordance with the rules of the Commission, and includes voting power and investment power with respect to such shares.

None of the selling shareholders has held any position or office with us, nor are any of the selling shareholders associates or affiliates of any of our officers or directors. Except as indicated below, no selling shareholder is the beneficial owner of any additional shares of common stock or other equity securities issued by us

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or any securities convertible into, or exercisable or exchangeable for, our equity securities. Except as indicated below, no selling shareholder is a registered broker-dealer or an affiliate of a broker-dealer.

Name	Shares Owned	Shares Offered	Shares Held After Offering	% Ownership After Offering ⁽¹⁾


ABS SOS-Plus Partners, Ltd. ⁽²⁾	556,667	556,667	0	*

Arthur A. Arnold, Jr. ⁽³⁾	80,625	80,625	0	*

Atlas Industries, Ltd. ⁽³⁾	53,750	53,750	0	*

Michael Bailey ⁽³⁾	53,750	53,750	0	*

Ron Berg ⁽³⁾	53,750	53,750	0	*

Joseph Bridson ⁽³⁾	53,750	53,750	0	*

Bushido Capital Master Fund, L.P. ⁽²⁾	278,333	278,333	0	*

Bristol Associates LLC ⁽⁴⁾	89,062	89,062	0	*

Cobble Creek Consulting, Inc. ⁽⁵⁾	126,172	126,172	0	*
Edward Cohen ^(3):
Edward Cohen	107,500	107,500	0	*

PFSI F/B/O Edward Cohen IRA	53,750	53,750	0	*

Des Cumings, Jr. ⁽³⁾	53,750	53,750	0	*

Empire Financial Group, Inc. ⁽⁶⁾	255,049	255,049	0	*

Stephen John Dempsey ⁽³⁾	107,500	107,500	0	*

Denzyl Dinsmore ⁽³⁾	107,500	107,500	0	*

The Frank Siza Trust ⁽³⁾	26,875	26,875	0	*

Brian Gregory ⁽³⁾	53,750	53,750	0	*

Donald Heath ⁽³⁾	26.875	26.875	0	*

Hornet Renewable Energy Fund ⁽⁷⁾	645,000	645,000	0	*

Montgomery Capital Partners, LP ⁽⁸⁾	393,750	393,750	0	*

Brian Morgan ⁽³⁾	107,500	107,500	0	*

New Energy Fund LP ⁽⁷⁾	430,000	430,000	0	*

Pam Ohab ⁽³⁾	53,750	53,750	0	*

Warrick Oliver ⁽³⁾	53,750	53,750	0	*

Pam Ohab c/o Ryan Foundation ⁽³⁾	53,750	53,750	0	*

Pierce Diversified Strategy Master Fund ⁽²⁾	278,333	278,333	0	*

Geoffrey Rogers and Julie Rogers ⁽³⁾	53,750	53,750	0	*

Nigel Roth ⁽³⁾	107,500	107,500	0	*

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Name	Shares Owned	Shares Offered	Shares Held After Offering	% Ownership After Offering ⁽¹⁾


The Rubin Family Irrevocable Stock Trust ⁽⁹⁾	126,172	126,172	0	*

Joseph Savage ⁽³⁾	537,500	537,500	0	*

Shane Scott ⁽³⁾	53,750	53,750	0	*

James Skalko ⁽³⁾	53,750	53,750	0	*

Volta Associates, LLC ⁽¹⁰⁾	252,344	252,344	0	*

Adam Weis ⁽¹¹⁾	31,250	31,250	0	*

Eno Williams ⁽³⁾	53,750	53,750	0	*

Cormac O’Connell ⁽³⁾	215,000	215,000		*

ASX Optionholders ⁽¹²⁾	375,000	375,000	0	*

Comack O’Connell	215,000		0	*

Ryan Foundation	53,750	53,750	0	*

PFSI FBO Pamela C Ohab Sep IRA ⁽³⁾	53,750	53,750	0	*

Frank Sica ⁽³⁾	26,875	26,875	0	*

Robert L. Simon ⁽³⁾	53,750	53,750	0	*
CIP FF & E Wilshire Trust, Marvin Goodson, Trustee ⁽³⁾	322,500	322,500	0	*

*Less than one percent.

(1)

Beneficial ownership is determined in accordance with the Rule 13d-3(a) of the Exchange Act, and generally includes voting or investment power with respect to securities. Pursuant to the rules and regulations of the SEC, shares of common stock that an individual or group has a right to acquire within sixty (60) days pursuant to the exercise of options or warrants, or the conversion of preferred stock are deemed to be outstanding for the purposes of computing the percentage ownership of such individual or group, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person shown in the table. Except as subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of common stock shown as beneficially owned by him.

(2)	Indicates shares issuable upon exercise of warrants at an exercise price of $2.00 per share which were issued to such selling shareholder in connection with the Bushido Loan. In aggregate, holders of these warrants own beneficially approximately 5.6% of if the issued and outstanding shares.

(3)

Indicates maximum number of shares issuable to such shareholder under the Empire Notes in the aggregate principal amount of $1,000,000, with interest accrued at a rate of 15% through December 31,2006. The Empire Notes entitle the holder thereof to elect at the closing of the offering either (i) be repaid from the proceeds of this offering and receive a warrant exercisable at $2.40 per share (based on 120% of the offering price), to purchase such number of shares as equals the outstanding principal amount of the loan or (ii) convert the Empire Note into common stock at a convertible price of $1.00 per share (based on 50% of the offering price). For purposes of the above table, interest is presumed to have accrued commencing June 1, 2006 through December 31, 2006.

(4)	Received shares as a member of 41 Broadway Associates, LLC. The name of the natural person who holds voting and investment power over the securities held by Bristol Associates LLC is Marisa Callan.

(5)	Received shares as a member of 41 Broadway Associates, LLC. The name of the natural person who hold voting and investment power over the securities held by Cobble Creek Consulting, Inc. is Barry Pomerantz.

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(6)	Issuable to a selling security holder upon repayment of a promissory note, presuming repayment amount of $1,260,000 and a conversion price of $1.60 per share.

(7)	Indicates maximum number of shares issuable under the October Financing to such shareholders under notes that are identical in terms to the Empire Notes, but were issued in October of 2006 and for which no fees have been paid to Empire.

(8)	Indicates shares requested to be issued upon repayment of the Montgomery Loan to such holder based on an estimated repayment amount of approximately $1,260,000 as of December 31, 2006.

(9)	Received shares as a member of 41 Broadway Associates, LLC. The names of the natural persons who hold voting and investment power over the securities held by this Trust are Margery C. Rubin and Robert Schulman.

(10)	Received shares as a member of 41 Broadway Associates, LLC. The names of the natural persons who hold voting and investment power over the securities held by Volta Associates, LLC is David Eisenberg.

(11)	Received shares as a member of 41 Broadway Associates, LLC.

(12)	Indicates shares that may be issued upon exercise of publicly held and traded ASX Options that were issued in connection with our ASX public offering in Australia in March of 2006, exercisable at $3.00 (A$4.00) and expiring in December of 2007.

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PLAN OF DISTRIBUTION

This prospectus relates to the sale of 7,500,000 shares of common stock through a firm commitment underwriting, the provisions of which are discussed above in the section captioned “Underwriting.”

Additionally, we are registering for re-sale certain shares held by selling shareholders. The selling shareholders, which as used herein includes donees, pledgees, transferees or other successors-in-interest selling shares of common stock or interests in shares of common stock received after the date of this prospectus from a selling stockholder as a gift, pledge, partnership distribution or other transfer, may, from time to time, sell, transfer or otherwise dispose of any or all of their shares of common stock or interests in shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These dispositions may be at fixed prices, at prevailing market prices at the time of sale, at prices related to the prevailing market price, at varying prices determined at the time of sale, or at negotiated prices.

The selling shareholders may use any one or more of the following methods when disposing of shares or interests therein:

•	ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

•	block trades in which the broker-dealer will attempt to sell the shares as agent, but may position and resell a portion of the block as principal to facilitate the transaction;

•	purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

•	an exchange distribution in accordance with the rules of the applicable exchange;

•	privately negotiated transactions;

•	short sales effected after the date the registration statement of which this Prospectus is a part is declared effective by the SEC;

•	through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;

•	broker-dealers may agree with the selling shareholders to sell a specified number of such shares at a stipulated price per share; and

•	a combination of any such methods of sale.

The selling shareholders may, from time to time, pledge or grant a security interest in some or all of the shares of common stock owned by them and, if they default in the performance of their secured obligations, the pledgees or secured parties may offer and sell the shares of common stock, from time to time, under this prospectus, or under an amendment to this prospectus under Rule 424(b)(3) or other applicable provision of the Securities Act amending the list of selling shareholders to include the pledgee, transferee or other successors in interest as selling shareholders under this prospectus. The selling shareholders also may transfer the shares of common stock in other circumstances, in which case the transferees, pledgees or other successors in interest will be the selling beneficial owners for purposes of this prospectus.

In connection with the sale of our common stock or interests therein, the selling shareholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The selling shareholders may also sell shares of our common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The selling shareholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

The aggregate proceeds to the selling shareholders from the sale of the common stock offered by them will be the purchase price of the common stock less discounts or commissions, if any. Each of the selling shareholders reserves the right to accept and, together with their agents from time to time, to reject, in whole or in part, any proposed purchase of common stock to be made directly or through agents. We will not receive any of the proceeds from this offering by the selling shareholders. Upon any exercise of the warrants by payment of cash, however, we will receive the exercise price of the warrants.

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The selling shareholders also may resell all or a portion of the shares in open market transactions in reliance upon Rule 144 under the Securities Act of 1933, provided that they meet the criteria and conform to the requirements of that rule.

The selling shareholders and any underwriters, broker-dealers or agents that participate in the sale of the common stock or interests therein may be "underwriters" within the meaning of Section 2(11) of the Securities Act. Any discounts, commissions, concessions or profit they earn on any resale of the shares may be underwriting discounts and commissions under the Securities Act. Selling shareholders who are "underwriters" within the meaning of Section 2(11) of the Securities Act will be subject to the prospectus delivery requirements of the Securities Act.

To the extent required, the shares of our common stock to be sold, the names of the selling shareholders, the respective purchase prices and public offering prices, the names of any agents, dealer or underwriter, any applicable commissions or discounts with respect to a particular offer will be set forth in an accompanying prospectus supplement or, if appropriate, a post-effective amendment to the registration statement that includes this prospectus.

In order to comply with the securities laws of some states, if applicable, the common stock may be sold in these jurisdictions only through registered or licensed brokers or dealers. In addition, in some states the common stock may not be sold unless it has been registered or qualified for sale or an exemption from registration or qualification requirements is available and is complied with.

We have advised the selling shareholders that the anti-manipulation rules of Regulation M under the Exchange Act may apply to sales of shares in the market and to the activities of the selling shareholders and their affiliates. In addition, to the extent applicable we will make copies of this prospectus (as it may be supplemented or amended from time to time) available to the selling shareholders for the purpose of satisfying the prospectus delivery requirements of the Securities Act. The selling shareholders may indemnify any broker-dealer that participates in transactions involving the sale of the shares against certain liabilities, including liabilities arising under the Securities Act.

We have agreed to indemnify the selling shareholders against liabilities, including liabilities under the Securities Act and state securities laws, relating to the registration of the shares offered by this prospectus.

We have agreed with the selling shareholders to keep the registration statement of which this prospectus constitutes a part effective until the earlier of (1) such time as all of the shares covered by this prospectus have been disposed of pursuant to and in accordance with the registration statement or (2) the date on which the shares may be sold pursuant to Rule 144(k) of the Securities Act.

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DESCRIPTION OF SECURITIES

The following brief description of our capital stock is only a summary. It is subject in all respects to applicable Wisconsin law and to the provisions of our restated articles of incorporation, our bylaws and any agreements we have with shareholders, copies of which have been filed with the Securities and Exchange Commission, to which you should refer for more complete information.

We are authorized to issue 150,000,000 shares of common stock, par value $.01. As of the date of this prospectus, 11,155,451 shares of common stock are outstanding, held by 297 record holders (which includes CHESS Depository Nominees Pty Ltd.) and approximately 1,023 beneficial owners that hold CUFS’s representing our common stock trading on the ASX.

Common Stock

Voting Rights. Subject to Section 180.1150(2) of the Wisconsin Business Corporation Law (the "WBCL"), described below under "–Certain Statutory Provisions", holders of common stock are entitled to one vote for each share of common stock held by them on all matters to be voted upon by the shareholders, including the election of directors. Holders of common stock are not entitled to cumulative voting rights in the election of directors. Directors are elected by a plurality of the votes cast. Generally, unless a greater vote is required by our articles of incorporation, our bylaws or Wisconsin law, all other matters to be voted on by shareholders must be approved by a majority of the votes cast on the matter at a meeting at which a quorum is present, subject to any voting rights granted to holders of any then-outstanding preferred stock.

Classified Board of Directors . Articles of Incorporation provide for a classified board staggered into three classes. Directors are appointed to a class having three year terms and shareholders may only appoint up to two new directors in any year. As a result of this classified board structure, a maximum of only one-third of directors can be replaced in any year which will discourage any attempted takeover, and would delay a change of control in our board that was not appointed by our existing board members.

Dividends. Our Board of Directors, may, in its discretion, declare and pay dividends on the common stock out of earnings or assets legally available for the payment of dividends, subject to other restrictions under Wisconsin law. Because we are a holding company, our ability to pay dividends depends primarily upon the ability of our subsidiaries to pay dividends or otherwise transfer funds to us. Moreover, various financing arrangements, charter provisions and regulatory requirements may impose restrictions on the ability of our insurance subsidiaries to transfer funds to us in the form of dividends, loans or advances. We do not expect to pay cash dividends on our common stock, but instead, intend to utilize available cash to support the development and expansion of our business. There is no assurance that we will be able or will desire to pay dividends in the near future or, if dividends are paid, in what amount.

Liquidation and Dissolution. Subject to the rights of the holders of any series of preferred stock that may be outstanding, if we are liquidated, any amounts remaining after the payment of liabilities will be paid pro rata to the holders of the common stock.

Supermajority Voting Requirements , Articles of Incorporation and By-laws . Under our By-laws, our Articles of Incorporation may be amended, altered or replaced or supplemented unless at least three-quarters of the shares of common stock cast at a meeting of shareholder duly called for such purpose are voted in favor of such action.

Other Matters. Holders of common stock are not entitled to any preemptive, conversion or redemption rights. The outstanding shares of common stock are validly issued, fully paid and nonassessable, except for certain statutory liabilities which may be imposed by Section 180.0622 of the WBCL, as judicially interpreted, for unpaid employee wages. Section 180.0622(2)(b) provides that the shareholders of a Wisconsin corporation are personally liable, to an amount equal to the consideration for which their shares without par value were issued, for all debts owing to employees of the corporation for services performed for the corporation, but not exceeding six months service in any one case.

The CHESS Depository receipts representing 58,983,205 shares of our common stock and 370,625 options to purchase our common stock are, prior to the date of this prospectus, trading on the Australian Stock Exchange under the symbol “ZBB” and “ZBBO”, respectively.

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Preferred stock

We are not authorized to issue preferred stock .

Debt Securities

$1,000,000 Montgomery Capital Partners LP Convertible Loan Financing

On February 28, 2006 we borrowed $1,000,000 from Montgomery Capital Partners L.P., pursuant to the Montgomery Loan. Interest on this loan accrues at 10% per annum, compounded monthly, with a default rate of 13% and becomes payable in full on the earliest to occur of the consummation by us of any major financing (such as this offering), a default, or February 28, 2008. Outstanding principal and interest on this loan is convertible by Montgomery Capital in whole or in part from time to time, into shares of our common stock upon written request to us. The Montgomery Loan also provides that the holders may elect to receive up to 250,000 warrants to purchase common stock, the exercise price of which is set at the time notice is given with respect to such warrants. The warrant rights are redeemable upon request of Montgomery Capital at $.60 per warrant, or $150,000.

In order to pay the loan the Company is required to repay 120% of all outstanding principal and interest and issue such number of shares as would be issuable if half of said repayment amount were converted. Montgomery Capital has agreed not to convert any portion of the Montgomery Loan until January 2007, in exchange for $20,000 per month and has requested repayment of the loan at the closing of the offering, rather then conversion and has requested redemption of the warrants for $150,000 at the closing of the offering. If we repay this loan on December 31, 2006 we will be required to pay approximately $1,250,000 under the loan, $150,000 for redemption of the warrants and to issue approximately 393,750 shares to Montgomery Capital.

$2,226,666 Bushido Loan

On June 22, 2006 we entered into a Note Purchase Agreement with the Bushido Lenders pursuant to which we issued an aggregate of $2,226,667 face amount of secured, convertible promissory notes at a 25% original issue discount and the Bushido Warrants to the Bushido Lenders. Interest on the Bushido Loan accrues at 8%, payable quarterly on 75% of the face amount of the notes. The Bushido Notes are due in full on the earliest to occur of a default under the Bushido Notes or July 14, 2008. The Bushido Notes are secured by a subordinated mortgage on our Wisconsin Property, a lien on all of our assets and a pledge of all of the shares of our subsidiaries and of all of our shares of ZBB China Pty Ltd. The outstanding principal and interest will be convertible only in the event of default at a conversion price of $1.20 per share. In connection with the Bushido Loan and warrants, the Bushido Lenders have piggyback registration rights.

Among other restrictions, the Bushido Loan provides that for so long as the loan is outstanding we may not enter into certain kinds of transactions which include mergers and consolidations, a sale of our assets outside the ordinary course of business, take any action to change the nature of our business, enter into material transactions with affiliates except under reasonable terms, redeem our securities or permit any subsidiary to make loans or advances.

$1,187,500 Convertible Promissory Notes

Between April and September of 2006 we issued $1,187,500 of Empire Notes to accredited investors in a private placement transaction for which Empire Financial Group, the managing underwriter in this offering, acted as placement agent. The Empire Notes accrue interest 15% per annum and are due on the earlier of April 15, 2007 or the closing of an equity based offering of no less then $6 million. Each lender has the right to receive payment in full along with a warrant to purchase such number of shares of common stock equal to 50% of the principal amount of the Note at an exercise price equal to 120% of the equity offering price. Alternatively, each lender may choose to convert the principal and interest owed under the Empire Note into common stock at a conversion price equal to 50% of the equity offering price without receiving any warrants.

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$500,000 Convertible Promissory Notes

In October 2006, we issued an aggregate of $500,000 of 15% convertible October Notes to two fund investors. The October Notes are identical to the Empire Notes in all material respects except that no placement agent was used in connection with such sales and no commission or fees were paid in connection with the sale of such notes.

Listed Options

Currently, options to purchase 375,000 shares are outstanding and are trading on the ASX. Each listed option entitles the registered holder to purchase one share of our common stock at a price of A$4.00 ($3.00) per share, at any time prior to December 17, 2007. We intend to delist the options from trading on the ASX upon the closing of this offering and we do not intend to list these options on the AMEX. However, the shares that are issuable upon exercise thereof are being registered for resale under the registration statement to which this prospectus relates.

The exercise price and number of shares of common stock issuable on exercise of the options may be adjusted in certain circumstances including in the event of a stock dividend, or our recapitalization, reorganization, merger or consolidation. However, the options will not be adjusted for issuances of common stock at a price below their respective exercise prices.

The option holders do not have the rights or privileges of holders of common stock and any voting rights until they exercise their options and receive shares of common stock. After the issuance of shares of common stock upon exercise of the options, each holder will be entitled to one vote for each share held of record on all matters to be voted on by stockholders.

No fractional shares will be issued upon exercise of the options. If, upon exercise of the options, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up or down to the nearest whole number the number of shares of common stock to be issued to the option holder.

Underwriter Warrants

We have agreed to issue to the representative of the underwriters warrants to purchase such number of shares of our common stock as equals 10% of the number of shares sold by the underwriters in this offering at 120% of the per share purchase price of the common stock in this offering. Based on the forgoing, up to a total of 750,000shares at $2.40 per share may be issued to then underwriter with another 112,500 (or 862,500 total) if the underwriter exercises its over allotment option. The underwriter’s warrants expire five years from the date of issuance. The shares issuable upon exercise of this option are identical to those offered by this prospectus. For a more complete description of the underwriter’s warrants, see the section below entitled “Underwriting–Underwriter’s Warrants.”

Additionally, in connection with certain capital raising activities the underwriter or its affiliates have been issued warrants to purchase an aggregate of 255,049 shares of common stock at $1.52 per share, which expire on March 2, 2011. The shares underlying these warrants have not been registered in this offering.

Dividends

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Our Transfer Agent and Option Agent

The transfer agent in the U.S. for our securities and option agent for our warrants is Computershare Trust Company, N.A., Canton, Massachusetts.

Our common stock and options in Australia are held by CHESS Depository Nominees Pty Limited, a wholly owned subsidiary of ASTC Settlement and Transfer Corporation Pty Limited, which is in turn a wholly owned subsidiary of ASX. Computer Share Investor Services, of Perth Australia (61 8 9323 2000) acts as transfer agent for the CUFSs that trade on the ASX.

Certain Statutory Provisions

The Wisconsin Business Corporation Law or WBCL, under which we and ZBB Wisconsin are incorporated, contains certain provisions that may be important when considering the rights of holders of our capital stock. The description set forth below is intended as a summary only. For complete information, you should review the applicable provisions of the WBCL.

Control Share Voting Restrictions. Section 180.1150(2) of the WBCL provides that the voting power of shares of a "resident domestic corporation," which we held by any two or more persons acting in concert, including shares issuable upon conversion of convertible securities or upon exercise of options or warrants, in excess of 20% of the voting power in the election of directors shall be limited to 10% of the full voting power of those shares. This statutory voting restriction is not applicable to shares acquired before April 22, 1986, shares acquired directly from us, shares as to which our shareholders vote to restore the full voting power and under certain other circumstances more fully described in Section 180.1150(3).

Fair Price Provisions. Sections 180.1130 to 180.1133 of the WBCL provide that certain business combinations not meeting specified adequacy-of-price standards must be approved by the vote of at least 80% of the votes entitled to be cast by outstanding voting shares of the corporation, voting together as a single voting group, and by two-thirds of the votes entitled to be cast by shareholders other than a significant shareholder who is a party to the transaction or an affiliate or associate of the significant shareholder.

•

The term "business combination" is defined to include, subject to certain exceptions, a merger or share exchange of a resident domestic corporation or any subsidiary with, or the sale or other disposition of substantially all assets of the resident domestic corporation to, any significant shareholder or affiliate of the significant shareholder.

•

"Significant shareholder" is defined generally to include a person that is the beneficial owner of 10% or more of the voting power of the outstanding voting shares of the resident domestic corporation or an affiliate of the resident domestic corporation who was a 10% beneficial owner within the preceding two years.

Actions During a Take-over Offer. Section 180.1134 of the WBCL provides that, in addition to any vote otherwise required by law or the articles of incorporation, a resident domestic corporation must receive approval at a shareholders' meeting of the holders of a majority of the shares entitled to vote before the corporation can take the actions listed below while a "take-over offer" is being made for the corporation's voting shares or after a take-over offer has been publicly announced and before it is concluded:

•

Shareholder approval is required for the corporation to acquire more than 5% of the corporation's outstanding voting shares at a price above the market value from any individual who or organization which owns more than 3% of the outstanding voting shares and has held those shares for less than two years, unless an equal or better offer is made to acquire all voting shares.

•

Shareholder approval is also required for the corporation to sell or option assets of the corporation which amount to at least 10% of the market value of the corporation, unless the corporation has at least three directors who are not officers or employees and a majority of those directors vote not to be governed by this restriction.

Business Combination Provisions. Sections 180.1140 to 180.1144 of the WBCL provide that a "resident domestic corporation," such as us, may not engage in a "business combination" with an "interested stockholder" for three years after the date (the "stock acquisition date") the interested stockholder acquired his or her 10% or greater interest, unless the business combination or the acquisition of the 10% or greater interest was approved before the stock acquisition date by the corporation's board of directors. After the three-year period, a business combination

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that was not so approved may be consummated only if it is approved by a majority of the outstanding voting shares not held by the interested stockholder or is made at a specified formula price intended to provide a fair price for the shares held by noninterested stockholders.

•

A "business combination" includes a merger or share exchange, or a sale, lease, exchange, mortgage, pledge, transfer or other disposition of assets equal to at least 5% of the aggregate market value of the stock or assets of the corporation or 10% of its earning power, or the issuance of stock or rights to purchase stock having a market value equal to at least 5% of the outstanding stock, the adoption of a plan of liquidation or dissolution, and other enumerated transactions involving an interested stockholder or an affiliate or associate of an interested stockholder.


•	An "interested stockholder" is a person who beneficially owns at least 10% of the voting power of the outstanding voting stock of the corporation or who is an affiliate or associate of the corporation and beneficially owned 10% of the voting power of the then outstanding voting stock at any time within three years prior to the date in question.

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SHARES ELIGIBLE FOR FUTURE SALE

Immediately after this offering, we will have 18,655,451 shares of common stock outstanding, or 19,780,451 shares if the underwriters’ over-allotment option is exercised in full. These amounts do not include any shares issuable upon conversion of the Empire Loan or the October Notes or that are issuable upon repayment of the Montgomery Loan or exercise of any warrants or options. Of these shares, the shares registered in this offering, and all other existing shares will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by certain of our affiliates within the meaning of Rule 144 under the Securities Act.

Rule 144

In general, under Rule 144 as currently in effect, a person who has beneficially owned restricted shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of either of the following:

	•	1% of the number of shares of common stock then outstanding, which will equal 418,750 shares immediately after this offering (or 469,000 if the underwriters’ exercise their over-allotment option); and

	•	the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale.

Sales under Rule 144 are also limited by manner of sale provisions and notice requirements and to the availability of current public information about us.

Rule 144(k)

Under Rule 144(k), a person who is not deemed to have been one of our affiliates at the time of or at any time during the three months preceding a sale, and who has beneficially owned the restricted shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell their shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144.

Registration Rights

We have agreed, but are not obligated to register all shares underlying the Empire Notes and October Notes or issuable upon exercise of warrants issued upon repayment thereof. We have also agreed to register for re-sale all shares issuable to Montgomery Capital under the Montgomery Loan. Additionally, we have granted, pursuant to a registration rights agreement, registration rights to the Bushido Lenders with respect to all shares underlying the Bushido Warrants.

Stock Options

An additional 547,733 shares of our common stock may be issued in the future upon the exercise of options already granted under our stock option plans and 410,578 additional shares of our common stock are available for grant under the 2002 Stock Option Plan. Additionally, under our 2005 Employee Stock Option Scheme, we may issue additional options such that the maximum number of options that may be granted in aggregate at any time under this option scheme or under any other employee option or share plan is the number equivalent to 5% of the total number of issued shares of the Company including all shares underlying options under the KESOP, the ODSOP and the 2002 Plan. No options or shares have been issued under this option scheme. Our board has approved and proposed the issuance of 600,000 shares under the 2005 Employee Stock Option Plan to certain officers and directors, the issuance of which is contingent on shareholder approval and the consummation of this offering. We intend to register the issuance of these and all other shares underlying stock options under the Securities Act after the offering to which this prospectus relates.

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DISCLOSURE OF SEC POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES

We and ZBB Wisconsin are both incorporated under the Wisconsin Business Corporation Law (“WBCL”). Under Section 180.0851(1) of the WBCL, we are required to indemnify a director or officer, to the extent such person is successful on the merits or otherwise in the defense of a proceeding, for all reasonable expenses incurred in the proceeding if such person was a party because he or she was a director or officer of the corporation. In all other cases, we are required by Section 180.0851(2) of the WBCL to indemnify a director or officer against liability incurred in a proceeding to which such person was a party because he or she was an officer or director of the company, unless it is determined that he or she breached or failed to perform a duty owed to the us and the breach or failure to perform constitutes: (a) a willful failure to deal fairly with us or our shareholders in connection with a matter in which the director or officer has a material conflict of interest; (b) a violation of criminal law, unless the director or officer had reasonable cause to believe his or her conduct was lawful or no reasonable cause to believe his or her conduct was unlawful; (c) a transaction from which the director or officer derived an improper personal profit; or (d) willful misconduct. Section 180.0858(1) of the WBCL provides that, subject to certain limitations, the mandatory indemnification provisions do not preclude any additional right to indemnification or allowance of expenses that a director or officer may have under our articles of incorporation, bylaws, a written agreement or a resolution of the Board of Directors or shareholders.

Section 180.0859 of the WBCL provides that it is the public policy of the State of Wisconsin to require or permit indemnification, allowance of expenses and insurance to the extent required or permitted under Sections 180.0850 to 180.0858 of the WBCL for any liability incurred in connection with a proceeding involving a federal or state statute, rule or regulation regulating the offer, sale or purchase of securities.

Section 180.0828 of the WBCL provides that, with certain exceptions, a director is not liable to a corporation, its shareholders, or any person asserting rights on behalf of the corporation or its shareholders, for damages, settlements, fees, fines, penalties or other monetary liabilities arising from a breach of, or failure to perform, any duty resulting solely from his or her status as a director, unless the person asserting liability proves that the breach or failure to perform constitutes any of the four exceptions to mandatory indemnification under Section 180.0851(2) referred to above.

Under Section 180.0833 of the WBCL, directors of the company against whom claims are asserted with respect to the declaration of an improper dividend or other distribution to shareholders to which they assented are entitled to contribution from other directors who assented to such distribution and from shareholders who knowingly accepted the improper distribution, as provided therein.

Section 5.02 of Article V of our By-laws contains provisions that generally parallel the indemnification provisions of the WBCL and cover certain procedural matters not dealt with in the WBCL. Directors and officers of the company are also covered by directors’ and officers’ liability insurance under which they are insured (subject to certain exceptions and limitations specified in the policy) against expenses and liabilities arising out of proceedings to which they are parties by reason of being or having been directors or officers.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions or otherwise, we have been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.

LEGAL MATTERS

The validity of the securities offered in this prospectus are being passed upon for us by Hodgson Russ, LLP, New York, New York and Seyfarth Shaw, LLP, Washington, D.C., is acting as counsel for the underwriters in this offering.

EXPERTS

The financial statements included in this prospectus and in the registration statement have been audited by PKF, Certified Public Accountants, A Professional Corporation, New York, New York, an independent registered

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public accounting firm, to the extent and for the period set forth in their report appearing elsewhere in this prospectus and in the registration statement. The financial statements and the report of PKF, Certified Public Accountants, A Professional Corporation are included in reliance upon their report given upon the authority of PKF, Certified Public Accountants, A Professional Corporation as experts in auditing and accounting.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form SB-2, which includes exhibits, schedules and amendments, under the Securities Act, with respect to this offering of our securities. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by rules and regulations of the SEC. We refer you to the registration statement and its exhibits for further information about us, our securities and this offering. The registration statement and its exhibits, as well as our other reports filed with the SEC, can be inspected and copied at the SEC’s public reference room at 100 F Street, NE, Washington, D.C. 20549-1004. The public may obtain information about the operation of the public reference room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a web site at http://www.sec.gov which contains the Form SB-2 and other reports, proxy and information statements and information regarding issuers that file electronically with the SEC.

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ZBB ENERGY CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Financial Statements
Balance Sheet	F-3
Statements of Operations	F-4
Statements of Changes In Shareholder’s Equity	F-5
Statements of Cash Flows	F-6

Notes to Consolidated Financial Statements	F-7 to F-23

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
ZBB Energy Corporation
Milwaukee, Wisconsin

We have audited the accompanying consolidated balance sheet of ZBB Energy Corporation and subsidiaries as of June 30, 2006 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the two years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ZBB Energy Corporation and subsidiaries as of June 30, 2006 and the results of its operations and its cash flows for the two years then ended in conformity with accounting principles generally accepted in the United States of America.

We have also audited the adjustments described in Note 17 that were applied to restate shareholders’ equity as of June 30, 2004. In our opinion, such adjustments are appropriate and have been properly applied.

//s/ PKF
Certified Public Accountants
A Professional Corporation
New York, New York
July 28, 2006, except for Note 18,
which is dated
October 18, 2006

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ZBB Energy Corporation
Consolidated Balance Sheet
June 30, 2006

Assets
Current assets:
Cash and cash equivalents	$	794,606
Accounts receivable		164,100
Inventories		1,428,412
Prepaids and other current assets		462,584
Deferred finance fees		563,190


Total current assets		3,412,892

Long-term assets:
Property, plant, and equipment, net		3,505,388
Investment in joint venture		182,500
Goodwill		803,079


Total assets	$	7,903,859


Liabilities and Shareholders’ Equity
Current liabilities:
Bank loans		2,058,868
Accounts payable		290,143
Accrued loss on contracts		357,250
Deferred revenues		673,074
Accrued compensation and benefits		58,086
Current portion of notes payable		749,785


Total current liabilities		4,187,206

Long-term liablities:
Notes payable		2,385,699


Total liabilities	$	6,572,905


Shareholders’ equity:
Common stock ($0.001 par value); 150,000,000 authorized 83,616,507 shares issued and outstanding		83,617
Additional paid-in capital		20,077,645
Accumulated other comprehensive (loss)		(1,637,909	)
Accumulated deficit		(17,192,399	)


Total shareholder’s equity	$	1,330,954

Total liabilities and shareholder’s equity	$	7,903,859

See accompanying notes to consolidated financial statements.

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ZBB Energy Corporation
Consolidated Statements of Operations
	Years ended June 30,

		2006			2005

Revenues
Contracts	$	526,807		$	324,220
Other operating revenues		13,592			—

Total Revenues		540,399			324,220

Cost and Expenses
Cost of contracts		524,320			411,001
Other operating costs		2,661			—
Selling, General, and Administrative		1,341,578			1,453,899
Research and Development		676,948			600,608
Depreciation and Amortization		150,362			141,976
Loss on contracts		357,250			—

Total Costs and Expenses		3,053,119			2,607,484

Loss from Operations		(2,512,720	)		(2,283,264	)

Other Income (expense)
Interest Income		4,287			21,680
Interest expense		(148,534	)		(232,125	)
Income from lease termination agreement		160,000			—
Deferred finance fees		(41,313	)		—
Finance charges		(408,925	)		(200,476	)
Other Income		12,813			7,558

Total Other Income (expense)		(421,672	)		(403,363	)

Loss before provision for Income Taxes		(2,934,392	)		(2,686,627	)
Provision for Income Taxes		—			—

Net Loss	$	(2,934,392	)	$	(2,686,627	)

Net Loss per share-

Basic and diluted	$	(0.04	)	$	(0.04	)

Weighted average shares-basic and diluted:
Basic		82,589,627			67,159,626

Diluted		82,589,627			67,159,626

See accompanying notes to consolidated financial statements.

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ZBB Energy Corporation
Consolidated Statements of Changes in Shareholders’ Equity
June 30, 2006

	Common Stock

	Number of Shares	Common Stock	Add’l Paid-in Capital		Accumulated Other Comprehensive loss		Accumulated Deficit		TOTAL Shareholders’ Equity			Comprehensive Loss

Balance: June 30, 2004; as restated (note 17)	20,741,542	20,742	12,870,374		(1,288,210	)	(11,571,380	)	31,528

Net Loss							(2,686,627	)	(2,686,627	)		(2,686,627	)
Net Translation Adjustment					(324,605	)			(324,605	)		(324,605	)

1 for 3 stock split	41,483,084	41,483	(41,483	)							$	(3,011,232	)

Ordinary new shares issued by Initial Public Offering	12,000,000	12,000	4,583,400						4,595,400
Transaction cost from offering			(1,083,265	)					(1,083,265	)
Stock Options Exercised	240,000	240	41,027						41,267
Issuance of common stock pursuant to notes payable conversions	7,500,000	7,500	2,290,200						2,297,700
Convertible Notes-embedded equity feature			203,155						203,155
Other			(7,659	)					(7,659	)

Balance: June 30, 2005	81,964,626	81,965	18,855,750		(1,612,815	)	(14,258,007	)	3,066,892

Net Loss							(2,934,392	)	(2,934,392	)		(2,934,392	)
Net Translation Adjustment					(25,094	)			(25,094	)		(25,094	)

Stock Options Exercised	1,250,000	1,250	229,072						230,322		$	(2,959,486	)

Issuance of common stock pursuant to notes payable conversions	401,881	402	49,598						50,000
Convertible Notes-embedded equity feature			700,000						700,000
Issuance of warrants with
notes payable			243,225						243,225

Balance: June 30, 2006	83,616,507	83,617	20,077,645		(1,637,909	)	(17,192,399	)	1,330,954

See accompanying notes to consolidated financial statements.

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ZBB Energy Corporation	Years ended June 30,
Consolidated Statements of Cash Flows	2006			2005


Cash flows from operating activities:
Net loss		(2,934,392	)	$	(2,686,627	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		150,362			141,976
Asset impairment		—			6,936
Interest-embedded feature,convertible notes		400,000			195,496
Accrued interest on notes payable		49,785			—
Amortization of finance fees		112,790			—
(Increase) decrease in operating assets:
Accounts receivable		(121,317	)		812,179
Inventory		(469,069	)		(75,953	)
Deposits and prepaids		(204,161	)		(166,349	)
Other assets		—			(75,810	)
Increase (decrease) in operating liabilities:
Accounts payable		131,140			(146,722	)
Accrued expenses		(3,448	)		(43,230	)
Accrued loss on contracts		357,250			—
Deferred revenues		(274,159	)		172,757

Net cash used in operating activities		(2,805,219	)		(1,865,347	)

Cash flows from investing activities
Capital expenditures		(2,290,472	)		(94,556	)
Investment in joint venture		—			(191,475	)
Increase in other assets		8,975			(68,874	)

Net cash (used) in investing activities		(2,281,497	)		(354,904	)

Cash flows from financing activities
Proceeds from sale of common stock		—			4,636,667
Payments for share issue expenses		—			(1,083,265	)
Proceeds from exercise of stock options		230,322			—
Proceeds from convertible notes		3,670,000			—
Discounts-net of amortization on notes payable		(153,864	)		—
Deferred finance fees		(563,190	)		—
Proceeds from other borrowings		2,049,840			925,066
Payment of other borrowings		—			(1,500,824	)

Net cash provided by financing activities		5,233,108			2,977,643

Effect of exchange rate changes on cash		(25,097	)		(356,104	)
Net increase in cash and cash equivalents		121,295			401,288


Cash and cash equivalents – beginning of year		673,311			272,023

Cash and cash equivalents – end of year	$	794,606			673,311

Supplemental disclosure of cash flow information:
Cash paid for interest		98,749			236,322
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock pursuant to conversion of convertible notes		50,000			2,297,700
Non-cash transfers to inventory from equipment		—			783,765
Non-cash transfers from inventory to equipment		891,198			—

See accompanying notes to consolidated financial statements.

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ZBB Energy Corporation
June 30, 2006

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – Nature of Organization

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

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

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

– Uninterruptible power supply (“UPS”) providing power and quality protection for voltage, current, or frequency deviations

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

The consolidated financial statements include the accounts of the Company and those of its wholly owned subsidiaries, ZBB Technologies, Inc. (ZBBT, Inc.) manufacturing facility in the U.S., and ZBB Technologies, Ltd., the Perth, Australia based research and development facility. A joint venture in ZBB China Pty Ltd was formed in March 2006, to develop Asian markets.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation

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

In addition, the Company accounts for its 49% investment in the ZBB China Pty Ltd joint venture under the “equity” method of accounting.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. As of the year ended June 30, 2006 the Company had an accumulated deficit of $17.2 million. The Company has not achieved profitability in any quarter since its formation and expects to continue to incur net losses until it can generate sufficient revenue to cover costs, which is not expected to occur for the next 18 to 24 months. The Company anticipates that it will continue to incur losses until it can produce and sell a sufficient number of its products to be profitable.

The Company recognizes that its continuation as a going concern is dependent upon its ability to generate sufficient cash flow to allow it to satisfy its obligations on a timely basis. The generation of sufficient cash flow is dependent, in the short term, on the Company’s ability to obtain adequate equity investments, and in the long term, on the successful expansion of the Company’s share of the market for its current products and the establishment of cost reductions in the commercial development of its energy storage systems.

The Company anticipates that its existing capital resources, together with anticipated revenues and others sources of funding will be adequate to satisfy our planned financial requirements and agreements through at least the next twelve months.

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ZBB Energy Corporation
June 30, 2006

Stock Split

The Company has agreed to effect a 1-for-8 reverse stock split, subject to and immediately after the Company raises the minimum subscription ($6,000,000) under the pending public offering. (See note 18). All share and per share information included in these financial statements have not been restated for this proposed reverse stock split.

Foreign Currency

The Company uses the United States dollar as its reporting currency; the Australian dollar is the functional currency of two of its operating units. Assets and liabilities of the Company’s international operations are translated into U.S. dollars at exchange rates that are in effect on the balance sheet date and equity accounts are translated at historical exchange rates. Income and expense items are translated at average exchange rates which are in effect during the year. Translation adjustments are accumulated in other comprehensive income (loss) as a separate component of shareholders’ equity in the consolidated balance sheet. There is no gain or loss on translation included in net loss.

Use of Estimates

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the period reported. Actual results could differ from those estimates. Estimates are used in accounting for, among other things, revenue and losses recognized under the percentage of completion method, allowances for uncollectible receivables, impairment of assets, depreciation, and ending valuations of equity and debt instruments. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary.

Income Tax

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

Deferred tax assets are recorded at the likely realizable amounts as at the balance sheet dates.

Property, Plant and Equipment

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

Finished Goods, normally held for sale to customers, may be used in demonstration and testing by customers. During these periods, the units are transferred from Inventory to Plant and Equipment and depreciated over the period in use. Since the intent is for these units to be eventually sold, they are returned to Inventory upon the completion of customer demonstration and testing at net book value.

Depreciation

Depreciation is provided on all property, plant, and equipment (excluding land), which are depreciated on a straight line basis over their estimated useful lives.

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ZBB Energy Corporation
June 30, 2006

The depreciation rates used for each class of depreciable assets are:

	Depreciation Rate
Manufacturing Equipment	3 – 15 years
Office Equipment	3 – 8 years
Building	40 years

Impairment of Long-lived Assets

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

Goodwill

Goodwill represents the cost of acquisition in excess of the net fair value of the identifiable assets, liabilities and contingent liabilities.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of 90 days or less to be cash equivalents.

The Company maintains its cash deposits with high credit quality financial institutions in the U.S. and Australia, and at times such balances may exceed insurable limits.

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 good 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 – purchase cost of direct material plus direct labor plus a proportion of manufacturing overheads.

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ZBB Energy Corporation
June 30, 2006

Revenue Recognition

The Company contracts with its customers to research and develop, manufacture, and install energy storage systems under long-term contracts. The Company recognizes revenue on the percentage-of-completion method. Revenues are recognized proportionally as costs are incurred and compared to the estimated total costs for each contract. The amount deferred as of June 30, 2006 is $673,074, based on the $1,581,851 billed under the terms of the current contract, less the $908,777 recognized to revenue to date (since the 2004 contract began) under the percentage-of-completion method.

As the Company’s energy storage systems are in their initial stages of development, actual costs incurred could differ materially from those previously estimated. Once the Company has established that its costs can be reasonably estimated, then costs to complete an individual contract, in excess of revenue, will be accrued upon identification. As of June 30, 2006 provisions of $357,250 have been identified and accrued on existing contracts.

For the years ended June 30, 2006 and 2005, substantially all of the Company’s revenue is from a multi-year contract with one customer. Deferred revenue at June 30, 2006 represents the excess of billings over revenues recognized under the percentage of completion method.

Loss Per Share

The Company adopted Statement of Financial Accounting Standards No. 128 which requires the reporting of both basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period.

Diluted earnings (Net loss) per share reflect the potential dilution that could occur if securities or other contracts to issue Common stock were exercised or converted into common stock. In accordance with FASB 128, any anti-dilutive effects on net income (loss) per share are excluded.

Net losses per share for fiscal 2006 and 2005 are not adjusted for anti-dilutive shares, as the Company incurred net losses for these years. Options to purchase 2,000,000 and 5,361,903 shares of common stock for the years ended June 30, 2006 and 2005, respectively, have been excluded from the computation of net loss per share, as their effect would have been antidilutive. Any shares which may result from the conversion of convertible debt, but have not been converted as of June 30, 2006 have been excluded from the computation of net loss per share as their effect would have been anti-dilutive.

Convertible Notes

The Company accounts for conversion options embedded in convertible notes in accordance with SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) and Emerging Issues Task Force (“EITF”) 00-19, “Accounting for Derivative Financial Instruments Indexed to, and potentially settled in, a Company’s Own Stock” (“EITF 00-19”). SFAS 133 generally requires companies to bifurcate conversion options embedded in convertible notes from their host instruments and to account for them as free standing derivative financial instruments in accordance with EITF 00-19. SFAS 133 provides for an exception to this rule when convertible notes, as host instruments, are deemed to be conventional as that term is described in the implementation guidance under Appendix A to SFAS 133 and further clarified in EITF 05-2 “The Meaning of “Conventional Convertible Debt Instrument” in Issue No. 00-19.

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ZBB Energy Corporation
June 30, 2006

The Company accounts for convertible notes deemed conventional and conversion options embedded in non-convertible notes which qualify as equity under EITF 00-19, in accordance with the provisions of Emerging Issues Task Force Issue (“EITF”) 98-5 “Accounting for Convertible Securities with Beneficial Conversion Features,” and EITF 00-27 “Application of EITF 98-5 to Certain Convertible Instruments,” Accordingly, the Company records, as a discount to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their earliest date of redemption.

Recent Accounting Pronouncements

Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123. SFAS 123(R) supersedes APB 25 and amends SFAS No. 95, “Statement of Cash Flows.” Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative. The provisions of this statement are effective for the Company as of July 1, 2006. The Company expects to adopt SFAS No. 123(R) in the first fiscal quarter of 2007.

SFAS No. 123(R) requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. SFAS No. 123(R) also establishes accounting requirements for measuring, recognizing and reporting share-based compensation, including income tax considerations. Upon adoption of SFAS No. 123(R), the Company will be required to determine the transition method to be used at the date of adoption. The Company plans to adopt SFAS No. 123(R) using the modified prospective application. Under the modified prospective application, the cost of new awards and awards modified, repurchased or cancelled after the required effective date and the portion of awards for which the requisite service has not been rendered (unvested awards) that are outstanding as of the required effective date will be recognized as the requisite service is rendered on or after the required effective date. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro forma disclosures under SFAS No. 123.

See Note 9 for pro forma information required under SFAS No. 123.

Inventory Costs
In November 2004, the FASB issued SFAS No. 161, “Inventory Costs” which amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted materials. This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal”. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company adopted the provisions of this accounting standard as of June 30, 2005, and there was not a material impact to the Company’s financial statements.

Research and Development

The Company expenses research and development costs as incurred. These costs consist primarily of labor, overhead, materials to build prototype units, materials for testing, consulting fees and other costs. Intellectual property, including internally generated patents and know-how is carried at no value.

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ZBB Energy Corporation
June 30, 2006

Comprehensive income (loss)

The Company reports its comprehensive income (loss) in accordance with SFAS 130, Reporting Comprehensive Income, which requires presentation of the components of comprehensive earnings. Comprehensive income (loss) consists of net loss for the period plus or minus net translation adjustments for the years ended June 30, 2006 and 2005.

NOTE 3 – INVENTORIES

Inventory balances are comprised of the following amounts as of June 30, 2006:

Raw materials	$	464,344
Work in progress		522,824
Finished goods		441,244

TOTAL	$	1,428,412

NOTE 4 – PROPERTY, PLANT & EQUIPMENT

Office equipment	$	91,650
Manufacturing equipment		1,695,622
Test units		945,501
Building		1,996,134
Land		217,000

		4,945,907

Less, accumulated depreciation		(1,440,519	)

Net Property, Plant & Equipment	$	3,505,388

NOTE 5 – INVESTMENT IN JOINT VENTURE

In March 2005, the Company acquired a 49% interest in ZBB China Pty Ltd (Australian dollars; $250,000) for a cash cost of $191,475. The joint venture company is licensed to distribute ZBB energy storage systems into the Chinese market.

During the years ended June 30, 2006 and 2005, there was no significant activity in the joint venture.

NOTE 6 – GOODWILL

The Company, through a series of transactions in March 1996, acquired ZBBT, Inc., the wholly-owned subsidiary of ZBB Energy Corporation.

The goodwill amount of $1.134 million, the difference between the price paid for ZBBT Inc. and the net assets of the acquisition, amortized through fiscal 2002, results in the net goodwill amount of $803,079 as of June 30, 2006.

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ZBB Energy Corporation
June 30, 2006

NOTE 7- INCOME TAXES

The Company did not record a provision for federal, state or foreign income taxes for the years ended June 30, 2006 and 2005. The Company has not recorded a benefit for deferred tax assets as its realizability is uncertain.

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

			2006			2005

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

	Total		0	%		0	%

Significant components of the Company’s net deferred tax assets as of June 30, 2006 and 2005 were as follows:
			2006			2005

	Net operating loss carryforwards	$	4,538,607		$	3,674,000
	Foreign loss carryforwards		690,080			572,650
	Deferred tax asset valuation allowance		(5,228,686	)		(4,246,650	)

	Total deferred tax assets	$	—		$	—

As of June 30, 2006, the Company had U.S net operating loss carryforward of approximately $13,348,000 which begin to expire in 2014 for federal tax purposes. The Company also has gross foreign tax loss carryforwards of approximately $2,300,000 that are available to offset future liabilities for foreign income taxes. Substantially all of the foreign tax losses are carried forward indefinitely, subject to certain limitations.

A valuation allowance has been established for certain future income tax benefits related to income tax loss carryforwards and temporary tax adjustments based on an assessment that it is more likely than not that these benefits will not be realized. During 2006, the valuation allowance increased by $982,036.

NOTE 8- EMPLOYEE/DIRECTOR OPTION PLANS

In 1998 the Company entered into a Key Employees Stock Option Plan (KESOP) whereby a stock option committee comprising three Directors was given the discretion to grant up to 4,800,000 (1,600,000 pre 1 for 3 split) options to key employees of the Company. At June 30, 2006 all 4,800,000 KESOP options had been granted. During the year ended June 30, 2006, no KESOP options were exercised in accordance with their terms and conditions. At June 30, 2006 there remain 255,000 KESOP options with exercise prices of US$0.50 and exercise dates between March 15, 2007 and March 15, 2008 outstanding.

In 1998 the Company entered into an Outside (Non-Executive) Directors Stock Option Plan (ODSOP) whereby 1,200,000 (400,000 pre 1 for 3 split) options were issued to Non-Executive Directors over a five year period commencing on January 2, 1999. At June 30, 2003, all ODSOP options had been granted. During the year ended June 30, 2006, no ODSOP options were exercised in accordance with their terms and conditions. At June 30, 2006 there remain 480,000 ODSOP options with prices of US$0.25 and exercise dates between January 2, 2007 and January 2, 2008 outstanding.

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ZBB Energy Corporation
June 30, 2006

In 2002 the Company established the Company’s 2002 Stock Option Plan (“SOP”) whereby a stock option committee comprising all Directors was given the discretion to grant up to 10,500,000 (3,500,000 pre 1 for 3 split) options to key employees of the Company at exercise prices to be determined (but in any case not less than US$0.33 per share) and exercisable at times to be determined by the Company. During the year ended June 30, 2006 no 2002 SOP options were exercised in accordance with their terms and conditions. At June 30, 2006 there remains 3,646,867 options with exercise prices of not less than US$0.33 and exercise dates up to March 31, 2010 outstanding and a further 3,284,627 available to be issued.

During the 2005 financial year the Company established an Employee Option Scheme whereby at the discretion of the Board of the Company, options may be granted to employees and Directors of the Company or any company related to it. The maximum number of options that may be granted in aggregate at any time under this option scheme or under any other employee option or share plan is the number equivalent to 5% of the total number of shares on issue in the Company (as if all options issued under any employee or executive option scheme had been exercised). The options will not be listed nor are they transferable. As of June 30, 2006 no options have been issued under this option scheme, with a maximum of 4,399,919 options available to be issued. Options issued shall expire 5 years after they are vested in the holder. The exercise price for options issued under this scheme shall be an amount determined by Directors provided that whilst the Company is on the official list of the Australian Stock Exchange (ASX) in no event shall the exercise price be a price less than 10% higher than the weighted average market price for shares on ASX over the last 20 days on which sales in shares were recorded on ASX immediately preceding the date of grant of the option.

Information with respect to activity under the employee and director plans are as follows:

Stock Option Activity	Number of Options			Weighted-Average Exercise Price Per Share

Balance at June 30, 2004	7,841,403		$	0.32

Options granted	1,494,424		$	0.38
Options expired	(4,473,960	)	$	0.32
Options exercised	(240,000	)	$	0.19

Balance at June 30, 2005	4,621,867		$	0.34

Options granted	—		$	—
Options expired	(240,000	)	$	0.25
Options exercised	—		$	—

Balance at June 30, 2006	4,381,867		$	0.34

At June 30, 2006 the Company had 7,684,546 options available for future grant.

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ZBB Energy Corporation
June 30, 2006

The following table summarizes information relating to the stock options outstanding at June 30, 2006:

	Outstanding				Exercisable

Range of Exercise Prices	Number of Options Outstanding	Weighted- Average Remaining Contractual Life *(in years)*		Weighted- Average Exercise Price		Number of Options		Weighted- Average Exercise Price

$.25-.50	801,483	0.6	$	0.31		801,483	$	0.31
$.25-.50	900,480	1.6	$	0.33		900,480	$	0.33
$.33-.38	2,679,904	3.0	$	0.35		2,679,904	$	0.35

Balance at June 30, 2006	4,381,867	2.3	$	0.34		4,381,867	$	0.34

NOTE 9 – STOCK-BASED COMPENSATION

The Company has elected to account for its stock-based compensation plans under the intrinsic value method pursuant to APB No. 25, Accounting for Stock Issued to Employees (APB 25), and related Interpretations, rather than the alternative fair value accounting provided under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation (SFAS 123).

SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation , requires pro forma information regarding net loss and net loss per share as if the Company had accounted for its stock-based awards to employees under the fair value method of SFAS 123. The fair value of the Company’s stock options used to compute pro forma net loss is the estimated fair value at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions:

	2006	2005
Risk-free interest rate	4.1%	3.6%
Expected volatility	22%	50%
Expected lives	5 years	5 years
Expected dividend	–	–

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ZBB Energy Corporation
June 30, 2006

The per-share, weighted-average grant date fair value of options granted during the years ended June 30, 2006 and 2005 was $-0- and $81,595. “Share-based payments” related to the 1,494,424 options granted to employees during the period ending June 30, 2005 did not result in an adjustment to expense for the period.

For purposes of pro forma disclosures, the estimated fair value of the stock-based compensation is amortized over the vesting period of the award. Had compensation expense for the Company’s stock-based compensation plan been determined based on the fair value at the grant dates for awards under that plan consistent with the method of SFAS 123, the Company’s net loss and net loss per share for the years ended June 30, 2006 and 2005 would have been as follows:

	Year ended June 30,

		2006			2005

Net loss as reported	$	(2,934,392	)	$	(2,686,627	)
Stock compensation expense included in net loss		—			—
Stock compensation expense determined using fair value method for all awards					(81,595	)

Pro forma net loss	$	(2,934,392	)	$	(2,768,222	)

Loss per share (basic and diluted
as reported	$	(0.04	)	$	(0.04	)
Pro forma loss per share
(basic and diluted)	$	(0.04	)	$	(0.04	)

NOTE 10 – NON RELATED PARTY OPTIONS

At June 30, 2006 there are 4,875,000 options (issued one option per four shares acquired through IPO) with an expiration date of December 2007 and an exercise price of $0.38 issued and outstanding.

At June 30, 2006 there are 5,341,000 options (per IPO brokerage agreement) with an expiration date of December 2007 and an exercise price of $0.38 issued and outstanding.

At June 30, 2006 there are 2,000,000 options (per March 2006 convertible notes) with an expiration date of April 2008 and an exercise price of $0.13 issued and outstanding.

At June 30, 2006 there are 8,906,664 options (per June 2006 convertible notes) with an expiration date of April 2010 and an exercise price of $0.25 issued and outstanding.

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ZBB Energy Corporation
June 30, 2006

The table below summarizes the non-related party option balances:

Stock Options Non-related party activity	Number of Options			Weighted-Average Exercise Price Per Share

Balance at June 30, 2004	5,361,903		$	0.19

Options granted	10,216,000		$	0.38
Balance at June 30, 2005	15,577,903		$	0.32

Options granted	10,906,664		$	0.23
Options expired	(4,111,903	)	$	0.19
Options exercised	(1,250,000	)	$	0.19
Balance at June 30, 2006	21,122,664		$	0.30

NOTE 11 – COMMITMENTS

The Company has a lease for premises in Bibra Lake, Western Australia that is due to expire on October 31, 2006. Future minimum payments due under the lease is $13,930. Rent expense for the years ended June 30, 2006 and 2005 amounted to $ 147,069 and $ 191,379.

In January 2006, the Company entered into a stock purchase and business development agreement with 41 Broadway Associates, to sell for $62,500 up to 1,250,000 shares in exchange for consulting services including business planning, introduction to strategic relationships and customers, corporate finance and investment banking arrangements. In February 2006, they provided the Company with $500,000 in short-term financing, enabling the Company to consummate the purchase of its principal facility in Menomonee Falls, Wisconsin. See Subsequent Events (Note 18) for additional information and amendment to the agreement.

NOTE 12 – NOTES PAYABLE

Issuance of notes:
During fiscal 2006 and 2005, the Company completed a series of private placement of convertible notes, notes payable and warrants to a group of sophisticated institutional and individual investors. The Company sold the notes in the aggregate principal amount of $4,227,000 ($3,670,000, net of discounts) and $812,620, in 2006 and 2005 respectively. All of the 2005 and earlier notes have been redeemed or converted into shares of the Company as of June 30, 2005.

On issuance of the convertible notes, there was deemed to be an immediate benefit available to the note holders to convert the notes into shares at various discounts to market value. This “embedded conversion discount” resulted in additional paid-in capital recorded at the time the notes were issued, with a corresponding charge to finance expense of $200,000 (see “Montgomery Notes” below), and $203,155, in 2006 and 2005. In addition, the “Empire Notes” (see below) is also deemed to have an “embedded conversion discount” of $500,000, amortized over the term of the note, resulting in additional paid-in-capital of $500,000 and finance expense of $200,000.

In connection with the issuance of the 2006 notes, issues of 8,906,664 and 2,000,000 warrants were issued to investors to purchase shares of the Company’s stock at an exercise price of $0.25 and $0.13, expiring April 2010 and April 2008 respectively. The Company determined the value of the warrants to be $243,225 using fair value and the Black-Scholes pricing model and the following assumptions: risk free interest rate, 4.1%; expected dividend yield, 0; and expected volatility, 22%. For the Black-Scholes computations, market value of Company’s stock at time of issuance of the warrants was $0.14 and $0.18 respectively.

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ZBB Energy Corporation
June 30, 2006

These warrants were recorded as a discount to the convertible notes and a credit to additional paid-in-capital. These discounts were amortized to finance expense through the maturity date of the notes. As of June 30, 2006, the unamortized value of the discounts was $234,301.

In addition, the Company paid legal expenses and brokerage fees of $433,503, which have been recorded as deferred finance fees. The deferred finance fees are being amortized to finance expense through the maturity date of the convertible notes. When holders convert their debentures into common stock of the Company, the pro-rata capitalized deferred financing fees are charged to additional paid-in-capital. As of June 30, 2006 the unamortized portion of the deferred finance fees were $392,190.

The details on the notes issued in fiscal 2006 are as follows:

$1,000,000 Montgomery Capital Partners LP Convertible Notes

On February 28, 2006 the Company borrowed $1,000,000 from Montgomery Capital Partners L.P., and entered into a convertible loan and warrant agreement (the “Montgomery Notes”). Interest on these notes accrues at 10% per annum, compounded monthly, with a default rate of 13% and becomes payable in full on the earliest to occur of the consummation by us of any major financing (such as this offering), a default, or February 28, 2008. Outstanding principal and interest on this loan is convertible by Montgomery Capital in whole or in part from time to time, into shares of our common stock upon written request to us.

Under the Montgomery Notes, the Company must notify Montgomery Capital of this financing ten days prior to the Company’s receipt of the proceeds of this offering. The Company must pay 120% of the remaining outstanding principal and accrued interest to Montgomery Capital when the proceeds of this offering are received by the Company. The Company must also issue shares of its common stock equal to 50% of the outstanding amount owed by the Company under the Montgomery Loan, divided by the conversion price then in effect. The conversion price is the lesser of (i) the lowest average trading price of the shares as reported on the ASX during the ten consecutive trading days prior to the closing of the Montgomery Loan or (ii) 80% of the lowest average trading price of the common stock for the ten consecutive trading days prior to the date that the Company notifies Montgomery Capital of this offering with a minimum price of $.0625 per share.

The Montgomery Notes also grants Montgomery Capital a warrant to purchase 2,000,000 shares of common stock from time to time until February 28, 2010, at the purchase price equal to the lesser of the lowest average trading price of the shares [as reported on the ASX] during the ten consecutive trading days prior to the closing of the Montgomery Notes or (ii) 80% of the price of the shares on the date(s) that Montgomery Capital provides notice of their intent to exercise the warrant, with a minimum price of $.0625 per share. Additionally, pursuant to the terms of the Montgomery Notes, Montgomery Capital may, from time to time upon giving notice to the Company, require the Company to redeem any unexercised warrants at an equivalent redemption price of [$.10 AUS], in shares based on the above calculation, or in cash, at the Company’s preference, provided that Montgomery may not require the Company to redeem more then 10% of the unexercised warrants during any month. The Company is required to make application to the ASX for any shares issued to Montgomery under the Montgomery Loan or warrants. Additionally, the Company has entered into a registration rights agreement with Montgomery agreeing to register for resale any of their shares underlying outstanding the Montgomery Notes or warrants, following effectiveness of this registration statement.

The Company determined the value of the warrants to be $182,500, based on the fair value of the redemption feature of unexercised warrants. There were 2,000,000 unexercised warrants as of June 30, 2006.

On issuance of the Montgomery Notes, there was also deemed to be an immediate benefit available, as of June 30, 2006, in the amount of $200,000 to the note holders to convert the notes into shares at a discount to market value. This “embedded conversion discount” resulted in additional paid-in capital recorded at the time the notes were issued, with a corresponding charge to finance expense of $200,000.

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ZBB Energy Corporation
June 30, 2006

As of June 30, 2006, $950,000 is outstanding under this loan, 401,881 shares have been issued in respect to converted principal.

$2,226,666 Bushido Loan

On June 22, 2006 the Company entered into a Note Purchase Agreement with Bushido Capital Master Fund, L.P., ABS SOS-Plus Partners, Ltd and Pierce Diversified Strategy Master Fund, (the “Bushido Lenders”) pursuant to which the Company issued an aggregate of $2,226,667 face amount of secured promissory notes at a 25% original issue discount) and warrants to purchase the Company’s common stock (the “Bushido Warrants”) to the Bushido Lenders. Interest on the Bushido Loan accrues at 8%, payable quarterly on 75% of the face amount of the notes. The Bushido Notes are due in full on the earliest to occur of a default under the Bushido Notes or July 14, 2008. The Bushido Notes are secured by a mortgage on the Company’s Wisconsin Property, a lien on all of its assets and a pledge of all of the shares of the Company’s subsidiaries, and of all of the Company’s shares of ZBB China Pty Ltd. The Bushido Warrants are exercisable at the offering price ($0.25 per share) for 8,906,664 shares of common stock and expire on June 14, 2010. The outstanding principal and interest will be convertible only in the event of default at a conversion price of $0.15 per share.

In connection with the Bushido Loan and warrants, the Bushido Lenders have piggyback registration rights.

$1,000,000 Convertible Promissory Notes

Between April and June of 2006 the Company issued $1,000,000 of convertible promissory notes to [22] accredited investors in a private placement transaction for which Empire Financial Group, the managing underwriter in this offering, acted as placement agent (the “Empire Notes”). The Empire Notes accrue interest 15% per annum and are due on April 15, 2007. Each lender has the right to receive payment in full along with a warrant to purchase such number of shares of common stock equal to 50% of the principal amount of the Note at an exercise price equal to 120% of the offering price. Alternatively, each lender may choose to convert the principal and interest owed under the Empire Note into common stock at a conversion price equal to 50% of the offering price.

On issuance of the Empire Notes, the conversion rights was deemed to be an “embedded conversion discount” to note holders to convert the notes into shares at a discount to market value. This “embedded conversion discount” resulted in additional paid-in capital recorded at the time the notes were issued, with a corresponding charge to debt discount of $500,000, of which $200,000 has been amortized to finance expense in the year ended June 30, 2006.

As of June 30, 2006, $1,000,000 is outstanding under this loan.

Repayment of notes:

Grant of options on conversion: Upon conversion of 2005 notes, for each four ZBB shares issued to note holders, the note holders were issued with one option to subscribe to one ZBB share which may be exercised on or before January 31, 2007 at an exercise price being the price per share paid by subscribers in the equity financing.

At the end of fiscal 2005, all notes issued prior to fiscal 2006 had been redeemed or converted into common shares of the Company.

Maximum aggregate annual principal payments related to the notes payable for the years subsequent to June 30, 2006 are as follows:


2007	$	1,000,000
2008		950,000
2009		2,226,666

	$	4,176,666

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ZBB Energy Corporation
June 30, 2006

NOTE 13 – BANK LOANS AND NOTES PAYABLE

At June 30, 2006, debt consisted of the following:


Current portion of notes payable		1,000,000
less debt discount-embedded benefit		(300,000	)
plus accrued interest		49,785
Bank loans		2,058,868

Short-term debt	$	2,808,653

Long-term notes payable		2,620,000
less debt discount-warrants		(234,301	)

Long-term debt	$	$ 2,385,699

See “Note 12” for additional details on the notes payable.

On February 15, 2006, the Company entered into two short-term loan agreements related to the purchase of the land and building in Menomonee Falls, WI and the acquisition of manufacturing equipment. These are interest only loans, interest calculated at prime rate, secured by the property and equipment, with the balance of $2,058,868 due in December 2006.

NOTE 14 – RELATED PARTY TRANSACTIONS

During the year ended June 30, 2006 the following related party transactions occurred in addition to the transactions disclosed elsewhere in the financial statements:

The Company leases its Bibra Lake office space from an entity affiliated with three of the Company’s officers. The current rental is $41,791 per annum based on an independent rental valuation in June 2004. ZBB Technologies Limited has 2 options of renewal, each of 5 years and an option to buy the property at any time during the term or any extended term after July 31, 2006 at the then current market value.

Richard Payne & Associates, a legal firm associated with Richard Payne, has provided general legal services to the Company. During the years ending June 30, 2006 and 2005, the Company has paid $2,455 and $48,912 in fees to Richard Payne & Associates under normal commercial terms and conditions.

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ZBB Energy Corporation
June 30, 2006

NOTE 15 – EMPLOYMENT CONTRACTS

The Company has entered into an employment agreement with its Chief Executive Officer for a period expiring on June 30, 2009on normal commercial terms and conditions and is paid a remuneration package totaling $187,620 per annum exclusive of any options granted to him.

The Company has entered into an employment agreement with its Chief Financial Officer for a period expiring on June 30, 2009 on normal commercial terms and conditions and is paid a remuneration package totaling $160,000 per annum exclusive of any options granted to him.

These employment agreements contains covenants prohibiting the employee competing with the Company during his employment and at any time during 18 months following termination for any reason and a requirement for the employee to keep all information strictly confidential.

If the Company terminates either of these agreements prior to its expiration for any reason other than for cause, the Company must pay the employee their annual remuneration for the greater of 18 months or the remaining term of the agreement and all options shall become immediately exercisable.

NOTE 16 – 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 US employees, the Company has a 401(k) plan. All active participants are 100% vested immediately.

Expenses under these plans were $57,392 and $25,400 in 2006 and 2005.

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ZBB Energy Corporation
June 30, 2006

NOTE 17 – RESTATEMENT OF PRIOR PERIODS

Subsequent to the issuance in 2004 of the June 30, 2004 financial statements, management reviewed and determined that the 2004 financial statements required restatement.

The effect on shareholders’ equity as of June 30, 2004 has been restated as follows:

		Year ended June 30, 2004

Shareholder’s Equity as previously reported:		$	4,836,100

Changes to accumulated deficit
	Depreciation on test units		(220,464	)
	Change in goodwill amortization		150,517
	Adjust carrying value of intangibles		(1,266,937	)
	Deferred tax asset valuation		(3,434,838	)
	Embedded benefit expense-Convertible notes		(331,163	)


Other Changes to Shareholder’s Equity
	Convertible Notes-embedded benefit to paid-in-capital		331,311
	Other		(32,998	)

Shareholder’s Equity as restated:		$	31,528

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ZBB Energy Corporation
June 30, 2006

NOTE 18 – SUBSEQUENT EVENTS

1.) In July 2006 the ZBB Energy Corporation entered into an agreement with Empire Financial Group (Empire) for a firm commitment public offering of up to US$15,000,000 with provision for 15% over subscription. The price of the offering is to be determined prior to the offering closing. This agreement states certain conditions and assumptions upon the proposed offering by Empire who will, immediately prior to the effective date of the offer closing, enter into a “Firm Commitment” Underwriting Agreement. The Underwriting Agreement shall provide that the Empire shall be committed to take and pay for all of the Shares, if any are purchased. The Underwriting Agreement and related agreements shall contain such terms and conditions as are customarily contained in agreements of such character and among other things, shall provide for the following:

a. An underwriting discount of eight percent (8%) of the amount raised in the offering,

b. Underwriter’s Warrants to purchase that aggregate number of shares as would be equal to ten (10%) of the total number of shares sold pursuant to the public offering. The Underwriter’s Warrants shall be exercisable at a price per unit equal to one hundred and twenty percent (120%) of the public offering price and will have a term of five (5) years.

c. ZBB is in the process of having its Shares approved for quotation on the American Stock Exchange (AMEX) , effective on the closing of the offer. ZBB will also register its Common Stock with the Securities and Exchange Commission under the provisions of the Securities Exchange Act of 1934 and will use its best efforts to maintain such registration in effect for a period of at least five years from the close of the offer. ZBB will bare all fees, disbursements and expenses in connection with the proposed offering, including reimbursement to Empire for its costs, fees and expenses customarily incurred by an underwriter during the process.

d. The Company has agreed to engage Empire Financial Group, Inc. to provide financial advisory services to the Company for a period of two years from the date of the registration statement. The Company has agreed to pay Empire Financial Group a monthly fee of $5,000 for their services, and to pay them a finder’s fee if they originate any merger, acquisition, joint venture or similar transaction.

2.) In July 2006, the Company agreed to amend and restate a service and stock sale agreement with 41 Broadway Associates, LLC. Under the terms of such restated agreement, we sold to 41 Broadway Associates a total of 5,000,000 shares in consideration for a 6% $1,000,000 promissory note of 41 Broadway Associates, payable in equal annual installments over 5 years. In addition, the Company paid one of the members of 41 Broadway Associates $100,000 for consulting services and agreed to extend the term of our consulting agreement with 41 Broadway Associates through December 31, 2010, at a consulting fee of $200,000 per annum, payable quarterly. None of the six members of 41 Broadway Associates are affiliated with each other or were or are officers, directors or otherwise affiliated with our company. Neither 41 Broadway Associates nor any of its members owns individually or in the aggregate of record or beneficially 5% or more of the Company’s shares.

3.) Between July and September of 2006 the Company issued an additional $187,500 of convertible promissory notes to the Empire Financial Group, the managing underwriter in this offering (the “Empire Notes”). The Empire Notes accrue interest 15% per annum and are due on the earlier of April 15, 2007 or the closing of an equity based offering of no less then $6 million. In addition, the Company issued $500,000 of convertible promissory notes, with terms identical to the “Empire Notes” in all material respects in October 2006.

4.) During October 2006, the Company entered into a letter agreement with Montgomery Capital wherein Montgomery Capital has agreed not to convert any portion of the Montgomery Loan until January 2007, in exchange for $20,000 per month. Additionally, Montgomery Capital has requested repayment of the loan at the closing of the offering, rather then conversion and has requested redemption of the warrants for $150,000 at the closing of the offering. If the Company repays this loan on December 31, 2006 it will be required to pay approximately $1,250,000 under the loan, $150,000 for redemption of the warrants and to issue approximately 393,750 shares to Montgomery Capital.

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Until 2006, all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

No dealer, salesperson or any other person is authorized to give any information or make any representations in connection with this offering other than those contained in this prospectus and, if given or made, the information or representations must not be relied upon as having been authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any security other than the securities offered by this prospectus, or an offer to sell or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the offer or solicitation is not authorized or is unlawful.

$15,000,000

ZBB Energy Corporation

7,500,000 Shares

PROSPECTUS

Empire Financial Group, Inc.

_______________________, Inc.

__________, 2006

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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS

Item 24. Indemnification of Directors and Officers.

ZBB Energy Corporation (the “company”) is incorporated under the Wisconsin Business Corporation Law (“WBCL”). Under Section 180.0851(1) of the WBCL, The company is required to indemnify a director or officer, to the extent such person is successful on the merits or otherwise in the defense of a proceeding, for all reasonable expenses incurred in the proceeding if such person was a party because he or she was a director or officer of the corporation. In all other cases, the company is required by Section 180.0851(2) of the WBCL to indemnify a director or officer against liability incurred in a proceeding to which such person was a party because he or she was an officer or director of the company, unless it is determined that he or she breached or failed to perform a duty owed to the company and the breach or failure to perform constitutes: (a) a willful failure to deal fairly with the company or its shareholders in connection with a matter in which the director or officer has a material conflict of interest; (b) a violation of criminal law, unless the director or officer had reasonable cause to believe his or her conduct was lawful or no reasonable cause to believe his or her conduct was unlawful; (c) a transaction from which the director or officer derived an improper personal profit; or (d) willful misconduct. Section 180.0858(1) of the WBCL provides that, subject to certain limitations, the mandatory indemnification provisions do not preclude any additional right to indemnification or allowance of expenses that a director or officer may have under the company’s articles of incorporation, bylaws, a written agreement or a resolution of the Board of Directors or shareholders.

Section 5.02 of Article V of our By-laws contains provisions that generally parallel the indemnification provisions of the WBCL and cover certain procedural matters not dealt with in the WBCL. Directors and officers of the company are also covered by directors’ and officers’ liability insurance] under which they are insured (subject to certain exceptions and limitations specified in the policy) against expenses and liabilities arising out of proceedings to which they are parties by reason of being or having been directors or officers.

Item 25. Other Expenses of Issuance and Distribution.

The estimated expenses payable by us in connection with the offering described in this registration statement (other than the underwriting discount and commissions and the Representative’s non-accountable expense allowance) will be as follows:


SEC Registration Fee	$	4,083
NASD filing fee
Accounting fees and expenses
Printing and engraving expenses
Legal fees and expenses
AMEX Filing Fees		70,000.00
Miscellaneous		________	⁽¹⁾

Total	$	_______.00

(1) This amount represents additional expenses that may be incurred by the company in connection with the offering over and above those specifically listed above, including distribution and mailing costs.

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Item 26. Recent Sales of Unregistered Securities.

NOTE: The below amount reflect the contemplated 1-for 8 reverse stock split which has been approved by our stockholders and which we contemplate to take effect prior to the effective date of this Registration Statement.

(a) During the past three years, we sold the following shares of common stock without registration under the Securities Act:

Between July of 2003 and June of 2005, prior to the company’s initial public offering, the we sold an aggregate of $2,250,000 (A$3,000,000) 10% convertible notes to an aggregate of 53 investors outside the United States. The investors were primarily located in western Australia. The Company believes that, among other exemptions that may be available, the issuance of the above notes and issuance of shares upon conversion thereof, was exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933 and Regulation S in that no attempts to sell or sales were made in the United States and none of the convertible note holders were, to the company’s knowledge, domiciled in the United States. In addition, These notes converted into 937,500 (7,500,000 pre-reverse split) shares of common stock at a 20% discount to the offering price of our IPO in Australia and were registered for resale on the ASX upon closing of our initial public offering in March of 2005 and no United States trading market for the securities issued existed at such time.

In March 2005, we completed an initial public offering in Australia of our common stock and options to purchase common stock. Since Australian trading regulations do not readily permit securities of foreign corporations to trade on their exchanges, securities known as CUFS (CHESS Units of Foreign Securities) reflecting ownership in our securities trade on the Australian Stock Exchange Ltd. (the ASX). We sold 1,500,000 shares of our common stock (12,000,000 shares before giving effect to our contemplated 1:8 reverse stock split) at a price of A$4.00 per share together with options expiring on December 15, 2007 to purchase an additional 375,000 shares (3,000,000 shares before giving effect to our contemplated 1:8 reverse stock split) at an exercise price of A$4.00 per share. We received gross proceeds of A$6.0 million (approximately US$4.5 million) in the Australian stock offering. Axis Financial Group (Australia) Limited acted as financial advisor and received a fee of $390,000 (A$520,000) and options to purchase 667,625 shares of our common stock exercisable at $3.00 (A$4.00). The prospectus relating to the foregoing offering was lodged with the Australian Securities and Investments Commission on December 23, 2004. The prospectus contained a legend on the cover page thereof to the effect that such prospectus may not be distributed in the United States or to U.S. investors and that shares may not be sold in the United States in the offering or for one year thereafter. Accordingly, the Company believes that this transaction was exempt from the registration requirements of the 1933 Act pursuant to Regulation S. Additionally, the company is registering 375,000 shares of common stock issuable upon exercise of the ASX listed options, in this registration statement.

On February 28, 2006 we borrowed $1,000,000 from Montgomery Capital Partners L.P., and entered into a convertible loan and warrant agreement (the “Montgomery Loan”). Interest on this loan accrues at 10% per annum, compounded monthly, with a default rate of 13% and becomes payable in full on the earliest to occur of the consummation by us of any major financing (such as this offering), a default, or February 28, 2008. Outstanding principal and interest on this loan is convertible by Montgomery Capital in whole or in part from time to time, into shares of our common stock. The Montgomery Loan also provides that the holders may elect to receive up to 250,000 warrants to purchase common stock, the exercise price of which is set at the time notice is given with respect to such warrants. We paid a fee of $70,000 to Empire Financial Group, Inc., the managing underwriter in this offering, for introducing Montgomery Capital and assisting in procurement of the Montgomery Loan. Between February and September of 2006, Montgomery Capital converted approximately $110,000 of the Montgomery Loan into 128,623 shares of our common stock, which were issued outside the United States and which shares are listed

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for trading on the ASX. In addition, Montgomery has requested repayment of the Montgomery Loan and redemption of all of the warrants, (which are redeemably by their terms at $.60 per warrant) at the closing of the offering which will result in the Company’s payment of approximately $1,205,000 under the loan and $150,000 for redemption of the warrants and the issuance of approximately 393,750 shares of our common stock (presuming repayment in late December 2006), which shares are being registered in this offering. The Company believes that, among other exemptions that may be available, the entry into the Montgomery Loan and issuance of shares upon conversion of portions thereof, was exempt from the registration requirements pursuant to Section 4(2) of the Securities Act of 1933 and Regulation S in that the transaction was not in the United States and Montgomery is not, to the company’s knowledge, domiciled in the United States and that no public solicitation was made with respect to this sale or any conversion of the Montgomery Loan. In addition, all shares issued were listed for trading on the ASX and no United States trading market for the securities issued exists.

On June 22, 2006 we entered into a Note Purchase Agreement with Bushido Capital Master Fund, L.P., ABS SOS-Plus Partners, Ltd and Pierce Diversified Strategy Master Fund, (the “Bushido Lenders”) pursuant to which we issued an aggregate of $2,226,667 face amount of secured, promissory notes at a 25% original issue discount and warrants to purchase our common stock (the “Bushido Warrants”) to the Bushido Lenders. Interest on the Bushido Loan accrues at 8%, payable quarterly on 75% of the face amount of the notes. The Bushido Notes are due in full on the earliest to occur of a default under the Bushido Notes or July 14, 2008. The Bushido Notes are secured by a mortgage on our Wisconsin Property, a lien on all of our assets and a pledge of all of the shares of our subsidiaries, and of all of our shares of ZBB China Pty Ltd. The Bushido Warrants are exercisable at the offering price ($2.00 per share) for 1,113,333 shares of common stock and expire on June 14, 2010. The outstanding principal and interest will be convertible only in the event of default at a conversion price of $1.20 per share. In connection with the Bushido Loan and warrants, the Bushido Lenders have piggyback registration rights and the shares underlying all warrants are being registered in this registration statement. The Company paid a consulting fee to Empire Financial Group, Inc., of $83,500 in connection with their introduction of the Bushido Lenders and in assisting in procuring the Bushido loan. The Company believes that this transaction was exempt from the registration requirements Section 4(2) of the Securities Act of 1933, Regulation D and Regulation S in that the transaction was not in the United States and that the Bushido Lenders are all accredited and sophisticated and are not, to the company’s knowledge, domiciled in the United States and that no public solicitation was made with respect to this sale or any conversion of the Bushido Loan. The Bushido Lenders, principal amount of notes and number of warrant shares are as follows:

Name	Principal Amount of Note	Warrants

ABS SOS-Plus Partners, Ltd.	$1,113,333	556,667
Bushido Capital Master Fund, L.P.	$556,667	278,333
Pierce Diversified Strategy Master Fund	$556,667	278,333

Between April and September of 2006 we issued $1,187,500 of convertible promissory notes to 24 accredited investors in a private placement transaction for which Empire Financial Group, the managing underwriter in this offering, acted as placement agent (the “Empire Notes”). The Empire Notes accrue interest 15% per annum and are due on the earlier of April 15, 2007 or the closing of an equity based offering. Each lender has the right to receive payment in full along with a warrant to purchase such number of shares of common stock equal to 50% of the principal amount of the Note at an exercise price equal to 120% of the equity offering price. Alternatively, each lender may choose to convert the principal and interest owed under the Empire Note into common stock at a conversion price equal to 50% of the equity offering price without receiving any warrants. Empire Financial Group received a placement fee of $111,250 and warrants to purchase 255,049 shares, at an exercise price of $1.52 per share and expiring on March 2, 2011, in connection with the sale of the Empire Notes. These warrants are being registered in this offering.

The company believes that this transaction was exempt from the registration requirements Section 4(2) of the Securities Act of 1933 and Regulation D in that the purchasers of the Empire Notes are all accredited and sophisticated and that no public solicitation was made with respect to this sale or any conversion of the Empire Notes. The principal amount of Empire Notes and the maximum number of shares that may be issued thereunder are as follows:

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Name		Principal Amount of Note	Underlying Shares

Arthur A. Arnold, Jr.	$	37,500	80,625
Atlas Industries, Ltd.	$	25,000	53,750
Michael Bailey	$	25,000	53,750
Ron Berg	$	12,500	26,875
Ron Berg	$	12,500	26,875
Joseph & Daum Bridson	$	25,000	53,750
Edward Cohen	$	50,000	107,500
PFSI F/B/O Edward Cohen IRA	$	25,000	53,750
Des Cumings, Jr.	$	25,000	53,750
Stephen John Dempsey	$	50,000	107,500
Denzyl Dinsmore	$	50,000	107,500
The Frank Sica Trust ⁽³⁾	$	12,500	26,875
Donald Heath	$	12,500	26.875
Brian Morgan	$	50,000	107,500
Pammela C. Ohab Sep. IRA	$	25,000	53,750
Warrick Oliver	$	25,000	53,750
Ryan Foundation	$	25,000	53,750
Geoffrey and Julie Rogers	$	25,000	53,750
Nigel Roth	$	50,000	107,500
Joseph Savage	$	250,000	537,500
Shane Scott	$	25,000	53,750
James Skalko	$	25,000	53,750
Eno Williams	$	25,000	53,750
Cormac O’Connell	$	100,000	215,000
Brian Gregory	$	25,000	53,750
Robert L. Simon	$	25,000	53,750
CIP FF & E Wilshire Trust, Marvin Goodson, Trustee	$	150,000	322,500

In connection with the sale of the Empire Notes, we issued warrants to purchase an aggregate of 255,049 shares to Empire Financial Group, Inc. the managing underwriter of this offering and to certain of its affiliates, as

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consideration for acting as placement agent. This warrant is exercisable at $1.52 per share and expires on March 2, 2011.

In October 2006, we issued an aggregate $500,000 convertible promissory notes (the “October Notes”) to two funds which the Company believes are domiciled outside of the united states. The October Notes are identical to the Empire Notes in all material respects except that no commission or fees were paid in connection with the sale of such notes. The Company believes that, among other exemptions that may be available, the entry into the October Notes and issuance of shares upon conversion of portions thereof, was exempt from the registration requirements Section 4(2) of the Securities Act of 1933 and Regulation S and Regulation D in that the transaction was not in the United States and the lenders were not, to the Company’s knowledge, domiciled in the United States and that no public solicitation was made with respect to this sale. The two investors in this offering, the dollar amount of notes acquired and the number of shares underlying the notes are as follows:

Name		Principal Amount of Note	Underlying Shares

Hornet Renewable Energy Fund	$	300,000	645,000
New Energy Fund LP	$	200,000	430,000

On November 9, 2005 we engaged Empire Financial Group, Inc. to purchase 255,049 warrants and certain investment banking services, in connection with the selling of the Empire Notes. These warrants are exercisable at $1.52 per share and expire on April 31, 2008.

Effective as of December 22, 2005, we entered into a share exchange agreement with Wharton Equity Partners, LLC and their affiliates (the “Wharton Group”) pursuant to which we agreed to exchange 653,334 shares of our common stock for 4,722,222 shares of common stock of either Idea One, Inc., a privately-owned Delaware corporation, or its publicly traded successor-in- interest, if Idea One consummates a merger with an inactive publicly traded corporation prior to the scheduled closing date. By letter dated August 22, 2006, we agreed with the Wharton Group to terminate the share exchange agreement. The Company believes that this sales of shares to Wharton Group was exempt pursuant to Section 4(2) of the Securities Act and under as amended.

Effective January 31, 2006, we entered into a stock purchase and business development agreement with 41 Broadway Associates LLC, a Delaware limited liability company. Under this agreement we agreed to sell, for $62,500 up to 1,250,000 of our shares to such entity or its members, in consideration for their providing business and consulting services to our company, including preparation of business plans, introduction to potential customers and strategic relationships, and consultation in connection with corporate finance and/or investment banking arrangements. In addition, one of the members of 41 Broadway Associates provided us with a short-term $500,000 loan in February 2006 that enabled us to consummate the purchase of our principal facility located in Menomonee Falls, Wisconsin. Such loan has since been repaid in full.

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the aggregate, of record or beneficially 5% or more of our shares. The Company believes that this sales of shares to 41 Broadway was exempt pursuant to Section 4(2) of the Securities Act and under as amended.

Item 27. Exhibits and Financial Statement Schedules.

(a) The following exhibits are filed as part of this Registration Statement:

Exhibit No.			Description
1.			Underwriting Agreement dated as of________, 2006 between ZBB Energy Corporation and Empire Financial Group, Inc.
3.1			Articles of incorporation of ZBB Energy Corporation as amended dated February 18, 1998.
3.2			By-laws of ZBB Energy Corporation.
4.			8% Senior Secured Note dated as of June 14, 2006 between ZBB Energy Corporation and ABS SOS-Plus Partners Ltd.
4.1			Registration Rights Agreement, dated as of June 14, 2006 between ZBB Energy Corporation and certain Investors.
4.2			Moratoriam Agreement dated as of February 28, 2006 between ZBB Energy Corporation and Montgomery Equity Partners Ltd.
5.			To be filed by Amendment
10.			Pledge and Escrow Agreement dated as of June 14, 2006 between ZBB Energy Corporation and Crucian Transition Inc. and Tarter Krinsky & Drogin LLP.
10.1			Note Purchase Agreement dated as of June 14, 2006 Between ZBB Energy Corporation and certain Purchasers.
10.2			Security Agreement dated as of June 14, 2006 between ZBB Energy Corporation and certain Secured Parties and Crucian Transition Inc.
10.3			Subsidiary Security Agreement dated as of June 14, 2006 between ZBB Technologies, Ltd. and certain Secured Parties and Crucian Transition Inc.
10.4			Subsidiary Security Agreement dated as of June 14, 2006 between ZBB Technologies, Inc. and certain Secured Parties and Crucian Transition Inc.
10.5			Guaranty Agreement dated as of June 14, 2006 by and among the Guarantors and Buyers of ZBB Energy Corporation.
10.6			Validity and Support Guaranty Agreement dated as of June 14, 2006 in favor of the Buyers of ZBB Energy Corporation.
10.7			Strategic Growth International Agreement dated as of March 22, 2006 between ZBB Energy Corporation and Strategic Growth International
10.8			Contract dated as of February 14, 2006 between ZBB Energy Corporation and California Energy Commission.
10.9			Montgomery Capital Loan Agreement dated as of February 9 , 2006 between ZBB Energy Corporation and Montgomery Capital Loan Partners L.P.
10.10			41 Broadway Associates LLC Consulting Agreement dated as of September 15, 2005 between ZBB Energy Corporation and 41 Broadway Associates LLC.
10.11			Empire Engagement Agreement relating to offering dated as of November 09, 2005 between ZBB Energy Corporation and Empire Financial Group, Inc.
10.12			Subscription and Investment Representation Agreement in connection with Empire Notes and October Financing.
10.13			1998 Outside Director Stock Option Plan dated as of July 3, 1998 between ZBB Energy Corporation and Non Employee Directors.
10.14			1998 Key Employee Stock Option Plan dated as of July 3, 1998 between ZBB Energy Corporation and Key Employees.
10.15			2005 Employee Option Scheme between ZBB Energy Corporation and Employees.
10.16			2002 Stock Option Plan dated as of February 4, 2002 between ZBB Energy Corporation and Employees.

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10.17			Employment Agreement dated as of October 4, 2006 between ZBB Energy Corporation and Geoffrey D. Hahn.
10.18			Employment Agreement dated as of October 4, 2006 between ZBB Energy Corporation and Robert J. Parry.
10.19			Lease dated November 1, 2001 between Geoffrey Hahn, Robert Parry, Michael Palmer, Richard Payne and ZBB Energy Technologies, Ltd. and ZBB Energy Corporation.
10.20			Variation of Lease dated June 1, 2002 between Geoffrey Hahn, Robert Parry, Michael Palmer, Richard Payne and ZBB Energy Technologies, Ltd. and ZBB Energy Corporation.
10.21			Stock Purchase Warrant for 7,422,220 shares of Common Stock dated as of June 14, 2006 by and between ZBB Energy Corporation and ABS SOS-PLUS Partners, Ltd.
10.22			Form of Warrant issued by ZBB Energy Corporation in connection with Empire Notes and October Financing.
10.23			15% Convertible Promissory Note, issued by ZBB Energy Corporation in connection with Empire Notes and October Financing.
21.			List of ZBB Energy Corporation Subsidiaries.
23.1			Consent of Independent Auditors

Item 28. Undertakings.

(a)	The undersigned registrant hereby undertakes:

	(1)	To file, during any period in which offers or sales are being made, a post-effective:
amendment to this registration statement

		i.	To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

		ii.	To reflect in the prospectus any facts or events arising after the effective date of the
	registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

		iii.	To include any material information with respect to the plan of distribution not previously
	disclosed in the registration statement or any material change to such information in the registration statement.

	(2)	for the purpose of determining any liability under the Securities Act of 1933, each such post-
effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

	(3)	To remove from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.

(b)	The undersigned hereby undertakes to provide to the underwriter at the closing specified in the

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	underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

	(c) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.


	(d) The undersigned registrant hereby undertakes that:

		(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.


		(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof

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SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorized this registration statement to be signed on its behalf by the undersigned in the City of Milwaukee, State of Wisconsin on October 27, 2006.

	ZBB ENERGY CORPORATION

	/s/ Robert J. Parry

	Robert J. Parry
	Chief Executive Officer (Principal Executive Officer) and Director

In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

	Position	Date
/s/ Robert J. Parry
	Chief Executive Officer (Principal	October 27, 2006
Robert J. Parry	executive officer) and Director

/s/ Geoffrey D. Hann
	Chief Financial Officer (Principal financial officer) and Director	October 27, 2006
Geoffrey D. Hann

/s/ Richard A. Payne
	Chairman and Director	October 27, 2006
Richard A. Payne

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EXHIBIT INDEX

Exhibit No.			Description
1.			Underwriting Agreement dated as of________, 2006 between ZBB Energy Corporation and Empire Financial Group, Inc.
3.1			Articles of incorporation of ZBB Energy Corporation as amended dated February 18, 1998.
3.2			By-laws of ZBB Energy Corporation.
4.			8% Senior Secured Note dated as of June 14, 2006 between ZBB Energy Corporation and ABS SOS-Plus Partners Ltd.
4.1			Registration Rights Agreement, dated as of June 14, 2006 between ZBB Energy Corporation and certain Investors.
4.2			Moratoriam Agreement dated as of February 28, 2006 between ZBB Energy Corporation and Montgomery Equity Partners Ltd.
5.			To be filed by Amendment
10.			Pledge and Escrow Agreement dated as of June 14, 2006 between ZBB Energy Corporation and Crucian Transition Inc. and Tarter Krinsky & Drogin LLP.
10.1			Note Purchase Agreement dated as of June 14, 2006 Between ZBB Energy Corporation and certain Purchasers.
10.2			Security Agreement dated as of June 14, 2006 between ZBB Energy Corporation and certain Secured Parties and Crucian Transition Inc.
10.3			Subsidiary Security Agreement dated as of June 14, 2006 between ZBB Technologies, Ltd. and certain Secured Parties and Crucian Transition Inc.
10.4			Subsidiary Security Agreement dated as of June 14, 2006 between ZBB Technologies, Inc. and certain Secured Parties and Crucian Transition Inc.
10.5			Guaranty Agreement dated as of June 14, 2006 by and among the Guarantors and Buyers of ZBB Energy Corporation.
10.6			Validity and Support Guaranty Agreement dated as of June 14, 2006 in favor of the Buyers of ZBB Energy Corporation.
10.7			Strategic Growth International Agreement dated as of March 22, 2006 between ZBB Energy Corporation and Strategic Growth International
10.8			Contract dated as of February 14, 2006 between ZBB Energy Corporation and California Energy Commission.
10.9			Montgomery Capital Loan Agreement dated as of February 9 , 2006 between ZBB Energy Corporation and Montgomery Capital Loan Partners L.P.
10.10			41 Broadway Associates LLC Consulting Agreement dated as of September 15, 2005 between ZBB Energy Corporation and 41 Broadway Associates LLC.
10.11			Empire Engagement Agreement relating to offering dated as of November 09, 2005 between ZBB Energy Corporation and Empire Financial Group, Inc.
10.12			Subscription and Investment Representation Agreement in connection with Empire Notes and October Financing.
10.13			1998 Outside Director Stock Option Plan dated as of July 3, 1998 between ZBB Energy Corporation and Non Employee Directors.
10.14			1998 Key Employee Stock Option Plan dated as of July 3, 1998 between ZBB Energy Corporation and Key Employees.
10.15			2005 Employee Option Scheme between ZBB Energy Corporation and Employees.
10.16			2002 Stock Option Plan dated as of February 4, 2002 between ZBB Energy Corporation and Employees.
10.17			Employment Agreement dated as of October 4, 2006 between ZBB Energy Corporation and Geoffrey D. Hahn.
10.18			Employment Agreement dated as of October 4, 2006 between ZBB Energy Corporation and Robert J. Parry.
10.19			Lease dated November 1, 2001 between Geoffrey Hahn, Robert Parry, Michael Palmer, Richard Payne and ZBB Energy Technologies, Ltd. and ZBB Energy Corporation.
10.20			Variation of Lease dated June 1, 2002 between Geoffrey Hahn, Robert Parry, Michael Palmer, Richard Payne and ZBB Energy Technologies, Ltd. and ZBB Energy Corporation.
10.21			Stock Purchase Warrant for 7,422,220 shares of Common Stock dated as of June 14, 2006 by and between ZBB Energy Corporation and ABS SOS-PLUS Partners, Ltd.
10.22			Form of Warrant issued by ZBB Energy Corporation in connection with Empire Notes and October Financing.
10.23			15% Convertible Promissory Note, issued by ZBB Energy Corporation in connection with Empire Notes and October Financing.
21.			List of ZBB Energy Corporation Subsidiaries.
23.1			Consent of Independent Auditors

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{__________} Shares

(Plus {________} Shares to cover over-allotments, if any.)

ZBB ENERGY CORPORATION

COMMON STOCK, PAR VALUE $.01 PER SHARE

UNDERWRITING AGREEMENT

_________, 2006

EMPIRE FINANCIAL GROUP, INC.
As Representative of the Several
Underwriters Named in Schedule I Hereto c/o Empire Financial Group, Inc.
14 E 60th Street
Suite 210
New York, NY 10022

Ladies and Gentlemen:

ZBB Energy Corporation, a Wisconsin corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to sell to the several Underwriters named in Schedule I hereto (the "Underwriters"), for whom Empire Financial Group, Inc. is serving as representative (the "Representative"), an aggregate of {__________} shares (the "Firm Shares") of the Company's common stock, par value $.01 per share (the "Common Stock"). If the Representative is the only firm named in Schedule I hereto, then the terms "Underwriters" and "Representative," as used herein, shall each be deemed to refer to such firm.

In addition, in order to cover over-allotments in the sale of the Firm Shares, the Underwriters may, at the Underwriters' election and subject to the terms and conditions stated herein, purchase ratably in proportion to the amounts set forth opposite their respective names in Schedule I hereto, up to {________} additional shares of Common Stock from the Company (such additional shares of Common Stock, the "Option Shares"). The Firm Shares and the Option Shares are referred to collectively as the "Shares."

The Company and the Underwriters, intending to be legally bound, hereby confirm their agreement as follows:

1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, each of the Underwriters that:

(a) A registration statement on Form SB-2 (File No. 333-_____) (the "Initial Registration Statement") in respect of the Shares has been filed with the Securities and Exchange Commission (the "Commission"); the Initial Registration Statement and any post-effective amendment thereto, each in the form heretofore delivered to the Representative and, excluding exhibits thereto, to each of the other Underwriters, have been declared effective by the Commission in such form; other than a registration statement, if any, increasing the size of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the "Act"), which became effective upon filing, no other document with respect to the Initial Registration Statement has heretofore been filed with the Commission; and no stop order suspending the effectiveness of the Initial Registration Statement, any post-effective amendment thereto or the Rule 462(b) Registration Statement, if any, has been issued and no proceeding for that purpose has been initiated or threatened by the Commission (any preliminary prospectus included in the Initial Registration Statement or filed with the Commission pursuant to Rule 424(a) of the rules and regulations of the Commission under the Act is hereinafter called a "Preliminary Prospectus"; the various parts of the Initial Registration Statement and the Rule 462(b) Registration Statement, if any, including all exhibits thereto and including the information contained in the form of final prospectus filed with the Commission pursuant to Rule 424(b) under the Act and deemed by virtue of Rule 430A under the Act to be part of the Initial Registration Statement at the time it was declared effective or such part of the Rule 462(b) Registration Statement, if any, became or hereafter becomes effective, each as amended at the time such part of the Initial Registration Statement became effective, are hereinafter collectively called the "Registration Statement"; and such final prospectus, in the form first filed pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus");

(b) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission, and each Preliminary Prospectus, at the time of filing thereof, conformed in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder, and did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through the Representative expressly for use therein.

(c) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will conform, in all material respects to the requirements of the Act and the rules and regulations of the Commission thereunder and do not and will not, as of the applicable effective date as to the Registration Statement and any amendment thereto, and as of the applicable filing date as to the Prospectus and any amendment or supplement thereto, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by an Underwriter through the Representative expressly for use therein.

(d) There are no legal or governmental proceedings pending or, to the knowledge of the Company, threatened to which the Company or any of its subsidiaries (as defined in Rule 405 of the rules and regulations under the Act) is a party or to which any of the properties of the Company or any of its subsidiaries are subject, except any such proceedings as would not have a material adverse effect on the financial position, results of operations or business of the Company and its subsidiaries taken as a whole ("Material Adverse Effect").

(e) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of Wisconsin. Each of the Company's subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of its state of incorporation or organization. The Company has full power and authority (corporate and other) to own or lease its properties and conduct its business as described in the Prospectus. The Company has full power and authority (corporate and other) to enter into this Agreement, the Underwriter's Warrant and the Consulting Agreement (defined in
Section 5(k) below) and to perform its obligations hereunder and thereunder. The Company is duly qualified to transact business as a foreign corporation under the laws of each other jurisdiction in which it owns or leases properties, or conducts any business, to the extent required under such laws, except where the failure to so qualify would not have a Material Adverse Effect.

(f) The Company's authorized, issued and outstanding capital stock is as disclosed in the Prospectus. All of the issued shares of capital stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description thereof contained in the Prospectus. None of the issued shares of capital stock of the Company have been issued or are owned or held in violation of any statutory or any other preemptive rights of shareholders, and no person or entity (including any holder of outstanding shares of capital stock of the Company) has any statutory or any other preemptive or other rights to subscribe for any of the Shares. None of the capital stock of the Company has been issued in violation of applicable federal or state securities laws.

(g) Other than the equity securities of its subsidiaries disclosed in the Prospectus, the Company does not own, directly or indirectly, any capital stock or other equity securities of any other corporation or any ownership interest in any partnership, joint venture or other association.

(h) Except as disclosed in the Prospectus, there are no outstanding (i) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (ii) warrants, rights or options to subscribe for or purchase from the Company any capital stock of the Company or any such convertible or exchangeable securities or obligations (other than pursuant to the Company's stock benefit plans) or (iii) obligations of the Company to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options.

(i) Since the respective dates as of which information is given in the Prospectus or otherwise disclosed therein, and prior to the Closing Date and Option Closing Date (as such terms are hereinafter defined), (i) neither the Company nor any of its subsidiaries has incurred any liabilities or obligations, direct or contingent, or entered into any transactions, not in the ordinary course of business, that are material to the Company, (ii) the Company has not purchased any of its outstanding capital stock or declared, paid or otherwise made any dividend or distribution of any kind on its capital stock, (iii) there has not been any material change in the capital stock, long-term debt or short-term debt of the Company, and (iv) there has not been any change, or any development involving a prospective change, which would have a Material Adverse Effect, in each case other than as disclosed in or contemplated by the Prospectus.

(j) Neither the Company nor any of its subsidiaries is, or with notice or the passage of time or both would be, in violation of its Articles of Incorporation or Bylaws (or comparable charter documents) or in default under any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or to which any of their properties or assets are subject.

(k) The Company and its subsidiaries have good and marketable title in fee simple to all real property, if any, and good title to all personal property owned by them, in each case, free and clear of all liens, security interests, pledges, charges, encumbrances, mortgages and defects, except such as are disclosed in the Prospectus or would not have a Material Adverse Effect and, in any case, do not interfere with the use made or proposed to be made of such property by the Company and its subsidiaries; and any real property and buildings held under lease by the Company or any of its subsidiaries are held under valid, subsisting and enforceable leases, with such exceptions as are disclosed in the Prospectus or are not material and, in any case, do not interfere with the use made or proposed to be made of such property and buildings by the Company and its subsidiaries.

(l) The issue and sale of the Shares, and the issue and sale of the Warrant Shares when issued and delivered upon exercise of the Underwriter's Warrant, by the Company and the compliance by the Company with all of the provisions of this Agreement, the Underwriter's Warrant and the Consulting Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries is bound or to which any of the property or assets of the Company or any of its subsidiaries is subject, nor will such action result in any violation of the provisions of the Articles of Incorporation or By-laws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; and no filing, consent, approval, authorization, order, registration or qualification of or with any such court or governmental agency or body is required for the issue and sale of the Shares or the Warrant Shares or the consummation by the Company of the transactions contemplated by this Agreement, the Underwriter's Warrant and the Consulting Agreement, except the registration under the Act of the Shares, the approval by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Shares and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares by the Underwriters.

(m) Other than as disclosed in the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation (including without limitation, any Company regulatory proceeding) pending or, to the Company's knowledge, threatened in which the Company or any of its subsidiaries is a party or of which any of their properties or assets are the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect. Neither the Company nor any of its subsidiaries is in violation of, or in default with respect to, any law, statute, rule, regulation, order, judgment or decree, except as described in the Prospectus or such as do not and will not individually or in the aggregate have a Material Adverse Effect, and neither the Company nor any of its subsidiaries is required to take any action in order to avoid any such violation or default.

(n) PKF, Certified Public Accountants, A Professional Corporation, which has certified certain financial statements of the Company included in the Prospectus, are independent public accountants as required by federal law and the rules and regulations of the Commission and are registered with the Public Company Accounting Oversight Board.

(o) The financial statements and schedules (including the related notes) of the Company and its subsidiaries included in the Prospectus and/or any Preliminary Prospectus were prepared in accordance with generally accepted accounting principles for financial reporting in the United States ("GAAP"), applied on a consistent basis throughout the periods involved and fairly present the consolidated financial position and results of operations of the Company and its subsidiaries at the dates and for the periods presented. The selected consolidated financial data and other operating and statistical information set forth in the Prospectus fairly present, on the basis stated in the Prospectus, the information included therein, and have been compiled on a basis consistent with that of the audited financial statements included in the Prospectus. The unaudited interim consolidated financial statements included in the Prospectus comply as to form in all material respects with the applicable accounting requirements of Rule 10-01 of Regulation S-X under the Securities Act of 1933 (the "Act").

(p) Each of this Agreement, the Underwriter's Warrant and the Consulting Agreement has been duly authorized, executed and delivered by the Company and, assuming due execution of this Agreement and the Consulting Agreement by the Representative, constitutes the valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws relating to or affecting the enforcement of creditors' rights generally and to general equitable principles and except as the enforceability of rights to indemnity and contribution under this Agreement may be limited under applicable securities laws or the public policy underlying such laws.

(q) When the Shares to be sold by the Company hereunder have been duly delivered against payment therefor as contemplated by this Agreement, the Shares will be validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. When the Warrant Shares to be sold by the Company upon exercise of the Underwriter's Warrant have been duly delivered against payment therefor as contemplated by the Underwriter's Warrant, the Warrant Shares will be validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. The stock certificate representing the Shares is in proper legal form under, and conforms in all respects to the requirements of, the Wisconsin Business Corporation Law and the American Stock Exchange.

(r) The Company has not distributed and will not distribute any offering material in connection with the offering and sale of the Shares other than a Preliminary Prospectus, the Prospectus and such other material, if any, as has been or will be provided to the Underwriters prior to distribution for their review and consent.

(s) The operations of the Company and its subsidiaries with respect to any real property currently leased or owned by them are in compliance in all material respects with all applicable federal, state, and local laws, ordinances, rules, and regulations relating to occupational health and safety and the environment (collectively, "Laws"), and neither the Company nor any of its subsidiaries has violated any Laws in a way which would have a Material Adverse Effect. Except as disclosed in the Prospectus, there is no pending or, to the Company's knowledge, threatened claim, litigation or administrative agency proceeding, nor has the Company or any of its subsidiaries received any written or oral notice from any governmental entity or third party, that: (i) alleges a violation of any Laws by the Company or any of its subsidiaries or
(ii) alleges the Company or any of its subsidiaries is a liable party under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. ss. 9601 et seq. or any state superfund law.

(t) The Company and its subsidiaries have sufficient interests in, all patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary for their business as described in the Prospectus, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property which, singly or in the aggregate, could reasonably be expected to have a Material Adverse Effect.

(u) The Company and its subsidiaries make and keep accurate books and records reflecting their assets and maintain internal accounting controls which provide reasonable assurance that (i) transactions are executed in accordance with management's authorization, (ii) transactions are recorded as necessary to permit preparation of the Company's consolidated financial statements in accordance with GAAP and to maintain accountability for the assets of the Company and its subsidiaries, (iii) access to the assets of the Company and its subsidiaries is permitted only in accordance with management's authorization, and (iv) the recorded assets of the Company and its subsidiaries are compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

(v) The Company and its subsidiaries have filed all foreign, federal, state and local tax returns that are required to be filed by them and has paid all taxes shown as due on such returns, as well as all other taxes, assessments and governmental charges that are due and payable; and no material deficiency with respect to any such return has been assessed or, to the knowledge of the Company, proposed.

(w) Except for such plans as are expressly disclosed in the Prospectus ("Plans"), the Company and its subsidiaries do not maintain, contribute to or have any material liability with respect to any employee benefit plan, profit sharing plan, employee pension benefit plan, employee welfare benefit plan, equity-based plan or deferred compensation plan or arrangement that is subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, or the rules and regulations thereunder ("ERISA"). All Plans are in compliance with all applicable laws, including but not limited to ERISA and the Internal Revenue Code of 1986, as amended (the "Code") and have been operated and administered in accordance with their terms except for such as would not have a Material Adverse Effect. No Plan is a multi-employer plan. The Company and its subsidiaries do not provide retiree life and/or retiree health benefits or coverage for any employee or any beneficiary of any employee after such employee's termination of employment, except as required by Section 4980B of the Code or under a Plan which is intended to be "qualified" under Section 401(a) of the Code. No liability has been, or could be expected to be, incurred under Title IV of ERISA or Section 412 of the Code by any entity required to be aggregated with the Company pursuant to Section 4001(b) of ERISA and/or Section 414(b) or (c) of the Code (and the regulations promulgated thereunder) with respect to any "employee pension benefit plan" which is not a Plan. As used in this subsection, the terms "defined benefit plan," "employee benefit plan," "employee pension benefit plan," "employee welfare benefit plan" and "multi-employer plan" shall have the respective meanings assigned to such terms in Section 3 of ERISA.

(x) No material labor dispute exists with the Company's employees, and no such labor dispute is threatened. The Company has no knowledge of any existing or threatened labor disturbance by the employees of any of its principal agents, suppliers, contractors or customers that would have a Material Adverse Effect.

(y) The Company and its subsidiaries have received all permits, licenses, franchises, authorizations, registrations, qualifications and approvals (collectively, "Permits") of governmental or regulatory authorities (including, without limitation, state or federal regulatory authorities) as may be required of them to own their properties and conduct their business in the manner described in the Prospectus, subject to such qualifications as may be set forth in the Prospectus; and the Company and its subsidiaries have fulfilled and performed all of its material obligations with respect to such Permits, and no event has occurred which allows or, after notice or lapse of time or both, would allow revocation or termination thereof or result in any other material impairment of the rights of the holder of any such Permit, subject in each case to such qualifications as may be set forth in the Prospectus; and, except as described in the Prospectus, such Permits contain no restrictions that materially affect the ability of the Company or its subsidiaries to conduct their business.

(z) The Company has filed, or has had filed on its behalf, on a timely basis, all materials, reports, documents and information, including but not limited to annual reports, with the Australian Stock Exchange which are required to be filed by it, except where the failure to have timely filed such materials, reports, documents and information would not have a Material Adverse Effect.

(aa) The Company is not an "investment company" or a company "controlled" by an investment company as such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act of 1940, as amended (the "Investment Company Act"), and, if the Company conducts its business as set forth in the Prospectus, it will not become an "investment company" and will not be required to register under the Investment Company Act.

(bb) The Company has in place and effective such policies of insurance, with limits of liability in such amounts, as are normal and prudent in the ordinary scope of business similar to that of the Company in the jurisdictions in which it conducts business.

2. Purchase and Sale of Shares.

(a) Subject to the terms and conditions herein set forth, the Company agrees to sell to each of the Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company, at a purchase price of {______} Dollars and {______} Cents (${____}) per share (the "Per Share Price"), the number of Firm Shares to be purchased by such Underwriter as set forth opposite the name of such Underwriter in Schedule I hereto.

(b) The Company hereby grants to the Underwriters the right to purchase at their election, in whole or in part, from time to time, up to {________} Optional Shares, at the Per Share Price, for the sole purpose of covering over-allotments in the sale of the Firm Shares. Any such election to purchase Optional Shares may be exercised by written notice from the Representative to the Company, given at any time (but not more than once) within a period of 60 calendar days after the date of this Agreement and setting forth the aggregate number of Optional Shares to be purchased and the date on which such Optional Shares are to be delivered, as determined by the Representative, but in no event earlier than the First Time of Delivery (as hereinafter defined) or, unless the Representative otherwise agrees in writing, earlier than two or later than ten business days after the date of such notice. In the event the Underwriters elect to purchase all or a portion of the Optional Shares, the Company agrees to furnish or cause to be furnished to the Representative the certificates, letters and opinions, and to satisfy all conditions set forth in Section 7 hereof at the Subsequent Time of Delivery (as hereinafter defined).

(c) In making this Agreement, each Underwriter is contracting severally, and not jointly, and except as provided in Sections 2(b) and 9 hereof, the agreement of each Underwriter is to purchase only that number of shares specified with respect to that Underwriter in Schedule I hereto. No Underwriter shall be under any obligation to purchase any Optional Shares prior to an exercise of the option with respect to such Optional Shares granted pursuant to Section 2(b) hereof.

3. Offering by the Underwriters. Upon the authorization by the Representative of the release of the Shares, the several Underwriters propose to offer the Shares for sale upon the terms and conditions disclosed in the Prospectus.

4. Delivery of Shares; Closing. The Firm Shares shall be issued in the form of one or more fully registered stock certificates in book-entry form in such denomination and registered in the name of the nominee of The Depositary Trust Company ("DTC") or in such names as the Representative may request upon at least 48 hours' prior notice to the Company, and shall be delivered by or on behalf of the Company to the Representative for the account of such Underwriter, against payment by such Underwriter on its behalf of the purchase price therefor by wire transfer of immediately available funds to such accounts as the Company shall designate in writing. The closing of the sale and purchase of the Firm Shares shall be held at the offices of Seyfarth Shaw LLP, 815 Connecticut Avenue, N.W., Suite 500, Washington, D.C. 20006. The time and date of such delivery and payment shall be, with respect to the Firm Shares, at 9:00

a.m., Washington, DC time, on the fourth (4th) full business day after this Agreement is executed or at such other time and date as the Representative and the Company may agree upon in writing, and, with respect to the Optional Shares, at 9:00 a.m., Eastern time, on the date specified by the Representative in the written notice given by the Representative of the Underwriters' election to purchase all or part of such Optional Shares, or at such other time and date as the Representative and the Company may agree upon in writing. Such time and date for delivery of the Firm Shares is herein called the "First Time of Delivery," such time and date for delivery of any Optional Shares, if not the First Time of Delivery, is herein called a "Subsequent Time of Delivery," and each such time and date for delivery is herein called a "Time of Delivery." The Company shall make the stock certificate(s) representing the Firm Shares or the Optional Shares, as the case may be, available for examination by the Representative and counsel for the Underwriters not later than 9:30 a.m. Eastern time on the business day prior to each Time of Delivery at the office of Seyfarth Shaw LLP, 815 Connecticut Avenue, N.W., Suite 500, Washington, D.C. 20006 or at such other location specified by the Representative or counsel for the Underwriters in writing at least 48 hours prior to such Time of Delivery.

5. Covenants of the Company. The Company covenants and agrees with each of the Underwriters that:

(a) The Company will prepare the Prospectus in a form approved by the Representative and file such Prospectus pursuant to Rule 424(b) under the Act not later than the Commission's close of business on the second business day following the execution and delivery of this Agreement, or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Act. The Company will make no further amendment or any supplement to the Registration Statement or Prospectus which shall be disapproved by the Representative promptly after reasonable notice thereof.

(b) The Company will advise the Representative promptly after receiving notice of (i) any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; (ii) the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representative with copies thereof; and (iii) the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus, of the suspension of the qualification of the Shares for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose. In the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or prospectus or suspending any such qualification, promptly to use its best efforts to obtain the withdrawal of such order.

(c) The Company promptly from time to time will take such action as the Representative may reasonably request to qualify the Shares for offering and sale under the securities or blue sky laws of such jurisdictions as the Representative may request and will continue such qualifications in effect for as long as may be necessary to complete the distribution of the Shares, provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or as a dealer in securities or to file a general consent to service of process in any jurisdiction. The Company will file such statements and reports as may be required by the laws of each jurisdiction in which the Shares have been qualified as above provided.

(d) The Company will promptly provide the Representative, without charge, at each Time of Delivery, as many copies of the Prospectus and any amendment or supplement thereto as the Representative may reasonably request.

(e) To furnish to its stockholders as soon as practicable after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders' equity and cash flows of the Company and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the effective date of the Registration Statement), to make available to its stockholders consolidated summary financial information of the Company and its subsidiaries for such quarter in reasonable detail.

(f) During the period beginning from the date hereof and continuing to and including the date 365 days after the date of the Prospectus, the Company will not, and will use its best efforts to cause each executive officer and director of the Company and shareholders owning 5% or more of the outstanding Common Stock after the Closing Date to deliver to the Representative an agreement in the form attached hereto as Exhibit A (each, a "Lock-Up Agreement"), agreeing not, without the prior written consent of the Representative, directly or indirectly to (i) offer, sell, contract to sell or otherwise dispose of, any shares of Common Stock or securities convertible into or exercisable or exchangeable for shares of Common Stock or (ii) enter into any swap or other agreement or any transaction that transfers, in whole or in part, the economic consequences of ownership of shares of Common Stock whether any such swap or other agreement is to be settled by delivery of shares of Common Stock, other securities, cash or otherwise; except for the sale of the Shares hereunder, except for the issuance of Common Stock upon the exercise of stock options or warrants or the conversion of convertible securities outstanding on the date of this Agreement to the extent that such stock options, warrants and convertible securities are disclosed in the Prospectus and except for the grant to employees of stock options to purchase Common Stock which are not exercisable within such 365 days.

(g) During the period of three years after the date of this Agreement, the Company will furnish to the Representative and, upon request, to each of the other Underwriters, without charge, (i) copies of all reports or other communications (financial or other) furnished to shareholders and (ii) as soon as they are available, copies of any reports and financial statements furnished to or filed under the Securities Exchange Act of 1934 (the "Exchange Act").

(h) Prior to the termination of the underwriting syndicate contemplated by this Agreement, the Company and its affiliates will not, and the Company shall cause its officers and directors not to, (i) take, directly or indirectly, any action designed to cause or to result in, or that might be expected to cause or result in, the stabilization or manipulation of the price of any security of the Company or (ii) sell, bid for, purchase or pay anyone any compensation for soliciting purchases of, the Shares.

(i) In case of any event, at any time within the period between the date hereof and the Closing Date or Option Closing Date, as a result of which any Preliminary Prospectus or the Prospectus, as then amended or supplemented, would contain an untrue statement of a material fact, or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, the Company promptly will prepare an amendment or supplement that will correct such statement or omission and will furnish to the several Underwriters such number of copies of such amendment(s) or supplement(s) as the Representative may reasonably request. For purposes of this subsection, the Company will provide such information to the Representative, the Underwriters' counsel and counsel to the Company as shall be necessary to enable such persons to consult with the Company with respect to the need to amend or supplement any Preliminary Prospectus or the Prospectus, and shall furnish to the Representative and the Underwriters' counsel such further information as each may from time to time reasonably request.

(j) The Company shall use its best efforts to list the Shares for trading on the American Stock Exchange.

(k) On the Closing Date, enter into a consulting agreement with the Representative (the "Consulting Agreement") whereby the Company will agree to pay the Representative (i) a financial consulting fee of $5,000 per month for the succeeding 24 month period, payable monthly, and (ii) a "Lehman Formula" finder's fee if the Representative originates a merger, acquisition, joint venture or other similar transaction to which the Company is a party.

(l) The Company shall continue to retain as its accountants PKF, Certified Public Accountants, A Professional Corporation or another firm of independent public accountants acceptable to the Representative for 24 months from the Closing Date.

(m) The Company shall retain as outside legal counsel a firm acceptable to the Representative, which shall be expert in securities law matters, for 12 months from the Closing Date.

(n) The Company shall retain Strategic Growth Advisors, Inc. or another investor/public relations firm acceptable to the Representative for 24 months from the Closing Date.

(o) The Company shall accept an individual, selected by the Representative, as a non-voting advisor to the Company's Board of Directors. Such advisor shall be entitled to notice and to attend all meetings of the Board of Directors, and shall be reimbursed for reasonable costs incurred in attending such meetings. To the extent permitted by law, the Company shall indemnify the Representative and such advisor for such advisor's actions in his role as an advisor, and the Company shall, if possible, include the Representative and such advisor as insureds under any directors and officers liability insurance policy maintained by the Company, if any.

6. Expenses and Fees.

(a) The Company will pay all costs and expenses incident to the performance of the obligations of the Company under this Agreement, whether or not the transactions contemplated hereby are consummated or this Agreement is terminated pursuant to Section 10 hereof, including, without limitation, all costs and expenses incident to (i) the printing of and mailing expenses associated with any Preliminary Prospectus and the Prospectus and any amendments or supplements thereto, this Agreement, the Agreement among Underwriters, the Underwriters' Questionnaire submitted to each of the Underwriters by the Representative in connection herewith, the power of attorney executed by each of the Underwriters in favor of Empire Financial Group, Inc. in connection herewith, the Selected Dealer Agreement and related documents (collectively, the "Underwriting Documents"); (ii) the fees, disbursements and expenses of the Company's counsel and accountants in connection with the registration of the Company's Common Stock under the Exchange Act and all other expenses in connection with the preparation and, if applicable, filing of, any Preliminary Prospectus, the Prospectus and any amendments and supplements thereto and the Underwriting Documents; (iii) the delivery of copies of the foregoing documents to the Underwriters; (iv) the filing fees of the National Association of Securities Dealers, Inc. relating to its approval of the fairness and reasonableness of the underwriting terms and arrangements; (v) the preparation, issuance and delivery to the Underwriters of any certificates evidencing the Shares, including transfer agent's and registrar's fees; (vi) any fees relating to listing of the Shares on the American Stock Exchange; (vii) any expenses for travel, lodging and meals incurred by the Company and any of its officers, directors and employees in connection with any meetings with prospective investors in the Shares; (viii) any cost of holding due diligence meetings and drafting sessions; (ix) any cost for placing a "tombstone" advertisement in the Wall Street Journal; and (x) all other costs and expenses reasonably incident to the performance of the Company's obligations hereunder that are not otherwise specifically provided for in this Section 6.

(b) On the Closing Date, the Company shall pay the Representative a sum of {$ }, less any amounts paid prior to the Closing Date, as a non-accountable expense allowance. Payment of the non-accountable expense allowance shall be made to the Representative by wire transfer of immediately available funds. The Representative acknowledges receipt of Twenty-Five Thousand Dollars ($25,000) as a deposit toward such sum.

(c) On the Closing Date, the Company will further issue and sell to the Representative or, at the direction of the Representative, to bona fide officers of the Representative, at a purchase price of $100.00 and for other good and valuable consideration, warrants to purchase Common Stock (the "Underwriter's Warrant") entitling the holders thereof to purchase an aggregate of { } shares of Common Stock (the "Warrant Shares"), exercisable for a period of four years, such period to commence on the first anniversary of the effective date of the Registration Statement. The Underwriter's Warrant shall be exercisable at a price equal to 120% of the public offering price of the Firm Shares, and shall contain terms and provisions more fully described herein below and as set forth more particularly in the warrant agreement relating to the Underwriter's Warrant to be executed by the Company on the effective date of the Registration Statement (the "Underwriter's Warrant Agreement"). No sale, transfer, assignment, pledge or hypothecation of the Underwriter's Warrant shall be made for a period of 12 months from the effective date of the Registration Statement, except (i) by operation of law or reorganization of the Company, or (ii) to the Representative and bona fide partners, officers (not directors) of the Representative and selling group members. The terms of the Underwriter's Warrant are as set forth in Exhibit WU appended hereto.

7. Conditions of the Underwriters' Obligations. The obligations of the Underwriters hereunder to purchase and pay for the Shares to be delivered at each Time of Delivery shall be subject, in their discretion, to the accuracy of the representations and warranties of the Company contained herein as of the date hereof and as of such Time of Delivery, to the accuracy of the statements of the Company's officers made pursuant to the provisions hereof, to the performance by the Company of its covenants and agreements hereunder, and to the following additional conditions precedent:

(a) The Prospectus shall have been filed with the Commission pursuant to Rule 424(b) within the applicable time period prescribed for such filing by the rules and regulations under the Act and in accordance with Section 5(a) hereof; if the Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration Statement shall have been filed by 10:00 P.M., Washington, D.C. time, on the date of this Agreement; no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and all requests for additional information on the part of the Commission shall have been complied with to the Representative's reasonable satisfaction.

(b) The Representative shall have received a copy of an executed Lock-Up Agreement from the Company and each of the Company's executive officers and directors and shareholders owning 5% or more of the outstanding Common Stock after the Closing Date.

(c) The Representative shall have received an opinion, dated such Time of Delivery, of Hodgson Russ LLP, special counsel for the Company, in form and substance satisfactory to the Representative and its counsel, to the effect that:

(i) The Company is validly existing as a corporation in good standing under the laws of the State of Wisconsin and has the corporate power and authority to own or lease its properties and conduct its business as described in the Prospectus and to enter into this Agreement, the Underwriter's Warrant and the Consulting Agreement and perform its obligations hereunder and thereunder. The Company is duly qualified to transact business as a foreign corporation in each jurisdiction in which it owns or leases property, or conducts any business, so as to require such qualification, except where the failure to so qualify would not have a Material Adverse Effect.

(ii) Each U.S. subsidiary of the Company, based solely on certificates of public officials of each applicable jurisdiction, has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation; and all of the issued shares of capital stock of each such subsidiary have been duly and validly authorized and issued, are fully paid and non-assessable, and (except for directors' qualifying shares) are owned directly or indirectly by the Company, free and clear of all liens, encumbrances, equities or claims (such counsel being entitled to rely in respect of the opinion in this clause upon opinions of local counsel and in respect to matters of fact upon certificates of officers of the Company or its subsidiaries, provided that such counsel shall state that they believe that both you and they are justified in relying upon such opinions and certificates and provided that such counsel shall provide you copies of any such opinions and certificates).

(iii) All of the issued shares of capital stock of the Company, including the Shares to be sold by the Company pursuant hereto when delivered against payment therefor as contemplated hereby, have been duly authorized and validly issued, are fully paid and nonassessable and conform to the description of the Common Stock contained in the Prospectus. The Warrant Shares to be sold upon exercise of the Underwriter's Warrant when delivered against payment therefor as contemplated thereby, have been duly authorized and will be validly issued, fully paid and nonassessable and conform to the description of the Common Stock contained in the Prospectus. None of the issued shares of Common Stock of the Company have been issued or are owned or held in violation of any statutory or any other preemptive rights of shareholders, and no person or entity (including any holder of outstanding shares of Common Stock of the Company) has any statutory or any other preemptive or other rights to subscribe for any of the Shares or the Warrant Shares.

(iv) To such counsel's knowledge, except as disclosed in the Prospectus, there are no outstanding (A) securities or obligations of the Company convertible into or exchangeable for any capital stock of the Company, (B) warrants, rights or options to subscribe for or purchase from the Company any such capital stock or any such convertible or exchangeable securities or obligations, other than pursuant to the Company's stock benefit plans, or (C) obligations of the Company to issue any shares of capital stock, any such convertible or exchangeable securities or obligations, or any such warrants, rights or options.

(v) The sale of the Shares being sold at such Time of Delivery, the sale of the Warrants Shares upon exercise of the Underwriter's Warrant and the performance of this Agreement, the Underwriter's Warrant and the Consulting Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or violate any provision of the Articles of Incorporation or bylaws or comparable charter documents of the Company as amended to date or any existing law, statute, rule or regulation, or, in any material respect conflict with, or (with or without notice or the passage of time or both) result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement, lease or other agreement or instrument known to such counsel to which the Company is a party or to which any of its properties or assets is subject, or, conflict with or violate any order, judgment or decree known to such counsel, of any court or governmental agency or body having jurisdiction over the Company or any of its properties or assets.

(vi) No consent, approval, authorization, order or declaration of or from, or registration, qualification or filing with, any court or governmental agency or body is required for the offer, sale or issuance of the Shares or the Warrant Shares except the registration under the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), of the Shares and the Warrant Shares, and such consents, approvals, authorizations, registrations or qualifications as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Shares and the Warrant Shares by the Underwriters.

(vii) To such counsel's knowledge, other than as disclosed in or contemplated by the Prospectus, there is no litigation, arbitration, claim, proceeding (formal or informal) or investigation pending or threatened, in which the Company or any of its subsidiaries is a party or of which any of their properties or assets is the subject which, if determined adversely to the Company or any of its subsidiaries, would individually or in the aggregate have a Material Adverse Effect.

(viii) Each of this Agreement, the Underwriter's Warrant and the Consulting Agreement has been duly authorized, executed and delivered by the Company and, assuming due execution of this Agreement and the Consulting Agreement by the Representative, constitutes the valid and binding agreement of the Company, enforceable against the Company, in accordance with its terms, subject, as to enforcement, to applicable bankruptcy, insolvency, reorganization and moratorium laws and other laws relating to or affecting the enforcement of creditors' rights generally and to general equitable principles and except as the enforceability of rights to indemnity and contribution under this Agreement may be limited under applicable securities laws or the public policy underlying such laws.

(ix) The Company is not an "investment company" or a company "controlled" by an investment company as such terms are defined in Sections 3(a) and 2(a)(9), respectively, of the Investment Company Act.

(x) The Registration Statement and the Prospectus and any further amendments and supplements thereto made by the Company prior to such Time of Delivery (other than the financial statements and related schedules therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Act and the rules and regulations thereunder; and they do not know of any amendment to the Registration Statement required to be filed or of any contracts or other documents of a character required to be filed as an exhibit to the Registration Statement or required to be described in the Registration Statement or the Prospectus which are not filed or described as required.

Such counsel shall also state that they have participated in the preparation of the Preliminary Prospectus and Prospectus and in conferences with officers and other representatives of the Company, representatives of the independent public accountants for the Company, and representatives of and counsel to the Underwriters at which the contents of the Preliminary Prospectus and Prospectus and related matters were discussed and, although such counsel has not passed upon or assumed any responsibility for the accuracy, completeness or fairness of the statements contained in the Preliminary Prospectus or Prospectus, and although such counsel has not undertaken to verify independently the accuracy or completeness of the statements in the Preliminary Prospectus or Prospectus, no facts have come to such counsel's attention to lead them to believe that the Preliminary Prospectus or Prospectus, or any further amendment or supplement thereto made prior to such Time of Delivery, on its issue date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Preliminary Prospectus or Prospectus, or any amendment or supplement thereto made prior to such Time of Delivery, as of its issue date and as of such Time of Delivery, contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (provided that such counsel need express no belief regarding the financial statements, the notes and schedules thereto and other financial, statistical or operating information or data contained in the Prospectus, or any amendment or supplement thereto).

In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of officers of the Company and public officials. Copies of such certificates of officers of the Company and other certificates and letters shall be furnished to the Underwriters and furnished to counsel for the Underwriters.

(d) Seyfarth Shaw LLP, counsel for the Underwriters, shall have furnished to the Representative such opinion or opinions, dated such Time of Delivery, with respect to such matters as the Representative may reasonably request, and the Company shall have furnished to such counsel such documents as they request for the purpose of enabling them to pass upon such matters.

(e) The Representative shall have received from PKF, Certified Public Accountants, A Professional Corporation, in form and substance satisfactory to the Representative, letters dated as of the date hereof, the date of delivery of the Firm Shares and the date(s) of delivery of any Optional Shares, containing statements and information of the type ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial information contained in the Prospectus; provided that the letter dated as of the date of delivery of the Firm Shares shall use a "cut-off date" not earlier than the date hereof.

(f) Since the date of the latest audited financial statements included in the Prospectus, neither the Company nor any of its subsidiaries shall not have sustained any change or any development involving a prospective change (including, without limitation, a change in management or control of the Company) reasonably likely to have a Material Adverse Effect, otherwise than as disclosed in or contemplated by the Prospectus, the effect of which, in either such case, in the Representative's reasonable judgment makes it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares.

(g) Subsequent to the date hereof, there shall not have occurred any of the following: (i) any suspension or limitation in trading in securities generally on any national securities exchange or any setting of minimum prices for trading on any national securities exchange, or in the Common Stock of the Company by the Commission, any national securities exchange; (ii) a moratorium on commercial banking activities declared by either federal or state authorities; or (iii) any outbreak or escalation of hostilities involving the United States, declaration by the United States of a national emergency or war or any other national or international calamity or emergency if the effect of any such event specified in this clause (iv) in the Representative's reasonable judgment makes it impracticable or inadvisable to proceed with the purchase, sale and delivery of the Shares.

(h) The Company shall have furnished to the Representative at such Time of Delivery certificates of the chief executive officer or an executive vice president and the chief financial officer of the Company satisfactory to the Representative, as to the accuracy of the representations and warranties of the Company herein at and as of such Time of Delivery with the same effect as if made at such Time of Delivery, as to the performance by the Company of all of its obligations hereunder to be performed at or prior to such Time of Delivery, and as to such other matters as the Representative may reasonably request, and the Company shall have furnished or caused to be furnished certificates of such officers as to such matters as the Representative may reasonably request.

(i) The representations and warranties of the Company in this Agreement and in the certificates delivered by the Company pursuant to this Agreement shall be true and correct in all material respects when made and on and as of each Time of Delivery as if made at such time, and the Company shall have performed in all material respects all covenants and agreements and satisfied all conditions contained in this Agreement required to be performed or satisfied by the Company at or before such Time of Delivery.

(j) The Shares shall have been approved for listing on the American Stock Exchange.

8. Indemnification and Contribution.

(a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement made by the Company in Section 1 of this Agreement; (ii) any untrue statement or alleged untrue statement of any material fact contained in (A) any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto, or (B) any application or other document, or amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify the Shares under the securities or blue sky laws thereof or filed with any securities association or securities exchange (each an "Application"); or (iii) the omission of or alleged omission to state in any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application of a

material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse each Underwriter for any legal or other expenses reasonably incurred by such Underwriter in connection with investigating, defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or any Application in reliance upon and in conformity with written information furnished to the Company by any Underwriter through the Representative expressly for use therein. The Company will not, without the prior written consent of the Representative, which shall not be unreasonably withheld, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding (or related cause of action or portion thereof) in respect of which indemnification may be sought hereunder (whether or not any Underwriter is a party to such claim, action, suit or proceeding), unless such settlement, compromise or consent includes an unconditional release of each Underwriter from all liability arising out of such claim, action, suit or proceeding (or related cause of action or portion thereof).

(b) Each Underwriter, severally but not jointly, agrees to indemnify and hold harmless the Company against any losses, claims, damages or liabilities to which the Company may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or any Application or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Underwriter through the Representative expressly for use therein; and will reimburse the Company for any legal or other expenses reasonably incurred by the Company in connection with investigating or defending any such loss, claim, damage, liability or action.

(c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than under such subsection (a) or (b). In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party); provided, however, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be one or more legal defenses available to it or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnifying party shall not have the

right to assume the defense of such action on behalf of such indemnified party and such indemnified party shall have the right to select separate counsel to defend such action on behalf of such indemnified party. After such notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof and approval by such indemnified party of counsel appointed to defend such action, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses, other than reasonable costs of investigation, subsequently incurred by such indemnified party in connection with the defense thereof. Nothing in this
Section 8(c) shall preclude an indemnified party from participating at its own expense in the defense of any such action so assumed by the indemnifying party.

(d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under subsection (a) or (b) above in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other hand from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under subsection (c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting discounts and commissions received by the Underwriters. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other hand and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this subsection (d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person

who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint.

(e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have and shall extend, upon the same terms and conditions, to each officer, director and employee of the Underwriters and to each person, if any, who controls any Underwriter within the meaning of the Act or the Exchange Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability which the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each officer and director of the Company and to each person, if any, who controls the Company within the meaning of the Act or the Exchange Act.

9. Default of Underwriters.

(a) If any Underwriter defaults in its obligation to purchase Shares at a Time of Delivery, the Representative may in its discretion arrange for one or more other Underwriters and/or one or more other parties to purchase such Shares on the terms contained herein within thirty-six (36) hours after such default by any Underwriter. In the event that, within the respective prescribed period, the Representative notifies the Company that they have so arranged for the purchase of such Shares, the Representative shall have the right to postpone a Time of Delivery for a period of not more than seven (7) days in order to effect whatever changes may thereby be made necessary in the Prospectus, or in any other documents or arrangements, and the Company agrees to file promptly any amendments to the Prospectus that in the Representative's opinion may thereby be made necessary. The cost of preparing, printing and filing any such amendments shall be paid for by the Underwriters. The term "Underwriter" as used in this Agreement shall include any person substituted under this Section with like effect as if such person had originally been a party to this Agreement with respect to such Shares.

(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters by the Representative as provided in subsection (a) above, if any, the aggregate number of such Shares which remains unpurchased does not exceed one-eleventh (1/11) of the aggregate number of Shares to be purchased at such Time of Delivery, then the Company shall have the right to require each non-defaulting Underwriter to purchase the number of Shares which such Underwriter agreed to purchase hereunder at such Time of Delivery and, in addition, to require each non-defaulting Underwriter to purchase its pro rata share (based on the number of Shares which such Underwriter agreed to purchase hereunder) of the Shares of such defaulting Underwriter or Underwriters for which such arrangements have not been made.

10. Termination.

(a) This Agreement may be terminated in the sole discretion of the Representative by notice to the Company given prior to the First Time of Delivery or any Subsequent Time of Delivery, respectively, in the event that (i) any condition to the obligations of the Underwriters set forth in Section 7 hereof has not been satisfied, or (ii) the Company shall have failed, refused or been unable to deliver the Firm Shares or the Company shall have failed, refused or been unable to perform all obligations and satisfy all conditions on its part to be performed or satisfied hereunder at or prior to such Time of Delivery, in either case other than by reason of a default by any of the Underwriters. If this Agreement is terminated pursuant to this Section 10(a), the Company will reimburse the Underwriters severally upon demand for all reasonable out-of-pocket expenses (including counsel fees and disbursements) that shall have been incurred by them in connection with the proposed purchase and sale of the Shares. Any termination pursuant to this Section 10(a) shall be without liability on the part of any Underwriter to the Company or on the part of the Company to any Underwriter, except for expenses to be paid by the Company pursuant to Section 6 hereof or reimbursed by the Company pursuant to this
Section 10(a) and except as to indemnification and contribution to the extent provided in Section 8 hereof.

(b) If, after giving effect to any arrangements for the purchase of the Shares of a defaulting Underwriter or Underwriters as provided in Section 9(a), the aggregate number of such Shares which remains unpurchased exceeds one-eleventh (1/11) of the aggregate number of Shares to be purchased at such Time of Delivery, then this Agreement (or, with respect to a Subsequent Time of Delivery, the obligations of the Underwriters to purchase and of the Company to sell the Optional Shares) shall thereupon terminate, without liability on the part of any non-defaulting Underwriter or the Company, except for the expenses to be borne by the Company and the Underwriters as provided in Section 6 hereof and the indemnity and contribution agreements in Section 8 hereof; but nothing herein shall relieve a defaulting Underwriter from liability for its default.

11. Survival. The respective indemnities, agreements, representations, warranties and other statements of the Company, its officers and the several Underwriters, as set forth in this Agreement or made by or on behalf of them, respectively, pursuant to this Agreement, shall remain in full force and effect, regardless of any investigation (or any statement as to the results thereof) made by or on behalf of any Underwriter or any controlling person referred to in
Section 8(f) or the Company, or any officer or director or controlling person of the Company referred to in Section 8(f), and shall survive delivery of and payment for the Shares. The respective agreements, covenants, indemnities and other statements set forth in Sections 6 and 8 hereof shall remain in full force and effect, regardless of any termination or cancellation of this Agreement.

12. Notices. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be sufficient in all respects if mailed, delivered or telecopied and confirmed in writing to Empire Financial Group, Inc., 14 E 60th Street, Suite 210, New York, NY 10022 (Fax No. (212) ____ - _______ ), Attention: Ed Cabrera, Head of Investment Banking (with a copy to Seyfarth Shaw LLP, 815 Connecticut Avenue, N.W., Suite 500, Washington, D.C. 20006 (Fax No. (202) 828-5359), Attention: Ernest M. Stern, Esq.); if to the Company, shall be sufficient in all respects if mailed, delivered or telecopied and confirmed in writing to ZBB Energy Corporation, N93 W14475 Whittaker Way, Menomonee Falls, WI 53051 (Fax No. (262) ____ - _______ ), Attention: Robert J. Parry, President and Chief Executive Officer (with a copy to Hodgson Russ LLP, 60 E. 42 Street, 37th Floor, New York, NY 10165 (Fax No. (212) 972-1677), Attention: Stephen Weiss, Esq.).

13. Binding Effect. This Agreement shall be binding upon, and inure solely to the benefit of, the Underwriters, the Company and, to the extent provided in Sections 8 and 11 hereof, the officers, directors and employees and controlling persons referred to therein and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign by reason merely of such purchase.

14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to any provisions regarding conflicts of laws.

15. Counterparts. This Agreement may be executed by any one or more of the parties hereto in any number of counterparts, each of which shall be deemed to be an original, but all such counterparts shall together constitute one and the same instrument.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

If the foregoing is in accordance with your understanding of our agreement, please sign and return to us one of the counterparts hereof, and upon the acceptance hereof by the Representative, on behalf of each of the Underwriters, this letter will constitute a binding agreement among the Underwriters and the Company. It is understood that your acceptance of this letter on behalf of each of the Underwriters is pursuant to the authority set forth in the Agreement among Underwriters, a copy of which shall be submitted to the Company for examination, upon request, but without warranty on your part as to the authority of the signers thereof.

Very truly yours,
ZBB ENERGY CORPORATION

By:

Name:

Title:

The foregoing Agreement is hereby
confirmed and accepted as of the
date first written above.

EMPIRE FINANCIAL GROUP, INC.

By:
Name:
Title:

On behalf of each of the
Underwriters

SCHEDULE I

                                                                                        Number of Optional Shares to
                                                         Total Number of Firm Shares       be Purchased if Maximum
Underwriter                                                    to be Purchased                Option Exercised
---------------------------------------------------      ---------------------------    -----------------------------
Empire Financial Group, Inc........................
Northeast Securities, Inc..........................
    Total..........................................

EXHIBIT A

FORM OF LOCK-UP AGREEMENT

ZBB ENERGY CORPORATION

LOCK-UP AGREEMENT

___________, 2006

EMPIRE FINANCIAL GROUP, INC.
As Representative (the "Representative") of the Several Underwriters Named in Schedule I to the Underwriting Agreement 14 E 60th Street
Suite 210
New York, NY 10022

Ladies and Gentlemen:

The undersigned understands that you, as Representative of the several underwriters (the "Underwriters"), propose to enter into an underwriting agreement (the "Underwriting Agreement") with ZBB Energy Corporation (the "Company") providing for the public offering (the "Public Offering") by the Underwriters, including yourself, of common stock of the Company (the "Common Stock").

In consideration of the Underwriters' agreement to purchase and make the Public Offering of the Common Stock, and for other good and valuable consideration, receipt of which is hereby acknowledged, the undersigned hereby agrees, for a period of 365 days after the First Time of Delivery, as such term is defined in the Underwriting Agreement (the "Lock-Up Period"), not to sell, offer to sell, solicit an offer to buy, contract to sell, encumber, distribute, pledge, grant any option for the sale of, or otherwise transfer or dispose of, directly or indirectly, in one or a series of transactions (collectively, a "Disposition"), any shares of Common Stock or any securities convertible or exercisable into or exchangeable for shares of Common Stock (collectively, "Securities"), now owned or hereafter acquired by the undersigned or with respect to which the undersigned has acquired or hereafter acquires the power of disposition, without the prior written consent of the Representative. Prior to the expiration of the Lock-Up Period, the undersigned agrees that it will not publicly announce or disclose any intention to take any action after the expiration of such period which the undersigned is prohibited, as provided in the preceding sentence, from taking during the Lock-Up Period.

The undersigned acknowledges and agrees that the restrictions above are expressly agreed to preclude the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities (or the economic equivalent thereof) during the Lock-Up Period even if such Securities would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from the Securities.

The undersigned hereby also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent against the transfer of the Securities held by the undersigned except in compliance with the Lock-Up Agreement.

It is understood that, if the Underwriting Agreement is not executed, or if the Underwriting Agreement shall terminate or be terminated prior to payment for and delivery of the Common Stock the subject thereof, this Lock-Up Agreement shall automatically terminate and be of no further force or effect.

This Lock-Up Agreement shall be governed by and construed in accordance with the laws of the State of New York (without giving effect to its conflict of laws provisions).

Very truly yours,

Name:

DFI/CORP/38 United States of America [LOGO]
RECORD 2/00

State of Wisconsin

DEPARTMENT OF FINANCIAL INSTITUTIONS

To All to Whom These Presents Shall Come, Greeting:

I, RAY ALLEN, Deputy Administrator, Division of Corporate & Consumer Services, Department of Financial Institutions, do hereby certify that the annexed copy has been compared by me with the record on file in the Corporation
Section of the Division of Corporate & Consumer Services of this department and that the same is a true copy thereof and the whole of such record; and that I am the legal custodian of said record, and that this certification is in due form.

[LOGO]                                      IN TESTIMONY WHEREOF, I have
                                       hereunto set my hand and affixed the
                                       official seal of the Department.


                                       /s/ Ray Allen
                                       -----------------------------------------
                                       RAY ALLEN, Deputy Administrator
                                       Division of Corporate & Consumer Services
                                       Department of Financial Institutions

DATE: JUN 12 2006

                                       BY: ILLEGIBLE

Effective July 1, 1996, the Department of Financial Institutions assumed the functions previously performed by the Corporations Division of the Secretary of State and is the successor custodian of corporate records formerly held by the Secretary of State.

ILLEGIBLE
STATE OF WISCONSIN

ARTICLES OF INCORPORATION

ZBB ENERGY CORPORATION

These Articles of Incorporation are executed by the undersigned for the purpose of forming a Wisconsin corporation under Chapter 180 of the Wisconsin Statutes:

ARTICLE I

The name of the corporation is ZBB energy corporation.

ARTICLE II

The period of existence of the corporation shall be perpetual.

ARTICLE III

The corporation is authorized to engage in any lawful activity for which corporations may be organized under Chapter 180 of the Wisconsin Statutes.

ARTICLE IV

The aggregate number of shares which the corporation shall have authority to issue is Nine Thousand (9,000) shares of stock consisting of one class only, designated as "common stock" having a par value of One Cent ($.01) each.

ARTICLE V

The registered office of the corporation is located at 780 North Water Street, in the City of Milwaukee, Milwaukee County, Wisconsin 53202 and the name of its registered agent at such address is John A. Dickens.

ARTICLE VI

The number of directors constituting the initial Board of Directors of the corporation shall be as provided in the By-Laws of the corporation. The number of directors of the corporation may be changed from time to time by the By-Laws of the corporation, but in no case shall be less than one (1).

ARTICLE VII

The name and address of the incorporator is John A. Dickens, 780 North Water Street, Milwaukee, WI 53202.

Executed this 16th day of February, 1998.

/s/ John A. Dickens
----------------------------------------
John A. Dickens

This instrument was drafted by:

John A. Dickens
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202

MW2-122445-1

ILLEGIBLE

                                  ARTICLES OF               STATE OF WISCONSIN
                                 INCORPORATION                     FILED
                                                                FEB 25 1998
                                  CHAPTER 180                  DEPARTMENT OF
                                                          FINANCIAL INSTITUTIONS

PLEASE RETURN TO:


/s/ Janell M. Bishop
----------------------------------
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, WI 53202

ILLEGIBLE

AMENDMENT TO ARTICLES OF INCORPORATION

ZBB ENERGY CORPORATION

Pursuant to the consent of the sole incorporator of ZBB Energy Corporation and in accordance with Section 180.1005 of the Wisconsin Statutes, the following resolution was duly adopted on February 23, 1998:

BE IT RESOLVED, that the Articles of Incorporation of ZBB Energy Corporation be, and they hereby are, amended by deleting Article IV thereof and inserting in its place the following:

ARTICLE IV. The aggregate number of shares which the corporation shall have authority to issue is Fifty Million (50,000,000) shares of stock consisting of one class only, designated as "Common Stock" having a par value of One Cent ($.01) each.

Executed in duplicate this 23rd day of February 1998.

ZBB ENERGY CORPORATION

By: /s/ John A. Dickens
    ---------------------------------
    John A. Dickens, Incorporator

This instrument was drafted by:

Christopher B. Noyes
Godfrey & Kahn, S.C.
780 North Water Street
Milwaukee, Wisconsin 53202

AMD-ZBB.jsd
MW2-131621-1

ARTICLES OF - Chap. 180
AMENDMENT

Increases auth shares:
from: 9,000 SHS. Com. @ $.01 P.V.
to: 50,000,000 SHS. Com. @ $.01 P.V.

$10,000.00

+ 25.00 Exp.

STATE OF WISCONSIN
FILED
APR 29 1998
DEPARTMENT OF
FINANCIAL INSTITUTIONS

RECEIVED

DEC 21 2004
WISCONSIN
DFI

AMENDMENT TO ARTICLES OF INCORPORATION

ZBB ENERGY CORPORATION

Pursuant to the consent of the Board of Directors and the Shareholders of ZBB Energy Corporation, a Wisconsin corporation (the "Corporation"), and in accordance with Section 180.1003 of the Wisconsin Statutes, the following resolution was duly adopted as of October 28, 2004:

BE IT RESOLVED, that the Articles of Incorporation of the Corporation, be, and they hereby are, amended as follows:

1. Article IV of the Articles of Incorporation is hereby deleted in its entirety and the following inserted in place thereof:

ARTICLE IV

The aggregate number of shares which the Corporation shall have authority to issue is One Hundred Fifty Million (150,000,000) shares of stock consisting of one class only, designated as "Common Stock" having a par value of One Cent ($.01) each.

At the close of business on the effective date of this Amendment (the "Record Date"), each share of Common Stock outstanding or held in treasury immediately prior to the Record Date shall be changed into three shares of said Common Stock (the "Stock Split"). Stock certificates evidencing shares of Common Stock outstanding or held in treasury on the Record Date shall continue to evidence the same number of shares that such certificates evidenced prior to the Record Date and the additional shares issuable as a result of such change of each share into three shares shall be uncertificated shares and issued on the Record Date to persons who are at the close of business on the Record Date the holder of record of Common Stock.

2. Article VI of the Articles of Incorporation is hereby deleted in its entirety and the following inserted in place thereof:

ARTICLE VI

The number of directors shall be determined from time to time by resolution adopted by affirmative vote of a majority of the entire Board of Directors then in office, but shall not be less than three. The directors shall be divided into three classes, designated Class I, Class II, and Class III, and the term of directors of each class shall be three years; provided, however, that the initial term of Class I directors shall expire at the first annual shareholders' meeting after October 30, 2004, the initial term of Class II directors shall expire at the second annual shareholders' meeting after October 30, 2004 and the initial term of Class III directors shall expire at the third annual shareholders' meeting after October 30, 2004. Each class shall consist, as nearly as possible, of one-third of the total number of directors constituting the entire Board of Directors. If the number of directors is changed by resolution of the Board of Directors pursuant to this Article VI, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, but in no case shall a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be duly elected and shall quality except where a director is removed or resigns as a director prior to that date.

3. The following new Article VIII is hereby added to the Articles of Incorporation:

ARTICLE VIII

Notwithstanding any provision of these Articles of Incorporation, these Articles of Incorporation may he amended, altered or repealed, and new Articles of Incorporation may be enacted, only if not less than three-quarters of the shares of common stock of the Corporation cast at a meeting of shareholders duly called for such purpose favor such action.

4. The following new Article IX is hereby added to the Articles of Incorporation:

ARTICLE IX

Notwithstanding any other provision of these Articles of Incorporation or the Corporation's By-Laws, the Corporation's By-Laws may be amended, altered or repealed, and new By-Laws may be enacted, only if not less than three-quarters of the shares of

common stock of the Corporation cast at a meeting of shareholders duly called for such purpose favor such action. The Board of Directors may not amend, alter, repeal the Corporation's By-Laws, or enact new By-Laws; provided, however, the Board of Directors may propose to the shareholders that the Corporation's By-Laws be amended, altered or repealed, or that new By-Laws be enacted.

This Amendment shall be effective as of 10:35 a.m. on December 21, 2004.

[THE REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY]

Executed in duplicate as of the 21st day of December, 2004,

ZBB ENERGY CORPORATION

By: /s/ Geoffery David Hamn
    ------------------------------------
Name: GEOFFERY DAVID HAMN
Title: DIRECTOR / CEO

This instrument was drafted by:

Dennis F. Connolly
Godfrey & Kehn, S.C.
780 North Water Street
Milwankee, Wisconsin 53202

ARTICLES OF AMENDMENT
CHAPTER 180

Increases auth stock to:
150,000,000 Shs. Com. @ $.01 P.V.

12/22/04
005881
$6500

STATE OF WISCONSIN
FILED
DEC 22 2004
DEPARTMENT OF
FINANCIAL INSTITUTIONS

BY-LAWS

ZBB ENERGY CORPORATION

ARTICLE I. OFFICES

SECTION 1.01. Principal Office. The principal office of the Corporation shall be located at any place either within or outside the state of Wisconsin as designated in the Corporation's most current Annual Report filed with the Wisconsin Secretary of State. The executive offices of the Corporation shall be located at the principal office.

SECTION 1.02. Registered Office. The registered office of the Corporation, as required by the Wisconsin Business Corporation Law (the "WBCL"), shall be located within Wisconsin and may, but need not, be the same as any of its places of business. The address of the registered office may be changed from time to time.

ARTICLE II. SHAREHOLDERS

SECTION 2.01. Annual Shareholder Meeting. The annual meeting of the shareholders shall be held within 90 days after the close of the Corporation's fiscal year, at such time and date as determined by the Corporation's Board of Directors, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the election of directors shall not be held on the day designated herein for the annual meeting of the shareholders, or at any subsequent continuation after adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the shareholders as soon thereafter as is convenient.

SECTION 2.02. Special Shareholder Meetings. Special meetings of the shareholders, for any purpose or purposes, described in the meeting notice, may be called by the President, or by the Board of Directors, and shall be called by the President at the request of the holders of not less than one-tenth of all outstanding votes of the Corporation entitled to be cast on any issue at the meeting.

SECTION 2.03. Place of Shareholder Meeting. The Board of Directors may designate any place, either within or without the State of Wisconsin, as the place of meeting for any annual or any special meeting of the shareholders, unless all shareholders entitled to vote at the meeting designate, by unanimous written consent, a different place, either within or without the State of Wisconsin, as the place for the holding of such meeting. If no designation is made by either the directors or unanimous action of the voting shareholders, the place of meeting shall be the principal office of the Corporation in the State of Wisconsin.

SECTION 2.04. Notice of Shareholder Meeting.

2.04.1. Required Notice. Except as otherwise required by the WBCL, written notice stating the date, time and place of each annual or special shareholder meeting shall be delivered not less than 10 nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Board of Directors, or other persons calling the meeting, to each shareholder of record, entitled to vote at such meeting and to any other shareholder entitled by the WBCL or the Corporation's Articles of Incorporation to receive notice of the meeting. Notice may be communicated in person, by telephone, telegraph, teletype, facsimile or other forms of wire or wireless communication, or by mail or private carrier. Written notice to a shareholder shall be deemed to be effective on the earlier of: (a) the date received; (b) the date it is deposited in the United States mail when addressed to the shareholder's address shown in the Corporation's current record of shareholders, with postage prepaid; (c) the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee; (d) the date sent, if transmitted by telegraph, teletype, facsimile or other form of wire or wireless communication; or (e) the date delivered to a courier or deposited in a designated receptacle, if sent by private carrier, when addressed to the shareholder's address shown in the Corporation's current record of shareholders.

2.04.2. Adjourned Meeting. If any shareholder meeting is adjourned to a different date, time, or place, notice need not be given of the new date, time, and place, if the new date, time, and place is announced at the meeting before adjournment. But if a new record date for the adjourned meeting is, or must be fixed (see Section 2.05 of this Article II), then notice must be given pursuant to the requirements of Section 2.04.1, above, to those persons who are shareholders as of the new record date.

2.04.3. Waiver of Notice. Any shareholder may waive notice of the meeting (or any notice required by the WBCL, the Corporation's Articles of Incorporation or By-Laws), by a writing signed by the shareholder entitled to the notice, which is delivered to the Corporation (either before or after the date and time stated in the notice) for inclusion in the corporate records. A shareholder's attendance at a meeting, in person or by proxy:

(a) waives objection to lack of notice or defective notice of the meeting, unless the shareholder at the beginning of the meeting or promptly upon arrival objects to holding the meeting or transacting business at the meeting;

(b) waives objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless the shareholder objects to considering the matter when it is presented.

2.04.4. Contents of Notice. The notice of each special shareholder meeting shall include a description of the purpose or purposes for which the meeting is called and such other information as may be required by the WBCL. Except as provided in this Section 2.04.4, or as provided in the Corporation's Articles of Incorporation or otherwise in the WBCL, the notice of an annual shareholder meeting need not include a description of the purpose or purposes for which the meeting is called.

2.04.5. Special Transactions and Dissenters' Rights. If a purpose of any shareholder meeting is to consider either: (a) a proposed amendment to the Corporation's Articles of Incorporation (including any restated articles requiring shareholder approval); (b) a plan of merger or share exchange; (c) the sale, lease, exchange or other disposition of all, or substantially all of the Corporation's property; (d) the dissolution of the Corporation; or (e) the removal of a director, the notice must so state and must be accompanied by, respectively, a copy or summary of the: (i) articles of amendment; (ii) plan of merger or share exchange; or (iii) a description of the transaction for disposition of all the Corporation's property and must be given a sufficient number of days in advance of the meeting to comply with the WBCL. If the proposed corporate action creates dissenters' rights, the notice must state that shareholders are, or may be, entitled to assert dissenters' rights, and must be accompanied by a copy of Subchapter XIII of the WBCL.

SECTION 2.05. Fixing of Record Date.

2.05.1. Meetings, Distributions, Etc. For the purpose of determining shareholders of any voting group entitled to notice of a shareholders' meeting, to demand a special meeting, or to vote or take any other action, or shareholders entitled to receive payment of any distribution or share dividend, the Board of Directors may fix in advance a date as the record date. Such record date shall not be more than 70 days prior to the date on which the particular action requiring such determination of shareholders is to be taken. If no record date is so fixed by the Board of Directors for the determination of shareholders entitled to notice of, or to demand or vote at a meeting of shareholders, or shareholders entitled to receive a share dividend or distribution, the record date for determination of such shareholders shall be at the close of business on:

(a) with respect to an annual shareholder meeting or any special shareholder meeting called by the Board of Directors or any person specifically authorized by the Board of Directors or these By-laws to call a meeting, the day before the first notice is delivered to shareholders;

(b) with respect to a special shareholders' meeting demanded by the shareholders, the date the first shareholder signs the demand;

(d) with respect to actions taken in writing without a meeting (pursuant to Section 2.11 of this Article II), the date the first shareholder signs a consent; and

(e) with respect to a distribution to shareholders, (other than one involving a purchase, redemption or other acquisition of the Corporation's shares), the date the Board of Directors authorizes the distribution.

2.05.2. Adjournment. When a determination of shareholders entitled to vote at any shareholders' meeting has been made as provided in this Section 2.05, such determination shall apply to any adjournment thereof unless the Board of Directors fixes a new record date which it must do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting.

SECTION 2.06. Shareholder List. After fixing a record date for a meeting of shareholders, the Corporation shall prepare a list of the names of all its shareholders who are entitled to notice of the shareholders' meeting. The list shall be arranged by class or series of shares and show the address of and the number of shares held by each shareholder. The shareholders' list shall be available for inspection by any shareholder beginning two business days after notice of the meeting is given for which the list was prepared and continuing through the meeting. The list shall be available at the Corporation's principal office or at a place identified in the meeting notice in the city where the meeting is to be held. A shareholder, or his or her agent or attorney, is entitled, on written demand, to inspect and, provided that the shareholder, or his or her agent or attorney, demonstrates to the satisfaction of the Corporation he or she satisfies the applicable requirements of the WBCL, to copy the list during regular business hours and at his expense, during the period it is available for inspection. The Corporation shall make the shareholders' list available at the meeting and any shareholder, or his or her agent or attorney, may inspect the list at any time during the meeting or any adjournment thereof. Refusal or failure to prepare or make available the shareholders' list shall not affect the validity of any action taken at such meeting.

SECTION 2.07. Shareholder Quorum, Voting Requirements and Voting Groups.

2.07.1. Quorum. Shares entitled to vote as a separate voting group may take action on a matter at a meeting only if a quorum of those shares exists with respect to that matter. Unless the Corporation's Articles of Incorporation, a By-law adopted under authority granted in the Corporation's Articles of Incorporation or the WBCL provides otherwise, a majority of the votes entitled to be cast on the matter by the voting group constitutes a quorum of that voting group for action on that matter.

2.07.2. Voting Requirements. Once a share is represented for any purpose at a meeting, other than for the purposes of objecting to holding the meeting or transacting business at the meeting, it is deemed present for quorum purposes for the remainder of the meeting and for any adjournment of that meeting unless a new record date is or must

be set for that adjourned meeting. If a quorum exists, action on a matter (other than the election of directors) by a voting group is approved if the votes cast within the voting group favoring the action exceed the votes cast opposing the action, unless the Articles of Incorporation or a By-law adopted under authority granted in the Corporation's Articles of Incorporation or the WBCL requires a greater number of affirmative votes.

2.07.3. Voting Groups. If the Corporation's Articles of Incorporation, a By-law adopted under authority granted in the Corporation's Articles of Incorporation or the WBCL provides for voting by a single voting group on a matter, action on that matter is taken when voted upon by that voting group. If the Articles of Incorporation or the WBCL provides for voting by two or more voting groups on a matter, action on that matter is taken only when voted upon by each of those voting groups counted separately. Action may be taken by one voting group on a matter even though no action is taken by another voting group entitled to vote on the matter.

SECTION 2.08. Proxies. At all meetings of shareholders, a shareholder may vote in person, or vote by proxy pursuant to an appointment of proxy that is executed in writing by the shareholder or by his duly authorized attorney-in-fact. Such appointment of a proxy shall be filed before or at the time of the meeting with the Secretary of the Corporation or other person authorized to tabulate votes. No appointment of a proxy shall be valid after 11 months from the date of its execution unless otherwise provided in the appointment of the proxy.

SECTION 2.09. Voting of Shares.

2.09.1. Generally. Except as provided otherwise in the WBCL or in the Corporation's Articles of Incorporation, each outstanding share entitled to vote shall be entitled to one vote upon each matter submitted to a vote at a meeting of shareholders.

2.09.2. Shares Held by a Controlled Corporation. No shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. The foregoing, however, shall not limit the power of the Corporation to vote any shares, including its own shares, held by it in a fiduciary capacity.

2.09.3. Redeemable Shares. Redeemable shares are not entitled to vote after notice of redemption is mailed to the holders thereof and a sum sufficient to redeem the shares has been deposited with a bank, trust company, or other financial institution under an irrevocable obligation to pay the holders the redemption price on surrender of the shares.

SECTION 2.10. Corporation's Acceptance of Votes.

2.10.1. Shareholder Name. If the name signed on a vote, consent, waiver, or proxy appointment corresponds to the name of a shareholder, the Corporation, if acting in good faith, is entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder.

2.10.2. Other Name. If the name signed on a vote, consent, waiver. Or proxy appointment does not correspond to the name of its shareholder, the Corporation, if acting in good faith, is nevertheless entitled to accept the vote, consent, waiver, or proxy appointment and give it effect as the act of the shareholder if:

(a) the shareholder is an entity as defined in the WBCL and the name signed purports to be that of an officer or agent of the entity;

(b) the name signed purports to be that of a personal representative, administrator, executor, guardian, or conservator representing the shareholder and, if the Corporation requests, evidence of fiduciary status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;

(c) the name signed purports to be that of a receiver or trustee in bankruptcy of the shareholder and, if the Corporation requests, evidence of this status acceptable to the Corporation has been presented with respect to the vote, consent, waiver, or proxy appointment;

(d) the name signed purports to be that of a pledgee, beneficial owner, or attorney-in-fact of the shareholder and, if the Corporation requests, evidence acceptable to the Corporation of the signatory's authority to sign for the shareholder has been presented with respect to the vote, consent, waiver, or proxy appointment; or

(e) two or more persons are the shareholder as co-tenants or fiduciaries and the name signed purports to be the name of at least one of the co-owners and the person signing appears to be acting on behalf of all the co-owners.

2.10.3. Invalid Signature. The Corporation is entitled to reject a vote, consent, waiver, or proxy appointment if the Secretary or other officer or agent authorized to tabulate votes, acting in good faith, has reasonable basis for doubt about the validity of the signature or about the signatory's authority to sign for the shareholder.

2.10.4. No Liability. The Corporation and its officers or agents who accept or reject a vote, consent, waiver, or proxy appointment in good faith and in accordance with

the standards of this Section we not liable in damages to the shareholder for the consequences of the acceptance or rejection.

2.10.5. Presumption of Validity. Corporate action based on the acceptance or rejection of a vote, consent, waiver, or proxy appointment under this Section 2.10 is valid unless a court of competent jurisdiction determines otherwise.

SECTION 2.11. Informal Action by Shareholders. Any action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting if one or more written consents, setting forth the action so taken, are signed by all of the shareholders entitled to vote with respect to the subject matter thereof and are delivered to the Corporation for inclusion in the minute book. If the action to be taken requires that notice be given to non-voting shareholders, the Corporation shall give the non-voting shareholders written notice of the proposed action at least 10 days before the action is taken, which notice shall contain or be accompanied by the same material that would have been required if a formal meeting had been called to consider the action. Action taken by consents is effective when the last such written consent is delivered to the Corporation, unless the consent specifies a different effective date. A consent signed under this Section has the effect of a meeting vote and may be described as such in any document.

SECTION 2.12. Voting for Directors. Except as provided in Section 2.11, above, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. In this Section 2.12, "plurality" means that the individuals with the largest number of votes are elected as directors up to the maximum number of directors to be chosen at the election. Votes cast against a candidate are not given legal effect and are not counted as votes cast in an election of directors.

ARTICLE III. BOARD OF DIRECTORS

SECTION 3.01. General Powers. All corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be managed under the direction of the Board of Directors.

SECTION 3.02. Number, Tenure, and Qualifications of Directors. The number of directors of the Corporation shall be Six (6). Each director shall hold office until the next annual meeting of shareholders or until his earlier removal or resignation. However, if his term expires, he shall continue to serve until his successor shall have been elected and qualified or until there is a decrease in the number of directors. Directors need not be residents of the State of Wisconsin or shareholders of the Corporation unless so required by the Corporation's Articles of Incorporation.

SECTION 3.03. Regular Meetings of the Board of Directors. A regular meeting of the Board of Directors shall be held without other notice than this By-law immediately after, and at the same place as, the annual meeting of shareholders. The President of the Corporation, or in

his absence, the Board of Directors may provide, by resolution, the time and place, only within the county where this Corporation's principal office is located, for the holding of additional regular meetings without other notice than such resolution. Any such regular meeting may be held by telephone in accordance with Section 3.07, below.

SECTION 3.04. Special Meetings of the Board of Directors. Special meetings of the Board of Directors may be called by or at the request of the President or any one director. The person authorized to call special meeting of the Board of Directors may fix any place, only within the county where this Corporation's principal office is located, for holding any special meeting of the Board of Directors. Any such special meeting may be held by telephone in accordance with
Section 3.07, below.

SECTION 3.05. Notice of, and Waiver of Notice for, Special Director Meetings. Notice of meetings, except the regular annual meeting of the Board of Directors, shall be given at least five (5) days prior to the date set for any such meeting. Notice may be communicated in person, by telephone, telegraph, teletype, facsimile or other form of wire or wireless communication, or by mail or private carrier. Written notice shall be deemed to be effective on the earlier of: (a) the date received; (b) the date it is deposited in the United States mail when addressed to the director at his business or home address as it appears in the Corporation's records, with postage prepaid; (c) the date shown on the return receipt, if sent by registered or certified mail, return receipt requested, and the receipt is signed by or on behalf of the addressee; (d) the date sent, if transmitted by telegraph, teletype, facsimile or other form of wire or wireless communication; or (e) the date delivered to a courier or deposited in a designated receptacle, if sent by private carrier, when addressed to the director at his business or home address as it appears in the Corporation's records. Oral notice shall be deemed effective when communicated. Whenever any notice whatever is required to be given to any director of the Corporation under these By-laws, the Corporation's Articles of Incorporation or the WBCL, a waiver thereof in writing, signed at any time whether before or after the time of meeting, by the director entitled to such notice, shall be deemed equivalent to timely notice. A director's attendance at, or participation in, a meeting waives any required notice unless the director at the beginning of the meeting or promptly upon his or her arrival objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of such meeting.

SECTION 3.06. Director Quorum and Votes.

3.06.1. Quorum. A majority of the number of directors specified in
Section 3.02. above, shall constitute a quorum for the transaction of business at any meeting of the Board of Directors.

3.06.2. Votes. The affirmative vote of the majority of the directors present at a meeting at which a quorum is present when the vote is taken shall be the act of the Board of

Directors. If a vote of the Directors results in a tie vote, the Chairman of the Board of Directors shall have the authority to cast a further vote in order to break the tie vote.

SECTION 3.07. Meetings; Assent.

3.07.1. Telephonic Meetings. Any or all directors may participate in a regular or special meeting by, or conduct the meeting through the use of, any means of communication by which all directors participating may simultaneously hear each other during the meeting and all communication during the meeting is immediately transmitted to each participating director and each participating director is able to immediately send messages to all other participating directors. If the meeting is to be conducted through the use of any such means of communication all participating directors must be informed that a meeting is taking place at which official business may be transacted. A director participating in a meeting by any such means of communication is deemed to be present in person at the meeting.

3.07.2. Presumption of Assent. A director who is present at a meeting of the Board of Directors or a committee of the Board of Directors when corporate action is taken is deemed to have assented to the action taken unless: (a) he objects at the beginning of the meeting (or promptly upon his arrival) to holding the meeting or transacting business at the meeting; or (b) he dissents or abstains from the action taken and minutes of the meeting are prepared that show his dissent or abstention from the action taken; or (c) he delivers written notice of his dissent or abstention to the presiding officer of the meeting before its adjournment or to the Corporation immediately after adjournment of the meeting; or (d) he dissents or abstains from the action taken and minutes of the meeting are prepared that fail to show his dissent or abstention and he delivers written notice of that failure to the Corporation promptly after receiving the minutes. The right of dissent or abstention is not available to a director who votes in favor of the action taken.

SECTION 3.08. Director Action Without a Meeting. Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if the action is taken by all members of the Board of Directors. The action shall be evidenced by one or more written consents describing the action taken, signed by each director and retained by the Corporation. Action taken by consents is effective when the last director signs the consent, unless the consent specifies a different effective date. A signed consent has the effect of a meeting vote and may be described as such in any document.

SECTION 3.09. Removal and Resignation of Directors.

3.09.1. Removal. The shareholders may remove one or more directors only at a meeting called for that purpose if notice has been given to the shareholders that a purpose of the meeting is such removal. The removal may be with or without cause. If a director

is elected by a voting group, only the shareholders of that voting group may participate in the vote to remove that director. A director may be removed only if the number of votes cast to remove him exceeds the number of votes cast not to remove him.

3.09.2. Resignation. A director may resign at any time by delivering written notice to the Board of Directors or to the Corporation. A resignation is effective when such notice is delivered to the Corporation unless the notice specifies a later effective date.

SECTION 3.10. Board of Director Vacancies.

3.10.1. Filling of Vacancies, Generally. Unless the Corporation's Articles of Incorporation provide otherwise, if a vacancy occurs on the Board of Directors, including a vacancy resulting from an increase in the number of directors, the shareholders may fill the vacancy. During such time that the shareholders fail or are unable to fill such vacancies then and until the shareholders act:

(a) the Board of Directors may fill the vacancy; or

(b) if the directors remaining in office constitute fewer than a quorum of the Board of Directors, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office.

3.10.2. Vacancy for Director Elected by a Voting Group. If the vacant office was held by a director elected by a voting group of shareholders, only the holders of shares of that voting group may vote to fill the vacancy if it is filled by the shareholders, and only the remaining directors elected by that voting group may vote to fill the vacancy if it is filled by the directors.

3.10.3. Filling of Vacancy Due to Deferred Resignation. A vacancy that will occur at a specific later date by reason of a resignation effective at a later date may be filled before the vacancy occurs but the new director may not take office until the vacancy occurs.

3.10.4. Term of Replacement Director. The term of a director elected to fill a vacancy expires at the next shareholders' meeting at which directors are elected. However, if his term expires, he shall continue to serve until his successor is elected and qualified or until there is a decrease in the number of directors.

SECTION 3.11. Director Compensation. Unless the Corporation's Articles of Incorporation provide otherwise, the Board of Directors, by resolution and irrespective of any personal interest of any of its members, may provide that each director be paid his expenses, if any, of attendance at each meeting of the Board of Directors, and a stated salary as director or a

fixed sum for attendance at each meeting of the Board of Directors or both. No such payment shall preclude any director from serving the Corporation in any capacity and receiving compensation therefor.

SECTION 3.12. Director Committees.

3.12.1. Creation of Committees. The Board of Directors may create one or more committees and appoint members of the Board of Directors to serve on them. Each committee must have two or more members, who serve at the pleasure of the Board of Directors.

3.12.2. Selection of Members. The creation of a committee and appointment of members to it must be approved by the greater of (1) a majority of all the directors in office when the action is taken or (2) the number of directors required by the Articles of Incorporation to take such action, (or, if none is specified in the Corporation's Articles of Incorporation, the number required by Section 3.06, above, to take action).

3.12.3. Required Procedures. Sections 3.03,3.04,3.05,3.06,3.07 and 3.08, above, which govern meetings, notice and waiver of notice, quorum and voting, and action without meetings, of the Board of Directors, apply to committees and their members.

3.12.4. Authority. Each committee may exercise those aspects of the authority of the Board of Directors which the Board of Directors confers upon such committee in the resolution creating the committee except that a committee may not do any of the following:

(a) authorize distributions of assets of the Corporation;

(b) approve or propose to shareholders action that the WBCL requires be approved by shareholders;

(c) fill vacancies on the Board of Directors or on any of its committees, unless the Board of Directors has specifically granted such authority to the committee;

(d) amend the Articles of Incorporation pursuant to the authority of directors to do so granted by Section 180.1002 of the WBCL or any successor thereto;

(e) adopt, amend, or repeal By-laws;

(f) approve a plan of merger not requiring shareholder approval;

(g) authorize or approve reacquisition of shares, except according to a formula or method prescribed by the Board of Directors; or

(h) authorize or approve the issuance or sale or contract for sale of shares or determine the designation and relative rights, preferences, and limitations of a class or series of shares, except that the Board of Directors may authorize a committee (or a senior executive officer of the Corporation) to do so within limits specifically prescribed by the Board of Directors.

ARTICLE IV. OFFICERS

SECTION 4.01. Number of Officers. The officers of the Corporation may consist of the offices of president, vice-president, secretary, and treasurer, each of whom shall be appointed by the Board of Directors. The Board of Directors may appoint such other officers and assistant officers as it deems necessary. If specifically authorized by the Board of Directors, an officer may appoint one or more officers or assistant officers. The same individual may simultaneously hold more than one office in the Corporation.

SECTION 4.02. Appointment and Term of Office. The officers of the Corporation shall be appointed by the Board of Directors for a term as determined by the Board of Directors. If no term is specified, they shall hold office until the first meeting of the Board of Directors held after the next annual meeting of shareholders. If the appointment of officers shall not be made at such meeting, such appointment shall be made as soon thereafter as is convenient. Each officer shall hold office until his successor shall have been duly appointed and shall have been qualified, until his death, or until he shall resign or shall have been removed in the manner provided in Section 4.03. below. The designation of a specified term does not grant to the officer any contract rights, and the Board of Directors may remove the officer at any time prior to the termination of such term.

SECTION 4.03. Removal of Officers. Any officer or agent may be removed by the Board of Directors at any time, with or without cause. Such removal shall be without prejudice to the contract rights, if any, of the person so removed. Appointment of an officer or agent shall not of itself create contract rights.

SECTION 4.04. Vacancies. A vacancy in any principal office because of death, resignation, removal, disqualification or otherwise, shall be filled by the Board of Directors for the unexpired portion of the term.

SECTION 4.05. Chairman of the Board. The Chairman of the Board (if the Board of Directors has elected one) shall preside at all annual and special meetings of the shareholders and all regular and special meetings of the Board of Directors, shall advise and consult with the President and shall be responsible for the administration and management of the areas of the

business and affairs of the Corporation assigned to him or her from time to time by the Board of Directors.

SECTION 4.06. President. The President shall be the principal executive officer of the Corporation and, subject to the control of the Board of Directors, shall supervise and control all of the business and affairs of the Corporation and its officers. The President shall have the authority, subject to such rules as may be prescribed by the Board of Directors, to appoint such agents and employees of the Corporation as the President deems necessary, prescribe their powers, duties and compensation and delegate authority to them. Such agents and employees shall hold offices at the discretion of the President. The President may sign, execute, and acknowledge, on behalf of the Corporation, certificates for shares of the Corporation's capital stock and deeds, mortgages, bonds, contracts, or other instruments necessary or proper to be executed in the course of the Corporation's regular business or which the Board of Directors has authorized to be executed. Except as otherwise provided by the WBCL or the Board of Directors, the President may authorize any other officer or agent of the Corporation to sign, execute and acknowledge such documents or instruments in his place and stead. In general, the President shall have all authority and perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time.

SECTION 4.07. Vice-Presidents. In the absence of the President and the Chairman of the Board or in the event of his death, inability or refusal to act, the Vice-President, if one has been elected (or in the event that there is more than one Vice-President, the Vice-Presidents in the order designated at the time of their appointment, or in the absence of any designation, then in the order of their appointment), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Any Vice-President may sign certificates for shares of the Corporation's capital stock, the issuance of which have been authorized by resolution of the Board of Directors; and shall perform such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

SECTION 4.08. Secretary. The Secretary shall: (a) keep the minutes of the proceedings of the shareholders and of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-laws or as required by the WBCL; (c) be custodian of the corporate records and of any seal of the Corporation and, if there is a seal of the Corporation, see that it is affixed to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized; (d) when requested or required, authenticate any records of the Corporation; (e) keep a register of the post office address of each shareholder which shall be furnished to the Secretary by such shareholder or delegate that responsibility to a stock transfer agent approved by the Board of Directors; (f) sign, with the President or a Vice-President, certificates for shares of the Corporation's capital stock, the issuance of which has been authorized by resolution of the Board of Directors; (g) have general charge of the stock transfer books of the Corporation; and (h) in general perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the President or by the Board of Directors.

SECTION 4.09. Treasury. The Treasurer shall: (a) have charge and custody of and be responsible for all funds and securities of the Corporation; (b) receive and give receipts for moneys due and payable to the Corporation from any source whatsoever, and deposit all such moneys in the name of the Corporation in such banks, trust companies, or other depositaries as shall be selected by the Board of Directors; and (c) in general perform all of the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the President or by the Board of Directors. If required by the Board of Directors, the Treasurer shall give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors shall require.

SECTION 4.10. Assistant Secretaries and Assistant Treasurers. The Assistant Secretaries, when authorized by the Board of Directors, may sign with the President or a Vice-President certificates for shares of the Corporation the issuance of which shall have been authorized by a resolution of the Board of Directors. The Assistant Treasurers shall respectively, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. The Assistant Secretaries and Assistant Treasurers, in general, shall perform such duties as shall be assigned to them by the Secretary or the Treasurer, respectively, or by the President or the Board of Directors.

SECTION 4.11. Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors.

ARTICLE V. LIABILITY AND INDEMNIFICATION
OF DIRECTORS, OFFICERS AND EMPLOYEES

SECTION 5.01. Definitions Applicable to Indemnification and Insurance Provisions.

5.01.1. Director. Officer or Employee. "Director, Officer or Employee" means any of the following:

(a) A natural person who is or was a director, officer or employee of the Corporation.

(b) A natural person who, while a director, officer or employee of the Corporation, is or was serving either pursuant to the Corporation's specific request or as a result of the nature of such person's duties to the Corporation as a director, officer, partner, trustee, member of any governing or decision-making committee, employee or agent of another corporation or foreign corporation, partnership, joint venture, trust or other enterprise.

(c) A natural person who, while a director, officer or employee of the Corporation, is or was serving an employee benefit plan because his or her duties

to the Corporation also impose duties on, or otherwise involve services by, the person to the plan or to participants in or beneficiaries of the plan.

(d) Unless the context requires otherwise, the estate or personal representative of a director, officer or employee.

5.01.2. Expenses. "Expenses" include fees, costs, charges, disbursements, attorney fees and any other expenses incurred in connection with a Proceeding (as defined below in Subsection 5.01.5).

5.01.3. Liability. "Liability" includes the obligation to pay a judgment, settlement, penalty, assessment, forfeiture or fine, including an excise tax assessed with respect to an employee benefit plan, and reasonable expenses.

5.01.4. Party. "Party" includes a natural person who was or is, or who is threatened to be made, a named defendant or respondent in a Proceeding (as defined below in Subsection 5.01.5).

5.01.5. Proceeding. "Proceeding" means any threatened, pending or completed civil, criminal, administrative or investigative action, suit, arbitration or other proceeding, whether formal or informal, which involves foreign, federal, state or local law and which is brought by or in the right of the Corporation or by any other person or entity.

SECTION 5.02. Indemnification of Officers, Directors and Employees.

5.02.1. Successful Defense. The Corporation shall indemnify a Director, Officer or Employee to the extent he has been successful on the merits or otherwise in the defense of a Proceeding for all reasonable Expenses incurred in connection with the Proceeding if such person was a party because he is a Director, Officer or Employee. Indemnification under this Subsection 5.02.1 shall be made within 10 days of receipt of a written demand for indemnification.

5.02.2. Other Cases. In cases not included under Subsection 5.02.1, the Corporation shall indemnify a Director, Officer or Employee against Liability and Expenses incurred by such person in connection with a Proceeding to which such person was a party because he is a Director, Officer or Employee, unless it shall have been proven by final judicial adjudication that such person breached or failed to perform a duty owed to the Corporation which constitutes:

(a) A willful failure to deal fairly with the Corporation or its shareholders in connection with a matter in which the Director, Officer or Employee has a material conflict of interest;

(b) A violation of criminal law, unless the Director, Officer or Employee had reasonable cause to believe his conduct was lawful or no reasonable cause to believe his conduct was unlawful;

(d) Willful misconduct

Indemnification required under this Subsection 5.02.2 shall be made within 30 days of receipt of a written demand for indemnification.

SECTION 5.03. Determination that Indemnification is Proper.

5.03.1. Means of Determining whether Indemnification is Required. Unless provided otherwise in the Corporation's Articles of Incorporation or by a written agreement between the Director, Officer or Employee and the Corporation, determination of whether indemnification is required under
Section 5.02 shall be made by any one of the following means selected by the Director, Officer or Employee seeking indemnification:

(a) By a majority vote of a quorum of the Board of Directors consisting of directors not at the time Parties to the same or related Proceedings. If a quorum of disinterested directors cannot be obtained, such determination may be made by majority vote of a committee duly appointed by the Board of Directors and consisting solely of two or more directors not at the time Parties to the same or related Proceedings. Directors who are Parties to the same or related Proceedings may participate in the designation of members of the committee.

(b) By independent legal counsel selected by a quorum of the Board of Directors or its committee in the manner prescribed in Subsection 5.03.1 (a). above, or, if unable to obtain such a quorum or committee, by a majority vote of the full Board of Directors, including directors who are Parties to the same or related Proceedings.

(c) By a panel of three arbitrators consisting of one arbitrator selected by those directors entitled under Subsection 5.03.1(b), above, to select independent counsel, one arbitrator selected by the Director, Officer or Employee seeking indemnification, and one arbitrator selected by the two arbitrators previously selected.

(d) By an affirmative vote of a majority of the outstanding shares. Shares owned by, or voted under the control of, persons who are at the time Parties to the

same or related Proceedings, whether as plaintiffs or defendants or in any other capacity, may not be voted in making the determination.

(e) By court order.

5.03.2. Effect of Termination of Proceeding. The termination of a Proceeding by judgment, order, settlement or conviction, or upon a plea of no contest or an equivalent plea, does not, by itself, create a presumption that indemnification of the Director, Officer or Employee is not required under this Article V.

5.03.3. Request for Indemnification & Assignment of Claims Required. A Director, Officer or Employee who seeks indemnification under this Article V shall make a written request to the Corporation. As a further pre-condition to any right to receive indemnification, the writing shall contain a declaration that the Corporation shall have the right to exercise all rights and remedies available to such Director, Officer or Employee against any other person, corporation, foreign corporation, partnership, joint venture, trust or other enterprise, arising out of, or related to, the Proceeding which resulted in the Liability and Expense for which such Director, Officer or Employee is seeking indemnification, and that the Director, Officer or Employee is hereby deemed to have assigned to the Corporation all such rights and remedies.

5.03.4. Indemnification Not Required. Indemnification under this Article V is not required to the extent the Director, Officer or Employee has previously received indemnification or allowance of expenses from any person or entity, including the Corporation, in connection with the same Proceeding.

5.03.5. Allowance of Expenses as Incurred. Upon written request by a Director, Officer or Employee who is a Party to a Proceeding, the Corporation shall pay or reimburse his reasonable expenses as incurred if the Director, Officer or Employee provides the Corporation with all of the following:

(a) A written affirmation of his good faith belief that he has not breached or failed to perform his duties to the Corporation; and

(b) A written undertaking, executed personally or on his behalf, to repay the allowance without interest to the extent that it is ultimately determined by court order that indemnification under Subsection 5.02.2 is prohibited.

The undertaking under this Subsection shall be accepted without reference to the Director's, Officer's or Employee's ability to repay the allowance. The undertaking shall be unsecured.

5.03.6. Subsequent Limitation of Right to Indemnification. The right to indemnification under this Article V may only be reduced by the subsequent affirmative vote of not less than two-thirds of the votes cast by the holders of the Corporation's outstanding capital stock entitled to vote on such matter. Any reduction in the right to indemnification may only be prospective from the date of such vote.

SECTION 5.04. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is a Director, Officer or Employee against any Liability asserted against or incurred by the individual in any such capacity or arising out of his status as such, regardless of whether the Corporation is required or authorized to indemnify or allow expenses to the individual under this Article V.

SECTION 5.05. Severability. If this Article V or any portion thereof is invalidated on any ground by any court of competent jurisdiction, the Corporation shall indemnity the Director, Officer or Employee as to Expenses and Liabilities paid in settlement with respect to any Proceeding to the full extent permitted by any applicable portion of this Article V that is not invalidated or by applicable law.

ARTICLE VI. CERTIFICATES FOR SHARES AND THEIR TRANSFER

SECTION 6.01. Certificates for Shares.

6.01.1. Content. Certificates representing shares of the Corporation shall at minimum, state on their face the name of the Corporation and that it is formed under the laws of Wisconsin; the name of the person to whom issued; and the number and class of shares and the designation of the series, if any, the certificate represents, and be in such form as determined by the Board of Directors. Such certificates shall be signed (either manually or by facsimile) by the President or Vice-President or any other two officers of the Corporation. Each certificate for shares shall be consecutively numbered or otherwise identified.

6.01.2. Legend as to Class or Series. If the Corporation is authorized to issue different classes of shares or different series within a class, the designations, relative rights, preferences, and limitations applicable to each class and the variations in rights, preferences, and limitations determined for each series (and the authority of the Board of Directors to determine variations for future series) must be summarized on the front or back of each certificate. Alternatively, each certificate may state conspicuously on its front or back that the Corporation will furnish the shareholder this information on request, in writing and without charge.

6.01.3. Shareholder List. The name and address of the person to whom the shares represented by each stock certificate are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Corporation.

6.01.4. Transferring Shares. Subject to Section 6.04, all certificates surrendered to the Corporation for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and cancelled, except that in case of a lost, destroyed, or mutilated certificate a new one may be issued therefor upon such terms and indemnity to the Corporation as the Board of Directors may prescribe.

SECTION 6.02. Registration of the Transfer of Shares. Registration of the transfer of shares of the Corporation shall be made only on the stock transfer books of the Corporation. In order to register a transfer, the record owner shall surrender the shares to the Corporation for cancellation, properly endorsed by the appropriate person or persons with reasonable assurances that the endorsements are genuine and effective. Unless the Corporation has established a procedure by which a beneficial owner of shares held by a nominee is to be recognized by the Corporation as the owner, the person in whose name shares stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes.

SECTION 6.03. Acquisition of Shares. The Corporation may acquire its own shares and all shares so acquired constitute treasury shares, which shall be considered issued but not outstanding shares, unless (a) the Corporation's Articles of Incorporation prohibit treasury shares or prohibit the reissuance of acquired shares; or (b) the Board of Directors, by resolution, cancels the acquired shares, in which event the shares are restored to the status of authorized but unissued shares. If the Articles of Incorporation prohibit treasury shares but do not prohibit the reissuance of acquired shares, all of the Corporation's shares acquired by it shall be restored to the status of authorized but unissued shares. If the Articles of Incorporation prohibit the reissuance of acquired shares, the number of authorized shares of the Corporation is reduced by the number of shares acquired by the Corporation, effective upon amendment of the Articles of Incorporation, including pursuant to articles of amendment adopted by the Board of Directors without shareholder action pursuant to Section 180.0631(3)(b) of the WBCL, which contain the information required thereby or by any successor to Section 180.0631(3)(b) of the WBCL.

SECTION 6.04. Transferability of Certain Securities. The Corporation will not register the transfer of any shares of the Corporation's common stock, options to purchase common stock and notes convertible into common stock (collectively, the "Securities"), which were exchanged for similar securities held by the shareholders of ZBB Technologies, Ltd. in a transaction exempt from registration under the U.S. securities laws pursuant to Regulation S thereunder, if such transfer is not made in accordance with the provisions of Regulation S of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to registration of the Securities under the Securities Act, or pursuant to an available exemption from registration under the Securities Act.

ARTICLE VII. DISTRIBUTIONS

The Board of Directors may authorize, and the Corporation may make, distributions (including dividends on its outstanding shares) in the manner and upon the terms and conditions provided by the WBCL and any other applicable law and in the Corporation's Articles of Incorporation.

ARTICLE VIII. AMENDMENTS

SECTION 8.01. By the Board of Directors. The Corporation's Board of Directors may amend or repeal the Corporation's By-laws unless:

(a) the Corporation's Articles of Incorporation or the WBCL reserve this power exclusively to the shareholders in whole or part; or

(b) the shareholders in adopting, amending, or repealing a particular By-law provide expressly that the Board of Directors may not amend or repeal that By-law.

SECTION 8.02. By the Shareholders. The Corporation's shareholders may amend or repeal the Corporation's By-laws even though the By-laws may also be amended or repealed by its Board of Directors.

SECTION 8.03. Implied Amendments. Any action taken or authorized by the shareholders by the affirmative vote of the holders of a majority of the shares of each voting group entitled to vote thereon or by the Board of Directors by affirmative vote of a majority of the directors, shall be given the same effect as though the By-laws had been temporarily amended so far as is necessary to permit the specific action so taken or authorized.

NEITHER THE OFFER NOR SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT"). THE SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE ACT, OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER THE ACT.

ZBB ENERGY CORPORATION
8% SENIOR SECURED NOTE
DUE: JULY 14, 2008

No. 1 June 14, 2006 $1,113,333 New York, New York

FOR VALUE RECEIVED, the undersigned, ZBB ENERGY CORPORATION (herein called the "COMPANY"), a corporation organized and existing under the laws of the State of Wisconsin, promises to pay to ABS SOS-PLUS PARTNERS, LTD., or registered assigns, the principal sum of One Million One Hundred Thirteen Thousand Three Hundred Thirty-Three Dollars (US$1,113,333) on July 14, 2008, with interest (computed on the basis of a 360-day year) on the amount equal to 75% of the unpaid balance thereof at the rate of eight percent (8.00%) per annum from the date hereof, payable quarterly, on the 14th day of each July, October, January and April, commencing July 14, 2006, until the principal hereof shall have become due and payable, provided, however, that the interest rate shall be the Default Rate, as defined in the Note Purchase Agreement dated as of June 14, 2006 by and between the Company and the respective Buyers named therein (as from time to time amended, the "NOTE PURCHASE AGREEMENT"), on all outstanding principal if a Default or an Event of Default, as such terms are defined in the Note Purchase Agreement, has occurred and is continuing.

Payments of principal of, and interest on, this Note are to be made in lawful money of the United States of America at such place as provided in the Note Purchase Agreement. This Note is one of a series of Senior Secured Notes (herein called the "NOTES") issued pursuant to the Note Purchase Agreement, and is subject to other terms as set forth in the Note Purchase Agreement.

This Note is a registered Note and, as provided in the Note Purchase Agreement, upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the registered holder hereof or such holder's attorney duly authorized in writing, a new Note for a like principal amount will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company may treat the person in whose name this Note is

registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company will not be affected by any notice to the contrary.

Payment of the principal of, and interest on, this Note, and all other amounts due under the Note Purchase Agreement, is guaranteed by certain subsidiaries of the Company and secured by certain assets of the Company and such subsidiaries as provided in the Note Purchase Agreement.

This Note may be converted into the capital stock of the Company as provided in the Note Purchase Agreement.

This Note shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the law of the State of New York excluding choice-of-law principles of the law of such State that would require the application of the laws of a jurisdiction other than such State.

It is intended that all interest paid hereunder shall constitute "portfolio interest" within the meaning of Section 871(h) of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder.

ZBB ENERGY CORPORATION

By:

Robert Parry Chief Executive Officer

REGISTRATION RIGHTS AGREEMENT

THIS REGISTRATION RIGHTS AGREEMENT (the "AGREEMENT") is made as of June 14, 2006 by and among ZBB ENERGY CORPORATION, a Wisconsin corporation (the "COMPANY"), and the persons and entities listed on the signature pages hereof (the "INVESTORS").

WITNESSETH:

WHEREAS, the Investors have purchased Warrants to purchase up to 14,844,440 shares (the "WARRANT SHARES") of Common Stock of the Company pursuant to the Note Purchase Agreement dated June 14, 2006 (the "NOTE PURCHASE
AGREEMENT"); and

WHEREAS, the Investors have purchased Notes pursuant to the Note Purchase Agreement, which such Notes, upon an event of default, as provided in the Note Purchase Agreement, may be converted at the option of each holder into an estimated aggregate of 14,844,440 shares (the "CONVERSION SHARES") of Common Stock of the Company; and

WHEREAS, the Company has agreed with the Investors to grant certain registration rights with respect to the Warrant Shares and Conversion Shares.

NOW THEREFORE, in consideration of the foregoing, the parties agree as follows:

1. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings:

"COMMISSION" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act.

"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations thereunder, all as the same shall be in effect at the time.

"HOLDER" shall mean any holder of outstanding Registrable Securities or anyone who holds outstanding Registrable Securities to whom the registration rights conferred by this Agreement have been transferred in compliance with this Agreement.

"INITIATING HOLDERS" shall mean any Holder or Holders of at least fifty-one percent (51%) of the Registrable Securities then outstanding.

"REGISTER," "REGISTERED" and "REGISTRATION" shall refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of the effectiveness of such registration statement, and compliance with applicable state securities laws of such states in which Holders notify the Company of their intention to offer Registrable Securities.

"REGISTRABLE SECURITIES" shall mean all of the following to the extent the same have not been sold to the public (i) any and all of the Warrant Shares and Conversion Shares;

or (ii) stock issued in respect of stock referred to in (i) above in any reorganization; or (iii) stock issued in respect of the stock referred to in (i) or (ii) as a result of a stock split, stock dividend, recapitalization or combination. Notwithstanding the foregoing, Registrable Securities shall not include otherwise Registrable Securities (i) sold by a person in a transaction in which his rights under this Agreement are not properly assigned; or (ii) (A) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (B) sold in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under
Section 4(1) thereof so that all transfer restrictions, and restrictive legends with respect thereto, if any, are removed upon the consummation of such sale or
(C) the registration rights associated with such securities have been terminated pursuant to Section 12 of this Agreement.

"RULE 144" shall mean Rule 144 under the Securities Act or any successor or similar rule as may be enacted by the Commission from time to time, but shall not include Rule 144A.

"RULE 144A" shall mean Rule 144A under the Securities Act or any successor or similar rule as may be enacted by the Commission from time to time, but shall not include Rule 144.

"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations thereunder, all as the same shall be in effect at the time.

2. RESTRICTIONS ON TRANSFERABILITY. The Registrable Securities shall not be sold, assigned, transferred or pledged except upon the conditions specified in this Agreement, which conditions are intended to ensure compliance with the provisions of the Securities Act. Each Holder will cause any proposed purchaser, assignee, transferee, or pledgee of the Registrable Securities held by a Holder to agree to take and hold such securities subject to the provisions and upon the conditions specified in this Agreement.

3. RESTRICTIVE LEGEND. Each certificate representing Registrable Securities shall (unless otherwise permitted by the provisions of Section 4 below) be stamped or otherwise imprinted with a legend as provided in the Note Purchase Agreement (in addition to any legend required under applicable state securities laws or otherwise). Each Holder consents to the Company making a notation on its records and giving instructions to any transfer agent of the Registrable Securities in order to implement the restrictions on transfer established in this Agreement.

4. NOTICE OF PROPOSED TRANSFER. The Holder of each certificate representing Registrable Securities, by acceptance thereof, agrees to comply in all respects with the provisions of this Section 4. Each such Holder agrees not to make any disposition of all or any portion of any Registrable Securities unless and until:

a. There is in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or

b. Such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and if reasonably requested by the Company, such Holder shall furnish the Company with an opinion of counsel, reasonably satisfactory to the Company that such disposition shall not require registration of such shares under the Securities Act. It is agreed, however, that no such opinion will be required for Rule 144 or Rule 144A transactions, except as required by the Company's transfer agent or in unusual circumstances.

c. Notwithstanding the provisions of paragraphs (a) and (b) above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is a partnership to a partner of such partnership or a retired partner of such partnership who retires after the date hereof, or to the estate of any such partner or retired partner or the transfer by gift, will, or intestate succession of any partner to his spouse or siblings, lineal descendants or ancestors of such partner or spouse, provided, however, that such transferee agrees in writing to be subject to all of the terms hereof to the same extent as if he were an original Holder hereunder.

5. PIGGYBACK REGISTRATION.

a. If at any time or from time to time, the Company shall determine to register any of its securities, for its own account or the account of any of its shareholders, other than a registration relating solely to employee benefit plans, or a registration relating solely to an SEC Rule 145 transaction, or a registration on any form (other than Form SB-1, SB-2, S-1, S-2 or S-3, or their successor forms) which does not include substantially the same information as would be required to be included in a registration statement covering the sale of Registrable Securities, the Company will:

i. give to each Holder written notice thereof as soon as practicable prior to filing the registration statement; and

ii. include in such registration and in any underwriting involved therein, all the Registrable Securities specified in a written request or requests, made within fifteen (15) days after receipt of such written notice from the Company, by any Holder or Holders, except as set forth in subsection
(b) below.

b. If the registration is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given pursuant to subsection 5(a)(i). In such event, the right of any Holder to registration pursuant to Section 5 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and the other holders distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by the Company. Notwithstanding any other provision of this Section 5, if the managing underwriter determines that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may limit the number of Registrable Securities

to be included in the registration and underwriting, or may exclude Registrable Securities entirely from such registration (provided that no shares held by officers and directors of the Company, other than Registrable Securities that may be owned by officers and directors, are included in the registration and underwriting). The Company shall so advise all Holders and the other Holders distributing their securities through such underwriting pursuant to piggyback registration rights similar to this Section 5, and the number of shares of Registrable Securities and other securities that may be included in the registration and underwriting shall be allocated among all Holders and other holders in proportion, as nearly as practicable, to the respective amounts of Registrable Securities held by such Holders and other securities held by other holders at the time of filing the registration statement. If any Holder disapproves of the terms of any such underwriting, he may elect to withdraw therefrom by written notice to the Company and the managing underwriter. If, by the withdrawal of such Registrable Securities, a greater number of Registrable Securities held by other Holders may be included in such registration (up to the limit imposed by the underwriters), the Company shall offer to all Holders who have included Registrable Securities in the registration the right to include additional Registrable Securities. Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from such registration.

6. EXPENSES OF REGISTRATION. In addition to the fees and expenses contemplated by Section 8 hereof, all expenses incurred in connection with all registrations pursuant to Section 5 hereof, including without limitation all registration, filing and qualification fees, printing expenses, fees and disbursements of counsel for the Company and a single counsel for all Holders, and expenses of any special audits of the Company's financial statements incidental to or required by such registration, shall be borne by the Company, except that the Company shall not be required to pay underwriters' fees, discounts or commissions relating to Registrable Securities or fees of a separate legal counsel of a Holder other than the counsel described above.

7. REGISTRATION PROCEDURES. In the case of each registration effected by the Company pursuant to this Agreement, the Company will keep each Holder participating therein advised in writing as to the initiation of each registration and as to the completion thereof. At its expense the Company will:

a. keep such registration pursuant to Section 5 continuously effective until all of the securities covered by such registration statement have been sold pursuant to such registration statement or all of the Registrable Securities covered by such registration statement may be sold without registration under Rule 144(k) of the Securities Act;

b. promptly prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act, and to keep such registration statement effective for that period of time specified in Section 7(a) above;

c. furnish such number of prospectuses and other documents incident thereto as a Holder from time to time may reasonably request;

d. use reasonable best efforts to obtain the withdrawal of any order suspending the effectiveness of a registration statement, or the lifting of any suspension of the

qualification of any of the Registrable Securities for sale in any jurisdiction, at the earliest possible moment;

e. register or qualify such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any Holder or underwriter reasonably requires, and keep such registration or qualification effective during the period set forth in Section 7(a) above;

f. cause all Registrable Securities covered by such registrations to be listed or quoted on each securities exchange, including Nasdaq, on which similar securities issued by the Company are then listed or quoted,

g. cause its independent public accountants to deliver an accountants' comfort letter and updates thereof, in customary form and covering matters of the type customarily covered in such letters with respect to underwritten offerings, addressed to the Holders;

h. enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably, request in order to expedite or facilitate the disposition of such Registrable Securities (including, without limitation, effecting a stock split or a combination of shares);

i. make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement, and any attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement;

j. if the offering is underwritten, at the request of any Holder of Registrable Securities to furnish on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such registration: (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such Holder, stating that such registration statement has become effective under the Securities Act and that (A) to the best knowledge of such counsel, no stop order suspending the effectiveness thereof has been issued and no proceedings for that purpose have been instituted or are pending or contemplated under the Securities Act, (B) the registration statement, the related prospectus and each amendment or supplement thereof comply as to form in all material respects with the requirements of the Securities Act (except that such counsel need not express any opinion as to financial statements or other financial data contained therein) and (C) to such other effects as reasonably may be requested by counsel for the underwriters or by such Holder or its counsel and (ii) a letter dated such date from the independent public accountants retained by the Company, addressed to the underwriters and to such seller, stating that they are independent public accountants within the meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or

any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to such registration as such underwriters reasonably may request;

k. notify each Holder, at any time a prospectus covered by such registration statement is required to be delivered under the Securities Act, of the happening of any event of which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing;

l. take such other actions as shall be reasonably requested by any Holder.

8. INDEMNIFICATION.

a. In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to Section 5, the Company will indemnify and hold harmless each Holder of such Registrable Securities thereunder, each underwriter of such Registrable Securities thereunder and each other person, if any, who controls such Holder or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such Holder, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Securities Act or any state securities law applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, and will reimburse each such Holder, each of its officers, directors and partners, and each person controlling such Holder, each such underwriter and each person who controls any such underwriter, for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, provided that the Company will not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by an instrument duly executed by such Holder or underwriter specifically for use therein.

b. Each Holder will, if Registrable Securities held by or issuable to such Holder are included in the securities as to which such registration is being effected, indemnify and hold harmless the Company, each of its directors and officers, each underwriter, if any, of the Company's securities covered by such a registration statement, each person who controls the

Company and each underwriter within the meaning of the Securities Act, and each other such Holder, each of its officers, directors and partners and each person controlling such Holder, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company, such Holders, such directors, officers, partners, persons or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information furnished to the Company by an instrument duly executed by such Holder specifically for use therein; provided, however, the total amount for which any Holder, its officers, directors and partners, and any person controlling such Holder, shall be liable under this Section 8(b) shall not in any event exceed the aggregate proceeds received by such Holder from the sale of Registrable Securities sold by such Holder in such registration.

c. Each party entitled to indemnification under this Section 8 (the "INDEMNIFIED PARTY") shall give notice to the party required to provide indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified Party has actual knowledge of any claims as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure resulted in actual detriment to the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation.

d. Notwithstanding the foregoing, to the extent that the provisions on indemnification contained in the underwriting agreements entered into among the selling Holders, the Company and the underwriters in connection with the underwritten public offering are in conflict with the foregoing provisions, the provisions in the underwriting agreement shall be controlling as to the Registrable Securities included in the public offering; provided, however, that if, as a result of this Section 8(d), any Holder, its officers, directors, and partners and any person controlling such Holder is held liable for an amount which exceeds the aggregate proceeds received by such Holder from the sale of Registrable Securities included in a registration, as provided in
Section 8(b) above, pursuant to such underwriting agreement (the "EXCESS LIABILITY"), the Company shall reimburse any such Holder for such Excess Liability.

e. If the indemnification provided for in this Section 8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss,

liability, claim, damage or expense referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall contribute to the amount paid or payable by such indemnified party as a result of such loss, liability, claim, damage or expense in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other hand in connection with the statements or omissions which resulted in such loss, liability, claim, damage or expense as well as any other relevant equitable considerations. The relevant fault of the indemnifying party and 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 indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. Notwithstanding the foregoing, the amount any Holder shall be obligated to contribute pursuant to this Section 8(e) shall be limited to an amount equal to the proceeds to such Holder of the Restricted Securities sold pursuant to the registration statement which gives rise to such obligation to contribute (less the aggregate amount of any damages which the Holder has otherwise been required to pay in respect of such loss, claim, damage, liability or action or any substantially similar loss, claim, damage, liability or action arising from the sale of such Restricted Securities).

f. The indemnification provided by this Section 8 shall be a continuing right to indemnification and shall survive the registration and sale of any securities by any Person entitled to indemnification hereunder and the expiration or termination of this Agreement.

9. INFORMATION BY HOLDER. The Holder or Holders of Registrable Securities included in any registration shall promptly furnish to the Company such information regarding such Holder or Holders and the distribution proposed by such Holder or Holders as the Company may request in writing and as shall be required in connection with any registration referred to herein.

10. RULE 144 REPORTING. With a view to making available to Holders of Registrable Securities the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees at all times to file with the Commission all reports and other documents required of the Company under the Securities Act and the Exchange Act.

11. TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company to register Registrable Securities of a Holder and keep information available granted to a Holder by the Company under Section 5 may be assigned by a Holder to any partner or shareholder of such Holder, to any other Holder, or to a transferee or assignee; provided, that the Company is given written notice by the Holder at the time of or within a reasonable time after said transfer, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being assigned.

12. TERMINATION OF RIGHTS. The rights of any particular Holder to cause the Company to register securities under Section 5 shall terminate with respect to such Holder at such time that such Holder is able to dispose of all of such Holder's Registrable Securities (i) in one three-month period pursuant to the provisions of Rule 144, provided that such Holder holds not

more than one percent (1%) of the outstanding voting stock of the Company, or
(ii) pursuant to the provisions of Rule 144(k).

13. REMEDIES UPON DEFAULT OR DELAY.

a. Without limitation of any other remedy available to a Holder under applicable law or otherwise, if the Company shall (1) fail to register Registrable Securities after it shall have been requested to do so by a Holder in accordance with Section 5, or (2) fail to perform any of its obligations hereunder and as a result of such failure Holders have not been able to sell their Registrable Securities, or (3) act or fail to act in any manner such that one or more Holders have been delayed in the sale of their Registrable Securities, which delay is not expressly permitted by this Agreement, then any Holder adversely affected by such action, failure or delay shall be entitled to any or all of the following remedies, which may be elected in the sole discretion of such Holder:

i. Such Holder may withhold from selling its Registrable Securities and cause the Company to repurchase some or all of its Holder's Registrable Securities at a price equal to the Repurchase Price for each of such securities in accordance with paragraph (b) of this Section; or

ii. Such Holder may otherwise sell its Registrable Securities and cause the Company to pay to such Holder the amount of any Price Difference for any or all of such securities in accordance with paragraph (c) of this Section.

b. Upon the occurrence of any of the events listed in paragraph
(a) of this Section, a Holder may elect to cause the Company to repurchase any of such Holder's Registrable Securities by giving written notice to the Company. As soon as practicable (but not later than 10 days) thereafter the Company shall pay the Repurchase Price to the Holder for such repurchased securities; provided, however, that subject to paragraph (e) of this Section, if the Repurchase Price for any security shall not be immediately determinable, the Company and the Holder shall agree in good faith upon an estimate of the Repurchase Price for such security, which estimate shall be paid by the Company in accordance with this paragraph.

c. Upon the occurrence of any of the events listed in paragraph
(a) of this Section, unless the Holder shall have been eligible to and have elected to cause the Company to repurchase such securities pursuant to paragraph
(a) of this Section, the Holder may sell any security to any third party and the Company shall be obligated to pay to the Holder the amount of any Price Difference with respect to such security. If the Holder is unable to sell such security promptly pursuant to a registration statement, such Holder may sell such security in a manner and on such terms that the Holder in good faith believes are not unreasonable under the circumstances. The Company shall pay the Price Difference for each such security as soon as practicable (but not later than 10 days) after the Holder shall give written notice to the Company, which notice shall set forth the number and type of securities sold by such Holder and the Sale Dates and Selling Prices applicable thereto; provided, however, that, if the Price Difference for any security shall not be immediately determinable, the Company and the Holder shall agree in good faith upon an estimate

of the Price Difference for such security, which estimate shall be paid by the Company in accordance with the terms of this paragraph.

d. If the Repurchase Price or Price Difference for any security shall not be immediately determinable, the Company shall cooperate with any investment banking firm selected by the Holder and shall otherwise use its best efforts to cause such amount to be determined as quickly as possible. As soon as practicable after the final Repurchase Price or Price Difference shall have been determined, any difference between the final Repurchase Price or Price Difference and the estimated Repurchase Price or Price Difference, respectively, shall be paid by either the Company or the Holder to the other party, as the case may be, the amount of any underpayment being paid by the Company and the amount of any overpayment being paid by the Holder.

e. If the Company shall be prevented by law from making any payment required to be made under this Section, the obligations hereunder shall be continuing obligations, and such payments shall be made in partial payments when, as soon as, and to the extent that, any portion of such payments shall later be permitted under applicable law. If more than one Holder has not been paid all amounts due as a result of the preceding sentence, all of such Holders shall share any partial payment on a pro rata basis based on the unpaid amount then owed to such Holders. No repurchase of any security shall be deemed to have been made, and the Holder shall continue to be deemed to be the owner of such security, until the date on which final payment of the Repurchase Price is made.

f. The term "REPURCHASE PRICE" shall mean, as to any Registrable Securities, the highest market value during the period which an event has occurred and is continuing under Section 16(a) which triggers the remedies under this Section 13, based on the assumption that the Registrable Securities are freely transferable without restriction. The term "PRICE DIFFERENCE" shall mean, as to any Registrable Securities, the difference between the Repurchase Price for such Registrable Securities and the actual sales price of such Registrable Securities.

14. MISCELLANEOUS.

a. Amendments. This Agreement may be amended only by a writing signed by the Holders of more than fifty percent (50%) of the Registrable Securities, as constituted from time to time. The Holders hereby consent to future amendments to this Agreement that permit future investors, other than employees, officers or directors of the Company, to be made parties hereto and to become Holders of Registrable Securities; provided, however, that no such future amendment may materially impair the rights of the Holders hereunder without obtaining the requisite consent of the Holders, as set forth above. For purposes of this Section, Registrable Securities held by the Company or beneficially owned by any officer or employee of the Company shall be disregarded and deemed not to be outstanding.

b. Counterparts. This Agreement may be executed in any number of counterparts, all of which shall constitute a single instrument.

c. Notices, Etc. All notices and other communications required or permitted hereunder shall be in writing and may be sent initially by facsimile transmission and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed:

(i) if to a Holder, at such Holder's address set forth on the books of the Company, or at such other address as such Holder shall have furnished to the Company in writing, or if to any other holder of any Registrable Securities, at such address as such holder shall have furnished the Company in writing, or, until any such holder so furnishes an address to the Company, then to and at the address of the last holder of such securities who has so furnished an address to the Company,

and, with copies to:   Tarter Krinsky & Drogin LLP
                       470 Park Avenue South, 14th Floor
                       New York, New York 10016
                       Attention: James G. Smith, Esq.
                       Telephone: (212) 481-8585
                       Facsimile: (212) 481-9062

(ii) if to the Company, one copy should be sent to the Company's current address, as follows, or at such other address as the Company shall have furnished to the Holders:

To the Company:        ZBB Energy Corporation
                       N93 W14475 Whittaker Way
                       Menomonee Falls, WI 53051
                       Attn: Robert Parry, Chief Executive Officer
                       Telephone: (262) 253-9800
                       Facsimile: (262) 253-9822

with copies to:        Hodgson Russ LLP
                       60 East 42nd Street, 37th Floor
                       New York, New York 10165 - 0150
                       Attn: Steven Weiss, Esq.
                       Telephone: (212) 661-3535
                       Facsimile: (212) 972-1677

Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given when delivered if delivered personally, or, if sent by first class, postage prepaid mail, at the earlier of its receipt or seventy-two (72) hours after the same has been deposited in a regularly maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid.

d. Severability. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any

other provision of this Agreement, and this Agreement shall be carried out as if any such illegal, invalid or unenforceable provision were not contained herein.

e. Governing Law. This Agreement shall be governed by and construed under the laws of the State of New York without regard to principles of conflict of law.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, the parties hereto have caused this Registration Rights Agreement to be duly executed on the day and year first above written.

THE COMPANY:

ZBB ENERGY CORPORATION

By:

Robert Parry Chief Executive Officer

THE INVESTORS:

ABS SOS-PLUS PARTNERS, LTD.

By:

Name:

Title:

BUSHIDO CAPITAL MASTER FUND L.P.
By: Bushido Capital Partners, Ltd.

By:

Name:

Title:

[CORNELL CAPITAL PARTNERS LOGO]

October 5, 2006

ZBB Energy Corporation
N93 W14475 Whittaker Way
Menomonee Falls, WI 53051

Attention: Robert Parry

Re: Convertible Debenture (the "Debenture") dated February 28, 2006 between ZBB Energy (the "Company") and Montgomery Equity Partners Ltd. (the "Investor")

In regards to the Company's request for a moratorium on conversions related to the Convertible Debenture dated February 28, 2006 the Investor and the Company shall agree to the following terms:

The Investor will agree to not convert any portion of the Debenture for a period of 90 days from date hereof. In consideration therefore, the parties agree that:

o The Company will make cash payments of $20,000 per month due on the eighteenth day of each month beginning on October 18, 2006 However such payment shall not be deemed a payment of principle under the Debenture.

o The Company represents that none of its directors or executive officers will sell shares held by them during the foregoing 90 day period. In addition, no other convertible note holder or warrant holder may sell any shares underlying any convertible notes or issuable upon exercise of their warrants during the foregoing 90 day period.

o The parties have consented to the reverse split which shall take place contemporaneously with the effective date of the registration statement described in the next sub-paragraph of this letter agreement.

o The Company will provide the Investor with copies of all documentation associated with the proposed initial public offering registration statement to be filed with the United States Securities and Exchange Commission.

101 Hudson Street - Suite 3700 Jersey City, NJ 07302 Tel: (201) 985-8300 / Facsimile: (201) 985-8266

[CORNELL CAPITAL PARTNERS LOGO]

o The parties agree that upon closing the proposed public offering (or any other sufficient Financing Transaction, as defined in the Debenture), the proceeds will be used to redeem the Debentures and Warrants, as adjusted, at the Redemption Rate as defined in the Debenture dated February 28, 2006.

o The Company agrees that it shall issue all shares that it is required to issue upon repayment of the Debenture as provided in Section 7.4 of the Debenture.

o The Company agrees that upon material default of any items mentioned above, the Investor will be allowed to convert as originally outlined in the original Financing Agreement.

o The Debenture shall only be deemed modified and in forbearance without default to the extent set forth herein during the 90 day period following the date of execution hereof by both parties and thereafter the provisions of the Debenture shall continue. All other provisions of the Debenture and rights and remedies of the parties as per the original Debenture remain in full force and effect as set forth in the Debenture during said 90 day period.

Signed and Agreed to by                          Signed and Agreed to by


-------------------------------------            -------------------------------
Robert Parry                                     Robert Press
ZBB Energy Corporation                           Montgomery Equity Partners Ltd.

101 Hudson Street - Suite 3700 Jersey City, NJ 07302 Tel: (201) 985-8300 / Facsimile: (201) 985-8266

PLEDGE AND ESCROW AGREEMENT

THIS PLEDGE AND ESCROW AGREEMENT ("AGREEMENT") is made as of June 14, 2006 by and among ZBB ENERGY CORPORATION, a Wisconsin corporation, (the "PLEDGOR"), CRUCIAN TRANSITION INC. DBA CTI CAPITAL MANAGEMENT, (the "PLEDGEE")
and TARTER KRINSKY & DROGIN LLP (the "ESCROW AGENT") as agent for the Pledgee.

WITNESSETH:

WHEREAS, pursuant to a Note Purchase Agreement, dated June 14, 2006, (the "NOTE PURCHASE AGREEMENT") the Company issued to certain Buyers (as defined in the Note Purchase Agreement) certain 8% Senior Secured Notes (collectively, the "NOTES") and may issue Advance Notes (as defined in the Note Purchase Agreement); and

WHEREAS, the Pledgor, the Buyers and the Pledgee contemporaneously entered into a Security Agreement dated June 14, 2006 (the "SECURITY AGREEMENT") to secure the Obligations (as defined in the Security Agreement); and

WHEREAS, the Pledgee enters into this Pledge and Escrow Agreement as the Collateral Agent under the Security Agreement.

NOW, THEREFORE, in consideration of the agreements herein contained and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto hereby agree as follows:

1. PLEDGE AND SECURITY INTEREST. As collateral security for the full and timely satisfaction of all of the Obligations, the Pledgor herewith deposits and pledges with the Escrow Agent, in form transferable for delivery, and grants to the Escrow Agent as agent for the Pledgee, a security interest in the following:

(a) all issued and outstanding shares of Common Stock of ZBB Technologies, Inc., a Wisconsin corporation; and

(b) all issued and outstanding shares of Common Stock of ZBB Technologies, Ltd., an Australian corporation. and

(c) all of Pledgor's interest in, which constitutes 49% interest of, the issued and outstanding shares of Common Stock of ZBB China Pty Ltd., an Australian corporation.

Each of the foregoing is referred to herein as an "ISSUER" and collectively as the "ISSUERS" and the foregoing shares are collectively referred to as the "SECURITIES." The security interest granted herein includes the Securities and the certificates or other instruments or documents evidencing same and such additional property at any time and from time to time receivable by the Pledgee hereunder or otherwise distributed in respect of, or in exchange for, any Securities (herein collectively called the "PLEDGED SECURITIES"). The Pledgor consents to the Pledgee filing, on behalf of Pledgor, UCC-1 financing statements with respect to the Pledged Securities.

2. VOTING RIGHTS, ETC.

(a) So long as no Event of Default (as defined herein) is continuing, the Pledgor shall be entitled: (i) to exercise, at its discretion, the voting power with respect to the Pledged Securities; and (ii) to receive and retain for its own account any and all dividends (other than stock or liquidating dividends) and interest at any time and from time to time declared or paid upon any of the Pledged Securities.

(b) After occurrence and during the continuance of an Event of Default, and after delivery of notice to the Escrow Agent pursuant to Section
5(a)(i), the Pledgee shall be entitled to exercise all voting power with respect to the Pledged Securities, and to direct the Escrow Agent to so exercise such power, and the Escrow Agent shall be entitled to receive and retain, as additional collateral hereunder, any and all dividends and interest at any time and from time to time declared or paid upon any of the Pledged Securities.

(c) Notwithstanding whether the Pledgee has given such notice to the Escrow Agent pursuant to Section 5(a)(i), the Pledgee shall be entitled to exercise all voting power with respect to the Pledged Securities and to direct the Escrow Agent to so exercise such power, with respect to any amendments, consents or waivers, which individually or collectively would restrict, diminish or otherwise alter the rights of the holders of any Issuer's common stock.

3. ADDITIONAL PROPERTY RECEIVABLE BY ESCROW AGENT. In case, upon the dissolution or liquidation (in whole or in part) of any Issuer of the Pledged Securities, any sum shall be paid as a liquidating dividend or otherwise upon or with respect to any of the Pledged Securities, and in case any such shall be paid on account of the principal of any of the Pledged Securities which shall be an obligation, such sum shall be paid over to the Escrow Agent, to be held by the Escrow Agent as additional collateral hereunder. In case any stock dividend shall be declared on any of the Pledged Securities, or any shares of stock or fractions thereof shall be issued pursuant to any stock split involving any of the Pledged Securities, or any distribution of capital shall be made on any of the Pledged Securities, or any shares, obligations or other property shall be distributed upon or with respect to the Pledged Securities pursuant to a recapitalization or reclassification of the capital of any Issuer thereof, or pursuant to the dissolution, liquidation (in whole or in part), bankruptcy or reorganization of such Issuer, or to the merger or consolidation of such Issuer with or into another corporation, the shares, obligations or other property so distributed shall be delivered to the Escrow Agent, to be held by it as additional collateral hereunder, and all of the same (other than cash) shall constitute Pledged Securities for all purposes hereof.

4. INVESTMENT OF CASH COLLATERAL. Any cash received and retained by the Escrow Agent as additional collateral hereunder pursuant to the foregoing provisions, shall continue to be held in escrow by Escrow Agent in accordance with the terms hereof and shall be distributed and disposed of by Escrow Agent in the same manner as Pledged Securities. Any such cash shall be held and invested in any obligation of, or unconditionally guaranteed by, the United States of America, entitled to its full faith and credit or deposits, either interest bearing or

non-interest bearing, issued by a bank which is a member of the Federal Reserve System and which deposits are guaranteed by the Federal Deposit Insurance Company.

5. DELIVERY OF THE PLEDGED SECURITIES.

(a) The Escrow Agent shall deliver the Pledged Securities in the event of, and in accordance with, any of the following:

(i) If the Pledgee gives notice to the Escrow Agent and the Pledgor that an Event of Default shall have occurred, which notice shall specify the amount outstanding under the Obligations, the Escrow Agent shall deliver to the Pledgee, or as directed by the Pledgee, the Pledged Securities within five
(5) business days after receipt of such notice.

(ii) Upon receipt by the Escrow Agent of a certified judgment or order of a court of competent jurisdiction, if receipt is prior to the Escrow Agent's release of the Pledged Securities under Section 5(a)(i), the Escrow Agent shall deliver the Pledged Securities as directed by such judgment or order.

(b) If the Pledgee has provided notice pursuant to Section
5(a)(i), the Escrow Agent shall not deliver the Pledged Securities except in accordance with Section 5(a) or the joint instructions of the Pledgee and the Pledgor.

6. INSTRUCTIONS TO ESCROW AGENT. Notwithstanding any other provision of this Agreement, upon receipt by the Escrow Agent of written instructions signed by or on behalf of each of the Pledgor and the Pledgee, with all signatures duly notarized, the Escrow Agent shall make any other payment or delivery of the Pledged Securities then held hereunder as may be specified in such instructions.

7. DEFAULT AND REMEDIES.

(a) For the purposes of this Agreement, "EVENT OF DEFAULT" shall mean the occurrence of a Default or an Event of Default as defined in the Note Purchase Agreement.

(b) The Pledgee shall have the following rights upon any Event of Default:

(i) the rights and remedies provided by the Uniform Commercial Code as adopted by the State of New York (the "UCC"), as said law may at any time be amended;

(ii) the right to receive and retain all dividends, payments and other distributions of any kind upon any or all of the Pledged Securities;

(iii) the right to cause any or all of the Pledged Securities to be transferred to the Buyers' names or to the names of their designees and have such transfer recorded in any place or places deemed appropriate by the Pledgee; and

(iv) the right to sell, at a public or private sale, the Pledged Securities or any part thereof for cash, upon credit or for future delivery, and at such price or prices in accordance with the UCC (as such law may be amended from time to time); provided however, that such sale shall be in conformity with all applicable U.S. federal and state securities laws and regulations. Upon any such sale the Pledgee shall have the right to deliver, assign and transfer to the purchaser thereof the Pledged Securities so sold. The Pledgee shall give the Pledgor not less than ten (10) days' written notice of its intention to make any such sale. Any such sale shall be held at such time or times during ordinary business hours and at such place or places as the Pledgee may fix in the notice of such sale. The Pledgee may adjourn or cancel any sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. In case of any sale of all or any part of the Pledged Securities upon terms calling for payments in the future, any Pledged Securities so sold may be retained by the Pledgee until the selling price is paid by the purchaser thereof, but the Pledgee shall incur no liability in the case of the failure of such purchaser to take up and pay for the Pledged Securities so sold and, in the case of such failure, such Pledged Securities may again be sold upon like notice. The Pledgee, however, instead of exercising the power of sale herein conferred upon Pledgee, may proceed by a suit or suits at law or in equity to foreclose the security interest and sell the Pledged Securities, or any portion thereof, under a judgment or decree of a court or courts of competent jurisdiction. The Pledgee shall incur no liability as a result of a sale of the Pledged Securities or any part thereof. All proceeds of any such sale, after deducting the reasonable expenses and reasonable attorneys' fees incurred in connection with such sale, shall be applied in reduction of the Obligations, and the remainder, if any, shall be paid to the Pledgor.

(c) The Pledgor recognizes that the Pledgee may be unable to effect a public sale of all or a part of the Pledged Securities by reason of certain prohibitions contained in the Securities Act of 1933, as amended, as now or hereafter in effect, or in applicable Blue Sky or other state securities laws, as now or hereafter in effect, but may be compelled to resort to one or more private sales to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such Pledged Securities for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor agrees that private sales so made may be at prices and other terms less favorable to the Pledgor than if such Pledged Securities were sold at public sales, and that the Pledgee has no obligation to delay sale of any such Pledged Securities for the period of time necessary to permit the Issuer of such Pledged Securities, even if such Issuer would agree, to register such Pledged Securities for public sale under such applicable securities laws.

(d) The remedies provided herein in favor of the Pledgee shall not be deemed exclusive, but shall be cumulative, and shall be in addition to all other remedies in favor of the Pledgee existing at law or in equity.

(e) The Pledgee shall have the right, for and in the name, place and stead of the Pledgor, to execute endorsements, assignments or other instruments of conveyance or transfer with respect to all or any of the Pledged Securities.

(f) The Pledgee shall have no duty as to the collection or protection of the Pledged Securities or income thereon or as to the preservation of any rights pertaining thereto, beyond the safe custody of any thereof actually in Pledgee's possession.

(g) No failure on the part of the Pledgee to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Pledgee of any right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. In addition, the exercise of any right or remedy of the Pledgee at law or equity or under this Agreement or any of the documents shall not be deemed to be an election of Pledgee's rights or remedies under such documents or at law or equity.

(h) The proceeds of any sale or enforcement of or against all or any part of the Pledged Securities, and any other cash or collateral at the time held by the Pledgee hereunder, shall be applied by the Pledgee first to the payment of the reasonable costs of any such sale or enforcement, then to reimburse the Pledgee for any damages, costs or expenses incurred by the Pledgee as a result of an Event of Default, then to the payment of the principal amount or stated value (as applicable) of, and interest and any other payments due in respect of, the Obligations, each in accordance with the Pledgee's obligations under the Security Agreement. As used in this Agreement, "proceeds" shall mean cash, securities and other property realized in respect of, and distributions in kind of, the Pledged Securities, including any thereof received under any reorganization, liquidation or adjustment of debt of any Issuer of securities included in the Pledged Securities.

8. DELIVERY OF PLEDGED SECURITIES TO PLEDGOR. Upon payment in full of the Obligations, the Pledgee, or the Escrow Agent if the Pledged Securities are held by the Escrow Agent, shall promptly return of all of the Pledged Securities and of all other property and cash, which have not been used or applied toward the payment of the Obligations, to the Pledgor. The assignment by the Pledgee or the Escrow Agent to the Pledgor of such Pledged Securities and other property shall be without representation or warranty of any nature whatsoever and wholly without recourse.

9. REPRESENTATIONS AND WARRANTIES. The Pledgor hereby represents and warrants to the Pledgee that:

(a) The Pledgor has full power and authority and legal right to pledge the Pledged Securities to the Pledgee pursuant to this Agreement and this Agreement constitutes a legal, valid and binding obligation of the Pledgor, enforceable in accordance with its terms.

(b) The execution, delivery and performance of this Agreement and other instruments contemplated herein will not violate any provision of any order or decree of any court or governmental instrumentality or of any mortgage, indenture, contract or other agreement to which the Pledgor or the Issuer is a party or by which the Pledgor, the Issuer or the Pledged Securities may be bound, and will not result in the creation or imposition of any lien, charge or encumbrance on, or security interest in, any of the Pledgor's or the Issuer's properties pursuant to the provisions of such mortgage, indenture, contract or other agreement.

(d) The Pledgor owns the Pledged Securities free and clear of all liens, claims, encumbrances and preemptive rights.

(e) All of the Securities were validly issued, fully paid and non-assessable.

(f) The Securities represent all of the issued and outstanding shares of capital stock of each Issuer and there are no issued and outstanding options, warranties or other rights to acquire any capital stock of the Issuers.

10. ESCROW AGENT. The acceptance by the Escrow Agent of its duties under this Agreement is subject to the following terms and conditions, which shall govern and control with respect to its rights, duties, liabilities and immunities:

(a) The duties of the Escrow Agent are only such as are herein specifically provided, being purely ministerial in nature. The Escrow Agent shall incur no liability whatsoever to the Pledgee, the Pledgor or otherwise, except for its own willful misconduct or gross negligence.

(b) The Escrow Agent shall be under no responsibility in respect of any of the items deposited with it other than to follow the provisions of this Agreement. The Escrow Agent may consult with counsel and shall be fully protected in any action taken or omitted in good faith, in accordance with the advice of such counsel.

(c) The Escrow Agent shall not be required to defend any legal proceedings which may be instituted against it in respect of the subject matter of this Agreement unless requested to do so by the Pledgee or the Pledgor and fully indemnified by the requesting party or parties to its satisfaction against the cost and expense of such defense. The Escrow Agent shall not be required to institute legal proceedings of any kind.

(d) The Escrow Agent shall have no responsibility for the genuineness, validity or value of any certificate, document or other item deposited with or delivered to it, and the Escrow Agent shall be fully protected in acting in accordance therewith.

(e) In the event that the Escrow Agent shall be uncertain as to its duties or rights hereunder, or shall receive instructions from the Pledgee or the Pledgor with respect to the Pledged Securities that, in its opinion, are in conflict with any of the provisions of this Agreement, the Escrow Agreement shall be entitled to refrain from taking any action until it shall be directed otherwise in writing by both the Pledgee and the Pledgor or by a final order of a court of competent jurisdiction.

(f) Notwithstanding any provision to the contrary contained in any other agreement (excluding any amendment to this Agreement) between any of the parties

hereto, the Escrow Agent shall have no interest in the Pledged Securities except as provided in this Agreement.

(g) In the event that any of the terms and provisions of any other agreement (excluding any amendment to this Agreement) between any of the parties hereto conflict or are inconsistent with any of the terms and provisions of this Agreement, the terms and provisions of this Agreement in respect of the rights and duties of the Escrow Agent shall govern and control in all respects.

(h) Nothing in this Agreement shall be deemed to prohibit the Escrow Agent from representing one or all of the parties to this Agreement in connection with any matter whatsoever.

(i) The Escrow Agent may at any time by written notice given to all parties to this Agreement resign its position under this Agreement, whereupon the other parties to this Agreement shall designate one or more persons to act as a successor.

11. COMPENSATION AND EXPENSES OF ESCROW AGENT. Escrow Agent shall be compensated by Pledgor at the Escrow Agent's normal hourly rate in connection with its services hereunder, and be entitled to reimbursement by Pledgor for all substantiated, reasonably necessary expenses (including reasonable counsel fees, if applicable) incurred by the Escrow Agent in the performance of its duties hereunder. Such compensation and reimbursement shall be payable by the Pledgor to Escrow Agent upon the sooner to occur of (i) repayment of the Obligations, or
(ii) such expenses reach the maximum amount set forth above in this Section 11.

12. NOTICES. All notices, requests, demands, consents and other communications required or permitted under this Note shall be in writing and shall be deemed to have been duly given when delivered by hand or three days after being mailed in the United States by first class registered or certified mail, postage prepaid, return receipt requested, to each party at the address for such party set forth below or at such other address as such party may from time to time designate as to itself by notice given in compliance with this paragraph:

If to the Pledgor:        ZBB Energy Corporation
                          N93 W14475 Whittaker Way
                          Menomonee Falls, WI 53051
                          Attn: Robert Parry, Chief Executive Officer
                          Telephone: (262) 253-9800
                          Facsimile: (262) 253-9822

with copies to:           Hodgson Russ LLP
                          60 East 42nd Street, 37th Floor
                          New York, New York 10165 - 0150
                          Attn: Steven Weiss, Esq.
                          Telephone: (212) 661-3535
                          Facsimile: (212) 972-1677

if to the Pledgee:        CTI Capital Management

                          1967 Longwood-Lake Mary Road
                          Longwood, Florida 32750
                          Attention: Kara Irish
                          Telephone: (407) 833-4000
                          Facsimile: (407) 771-4419

with copies to:           Tarter Krinsky & Drogin LLP
                          470 Park Avenue South, 14th Floor
                          New York, NY  10016
                          Attention:  James G. Smith, Esq.
                          Telephone: (212) 481-8585
                          Facsimile: (212) 481-9062

if to the Escrow Agent:   Tarter Krinsky & Drogin LLP
                          470 Park Avenue South, 14th Floor
                          New York, NY  10016
                          Attention:  James G. Smith, Esq.
                          Telephone: (212) 481-8585
                          Facsimile: (212) 481-9062

13. BINDING NATURE. This Agreement and the rights and obligations of the Pledgee, Pledgor and Escrow Agent hereunder shall bind and inure to the benefit of the parties and their respective successors and assigns.

14. APPLICABLE LAW. This Agreement has been negotiated, made and delivered in the State of New York and shall be governed by and construed in accordance with the laws of the State of New York without giving effect to the principles thereof relating to the conflict of laws. By signing this Agreement, the Pledgor acknowledges that any dispute or controversy between Pledgor and Pledgee may be based on difficult and complex issues of law and fact. Accordingly, the Pledgor hereby waives, to the extent permitted by applicable law, trial by jury in any action or proceeding of any kind or nature in any court or tribunal in which an action may be commenced by or against the Pledgor arising out of this Agreement or by reason of any other cause or dispute whatsoever between the Pledgor and the Pledgee of any kind or nature. The Pledgor hereby irrevocably consents to the non-exclusive jurisdiction of any court of the State of New York located in New York County, New York, and any federal court located in any such County with respect to any litigation relating to this Agreement. The Pledgor expressly submits and consents in advance to such jurisdiction in any action or proceeding commenced in any such court, hereby waiving personal service of the summons and complaint, or other process or papers issued therein, and agreeing that service of such summons and complaint, or other process or papers may be made by registered or certified mail, return receipt requested, addressed to the Pledgor at the address of the Pledgor set forth above. Should Pledgor fail to appear or answer any summons, complaint, process or papers so served within thirty (30) days after the mailing thereof, the Pledgor shall be deemed in default and an order and/or judgment may be entered against it as prayed for in such summons, complaint, process or papers. The choice of forum set forth in this paragraph shall not be deemed to preclude the bringing of any action by the Pledgee or the Pledgee's enforcement of any judgment obtained in such forum

in any other appropriate jurisdiction. The Pledgor hereby waives the right to assert the defense of forum non conveniens and the right to challenge the venue, subject matter or personal jurisdiction of any court proceeding.

15. ATTORNEYS' FEES. The Pledgor agrees to pay all costs including all reasonable attorneys' fees and disbursements incurred by the Pledgee, the Escrow Agent or any Buyer, or the respective assignees, in enforcing this Agreement in accordance with its terms.

16. TERMINATION. This Agreement shall terminate upon the payment in full of the Obligations of the Pledgor; provided, however, that the obligations of the Escrow Agent shall terminate at the time when all of the Pledged Securities held hereunder have been delivered by the Escrow Agent as provided in this Agreement.

17. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together shall constitute but one and the same instrument.

[remainder of page intentionally left blank]

IN WITNESS WHEREOF, the Pledgor, the Pledgee and the Escrow Agent have executed this Agreement as of the day and year first above written.

THE PLEDGOR:

ZBB ENERGY CORPORATION

By:

Robert Parry Chief Executive Officer

THE PLEDGEE:

CRUCIAN TRANSITION INC.
DBA CTI CAPITAL MANAGEMENT

By:

Name:

Title:

THE ESCROW AGENT:

TARTER KRINSKY & DROGIN LLP

By:

Name:

Title:

EXECUTION COPY

NOTE PURCHASE AGREEMENT

THIS NOTE PURCHASE AGREEMENT (this "AGREEMENT"), dated as of June 14, 2006, by and among ZBB ENERGY CORPORATION, a Wisconsin corporation, (the "COMPANY"), and each of the purchasers set forth on the signature pages hereto (the "BUYERS").

WHEREAS, the Company and the Buyers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by the rules and regulations as promulgated by the United States Securities and Exchange Commission (the "SEC") under the Securities Act of 1933, as amended (the "SECURITIES ACT");

WHEREAS, the Buyers desire to purchase and the Company desires to issue and sell, upon the terms and conditions set forth in this Agreement US$2,226,667 aggregate principal amount 8% Senior Secured Notes due July 14, 2008 (the "NOTES"), in the form attached hereto as EXHIBIT "A" and common stock purchase warrants, in the form attached hereto as EXHIBIT "B" (the "WARRANTS") to purchase shares of the Company's common stock, par value $0.01 per share (the "COMMON STOCK") for an aggregate purchase price of US$1,670,000;

WHEREAS, each Buyer wishes to purchase, upon the terms and conditions stated in this Agreement, such principal amount of Notes and number of Warrants as is set forth immediately below its name on the signature pages hereto;

WHEREAS, contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Registration Rights Agreement, in the form attached hereto as EXHIBIT "C" (the "REGISTRATION RIGHTS AGREEMENT"), pursuant to which the Company has agreed to provide certain registration rights under the Securities Act and the rules and regulations promulgated thereunder and applicable state securities laws;

WHEREAS, contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Security Agreement, in the form attached hereto as EXHIBIT "D" (the "SECURITY AGREEMENT") pursuant to which the Company has agreed to grant a senior security interest in all of the assets of the Company to secure the obligations of the Company to the Buyers;

WHEREAS, contemporaneous with the execution and delivery of this Agreement, each of the Subsidiaries (as defined herein) is executing and delivering a Guaranty Agreement, in the form attached hereto as EXHIBIT "E" (the "GUARANTY"), guaranteeing the obligations of the Company to the Buyers;

WHEREAS, contemporaneous with the execution and delivery of this Agreement, each of the Subsidiaries and the Buyers are executing and delivering a Security Agreement, in the form attached hereto as EXHIBIT "F" (the "SUBSIDIARY SECURITY AGREEMENT"), pursuant to which each Subsidiary has agreed to grant a senior security interest in all of the assets of such Subsidiary to secure the obligations of such Subsidiary to the Buyers;

WHEREAS, contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering a Pledge and Escrow Agreement, in the form attached hereto as EXHIBIT "G" (the "PLEDGE AGREEMENT") pursuant to which the Company has agreed to pledge all of the equity of each Subsidiary; and

WHEREAS, contemporaneous with the execution and delivery of this Agreement, the parties hereto are executing and delivering an agreement, (the "REAL PROPERTY SECURITY AGREEMENT") pursuant to which the Company has granted a non-senior security interest and mortgage in its real property located at N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin, reasonably satisfactory to the Buyers, and which is otherwise recordable with the proper government office in the State of Wisconsin.

NOW THEREFORE, the Company and each of the Buyers severally (and not jointly) hereby agree as follows:

1. AUTHORIZATION AND PURCHASE AND SALE OF NOTES AND WARRANTS.

a. AUTHORIZATION OF NOTES. The Company has authorized the issue and sale of the Notes.

b. PURCHASE OF NOTES AND WARRANTS. Subject to the terms and conditions of this Agreement, on the Closing Date (as defined below), the Company shall issue and sell to each Buyer and each Buyer severally agrees to purchase from the Company such principal amount of Notes and Warrants to purchase such number of shares of Common Stock as is set forth immediately below such Buyer's name on the signature pages hereto.

c. FORM OF PAYMENT. On the Closing Date, (i) each Buyer shall pay the purchase price for the Notes and the Warrants to be issued and sold to it at the Closing (as defined below) (the "PURCHASE PRICE") by wire transfer of immediately available funds to the Company, in accordance with the Company's written wiring instructions, against delivery of the Notes in the principal amount equal to the Purchase Price and the number of Warrants as is set forth immediately below such Buyer's name on the signature pages hereto, and (ii) the Company shall deliver such Notes and Warrants duly executed on behalf of the Company, to such Buyer, against delivery of such Purchase Price.

d. CLOSING DATE. Subject to the satisfaction (or written waiver) of the conditions thereto set forth in Sections 5 and 6 below, the date and time of the issuance and sale of the Notes and the Warrants pursuant to Section 1(b) of this Agreement (the "CLOSING DATE") shall be simultaneous with the execution and delivery of this Agreement by the parties, or such other mutually agreed upon time. The closing of the transactions contemplated by Section 1(b) of this Agreement (the "CLOSING") shall occur on the Closing Date at such location as may be agreed to by the parties.

2. REPRESENTATIONS AND WARRANTIES OF EACH BUYER. Each Buyer severally (and not jointly) represents and warrants to the Company solely as to such Buyer that:

a. INVESTMENT PURPOSE. As of the date hereof and the Closing Date the Buyer is purchasing the Notes and the Warrants and the shares of Common Stock issuable

upon exercise thereof (the "WARRANT SHARES" and, collectively with the Notes and Warrants, the "SECURITIES") for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the Securities Act; provided, however, that by making the representations herein, the Buyer does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act.

b. ACCREDITED INVESTOR STATUS. The Buyer is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D under the Securities Act (an "ACCREDITED INVESTOR").

c. RELIANCE ON EXEMPTIONS. The Buyer understands that the Securities are being offered and sold to it in reliance upon specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying upon the truth and accuracy of, and the Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of the Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of the Buyer to acquire the Securities.

d. INFORMATION. The Buyer and its advisors, if any, have had the opportunity to ask questions of management of the Company and have been furnished with all information relating to the business, finances and operations of the Company and information relating to the offer and sale of the Securities which have been requested by the Buyer or its advisors. Neither such inquiries nor any other due diligence investigation conducted by the Buyer or any of its advisors or representatives shall modify, amend or affect the Buyer's right to rely on the Company's representations and warranties contained in Section 3 below. The Buyer understands that its investment in the Securities involves a significant degree of risk. The Buyer further represents to the Company that the Buyer's decision to enter into this Agreement has been based solely on the independent evaluation of the Buyer and its representatives.

e. GOVERNMENTAL REVIEW. The Buyer understands that no United States federal or state agency or any other government or governmental agency has passed upon or made any recommendation or endorsement of the Securities.

f. TRANSFER OR RE-SALE. The Buyer understands that except as provided in the Registration Rights Agreement, the sale or re-sale of the Securities has not been and is not being registered under the Securities Act or any applicable state securities laws, and the Securities may not be transferred unless (i) the Securities are sold pursuant to an effective registration statement under the Securities Act, (ii) the Buyer shall have delivered to the Company an opinion of counsel that shall be in form, substance and scope customary for opinions of counsel in comparable transactions to the effect that the Securities to be sold or transferred may be sold or transferred pursuant to an exemption from such registration, which opinion shall be reasonably acceptable to the Company, (iii) the Securities are sold or transferred to an "affiliate" (as defined in Rule 144 promulgated under the Securities Act (or a successor rule) ("RULE 144")) of the Buyer who agrees to sell or otherwise transfer the Securities only in accordance with this Section 2(f) and who is an Accredited Investor, (iv) the Securities are sold

pursuant to Rule 144, or (v) the Securities are sold pursuant to Regulation S under the Securities Act (or a successor rule) ("REGULATION S"). Notwithstanding the foregoing or anything else contained herein to the contrary, the Securities may be pledged as collateral in connection with a bona fide margin account or other lending arrangement.

g. LEGENDS. The Buyer understands that the Notes and the Warrants shall bear a restrictive legend in the form as set forth on Exhibit "A" and Exhibit "B", respectively. The Buyer understands that, until such time as the resale of the Warrant Shares have been registered under the Securities Act as contemplated by the Registration Rights Agreement or otherwise may be sold pursuant to Rule 144 or Regulation S without any restriction as to the number of securities as of a particular date that can then be immediately sold, the Warrant Shares may bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of the certificates evidencing such Securities):

"Neither the offer nor sale of the securities represented by this certificate has been registered under the Securities Act of 1933, as amended, (the "Act"). The securities may not be sold, transferred or assigned in the absence of an effective registration statement for the securities under the Act, or an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, that registration is not required under the Act or unless sold pursuant to Rule 144 or Regulation S under the Act."

h. RESIDENCY. The Buyer is a resident of the jurisdiction set forth immediately below such Buyer's name on the signature pages hereto.

3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. Except as set forth in the DISCLOSURE SCHEDULE annexed hereto, the Company represents and warrants to each Buyer that:

a. ORGANIZATION AND QUALIFICATION.

(i) The Company and each of its Subsidiaries is a corporation or other entity duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or organized, with full power and authority (corporate and other) to own, lease, use and operate its properties and to carry on its business as and where now owned, leased, used, operated and conducted. The Company and each of its Subsidiaries is duly qualified as a foreign corporation to do business and is in good standing in every jurisdiction in which its ownership or use of property or the nature of the business conducted by it makes such qualification necessary except where the failure to be so qualified or in good standing would not have a Material Adverse Effect.

(ii) "MATERIAL ADVERSE EFFECT" means any material adverse effect on the business, operations, assets, financial condition or prospects of the Company and the Subsidiaries individually and taken as a whole, or on the transactions contemplated hereby or by the agreements or instruments to be entered into in connection herewith.

b. SUBSIDIARIES. The DISCLOSURE SCHEDULE contains a complete and correct list of the Subsidiaries, showing as to each Subsidiary, the correct name thereof, the jurisdiction of its organization, and the percentage of shares of each class of capital stock or similar equity interests outstanding owned by the Company. "SUBSIDIARY" means any "significant subsidiary" or "subsidiary" (as such terms are defined in the SEC's Rule 1-02 of Regulation S-X) of the Company. All of the outstanding shares of capital stock or similar equity interests of each Subsidiary shown in the DISCLOSURE SCHEDULE as being owned by the Company have been validly issued, fully paid and nonassessable and are owned by the Company free and clear of any lien, claim, mortgage, charge, restriction, pledge, security interest, option, lease or sublease, claim, right of any third party, easement, encroachment or encumbrance or any other right or adverse interest ("LIENS").

c. AUTHORIZATION; ENFORCEMENT.

(i) The Company has all requisite corporate power and authority to enter into and perform this Agreement, the Registration Rights Agreement, the Notes, the Warrants, the Pledge Agreement, the Real Property Security Agreement and the Security Agreement and to consummate the transactions contemplated hereby and thereby and to issue the Securities, in accordance with the terms hereof and thereof. The execution and delivery of this Agreement, the Registration Rights Agreement, the Notes, the Warrants, the Pledge Agreement, the Real Property Security Agreement and the Security Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby (including without limitation, the issuance of the Notes and the Warrants and the issuance and reservation for issuance of the Warrant Shares issuable upon exercise thereof) have been duly authorized by the Company's Board of Directors and no further consent or authorization of the Company, its Board of Directors, or its shareholders is required. This Agreement has been duly executed and delivered by the Company by its authorized representative, and such authorized representative is the true and official representative with authority to sign this Agreement and the other documents executed in connection herewith and bind the Company accordingly. This Agreement constitutes, and upon execution and delivery by the Company of the Registration Rights Agreement, the Notes, the Warrants, the Pledge Agreement, the Real Property Security Agreement and the Security Agreement each of such instruments will constitute, a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms.

(ii) Each Subsidiary has all requisite corporate power and authority to enter into and perform the Guaranty and the Subsidiary Security Agreement to which it is a party, and to consummate the transactions contemplated hereby and thereby. The execution and delivery of the Guaranty and each Subsidiary Security Agreement by each Subsidiary and the consummation by such Subsidiary of the transactions contemplated thereby have been duly authorized by such Subsidiary's Board of Directors and no further consent or authorization of such Subsidiary, its Board of Directors, or its shareholders is required. This Agreement has been duly executed and delivered by each Subsidiary by its authorized representative, and such authorized representative is the true and official representative with authority to sign this Agreement and the other documents executed in connection herewith and bind the Subsidiary accordingly. Upon execution and delivery by a Subsidiary of the Guaranty and the Subsidiary Security Agreement, each of such instruments will constitute, a legal, valid

and binding obligation of such Subsidiary enforceable against such Subsidiary in accordance with its terms.

d. ISSUANCE OF SHARES. The Warrant Shares are duly authorized and reserved for issuance and, upon exercise of the Warrants in accordance with their respective terms and payment of the consideration set forth in the Warrants, will be validly issued, fully paid and non-assessable, and free from all taxes and Liens with respect to the issue thereof and shall not be subject to preemptive rights or other similar rights of shareholders of the Company and will not impose personal liability upon the holder thereof.

e. NO CONFLICTS. The execution, delivery and performance of this Agreement, the Registration Rights Agreement, the Pledge Agreement, the Real Property Security Agreement, the Security Agreement, the Notes and the Warrants by the Company and the consummation by the Company of the transactions contemplated hereby and thereby (including, without limitation, the issuance and reservation for issuance of the Warrant Shares), and the execution, delivery and performance of the Guaranty and the Subsidiary Security Agreement by each Subsidiary and the consummation by each Subsidiary of the transactions contemplated thereby, will not (i) conflict with or result in a violation of any provision of the articles of incorporation, as amended, (the "ARTICLES OF INCORPORATION") of the Company or any of its Subsidiaries or the by-laws, as amended, (the "BY-LAWS") of the Company or any of its Subsidiaries, or (ii) violate or conflict with, or result in a breach of any provision of, or constitute a default (or an event which with notice or lapse of time or both could become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any agreement or instrument to which the Company or any of its Subsidiaries is a party or is otherwise bound or is a beneficiary, or (iii) result in a violation of any law, rule, regulation, order, judgment or decree (including federal, state and foreign securities laws and regulations and regulations of any self-regulatory organizations to which the Company or its securities are subject) applicable to the Company or any of its Subsidiaries or by which any property or asset of the Company or any of its Subsidiaries is bound or affected (except for such conflicts, defaults, terminations, amendments, accelerations, cancellations and violations as would not, individually or in the aggregate, have a Material Adverse Effect). Neither the Company nor any of its Subsidiaries is in violation of its Articles of Incorporation, By-laws or other organizational documents and neither the Company nor any of its Subsidiaries is in default (and no event has occurred which with notice or lapse of time or both could put the Company or any of its Subsidiaries in default) under, and neither the Company nor any of its Subsidiaries has taken any action or failed to take any action that would give to others any rights of termination, amendment, acceleration or cancellation of, any agreement, indenture or instrument to which the Company or any of its Subsidiaries is a party or by which any property or assets of the Company or any of its Subsidiaries is bound or affected, except for possible defaults as would not, individually or in the aggregate, have a Material Adverse Effect. The businesses of the Company and its Subsidiaries, if any, are not being conducted in violation of any law, ordinance or regulation of any governmental entity material to the business of the Company and its Subsidiaries. Except as specifically contemplated by this Agreement and as required under the Securities Act and any applicable state and Australian securities laws, neither the Company nor any Subsidiary is required to obtain any consent, authorization or order of, or make any filing or registration with, any court, governmental agency, regulatory agency, self regulatory organization or stock market or any third party, in order for (i) the Company to execute, deliver

or perform any of its obligations under this Agreement, the Registration Rights Agreement, the Security Agreement, the Pledge Agreement, the Real Property Security Agreement, the Notes or the Warrants in accordance with the terms hereof or thereof or to issue and sell the Notes and the Warrants in accordance with the terms hereof and to issue the Warrant Shares upon exercise of the Warrants, or (ii) any Subsidiary to execute, deliver or perform the Guaranty or the Subsidiary Security Agreement in accordance with the terms thereof. All consents, authorizations, orders, filings and registrations which either the Company or any Subsidiary is required to obtain pursuant to the preceding sentence have been obtained or effected on or prior to the date hereof.

f. FINANCIAL STATEMENTS. The financial statements contained in the Company's 2005 Annual Report as filed with the Australian Stock Exchange ("ASX") on September 30, 2005 (the "FINANCIAL STATEMENTS") have been prepared in accordance with the Australian Accounting Standards, consistently applied, ("AAS") during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may not include footnotes or may be condensed or summary statements) and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the Financial Statements, the Company has no liabilities, contingent or otherwise, of the type customarily reflected on financial statements and the notes thereto, other than (i) liabilities incurred in the ordinary course of business subsequent to June 30, 2005 and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under AAS to be reflected in such Financial Statements, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company.

g. ABSENCE OF CERTAIN CHANGES. Since June 30, 2005, there has been no material adverse change and no material adverse development in the assets, liabilities, business, properties, operations, financial condition, results of operations or prospects of the Company or any of its Subsidiaries.

h. ABSENCE OF LITIGATION. There is no action, suit, claim, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of any executive officer of the Company or any of its Subsidiaries, threatened against or affecting the Company or any of its Subsidiaries, or their officers or directors in their capacity as such, that could have a Material Adverse Effect. No executive officer of the Company or any of its Subsidiaries has knowledge of any facts or circumstances which might give rise to any of the foregoing.

i. PATENTS, COPYRIGHTS, TRADEMARKS.

(i) The Company and each of its Subsidiaries owns or possesses the requisite licenses or rights to use all patents, patent applications, patent rights, inventions, know-how, trade secrets, trademarks, trademark applications, service marks, service names, trade names and copyrights ("INTELLECTUAL PROPERTY") necessary to enable it to conduct its business as now operated (and, to the Company's knowledge, as presently contemplated to be operated in the future); there is no claim or action by any Person pertaining to, or proceeding

pending, or to the knowledge of any executive officer of the Company or any of its Subsidiaries threatened, which challenges the right of the Company or of a Subsidiary with respect to any Intellectual Property necessary to enable it to conduct its business as now operated (and, to the knowledge of any executive officer of the Company or any of its Subsidiaries, as presently contemplated to be operated in the future); to the knowledge of any executive officer of the Company or any of its Subsidiaries, neither the Company's nor its Subsidiaries' current and intended products, services and processes infringe on any Intellectual Property or other rights held by any Person; and no executive officer of the Company or any of its Subsidiaries has knowledge of any facts or circumstances which might give rise to any of the foregoing.

(ii) Except as set forth in the DISCLOSURE SCHEDULE, neither the Company nor any of its Subsidiaries owns or possesses any Copyrights, Patents, Trademarks, Copyright Licenses, Patent Licenses or Trademark Licenses, each as defined herein.

(iii) "COPYRIGHTS" shall mean (i) copyrights, whether registered or unregistered, held pursuant to the laws of the United States, any State thereof or any other country; (ii) registrations, applications and recordings in the United States Copyright Office or in any similar office or agency of the United States, any State thereof or any other country; (iii) any continuations, renewals or extensions thereof; (iv) any registrations to be issued in any pending applications; (v) prior versions of works covered by copyright and all works based upon, derived from or incorporating such works;
(vi) income, royalties, damages, claims and payments now and hereafter due and/or payable with respect to copyrights, including, without limitation, damages, claims and recoveries for past, present or future infringement; (vii) rights to sue for past, present and future infringements of any copyright;
(viii) any rights in any material which is copyrightable or which is protected by common law, United States copyright laws or similar laws, or any law of any State, and (ix) any other rights corresponding to any of the foregoing rights throughout the world.

(iv) "COPYRIGHT LICENSE" shall mean any agreement, written or oral, granting any right in or to any Copyright or Copyright registration, including, without limitation, licenses for the exclusive right to use a copyright owned by a third party.

(v) "PATENTS" shall mean (i) letters patent of the United States or any other country, all registrations and recordings thereof and all applications for letters patent of the United States or any other country, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country; (ii) reissues, divisions, continuations, renewals, continuations in part or extensions thereof;
(iii) petty patents, divisionals and patents of addition; (iv) patents to issue in any such applications; (v) income, royalties, damages, claims and payments now and hereafter due and/or payable with respect to patents, including, without limitation, damages, claims and recoveries for past, present or future infringement; and (vi) rights to sue for past, present and future infringements of any patent.

(vi) "PATENT LICENSE" shall mean any agreement, whether written or oral, granting any right with respect to any Patent.

(vii) "TRADEMARKS" shall mean (i) trademarks, tradenames, corporate names, company names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, registrations and recordings thereof and any applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country (collectively, the "MARKS"); (ii) any reissues, extensions or renewals thereof,
(iii) income, royalties, damages, claims and payments now and hereafter due and/or payable with respect to the Marks, including, without limitation, damages, claims and recoveries for past, present or future infringement and (v) rights to sue for past, present and future infringements of the Marks.

(viii) "TRADEMARK LICENSE" shall mean any agreement, written or oral, granting any right in and to any Trademark or Trademark registration.

j. NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Company nor any of its Subsidiaries is subject to any charter, corporate or other legal restriction, or any judgment, decree, order, rule or regulation which in the judgment of the Company's officers has or is expected in the future to have a Material Adverse Effect. Neither the Company nor any of its Subsidiaries is a party to any contract or agreement which in the judgment of the Company's officers has or is expected to have a Material Adverse Effect.

k. TAX STATUS. The Company and each of its Subsidiaries has made or filed all federal, state and foreign income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company and each of its Subsidiaries has set aside on its Financial Statements provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and has set aside on its Financial Statements provisions reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and none of the executive officers of the Company or any of its Subsidiaries know of any basis for any such claim. Neither the Company nor any of its Subsidiaries has executed a waiver with respect to the statute of limitations relating to the assessment or collection of any foreign, federal, state or local tax. None of the Company's tax returns is presently being audited by any taxing authority.

l. CERTAIN TRANSACTIONS. Except for arm's length transactions pursuant to which the Company or any of its Subsidiaries makes payments in the ordinary course of business upon terms no less favorable than the Company or any of its Subsidiaries could obtain from third parties, none of the officers, directors, or employees of the Company is presently a party to any transaction with the Company or any of its Subsidiaries (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of any executive officer of the Company or any of its

Subsidiaries, any corporation, partnership, trust or other entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

m. PERMITS; COMPLIANCE. The Company and each of its Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exemptions, consents, certificates, approvals and orders necessary to own, lease and operate its properties and to carry on its business as it is now being conducted (collectively, the "COMPANY PERMITS"), and there is no action pending or, to the knowledge of any executive officer of the Company or any of its Subsidiaries, threatened regarding suspension or cancellation of any of the Company Permits. Neither the Company nor any of its Subsidiaries is in conflict with, or in default or violation of, any of the Company Permits, except for any such conflicts, defaults or violations which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Since June 30, 2005, neither the Company nor any of its Subsidiaries has received any notification with respect to possible conflicts, defaults or violations of applicable laws, except for notices relating to possible conflicts, defaults or violations, which conflicts, defaults or violations would not have a Material Adverse Effect.

n. ENVIRONMENTAL MATTERS. There are, with respect to the Company or any of its Subsidiaries, no past or present violations of Environmental Laws (as defined below), releases of any material into the environment, actions, activities, circumstances, conditions, events, incidents, or contractual obligations which may give rise to any common law environmental liability or any liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 or similar federal, state, local or foreign laws and neither the Company nor any of its Subsidiaries has received any notice with respect to any of the foregoing, nor is any action pending or, to the knowledge of any executive officer of the Company or any of its Subsidiaries, threatened in connection with any of the foregoing. The term "ENVIRONMENTAL LAWS" means all federal, state, local or foreign laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), including, without limitation, laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants contaminants, or toxic or hazardous substances or wastes (collectively, "HAZARDOUS MATERIALS") into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations issued, entered, promulgated or approved thereunder. Other than those that are or were stored, used or disposed of in compliance with applicable law, no Hazardous Materials are contained on or about any real property currently owned, leased or used by the Company or any of its Subsidiaries, and no Hazardous Materials were released on or about any real property previously owned, leased or used by the Company or any of its Subsidiaries during the period the property was owned, leased or used by the Company or any of its Subsidiaries, except in the normal course of the Company's or any of its Subsidiaries' business. There are no underground storage tanks on or under any real property owned, leased or used by the Company or any of its Subsidiaries that are not in compliance with applicable law.

o. TITLE TO PROPERTY. The Company and its Subsidiaries have good and marketable title in fee simple to all real property and good and marketable title to all

personal property owned by them which is material to the business of the Company and its Subsidiaries, in each case free and clear of all Liens and defects except such as would not have a Material Adverse Effect. Any real property and facilities held under lease by the Company and its Subsidiaries are held by them under valid, subsisting and enforceable leases with such exceptions as would not have a Material Adverse Effect.

p. INSURANCE. The Company and each of its Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks, including casualty and liability insurance, and in such amounts as management of the Company believes to be prudent and customary in the businesses in which the Company and its Subsidiaries are engaged, which such policies are set forth on the DISCLOSURE SCHEDULE. No executive officer of the Company or any of its Subsidiaries has any reason to believe that the Company and its Subsidiaries will not be able to renew their existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue such businesses at a cost that would not have a Material Adverse Effect.

q. INTERNAL ACCOUNTING CONTROLS. The Company and each of its Subsidiaries maintain a system of internal accounting controls sufficient, in the judgment of the Company's board of directors, to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company has adopted and implemented written procedures of internal control over financial reporting as required by Section 404 of the Sarbanes-Oxley Act and the rules and regulations thereunder.

r. FOREIGN CORRUPT PRACTICES; FOREIGN ASSETS CONTROL REGULATIONS. Neither the Company, nor any of its Subsidiaries, nor any current director or officer, nor, to the knowledge of any executive officer of the Company or any of its Subsidiaries, any past director, past officer, agent, employee or other Person acting on behalf of the Company or any Subsidiary has, in the course of his actions for, or on behalf of, the Company or any of its Subsidiaries, (i) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (ii) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (iii) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (iv) made any bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee. Neither the sale of the Securities by the Company hereunder nor its use of the proceeds thereof will violate the trading with the Enemy Act, as amended, or any foreign assets control regulations of the United States Treasury Department (31 CFR Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating therefrom. Neither the Company nor any Subsidiary nor any director or senior officer of the Company or any Subsidiary is a Person named on the U.S. Treasury Department's Office of Foreign Assets Control ("OFAC") list, nor is a Person prohibited under the OFAC programs.

s. SOLVENCY. The Company and each Subsidiary (after giving effect to the transactions contemplated by this Agreement) is solvent (i.e., its assets have a fair market value in excess of the amount required to pay its probable liabilities on its existing debts as they become absolute and matured). The Company and each Subsidiary (after giving effect to the transactions contemplated by this Agreement) has the ability to pay its debts from time to time incurred in connection therewith as such debts mature.

t. NO INVESTMENT COMPANY. The Company is not, and upon the issuance and sale of the Securities as contemplated by this Agreement will not be an "investment company" as defined under the Investment Company Act of 1940 (an "INVESTMENT COMPANY"). The Company is not controlled by an Investment Company.

u. ACKNOWLEDGMENT REGARDING BUYERS' PURCHASE OF SECURITIES. The Company acknowledges and agrees that the Buyers are acting solely in the capacity of arm's length purchasers with respect to this Agreement and the transactions contemplated hereby. The Company further acknowledges that no Buyer is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the transactions contemplated hereby and any statement made by any Buyer or any of their respective representatives or agents in connection with this Agreement and the transactions contemplated hereby is not advice or a recommendation and is merely incidental to such Buyer's purchase of the Securities. The Company further represents to each Buyer that the Company's decision to enter into this Agreement has been based solely on the independent evaluation of the Company and its representatives.

v. NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor any Person acting on its or their behalf, has directly or indirectly made any offers or sales in any security or solicited any offers to buy any security under circumstances that would require registration under the Securities Act of the issuance of the Securities to the Buyers. The issuance of the Securities to the Buyers will not be integrated with any other issuance of the Company's securities (past, current or future) for purposes of any shareholder approval provisions applicable to the Company or its securities.

w. NO BROKERS. The Company has taken no action which would give rise to any claim by any Person for brokerage commissions, transaction fees or similar payments relating to this Agreement or the transactions contemplated hereby.

x. GENERAL SOLICITATION. Neither the Company nor any other Person or entity authorized by the Company to act on its behalf has engaged in a general solicitation or general advertising (within the meaning of Regulation D of the Securities Act) of investors with respect to offers or sales of the Notes or the Warrants.

y. DISCLOSURE. All information relating to or concerning the Company or any of its Subsidiaries set forth in this Agreement and provided to the Buyers in connection with the transactions contemplated hereby is true and correct in all material respects and the Company has not omitted to state any material fact necessary in order to make the statements made herein or therein, in light of the circumstances under which they were made, not misleading. No event or circumstance has occurred or exists with respect to the Company or any

of its Subsidiaries or its or their business, properties, prospects, operations or financial conditions, which, under applicable law, rule or regulation, requires public disclosure or announcement by the Company but which has not been so publicly announced or disclosed.

4. INFORMATION.

a. FINANCIAL INFORMATION. For so long as any of the Notes are outstanding, the Company shall send the following reports to each holder of the Notes the following:

(i) At any time that the Company has a class of securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") or is filing reports with the SEC as required under Section 15(d) of the Exchange Act, then within three (3) days after the filing with the SEC, a copy of its Annual Report on Form 10-K, its Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K, provided, however, if any such document is available on the SEC's EDGAR Filing System then the Company need not deliver a hard copy of such document;

(ii) At any time that the Company does not have a class of securities registered under Section 12(b) or 12(g) of the Exchange Act and is not required to file reports with the SEC as required under Section 15(d) of the Exchange Act ("NON-REPORTING COMPANY"), then (A) within ninety (90) days after the end of each of the Company's fiscal years a consolidated audited balance sheet for such fiscal year and the immediately preceding fiscal year, a consolidated income statement for such fiscal year and the immediately preceding two fiscal years, a consolidated cash flow statement for such fiscal year and the immediately preceding two fiscals year and a consolidated shareholders' equity statement for such fiscal year and the immediately preceding two fiscals year, (B) within forty-five (45) days after the end of each of the Company's fiscal quarters (other than a fiscal quarter which is also the end of the Company's fiscal year) a consolidated unaudited balance sheet for such fiscal quarter, a consolidated income statement for such fiscal quarter and a consolidated cash flow statement for such fiscal quarter, in each case all in accordance with AAS, or generally accepted accounting principles, and each certified by the Chief Executive Officer and Chief Financial Officer as fairly presenting, in all material respects, the financial condition of the companies being reported on and their results of operations, subject to, in the case of unaudited financial statements, changes resulting from normal audit adjustments.

(iii) promptly upon their becoming available, one copy of (A) each report, notice or proxy statement sent by the Company or any Subsidiary to securities holders generally, and (B) each registration statement, and each prospectus and all amendments thereto filed by the Company or any Subsidiary with the SEC, provided, however, if any such document is available on the SEC's EDGAR Filing System then the Company need not deliver a hard copy of such document; and

(iv) within fifteen (15) days after the end of each month, copies of a consolidated balance sheet and consolidated income statement of the Company and its Subsidiaries as at the end of such month, each certified by the Chief Executive Officer and Chief Financial Officer as fairly presenting, in all material respects, the financial condition of the

companies being reported on and their results of operations, subject to changes resulting from normal audit adjustments and a report detailing the aging of all accounts receivable and accounts payable of the Company and each Subsidiary.

b. NOTICE OF DEFAULT OR EVENT OF DEFAULT. Promptly, and in any event within three (3) business days after the Company becomes aware of the existence of any Default or Event of Default or that any Person has given any notice or taken any action with respect to a claimed default hereunder or that any Person has given notice or taken any action with respect to a claimed default of the type referred to in Section 9(f), the Company shall deliver to each holder of the Notes a written notice specifying the nature and period of existence thereof and what action the Company is taking or proposes to take with respect thereto. "PERSON" shall mean any individual, corporation, limited liability company, partnership, association, trust or other entity or organization.

c. NOTICES FROM GOVERNMENTAL AUTHORITIES. Promptly, and in any event within three (3) business days of receipt thereof, the Company shall deliver to each holder of the Notes copies of any notice to the Company or any Subsidiary from any Federal, State, local or foreign governmental authority alleging a violation of any order, ruling, statute or other law or regulation that could reasonably be expected to have a Material Adverse Effect; and

d. REQUESTED INFORMATION. With reasonable promptness, the Company shall deliver to each holder of the Notes such other data and information relating to the business, operations, affairs, financial condition, assets or properties of the Company or any of its Subsidiaries or relating to the ability of the Company to perform its obligations hereunder and under the Notes as from time to time may be reasonably requested by any such holder of Notes.

e. INSPECTION. The Company will permit the representatives of each holder of Notes, at the expense of the Company, to visit and inspect any of the offices or properties of the Company or any Subsidiary, to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances, and accounts with their respective officers and independent public accountants (and by this provision the Company authorizes said accountants to discuss the affairs, finances and accounts of the Company and its Subsidiaries), all at such times and as often as may be requested. Furthermore, that the holders of a majority of the then-outstanding principal amount of Notes may authorize audits of the Company and its Subsidiaries every three (3) months commencing September 14, 2006 and the Company shall reimburse or pay directly audit fees of $800 per day, per auditor, plus out of pocket expenses. The audit will include, but not be limited to, the review of accounts receivables documentation, cash receipts and disbursements, accounts payable inventory contracts, and other purchase order documentation. The Company shall provide all documents and information deemed necessary or appropriate by the auditor.

f. OFFICERS' CERTIFICATE. Each set of financial statements delivered to, or made available under the SEC's EDGAR Filing System to, a holder of Notes pursuant to Section 7(a) shall be accompanied by a certificate of the Chief Executive Officer and Chief Financial Officer of the Company setting forth:

(i) That the Company was in compliance with the requirements of the covenants contained in Sections 7 and 8 herein during the monthly, quarterly or annual period covered by the statements then being furnished; and

(ii) A statement that such officer has reviewed the relevant terms hereof and has made, or caused to be made, under his or her supervision, a review of the transactions and conditions of the Company and its Subsidiaries from the beginning of the monthly, quarterly or annual period covered by the statements then being furnished to the date of the certificate and that such review shall not have disclosed the existence during such period of any condition or event that constitutes an Event of Default or, if any such condition or event existed or exists specifying the nature and period of existence thereof and what action the Company shall have taken or proposes to take with respect thereto.

5. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell the Notes and the Warrants to a Buyer at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions thereto, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion:

a. The applicable Buyer shall have executed this Agreement, the Registration Rights Agreement, the Security Agreement, the Pledge Agreement, the Real Property Security Agreement and the Subsidiary Security Agreement and delivered the same to the Company.

b. The applicable Buyer shall have delivered the Purchase Price in accordance with Section 1(c) above.

c. The representations and warranties of the applicable Buyer shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and the applicable Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the applicable Buyer at or prior to the Closing Date.

d. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.

6. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE. The obligation of each Buyer hereunder to purchase the Notes and the Warrants at the Closing is subject to the satisfaction, at or before the Closing Date of each of the following conditions, provided that these conditions are for such Buyer's sole benefit and may be waived by such Buyer at any time in its sole discretion:

a. The Company shall have executed this Agreement, the Registration Rights Agreement, the Pledge Agreement, the Real Property Security Agreement and the Security Agreement and delivered the same to such Buyer.

b. Each Subsidiary shall have executed the Guaranty and the Subsidiary Security Agreement and delivered the same to such Buyer.

c. The Company shall have delivered to such Buyer duly executed Notes (in such denominations as such Buyer shall request) and Warrants in accordance with Section 1(b) above.

d. The representations and warranties of the Company shall be true and correct in all material respects (provided, however, that such qualification shall only apply to representations or warranties not otherwise qualified by materiality) as of the date when made and as of the Closing Date as though made at such time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. Such Buyer shall have received a certificate or certificates, executed by the Chief Executive Officer and Chief Financial Officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by such Buyer including, but not limited to certificates with respect to the Company's and each Subsidiary's Articles of Incorporation, By-laws and Board of Directors' resolutions relating to the transactions contemplated hereby.

e. No litigation, statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by or in any court or governmental authority of competent jurisdiction or any self-regulatory organization having authority over the matters contemplated hereby which prohibits the consummation of any of the transactions contemplated by this Agreement.

f. No event shall have occurred which could reasonably be expected to have a Material Adverse Effect.

g. The Buyer shall have received an opinion of the Company's counsel, dated as of the Closing Date, in form, scope and substance acceptable to such Buyer.

h. The Company's Chief Executive Officer shall deliver a validity guaranty in form and substance acceptable to the Collateral Agent.

i. [intentionally omitted]

j. [intentionally omitted]

k. The Company and the Subsidiaries shall deliver, or cause to be delivered, at the Closing (i) an insurance certificate naming each Buyer as a loss payee on each of the Company's and each Subsidiary's casualty insurance policies (the "CASUALTY POLICIES"), (ii) an insurance certificate naming each Buyer as an additional insured on each of the

Company's and each Subsidiary's liability insurance policies (the "LIABILITY POLICIES"), each of the foregoing in an amount of coverage not less than the aggregate amount of the then-outstanding Notes issued under this Agreement.

l. The Buyers shall have received an executed payoff letter from Park Bank - Capitol (the "LENDER"), in form and substance satisfactory to the Buyers, relating to the payment of the Company's indebtedness to the Lender, and the release of the Lender's liens on all of the Company's and any Subsidiaries' assets.

m. Contemporaneous with the Closing, the Company shall sell to each other Buyer and each other Buyer shall purchase the Notes and Warrants to be purchased by it at the Closing.

7. AFFIRMATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding, unless holders of a majority of the then-outstanding principal amount of the Notes consents in writing otherwise:

a. COMPLIANCE WITH LAW. The Company will, and will cause each Subsidiary to, comply with all laws, ordinances or governmental rules or regulations to which each of them is subject, including, without limitation, Environmental Laws, and will obtain and maintain in effect all licenses, certificates, permits, franchises and other governmental authorizations necessary to the ownership of their respective properties or to the conduct of their respective businesses, in each case to the extent necessary to ensure that non-compliance with such laws, ordinances or governmental rules or regulations or failures to obtain or maintain in effect such licenses, certificates, permits, franchises and other governmental authorizations could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

b. INSURANCE. The Company will, and will cause each Subsidiary to, maintain, with financially sound and reputable insurers, insurance, including, without limitation, the Casualty Policies and the Liability Policies, with respect to their respective properties and businesses against such casualties and contingencies, of such types, on such terms and in such amounts (including deductibles, co-insurance and self-insurance, if adequate reserves are maintained with respect thereto) as is customary in the case of entities of established reputations engaged in the same or a similar business and similarly situated.

c. MAINTENANCE OF PROPERTIES. The Company will, and will cause each Subsidiary to, maintain and keep, or cause to be maintained and kept, their respective properties in good repair, working order and condition (other than ordinary wear and tear), so that the business carried on in connection therewith may be properly conducted at all times.

d. PAYMENT OF TAXES AND CLAIMS. The Company will, and will cause each Subsidiary to, file all income tax or similar tax returns required to be filed in any jurisdiction and to pay and discharge all taxes shown to be due and payable on such returns and all other taxes, assessments, governmental charges, or levies imposed on them or any of their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent and all claims for which sums have become due and payable that have or might become a Lien on properties or assets of the

Company or any Subsidiary, provided that neither the Company nor any Subsidiary need pay any such tax or assessment or claims if the amount, applicability or validity thereof is contested by the Company or such Subsidiary on a timely basis in good faith and in appropriate proceedings, and the Company or a Subsidiary has established adequate reserves therefor in accordance with United States generally accepted accounting principles, consistently applied, (or if the Company is a Non-Reporting Company, in accordance with AAS, or generally accepted accounting principles, consistently applied) on the books of the Company or such Subsidiary .

e. CORPORATE EXISTENCE, ETC. The Company will at all times preserve and keep in full force and effect its corporate existence. The Company will at all times preserve and keep in full force and effect the corporate existence of each Subsidiary and all rights and franchises of the Company and its Subsidiaries.

f. USE OF PROCEEDS. The Company shall use the proceeds from the sale of the Notes and the Warrants as set forth in the DISCLOSURE SCHEDULE. The Company shall not, directly or indirectly, use the proceeds from the sale of the Notes and the Warrants for any loan to or investment, directly or indirectly, in any other corporation, partnership, enterprise or other Person (except in connection with the Subsidiaries).

g. AUTHORIZATION AND RESERVATION OF SHARES. The Company shall at all times have authorized, and reserved for the purpose of issuance, a sufficient number of shares of Common Stock to provide for the full exercise of the outstanding Warrants and issuance of the Warrant Shares in connection therewith (based on the Exercise Price of the Warrants in effect from time to time) and as otherwise required by the Warrants. Except in the case of combinations of Common Stock (by any reverse stock split, recapitalization, reorganization, reclassification or otherwise), the Company shall not reduce the number of shares of Common Stock reserved for issuance upon exercise of the Warrants without the consent of each Buyer.

h. PATENTS. The Company shall, and cause its Subsidiaries to, use its and their best efforts, respectively, to complete, prosecute, and defend all patent applications, including, those listed on the DISCLOSURE SCHEDULE with respect to Section 3(i) of this Agreement and any other patent applications.

i. DOCUMENT ROOM. The Company shall on behalf of itself and each of the Subsidiaries, establish not later than thirty (30) days after the Closing Date and maintain continuously thereafter until all of the Obligations (as defined in the Security Agreement) have been indefeasibly paid in full, a secure document control room ("DOCUMENT CONTROL ROOM") designated as such at the Company's central offices located at N93 W14475 Whitaker Way, Menomonee Falls, Wisconsin, which shall contain all complete, genuine and accurate current, as of the Closing Date, and future:

(i) design sheets, testing and operating procedures and manuals, and all other documentation specifying the method of manufacture of the Company's and the Subsidiaries' products, including, without limitation, procedures for manufacturing all parts of battery stack, list of drawings, vendor information and pictures of the such manufacturing process;

(ii) design sheets, testing and operating procedures and manuals, and all other documentation specifying the method of assembly of the Company's and the Subsidiaries' products, including, without limitation, procedures for assembling modules and shipping containers, list of drawings, vendor information and pictures of the such assembly process;

(iii) designs and drawings, whether hard copy or computer files, of the Company's and the Subsidiaries' products, including the battery, module and shipping containers, list of such designs and drawings, vendor information and specifications for all components of the foregoing;

(iv) lists and descriptions of raw materials used in the manufacture of the Company's and the Subsidiaries' products, including trade name, complete technical specification, vendor name(s) and contact;

(v) lists and detail descriptions of all formulations used in the manufacture of the Company's and the Subsidiaries' products, including Electrolyte, Electrode material and Battery frame material;

(vi) licenses and agreements (including joint ventures, manufacturing, development and marketing agreements) which any of the Company or any of the Subsidiaries is a party;

(vii) contracts with consultants, employee agreements with respect to inventions and intellectual property which any of the Company or any of the Subsidiaries is a party;

(viii) any of the Company's or any of the Subsidiaries' products customer lists, price lists, market studies, and business plans;

(ix) hard copy and computer files containing any of the Company's or any of the Subsidiaries' operating manuals for use of manufacturing equipment, including, without limitation, vendor information, designs and drawings of such equipment, and maintenance records;

(x) any of the Company's or any of the Subsidiaries' internal and independent technical reports, including results of technical specification measurements;

(xi) all software, including object and source code, and related manuals, both hard copy and electronic formats, used in the design, manufacturing, monitoring and marketing of the Company's or any of the Subsidiaries' products;

(xii) all manuals, procedures and codes, whether in hard copy of electronic format, for the testing of batteries, including, Individual Stacks, Modules and Shipping Containers, and all data, results and conclusions of all prior testing

(xiii) software, including object and source code, and related manuals, both hard copy and electronic formats, used in the design, manufacturing, monitoring and marketing of the Company's or any of the Subsidiaries' products;

(xiv) all documentation, whether in hard copy or electronic format, concerning the Company's and each Subsidiaries' research and development, including, without limitation, all information and documentation which the Company or any Subsidiary has protected as trade secrets, all documentation with respect to previous and future research and development projects and reports, and all documentation with respect to testing methods used in such research and development efforts (such as including bromine diffusion, resistivity, surface area).

(xv) all documentation, whether in hard copy or electronic format, concerning the Company's and each Subsidiaries' quality control methods, procedures and specifications used with respect to research and development, manufacturing, assembly, shipping, maintenance and service.

(xvi) patents and applications, trademarks and tradenames and applications, copyrights and applications and correspondence with applicable government agencies and intellectual property counsel by or with the Company or any of the Subsidiaries;

(xvii) the Company's or any of the Subsidiaries' distribution methods and processes;

(xviii) the Company's or any of the Subsidiaries' security codes, passwords and other access devices with respect to the foregoing;

(xix) all written vendor or supplier, contracts, and written summaries of any such oral contracts, to which any of the Company or any of the Subsidiaries is a party;

(xx) all written customer contracts, and written summaries of any such oral contracts, to which any of the Company or any of the Subsidiaries is a party;

(xxi) hard copy and computer files containing all of the Company's and all of the Subsidiaries' financial information, including, without limitation, bills of materials, vendor phone and contact info, back-up of data files, Peachtree Manufacturing software and asset schedules; and

(xxii) any and all amendments, changes and additions to the foregoing as they may arise, which such amendments, changes and additions shall be included in the Document Control Room not later than every sixty (60) days commencing on the ninetieth (90th) day after the Closing Date.

The foregoing items under (i) through (xxii), inclusive is collectively referred to as the "DOCUMENT CONTROL ROOM ITEMS." The Company shall make the foregoing, and all of the Company's and Subsidiaries Collateral, as defined in the Security Agreement and each Subsidiary Security Agreement, available to the Collateral Agent for inspection during normal

business hours. The Collateral Agent and the Company shall execute a confidentiality agreement reasonable satisfactory to both parties. Upon an Event of Default, the Collateral Agent may terminate the confidentiality agreement and take exclusive possession of the Document Control Room and/or the contents therein.

j. APPLICATION TO ASX. The Company shall (i) within thirty (30) days of the Closing Date, apply to the ASX for a waiver permitting the Company to issue the shares of common stock upon conversion of the Notes in accordance with Section 18 of this Agreement (the "ASX APPROVAL"), and (ii) use its commercially reasonable efforts to obtain the ASX Approval.

k. COLLATERAL ASSIGNMENTS OF MATERIAL EQUIPMENT LEASES. The Company shall, and cause its Subsidiaries to, within sixty (60) days of the Closing Date, (i) execute and deliver collateral assignments reasonably acceptable to the Collateral Agent of each of the Company's and each Subsidiary's respective equipment leases, which are material to the businesses of the Company and the Subsidiaries respectively, as mutually agreed in good faith by the Company and the Collateral Agent, and (ii) to deliver lessors' consents reasonably acceptable to the Collateral Agent to such collateral assignments.

8. NEGATIVE COVENANTS. The Company covenants that so long as any of the Notes are outstanding, unless holders of a majority of the then-outstanding principal amount of the Notes consents in writing otherwise:

a. LIENS. The Company will not, and will not permit any Subsidiary to, and cause such Subsidiary not to, permit to exist, create, assume or incur, directly or indirectly, any Lien on its properties or assets, whether now owned or hereafter acquired, except:

(i) Liens existing on property or assets of the Company or any Subsidiary as of the date of this Agreement that are described in the DISCLOSURE SCHEDULE;

(ii) Liens for taxes, assessments or governmental charges not then due and delinquent;

(iii) encumbrances in the nature of leases, subleases, zoning restrictions, easements, rights of way, minor survey exceptions and other rights and restrictions of record on the use of real property and defects in title arising or incurred in the ordinary course of business, which, individually and in the aggregate, do not materially impair the use or value of the property or assets subject thereto or which relate only to assets that in the aggregate are not material;

(iv) Liens incidental to the conduct of business or the ownership of properties and assets (including landlords', lessors', carriers', warehousemen's, mechanics', materialmen's and other similar liens) and Liens to secure the performance of bids, tenders, leases or trade contracts, or to secure statutory obligations (including obligations under workers compensation, unemployment insurance and other social security legislation), surety or appeal bonds or other Liens of like general nature incurred in the ordinary course of business and not in connection with the borrowing of money; or

(v) any attachment or judgment Lien, unless the judgment it secures has not, within sixty (60) days after the entry thereof, been discharged or execution thereof stayed pending appeal, or has not been discharged within sixty (60) days after the expiration of any such stay.

b. MERGERS, CONSOLIDATIONS, ETC. The Company will not, and will not permit any Subsidiary to, and cause such Subsidiary not to, consolidate with or merge with any other Person or convey, transfer, sell or lease all or substantially all of its assets in a single transaction or series of transactions to any Person.

c. SALE OF ASSETS. The Company will not, and will not permit any Subsidiary to, and cause such Subsidiary not to, sell, lease, transfer or otherwise dispose of, including by way of merger (collectively a "DISPOSITION"), any assets, including capital stock of any Subsidiary, in one or a series of transactions, to any Person, other than Dispositions in the ordinary course of business.

d. NATURE OF BUSINESS. The Company will not, and will not permit any Subsidiary to, and cause such Subsidiary not to, engage in any business if, as a result, the general nature of the business in which the Company and its Subsidiaries, taken as a whole, would then be engaged would be substantially changed from the general nature of the business in which the Company and its Subsidiaries, taken as a whole, are engaged on the date of this Agreement.

e. TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit any Subsidiary to, and cause such Subsidiary not to, enter into directly or indirectly any transaction or material group of related transactions (including without limitation the purchase, lease, sale or exchange of properties of any kind or the rendering of any service) with any Affiliate (other than the Company or another Subsidiary), except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would be obtainable in a comparable arm's-length transaction with a Person not an Affiliate.

f. RESTRICTION ON DISTRIBUTIONS AND STOCK REPURCHASES. The Company will not, and will not permit any Subsidiary to, and cause such Subsidiary not to, redeem, repurchase or otherwise acquire (whether for cash or in exchange for property or other securities or otherwise) in any one transaction or series of related transactions any shares of capital stock of the Company or any Subsidiary or any warrants, rights or options to purchase or acquire any such shares. The Company will not and will not permit any Subsidiary to make any distribution or dividend of cash or other property with respect to its capital stock.

g. INVESTMENTS. The Company will not, and will not permit any Subsidiary to, and cause such Subsidiary not to, make any loan or advance to any Person or entity, or purchase or otherwise acquire any capital stock, assets, obligations, or other securities of, make any capital contribution to, or otherwise invest in or acquire any interest in any Person or entity, except direct obligations of the United States or any agency thereof, bonds, and certificates of deposit in commercial or savings banks of recognized standing.

h. ADDITIONAL SUBSIDIARY CAPITAL. The Company shall not permit any of the Subsidiaries to issue to third parties any of its capital stock or options, warrants or other similar rights to acquire its capital stock.

9. EVENTS OF DEFAULT. An "Event of Default" shall exist if any of the following conditions or events shall occur and be continuing:

a. the Company defaults in the payment of any principal on any Note when the same becomes due and payable, whether at maturity or otherwise; or

b. the Company defaults in the payment of any interest on any Note for more than five (5) business days after the same becomes due and payable; or

c. the Company defaults in the performance of or compliance with any term contained in or Sections 8(a) through 8(h), and such default has not been cured for ten (10) business days after the earlier of (i) an executive officer of the Company or any Subsidiary obtaining actual knowledge of such default and (ii) the Collateral Agent delivering written notice to the Company of such default; or

d. the Company defaults in the performance of or compliance with any term, agreement or covenant contained herein (other than those referred to in paragraphs (a), (b) and (c) of this Section 9) and such default is not remedied within ten (10) business days after the earlier of (i) an executive officer of the Company or any Subsidiary obtaining actual knowledge of such default and (ii) the Collateral Agent delivering written notice to the Company of such default; or

e. any representation or warranty made by or on behalf of the Company or any Subsidiary or by any officer of the Company or a Subsidiary in this Agreement, the Security Agreement, any Subsidiary Security Agreement, any Guaranty, the Real Property Security Agreement, the Pledge Agreement or in any writing furnished in connection with the transactions contemplated hereby or thereby proves to have been false or incorrect in any material respect on the date as of which made, and such condition has not been cured for ten (10) business days after the earlier of (i) an executive officer of the Company or any Subsidiary obtaining actual knowledge of such condition and (ii) the Collateral Agent delivering written notice to the Company of such condition; or

f. (i) the Company or any Subsidiary is in default (as principal or as guarantor or other surety) in the payment of any principal of or premium or make-whole amount or interest on any indebtedness that is outstanding beyond any period of grace provided with respect thereto, or (ii) the Company or any Subsidiary is in default in the performance of or compliance with any term of any evidence of any indebtedness that is outstanding or of any mortgage, indenture or other agreement relating thereto or any other condition exists, and as a consequence of such default or condition such indebtedness has become, or has been declared (or one or more Persons are entitled to declare such indebtedness to be), due and payable before its stated maturity or before its regularly scheduled dates of payment, or (iii) as a consequence of the occurrence or continuation of any event or condition (other than the passage of time or the right of the holder of indebtedness to convert such indebtedness into equity interests), (A) the

Company or any Subsidiary has become obligated to purchase or repay indebtedness before its regular maturity or before its regularly scheduled dates of payment, or (B) one or more Persons have the right to require the Company or any Subsidiary so to purchase or repay such indebtedness; provided, that any of the foregoing, if curable, has not been cured within ten (10) business day after the earlier of (i) an executive officer of the Company or any Subsidiary obtaining actual knowledge of such default and (ii) the Collateral Agent delivering written notice to the Company of such default; or

g. the Company or any Subsidiary (i) is generally not paying, or admits in writing its inability to pay, its debts as they become due, (ii) files, or consents by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy, insolvency, reorganization, moratorium or other similar law of any jurisdiction, (iii) makes an assignment for the benefit of its creditors, (iv) consents to the appointment of a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, (v) is adjudicated as insolvent or to be liquidated, or (vi) takes corporate action for the purpose of any of the foregoing; or

h. a court or governmental authority of competent jurisdiction enters an order appointing, without consent by the Company or any Subsidiary, a custodian, receiver, trustee or other officer with similar powers with respect to it or with respect to any substantial part of its property, or constituting an order for relief or approving a petition for relief or reorganization or any other petition in bankruptcy or for liquidation or to take advantage of any bankruptcy or insolvency law of any jurisdiction, or ordering the dissolution, winding-up or liquidation of the Company or any Subsidiary, or any such petition shall be filed against the Company or any Subsidiary and such petition shall not be dismissed within sixty (60) days; or

i. a final judgment or judgments for the payment of money are rendered against one or more of the Company and its Subsidiaries, which judgments are not, within sixty (60) days after entry thereof, bonded, discharged or stayed pending appeal, or are not discharged within sixty (60) days after the expiration of such stay; or

j. any Subsidiary defaults in the performance of or compliance with any term contained in any Guaranty or the Subsidiary Security Agreement or any Guaranty or the Subsidiary Security Agreement ceases to be in full force and effect as a result of acts taken by the Company or any Subsidiary, or is declared to be null and void in whole or in material part by a court or other governmental or regulatory authority having jurisdiction or the validity or enforceability thereof shall be contested by any of the Company or any Subsidiary or any of them renounces any of the same or denies that it has any or further liability thereunder; provided, that any of the foregoing, if curable, has not been cured within ten (10) business day after the earlier of (i) an executive officer of the Company or any Subsidiary obtaining actual knowledge of such default and (ii) the Collateral Agent delivering written notice to the Company of such default;

k. the Company defaults in the performance of or compliance with any term contained in the Pledge Agreement or the Pledge Agreement ceases to be in full force and effect as a result of acts taken by the Company or any Subsidiary, or is declared to be null

and void in whole or in material part by a court or other governmental or regulatory authority having jurisdiction or the validity or enforceability thereof shall be contested by any of the Company or any Subsidiary or any of them renounces any of the same or denies that it has any or further liability thereunder; provided, that any of the foregoing, if curable, has not been cured within ten (10) business day after the earlier of (i) an executive officer of the Company or any Subsidiary obtaining actual knowledge of such default and
(ii) the Collateral Agent delivering written notice to the Company of such default; or

l. the Company defaults in the performance of or compliance with any term contained in the Real Property Security Agreement or the Real Property Security Agreement ceases to be in full force and effect as a result of acts taken by the Company or any Subsidiary, or is declared to be null and void in whole or in material part by a court or other governmental or regulatory authority having jurisdiction or the validity or enforceability thereof shall be contested by any of the Company or any Subsidiary or any of them renounces any of the same or denies that it has any or further liability thereunder; provided, that any of the foregoing, if curable, has not been cured within ten (10) business day after the earlier of (i) an executive officer of the Company or any Subsidiary obtaining actual knowledge of such default and (ii) the Collateral Agent delivering written notice to the Company of such default.

10. REMEDIES ON DEFAULT, ETC.

a. ACCELERATION.

(i) If an Event of Default with respect to the Company described in paragraph (g) or (h) of Section 9 (other than an Event of Default described in clause (i) of paragraph (g) or described in clause (vi) of paragraph (g) by virtue of the fact that such clause encompasses clause (i) of paragraph (g)) has occurred, all the Notes then outstanding shall automatically become immediately due and payable.

(ii) If any other Event of Default has occurred and is continuing, holders of a majority or more in principal amount of the Notes at the time outstanding may at any time at its or their option, by notice or notices to the Company, declare all the Notes then outstanding to be immediately due and payable.

(iii) If any Event of Default described in paragraph (a) or
(b) of Section 9 has occurred and is continuing, any holder or holders of Notes at the time outstanding affected by such Event of Default may at any time, at its or their option, by notice or notices to the Company, declare all the Notes held by it or them to be immediately due and payable.

Upon any Notes becoming due and payable under this Section 10(a), whether automatically or by declaration (a "DEFAULT"), such Notes will forthwith mature and the entire unpaid principal amount of such Notes, plus all accrued and unpaid interest thereon shall all be immediately due and payable, in each and every case without presentment, demand, protest or further notice, all of which are hereby waived.

b. OTHER REMEDIES. If any Default or Event of Default has occurred and is continuing, and irrespective of whether any Notes have become or have been declared

immediately due and payable under Section 10(a), the holder of any Note at the time outstanding may proceed to protect and enforce the rights of such holder by an action at law, suit in equity or other appropriate proceeding, whether for the specific performance of any agreement contained herein or in any Note, or for an injunction against a violation of any of the terms hereof or thereof, or in aid of the exercise of any power granted hereby or thereby or by law or otherwise.

c. RESCISSION. At any time after any Notes have been declared due and payable pursuant to clause (i) or (ii) of Section 10(a), the holders of a majority in principal amount of the Notes then outstanding, by written notice to the Company, may rescind and annul any such declaration and its consequences if
(i) the Company has paid all overdue interest on the Notes and all principal of any Notes that are due and payable and are unpaid other than by reason of such declaration, (ii) all Events of Default and Defaults, other than non-payment of amounts that have become due solely by reason of such declaration, have been cured or have been waived pursuant to Section 14, and (iii) no judgment or decree has been entered for the payment of any monies due pursuant hereto or to the Notes. No rescission and annulment under this Section 10(c) will extend to or affect any subsequent Event of Default or Default or impair any right consequent thereon.

d. NO WAIVERS OR ELECTION OF REMEDIES, EXPENSES, ETC. No course of dealing and no delay on the part of any holder of any Note in exercising any right, power or remedy shall operate as a waiver thereof or otherwise prejudice such holder's rights, powers or remedies. No right, power or remedy conferred by this Agreement or by any Note upon any holder thereof shall be exclusive of any other right, power or remedy referred to herein or therein or now or hereafter available at law, in equity, by statute or otherwise. Without limiting the obligations of the Company under Section 17, the Company will pay to the holder of each Note on demand such further amount as shall be sufficient to cover all costs and expenses of such holder incurred in any enforcement or collection under this Section 10, including, without limitation, reasonable attorneys' fees, expenses and disbursements.

e. DEFAULT INTEREST. During any period a Default or an Event of Default has occurred and is continuing, any amount of principal on the Notes then outstanding shall bear interest (the "DEFAULT INTEREST"), and the Company shall pay to the holder thereof in cash as liquidated damages and not as a penalty, at the rate equal to (i) two percent (2%) for the first thirty (30) days, or fraction thereof, after such Default or Event of Default has occurred and (ii) thereafter three and one-half percent (3.5%) for each thirty (30) day period, or fraction thereof, until the earlier of (A) the Notes, including accrued but unpaid interest thereon, are paid in full and (B) such Default or Event of Default, if curable under the terms of this Agreement, has been cured. Such Default Interest shall be paid to the holders of such Notes by the fifth
(5th) day of the month following the month in which it has accrued or, if not so paid, shall be added to the principal amount of such holder's Notes, in which event interest shall accrue thereon in accordance with the terms of the Notes.

11. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES.

a. REGISTRATION OF NOTES. The Company shall keep at its principal executive office a register for the registration and registration of transfers of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address

of each transferee of one or more Notes shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary.

b. TRANSFER AND EXCHANGE OF NOTES. Upon surrender of any Note at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Note or part thereof), the Company shall execute and deliver, at the Company's expense (except as provided below), one or more new Notes (as requested by the holder thereof) in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable to such Person as such holder may request and shall be substantially in the form of Exhibit "A." Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. Notes shall not be transferred in denominations of less than $50,000, provided that if necessary to enable the registration of transfer by a holder of its entire holding of Notes, one Note may be in a denomination of less than $50,000.

c. REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be notice from such holder of such ownership and such loss, theft, destruction or mutilation), and

(i) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is, or is a nominee for, (A) a Buyer, or (B) other Person with a minimum net worth of at least the then-outstanding principal amount of the Notes so lost, stolen, destroyed or mutilated, then such Buyer's or other Person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or

(ii) in the case of mutilation, upon surrender and cancellation thereof,

the Company at its own expense shall execute and deliver, in lieu thereof, a new Note dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon.

12. PAYMENT ON NOTES.

a. PLACE OF PAYMENT. Subject to Section 12(b), payments of principal and interest becoming due and payable on the Notes shall be made in U.S. Dollars at the principal office of the Company. The Company may at any time, by notice to each holder of a Note, change the place of payment of the Notes so long as such place of payment shall be

either the principal office of the Company in such jurisdiction or the principal office of a bank or trust company in such jurisdiction.

b. HOME OFFICE PAYMENT. So long as a Buyer or its nominee shall be the holder of any Note, and notwithstanding anything contained in Section 12(a) or in such Note to the contrary, the Company will pay all sums becoming due on such Note for principal and interest in U.S. Dollars and by the method and at the address specified for such purpose below such Buyer's name on the signature page hereto, or by such other method or at such other address as such Buyer shall have from time to time specified to the Company in writing for such purpose, without the presentation or surrender of such Note or the making of any notation thereon, except that upon written request of the Company made concurrently with or reasonably promptly after payment or prepayment in full of any Note, such Buyer shall surrender such Note for cancellation, reasonably promptly after any such request, to the Company at its principal executive office or at the place of payment most recently designated by the Company pursuant to Section 12(a).

c. ALLOCATION OF PREPAYMENT. In the case of each partial prepayment of the Notes, the principal amount of the Notes to be prepaid shall be allocated among all of the Notes at the time outstanding in proportion, as nearly as practicable, to the respective unpaid principal amounts thereof not theretofore called for prepayment.

d. MAKE-WHOLE AMOUNT. If (i) the Company, at its option, prepays at any time all, or from time to time any part of, the Notes, or (ii) the principal amount of the Notes become due and payable prior to the Maturity Date, by acceleration or otherwise, then the Company shall pay, in addition to any other amounts due and owing to the holders of such Notes, the Make-Whole Amount determined for the prepayment date with respect to such principal amount so prepaid. Contemporaneous with any such payment, the Company will give each holder of Notes (i) written notice which shall specify (A) the aggregate principal amount of the Notes being prepaid, (B) the principal amount of each Note held by such holder being prepaid, (C) the accrued but unpaid interest through the prepayment date, including Default Interest, if any, being paid with respect to such principal amount being prepaid, and (ii) a certificate of the Chief Financial Officer as to the estimated Make-Whole Amount due in connection with such prepayment, setting forth the details of such computation. The term "MAKE-WHOLE AMOUNT" means, with respect to any Note, an amount equal to the non-discounted interest that would have accrued from the date of such prepayment to the Maturity Date.

13. INDEMNIFICATION.

a. SURVIVAL. All representations, warranties and covenants in this Agreement and the DISCLOSURE SCHEDULE will survive the Closing. The right to indemnification, payment of Damages (as defined below) or other remedy based on such representations, warranties and covenants will not be affected by any investigation conducted with respect to, or any knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing, with respect to the accuracy or inaccuracy of or compliance with, any such representation, warranty or covenant. The waiver of any condition based on the accuracy of any representation or warranty, or on the performance of

or compliance with any covenant, shall not affect the right to indemnification, payment of Damages, or other remedy based on such representations, warranties and covenants.

b. INDEMNIFICATION. The Company will indemnify and hold harmless the Buyers and the Collateral Agent, each of their officers, partners, managers, and all Persons who control (as such term is defined under the Securities Act or the Exchange Act) such Buyer or the Collateral Agent (each an "INDEMNIFIED PARTY" and collectively the "INDEMNIFIED PARTIES"), and will pay to the Indemnified Parties the amount of, any loss, liability, claim, damage, expense, including costs of investigation and defense and reasonable attorneys' fees, (collectively, "DAMAGES") arising, directly or indirectly, from or in connection with (i) any breach of any representation or warranty made by the Company in this Agreement or the DISCLOSURE SCHEDULE, the Notes, the Warrants, the Registration Rights Agreement, the Pledge Agreement, the Real Property Security Agreement or the Security Agreement, (ii) any breach by the Company of any covenant or obligation of the Company in this Agreement, the Notes, the Warrants, the Registration Rights Agreement, the Pledge Agreement, the Real Property Security Agreement or the Security Agreement, or (iii) any breach of any representation or warranty made by any Subsidiary in any Guaranty or any Subsidiary Security Agreement, or (iv) any breach of by any Subsidiary of any covenant or obligation of such Subsidiary under any Guaranty or any Subsidiary Security Agreement.

c. TIME LIMITATIONS. The Company shall have no liability (for indemnification or otherwise) with respect to any breach of any representation or warranty, unless on or before the date three (3) years from the Closing Date, an Indemnified Party notifies the Company of a claim specifying the factual basis of that claim in reasonable detail to the extent then known by such Indemnified Party.

d. PROCEDURE FOR INDEMNIFICATION. If a claim is to be made against the Company under Section 13(b), the Indemnified Party shall give notice to the Company of such claim. In the event that the Company objects in writing to any claim for Damages, the Indemnified Party and the Company shall attempt in good faith to resolve the dispute. The remedies provided in this Section 13 will not be exclusive of or limit any other remedies that may be available to the Buyers. When determining Damages under this Section 13, all materiality qualifiers will be disregarded.

14. AMENDMENT AND WAIVER.

a. REQUIREMENTS. This Agreement, the Notes, the Security Agreement, any Guaranty, the Subsidiary Security Agreement, the Pledge Agreement and the Real Property Security Agreement may be amended, and the observance of any term hereof or thereof may be waived (either retroactively or prospectively), with (and only with) the written consent of the Company and the holders of a majority of the then-outstanding principal amount of the Notes.

b. SOLICITATION OF HOLDERS OF NOTES. The Company will provide each holder of the Notes (irrespective of the amount of Notes then owned by it) with sufficient information, sufficiently far in advance of the date a decision is required, to enable such holder to make an informed and considered decision with respect to any proposed amendment, waiver or

consent in respect of any of the provisions hereof or of the Notes. The Company will deliver executed or true and correct copies of each amendment, waiver or consent effected pursuant to the provisions of this Section 14 to each holder of outstanding Notes promptly following the date on which it is executed and delivered by, or receives the consent or approval of, the requisite holders of Notes.

c. BINDING EFFECT, ETC. Any amendment or waiver consented to as provided in this Section 14 applies equally to all holders of Notes and is binding upon them and upon each future holder of any Note and upon the Company without regard to whether such Note has been marked to indicate such amendment or waiver. No such amendment or waiver will extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. No course of dealing between the Company and the holder of any Note nor any delay in exercising any rights hereunder or under any Note shall operate as a waiver of any rights of any holder of such Note. As used herein, the term "this Agreement" or "the Agreement" and references thereto shall mean this Agreement as it may from time to time be amended or supplemented.

d. NOTES HELD BY COMPANY. Solely for the purpose of determining whether the holders of the requisite percentage of the aggregate principal amount of Notes then outstanding approved or consented to any amendment, waiver or consent to be given under this Agreement or the Notes, or have directed the taking of any action provided herein or in the Notes to be taken upon the direction of the holders of a specified percentage of the aggregate principal amount of Notes then outstanding, Notes directly or indirectly owned by the Company or any of its Affiliates shall be deemed not to be outstanding.

15. EXPENSES.

a. CURRENT EXPENSES. The Company shall reimburse, or pay directly, at the Closing up to $30,000 in the aggregate, of which $10,000 is acknowledged as previously paid, (i) counsels' fees of one firm designated by ABS SOS-PLUS PARTNERS, LTD. (the "LEAD BUYER") incurred in connection with the negotiation, preparation, and closing of this Agreement and the other agreements to be executed in connection herewith (the "DOCUMENTS"), (ii) such counsels' reasonable out of pocket expenses and (iii) other out-of-pocket expenses incurred by the Lead Buyer or the Collateral Agent incurred in connection with the negotiation of the terms of the transactions contemplated herein and due diligence of the Company, its Subsidiaries and their respective management. When requested by the Lead Buyer the Company shall pay these fees directly, otherwise the Company must make immediate payment for reimbursement to the Lead Buyer for such fees and expenses immediately upon written notice by the Lead Buyer or the submission of an invoice by the Lead Buyer. If the Company fails to reimburse the Lead Buyer in full within three (3) business days of the written notice or submission of invoice by the Lead Buyer, the Company shall pay interest on the total amount of fees to be reimbursed at a rate of eighteen percent (18%) per annum. Unless otherwise provided in this Agreement, each party shall bear its own expenses in performing this Agreement.

b. EXPENSES IN DISPUTE. In the event of any dispute regarding the subject matter hereunder, the non-prevailing party in any dispute shall be required to fully

reimburse the prevailing party in any dispute for all of its documented attorneys' fees, costs and expenses incurred in connection with such dispute, the outcome of which shall have been determined by a court of competent jurisdiction.

c. EXPENSES FOR AMENDMENTS. If the Lead Buyer shall employ counsel for advice or other representation or shall incur legal or other costs and expenses in connection with any amendment or modification of this Agreement or any of the other Documents, then, and in any such event, the counsel fees arising from such services and all expenses, costs, charges and other fees of such counsel incurred in connection with or related to any of the events or actions described above shall be payable by the Company.

16. [INTENTIONALLY OMITTED]

17. GOVERNING LAW; JURY TRIAL.

a. GOVERNING LAW. The validity and interpretation of this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York. Each of the parties hereto and their assigns hereby consents to the exclusive jurisdiction and venue of the Courts of the State of New York, located in the City and County of New York and the United States District Court, Southern District, for the State of New York with respect to any matter relating to this Agreement and performance of the parties' obligations hereunder, the documents and instruments executed and delivered concurrently herewith or pursuant hereto and performance of the parties' obligations thereunder and each of the parties hereto hereby consents to the personal jurisdiction of such courts and shall subject itself to such personal jurisdiction. Any action, suit or proceeding relating to such matters shall be commenced, pursued, defended and resolved only in such courts and any appropriate appellate court having jurisdiction to hear an appeal from any judgment entered in such courts. The parties irrevocably waive the defense of an inconvenient forum to the maintenance of such suit or proceeding. Service of process in any action, suit or proceeding relating to such matters may be made and served within or outside the State of New York by registered or certified mail to the parties and their representatives at their respective addresses specified in Section 18 hereof, provided that a reasonable time, not less than thirty (30) days, is allowed for response. Service of process may also be made in such other manner as may be permissible under the applicable court rules.

b. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO

THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

18. CONVERSION RIGHTS.

a. GENERAL.

(i) CONVERSION EVENTS. Each holder of a Note shall have the right from time to time, at any time while a Default or an Event of Default has occurred as is continuing and subject to (A) the ASX granting the ASX Approval or (B) such conversion or conversions not causing a delisting of the Company from the ASX, to convert all or any part of the outstanding and unpaid principal amount and accrued but unpaid interest of the holder's Note into fully paid and non-assessable common stock, par value $0.01 per share, of the Company (the "COMMON STOCK"), or any shares of capital stock or other securities of the Company into which such Common Stock shall hereafter be changed or reclassified at the Conversion Price (as defined herein).

(ii) CONVERSION AMOUNT. The number of shares of Common Stock to be issued upon each conversion of the holder's Note shall be equal to (i) the Conversion Amount (as defined below) divided by (ii) the applicable Conversion Price then in effect on the date specified in the notice of conversion, in the form accompanying this Agreement (the "NOTICE OF CONVERSION"), delivered to the Company by the holder in accordance with Section 18(d) below; provided that the Notice of Conversion is submitted by facsimile (or by other means resulting in, or reasonably expected to result in, notice) to the Company before 6:00 p.m., New York, New York time on such conversion date (the "CONVERSION DATE"). The term "CONVERSION AMOUNT" means, with respect to any conversion of the holder's Note, the sum of (1) the principal amount of the holder's Note to be converted in such conversion plus (2) accrued and unpaid interest, if any, on such principal amount at the interest rates provided in the holder's Note to the Conversion Date plus (3) Default Interest, if any.

(iii) CONVERSION LIMIT. In no event, at any time that the Company has any class of its securities registered under Section 12(b) or
Section 12(g) of the Exchange Act, shall the holder be entitled to convert any portion of the holder's Note in excess of that portion of the holder's Note upon conversion of which the sum of (i) the number of shares of Common Stock beneficially owned by the holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unconverted portion of the Notes or the unexercised or unconverted portion of any other security of the Company (including, without limitation, the warrants issued by the Company pursuant to this Agreement) subject to a limitation on conversion or exercise analogous to the limitations contained herein) and (ii) the number of shares of Common Stock issuable upon the conversion of the portion of the holder's Note with respect to which the determination of this proviso is being made, would result in beneficial ownership by the holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of this Agreement, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act, and Regulations 13D-G thereunder, except as otherwise provided in clause (i) above. The holder

may waive the provisions of this Section 18(a)(iii) as to itself (and solely as to itself) (i) upon not less than 61 days' prior notice to the Company, and the provisions of this Section 18(a)(iii) shall continue to apply until such 61st day (or such later date as may be specified in such notice of waiver) or (ii) upon the occurrence of any event under Section 18(f)(i). No conversion in violation of this Section 18(a)(iii), but otherwise in accordance here, shall affect the status of the Common Stock issued upon such conversion as validly issued, fully-paid and nonassessable.

b. DEFINITIONS. The capitalized terms below as used in this
Section 18 shall have the following definitions.

(i) BLOOMBERG. The term "BLOOMBERG" shall mean Bloomberg, L.P. (or any successor to its function of reporting stock prices).

(ii) CONVERSION PRICE. The "CONVERSION PRICE" shall be US$0.15, subject to adjustment as provided herein.

(iii) MARKET PRICE. The term "MARKET PRICE" means, as of any date, (i) the average of the last reported sale prices for the shares of Common Stock on a national securities exchange which is the principal trading market for the Common Stock for the five (5) Trading Days immediately preceding such date as reported by Bloomberg, or (ii) if no national securities exchange is the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the fair market value as reasonably determined in good faith by (x) the Board of Directors of the Company or, (y) at the option of a majority-in-interest of the holders of the outstanding Notes, by an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the Company. The manner of determining the Market Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder.

(iv) TRADING DAY. The term "TRADING DAY" shall mean any day on which the Common Stock is traded for any period on the principal securities exchange or other securities market on which the Common Stock is then being traded.

c. AUTHORIZED SHARES. The Company covenants that during the period the conversion right exists, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of Common Stock upon the full conversion of the holder's Note and the other Notes issued pursuant to this Agreement (the "RESERVED AMOUNT"). If the Company shall issue any securities or make any change to its capital structure which would change the number of shares of Common Stock into which the Notes shall be convertible at the then current Conversion Price, the Company shall at the same time make proper provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved, free from preemptive rights, for conversion of the outstanding Notes. The Company (i) acknowledges that it has irrevocably instructed its transfer agent to issue certificates for the Common Stock issuable upon conversion of the holder's Note, and (ii) agrees that its issuance of the holder's Note shall

constitute full authority to its officers and agents who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock in accordance with the terms and conditions of the holder's Note.

d. METHOD OF CONVERSION.

(i) MECHANICS OF CONVERSION. Subject to Section 18(a), the holder's Note may be converted by the holder in whole or in part, by (i) submitting to the Company a Notice of Conversion (by facsimile or other reasonable means of communication dispatched on the Conversion Date prior to 6:00 p.m., New York, New York time) and (ii) subject to Section 18(d)(ii), surrendering the holder's Note at the principal office of the Company.

(ii) SURRENDER OF NOTE UPON CONVERSION. Notwithstanding anything to the contrary set forth herein, upon conversion of the holder's Note in accordance with the terms hereof, the holder shall not be required to physically surrender the holder's Note to the Company unless the entire unpaid principal amount of the holder's Note is so converted. The holder and the Company shall maintain records showing the principal amount so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the holder and the Company, so as not to require physical surrender of the holder's Note upon each such conversion. In the event of any dispute or discrepancy, such records of the Company shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if any portion of the holder's Note is converted as aforesaid, the holder may not transfer the holder's Note unless the holder first physically surrenders the holder's Note to the Company, whereupon the Company will forthwith issue and deliver upon the order of the holder a new Note of like tenor, registered as the holder (upon payment by the holder of any applicable transfer taxes) may request, representing in the aggregate the remaining unpaid principal amount of the holder's Note. The holder and any assignee, by acceptance of the holder's Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of the holder's Note, the unpaid and unconverted principal amount of the holder's Note represented by the holder's Note may be less than the amount stated on the face hereof.

(iii) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon receipt by the Company from the holder of a facsimile transmission (or other reasonable means of communication) of a Notice of Conversion meeting the requirements for conversion as provided in this Section 18(d), the Company shall issue and deliver or cause to be issued and delivered to or upon the order of the holder certificates for the Common Stock issuable upon such conversion within two (2) business days after such receipt (and, solely in the case of conversion of the entire unpaid principal amount hereof, surrender of the holder's Note) (such third business day being hereinafter referred to as the "DEADLINE") in accordance with the terms hereof and the Purchase Agreement.

(iv) OBLIGATION OF COMPANY TO DELIVER COMMON STOCK. Upon delivery by the holder to the Company of a Notice of Conversion, the holder shall be deemed to be the holder of record of the Common Stock issuable upon such conversion, the outstanding principal amount and the amount of accrued and unpaid interest on the holder's Note shall be reduced to reflect such conversion, and, unless the Company defaults on its obligations

under this Section 18, all rights with respect to the portion of the holder's Note being so converted shall forthwith terminate except the right to receive the Common Stock or other securities, cash or other assets, as herein provided, on such conversion. If the holder shall have given a Notice of Conversion as provided herein, the Company's obligation to issue and deliver the certificates for Common Stock shall be absolute and unconditional, irrespective of the absence of any action by the holder to enforce the same, any waiver or consent with respect to any provision thereof, the recovery of any judgment against any Person or any action to enforce the same, any failure or delay in the enforcement of any other obligation of the Company to the holder of record, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the holder of any obligation to the Company, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the holder in connection with such conversion. The Conversion Date specified in the Notice of Conversion shall be the Conversion Date so long as the Notice of Conversion is received by the Company before 6:00
p.m., New York, New York time, on such date.

(v) DELIVERY OF COMMON STOCK BY ELECTRONIC TRANSFER. In lieu of delivering physical certificates representing the Common Stock issuable upon conversion, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program, upon request of the holder and its compliance with the provisions contained in
Section 18(a) and in this Section 18(d), the Company shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon conversion to the holder by crediting the account of holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission system.

e. CONCERNING THE SHARES.

(i) LEGEND. The shares of Common Stock issuable upon conversion of the holder's Note may not be sold or transferred unless (A) such shares are sold pursuant to an effective registration statement under the Securities Act, or (B) the Company or its transfer agent shall have been furnished with an opinion of counsel (which opinion shall be in form, substance and scope customary for opinions of counsel in comparable transactions) to the effect that the shares to be sold or transferred may be sold or transferred pursuant to an exemption from such registration or (C) such shares are sold or transferred pursuant to Rule 144 under the Securities Act (or a successor rule) ("RULE 144") or (D) such shares are sold or transferred outside the United States in accordance with Rule 904 of Regulation S under the Securities Act, or (E) such shares are transferred to an "affiliate" (as defined in Rule 144) of the Company who agrees to sell or otherwise transfer the shares only in accordance with this Section 18(e). Except as otherwise provided in this Agreement (and subject to the removal provisions set forth below), until such time as the shares of Common Stock issuable upon conversion of the holder's Note have been registered under the Act as contemplated by the Registration Rights Agreement, otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold, each certificate for shares of Common Stock issuable upon conversion of the holder's Note that has not been so included in an effective registration statement or that has not been sold pursuant to an effective registration statement or an exemption that permits removal of the legend, shall bear a legend substantially in the following form, as appropriate:

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES ACT"). THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES THAT SUCH SECURITIES MAY BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT, (C) WITHIN THE UNITED STATES AFTER REGISTRATION OR IN ACCORDANCE WITH THE EXEMPTION FROM THE REGISTRATION REQUIREMENTS UNDER THE U.S. SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF APPLICABLE, AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS, OR (D) WITHIN THE UNITED STATES IN A TRANSACTION THAT DOES NOT REQUIRE REGISTRATION UNDER THE U.S. SECURITIES ACT OR ANY APPLICABLE STATE SECURITIES LAWS AND THE HOLDER HAS PRIOR TO SUCH SALE FURNISHED TO THE CORPORATION AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION.

(ii) REMOVAL OF LEGEND. The legend set forth above shall be removed and the Company shall issue to the holder a new certificate therefor free of any transfer legend if (A) the Company or its transfer agent shall have received an opinion of counsel, in form, substance and scope customary for opinions of counsel in comparable transactions, to the effect that a public sale or transfer of such Common Stock may be made without registration under the Act and the shares are so sold or transferred, (B) such holder provides the Company or its transfer agent with reasonable assurances that the Common Stock issuable upon conversion of the holder's Note (to the extent such securities are deemed to have been acquired on the same date) can be sold pursuant to Rule 144 or (C) in the case of the Common Stock issuable upon conversion of the holder's Note, such security is registered for sale by the holder under an effective registration statement filed under the Act or otherwise may be sold pursuant to Rule 144 without any restriction as to the number of securities as of a particular date that can then be immediately sold. The Company shall cause its counsel to issue a legal opinion to the Company's transfer agent promptly after the effective date of any registration statement under the Act registering the resale of the Common Stock issuable upon conversion of the Notes if required by the Company's transfer agent to effect the removal of the legend hereunder. Nothing in the holder's Note shall (x) limit the Company's obligation under the Registration Rights Agreement or (y) affect in any way the holder's obligations to comply with applicable prospectus delivery requirements upon the resale of the securities referred to herein.

(iii) AUSTRALIAN STOCK EXCHANGE. Notwithstanding the foregoing under this Section 18(e), subject to the ASX granting the ASX Approval, the Company (A) represents and warrants to each Buyer that the shares of Common Stock issuable upon conversion of the Notes pursuant to this Section 18 are freely transferable by each of the Buyers and their respective registered assigns of the Notes on the ASX pursuant to the rules and regulations of the ASX, Australian law and United States federal and state law, without, subject to market conditions, volume limitation or price discount, and (B) covenants to each of the Buyers and their respective registered assigns of the Notes that the shares of Common Stock

when issued upon conversion of the Notes pursuant to this Section 18 will be freely transferable by such Buyers and their respective registered assigns on the ASX pursuant to the rules and regulations of the ASX, Australian law and United States federal and state law, without, subject to market conditions, volume limitation or price discount, and subject to changes in rules and regulations of the ASX, Australian law and United States federal and state law after the date hereof.

f. EFFECT OF CERTAIN EVENTS.

(i) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when any of the Notes are issued and outstanding, there shall be any merger, consolidation, exchange of shares, recapitalization, reorganization, or other similar event, as a result of which shares of Common Stock of the Company shall be changed into the same or a different number of shares of another class or classes of stock or securities of the Company or another entity, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then each holder of a Note shall thereafter have the right to receive upon conversion of the holder's Note, upon the basis and upon the terms and conditions specified herein and in lieu of the shares of Common Stock immediately theretofore issuable upon conversion, such stock, securities or assets which the holder would have been entitled to receive in such transaction had the holder's Note been converted in full immediately prior to such transaction (without regard to any limitations on conversion set forth herein), and in any such case appropriate provisions shall be made with respect to the rights and interests of the holder of the holder's Note to the end that the provisions hereof (including, without limitation, provisions for adjustment of the Conversion Price and of the number of shares issuable upon conversion of the Note) shall thereafter be applicable, as nearly as may be practicable in relation to any securities or assets thereafter deliverable upon the conversion hereof. The Company shall not effect any transaction described in this Section 18(f)(i) unless (a) it first gives, to the extent practicable, thirty (30) days prior written notice (but in any event at least fifteen (15) days prior written notice) of the record date of the special meeting of stockholders to approve, or if there is no such record date, the consummation of, such merger, consolidation, exchange of shares, recapitalization, reorganization or other similar event or sale of assets (during which time the holder shall be entitled to convert the holder's Note notwithstanding Section 18(a)(iii)) and (b) the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligations of this Section 18(f)(i). The above provisions shall similarly apply to successive consolidations, mergers, sales, transfers or share exchanges.

(ii) ADJUSTMENT DUE TO DISTRIBUTION. If, at any time when any Notes are issued and outstanding, the Company shall declare or make any distribution of its assets (or rights to acquire its assets) to holders of Common Stock as a dividend, stock repurchase, by way of return of capital or otherwise (including any dividend or distribution to the Company's shareholders in cash or shares (or rights to acquire shares) of capital stock of a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then each holder of a Note shall be entitled, upon any conversion of the holder's Note after the date of record for determining shareholders entitled to such Distribution, to receive the amount of such assets which would have been payable to the holder with respect to the shares of Common Stock issuable upon such conversion had such holder been the holder of such shares of Common Stock on the record date for the determination

of shareholders entitled to such Distribution and the Note shall be deemed repaid by the amount of the fair value of the Distribution.

(iii) ADJUSTMENT DUE TO DILUTIVE ISSUANCE. If, at any time when any Notes are issued and outstanding, the Company issues or sells, or in accordance with this Section 18(f) is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Conversion Price in effect on the date of such issuance (or deemed issuance) of such shares of Common Stock (a "DILUTIVE ISSUANCE"), then immediately upon the Dilutive Issuance, the Conversion Price will be reduced to the lower of (i) the amount of the consideration per share received by the Company in such Dilutive Issuance and
(ii) the price determined by multiplying the Conversion Price in effect immediately prior to the Dilutive Issuance by a fraction, (A) the numerator of which is an amount equal to the sum of (x) the number of shares of Common Stock actually outstanding immediately prior to the Dilutive Issuance, plus (y) the quotient of the aggregate consideration, calculated as set forth in Section 18(f)(iv) hereof, received by the Company upon such Dilutive Issuance divided by the Conversion Price in effect immediately prior to the Dilutive Issuance, and (B) the denominator of which is the Common Stock Deemed Outstanding (as defined below) immediately after the Dilutive Issuance; provided that only one adjustment will be made for each Dilutive Issuance. The term "COMMON STOCK DEEMED OUTSTANDING" shall mean the number of shares of Common Stock actually outstanding (not including shares of Common Stock held in the treasury of the Company), plus (i) pursuant to Section 18(f)(iv)(1) hereof, the maximum total number of shares of Common Stock issuable upon the exercise of Options, as of the date of such issuance or grant of such Options, if any, and (ii) pursuant to
Section 18(f)(iv)(2) hereof, the maximum total number of shares of Common Stock issuable upon conversion or exchange of Convertible Securities, as of the date of issuance of such Convertible Securities, if any. No adjustment to the Conversion Price shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment.

(iv) EFFECT ON CONVERSION PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Conversion Price, the following will be applicable:

1. ISSUANCE OF RIGHTS OR OPTIONS. If the Company in any manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock ("CONVERTIBLE SECURITIES") (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "OPTIONS") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Conversion Price on the date of issuance or grant of such Options, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Options will, as of the date of the issuance or grant of such Options, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Options" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise

of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options.

2. ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Conversion Price on the date of issuance, then the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities will, as of the date of the issuance of such Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For the purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Conversion Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.

3. CHANGE IN OPTION PRICE OR CONVERSION RATE. If there is a change at any time in (i) the amount of additional consideration payable to the Company upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Company upon the conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (other than under or by reason of provisions designed to protect against dilution), the Conversion Price in effect at the time of such change will be readjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.

4. SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a greater number of shares, then, after such date of record for effecting such subdivision, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a smaller number of shares, then, after the date of record for effecting such combination, the Conversion Price in effect immediately prior to such combination shall be proportionately increased.

5. TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE SECURITIES. If, in any case, the total number of shares of Common Stock issuable upon exercise of any Option or upon conversion or exchange of any Convertible Securities is not, in fact, issued and the rights to exercise such Option or to convert or exchange such Convertible Securities shall have expired or terminated, the Conversion Price then in effect will be readjusted to the Conversion Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination (other than in respect of the actual number of shares of Common Stock issued upon exercise or conversion thereof), never been issued.

6. CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock, Options or Convertible Securities are issued, granted or sold for cash, the consideration received therefor for purposes of the holder's Note will be the amount received by the Company therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Company in connection with such issuance, grant or sale. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of securities, in which case the amount of consideration received by the Company will be the Market Price thereof as of the date of receipt. In case any Common Stock, Options or Convertible Securities are issued in connection with any acquisition, merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors of the Company.

7. EXCEPTIONS TO ADJUSTMENT OF CONVERSION PRICE. No adjustment to the Conversion Price will be made (A) upon the issuance of shares of Common Stock or options or warrants to purchase Common Stock to employees of the Company pursuant to any stock or option plan duly adopted by the Board of Directors of the Company on or before June 14, 2006, or (B) the issuance of shares of Common Stock upon exercise of any of the Warrants.

(v) NOTICE OF ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment of the Conversion Price as a result of the events described in this Section 18(f), the Company, at its expense, shall promptly compute such adjustment or readjustment and prepare and furnish to each holder of Notes a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request at any time of any holder of Notes, furnish to such holder a like certificate setting forth (i) such adjustment or readjustment, (ii) the Conversion Price at the time in effect and (iii) the number of shares of Common Stock and the amount, if any, of other securities or property which at the time would be received upon conversion of such holder's Note.

g. STATUS AS SHAREHOLDER.

(i) DEEMED OWNER; RESCISSION. Upon submission of a Notice of Conversion by a holder of a Note, (i) the shares covered thereby (other than the shares, if any, which cannot be issued because their issuance would exceed such holder's allocated portion of the Reserved Amount) shall be deemed converted into shares of Common Stock and (ii) the holder's rights as a holder of such converted portion of the holder's Note shall cease and terminate, excepting only the right to receive certificates for such shares of Common Stock and to any remedies provided herein or otherwise available at law or in equity to such holder because of a failure by the Company to comply with the terms of the holder's Note. Notwithstanding the foregoing, if a holder has not received certificates for all shares of Common Stock prior to the third (3rd) business day after the Deadline with respect to a conversion of any portion of the holder's Note for any reason, then the holder may elect at such holder's option to regain the rights of a holder of the holder's Note with respect to such attempted converted portions of the holder's Note and the Company shall, as soon as practicable, return such attempted converted Note to the holder or, if the Note has not been surrendered, adjust its records to reflect that such portion of the holder's Note has not been converted. In all cases, the holder shall retain all of its rights and remedies for the Company's failure to convert the holder's Note.

(ii) COMPENSATION FOR BUY-IN ON FAILURE TO TIMELY DELIVER CERTIFICATES UPON CONVERSION. In addition to any other rights available to the holder, if the Company fails for any reason to deliver to the holder of a Note such certificate or certificates pursuant to this Section 18 by the third (3rd) business day after the Deadline, and if after such third business day after the Deadline the holder is required by its brokerage firm to purchase (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such holder of Common Stock which the holder anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall (i) pay in cash to the holder (in addition to any remedies available to or elected by the holder) the amount by which (x) the holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such holder anticipated receiving from the conversion at issue multiplied by (2) the actual sale price of the Common Stock at the time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation and (ii) at the option of the holder, either reissue Notes in principal amount equal to the principal amount of the attempted conversion or deliver to the holder the number of shares of Common Stock that would have been issued had the Company timely complied with its delivery requirements under this Section 18. The holder shall provide the Company written notice indicating the amounts payable to the holder in respect of the Buy-In.

19. MISCELLANEOUS.

a. HEADINGS. The headings of this Agreement are for convenience of reference only and shall not form part of, or affect the interpretation of, this Agreement.

b. SEVERABILITY. In the event that any provision of this Agreement is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform to such statute or rule of law. Any provision hereof which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision hereof.

c. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the party to be charged with enforcement.

d. NOTICES. Any notices required or permitted to be given under the terms of this Agreement shall be sent by certified or registered mail (return receipt requested) or delivered personally or by courier (including a recognized overnight delivery service) or by facsimile and shall be effective five days after being placed in the mail, if mailed by regular United States mail, or upon receipt, if delivered personally or by courier (including a recognized overnight delivery service) or by facsimile, in each case addressed to a party. The addresses for such communications shall be:

If to the Company:

ZBB Energy Corporation

N93 W14475 Whittaker Way
Menomonee Falls, WI 53051 Attn: Robert Parry, Chief Executive Officer Telephone: (262) 253-9800 Facsimile: (262) 253-9822

with copies to:

Hodgson Russ LLP
60 East 42nd Street, 37th Floor New York, New York 10165 - 0150 Attn: Steven Weiss, Esq.

Telephone: (212) 661-3535

Facsimile: (212) 972-1677

If to a Buyer: To the address set forth immediately below such Buyer's name on the signature pages hereto.

with copies to:

Tarter Krinsky & Drogin LLP 470 Park Avenue South, 14th Floor New York, New York 10016
Attention: James G. Smith, Esq.

Telephone: (212) 481-8585

Facsimile: (212) 481-9062

Each party shall provide notice to all of the other parties of any change in address.

e. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and assigns. Neither the Company nor

any Buyer shall assign this Agreement or any rights or obligations hereunder without the prior written consent of the other. Notwithstanding the foregoing, any Buyer may assign its rights hereunder to any Person that purchases any of the Securities in a private transaction from such Buyer or to any of its Affiliates without the consent of the Company.

f. THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person.

g. FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

h. NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

i. REMEDIES. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Buyers by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Agreement will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Agreement, that the Buyers shall be entitled, in addition to all other available remedies at law or in equity, to an injunction or injunctions restraining, preventing or curing any breach of this Agreement and to enforce specifically the terms and provisions hereof, without the necessity of showing economic loss and without any bond or other security being required.

j. NONLIABILITY OF THE BUYERS. The relationship between the Company and the Buyers is, and shall at all times remain, solely that of the Company with a purchaser of its securities. The Buyers neither undertake nor assume any responsibility or duty to the Company to review, inspect, supervise, pass judgment upon, or inform the Company of any matter in connection with any phase of the Company's business, operations, or condition, financial or otherwise. The Company shall rely entirely upon its own judgment with respect to such matters, and any review, inspection, supervision, exercise of judgment, or information supplied to the Company by the Buyers, or any representative or agent of the Buyers, in connection with any such matter is for the protection of the Buyers, and neither the Company nor any third party is entitled to rely thereon.

k. WAIVER OF STAY, EXTENSION OR USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, or plead, or in any manner whatsoever claim, and shall resist any and all efforts to be compelled to take the benefit or advantage of, any stay or extension law or any usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Notes as contemplated herein and therein, wherever enacted, now or at any time hereafter in force, or which may effect the covenants or the performance of this Agreement; and

(to the extent that it may lawfully do so) the Company hereby expressly waives all benefit or advantage of any such law and covenants that it shall not hinder, delay or impede the execution of power herein granted to the holders of the Notes, but shall suffer and permit the execution of every such power as though no such law had been enacted. All agreements between the Company and holders of the Notes, whether now existing or hereafter arising and whether written or oral, are hereby limited so that in no contingency, whether by reason or demand or acceleration of the final maturity date of the Notes or prepayment or otherwise, shall the interest contracted for (or any original issue discount that would be determined to be interest), charged, received, paid or agreed to be paid to holders exceed the maximum amount permissible under the laws of the State of New York (hereinafter the "APPLICABLE LAW"). If, from any circumstances whatsoever, interest (or any original issue discount that would be determined to be interest) would otherwise be payable to any holder of the Notes in excess of the maximum amount permissible under Applicable Law, the interest payable to such holder shall be reduced to the maximum amount permissible under Applicable Law, and if from any circumstances such holder shall ever receive anything deemed interest by the Applicable Law in excess of the maximum amount permissible under the Applicable Law, an amount equal to the excessive interest shall be applied to the reduction of the principal hereof and not to the payment of interest, or if such excessive amount of interest exceeds the unpaid principal balance of principal hereof, such excess shall be refunded to the Company as applicable. All interest paid or agreed to be paid to the holders of the Notes shall, to the extent permitted by Applicable Law, be amortized, prorated, allocated and spread throughout full period (including any renewal or extension) until payment in full of the principal so that the interest hereon for such full period shall not exceed the maximum amount permissible under the Applicable Law.

l. OBLIGATIONS SEVERAL NOT JOINT. The obligations of each Buyer under this Agreement are several and not joint with the obligations of any other Buyer, and no Buyer shall be responsible in any way for the performance of the obligations of any other Buyer under this Agreement. Nothing contained herein, and no action taken by any Buyer pursuant hereto, shall be deemed to constitute the Buyers as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that the Buyers are in any way acting in concert or as a group with respect to such obligations or the transactions contemplated by this Agreement. Each Buyer shall be entitled to independently protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Buyer to be joined as an additional party in any proceeding for such purpose. Each Buyer has been represented by, or has had the opportunity to be represented by, its own separate legal counsel in its review and negotiation of this Agreement, the Notes, the Warrants, the Registration Rights Agreement, the Pledge Agreement, the Real Property Security Agreement, the Security Agreement, each Guaranty, the Subsidiary Security Agreement and any other documents contemplated by any of the foregoing.

m. COUNTERPARTS; SIGNATURES BY FACSIMILE. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party. This Agreement, once executed by a party, may be delivered to the other party hereto by facsimile transmission of a copy of this Agreement bearing the signature of the party so delivering this Agreement.

[remainder of page intentionally left blank]

IN WITNESS WHEREOF, the undersigned Buyers and the Company have caused this Agreement to be duly executed as of the date first above written.

COMPANY:

ZBB ENERGY CORPORATION

By:
Robert Parry
Chief Executive Officer

[signature page continues on next page]

BUYERS:

ABS SOS-PLUS PARTNERS, LTD.

By:

Name:

Title:

JURISDICTION: Cayman Islands

ADDRESS:      Trehl Plaza Suite 4
              Harold Road West
              Nassau, Bahamas CB-11267
              Attention: Tamischa Ambrister
              Facsimile: 242-328-0683
              Telephone: 242-323-0195

With copies of notices to:

ADDRESS:      CTI Capital Management
              1967 Longwood-Lake Mary Road
              Longwood, FL 32750
              Attn: Kara Irish
              Facsimile: 407-833-4036
              Telephone: 407-833-4022

AGGREGATE SUBSCRIPTION AMOUNT:

Purchase Price:                                                    $835,000

Principal Amount of Notes: Equal to Buyer's Purchase Price
multiplied by 1 1/3                                              $1,113,333

Number of Warrants: Equal to Principal Amount of Note divided
by $0.15                                                          7,422,220


                [signature page continues on next page]

BUYERS (CONTINUED):

BUSHIDO CAPITAL MASTER FUND L.P.
By: Bushido Capital Partners, Ltd.

By:

Louis Rabman
President

JURISDICTION: Cayman Islands

ADDRESS:      275 Seventh Avenue, Suite 2000
              New York, New York 10001
              Facsimile: (646) 486-6885
              Telephone: (212) 750-5200

AGGREGATE SUBSCRIPTION AMOUNT:

Purchase Price:                                                    $417,500

Principal Amount of Notes: Equal to Buyer's Purchase Price
multiplied by 1 1/3                                                $556,667

Number of Warrants: Equal to Principal Amount of Note
divided by $0.15                                                  3,711,110

                [signature page continues on next page]

BUYERS (CONTINUED):

PIERCE DIVERSIFIED STRATEGY MASTER FUND
BY: BUSHIDO CAPITAL PARTNERS, LTD.

By:

Louis Rabman
President

JURISDICTION: _________________

ADDRESS:      275 Seventh Avenue, Suite 2000
              New York, New York 10001
              Facsimile: (646) 486-6885
              Telephone: (212) 750-5200

AGGREGATE SUBSCRIPTION AMOUNT:

Purchase Price:                                                    $417,500

Principal Amount of Notes: Equal to Buyer's Purchase
Price multiplied by 1 1/3                                          $556,666

Number of Warrants: Equal to Principal Amount of
Note divided by $0.15                                             3,711,110

SECURITY AGREEMENT

THIS SECURITY AGREEMENT (the "AGREEMENT") is made as of June 14, 2006 by and among ZBB ENERGY CORPORATION, a Wisconsin corporation (the "COMPANY"), and the secured parties signatory hereto and their respective endorsees, transferees and assigns (collectively, the "SECURED PARTIES") and CRUCIAN TRANSITION INC. DBA CTI CAPITAL MANAGEMENT, a Delaware corporation (the "COLLATERAL AGENT"), as agent for the Secured Parties.

WITNESSETH:

WHEREAS, pursuant to a Note Purchase Agreement, dated June 14, 2006, (the "NOTE PURCHASE AGREEMENT") the Company issued to the Secured Parties certain 8% Senior Secured Notes (collectively, the "NOTES").

1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the meanings set forth in this Section 1. Terms used but not otherwise defined in this Agreement that are defined in Article 9 of the UCC (such as "general intangibles" and "proceeds") shall have the respective meanings given such terms in Article 9 of the UCC.

a. "COLLATERAL" means the collateral in which the Secured Parties is granted a security interest by this Agreement and which shall include the following, whether presently owned or existing or hereafter acquired or coming into existence, and all additions and accessions thereto and all substitutions and replacements thereof, and all proceeds, products and accounts thereof, including, without limitation, all proceeds from the sale or transfer of the Collateral and of insurance covering the same and of any tort claims in connection therewith:

i. All goods, including, without limitation, all machinery, equipment, computers, motor vehicles, trucks, tanks, boats, ships, appliances, furniture, special and general tools, fixtures, test and quality control devices and other equipment of every kind and nature and wherever situated, together with all documents of title and documents representing the same, all additions and accessions thereto, replacements therefor, all parts therefor, and all substitutes for any of the foregoing and all other items, owned by the Company and used in connection with the Company's businesses and all improvements thereto; and

ii. All inventory of the Company; and

iii. All of the Company's contract rights and general intangibles, including, without limitation, all partnership interests, stock or other securities, licenses, distribution and other agreements, computer software development rights, employee non-compete, non-disclosure and assignment of rights agreements, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, deposit accounts, and income tax refunds; and

iv. All receivables of the Company including all insurance proceeds, and rights to refunds or indemnification whatsoever owing, together with all instruments, all documents of title representing any of the foregoing, all rights in any merchandising, goods, equipment, motor vehicles and trucks which any of the same may represent, and all right, title, security and guaranties with respect to each receivable, including any right of stoppage in transit;

v. All of the Company's Intellectual Property; and

vi. All of the Company's documents, instruments and chattel paper, files, records, books of account, business papers, computer programs and the products and proceeds of all of the foregoing Collateral set forth in clauses (i)-(v) above.

b. "COPYRIGHTS" shall mean all of the following in which the Company now holds or hereafter acquires any interest (i) all copyrights, whether registered or unregistered, held pursuant to the laws of the United States, any State thereof or any other country; (ii) registrations, applications and recordings in the United States Copyright Office or in any similar office or agency of the United States, any State thereof or any other country; (iii) any continuations, renewals or extensions thereof; (iv) any registrations to be issued in any pending applications; (v) prior versions of works covered by copyright and all works based upon, derived from or incorporating such works;
(vi) income, royalties, damages, claims and payments now and hereafter due and/or payable with respect to copyrights, including, without limitation, damages, claims and recoveries for past, present or future infringement; (vii) rights to sue for past, present and future infringements of any copyright;
(viii) any rights in any material which is copyrightable or which is protected by common law, United States copyright laws or similar laws, or any law of any State, and (ix) any other rights corresponding to any of the foregoing rights throughout the world; including, without limitation, any referred to in SCHEDULE B hereto.

c. "COPYRIGHT LICENSE" shall mean any agreement, written or oral, in which the Company now holds or hereafter acquires any interest, granting any right in or to any Copyright or Copyright registration (whether the Company is the licensee or the licensor thereunder) including, without limitation, licenses pursuant to which the Company has obtained the exclusive right to use a copyright owned by a third party, and including, without limitation, any thereof referred to in SCHEDULE B hereto.

d. "INTELLECTUAL PROPERTY" shall mean, collectively, the Software Intellectual Property, Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks, Trademark Licenses and Trade Secrets.

e. "OBLIGATIONS" means all of the Company's obligations under this Agreement, the Note Purchase Agreement and the Notes, but excluding the Warrants, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and later decreased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Parties as a preference,

fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time.

f. "PATENTS" shall mean all of the following in which the Company now holds or hereafter acquires any interest: (i) all letters patent of the United States or any other country, all registrations and recordings thereof and all applications for letters patent of the United States or any other country, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country; (ii) all reissues, divisions, continuations, renewals, continuations in part or extensions thereof;
(iii) all petty patents, divisionals and patents of addition; (iv) all patents to issue in any such applications; (v) income, royalties, damages, claims and payments now and hereafter due and/or payable with respect to patents, including, without limitation, damages, claims and recoveries for past, present or future infringement; and (vi) rights to sue for past, present and future infringements of any patent; including, without limitation, any referred to in SCHEDULE B hereto.

g. "PATENT LICENSE" shall mean any agreement, whether written or oral, in which the Company now holds or hereafter acquires any interest, granting any right with respect to any Patent (whether the Company is the licensee or the licensor thereunder), including, without limitation, any referred to in SCHEDULE B hereto.

h. "SOFTWARE INTELLECTUAL PROPERTY" shall mean (i) all software programs (including all source code, object code and all related applications and data files), whether now owned, upgraded, enhanced, licensed or leased or hereafter acquired by the Company; (ii) all computers and electronic data processing hardware and firmware associated therewith; (iii) all documentation (including flow charts, logic diagrams, manuals, guides and specifications) with respect to such software, hardware and firmware described in the preceding subclauses (i) and (ii); and (iv) all rights with respect to all of the foregoing, including, without limitation, any and all upgrades, modifications, copyrights, licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and substitutions, replacements, additions, or model conversions of any of the foregoing.

i. "TRADEMARKS" shall mean any of the following in which the Company now holds or hereafter acquires any interest: (i) any trademarks, tradenames, corporate names, company names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, all registrations and recordings thereof and any applications in connection therewith, including, without limitation, registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State thereof or any other country (collectively, the "MARKS"); (ii) any reissues, extensions or renewals thereof,
(iii) the goodwill of the business symbolized by or associated with the Marks,
(iv) income, royalties, damages, claims and payments now and hereafter due and/or payable with respect to the Marks, including, without limitation, damages, claims and recoveries for past, present or future infringement and (v) rights to sue for past, present and future infringements of the Marks, including, without limitation, any referred to in SCHEDULE B hereto.

j. "TRADEMARK LICENSE" shall mean any agreement, written or oral, in which the Company now holds or hereafter acquires any interest, granting any right in and to any Trademark or Trademark registration (whether the Company is the licensee or the licensor thereunder) including, without limitation, any thereof referred to in SCHEDULE B hereto.

k. "TRADE SECRETS" shall mean common law and statutory trade secrets and all other confidential or proprietary or useful information and all know-how obtained by or used in or contemplated at any time for use in the business of the Company, and any agreement, written or oral, in which the Company now holds or hereafter acquires any interest, granting any right in and to any of the foregoing, whether or not any of the foregoing has been reduced to a writing or other tangible form, including all documents and things embodying, incorporating or referring in any way to any of the foregoing, and including the right to sue for and to enjoin and to collect damages for the actual or threatened misappropriation of any of the foregoing and for the breach or enforcement of any of the foregoing.

l. "UCC" means the Uniform Commercial Code, as the same may, from time to time, be in effect in the State of New York; provided, however, in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of the Secured Parties' security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, the term "UCC" shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such attachment, perfection of priority and for purposes of definitions related to such provisions.

2. GRANT OF SECURITY INTEREST. As an inducement for the Secured Parties to purchase the Notes and to secure the complete and timely payment, performance and discharge in full, as the case may be, of all of the Obligations, the Company hereby, unconditionally and irrevocably, pledges, grants and hypothecates to the Secured Parties, a continuing senior security interest in, a continuing first lien upon, an unqualified right to possession and disposition of and a right of set-off against, in each case to the fullest extent permitted by law, all of the Company's right, title and interest of whatsoever kind and nature in and to the Collateral (the "SECURITY INTEREST").

3. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE COMPANY. Except as set forth on SCHEDULE A attached hereto, the Company represents and warrants to, and covenants and agrees with, the Secured Parties as follows:

a. The Company has the requisite corporate power and authority to enter into this Agreement and otherwise carry out its obligations thereunder. The execution, delivery and performance by the Company of this Agreement and the filings contemplated therein have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company. This Agreement constitutes a legal, valid and binding obligation of the Company enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor's rights generally.

b. The Company represents and warrants that it has no place of business or offices where its respective books of account and records are kept (other than temporarily at the offices of its attorneys or accountants) or places where the Collateral is stored or located, except as set forth on SCHEDULE A attached hereto;

c. The Company is the sole owner of the Collateral (except for non-exclusive licenses granted by the Company in the ordinary course of business), free and clear of any liens, security interests, encumbrances, rights or claims, except as set forth on SCHEDULE A, and is fully authorized to grant the Security Interest in and to pledge the Collateral. There is not on file in any governmental or regulatory authority, agency or recording office an effective financing statement, security agreement, license or transfer or any notice of any of the foregoing (other than those that have been filed in favor of the Secured Parties pursuant to this Agreement) covering or affecting any of the Collateral. So long as this Agreement shall be in effect, without the prior consent of the Collateral Agent, which consent shall not be unreasonably withheld, the Company shall not execute and shall not knowingly permit to be on file in any such office or agency any such financing statement or other document or instrument (except to the extent filed or recorded in favor of the Secured Parties pursuant to the terms of this Agreement).

d. No part of the Collateral or rights in connection therewith has been judged, by any governmental body with proper jurisdiction, to be invalid or unenforceable. No written claim has been received alleging the Company's use of any Collateral violates the rights of any third party. There has been no adverse decision to the Company's claim of ownership rights in or exclusive rights to use the Collateral in any jurisdiction or to the Company's right to keep and maintain such Collateral in full force and effect, and there is no proceeding involving said rights pending or threatened before any court, judicial body, administrative or regulatory agency, arbitrator or other governmental authority.

e. The Company shall at all times maintain its books of account and records relating to the Collateral at its principal place of business and its Collateral at the locations set forth on SCHEDULE A attached hereto and may not relocate such books of account and records or tangible Collateral unless it delivers to the Secured Parties at least thirty (30) days prior to such relocation (i) written notice of such relocation and the new location thereof (which must be within the United States) and (ii) evidence that appropriate financing statements and other necessary documents have been filed and recorded and other steps have been taken to perfect the Security Interest to create in favor of the Secured Parties valid, perfected and continuing first priority liens in the Collateral.

f. This Agreement creates in favor of the Secured Parties a valid security interest in the Collateral securing the payment and performance of the Obligations and, upon making the filings described in the immediately following sentence, a perfected first priority security interest in such Collateral and, to the extent that it can be perfected through such filings, the Intellectual Property. Except for the filing of financing statements on Form-1 under the UCC with the jurisdictions indicated on SCHEDULE A, attached hereto, no authorization or approval of or filing with or notice to any governmental authority or regulatory body is required either (i) for the grant by the Company of, or the effectiveness of, the Security Interest granted hereby or for the execution, delivery and performance of this Agreement by the Company or (ii) for the perfection of, or exercise by the Secured Parties of, their rights and remedies hereunder.

g. Prior to or after the closing of the Note Purchase Agreement, the Secured Parties, through the Collateral Agent, may file or cause to be filed one or more executed UCC financing statements on Form-1 with respect to the Security Interest with the appropriate jurisdictions. Furthermore, upon request of the Collateral Agent, the Company shall execute and deliver any and all agreements, instruments, documents, and papers as the Collateral Agent may reasonably request to evidence the Secured Parties' security interest in the Intellectual Property and the goodwill and general intangibles of the Company relating thereto or represented thereby.

h. The execution, delivery and performance of this Agreement does not conflict with or cause a material breach or default, or an event that with or without the passage of time or notice, shall constitute a material breach or default, under any agreement to which the Company is a party or by which the Company is bound. No consent (including, without limitation, from stockholders or creditors of the Company) is required for the Company to enter into and perform its obligations hereunder.

i. The Company shall at all times safeguard, protect and maintain the Collateral for the account of the Secured Parties until this Agreement and the Security Interest hereunder shall terminate pursuant to Section 12. Without limiting the generality of the foregoing, the Company shall pay all governmental fees and taxes necessary to maintain the Collateral and the Security Interest hereunder, and the Company shall obtain and furnish to the Secured Parties from time to time, upon demand, such releases and/or subordinations of claims and liens which may be required to maintain the priority of the Security Interest hereunder.

j. The Company will not transfer, pledge, hypothecate, encumber, license, sell or otherwise dispose of any of the Collateral, other than in the ordinary course of business, without the prior written consent of the Secured Parties.

k. The Company shall, within ten (10) days of obtaining knowledge thereof, advise the Secured Parties promptly, in sufficient detail, of any substantial change in the Collateral other than in the ordinary course of business, and of the occurrence of any event which would have a material adverse effect on the value of the Collateral or on the Secured Parties' security interest therein.

l. The Company shall promptly execute and deliver to the Secured Parties such further deeds, mortgages, assignments, security agreements, financing statements or other instruments, documents, certificates and assurances and take such further action as the Collateral Agent may from time to time request and may in its sole discretion deem necessary to perfect, protect or enforce the Security Interest.

m. Subject to a confidentiality agreement reasonably acceptable to the Collateral Agent and the Company, the Company shall permit the Collateral Agent and its representatives and agents to inspect the Collateral at any time and to make copies of records pertaining to the Collateral as may be requested by the Collateral Agent from time to time.

n. The Company will take all steps reasonably necessary to diligently pursue and seek to preserve, enforce and collect any rights, claims, causes of action and accounts receivable in respect of the Collateral.

o. The Company shall promptly notify the Collateral Agent in sufficient detail upon becoming aware of any attachment, garnishment, execution or other legal process levied against any Collateral and of any other information received by the Company that may materially affect the value of the Collateral, the Security Interest or the rights and remedies of the Secured Parties hereunder.

p. All information supplied to the Secured Parties or the Collateral Agent by or on behalf of the Company with respect to the Collateral is accurate and complete in all material respects as of the date hereof, and all information supplied after the date hereof to the Secured Parties shall be accurate in all material respects.

q. SCHEDULE B attached hereto includes all Patents and Patent Licenses, if any, owned by the Company in its own name as of the date hereof. SCHEDULE B hereto includes all Trademarks and Trademark Licenses, if any, owned by the Company in its own name as of the date hereof. SCHEDULE B hereto includes all Copyrights and Copyright Licenses, if any, owned by the Company in its own name as of the date hereof. All of the Intellectual Property is valid, subsisting, unexpired, enforceable and has not been abandoned. Except as set forth in SCHEDULE B, none of such Intellectual Property is the subject of any licensing or franchise agreement as of the date of this Agreement. No holding, decision or judgment has been rendered by any governmental authority which would limit, cancel or question the validity of any Intellectual Property. No action or proceeding is pending (i) seeking to limit, cancel or question the validity of any of the Intellectual Property, or (ii) which, if adversely determined, would have a material adverse effect on the value of any of the Intellectual Property. The Company has used and will continue to use for the duration of this Agreement, proper statutory notice in connection with its use of the Intellectual Property and consistent standards of quality in products leased or sold under the Intellectual Property.

r. With respect to any Intellectual Property:

i. such Intellectual Property is subsisting and the rights in connection with such Intellectual Property have not been adjudged invalid or unenforceable, in whole or in part;

ii. the rights in connection with such Intellectual Property are valid and enforceable;

iii. the Company has made all necessary filings and recordations necessary to protect its interest in such Intellectual Property, including, without limitation, recordations of all of its interests in the Patents, Patent Licenses, Trademarks and Trademark Licenses in the United States Patent and Trademark Office and its claims to the Copyrights and Copyright Licenses in the United States Copyright Office and similar government offices of foreign countries;

iv. other than as set forth in SCHEDULE B, the Company is the exclusive owner of the entire and unencumbered right, title and interest in and to such Intellectual Property and no claim has been made that the use of such Intellectual Property infringes on the asserted rights of any third party; and

v. the Company has performed and will continue to perform all acts and has paid all required fees and taxes to maintain its rights with respect to each and every item of Intellectual Property in full force and effect.

s. The Company shall:

i. except with respect to any Trademark or Copyright that the Company shall reasonably determine is of negligible economic value to the Company, maintain each Trademark and Copyright in full force free from any claim of abandonment for non-use, maintain as in the past the quality of products and services offered under such Trademark or Copyright; employ such Trademark or Copyright with the appropriate notice of registration; not adopt or use any mark which is confusingly similar or a colorable imitation of such Trademark or Copyright unless the Secured Parties shall obtain a perfected security interest in such mark pursuant to this Agreement; and not (and not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any Trademark or Copyright may become invalidated;

ii. not, except with respect to any Patent that it shall reasonably determine is of negligible economic value to it, do any act, or omit to do any act, whereby any Patent may become abandoned; and

iii. notify the Collateral Agent and the Secured Parties immediately if it knows, or has reason to know, that any application or registration relating to any Patent, Trademark or Copyright may become abandoned, or of any material adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in the United States) regarding its ownership of any Patent, Trademark or Copyright or its right to register the same or to keep and maintain the same.

t. Whenever the Company, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Patent, Trademark or Copyright with the United States Patent and Trademark Office or the United States Copyright Office or similar government office of any foreign country, or acquire rights to any new Patent, Trademark or Copyright whether or not registered, report such filing to the Collateral Agent within five (5) business days after the last day of the fiscal quarter in which such filing occurs.

u. The Company shall take all reasonable and necessary steps, including, without limitation, in any proceeding before the United States Patent and Trademark Office or the United States Copyright Office, to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the Patents, Trademarks and Copyrights, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability.

v. In the event that any Patent, Trademark or Copyright included in the Intellectual Property is infringed, misappropriated or diluted by a third party, the Company

shall promptly notify the Collateral Agent after it learns thereof and shall, unless it shall reasonably determine that such Patent, Trademark or Copyright is of negligible economic value to it, which determination it shall promptly report to the Collateral Agent: promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other actions as it shall reasonably deem appropriate under the circumstances to protect such Patent, Trademark or Copyright. If the Company lacks the financial resources to comply with this Section 3(v), the Company shall so notify the Collateral Agent and shall cooperate fully with any enforcement action undertaken by the Collateral Agent on behalf of the Company.

4. DEFAULTS. The occurrence of an Event of Default as defined in the Note Purchase Agreement shall be an "EVENTS OF DEFAULT."

5. DUTY TO HOLD IN TRUST. Upon the occurrence of an Event of Default, and at any time thereafter, the Company shall, upon receipt by it of any revenue, income or other sums subject to the Security Interest, whether payable pursuant to the Notes or otherwise, or of any check, draft, note, trade acceptance or other instrument evidencing an obligation to pay any such sum, hold the same in trust for the Secured Parties and shall forthwith endorse and transfer any such sums or instruments, or both, to the Secured Parties for application to the satisfaction of the Obligations.

6. THE COLLATERAL AGENT; RIGHTS AND REMEDIES UPON DEFAULT. Each of the Secured Parties hereby irrevocably appoints the Collateral Agent to act on its behalf hereunder and under any other document executed in connection herewith, and authorizes the Collateral Agent to take such actions on its behalf to exercise such powers as are delegated to the Collateral Agent by the terms hereof or thereof, and the Company shall not have rights as a third party beneficiary of any such provision in this Section 6. The Collateral Agent is authorized to act, in its sole discretion, on behalf of the Secured Parties as described herein. Upon occurrence and continuance of any Event of Default and at any time thereafter, the Collateral Agent (on behalf of the Secured Parties) shall have the right to exercise (on behalf of the Secured Parties) all of the remedies conferred to the Secured Parties hereunder and under the Notes, and the Collateral Agent (on behalf of the Secured Parties) shall have all the rights and remedies of a secured party under the UCC and/or any other applicable law (including the Uniform Commercial Code of any jurisdiction in which any Collateral is then subject). Without limitation, the Collateral Agent (on behalf of the Secured Parties) shall have the following rights and powers:

a. to have a third party custodian take possession of the Collateral and, for that purpose, enter, with the aid and assistance of any person, any premises where the Collateral, or any part thereof, is or may be placed and remove the same, and the Company shall assemble the Collateral and make it available to the Collateral Agent for the benefit of the Secured Parties at places which the Collateral Agent shall reasonably select, whether at the Company's premises or elsewhere, and make available to the Collateral Agent, without rent, all of the Company's respective premises and facilities for the purpose of the Collateral Agent taking possession of, removing or putting the Collateral in saleable or disposable form; and

b. to operate the business of the Company using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the

Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Collateral Agent may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Company or right of redemption of the Company, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Collateral Agent may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Company, which are hereby waived and released.

7. INDEMNIFICATION OF THE COLLATERAL AGENT. Neither the Collateral Agent nor any of its affiliates or representatives will be liable for any action taken or omitted to be taken by it or them under this Agreement in good faith and believed by it or them to be within the discretion or power conferred upon it or them by this Agreement or be responsible for the consequences of any error of judgment (except for fraud, gross negligence, or willful misconduct). Unless indemnified to its satisfaction against loss, cost, liability and expense, the Collateral Agent may not be compelled to do any act under this Agreement or to take any action toward the execution or enforcement of the powers created under this Agreement or to prosecute or defend any suit in respect of this Agreement. If the Collateral Agent requests instructions from Secured Parties with respect to any act or action in connection with this Agreement, then the Collateral Agent is entitled to refrain (without incurring any liability to anyone by so refraining) from that act or action unless and until it has received instructions. In no event, however, may the Collateral Agent or any of its representatives be required to take any action that it or they determine could incur for it or them criminal or onerous civil liability. Without limiting the generality of the foregoing, no Secured Party has any right of action against the Collateral Agent as a result of the Collateral Agent's acting or refraining from acting under this Agreement in accordance with instructions of the Secured Parties. EACH SECURED PARTY (IN PROPORTION TO THE THEN-OUSTANDING PRINCIPAL AMOUNT OF NOTES) SHALL INDEMNIFY THE COLLATERAL AGENT AND ITS REPRESENTATIVES AND HOLD THEM HARMLESS FROM AND AGAINST ANY AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS, JUDGMENTS, SUITS, COSTS, REASONABLE EXPENSES, AND REASONABLE DISBURSEMENTS OF ANY KIND OR NATURE WHATSOEVER THAT MAY BE IMPOSED ON, ASSERTED AGAINST, OR INCURRED BY THEM IN ANY WAY RELATING TO OR ARISING OUT OF THIS AGREEMENT OR ANY ACTION TAKEN OR OMITTED BY THEM UNDER THIS AGREEMENT.

8. APPLICATIONS OF PROCEEDS. The proceeds of any such sale, lease or other disposition of the Collateral hereunder shall be applied first, to the expenses of retaking, holding, storing, processing and preparing for sale, selling, and the like (including, without limitation, any taxes, fees and other costs incurred in connection therewith) of the Collateral, to the reasonable attorneys' fees and expenses incurred by the Secured Parties in enforcing its rights hereunder and in connection with collecting, storing and disposing of the Collateral, and then to satisfaction of the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Parties shall pay to the Company any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Parties are legally entitled, (i) then the proceeds shall be allocated among the Secured Parties in proportion to the amount outstanding under each Note, and (ii) the Company

will be liable for the deficiency, together with interest thereon, at the Default Rate, as defined in the Note Purchase Agreement, and the reasonable fees of any attorneys employed by the Secured Parties to collect such deficiency. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Secured Parties arising out of the repossession, removal, retention or sale of the Collateral.

9. COSTS AND EXPENSES. The Company agrees to pay all out-of-pocket fees, costs and expenses incurred in connection with any filing required hereunder, including without limitation, any financing statements, continuation statements, partial releases and/or termination statements related thereto or any expenses of any searches reasonably required by the Secured Parties. The Company shall also pay all other claims and charges which would reasonably be expected to prejudice, imperil or otherwise affect the Collateral or the Security Interest therein. Each party shall bear its own expenses with respect to this Agreement, except that upon the occurrence and continuance of an Event of Default, the Company shall upon demand, pay to the Collateral Agent the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, which the Collateral Agent incurs in connection with (a) the enforcement of this Agreement, (b) the custody or preservation of, or the sale of, collection from, or other realization upon, any of the Collateral, or (c) the exercise or enforcement of any of the rights of the Secured Parties under the Notes. Until so paid, any fees payable hereunder shall be added to the principal amount of the Notes and shall bear interest at the Default Rate.

10. RESPONSIBILITY FOR COLLATERAL. The Company assumes all liabilities and responsibility in connection with all Collateral, and the obligations of the Company hereunder or under the Notes shall in no way be affected or diminished by reason of the loss, destruction, damage or theft of any of the Collateral or its unavailability for any reason.

11. SECURITY INTEREST ABSOLUTE. All rights of the Secured Parties and all Obligations of the Company hereunder, shall be absolute and unconditional, regardless of: (a) any change in the time, manner or place of payment or performance of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from the Notes or any other agreement entered into in connection with the foregoing; (b) any exchange, release or nonperfection of any of the Collateral, or any release or amendment or waiver of or consent to departure from any other collateral for, or any guaranty, or any other security, for all or any of the Obligations; or (c) any action by the Secured Parties to obtain, adjust, settle and cancel in its sole discretion any insurance claims or matters made or arising in connection with the Collateral. The Company expressly waives presentment, protest and notice of protest. In the event that at any time any transfer of any Collateral or any payment received by the Secured Parties hereunder shall be deemed by final order of a court of competent jurisdiction to have been a voidable preference or fraudulent conveyance under the bankruptcy or insolvency laws of the United States, or shall be deemed to be otherwise due to any party other than the Secured Parties, then, in any such event, the Company's obligations hereunder shall survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Company waives all right to require the Secured Parties to proceed against any other person or to apply any

Collateral which the Secured Parties may hold at any time, or to marshal assets, or to pursue any other remedy.

12. TERM OF AGREEMENT. This Agreement and the Security Interest shall terminate on the date on which all payments under the Notes have been indefeasibly made in full and all other Obligations have been indefeasibly paid. Upon such termination, the Secured Parties and the Collateral Agent, at the request and at the expense of the Company, will join in executing any termination statement with respect to any financing statement executed and filed pursuant to this Agreement.

13. POWER OF ATTORNEY; FURTHER ASSURANCES.

a. The Company authorizes the Collateral Agent, as agent for the Secured Parties, and does hereby make, constitute and appoint it, and its respective officers, agents, successors or assigns with full power of substitution, as the Company's true and lawful attorney-in-fact, with power, in its own name or in the name of the Company, to, after the occurrence and during the continuance of an Event of Default, (i) endorse any notes, checks, drafts, money orders, or other instruments of payment (including payments payable under or in respect of any policy of insurance) in respect of the Collateral that may come into possession of the Collateral Agent or any Secured Parties; (ii) to sign and endorse any UCC financing statement or any invoice, freight or express bill, bill of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications and notices in connection with accounts, and other documents relating to the Collateral; (iii) to pay or discharge taxes, liens, security interests or other encumbrances at any time levied or placed on or threatened against the Collateral; (iv) to demand, collect, receipt for, compromise, settle and sue for monies due in respect of the Collateral; and (v) generally, to do, at the option of the Collateral Agent, and at the Company's expense, at any time, or from time to time, all acts and things which the Collateral Agent deems necessary to protect, preserve and realize upon the Collateral and the Security Interest granted therein in order to effect the intent of this Agreement and the Notes, all as fully and effectually as the Company might or could do; and the Company hereby ratifies all that said attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and shall be irrevocable for the term of this Agreement and thereafter as long as any of the Obligations shall be outstanding.

b. On a continuing basis, the Company will cooperate in good faith with the Collateral Agent to make, execute, acknowledge, deliver, file and record, as the case may be, in the proper filing and recording places in any applicable jurisdiction, all such instruments, and take all such action as may reasonably be deemed necessary or advisable, or as reasonably requested by the Collateral Agent, to perfect the Security Interest granted hereunder and otherwise to carry out the intent and purposes of this Agreement, or for assuring and confirming to the Collateral Agent the grant or perfection of a security interest in all the Collateral.

advisable in order to perfect the Security Interest, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Company where permitted by law.

14. NOTICES. All notices, requests, demands and other communications hereunder shall be in writing, with copies to all the other parties hereto, and shall be deemed to have been duly given (i) if delivered by hand, (ii) upon receipt of proof of sending thereof if sent by facsimile, (iii) upon receipt if sent by nationally recognized overnight delivery service (receipt requested), the next business day, or (iv) if mailed by first-class registered or certified mail, return receipt requested, postage prepaid, four days after posting in the U.S. mails, in each case if delivered to the following addresses:

If to the Company:            ZBB Energy Corporation
                              N93 W14475 Whittaker Way
                              Menomonee Falls, WI 53051
                              Attn: Robert Parry, Chief Executive Officer
                              Telephone: (262) 253-9800
                              Facsimile: (262) 253-9822

with copies to:               Hodgson Russ LLP
                              60 East 42nd Street, 37th Floor
                              New York, New York 10165 - 0150
                              Attn: Steven Weiss, Esq.
                              Telephone: (212) 661-3535
                              Facsimile: (212) 972-1677

if to the Collateral Agent:   CTI Capital Management
                              1967 Longwood-Lake Mary Road
                              Longwood, Florida 32750
                              Attention: Kara Irish
                              Telephone: (407) 833-4000
                              Facsimile: (407) 771-4419

with copies to:               Tarter Krinsky & Drogin LLP
                              470 Park Avenue South, 14th Floor
                              New York, NY 10016
                              Attention: James G. Smith, Esq.
                              Telephone: (212) 481-8585
                              Facsimile: (212) 481-9062

15. OTHER SECURITY. To the extent that the Obligations are now or hereafter secured by property other than the Collateral or by the guarantee, endorsement or property of any other person, firm, corporation or other entity, then the Collateral Agent shall have the right, in its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Parties' rights and remedies hereunder.

16. MISCELLANEOUS.

a. No course of dealing between the Company, the Collateral Agent and any Secured Parties, nor any failure to exercise, nor any delay in exercising, on the part of the Collateral Agent or any Secured Parties, any right, power or privilege hereunder or under the Notes shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege.

b. All of the rights and remedies of the Secured Parties with respect to the Collateral, whether established hereby or by the Notes or by any other agreements, instruments or documents or by law shall be cumulative and may be exercised singly or concurrently.

c. This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and is intended to supersede all prior negotiations, understandings and agreements with respect thereto, including the prior Agreement. Any term of this Agreement may be terminated or amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only with written consent of the Company and the holders of more than fifty percent (50%) of the then-outstanding principal amount of the Notes. Any termination, amendment or waiver effected in accordance with this paragraph shall be binding upon each holder of the Notes, each future holder of the Notes, their successors and assigns, and the Company.

d. In the event that any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction for any reason, unless such provision is narrowed by judicial construction, this Agreement shall, as to such jurisdiction, be construed as if such invalid, prohibited or unenforceable provision had been more narrowly drawn so as not to be invalid, prohibited or unenforceable. If, notwithstanding the foregoing, any provision of this Agreement is held to be invalid, prohibited or unenforceable in any jurisdiction, such provision, as to such jurisdiction, shall be ineffective to the extent of such invalidity, prohibition or unenforceability without invalidating the remaining portion of such provision or the other provisions of this Agreement and without affecting the validity or enforceability of such provision or the other provisions of this Agreement in any other jurisdiction.

e. No waiver of any breach or default or any right under this Agreement shall be considered valid unless in writing and signed by the party giving such waiver, and no such waiver shall be deemed a waiver of any subsequent breach or default or right, whether of the same or similar nature or otherwise.

f. This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns.

g. Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.

h. The validity and interpretation of this Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of New York. Each of the parties hereto hereby consents to the exclusive jurisdiction and venue of the Courts of the State of New York, located in the City and County of New York and the United States District Court, Southern District, for the State of New York with respect to any matter relating to this Agreement and performance of the parties' obligations hereunder, the documents and instruments executed and delivered concurrently herewith or pursuant hereto and performance of the parties' obligations thereunder and each of the parties hereto hereby consents to the personal jurisdiction of such courts and shall subject itself to such personal jurisdiction. Any action, suit or proceeding relating to such matters shall be commenced, pursued, defended and resolved only in such courts and any appropriate appellate court having jurisdiction to hear an appeal from any judgment entered in such courts. The parties irrevocably waive the defense of an inconvenient forum to the maintenance of such suit or proceeding. Service of process in any action, suit or proceeding relating to such matters may be made and served within or outside the State of New York by registered or certified mail to the parties and their representatives at their respective addresses specified in Section 14 hereof, provided that a reasonable time, not less than thirty (30) days, is allowed for response. Service of process may also be made in such other manner as may be permissible under the applicable court rules.

i. EACH PARTY HERETO HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE SUBJECT MATER OF THIS AGREEMENT, INCLUDING WITHOUT LIMITATION CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. EACH PARTY HERETO ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR EACH PARTY TO ENTER INTO A BUSINESS RELATIONSHIP, THAT EACH PARTY HAS RELIED ON THIS WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT EACH PARTY WILL CONTINUE TO RELY ON THIS WAIVER IN THEIR RELATED FUTURE DEALINGS. EACH PARTY FURTHER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL, AND THAT SUCH PARTY HAS KNOWINGLY AND VOLUNTARILY WAIVES ITS RIGHTS TO A JURY TRIAL FOLLOWING SUCH CONSULTATION. THIS WAIVER IS IRREVOCABLE, MEANING THAT, NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS AND SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.

j. This Agreement may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original and, all of which taken together shall constitute one and the same Agreement. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature were the original thereof.

[remainder of page intentionally left blank]

IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be duly executed on the day and year first above written.

COMPANY:

ZBB ENERGY CORPORATION

By:

Robert Parry Chief Executive Officer

COLLATERAL AGENT:

CRUCIAN TRANSITION INC.
DBA CTI CAPITAL MANAGEMENT

By:

Name:

Title:

[signatures continue on next page]

SECURED PARTIES:

ABS SOS-PLUS PARTNERS, LTD.

By:

Name:

Title:

BUSHIDO CAPITAL MASTER FUND L.P.
By: Bushido Capital Partners, Ltd.

By:

Name:

Title:

SCHEDULE A

Principal Place of Business of the Company:

Locations Where Collateral is Located or Stored:

Exceptions to Representations and Warranties Under Section 3:

SCHEDULE B

SCHEDULE A

Principal Place of Business of the Company:

N93 W14475 Whittaker Way
Menomonee Falls Wisconsin 53051

Alt. Office and Place of Business is:
240 Barrington Street
Bibra Lake Western Australia 6163

Locations Where Collateral is Located or Stored:

N93 W14475 Whittaker Way
Menomonee Falls Wisconsin 53051

240 Barrington Street
Bibra Lake Western Australia 6163

Exceptions to Representations and Warranties Under Section 3:

Liens exist on the building and property owned by the Company in Wisconsin.

In addition, the Company has various liens from Park Bank and Investors Bank.

SCHEDULE B

None.

SUBSIDIARY SECURITY AGREEMENT

THIS SUBSIDIARY SECURITY AGREEMENT (the "AGREEMENT") is made as of June 14, 2006 by and among ZBB Technologies, Ltd., an Australian corporation (the "COMPANY"), and the secured parties signatory hereto and their respective endorsees, transferees and assigns (collectively, the "SECURED PARTIES") and CRUCIAN TRANSITION INC. DBA CTI CAPITAL MANAGEMENT, a Delaware corporation (the "COLLATERAL AGENT"), as agent for the Secured Parties.

WITNESSETH:

WHEREAS, pursuant to a Note Purchase Agreement, dated June 14, 2006, (the "NOTE PURCHASE AGREEMENT") ZBB Energy Corporation, a Wisconsin corporation (the "PARENT") issued to the Secured Parties certain 8% Senior Secured Notes (collectively, the "NOTES"); and

WHEREAS, pursuant to a Note Purchase Agreement, the Company executed and delivered to the Secured Parties a Guaranty Agreement dated June 14, 2006, (the "GUARANTY").

ii. All inventory of the Company; and

non-compete, non-disclosure and assignment of rights agreements, leases, franchises, customer lists, quality control procedures, grants and rights, goodwill, deposit accounts, and income tax refunds; and

v. All of the Company's Intellectual Property; and

d. "INTELLECTUAL PROPERTY" shall mean, collectively, the Software Intellectual Property, Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks, Trademark Licenses and Trade Secrets.

e. "OBLIGATIONS" means all of the Company's obligations under the Guaranty and this Agreement, in each case, whether now or hereafter existing, voluntary or involuntary, direct or indirect, absolute or contingent, liquidated or unliquidated, whether or not jointly owed with others, and whether or not from time to time decreased or extinguished and

later decreased, created or incurred, and all or any portion of such obligations or liabilities that are paid, to the extent all or any part of such payment is avoided or recovered directly or indirectly from the Secured Parties as a preference, fraudulent transfer or otherwise as such obligations may be amended, supplemented, converted, extended or modified from time to time.

infringement and (v) rights to sue for past, present and future infringements of the Marks, including, without limitation, any referred to in SCHEDULE B hereto.

may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor's rights generally.

either (i) for the grant by the Company of, or the effectiveness of, the Security Interest granted hereby or for the execution, delivery and performance of this Agreement by the Company or (ii) for the perfection of, or exercise by the Secured Parties of, their rights and remedies hereunder.

r. With respect to any Intellectual Property:

i. such Intellectual Property is subsisting and the rights in connection with such Intellectual Property have not been adjudged invalid or unenforceable, in whole or in part;

ii. the rights in connection with such Intellectual Property are valid and enforceable;

s. The Company shall:

ii. not, except with respect to any Patent that it shall reasonably determine is of negligible economic value to it, do any act, or omit to do any act, whereby any Patent may become abandoned; and

Copyrights, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability.

v. In the event that any Patent, Trademark or Copyright included in the Intellectual Property is infringed, misappropriated or diluted by a third party, the Company shall promptly notify the Collateral Agent after it learns thereof and shall, unless it shall reasonably determine that such Patent, Trademark or Copyright is of negligible economic value to it, which determination it shall promptly report to the Collateral Agent: promptly sue for infringement, misappropriation or dilution, to seek injunctive relief where appropriate and to recover any and all damages for such infringement, misappropriation or dilution, or take such other actions as it shall reasonably deem appropriate under the circumstances to protect such Patent, Trademark or Copyright. If the Company lacks the financial resources to comply with this
Section 3(v), the Company shall so notify the Collateral Agent and shall cooperate fully with any enforcement action undertaken by the Collateral Agent on behalf of the Company.

4. DEFAULTS. The occurrence of an Event of Default as defined in the Note Purchase Agreement shall be an "EVENTS OF DEFAULT."

of the Company's respective premises and facilities for the purpose of the Collateral Agent taking possession of, removing or putting the Collateral in saleable or disposable form; and

b. to operate the business of the Company using the Collateral and shall have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the Collateral, at public or private sale or otherwise, either with or without special conditions or stipulations, for cash or on credit or for future delivery, in such parcel or parcels and at such time or times and at such place or places, and upon such terms and conditions as the Collateral Agent may deem commercially reasonable, all without (except as shall be required by applicable statute and cannot be waived) advertisement or demand upon or notice to the Company or right of redemption of the Company, which are hereby expressly waived. Upon each such sale, lease, assignment or other transfer of Collateral, the Collateral Agent may, unless prohibited by applicable law which cannot be waived, purchase all or any part of the Collateral being sold, free from and discharged of all trusts, claims, right of redemption and equities of the Company, which are hereby waived and released.

the Obligations, and to the payment of any other amounts required by applicable law, after which the Secured Parties shall pay to the Company any surplus proceeds. If, upon the sale, license or other disposition of the Collateral, the proceeds thereof are insufficient to pay all amounts to which the Secured Parties are legally entitled, (i) then the proceeds shall be allocated among the Secured Parties in proportion to the amount outstanding under each Note, and
(ii) the Company will be liable for the deficiency, together with interest thereon, at the Default Rate, as defined in the Note Purchase Agreement, and the reasonable fees of any attorneys employed by the Secured Parties to collect such deficiency. To the extent permitted by applicable law, the Company waives all claims, damages and demands against the Secured Parties arising out of the repossession, removal, retention or sale of the Collateral.

survive cancellation of this Agreement, and shall not be discharged or satisfied by any prior payment thereof and/or cancellation of this Agreement, but shall remain a valid and binding obligation enforceable in accordance with the terms and provisions hereof. The Company waives all right to require the Secured Parties to proceed against any other person or to apply any Collateral which the Secured Parties may hold at any time, or to marshal assets, or to pursue any other remedy.

13. POWER OF ATTORNEY; FURTHER ASSURANCES.

c. The Company hereby irrevocably appoints the Collateral Agent as the Company's attorney-in-fact, with full authority in the place and stead of the Company and in the name of the Company, from time to time in the Collateral Agent's discretion, to take any action and to execute any instrument which the Collateral Agent may deem necessary or advisable in order to perfect the Security Interest, including the filing, in its sole discretion, of one or more financing or continuation statements and amendments thereto, relative to any of the Collateral without the signature of the Company where permitted by law.

If to the Company:            ZBB Energy Corporation
                              N93 W14475 Whittaker Way
                              Menomonee Falls, WI 53051
                              Attn: Robert Parry, Chief Executive Officer
                              Telephone: (262) 253-9800
                              Facsimile: (262) 253-9822

with copies to:               Hodgson Russ LLP
                              60 East 42nd Street, 37th Floor
                              New York, New York 10165 - 0150
                              Attn: Steven Weiss, Esq.
                              Telephone: (212) 661-3535
                              Facsimile: (212) 972-1677

if to the Collateral Agent:   CTI Capital Management
                              1967 Longwood-Lake Mary Road
                              Longwood, Florida 32750
                              Attention: Kara Irish
                              Telephone: (407) 833-4000
                              Facsimile: (407) 771-4419

with copies to:               Tarter Krinsky & Drogin LLP
                              470 Park Avenue South, 14th Floor
                              New York, NY 10016
                              Attention: James G. Smith, Esq.
                              Telephone: (212) 481-8585
                              Facsimile: (212) 481-9062

its sole discretion, to pursue, relinquish, subordinate, modify or take any other action with respect thereto, without in any way modifying or affecting any of the Secured Parties' rights and remedies hereunder.

16. MISCELLANEOUS.

f. This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns.

g. Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.

[remainder of page intentionally left blank]

IN WITNESS WHEREOF, the parties hereto have caused this Subsidiary Security Agreement to be duly executed on the day and year first above written.

COMPANY:

ZBB TECHNOLOGIES, LTD.

By:

Name:

Title:

COLLATERAL AGENT:

CRUCIAN TRANSITION INC.
DBA CTI CAPITAL MANAGEMENT

By:

Name:

[signatures continue on next page]

SECURED PARTIES:

ABS SOS-PLUS PARTNERS, LTD.

By:

Name:

Title:

BUSHIDO CAPITAL MASTER FUND L.P.
By: Bushido Capital Partners, Ltd.

By:

Name:

Title:

SCHEDULE A

Principal Place of Business of the Company:

Locations Where Collateral is Located or Stored:

Exceptions to Representations and Warranties Under Section 3:

SCHEDULE B

SUBSIDIARY SECURITY AGREEMENT

THIS SUBSIDIARY SECURITY AGREEMENT (the "AGREEMENT") is made as of June 14, 2006 by and among ZBB Technologies, Inc., a Wisconsin corporation (the "COMPANY"), and the secured parties signatory hereto and their respective endorsees, transferees and assigns (collectively, the "SECURED PARTIES") and CRUCIAN TRANSITION INC. DBA CTI CAPITAL MANAGEMENT, a Delaware corporation (the "COLLATERAL AGENT"), as agent for the Secured Parties.

WITNESSETH:

WHEREAS, pursuant to a Note Purchase Agreement, the Company executed and delivered to the Secured Parties a Guaranty Agreement dated June 14, 2006, (the "GUARANTY").

ii. All inventory of the Company; and

v. All of the Company's Intellectual Property; and

d. "INTELLECTUAL PROPERTY" shall mean, collectively, the Software Intellectual Property, Copyrights, Copyright Licenses, Patents, Patent Licenses, Trademarks, Trademark Licenses and Trade Secrets.

infringement and (v) rights to sue for past, present and future infringements of the Marks, including, without limitation, any referred to in SCHEDULE B hereto.

may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditor's rights generally.

r. With respect to any Intellectual Property:

i. such Intellectual Property is subsisting and the rights in connection with such Intellectual Property have not been adjudged invalid or unenforceable, in whole or in part;

ii. the rights in connection with such Intellectual Property are valid and enforceable;

s. The Company shall:

ii. not, except with respect to any Patent that it shall reasonably determine is of negligible economic value to it, do any act, or omit to do any act, whereby any Patent may become abandoned; and

Copyrights, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability.

4. DEFAULTS. The occurrence of an Event of Default as defined in the Note Purchase Agreement shall be an "EVENTS OF DEFAULT."

of the Company's respective premises and facilities for the purpose of the Collateral Agent taking possession of, removing or putting the Collateral in saleable or disposable form; and

13. POWER OF ATTORNEY; FURTHER ASSURANCES.

If to the Company:            ZBB Energy Corporation
                              N93 W14475 Whittaker Way
                              Menomonee Falls, WI 53051
                              Attn: Robert Parry, Chief Executive Officer
                              Telephone: (262) 253-9800
                              Facsimile: (262) 253-9822

with copies to:               Hodgson Russ LLP
                              60 East 42nd Street, 37th Floor
                              New York, New York 10165 - 0150
                              Attn: Steven Weiss, Esq.
                              Telephone: (212) 661-3535
                              Facsimile: (212) 972-1677

if to the Collateral Agent:   CTI Capital Management
                              1967 Longwood-Lake Mary Road
                              Longwood, Florida 32750
                              Attention: Kara Irish
                              Telephone: (407) 833-4000
                              Facsimile: (407) 771-4419

with copies to:               Tarter Krinsky & Drogin LLP
                              470 Park Avenue South, 14th Floor
                              New York, NY 10016
                              Attention: James G. Smith, Esq.
                              Telephone: (212) 481-8585
                              Facsimile: (212) 481-9062

16. MISCELLANEOUS.

f. This Agreement shall be binding upon and inure to the benefit of each party hereto and its successors and assigns.

g. Each party shall take such further action and execute and deliver such further documents as may be necessary or appropriate in order to carry out the provisions and purposes of this Agreement.

[remainder of page intentionally left blank]

IN WITNESS WHEREOF, the parties hereto have caused this Subsidiary Security Agreement to be duly executed on the day and year first above written.

COMPANY:

ZBB TECHNOLOGIRS, INC.

By:

Name:

Title:

COLLATERAL AGENT:

CRUCIAN TRANSITION INC.
DBA CTI CAPITAL MANAGEMENT

By:

Name:

[signatures continue on next page]

SECURED PARTIES:

ABS SOS-PLUS PARTNERS, LTD.

By:

Name:

Title:

BUSHIDO CAPITAL MASTER FUND L.P.
By: Bushido Capital Partners, Ltd.

By:

Name:

Title:

SCHEDULE A

Principal Place of Business of the Company:

Locations Where Collateral is Located or Stored:

Exceptions to Representations and Warranties Under Section 3:

SCHEDULE B

GUARANTY AGREEMENT

THIS GUARANTY AGREEMENT ("GUARANTY") is made June 14, 2006 by the undersigned (each hereinafter referred to as a "GUARANTOR" and collectively, the "GUARANTORS"), in favor of the purchasers (each a "BUYER" and collectively the "BUYERS") of the 8% Senior Secured Notes (the "NOTES") pursuant to the Note Purchase Agreement and the Exhibits thereto dated even date herewith (the "NOTE PURCHASE AGREEMENT") (collectively, the "LOAN DOCUMENTS") from ZBB ENERGY CORPORATION, a Wisconsin corporation (the "COMPANY").

NOW, THEREFORE, as a material inducement to each Buyer to purchase the Notes from the Company, and for further good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Guarantors hereby, unconditionally, irrevocably and absolutely, warrant and represent to and covenant with the Buyers as follows:

1. GUARANTY OF OBLIGATION. The Guarantors jointly, severally, unconditionally, irrevocably and absolutely, guarantee to the Buyers that all indebtedness evidenced by or provided in the Loan Documents ("GUARANTEED INDEBTEDNESS"), will be promptly paid when due and in accordance with the terms and provisions thereof (and as they may be amended, extended or renewed from time to time) including, without limitation, interest on all of the above amounts as agreed upon between the Company and the Buyers, and any and all renewals, extensions and rearrangements of all or any part of the Guaranteed Indebtedness. This is a continuing guaranty and shall continue to apply without regard to the form or amount of indebtedness or obligation which the Company may create, renew, extend or alter in whole or in part, without notice to the Guarantors.

2. LIABILITY FOR OTHER INDEBTEDNESS. If the Guarantors are or become liable for any indebtedness owing by the Company to any or all Buyers by endorsement or otherwise than under this Guaranty, such liability shall not be in any manner impaired or affected hereby, and the rights of such Buyer hereunder shall be cumulative of any and all other rights that such Buyer may ever have against the Guarantors. The exercise by such Buyer of any right or remedy hereunder or under any other instrument, or at law or in equity, shall not preclude the concurrent or subsequent exercise of any other right or remedy.

3. NO RELEASE FROM OBLIGATIONS. The obligations, covenants, agreements and duties of the Guarantors under this Guaranty shall not be released or impaired in any manner whatsoever, without the written consent of the Buyers, including on account of any or all of the following:

a. any permitted assignment, endorsement or transfer, in whole or in part, of the Guaranteed Indebtedness, although made without consent of the Guarantors;

b. any waiver by any Buyer of the performance or observance by either or both of the Company or the Guarantors of any of the agreements, covenants, terms or conditions contained in any document evidencing, governing or securing the Guaranteed Indebtedness;

c. any extension of the time for payment or performance of all or any portion of the Guaranteed Indebtedness;

d. the renewal, rearrangement, modification or amendment (whether material or otherwise) of any duty, agreement or obligation of the Company set forth in any document evidencing, governing or securing the Guaranteed Indebtedness;

e. the voluntary or involuntary liquidation, sale or other disposition of all or substantially all of the assets of either or both of the Company or the Guarantors;

f. any receivership, insolvency, bankruptcy, reorganization or other similar proceedings or lack of corporate power, affecting either or both of the Company or the Guarantors or any of their assets;

g. any release, withdrawal, surrender, exchange, substitution, subordination or loss of any security or other guaranty at any time existing in connection with all or any portion of the Guaranteed Indebtedness, or the acceptance of additional or substitute property as security therefore;

h. the release or discharge of the Company or the Guarantors from the observance or performance of any agreement, covenant, term or condition contained in any document evidencing, governing or securing the Guaranteed Indebtedness;

i. any action which the Buyers may take or omit to take by virtue of any document evidencing, governing or securing the Guaranteed Indebtedness or through any course of dealing with either or both of the Company or the Guarantors;

j. the addition of a new guarantor or guarantors;

k. the operation of law or any other cause, whether similar or dissimilar to the foregoing;

l. any adjustment, indulgence, forbearance or compromise that may be granted or given by the Buyers to any party;

m. the failure by the Buyers to file or enforce a claim against the estate (either in administration, bankruptcy or other proceeding) of the Company;

n. if the recovery from the Company becomes barred by any statute of limitations or is otherwise prevented;

o. any defenses, set-offs or counterclaims which may be available to the Company;

p. any impairment, modification, change, release or limitation of liability of, or stay of actions of lien enforcement proceedings against the Company, its property,

or its estate in bankruptcy resulting from the operation of any present or future provision of the Bankruptcy Code or any other similar federal or state statute, or from the decision of any court; or

q. any neglect, delay, omission, failure or refusal of the Buyers to take or prosecute any action for the collection of any of the Guaranteed Indebtedness or to foreclose or take or prosecute any action in connection with any lien, right of security (including perfection thereof), existing or to exist in connection with, or as security for, any of the Guaranteed Indebtedness, it being the intention hereof that the Guarantors shall remain liable as principals on the Guaranteed Indebtedness, notwithstanding any act, omission or thing which might, but for the provisions hereof, otherwise operate as a legal or equitable discharge of any Guarantor.

4. PAYMENT AND PERFORMANCE OF OBLIGATIONS. In the event of default by the Company in payment or performance of the Guaranteed Indebtedness, or any part thereof, when such indebtedness or performance becomes due, either by its terms or as the result of the exercise of any power to accelerate, the Guarantors shall, without notice or demand, and without any notice having been given to the Guarantors of the acceptance by any Buyer of this Guaranty and without any notice having been given to the Guarantors of the creating or incurring of such indebtedness, pay the amount due thereon to each Buyer, at its office, or at such other place as may be designated in writing by such Buyer, and it shall not be necessary for any Buyer, in order to enforce such payment by the Guarantors, first, to institute suit or exhaust its remedies against the Company or others liable on such indebtedness, or to enforce its rights against any security which shall ever have been given to secure such indebtedness.

5. WAIVER OF NOTICE. Notice to the Guarantors of the acceptance of this Guaranty and of the making, renewing or assignment of the Guaranteed Indebtedness and each item thereof, are hereby expressly waived by the Guarantors.

6. PAYMENTS BY THE COMPANY. Each payment on the Guaranteed Indebtedness shall be deemed to have been made by the Company unless express written notice is given to the Buyers at the time of such payment that such payment is made by the Guarantors as specified in such notice.

7. RELEASES AND WAIVERS. If all or any part of the Guaranteed Indebtedness at any time be secured, the Guarantors agree that the Buyers may at any time and from time to time, at their discretion and with or without valuable consideration, allow substitution or withdrawal of collateral or other security and release collateral or other security without impairing or diminishing the obligations of the Guarantors hereunder. The Guarantors further agree that if the Company executes in favor of the Buyers any collateral agreement, deed of trust or other security instrument, the exercise by the Buyers of any right or remedy thereby conferred on the Buyers shall be wholly discretionary with the Buyers, and that the exercise or failure to exercise any such right or remedy shall in no way impair or diminish the obligations of the Guarantors hereunder. The Guarantors further agree that the Buyers shall not be liable for their failure to use diligence in the collection of the Guaranteed Indebtedness or in preserving the

liability of any person liable on the Guaranteed Indebtedness, and the Guarantors hereby waive presentment for payment, protest and notice thereof, notice of acceleration, and diligence in bringing suits against any person liable on the Guaranteed Indebtedness, or any part thereof.

8. NO RELEASE OF THE GUARANTORS. If the Guaranteed Indebtedness at any time exceeds the amount permitted by law, or the Company is not liable because the act of creating the Guaranteed Indebtedness is ultra vires, or the officers or persons creating the Guaranteed Indebtedness acted in excess of their authority, and for these reasons the Guaranteed Indebtedness which the Guarantors agree to pay cannot be enforced against the Company, such fact shall in no manner affect the Guarantors' liability hereunder, but the Guarantors shall be liable under this Guaranty notwithstanding that the Company is not liable for the Guaranteed Indebtedness, and to the same extent the Guarantors would have been liable if the Guaranteed Indebtedness had been enforceable against the Company.

9. OPTIONAL ACCELERATION. In the Event of Default by the Company, as such term is defined in the Note Purchase Agreement, and if any such Event of Default shall occur at a time when any of the Guaranteed Indebtedness may not then be due and payable, such Guaranteed Indebtedness, at the option of the Buyers, shall thereupon be deemed to be immediately due and payable in full, and the Guarantors shall pay to the Buyers forthwith the full amount which would be payable hereunder if all Guaranteed Indebtedness were then due and payable.

10. SUCCESSORS AND ASSIGNS. This Guaranty is for the benefit of the Buyers, their permitted successors and assigns, and in the event of an assignment by any Buyer, its permitted successors or assigns, of the Guaranteed Indebtedness, or any part thereof, the rights and benefits hereunder, to the extent applicable to the indebtedness so assigned, may be transferred with such indebtedness.

11. MODIFICATIONS AND WAIVERS. CUMULATIVE RIGHTS. No modification, consent, amendment or waiver of any provision of this Guaranty, nor consent to any departure by any Guarantor therefrom, shall be effective unless the same shall be in writing and signed by an officer of each Buyer and Guarantor, and then shall be effective only in the specific instance and for the purpose for which given. No notice to or demand on the Guarantors in any case shall, of itself, entitle the Guarantors to any other or further notice or demand in similar or other circumstances. No delay or omission by any Buyer in exercising any power or right hereunder shall impair any such right or power or be construed as a waiver thereof or any acquiescence therein, nor shall any single or partial exercise of any such power preclude other or further exercise thereof, or the exercise of any other right or power hereunder. All rights and remedies of the Buyers hereunder are cumulative of each other and of every other right or remedy which the Buyers may otherwise have at law or in equity or under any other contract or document, and the exercise of one or more rights or remedies shall not prejudice or impair the concurrent or subsequent exercise of other rights or remedies. In this Guaranty, whenever the context so requires, the singular number includes the plural, and conversely.

12. COMPLIANCE WITH LAWS. Should the Guarantors be permitted to raise usury as a defense under applicable law, then no provision herein or in the Loan Documents shall require the payment or permit the collection of interest in excess of the maximum permitted by law. Should such defense be available, the Guarantors shall not be obligated to pay the amount of such interest to the extent that it is in excess of the amount permitted by law as to the Guarantors. Should the Guarantors be permitted to raise the usury defense and prevail, the Loan Documents shall be held subject to reduction of the interest charged to the amount allowed under said usury laws as now or hereafter construed by the courts having jurisdiction. The parties agree that New York law shall control as to this issue.

13. BENEFIT TO GUARANTOR. The Guarantors acknowledge and warrant that they have derived or expect to derive financial and other advantage and benefit, directly or indirectly, from the Guaranteed Indebtedness and each and every advance thereof and from each and every renewal, extension, release of collateral or other relinquishment of legal rights made or granted or to be made or granted by the Buyers to the Company.

14. ATTORNEY'S FEES. The Buyers shall be entitled to recover their reasonable attorneys' fees and expenses in the event of any dispute between the parties arising under this Agreement in which the Buyers are the prevailing party.

15. GUARANTOR'S WARRANTIES. Each Guarantor hereby warrants and represents to each Buyer that:

a. Such Guarantor is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and is duly qualified and is in good standing in each jurisdiction in which such qualification is required by law, other than those jurisdictions as to which the failure to be so qualified or in good standing could not, individually or in the aggregate, reasonably be expected to have a material adverse effect. Such Guarantor has the corporate or other requisite power and authority to execute and deliver this Guaranty and to perform the provisions hereof.

b. This Guaranty has been duly authorized by all necessary action on the part of such Guarantor, and this Guaranty constitutes a legal, valid and binding obligation of such Guarantor enforceable against such Guarantor in accordance with its terms.

c. The execution, delivery and performance by such Guarantor of this Guaranty will not (i) contravene, result in any breach of, or constitute a default under, or result in the creation of any lien, claim or encumbrance in respect of any property of such Guarantor under, any indenture, mortgage, deed of trust, loan, purchase or credit agreement, lease, corporate charter or by-laws or other organizational document, or any other agreement or instrument to which such Guarantor is bound or by which such Guarantor or any of its properties may be bound or affected, (ii) conflict with or result in a breach of any of the terms, conditions or provisions of any order, judgment, decree, or ruling of any court, arbitrator or governmental

authority applicable to such Guarantor or (iii) violate any provision of any statute or other rule or regulation of any governmental authority applicable to such Guarantor.

d. No consent, approval or authorization of, or registration, filing or declaration with, any governmental authority is required in connection with the execution, delivery or performance by such Guarantor of this Guarantee.

e. Upon the execution and delivery hereof, such Guarantor will be solvent, will be able to pay its debts as they mature and will have capital sufficient to carry on its business.

16. SUBORDINATION AND NO SUBROGATION. If, for any reason whatsoever, the Company now or hereafter becomes indebted to the Guarantors, such indebtedness and all interest thereon, shall, at all times, be subordinate in all respects to the Loan Documents, and the Guarantors shall not be entitled to enforce or receive payment thereof until the Guaranteed Indebtedness has been fully paid and satisfied. Notwithstanding anything to the contrary contained in this Guaranty or any payments made by the Guarantors hereunder, the Guarantors shall not have any right of subrogation in or under the Loan Documents or to participate in any way therein, or any right, title or interest in and to any mortgaged property or any collateral for the Guaranteed Indebtedness, all such rights of subrogation and participation being hereby expressly waived and released, until the Guaranteed Indebtedness has been fully paid and satisfied.

17. LAW GOVERNING AND JURISDICTION. This Agreement shall be enforced, governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such state, without regard to the principles of conflict of laws. The parties hereto hereby submit to the exclusive jurisdiction of the United States federal courts or New York state courts located in New York, New York with respect to any dispute arising under this Agreement, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby, and consent to the personal jurisdiction of such courts and shall subject themselves to such personal jurisdiction. The parties irrevocably waive the defense of an inconvenient forum to the maintenance of such suit or proceeding. The parties further agree that service of process upon a party mailed by first class mail shall be deemed in every respect effective service of process upon the party in any such suit or proceeding. Nothing herein shall affect any party's right to serve process in any other manner permitted by law. The parties agree that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. The party which does not prevail in any dispute arising under this Agreement shall be responsible for all fees and expenses, including attorneys' fees, incurred by the prevailing party in connection with such dispute.

18. SEVERABILITY. If any provision of this Guaranty or the application thereof to any person or circumstance shall, for any reason and to any extent, be invalid or unenforceable, neither the remainder of this Guaranty nor the application of such provision to

any other persons or circumstances shall be affected thereby, but rather the same shall be enforced to the greatest extent permitted by law.

19. PARAGRAPH HEADINGS. The paragraph headings inserted in this Guaranty have been included for convenience only and are not intended, and shall not be construed, to limit or define in any way the substance of any paragraph contained herein.

20. COMPOUNDING AND SETTLEMENT. The Guarantors agree that Buyer, in its discretion, may (i) bring suit against the Guarantors and other guarantors, if any, jointly and severally or against any one or more of them, (ii) compound or settle with any one or more of guarantor(s) for such consideration as the Buyer may deem proper, and (iii) release one or more of guarantor(s) from liability hereunder, and that no such action shall impair the rights of any Buyer to collect the Guaranteed Indebtedness (or the unpaid balance thereof) from the Guarantors, not so sued, settled with or released.

21. TERMINATION. This Guaranty shall terminate upon the Company's repayment in full of the Guaranteed Indebtedness; provided, however, that this Guaranty shall continue to be effective or be reinstated, as the case may be, if at any time payment of all, or any part thereof, of the principal of or interest on any of the Obligations is rescinded or must otherwise be restored by any Buyer, whether under any bankruptcy or insolvency proceeding or otherwise.

22. NO FRAUDULENT CONVEYANCE. The Guarantors and the Company hereby confirm that it is their intention that the obligations of each Guarantor hereunder shall not constitute a fraudulent transfer or obligation for the purposes of the U.S. Bankruptcy Code and applicable state law, including any state law based on the Uniform Fraudulent Transfer Act or the Uniform Fraudulent Conveyance Act. To effectuate the foregoing intention, the Company and each Guarantor (each a "CO-OBLIGOR" and collectively the "CO-OBLIGORS") agree to reimburse, in an amount equal to (a) the amount of the proceeds that such Co-Obligor received, directly or indirectly, from the Buyers under the Note Purchase Agreement, less (b) seventy-five percent (75%) of the principal amount such Co-Obligor repaid to the Buyers under the Note Purchase Agreement, but not below zero, to each other Co-Obligor so that the receiving Co-Obligor receives in the aggregate from each paying Co-Obligor an amount equal to (a) seventy-five percent (75%) of the principal amount such receiving Co-Obligor repaid to the Buyers under the Note Purchase Agreement, less (b) the amount of the proceeds that such Co-Obligor received, directly or indirectly, from the Buyers under the Note Purchase Agreement, but not below zero. Each Buyer and the Collateral Agent is an intended third party beneficiary under this Section 22. Nothing in the
Section 22 shall limit each Guarantor's joint and several liability under this Guaranty or any of the Company's or any Guarantor's obligations under the Note Purchase Agreement or the other agreement referenced there.

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IN WITNESS WHEREOF, this Guaranty has been duly executed by the undersigned on the date set forth above.

GUARANTORS:

ZBB TECHNOLOGIES, INC.

By:
Name:
Title:

ZBB TECHNOLOGIES, LTD.

By:
Name:
Title:

BORROWER:

ZBB ENERGY CORPORATION

By:
Robert Parry
Chief Executive Officer

VALIDITY AND SUPPORT GUARANTY

THIS VALIDITY AND SUPPORT GUARANTY (the "GUARANTY") is made as of June

14, 2006 by the undersigned in favor of the Buyers (as defined below).

WITNESSETH:

WHEREAS, pursuant to a Note Purchase Agreement, dated June 14, 2006, (the "NOTE PURCHASE AGREEMENT") ZBB ENERGY CORPORATION, a Wisconsin corporation (the "COMPANY"), issued to certain investors (the "BUYERS") certain 8% Senior Secured Notes (collectively, the "NOTES"); and

WHEREAS, pursuant to the Note Purchase Agreement, the Company, the Buyers and CRUCIAN TRANSITION INC. DBA CTI CAPITAL MANAGEMENT, a Delaware corporation (the "COLLATERAL AGENT"), as agent for the Buyers, entered into a Security Agreement dated June 14, 2006 (the "SECURITY AGREEMENT");

WHEREAS, pursuant to the Note Purchase Agreement, each of ZBB Technologies, Inc., a Wisconsin corporation, and ZBB Technologies, Ltd., an Australian corporation (each a "SUBSIDIARY" and collectively the "SUBSIDIARIES") each a wholly-owned Subsidiary (as defined in the Note Purchase Agreement) of the Company, has executed and delivered a Guaranty Agreement, dated June 14, 2006; and

WHEREAS, pursuant to the Note Purchase Agreement, each Subsidiary, the Buyers and the Collateral Agent entered into a Subsidiary Security Agreement dated June 14, 2006 (each a "SUBSIDIARY SECURITY AGREEMENT", and collectively the "SUBSIDIARY SECURITY AGREEMENTS").

NOW, THEREFORE, the undersigned does hereby unconditionally, irrevocably and absolutely warrant and represent to and covenant with the Buyers as follows:

1. DOCUMENT ROOM. In order to induce the Buyers to enter into the Note Purchase Agreement and the related agreements therein, and due to the close business and financial relationship between the undersigned and each of the Company and each Subsidiary, whereby it is in the direct interest and benefit of the undersigned, and for other good and valuable consideration received, the undersigned, at any and all time the undersigned is employed as an executive officer of the Company, hereby represents, warrants, covenants and agrees in favor of the Buyers, together with their successors and assigns, that the Company, on behalf of itself and each of the Company Subsidiaries, shall, in accordance with Section 7(i) of the Note Purchase Agreement, establish within thirty (30) days of the Closing Date (as defined in the Note Purchase Agreement) and maintain continuously thereafter until all of the Obligations (as defined in the Security Agreement) have been indefeasibly paid in full, a secure document control room designated as such at the Company's central offices located at N93 W14475 Whitaker Way, Menomonee Falls, Wisconsin, which shall contain all complete, genuine and accurate current, as of the Closing Date, and future of all of the Document Control Room Items, as such term is defined in Section 7(i) of the Note Purchase Agreement.

2. REPRESENTATIONS, WARRANTIES AND COVENANTS.

a. The undersigned will, at any and all time the undersigned is employed as an executive officer of the Company, to use his or her good faith efforts, subject to his or her fiduciary obligations, to work with the Buyers and the Collateral Agent, to: (i) ensure the Buyers have a continuing unconditional, first-priority, perfected security interest in the Collateral, as defined in the Security Agreement, and (ii) ensure the Buyers have a continuing unconditional, first-priority, perfected security interest in the Collateral, as defined in the Subsidiary Security Agreements. The undersigned represents and warrants to the Buyers and the Collateral Agent that the Company and each Subsidiary, respectively, has good right to pledge and transfer same, and has no knowledge of any fact which would impair the validity thereof.

b. The undersigned further represents and warrants to the Buyers and the Collateral Agent, together with their respective successors and assigns, and agrees to indemnify and hold harmless the Buyers and the Collateral Agent and their respective successors and assigns against, any and all liabilities, claims, actions, causes of action, damages, losses, judgments, costs and expenses, including but not limited to reasonable attorneys' fees which any of them may suffer as a result of: (i) any illegal, improper, fraudulent or dishonest act of the undersigned, without limitation, any misappropriation, conversion, or diversion of any Collateral; (ii) the making, by the undersigned of any representation, warranty, or other statement or the furnishing of any information to the Buyers or the Collateral Agent by the Company or any Subsidiary in connection with this Guaranty which shall have been false or misleading in any material respect when made or furnished; and (iii) the breach or failure of any of the obligations, covenants, representations and conditions guaranteed, made or assumed by the undersigned in accordance with the terms of this Guaranty.

c. During any liquidation of the Company or any Subsidiary or any of their respective assets, the undersigned agrees to be available at the request of the Buyers or the Collateral Agent, at an agreed upon compensation commensurate with the compensation previously paid to the undersigned by the Company, and at and under the Buyers' or the Collateral Agent's direction, to cooperate in such a liquidation, including, without limitation, collect and prepare the Collateral for sale, initiating and hold discussions with possible purchasers, and in general providing the benefit of the undersigned knowledge and experience.

d. The undersigned agrees to unconditionally guaranty to the Buyers and the Collateral Agent as surety against any loss, damage, liability or cost as a result of any breach of a representation, warranty, covenant or agreement contained in Sections 1 and 2 hereof.

3. NO RELEASE FROM OBLIGATIONS. The undersigned waives notice of acceptance of this Guaranty and notice of any liability to which it may apply, and waives presentment, demand for payment, protest, notice of dishonor or nonpayment of any liabilities, suit or taking other action by the Buyers and/or the Collateral Agent against, and any other notice, to any party liable thereon (including the undersigned), and waives any defense, offset or counterclaim to any liability hereunder. The Buyers and/or the Collateral Agent may at any time and from time to time (whether or not after revocation of termination of this Guaranty) without

the consent of, or notice to, the undersigned, without incurring responsibility to the undersigned without impairing or releasing the obligations of the undersigned hereunder, upon or without any terms or conditions and in whole or in part:

a. change the manner, place or terms of payment, and/or change or extend the time of payment of, renew or alter, any of the Obligations, any security therefor, or any liability incurred directly or indirectly in respect thereof, and the guaranty herein made shall apply to the Obligations as so changed, extended, renewed or altered;

b. sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof and/or offset there against;

c. exercise or refrain from exercising any rights against the Company or any Subsidiary or others (including the undersigned) or otherwise act or refrain from acting;

d. settle or compromise any of the Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability, (whether due or not) to creditors of the Company or any Subsidiary other than the Buyers; and

e. apply any sums by whomsoever paid or howsoever realized to any of the Obligations regardless of what Obligations or other liabilities of the Company remain unpaid.

4. SEVERABILITY. No invalidity, irregularity or unenforceability of all or any part of the Obligations hereby guaranteed or of any security therefor shall affect, impair or be a defense to this Guaranty. The liability of the undersigned hereunder is primary and unconditional and shall not be subject to any offset, defense or counterclaim of the Company or any Subsidiary. This Guaranty is a continuing one and all obligations to which it applies or may apply under the terms hereof shall be conclusively presumed to have been created in reliance hereon.

5. ATTORNEYS' FEES. In the event any of the Buyers or the Collateral Agent retains attorneys for the purpose of enforcing this Guaranty, the undersigned shall on demand, pay all costs and expenses of every kind (including without limitation, reasonable attorneys' fees) which may be paid or incurred by the Buyers or the Collateral Agent in enforcing any rights under this Guaranty.

6. WAIVERS. No delay on the part of the Buyers or the Collateral Agent in exercising any of their options, powers or rights, or partial or single exercise thereof, shall constitute a waiver thereof. No waiver of any of their rights hereunder, and no modification or amendment of this Guaranty, shall be deemed to be made by the Buyers or the Collateral Agent

unless the same shall be in writing, duly signed on behalf of the Buyers or the Collateral Agent, and each waiver, if any, shall apply only with respect to the specific instance involved, and shall in no way impair the rights of any of the Buyers or the Collateral Agent or the obligations of the undersigned to the Buyers or the Collateral Agent in any other respect at any other time. The undersigned shall have no right of subrogation, indemnification or recourse against the Company or any Subsidiary or any of their respective assets or property or any security held for any Obligations until all of the Obligations are indefeasibly paid in full to the Buyers.

7. LAW GOVERNING AND JURISDICTION. This Guaranty shall be enforced, governed by and construed in accordance with the laws of the State of New York applicable to agreements made and to be performed entirely within such state, without regard to the principles of conflict of laws. The undersigned hereby submits to the exclusive jurisdiction of the United States federal courts or New York state courts located in New York, New York with respect to any dispute arising under this Guaranty, the agreements entered into in connection herewith or the transactions contemplated hereby or thereby, and consent to the personal jurisdiction of such courts and shall subject himself or herself to such personal jurisdiction. The undersigned irrevocably waives the defense of an inconvenient forum to the maintenance of such suit or proceeding. The undersigned further agrees that service of process upon him or her mailed by first class mail shall be deemed in every respect effective service of process upon the undersigned in any such suit or proceeding. Nothing herein shall affect any right to serve process in any other manner permitted by law. The undersigned agrees that a final non-appealable judgment in any such suit or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on such judgment or in any other lawful manner. THE UNDERSIGNED AGREES AND DOES HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM BROUGHT AGAINST THE UNDERSIGNED ON ANY MATTERS WHATSOEVER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS GUARANTY OR THE RELATIONSHIP CREATED HEREBY.

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IN WITNESS WHEREOF, the undersigned has been duly executed this Guaranty on the date set forth above.

Signature

Name

Address

City, State, Zip Code

STRATEGIC GROWTH
INTERNATIONAL, INC.

March 22, 2006

Mr. Robert Parry
Chief Executive Officer
ZBB ENERGY CORPORATION
N93 W14475 Whittaker Way
Menomonee Falls, WI 53051

Dear Mr. Halloran:

We are pleased to set forth the terms of the retention of Strategic Growth International ("SGI") by ZBB ENERGY CORPORATION (collectively with its affiliates, the "Company").

1. SGI shall, on a non-exclusive basis, assist the Company as the Company's investor relations advisor in the development of a comprehensive financial relations program with the following goals, all of which are designed to achieve increased and sustained share value:

(a) Introducing the Company to investment banking firms, institutional investors, money managers, and high net worth brokers both in the U.S. and Europe;

(b) Obtaining on behalf of the Company invitations to and coordinate participation in financial industry conferences;

(c) Assisting with day-to-day investor communications (i.e. shareholders calls, scheduling appointments, sending introductory and follow-up materials); and

(d) Providing to the Company such professional services as may be reasonably required to assist the Company in carrying out the following programs and objectives:

(i) Developing a coordinated package of financial public relations materials, including PowerPoint presentation, fact sheet, press releases, corporate package, etc., that is reasonably acceptable to the Company. SGI will also review and advise on features and functionality of the website in this regard;

(ii) Assisting the Company in obtaining introductions to market makers and professionals in the investment community;

(iii) Encouraging institutional ownership in the stock;

150 EAST 52ND STREET, 22ND FL., NEW YORK, NEW YORK 10022
TEL: 1-212-838-1444 / FAX: 1-212-838-1511

ZBB ENERGY CORPORATION
MARCH 22, 2006

PAGE 2

(iv) Obtaining research from reputable institutional sales boutiques and small cap research analysts;

(v) Creating financial media opportunities for the Company as appropriate;

(vi) Obtaining invitations to, and coordinate participation in, financial industry conferences; and

(vii) Assisting in creating opportunities for European buying in the stock.

2. In connection with SGI's activities on the Company's behalf, SGI will familiarize itself with the business, operations, properties, financial condition, and prospects of the Company. In connection with its role as the Company's investor relations advisor, SGI would expect its services to include such additional advisory and related services as may be mutually agreed upon by SGI and the Company. The retention by the Company of SGI as investor relations advisor as heretofore described shall be for a period of one year from the date hereof.

3. In connection with SGI's activities on the Company's behalf, the Company will cooperate with SGI and will furnish SGI with all information and data concerning the Company (the "Information") which SGI deems appropriate and will provide SGI with access to the Company's managers, members, officers, directors, employees, independent accountants, legal counsel, consultants, and representatives. The Company represents and warrants that all Information made available to SGI by the Company will, at all times during the period of engagement of SGI hereunder, be complete and correct in all material respects and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading in the light of the circumstances under which such statements are made. The Company further represents and warrants that any projections provided by it to SGI will have been prepared in good faith and will be based upon assumptions which, in light of the circumstances under which they are made, are reasonable. The Company acknowledges and agrees that, in rendering its services hereunder, SGI will be using and relying on the Information without independent verification thereof by SGI or independent appraisal by SGI of any of the Company's assets. SGI does not assume responsibility for any information regarding the Company. Any advice rendered by SGI pursuant to this Agreement may not be disclosed publicly without SGI's prior written consent.

ZBB ENERGY CORPORATION
MARCH 22, 2006

PAGE 3

4. In consideration of its services pursuant to this Agreement, SGI shall be entitled to receive, and the Company agrees to pay SGI, the following compensation:

U.S. $10,000 per month in cash, payable each month in advance, for a period of one year commencing upon the date hereof.

The first month will be paid immediately upon execution of this Agreement. Billing will be done monthly for the coming month. Expenses and charges will be included in the following month's bill. Payment will be due with ten (10) days upon receipt of invoice otherwise a $150.00 late fee per month late will be added.

The Company agrees to grant SGI 3,328,585 options on the following basis. 1,664,292 options to be issued on execution of this Agreement, exercisable at AUD$.25 per share. 832,146 options to be issued subject to ZBB completing its Bridge Loan funding by an additional amount of not less than US$500,000, exercisable at AUD$0.25 per share. 832,146 options to be issued subject to ZBB's net tangible assets increasing by at least $6 million (excluding any bank financing or merger and acquisition activities), exercisable at 120% of the PIPE or IPO price. All such options will be of five-year duration. At the option of SGI, such options may be exercised on a cashless basis and will have piggyback registration rights for one year with respect to the options with demand registration rights after one year, and will be subject to non-dilution provisions and my be transferred in whole or in part to one or more officers of the Company.

The Company shall have the right to terminate this agreement on September 22, 2006 upon 10 days prior written notice. Upon such termination on September 22, 2006, the Company will have the right to rescind 50% of the options.

5. In addition to the fees described in Paragraph 3 above, the Company agrees to promptly reimburse SGI for reasonable accountable expenses incurred in connection with its retention hereunder when incurred or promptly thereafter. SGI will obtain approval for any expenses incurred exceeding $250.00 per activity.

6. The Company agrees to indemnify SGI in accordance with the indemnification provisions (the "Indemnification Provisions") attached to this Agreement as Annex A, which Indemnification Provisions are incorporated herein and made a part hereof.

7. SGI may terminate this Agreement at any time upon 30 days' prior written notice, without liability or continuing obligation, except as set forth in the following sentence. Neither termination of this Agreement nor completion of the assignment contemplated hereby shall affect: (i) any compensation earned by SGI up to the date of termination or completion, as the case may be, including the consulting fees

ZBB ENERGY CORPORATION
MARCH 22, 2006

PAGE 4

of termination or completion, as the case may be, including the consulting fees referenced in Paragraph 4 hereof; (ii) the reimbursement of expenses incurred by SGI up to the date of termination or completion, as the case may be, (iii) the provisions of Paragraphs 4 through 8 of this Agreement and (iv) the Indemnification Provisions attached as Annex A hereto which are incorporated herein, all of which shall remain operative and in full force and effect.

8. The validity and interpretation of this Agreement shall be governed by the law of the State of New York applicable to agreements made and to be fully performed therein. The Company irrevocably submits to the jurisdiction of any court of the State of New York or the United States District Court for the Southern District of the State of New York for the purpose of any suit, action, or other proceeding arising out of this Agreement, or any of the agreements or transactions contemplated hereby, which is brought by or against the Company and
(i) hereby irrevocably agrees that all claims in respect of any such suit, action, or proceeding may be heard and determined in any such court and (ii) to the extent that the Company has acquired, or hereafter may acquire, any immunity from jurisdiction of any such court or from any legal process therein, the Company hereby waives, to the fullest extent permitted by law, such immunity. The Company hereby waives, and agrees not to assert in any such suit, action, or proceeding, in each case, to the fullest extent permitted by applicable law, any claim that (a) the Company is not personally subject to the jurisdiction of any such court, (b) the Company is immune from any legal process (whether through service or notice, attachment prior to judgment attachment in aid of execution, execution, or otherwise) with respect to the Company's property or (c) any such suit, action, or proceeding is brought in an inconvenient forum.

9. The benefits of this Agreement shall inure to the respective successors and assigns of the parties hereto and of the indemnified parties hereunder and their successors and assigns and representatives, and the obligations and liabilities assumed in this Agreement by the parties hereto shall be binding upon their respective successors and assigns.

10. For the convenience of the parties hereto, any number of counterparts of this Agreement may be executed by the parties hereto. Each such counterpart shall be, and shall be deemed to be, an original instrument, but all such counterparts taken together shall constitute one and the same Agreement. This Agreement may not be modified or amended except in writing signed by the parties hereto.

If the foregoing correctly sets forth our Agreement, please sign the enclosed copy of this letter in the space provided and return it to us.

ZBB ENERGY CORPORATION
MARCH 22, 2006

PAGE 5

Very truly yours,

STRATEGIC GROWTH INTERNATIONAL, INC.

BY: /s/ Stanley S. Altschuler
    ------------------------------------
    NAME: STANLEY S. ALTSCHULER
    TITLE: PRESIDENT

CONFIRMED AND AGREED TO:
THIS 22 DAY OF MARCH, 2006

ZBB ENERGY CORPORATION

BY: /s/ Robert Parry
    ---------------------------------
    NAME: ROBERT PARRY
    TITLE: CHIEF EXECUTIVE OFFICER

ZBB ENERGY CORPORATION
MARCH 22, 2006

PAGE 6

ANNEX A

INDEMNIFICATION PROVISIONS

ZBB Energy Corporation (the "Company") agrees to indemnify and hold harmless SGI Associates LLC ("SGI") against any and all losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses, and disbursements (and any and all actions, suits, proceedings, and investigations in respect thereof and any and all legal and other costs, expenses, and disbursements in giving testimony or furnishing documents in response to a subpoena or otherwise), including, without limitation the costs, expenses, and disbursements, as and when incurred, of investigating, preparing, or defending any such action, suit, proceeding, or investigation (whether or not in connection with litigation in which SGI is a party), directly or indirectly, caused by, relating to, based upon, arising out of, or in connection with SGI's acting for the Company, including, without limitation, any act or omission by SGI in connection with its acceptance of or the performance or non-performance of its obligations under the letter agreement dated MARCH 22, 2004, between SGI and the Company, as it may be amended from time to time (the "Agreement"); provided, however, such indemnity agreement shall not apply to any portion of any such loss, claim, damage, obligation, penalty, judgment, award, liability, cost expense, or disbursement to the extent it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from the willful misconduct of SGI. The Company also agrees that SGI shall not have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company for or in connection with the engagement of SGI, except to the extent that any such liability is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from SGI's willful misconduct.

These Indemnification Provisions shall be in addition to any liability which the Company may otherwise have to SGI or the persons indemnified below in this sentence and shall extend to the following: SGI, its affiliated entities, directors, officers, employees, legal counsel, agents, and controlling persons (within the meaning of the federal securities laws). All references to SGI in these Indemnification Provisions shall be understood to include any and all of the foregoing.

ZBB ENERGY CORPORATION
MARCH 22, 2006

PAGE 7

If any action, suit, proceeding, or investigation is commenced, as to which SGI proposes to demand indemnification, it shall notify the Company with reasonable promptness: provided, however, that any failure by SGI to notify the Company shall not relieve the Company from its obligations hereunder. SGI shall have the right to retain counsel of its own choice to represent it, and the Company shall pay the fees, expenses, and disbursements of such counsel; and such counsel shall, to extent consistent with its professional responsibilities, cooperate with the Company and any counsel designated by the Company. The Company shall be liable for any settlement of any claim against SGI made with the Company's written consent, which consent shall not be unreasonably withheld. The Company shall not, without the prior written consent of SGI, settle or compromise any claim, or permit a default or consent to the entry of any judgment in respect thereof, unless such settlement, compromise, or consent includes, as an unconditional term thereof, the giving by the claimant to SGI of an unconditional release from all liability in respect of such claim.

In order to provide for just and equitable contribution, if a claim for indemnification pursuant to these Indemnification Provisions is made, but it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification in such case, then the Company, on the one hand, and SGI, on the other hand, shall contribute to the losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses, and disbursements to which the indemnified persons may be subject in accordance with the relative benefits received by the Company, on the one hand, and SGI, on the other hand, and also the relative fault of the Company, on the one hand, and SGI on the other hand, in connection with the statements, acts, or omissions which resulted in such losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses, or disbursements and the relevant equitable considerations shall also be considered. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. Notwithstanding the foregoing, SGI shall not be obligated to contribute any amount hereunder that exceeds the amount of fees previously received by SGI pursuant to the Agreement.

Neither termination nor completion of the engagement of SGI referred to above shall affect these Indemnification Provisions which shall then remain operative and in full force and effect.

02/04/2004

Contractor: ZBB Energy Corporation

ENCUMBRANCE INFORMATION

DOCUMENT #500-03-031

------------------------------------------------------------------------------------------------------------------------
Amount Encumbered         Program/Category (Code & Title)                                    Fund Title
by this Document
                          B/A IT. 3360-001-0381 (C) 30-Development
                                                                                             PIERRD
    $1,873,133.00

Prior Amount Encumbered   Budget List # 501.027B Encumber by: 06/30/2005   Expend by: 06/30/2009
for this Contract
                          Item                                                  Chapter        Statute       Fiscal Year

                          0381000-3360-001-30                                     157            2003           03/04

Total Amount Encumbered
to Date                   Object of Expenditure (Code and Title)

                          5400-615.68-54302

I hereby certify upon my own personal knowledge that budgeted funds          T.B.A. No.         B.R. No.
are available for the period and purpose of the expenditure stated above.

Signature of Accounting Officer                                                                 Date
/s/ Pam Young                                                                                   3/2/04

------------------------------------------------------------------------------------------------------------------------

NOTES: Energy Systems Integration - 2004 Calendar Award

$1,873,133 TOTAL DOCUMENT

Illegible

                                         ---------------------------------------
STANDARD AGREEMENT -- APPROVED BY THE    CONTRACT NUMBER        AM. NO._________
STD. 2(REV. 5-91)     ATTORNEY GENERAL   500-03-031
                                         ---------------------------------------
                                         TAXPAYERS FEDERAL EMPLOYER
                                         IDENTIFICATION NUMBER 39-1987014
                                         ---------------------------------------

THIS AGREEMENT, made and entered into this 4th day of February, 2004. in the State of California, by and between State of California, through its duly elected or appointed, qualified and acting.

--------------------------------------------------------------------------------
TITLE OF OFFICER ACTING FOR STATE       Agency
                                        State Energy Resources Conservation
Executive Director__________________.   & Development Commission ______________,
                                        hereafter called the state, and
--------------------------------------------------------------------------------

CONTRACTOR'S NAME

ZBB Energy Corporation ________________________________________________________, hereafter called the Contractor

WITNESSETH: That the Contractor for and in consideration of the covenants, conditions, agreements, and stipulations of the State hereinafter expressed, does hereby agree to furnish to the State services and materials as follows:
(Set forth service to be rendered by Contractor, amount to be paid Contractor, time for performance or completion, and attach plans and specification, if any.)

1. CONTRACT CONTENTS

This contract consists of the paragraphs listed below and attached exhibits which are hereby expressly incorporated herein.

1. Contract Contents

2. Contract Purpose

3. Contract Term

4. Definitions

5. Payments to Contractor

6. Travel and Per Diem

CONTINUED ON _______ SHEETS, EACH BEARING NAME OF CONTRACTOR AND CONTRACT NUMBER.

The provisions on the reverse side hereof constitute a part of this agreement.

IN WITNESS WHEREOF, this agreement has been executed by the parties hereto, upon the date first above, written.

         STATE OF CALIFORNIA                           CONTRACTOR
--------------------------------------------------------------------------------
AGENCY                                  CONTRACTOR (If other then an individual,
                                        state whether a corporation partnership,
                                        etc.)
   State Energy Resources                  ZBB Energy Corporation
   Conservation and Development
   Commission
--------------------------------------------------------------------------------
BY (AUTHORIZED SIGNATURE)               BY (AUTHORIZED SIGNATURE)


   /s/ Cheryl Raedel          4-2-04       /s/ Geoffrey David Hann
--------------------------------------------------------------------------------
PRINTED NAME OF PERSON SIGNING          PRINTED NAME AND TITLE OF PERSON SIGNING

   Cheryl Raedel                           Geoffrey David Hann -- Director
--------------------------------------------------------------------------------
TITLE                                   ADDRESS
                                           N93 W 14475 Whittaker Way
   Manager, Contracts Office               Menomenee Falls, WI 53051-1653
--------------------------------------------------------------------------------

-------------------------------------------------------------------------------------------------
AMOUNT ENCUMBERED BY          PROGRAM        FUND                  Department of General Services
   THIS DOCUMENT          CATEGORY (CODE    TITLE                              Use Only
                            AND TITLE)
                          --------------------------------------      DPR
$1,873,133.00             (OPTIONAL USE)
-----------------------    SEE ATTACHED                            ------------------------------
PRIOR AMOUNT ENCUMBERED   --------------------------------------
FOR THIS CONTRACT         ITEM   CHAPTER   STATUTE   FISCAL YEAR              APPROVED
$0.00                                                                   ---------------------
-----------------------   --------------------------------------        |                    |
TOTAL AMOUNT ENCUMBERED   OBJECT OF EXPENDITURE( CODE AND TITLE)        |     APR 28 2004    |
TO DATE                                                                 |                    |
$1,873,133.00                                                           ---------------------
----------------------------------------------------------------      DEPT OF GENERAL SERVICES
I hereby certify upon my own personal      T.B.A NO.    B.R. NO.
knowledge that budgeted funds are                                  ------------------------------
available for this period and purpose of
the expenditure stated above.

----------------------------------------------------------------
SIGNATURE OF ACCOUNTING OFFICER                        DATE


/s/ Pam young                                          3/2/04      /s/ Illegible
================================================================

[_] CONTRACTOR [_] STATE AGENCY [_] DEPT. OF GEN. SER. [_] CONTROLLER [_]

STATE Illegible                                            CONTRACTOR'S COPY

STANDARD AGREEMENT -- APPROVED BY THE         CONTRACT NUMBER        AM. NO.
STD. 2 (REV. 5.91)    ATTORNEY GENERAL        500-03-031
                                              TAXPAYERS FEDERAL EMPLOYER
                                              IDENTIFICATION NUMBER
                                              39-1987014

THIS AGREEMENT, made and entered into this 4th day of February, 04, in the State of California, by and between State of California, through its duly elected or appointed, qualified and acting

TITLE OF OFFICER ACTING FOR STATE   AGENCY
                                    State Energy Resources Conservation
Executive Director                  & Development Commission _________________, hereafter called the State, and

CONTRACTOR'S NAME
ZBB Energy Corporation _______________________________________________________, hereafter called the Contractor

1. CONTRACT CONTENTS

This contract consists of the paragraphs listed below and attached exhibits which are hereby expressly incorporated herein.

1. Contract Contents

2. Contract Purpose

3. Contract Term

4. Definitions

5. Payments to Contractor

6. Travel and Per Diem

CONTINUED ON _________ SHEETS, EACH BEARING NAME OF CONTRACTOR AND CONTRACT NUMBER

The provisions on the reverse side hereof constitute a part of this agreement.

IN WITNESS WHEREOF, this agreement has been executed by the parties hereto, upon the date first above written.

            STATE OF CALIFORNIA                                   CONTRACTOR
------------------------------------------   --------------------------------------------------------
AGENCY                                       CONTRACTOR (If other than an individual, state whether a
                                             corporation, partnership, etc.)

   State Energy Resources Conservation and   ZBB Energy Corporation
   Development Commission

BY (AUTHORIZED SIGNATURE)                    BY (AUTHORIZED SIGNATURE)

PRINTED NAME OF PERSON SIGNING               PRINTED NAME AND TITLE OF PERSON SIGNING

   Cheryl Raedel

TITLE                                        ADDRESS

                                                N93 W 14475 Whittaker Way
   Manager, Contracts Office                    Menomenee Falls, WI 53051-1653

AMOUNT ENCUMBERED BY THIS          PROGRAM/CATEGORY (CODE AND TITLE)   FUND TITLE    Department of General Services
DOCUMENT                                                                                       Use Only

_ 1,873,133.00                     (OPTIONAL USE)
                                   See Attached

PRIOR AMOUNT ENCUMBERED FOR
THIS CONTRACT                      ITEM   CHAPTER   STATUTE   FISCAL YEAR

_ 0.00

TOTAL AMOUNT ENCUMBERED TO DATE    OBJECT OF EXPENDITURE (CODE AND TITLE)

_ 1,873,133.00

I hereby certify upon my own personal knowledge    T.B.A. NO.   B.R. NO.
that budgeted funds are available for the period
and purpose of the expenditure stated above.

SIGNATURE OF ACCOUNTING OFFICER                                DATE

/s/ Pam young                                                  3/2/04
-------------------------------

[_] CONTRACTOR [_] STATE AGENCY [_] DEPT. OF GEN. SER. [_] CONTROLLER [_]

Contractor: ZBB Energy Corporation 02/04/2004

ENCUMBRANCE INFORMATION

DOCUMENT # 500-03-031

---------------------------------------------------------------------------------------------------------------------
Amount Encumbered         Program/Category (Code & Title)                                    Fund Title
by this Document          B/A IT. 3360-001-0381 (C) 30-Development
                                                                                             PIERRD
    $1,873,133.00

Prior Amount Encumbered   Budget List # 501.027B    Encumber by: 06/30/2005   Expend by: 06/30/2009
for this Contract
                          Item                                               Chapter   Statute   Fiscal Year

                          0381000-3360-001-30                                  157       2003       03/04

Total Amount Encumbered
to Date                   Object of Expenditure (Code and Title)

                          5400-615.68-54302

I hereby certify upon my own personal knowledge that budgeted funds          T.B.A. No.         B.R. No.
are available for the period and purpose of the expenditure stated above.

Signature of Accounting Officer                                                                 Date


/s/ Pam Young                                                                                   3/2/04
---------------------------------------------------------------------------------------------------------------------

NOTES: Energy Systems Integration - 2004 Calendar Award

$1,873,133 Total Document

1. Purchase of Equipment
8. Project Budget Revision
9. Contract Management
10. Standard of Performance
11. Subcontractors and Subcontractor Agreements
12. Reporting
13. Recordkeeping, Cost Accounting and Auditing
14. Business Activity Reporting
15. Review and Notice of Conflicting Terms
16. Confidentiality
17. Intellectual Property Items Developed Prior to this Contract
18. Rights of Parties Regarding Intellectual Property
19. Royalty Payments to Commission
20. Notices to Parties
21. Disputes
22. Stop Work
23. Termination
24. General Terms and Conditions

          Exhibit A:   Work Statement
                          Attachment A-l - Progress Report Format
                          Attachment A-2 - Final Report Format
                          Attachment A-3 - Resume/Bios
          Exhibit B:   Task Deliverables, Schedule & Gantt Chart
          Exhibit C:   Budget
          Exhibit D:   Contract Contacts - Commission and Contractor
          Exhibit E:   Confidential and Intellectual Property List

2.   CONTRACT PURPOSE

The purpose of this contract is to fund research, development and demonstration projects under the Energy Commission Public Interest Energy Research (PIER) Program. The contract will demonstrate and evaluate the economic benefits of distribution system upgrade deferral. This goal will be met by operating a ZBB zinc-bromine battery EES at a PG&E distribution node for a minimum of 18 months. Specific tasks are detailed in the attached Exhibit A, "Work Statement."

3. CONTRACT TERM

The term of this contract shall be from APRIL 12, 2004 TO MARCH 31, 2008. This contract is of no force or effect until signed by both parties, and approved by the Department of General Services.

4. DEFINITIONS

A. AFFILIATE OF THE CONTRACTOR means any natural person, corporation, partnership joint venture, sole proprietorship or other business entity directly or indirectly through one or more intermediaries, controlling, controlled by, or under common control with the Contractor. The term "control" (including the terms "controlled by" and "under common control with") means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. For purposes of this contract, it is presumed that ownership or control of the voting power of more than fifty

Page 3 of 28

percent (50%) of the voting stock or partnership interests in an entity constitutes control of that entity.

B. CONTRACT BUDGET refers to Commission reimbursable and Contractor's matching fund expenditures for that portion of the project covered by the contract.

C. CONTRACT PERIOD is the length of this contract between the Energy Commission and the Contractor. The Contractor's "project" may coincide with or extend outside the "contract period."

D. DATE means calendar date.

E. CONTRACT START DATE is the date Commission reimbursable expenses can begin after the Department of General Services signs the contract document.

F. CONTRACT END DATE is the last date Commission reimbursable expenses can be incurred and is the expiration date of the contract.

G. ECONOMIC BENEFIT for a project co-funded using Energy Commission funds means the realization of economic gain or other tangible benefits by the Contractor or its affiliates (except bona fide third party purchasers of Contractor's commercial products) through the use of project-related products and rights, including but not limited to, operation, sale, distribution or manufacturing, or by any other transaction, including but not limited to, grant, rent, loan, equity, option, transfer, license or other fee, or by otherwise disposing of the project-related products and rights.

H. The Commission may rely upon professional accounting opinion in making a final determination of the dollar value of gross revenue, and such determination shall be the basis for calculating the royalty payment due the Commission.

I. EQUIPMENT is defined as having a useful life of at least one year, having an acquisition unit cost of at least $5,000, and purchased with Commission funds. EQUIPMENT means any products, objects, machinery, apparatus, implements or tools purchased, used or constructed within the project, including those products, objects, machinery, apparatus, implements or tools from which over thirty percent (30%) of the equipment is composed of materials purchased for the project.

J. For purposes of determining depreciated value of equipment used in the contract, the project shall terminate at the end of the normal useful life of the equipment purchased, funded and/or developed with Commission funds. The Commission may determine the normal useful life of such equipment.

K. FINANCIAL STATEMENTS means balance sheets, statements of operations, statements of cash flows, and capita] statements.

L. GROSS REVENUES means the gross sales price, rentals and other amounts received by Contractor from or on account of the sale, lease, or other transfer or use of Project-Related Products and Rights, less sales tax paid. Gross Revenues shall be determined as above and in accordance with appropriate Federal cost principles and any economic benefit.

M. KEY PERSONNEL are employees or consultants of the Contractor who are critical to the outcome of the project. For example, they may have expertise in the particular field, or have experience that is not available from another source. Replacing these individuals may affect the outcome of the project.

N. KEY SUBCONTRACTORS are contractors, subcontractors or vendors to the Contractor and who are critical to the outcome of the project. As with Key Personnel, Key Subcontractors may have

Page 4 of 28

expertise in the particular field, or have experience that is not available from another source and replacement may significantly affect the project. An employee of the Contractor's subcontractor or vendor may also qualify as "key".

O. MATCH FUND PARTICIPANT means any party which supplies match funds to the project.

P. MATERIALS means the substances used in constructing a finished object, commodity, device, article or product.

Q. OTHERWISE DISPOSING OF means (1) project-related products and rights not sold but delivered by the Contractor or its affiliates to others regardless of the basis for compensation, if any, and (2) project-related products and rights put into use by the Contractor or any third party for any purpose other than testing or evaluation of the project-related products and rights.

R. PROJECT refers to the entire effort undertaken and planned by the Contractor including the work co-funded by the Commission. The project may coincide with or extend beyond the contract period.

S. PROJECT-RELATED PRODUCTS AND RIGHTS means any and all energy inventions, discoveries, machines, designs, computer software, products, devices, mechanisms, methods, protocols, processes, algorithms, flowcharts, diagrams, trade secrets, data, copyrights, patents, trademarks, proprietary rights, and the like created or made or discovered or first reduced to practice by the Contractor or other third party as a result, in whole or in part, of the contract award(s) and any and all updates, revisions, modification, enhancements, derivations, variations, additions, continuations, renewals, and extensions thereto and all proceeds and products therefrom.

T. SALE is sale, license, lease, gift or other transfer of a project-related product or right.

U. SALES PRICE means gross revenue, excluding normal returns and allowances such as sales tax, freight and insurance, if applicable, derived from a sale.

V. SUBJECT INVENTION means any and all energy invention or discovery conceived, or first actually reduced to practice in the course of or under the Commission-funded portion of this contract (i.e., that portion of this contract for which Contractor has invoiced the Commission and received reimbursement) and includes any art, method, process, machine, manufacture design or composition of matter, or any new and useful improvement hereof, whether patented or unpatented, under the patent laws of the United States of America or any foreign country.

W. TECHNOLOGY refers to the general subject area where the product or innovation will be used. For example, solar thermal electric generation is a technology area; direct steam generation is an innovation in this technology area. TECHNOLOGY DEVELOPED means subject invention and/or project-related products and rights.

X. Terms Relating to Data

1) TECHNICAL DATA or DATA as used throughout this contract means recorded information regardless of form or characteristic, of a scientific or technical nature. It may, for example, document research; document experimental, developmental, demonstration, or engineering work; or be usable or used to define a design or process; or to procure, produce, support, maintain, or operate material. The data may be graphic or pictorial delineations in media such as drawings or photographs, test specifications or related performance or design type documents or computer software (including computer programs, computer software data bases, and computer software documentation). Examples of technical data include manufacturing techniques and methods, machinery, devices such as tools, products, or components, research and engineering data, engineering drawings and associated lists,

Page 5 of 28

specifications, engineering calculations, standards, process sheets, manuals, technical reports, catalog item identification, and related information. Technical data as used herein does not include financial reports, cost analyses and other information incidental to contract administration.

2) BUSINESS INFORMATION is information about the operation of a specific business. It includes information concerning the cost and pricing of goods, supply sources, cost analyses, characteristics of customers, books and records of the business, sales information including mailing lists, customer lists, business opportunities, information regarding the effectiveness and performance of personnel, and information incidental to contract administration.

3) PUBLIC INFORMATION is information previously published, generally available from more than one source, or information in the public domain. All air monitoring and emission data included in a proposal or requested through a contract are public information California Government Code Section 6254.7 states that all information, analyses, plans or specifications that disclose the nature, extent, quantity, or degree of air contaminants or other pollution which any article, machine, equipment, or other contrivance will produce, which any state or local agency requires Contractor to provide before the Contractor builds, erects, alters, replaces, operates, sells, rents, or uses such article, etc., are public records.

4) CONFIDENTIAL INFORMATION is technical data or business information Contractor has satisfactorily identified and which the Commission has agreed to designate as confidential.

5) PROPRIETARY DATA is such data as Contractor has identified in a satisfactory manner as being under Contractor's control prior to commencement of performance of this contract or produced by Contractor or its subcontractors at its own expense, and which Contractor has reasonably demonstrated as being of a proprietary nature either by reason of copyright, patent or trade secret doctrines in full force and effect at the time when performance of this contract is commenced.

6) A TRADE SECRET is any formula, plan, pattern, process, tool, mechanism, compound, procedure, production data, or compilation of information which is not patented and which is generally known only to certain individuals with a commercial concern and are using it to fabricate, produce or compound an article of trade or a service having commercial value and which gives its user an opportunity to obtain a business advantage over competitors who do not know or use it.

7) GENERATED DATA is that data which the Contractor collects, collates, records, deduces, reads out or postulates for use in the performance of this contract. In addition, any electronic data processing program, model or software system developed or substantially modified by the Contractor in the performance of this contract at Commission expense, together with complete documentation thereof, shall be treated as generated data.

8) DELIVERABLE DATA is that data which, under the terms of this contract, is required to be delivered to the Commission.

5. PAYMENTS TO CONTRACTOR

Subject to the conditions listed below, the Commission agrees to reimburse Contractor, monthly in arrears, for expenses incurred in accordance with Exhibit C, Budget. The consideration to be paid Contractor, as provided herein, shall be in compensation for Contractor's actual and allowable expenses incurred in the performance hereof, including travel, per diem, and applicable taxes, unless otherwise expressly so provided. The total amount of this contract shall not exceed $1,873,133 (One million, eight hundred seventy three thousand, one hundred thirty three dollars).

Page 6 of 28

A. A request for payment shall consist of, but is not limited to:

1) An invoice that is a LIST of actual expenses incurred during the billing period, backup information is not required, see Audit clauses. The invoice list must include:

a) date prepared, contract number, contractor's Federal ID number and billing period,

b) contractor's actual hourly labor rates by individual, which may be fully loaded,

c) operating expenses, including equipment, travel, miscellaneous,

d) subcontractor invoices, identifying small business and disabled veteran business,

e) overheads, direct & indirect, not included in the fully loaded hourly rate,

f) match fund expenditures, and

g) by task: cumulative amounts, budgeted, billed to date, current billing, and balance of funds.

2) A progress report that documents evidence of progress, which includes written progress reports and deliverables prepared by the Contractor as detailed in Exhibit A and Exhibit B.

B. The Commission will accept computer-generated or electronically transmitted invoices without backup documentation provided that Contractor sends a hardcopy the same day to the address in Exhibit D, Contract Contacts.

C. Contractor shall submit all invoices to the address designated in Exhibit D.

D. Each invoice is subject to Commission Contract Manager approval and payment by the State Controller's Office.

E. The Commission Contract Manager may approve invoices requesting partial payment of a task if the Contractor has demonstrated sufficient evidence of progress toward preparing the deliverables required in that task. The Commission Contract Manager will dispute an invoice requesting payment of all funds remaining in that task budget, if the Commission Contract Manager has not received and approved all of the deliverables due for that task.

F. Payments shall be made to Contractor only for undisputed invoices. An undisputed invoice is an invoice executed by Contractor for services rendered to the Commission and for which additional evidence is not required to make payment. The Commission Contract Manager shall give written notice and specify the known reasons for dispute to Contractor within 15 working days of receipt of the disputed invoice by using a State of California Standard Form 209. If the invoice is not disputed within the 15 working days, the invoice is presumed to be valid, but is subject to audit and verification.

G. Commission shall retain from each invoice an amount equal to 10 per cent (10%) of that invoice, excluding equipment invoices. The retained amount shall be held by the Commission and released to Contractor only upon the Commission's approval that the contract work has been satisfactorily completed and the Final Report has been received and approved. Contractor must submit an invoice for the retained amount.

H. Payment shall be made to Contractor no later than 30 calendar days from the date a correct, undisputed invoice is received in the Commission Accounting Office. The State shall make payment to the Contractor for performance under this contract, in accordance with applicable deliverable criteria, receipt and approval by the Commission, and in accordance with invoices submitted.

Page 7 to 28

I. Contractor is entitled to interest penalties beginning on the 46th calendar day that an undisputed invoice is not paid. Contractor is not required to submit an invoice for the interest penalties.

J. Contractor shall retain all records relating to direct and indirect expenses reimbursed to Contractor hereunder, and to hours of employment on this contract by all employees of Contractor for which the Commission is billed. Such records shall be maintained for a period of three years after final payment of this contract, or until audited by the State, whichever occurs first, and shall be available for inspection or audit at any reasonable time by the Commission or its designee.

K. This contract is funded through the Public Interest Energy Research (PIER) Program. Contractor may be providing matching fund identified in Contractor's proposal and as detailed in Exhibit C, Budget. Match sources may be revised subject to the requirements of Exhibit A.

L. These (PIER) contract funds are available until June 30, 2009. The Commission cannot warrant or guarantee that these funds will be extended by the State Legislature. To reflect a reduction of funds, the Commission may amend the contract to reflect any reduction of funds or cancel the contract under the Termination clause.

6. TRAVEL AND PER DIEM

A. Travel identified in Exhibit C, Budget is approved and does not require further authorization.

B. Travel that is not included in Exhibit C, Budget shall require prior written authorization from the Commission Contract Manager. Commission will reimburse travel expenses from the Contractor's office location where the employees assigned to the contract are permanently located.

C. Commission shall reimburse Contractor for travel and per diem, up to but not to exceed, the rates allowed nonrepresented State employees. Commission shall provide Contractor with current rates and updates when revised by the State or requested by Contractor. Travel expenses in excess of the State rates cannot be reimbursed.

D. Contractor must retain documentation of travel expenses in its financial records as follows:

o expenses must be detailed using the current State rates,

o expenses must be listed by trip including dates and times of departure and return, and

o receipts for travel expenses claimed must be retained by Contractor (receipts are not required for travel meals or incidentals within current allowable rates).

7. PURCHASE OF EQUIPMENT

A. Equipment, as defined in Clause 4 and identified in Exhibit C, Budget, PIER Reimbursable Expenditures, is approved for purchase.

B. Equipment not included in Exhibit C, Budget, PIER Reimbursable Expenditures, shall be subject to prior written approval from the Commission Contract Manager.

C. All equipment purchased with Commission funds shall be made subject to the following terms and conditions:

1) The Commission Contract Officer will complete and sign a Uniform Commercial Code (UCC.l) Financing Statement and submit it to the Contractor for signature. The Commission Contract Officer will file the signed UCC.l with the Secretary of State's Office. Invoices for equipment purchases associated with a UCC.l will not be processed until the UCC.l has been filed with the Secretary of State's Office

Page 8 of 28

2) Title to all non-expendable equipment purchased in part or in whole with Commission funds shall remain with the Commission

3) Contractor shall assume all risk for maintenance, repair, destruction and damage to equipment while in the possession or subject to the control of Contractor. Contractor is not expected to repair or replace equipment that is intended to undergo significant modification or testing to the point of damage/destruction as part of the work described in Exhibit A, Work Statement

D. Upon termination of this contract, Commission may:

1) if requested by the Contractor, authorize the continued use of such equipment to further Public Interest Energy Research efforts,

2) by mutual agreement with the Contractor, allow the Contractor to purchase such equipment for an amount not to exceed the residual value of the equipment as of the date of termination of this contract, or

3) request that such equipment be delivered to the Commission with any costs incurred for such return to be borne by the Commission.

8. PROJECT BUDGET REVISIONS

A. Budget reallocations that do not significantly affect the scope of work will be made in the following manner. Contractor shall provide reasonable advance notification to the Commission Contract Manager of any anticipated budget reallocations. Contractor may reallocate a task budget up to 15 percent (15%) of the original task amount, with prior written notification to the Contract Manager. Reallocations of more than 15 percent (15%) of an original task budget require prior written approval of the Commission Contract Manager and the Program Team Lead Commission Contract Manager will notify the Contractor Project Manager in writing within 10 working days. The Commission Contract Manager shall send approved changes in a revised Exhibit C, Budget to the Commission Contract Officer.

B. Significant changes in the scope of work must be approved by the Commission in the form of a formal amendment. A change is significant if it increases the project budget beyond the approved amount, results in changes in deliverables, moves due dates beyond the term of the contract or modifies the scope of work reasonably beyond that approved at the Commission business meeting.

9. CONTRACT MANAGEMENT

A. Contractor Project Manager

The Contractor Project Manager on behalf of Contractor is designated in Exhibit D. The Contractor Project Manager may not be replaced without Commission Contract Manager's prior written approval. Such approval shall not be unreasonably withheld. The Contractor Project Manager is responsible for the day to day project status, decisions and communications with the Commission Contract Manager.

B. Commission Contract Manager

The Commission Contract Manager is designated in Exhibit D. Commission may change the Contract Manager by notice given Contractor at any time signed by the Commission Contract

Page 9 of 28

Officer. The Commission Contract Manager is responsible for the day-to-day contract status, decisions and communications with the Contractor Project Manager. The Commission Contract Manager will review and approve all project deliverables, reports and invoices.

C. Within the contract term stated in contract clause 3, revisions to Exhibit B, Task Deliverables, Schedule and Gantt Chart, may be made by the Contractor Project Manager and approved in writing by the Commission Contract Manager without a formal amendment to the contract.

10. STANDARD OF PERFORMANCE

A. Contractor, its subcontractors and their employees in the performance of Contractor's work under this contract shall be responsible for exercising the degree of skill and care required by customarily accepted good professional practices and procedures used in scientific and engineering research fields.

B. The failure of a project to achieve the technical or economic goals stated in the Work Statement is not a basis for the Commission to determine that the work is unacceptable, unless the work conducted by the Contractor or subcontractors is deemed by the Commission to have failed the foregoing standard of performance.

C. In the event that Contractor or its subcontractor fail to perform in accordance with the foregoing standard of performance, the Commission Contract Manager and the Contractor Project Manager shall seek to negotiate in good faith an equitable resolution satisfactory to both parties. If such a resolution cannot be reached, the parties shall work through the Commission's dispute resolution process described in the Disputes clause herein.

D. Nothing contained in this section is intended to limit any of the rights or remedies which the Commission may have under law.

E. The Commission Contract Manager shall, upon completion of the contract and/or release of retention, prepare a performance evaluation of Contractor.

1) If the Commission Contract Manager prepares an unsatisfactory evaluation, the evaluation shall be filed with the Department of General Services, Office of Legal Services (DGS), and sent to the Contractor within 15 days. The Contractor shall have 30 days to prepare a response to the evaluation of the contract performance. The Contractor shall send its response to the DGS and a copy to the Commission.

2) The unsatisfactory evaluation and Contractor's response shall not be a public record and shall remain on file for a period of 36 months only.

11. PERSONNEL, SUBCONTRACTORS, DVBES

A. Key Personnel

Contractor's key personnel, listed in Exhibit D, may not be substituted without the Commission Contract Manger's prior written approval. Such approval shall not be unreasonably withheld Contractor may substitute all other personnel, with reasonable advance notification made to the Commission Contract Manager.

B. Key Subcontractors

Contractor's key subcontractors, listed in Exhibit D, may not be substituted without the Commission Contract Manager's prior written approval. Such approval shall not be unreasonably

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withheld. Contractor may substitute all other subcontractors, with reasonable advance notification made to the Commission Contract Manager. Replacement of key subcontractors is subject to the conditions of subparagraph C.

C. Agreements with Subcontractors

1) Nothing contained in this contract or otherwise, shall create any contractual relationship between the Commission and any subcontractors, and no subcontract shall relieve the Contractor of its responsibilities and obligations hereunder. The Contractor agrees to be as fully responsible to the Commission for the acts and omissions of its subcontractors or persons either directly or indirectly employed by any of them as it is for the acts and omissions of persons directly employed by the Contractor. The Contractor's obligation to pay its subcontractors is an independent obligation from the Commission's obligation to make payments to the Contractor. As a result, the Commission shall have no obligation to pay or to enforce the payment of any monies to any subcontractor.

2) Contractor shall be responsible for establishing and maintaining contractual agreements with and reimbursement of each of the subcontractors for work performed in accordance with the terms of this contract. Contractor shall provide Commission with copies of all contractual agreements with key subcontractors promptly upon final execution thereof.

3) Flowdown provisions that should be included in subcontracts are listed below. Review each provision for applicability to each situation.

DEFINITIONS               CONFIDENTIALITY
-----------------------   -------------------------------------
Travel & Per Diem         Intellectual Property Items Developed
                          prior to this Contract
Purchase of Equipment     Recordkeeping, Cost Accounting &
                          Auditing
Standard of Performance   Rights of Parties Regarding
                          Intellectual Property
Disputes                  Stop Work
Termination               General Terms & Conditions

3) PIER contractors who are subcontracting with a private or public university may use the terms and conditions negotiated by the Commission for their subcontracts with the university.

4) Replacement or substitution of all non-key subcontractors is permitted with reasonable advance written notification to the Commission Contract Manager and shall be subject to the provisions of subparagraphs D and E below.

5) Each subcontract shall contain provisions similar to those of Clause 18, "Rights of Parties Regarding Intellectual Property", subparagraph F. "Limitations on Contractor Disclosure of Contract Data, Information, Reports and Records." related to the confidentiality of Commission data and its nondisclosure by Contractor.

6) All subcontracts entered into pursuant to this contract shall be subject to examination and audit by the Bureau of State Audits for a period of three years after final payment under the contract.

7) Each subcontract to which the Commission has consented shall contain a provision that further assignments shall not be made to any third or subsequent tier subcontractor without additional advance written consent of Commission.

D. Additions, Removal, or Substitutions of Subcontractors

Any subcontractor change shall be subject to the following conditions:

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1) Contractor shall provide the Commission with a copy of its contracting policies and procedures for selecting subcontractors. The Commission Contract Officer shall evaluate the Contractor's process to determine if it is in substantial accord with the State's process. The Commission Contract Officer will provide a written determination to the Contractor. The Commission Contract Officer will retain this set of contracting policies and procedures until the final audit of project records.

2) If Contractor's process is acceptable, Contractor may use its process to solicit and select subcontractors. If, however, Contractor's process does not substantially meet the State's requirements, Contractor shall solicit a minimum of three bids or provide justification, in advance, to the Contract Officer, as to why a competitive process is not appropriate.

3) Thirty days prior to using new policies and procedures, the Contractor shall notify the Commission Contract Officer and provide a detailed, written description of the changes. The Commission Contract Officer will provide a written determination to the Contractor stating whether the revised changes are still in substantial accord with the State's process.

E. Disabled Veteran Business (DVBE) Changes

Contractor must use the DVBE subcontractors/vendors identified in its proposal for the duration of the contract. Replacement of DVBEs must be approved in advance by the Commission. Contractor must notify the Commission Contract Manager in writing. The process of replacing any subcontractor/vendor is defined in subparagraph D above. In addition, the Contractor's written request must include:

1) A letter from the Contractor explaining the reason for the change and the identity of the DVBE subcontractor/vendor changed; or

2) If the change is not a DVBE, an explanation of the Contractor's efforts (good faith) to replace the DVBE with another DVBE.

Contractor shall submit the request to the Commission Contract Manager, the Commission Contract Officer determines compliance with the DVBE. The Contractor's request and the Commission's approval or disapproval shall not be an excuse for noncompliance with any other provision of law including, but not limited to, the subletting and subcontracting fair practices act or any other contract requirements related to substitution of subcontractors.

Contractor's failure to adhere to the DVBE participation goals in its proposal may be cause for contract termination and recovery of damages under the rights and remedies due the Commission under the Termination clause.

12. REPORTING

A. All reports and deliverables shall be delivered to the Accounting Office and address designated in Exhibit D. Confidential reports and deliverables shall be delivered to the Contracts Officer designated in Exhibit D.

B. Progress Reports

The Contractor shall prepare progress reports which summarize all contract activities conducted by the Contractor for the reporting period, including an assessment of the ability to complete the project within the current budget and any anticipated cost overruns. Each progress report is due to

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the Commission Contract Manager within 30 days after the end of the reporting period. The Commission Contract Manager will specify the report format, contents, and number of copies to be submitted, see Attachment A-1, Progress Report Format.

C. Final Report and Final Meeting

At the conclusion of the contract's technical work and as provided for in Exhibit A, Work Statement, and Exhibit B, Task Deliverables Schedule. Contractor shall prepare a comprehensive written Final Report, including an Executive Summary. The Commission Contract Manager will review and approve the Final Report.

Contractor shall also meet with the Commission to present the findings, conclusions, and recommendations. Both the final meeting and the Final Report must be consummated on or before the termination date of the contract. Final Report specifications and meeting are detailed in the Exhibit A, Work Statement and Attachment A-2, Final Report Format.

D. All reports, including reprints, shall include the following legend:

LEGAL NOTICE

THIS REPORT WAS PREPARED AS A RESULT OF WORK SPONSORED BY THE CALIFORNIA ENERGY COMMISSION (COMMISSION). IT DOES NOT NECESSARILY REPRESENT THE VIEWS OF THE COMMISSION, ITS EMPLOYEES, OR THE STATE OF CALIFORNIA. THE COMMISSION, THE STATE OF CALIFORNIA, ITS EMPLOYEES, CONTRACTORS, AND SUBCONTRACTORS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AND ASSUME NO LEGAL LIABILITY FOR THE INFORMATION IN THIS REPORT; NOR DOES ANY PARTY REPRESENT THAT THE USE OF THIS INFORMATION WILL NOT INFRINGE UPON PRIVATELY OWNED RIGHTS. THIS REPORT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION IN THIS REPORT.

13. RECORDKEEPING, COST ACCOUNTING AND AUDITING

A. Cost Accounting

Contractor agrees to keep separate, complete, and correct accounting of the costs involved in developing, installing, constructing, and testing of project-related product(s) funded under the Commission-funded portion of this contract as well as keep separate, complete, and correct account of the economic benefit(s) from project-related product(s) and right(s). The Commission shall have the right to examine Contractor's books of accounts at all reasonable times to the extent and as is necessary to verify the accuracy of Contractor's reports.

B. Accounting Procedures

The Contractor's costs shall be determined on the basis of the Contractor's accounting system procedures and practices employed as of the effective date of this contract. The Contractor's cost accounting practices used in accumulating and reporting costs during the performance of this contract shall be consistent with the practices used in estimating costs for any proposal to which this contract relates; provided that such practices are consistent with the other terms of this contract and provided, further, that such costs may be accumulated and reported in greater detail during performance of this contract. The Contractor's accounting system shall distinguish between direct costs and indirect costs. All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to costs incurred under this contract.

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C. Allowabi1ity of Costs

1) Allowable Costs

The costs for which the Contractor shall be reimbursed under this contract include all costs, direct and indirect, incurred in the performance of work that are identified in the Contractor's proposal and contract Exhibit C, Budget.. Costs must be incurred within the term of the contract. Factors to be considered in determining whether an individual item of cost is allowable include (i) reasonableness of the item, (ii) allocability of the item to the work, (iii) the Contractor's use of applicable Federal OMB Circulars A-87, A-21, A-122 or FAR Part 31, and (iv) the other terms and conditions of this contract. Federal guidelines are on-line at:www.whitehouse.gov/omb.

2) Unallowable Costs

The following is a description of some specific items of cost that are unallowable; provided, however, that the fact that a particular item of cost is not included shall not mean that it is allowable. Details concerning the allowability of costs are available from the Commission Accounting Office.

a) Contingency Costs, Imputed Costs, Fines and Penalties, Losses on Contracts, and Excess Profit Taxes are unallowable.

b) The Commission will pay for State or local sales or use taxes on the services rendered or equipment, parts or software supplied to the Commission pursuant to this contract. The State of California is exempt from Federal excise taxes.

3) Except as provided for in this contract, Contractor shall use the Federal OMB Circulars A-87, A-21, A-122 or FAR Part 31 in determining allowable and unallowable costs.

D. Audit Rights

Contractor shall maintain books, records, documents, and other evidence, based on the procedures set forth above, sufficient to reflect properly all costs claimed to have been incurred in performing this contract. The Commission, an agency of the State or, at the Commission's option, a public accounting firm designated by Commission, may audit such accounting records at all reasonable times with prior notice by Commission, Commission shall bear the expense of such audits. It is the Intent of the parties that such audits shall ordinarily be performed not more frequently than once every twelve
(12) months during the performance of the work and once at any time within three (3) years following payment by Commission of the Contractor's final invoice. However, performance of any such interim audits by Commission does not preclude further audit.

Contractor agrees that the Commission, the Department of General Services, the Bureau of State Audits, or their designated representative shall have the right to review and to copy any records and supporting documentation pertaining to the performance of this contract. Contractor agrees to maintain such records for possible audit for a minimum of three (3) years after final payment, unless a longer period of record retention is stipulated. Contractor agrees to allow the auditor(s) access to such records during normal business hours and to allow interviews of any employees who might reasonably have information related to such records. Further, Contractor agrees to include a similar right of the State to audit records and interview staff in any subcontract related to performance of this contract. (GC 8546.7, PCC 10115 et seq., CCR Title 2, Section 1896)

E. Refund to Commission

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If Commission determines, pursuant to subarticle C or otherwise, that any invoiced and paid amounts exceed the actual allowable incurred costs and earned fixed fees (if any), Contractor shall repay such amounts to Commission within thirty (30) days of request or as otherwise agreed by the Commission and Contractor, if Commission does not receive such repayments, Commission shall be entitled to withhold further payments to the Contractor,

F. Audit Cost

The cost of the audit shall be borne by the Commission except when the results of the audit reveal an error detrimental to the Commission exceeding more than ten percent (10%) or $5,O0O (whichever is greater) of 1) the amount audited, or 2) if a royalty audit, the total royalties due in the period audited. In these exceptions, Contractor agrees to reimburse Commission for reasonable costs and expenses incurred by the Commission in conducting such audit.

14. BUSINESS ACTIVITY REPORTING

A. Contractor shall promptly notify the Commission Contract Manager of the occurrence of each of the following:

1) A change of address.

2) A change in the business name or ownership.

3) The existence of any litigation or other legal proceeding affecting the project.

4) The occurrence of any casualty or other loss to project personnel, equipment or third parties of a type commonly covered by insurance,

5) Contractor's receipt of notice of any claim or potential claim against Contractor for patent, copyright, trademark, service mark and/or trade secret infringement that could affect the Commission's rights.

B. Contractor shall not change or reorganize the type of business entity under which it does business except upon prior written notification to the Commission. A change of business entity or name change requires an amendment assigning or novating the contract to the changed entity. In the event the Commission is not satisfied that the new entity can perform as the original Contractor, the Commission may terminate this contract as provided in the Termination clause.

15. REVIEW AND NOTICE OF CONFLICTING TERMS

Contractor warrants and attests that it has conducted a detailed review of the terms and conditions of its existing project related third party agreements and has identified all known or reasonably foreseeable conflicts with this contract's terms and conditions and has disclosed the conflicts in writing to the Commission prior to executing this contract. In the event further conflicts are identified. Contractor and Commission agree that these conflicts shall be addressed using the procedure described in the Disputes clause. Nothing in this contract is intended to nullify or obviate any prior third party agreements executed by Contractor. However, the Commission is free to terminate this contract if the conflict impairs or diminishes the value of this contract.

16. CONFIDENTIALITY

A. Determination

The Commission Executive Director makes the final determination of confidentiality. In the event there is a disagreement over the items to be delivered under the contract, the parties shall use the Disputes clause. Those items to be delivered as confidential shall be subject to the Commission Executive Director's determination of confidentiality. If the

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Contractor wishes to appeal the Executive Director's determination, the appeal shall be made to the full Commission. If the Contractor disagrees with this determination, the Contractor may seek judicial review as per Title 20 CCR 2506, et seq.

The Contractor has not identified any confidential or proprietary items to be delivered under this contract.

B. Public and Confidential Deliverables

Only those items specifically listed in Exhibit E or in a subsequent determination of confidentiality qualify as confidential deliverables. All deliverables including, but not limited to, progress reports, task deliverables and the Final Report shall not contain confidential information except when the Commission Contract Manager and the Contractor deem it necessary to include confidential information in a deliverable. In such event, the Contractor shall prepare the deliverable in two separate volumes, one for public distribution and one to be maintained in the Commission's confidential records.

C. Future Confidential Information

The Contractor and the Commission agree that during this contract, it is possible that the Contractor may develop additional data or information that the Contractor considers to be protectable as confidential information. The Commission Contract Manager shall provide a copy of the Commission Application for Confidential Designation to the Contractor Project Manager. Contractor must list all items and information along with justification for confidentiality and submit the application to the Commission Contract Manager. The Commission Executive Director makes the final determination of confidentiality. Such subsequent determinations will be added to Exhibit E.

D. Identifying and Submitting Confidential Information

All confidential information submitted by the Contractor shall be marked "Confidential" on each document containing the confidential information and delivered in a sealed package to the Commission Contract Officer identified in Exhibit D. The Commission Contract Officer will notify the Commission Contract Manager that the confidential information has been received and is in the Contracts Office for review. The confidential information will only be available to those persons authorized by the Executive Director.

17. INTELLECTUAL PROPERTY ITEMS DEVELOPED PRIOR TO THIS CONTRACT

A. The Commission makes no claim to intellectual property that existed prior to this contract and was developed without Commission funding.

B. The Contractor gives notice that the items listed in Exhibit E have been developed without Commission funding and prior to the start of this contract. This list represents a brief description of the prior developed intellectual property. A detailed description of the intellectual property, as it exists on the effective date of this contract, may be necessary if Commission funds are used to further develop the listed intellectual property. This information will assist the parties make an informed decision regarding intellectual property rights and possible repayment obligations.

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18. RIGHTS OF PARTIES REGARDING INTELLECTUAL PROPERTY

A. Commission's Rights in Deliverables

Deliverables and reports specified for delivery to the Commission under this contract shall become the property of the Commission. The Commission may use, publish, and reproduce the deliverables and reports subject to the provisions of subparagraph C.

B. Rights in Technical, Generated, and Deliverable Data

1) Contractor's Rights

All data (i.e., technical, generated and deliverable data) produced under this contract shall be the property of the Contractor, limited by the license retained by the Commission in
2) below, and the rights the Commission has in deliverables specified above in A).

2) Commission's Rights

Contractor shall provide the Commission with a copy of all technical, generated and deliverable data produced under the contract. Contractor does not have to copy and submit data the Commission Contract Manager has identified as being unusable to the Commission and the PIER program. For instance, some data may not warrant routine copying and shipping because the raw data is too disaggregated or voluminous for practical application. Retention of such data at the Contractor's facility for inspection, review and possible copying by the Contract Manager is expected to be a more efficient use of Commission staff and the Contractor's time and efforts.

For all data (technical, generated and deliverable) produced under this contract, the Commission retains a no-cost, non-exclusive, non-transferable, irrevocable, royalty-free, worldwide, perpetual license to use, publish, translate, produce and to authorize others to produce, translate, publish and use the data, subject to the provisions of subparagraph C.

C. Limitations on Commission Disclosure of Contractor's Confidential Records

1) Data provided to the Commission by Contractor, which data the Commission has not already agreed to keep confidential and which Contractor seeks to have designated as confidential, or is the subject of a pending application for confidential designation, shall not be disclosed by the Commission except as provided in Title 20 CCR Sections 2506 and 2507 (or as they may be amended), unless disclosure is ordered by a court of competent jurisdiction.

2) It is the Commission's intent to use and release project results such as deliverables and data in a manner calculated to further PIER while protecting proprietary or patentable interests of the parties. Therefore, the Commission agrees not to disclose confidential data or the contents of reports containing data considered by Contractor as confidential, without first providing a copy of the disclosure document for review and comment by Contractor. Contractor shall have no less than 10 working days for review and comment and, if appropriate, to make an application for confidential designation on some or all of the data. The Commission shall consider the comments of Contractor and use professional judgment in revising the report, information or data accordingly.

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D. Exclusive Remedy

In the event the Commission intends to publish or has disclosed data the Contractor considers confidential, the Contractor's exclusive remedy is a civil court action for injunctive relief. Such court action shall be filed in Sacramento County, Sacramento, California.

E. Waiver of Consequential Damages

IN NO EVENT WILL THE ENERGY COMMISSION BE LIABLE FOR ANY SPECIAL, INCIDENTAL, OR CONSEQUENTIAL DAMAGES BASED ON BREACH OF WARRANTY, BREACH OF CONTRACT, NEGLIGENCE, STRICT TORT, OR ANY OTHER LEGAL THEORY FOR THE DISCLOSURE OF CONTRACTOR'S CONFIDENTIAL RECORDS, EVEN IF THE ENERGY COMMISSION HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. DAMAGES THAT THE ENERGY COMMISSION WILL NOT BE RESPONSIBLE FOR INCLUDE, BUT ARE NOT LIMITED TO, LOSS OF PROFIT; LOSS OF SAVINGS OR REVENUE; LOSS OF GOODWILL; LOSS OF USE OF THE PRODUCT OR ANY ASSOCIATED EQUIPMENT; COST OF CAPITAL; COST OF ANY SUBSTITUTE EQUIPMENT, FACILITIES, OR SERVICES; DOWNTIME; THE CLAIMS OF THIRD PARTIES INCLUDING CUSTOMERS; AND INJURY TO PROPERTY.

F. Limitations on Contractor Disclosure of Contract Data, Information, Reports and Records

1) Contractor will not disclose the contents of the final or any preliminary deliverable or report without first providing a copy of the disclosure document for review and comment to the Commission Contract Manager. The Contractor shall consider the comments of the Commission Contract Manager and use professional judgment in revising the reports, information or data accordingly.

2) After any document submitted has become a part of the public records of the State, Contractor may, if it wishes to do so at its own expense, publish or utilize the same, but shall include the legal notice stated above.

3) Notwithstanding the foregoing, in the event any public statement is made by the Commission as to the role of Contractor or the content of any preliminary or Final Report of Contractor hereunder, Contractor may, if it believes such statement to be incorrect, state publicly what it believes is correct.

4) No record that is provided by the Commission to Contractor for Contractor's use in executing this contract and which has been designated as confidential, or is the subject of a pending Application for Confidential Designation, except as provided in Title 20, CCR Sections 2506 and 2507, shall be disclosed, unless disclosure is ordered by a court of competent jurisdiction (Title 20 CCR Section 2501, et seq.). At the election of the Commission Contract Manager, the Contractor, its employees and any subcontractor shall execute a "Confidentiality Agreement," supplied by the Commission Contract Manager.

5) Contractor acknowledges that each of its officers, employees, and subcontractors who are involved in the performance of this contract will be informed about the restrictions contained herein and to abide by the above terms.

G. Proprietary Data

Proprietary data owned by the Contractor shall remain with the Contractor throughout the term of this contract and thereafter. The extent of Commission access to the same and the testimony

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available regarding the same shall be limited to that reasonably necessary to demonstrate, in a scientific manner to the satisfaction of scientific persons, the validity of any premise, postulate or conclusion referred to or expressed in any deliverable hereunder.

H. Preservation of Data

Any data which is reserved to the Contractor by the express terms hereof, and pre-existing proprietary or confidential data which has been utilized to support any premise, postulate or conclusion referred to or expressed in any deliverable hereunder, shall be preserved by the Contractor at the Contractor's own expense for a period of not less than three years after receipt and approval by the Commission of the Final Report herein.

I. Destruction of Data

Before the expiration of three years and before changing the form of or destroying any such data, the Contractor shall notify Commission of any such contemplated action and Commission may, within thirty (30) days after said notification, determine whether it desires said data to be further preserved. If Commission so elects, the expense of further preserving said data shall be paid for by the Commission. Contractor agrees that Commission may at its own expense, have reasonable access to said data throughout the time during which said data is preserved. Contractor agrees to use its best efforts to identify competent witnesses to testify in any court of law regarding said data or, at Commission's expense, to furnish such competent witnesses.

J. Patent Rights

Patent rights for subject inventions will be the property of Contractor, subject to the Commission retaining a no-cost, nonexclusive, nontransferable, irrevocable royalty-free, worldwide perpetual license to use or have practiced for or on behalf of the State of California the subject invention(s) for governmental purposes. Contractor must obtain agreements to effectuate this clause with all persons or entities, except for the U.S. Department of Energy (DOE), obtaining ownership interest in the patented subject invention(s). Previously documented (whether patented or unpatented under the patent laws of the United States of America or any foreign country) inventions are exempt from this provision.

K. March-In Rights

The Contractor shall forfeit and assign to the Commission, at the Commission's request, all rights on a subject invention if either: 1) Contractor fails to apply for a patent on subject inventions(s) developed under this contract within six months of conceiving or first actually reducing to practice the technology or 2) Contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention. In this event, the Contractor agrees to relinquish all rights, subject to DOE reserved rights, on the subject invention to the Commission. The Commission will have the unfettered right to use and/or dispose of the rights in whatever manner it deems most suitable to help transfer the technology into the market place, including but not limited to, seeking patent protection, or licensing the invention.

L. Commission's Rights to Invention.

Contractor and all persons and/or entities obtaining an ownership interest in subject invention(s) shall include within the specification of any United States patent application, and any patent issuing thereon covering a subject invention, the following statement:

"THIS INVENTION WAS MADE WITH STATE OF CALIFORNIA SUPPORT UNDER
CALIFORNIA ENERGY COMMISSION CONTRACT NUMBER 500-03-031. THE ENERGY

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COMMISSION HAS CERTAIN RIGHTS TO THIS INVENTION."

M. Commission's Interest in Inventions.

Upon the perfecting of a patent application on any subject invention, Contractor will complete and sign a Uniform Commercial Code (UCC.1) Financing Statement and submit it to the Commission Contract Manager for complete processing. The Commission Contract Manager will review the UCC.1 for complete information and file the satisfactory UCC.1 with the Secretary of State's Office.

N. Copyrights

1) Copyrightable material first produced under this contract shall be owned by the Contractor, limited by the license granted to the Commission in 2) below.

2) Contractor agrees to grant the Commission a royalty-free, no-cost nonexclusive, irrevocable, nontransferable worldwide, perpetual license to produce, translate, publish, use and dispose of, and to authorize others to produce, translate, publish, use and dispose of all copyrightable material first produced or composed in the performance of this contract.

3) Contractor will apply copyright notices to all deliverables using the following form or such other form as may be reasonably specified by Commission.

"(C)[YEAR OF FIRST PUBLICATION OF DELIVERABLE],
[THE COPYRIGHT HOLDER'S NAME].
ALL RIGHTS RESERVED."

4) Software

In the event software is developed that is not a deliverable under the contract, Contractor shall have the right to copyright and/or patent such software and grants the Commission a royalty-free, no-cost, non-exclusive, irrevocable, non-transferable, worldwide, perpetual license to produce and use the software, its derivatives and upgrades for governmental purposes.

O. Intellectual Property Indemnity

Contractor warrants that Contractor will not, in its supplying of the work under this contract's work statement, knowingly infringe or misappropriate any intellectual property right of a third party, and that it will conduct a reasonable investigation of the intellectual property rights of third parties to avoid such infringement. Contractor will defend and indemnify Commission from and against any claim, lawsuit or other proceeding, loss, cost, liability or expense (including court costs and reasonable fees of attorneys and other professionals) to the extent arising out of: (i) any third party claim that a deliverable infringes any patent, copyright, trade secret or other intellectual property right of any third party, or (ii) any third party claim arising out of the negligent or other tortious act(s) or omission(s) by the Contractor, its employees, subcontractors or agents, in connection with or related to the deliverables or the Contractor's performance thereof under this contract.

19. ROYALTY PAYMENTS TO COMMISSION

In consideration of Commission providing funding to Contractor, Contractor agrees to pay Commission royalties on the terms and conditions hereinafter set forth.

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A. Contractor agrees to pay Commission a royalty of 1.5% (one and one-half percent) of the Sale Price on the sale of each and every project-related product or right that the Contractor receives.

B. Contractor's obligation to make payments to Commission shall commence from the date project related products or rights are first sold and shall extend for a period of fifteen years thereafter. Payments are payable in annual installments and are due the first day of March in the calendar year immediately following the year during which Contractor receives gross revenues.

C. Early Buyout. Contractor has the option of paying its royalty obligations to Commission without a pre-payment penalty, provided Contractor makes the payment within two years from the date at which royalties are first due to Commission, in the lump sum amount equal to two (2) times the amount of funds drawn down on the contract.

D. Contractor agrees not to make any sale, license, lease, gift or other transfer of any Project-Related Products and Rights with the intent of, or for the purpose of, depriving Commission of royalties hereunder. Generally, this means that Contractor will not make any sale, license, lease or other transfer of Project-Related Products and Rights for consideration other than fair market value. Further, Contractor agrees that such activity constitutes breach of this contract and that Contractor agrees to repay within 60 days the amount due under subparagraph C above (Early Buyout).

E. Contractor acknowledges that a late payment of royalties owed to the Commission will cause the Commission to incur costs not contemplated by the parties. If a royalty payment is not paid when due, Contractor agrees to pay the Commission a late fee equal to two percent (2%) of the payment due. Additionally, Contractor agrees that royalty payments not paid within fifteen (15) days of the due date shall thereupon become debt obligations of Contractor to the Commission, due upon demand and bearing interest at the maximum interest rate allowed by law.

F. Contractor shall maintain separate accounts within its financial and other records for purposes of tracking components of sales and royalties due to Commission under this contract.

G. Payments to Commission are subject to audit as provided for under the Recordkeeping, Cost Accounting and Auditing clause.

H. In the event of default hereunder, Commission shall be free to exercise all rights and remedies available to it herein, and under law and at equity. The occurrence of any of the following events or conditions shall cause default under this contract:

1) Contractor's failure to pay when due, any amount due and payable under the terms of this contract.

20. NOTICES TO PARTIES

Notice to either party may be given by certified mail properly addressed, postage fully prepaid, to the address designated in Exhibit D for each respective party or to such other address as either party shall notify the other in accordance with this section. Such notice shall be effective when received, as indicated by post office records, or if deemed undeliverable by post office, such notice shall be effective nevertheless fifteen (15) days after mailing.

Alternatively, notice may be given by personal delivery to the party at the address designated in Exhibit D. Such notice shall be deemed effective when delivered unless a legal holiday for State offices commences during said 24-hour period, in which case the effective time of the notice shall be postponed 24 hours for each such intervening day.

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21. DISPUTES

In the event of a contract dispute or grievance between the Contractor Project Manager and Commission Contract Manager, the parties shall use any or all of the following procedures:

A. Commission Dispute Resolution

If the Commission Contract Manager and the Contractor Project Manager cannot resolve a contract dispute or grievance, Contractor Project Manager and Commission Contract Manager shall each prepare a package in writing stating the issues in dispute, the legal authority or other basis for their respective positions and the remedy sought. The packages must be submitted to the Commission Dispute Resolution Committee. The Commission Contract Manager will notify the Contractor Project Manager of the current Committee members. The Committee shall make a determination on the problem within ten (10) working days after receipt of the package.

If Contractor disagrees with the Committee's decision, Contractor may appeal to the full Commission at a regularly scheduled business meeting. The Committee will provide the Contractor with the current procedures for placing the appeal on a Commission Business Meeting Agenda.

Contractor shall continue with its responsibilities under this contract during any dispute.

B. Binding Arbitration

Should the Commission's Dispute Resolution procedure identified in Paragraph A. above fail to resolve a contract dispute or grievance to the satisfaction of the Contractor, the parties must mutually agree to have the dispute or grievance resolved through binding arbitration. The arbitration proceeding shall take place in Sacramento County, California, and shall be governed by the commercial arbitration rules of the American Arbitration Association (AAA) in effect on the date the arbitration is initiated. One (1) arbitrator who is an expert in the particular field of the dispute or grievance shall resolve the dispute or grievance. The arbitrator shall be selected in accordance with the aforementioned commercial arbitration rules. The decision rendered by the arbitrator shall be final, and judgment may be entered upon it in accordance with the applicable law in any court having jurisdiction thereof. The demand for arbitration shall be made no later than six (6) months after the date of the contract's termination, irrespective of when the dispute or grievance arose, and irrespective of the applicable statute of limitations for a suit based on the dispute or grievance. If the parties do not mutually agree to arbitration, the sole forum to resolve the dispute is State court.

The cost of arbitration shall be borne by the parties as follows:

1) The AAA's administrative fees shall be borne equally by the parties;

2) The expense of a stenographer shall be borne by the party requesting a stenographic record;

3) Witness expenses for either side shall be paid by the party producing the witness;

4) Each party shall bear the cost of its own travel expenses;

5) All other expenses shall be borne equally by the parties, unless the arbitrator apportions or assesses the expenses otherwise as part of his or her award.

At the option of the parties, any or all of these arbitration costs may be deducted from any balance of contract funds Both parties must agree, in writing, to utilize contract funds to pay for arbitration costs.

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22. STOP WORK

The Commission Contract Officer may, at any time, by written notice to Contractor, require Contractor to stop all or any part of the contract's work tasks. Stop Work Orders may be issued for reasons such as a project exceeding budget, standard of performance, out of scope work, delay in project schedule, misrepresentations, etc.

A. Compliance

Upon receipt of such stop work order, Contractor shall immediately take all necessary steps to comply therewith and to minimize the incurrence of costs allocable to work stopped.

B. Equitable Adjustment

An equitable adjustment shall be made by Commission based upon a written request by Contractor for an equitable adjustment. Contractor must make such adjustment request within thirty (30) days from the date of receipt of the stop work notice.

C. Terminating a Stop Work Order

Contractor shall resume the stopped work only upon receipt of written instructions from the Commission's Contract Officer terminating the stop work order.

23. TERMINATION

A. Purpose

The parties agree that because the Commission is a state entity and contracts on behalf of all Californian ratepayers, it is necessary for the Commission to be able to terminate, at once, upon the default of Contractors and to proceed with the work required under the Contract in any manner the Commission deems proper. Contractor specifically acknowledges that the termination of the Contract by the Commission under the terms set forth below is an essential term of the Contract, without which the Commission would not enter into the Contract. Contractor further agrees that upon any of the events triggering the termination the Contract by the Commission, the Commission has the right to terminate the Contract, and it would constitute bad faith of the Contractor to interfere with the immediate termination of the Contract by the Commission.

B. Breach

The Commission shall provide the Contractor written notice of intent to terminate due to Contractors breach. Contractor will have 15 calendar days to fully perform or cure the breach. In the event Contractor does not cure the breach within 15 days, the Commission may, without prejudice to any of its other remedies, terminate this contract upon five (5) calendar days written notice to Contractor. In such event, Commission shall pay Contractor only the reasonable value of the satisfactorily performed services theretofore rendered by Contractor, as may be agreed upon by the parties or determined by a court of law, but not in excess of the contract maximum payable.

C. For Cause

The Commission may, for cause, and at its option, terminate this contract upon giving thirty calendar (30) days, advance written notice to Contractor. In such event, Contractor agrees to use all reasonable efforts to mitigate its expenses and obligations. Commission will pay Contractor for

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services rendered and expenses incurred within 30 days after notice of termination which could not by reasonable efforts of Contractor have been avoided, but not in excess of contract maximum payable. Contractor agrees to relinquish possession of equipment purchased for this project with Commission funds to Commission, or Contractor may, with approval of Commission, purchase said equipment as provided by the terms of this contract.

The term "for cause" includes, but is not limited to, the following reasons:

o Partial or complete loss of match funds;

o Reorganization to a business entity unsatisfactory to the Commission;

o Retention or hiring of subcontractors, or replacement or addition of Key Personnel that fail to perform to the standards and requirements of this contract;

o Failure to utilize the DVBE subcontractors/vendors in Contractor's proposal,

o Contractor is not able to pay its debts as they become due and/or Contractor is in default of an obligation that impacts Contractor's ability to perform under this Contract,

o Significant change in State or Energy Commission policy such that the work or product being funded would not be supported by the Commission; or

o In the case of a technical support contract, changes in Commission staff such that Commission staff can do the work or product being funded.

D. Gratuities

The Commission may, by written notice to Contractor, terminate the right of Contractor to proceed under this contract if it is found, after notice and hearing by Commission or by Executive Director of the Energy Commission or his duly authorized representative, that gratuities were offered or given by Contractor, or any agent or representative of Contractor, to any officer or employee of the Commission, with a view toward securing a contract or securing favorable treatment with respect to awarding or amending or making a determination with respect to performance of such contract.

In the event this contract is terminated as provided herein. Commission shall be entitled to (1) pursue the same remedies against Contractor as it could pursue in the event of the breach of the contract by Contractor, and (2) exemplary damages in an amount which shall be not less than three nor more than ten times the cost incurred by Contractor in providing any such gratuities to any such officer or employee, as a penalty, in addition to any other damages to which it may be entitled by law.

The rights and remedies of Commission provided in this clause shall not be exclusive and are in addition to any other rights and remedies provided by law or under this contract.

E. Advantage

Contractor, team member or subcontractors shall not hire, contract with, or otherwise commit themselves to an advantageous economic contract with the Commission's Contractor/subcontractor who evaluated Contractor's proposal. The Commission reserves the right to cancel the contract.

24. GENERAL TERMS & CONDITIONS

A. It is understood and agreed that certain contract provisions shall survive the completion or termination date of this contract for any reason. The contract provisions include, but are not limited to:

o "Payments to Contractor" Section 5

o "Purchase of Equipment" Section 7

o "Recordkeeping, Cost Accounting and Auditing" Section 13

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o "Business Activity Reporting" Section 14

o "Rights of Parties Regarding Intellectual

      Property"                                  Section 18

o    "Royalty Payments to Commission"            Section 19

o    "Disputes"                                  Section 21

o    "Termination"                               Section 23

o    "Site Access"                               Section 24. D

o    "Indemnification"                           Section 24. L

B. The clause headings appearing in this contract have been inserted for the purpose of convenience and ready reference. They do not purport, and shall not be deemed, to define, limit, or extend the scope or intent of the clauses to which they appertain.

C. If public hearings on the subject matter dealt with in this contract are held during the period of the contract, and if requested by the Commission, Contractor will make available to testify the personnel assigned to this contract. Commission will reimburse Contractor for labor and travel of said personnel at the contract rates for such work.

D. The Energy Commission staff or its representatives shall have reasonable access to the construction site or R&D laboratory, and all project records.

E. This contract shall be conducted in accordance with the terms and conditions of California Energy Resources Conservation and Development Commission (hereafter "Commission") Request for Proposal number 500-03-501, Addendum # 1-4, Contractor's proposal, dated October 20, 2004, this contract, and the attached exhibits listed below. Contractor's proposal is not attached hereto, but is expressly incorporated by reference into this contract. In the event of conflict or inconsistency between the terms of this contract and Contractor's proposal, this contract and its exhibits shall be considered controlling.

F. In the interpretation of this contract, any inconsistencies between the terms hereof and the exhibits shall be resolved in favor of the terms hereof.

G. The Commission reserves the right to seek further written assurances from the Contractor and its team that the work of the project under the contract will be performed consistent with the terms of the contract.

H. No alteration or variation of the terms of this contract shall be valid unless made in writing and signed by the parties hereto, and no oral understanding or agreement not incorporated herein, shall be binding on any of the parties hereto. Other than as specified herein, no document or communication passing between the parties hereto shall be deemed as part of this contract.

I. This contract is not assignable by the Contractor, either in whole or in part, without the consent of the State. Consent consists of a formal written contract amendment approved by the Commission and DGS. Such consent shall not be unreasonably withheld.

J. It is hereby understood and agreed that this contract shall be governed by the laws of the State of California as to interpretation and performance.

K. Time is of the essence in this contract.

L. Contractor agrees to indemnify, defend and save harmless the State, its officers, agents and employees from any and all claims and losses accruing or resulting to any and all contractors, subcontractors, suppliers, laborers, and any other person, firm or corporation furnishing or supplying work services, materials, or supplies in connection with the performance of this

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contract, and from any and all claims and losses accruing or resulting to any person, firm or corporation who may be injured or damaged by Contractor in the performance of this contract.

M. Contractor warrants, represents and agrees that it and its subcontractors, employees and representatives shall at all times comply with all applicable State contracting laws, codes, rules and regulations in the performance of this contract.

N. Contractor, and the agents and employees of Contractor, in the performance of this contract, shall act in an independent capacity and not as officers or employees or agents of the State.

O. No waiver of any breach of this contract shall be held to be a waiver of any other or subsequent breach. All remedies afforded in this contract shall be taken and construed as cumulative, that is, in addition to every other remedy provided therein or by law. The failure of Commission to enforce at any time any of the provisions of this contract, or to require at any time performance by Contractor of any of the provisions therefore, shall in no way be construed to be a waiver of such provisions, nor in any way affect the validity of this contract or any part thereof or the right of Commission to thereafter enforce each and every such provision.

P. If any provision of this contract or the application thereof is held invalid, that invalidity shall not affect other provisions of the contract.

Q. In no event shall any course of dealing, custom or trade usage modify, alter, or supplement any of the terms or provisions contained herein.

R. During the performance of this Agreement, Contractor and its subcontractors shall not unlawfully discriminate, harass, or allow harassment against any employee or applicant for employment because of sex, race, color, ancestry, religious creed, national origin, physical disability (including HIV and AIDS), mental disability, medical condition (cancer), age (over 40), marital status, and denial of family care leave. Contractor and subcontractors shall insure that the evaluation and treatment of their employees and applicants for employment are free from such discrimination and harassment. Contractor and subcontractors shall comply with the provisions of the Fair Employment and Housing Act (Government Code Section 12990 (a-f) et seq.) and the applicable regulations promulgated thereunder (California Code of Regulations, Title 2, Section 7285 et seq.). The applicable regulations of the Fair Employment and Housing Commission implementing Government Code Section 12990 (a-f), set forth in Chapter 5 of Division 4 of Title 2 of the California Code of Regulations, are incorporated into this Agreement by reference and made a part hereof as if set forth in full. Contractor and its subcontractor shall give written notice of their obligations under this clause to labor organizations with which they have a collective bargaining or other Agreement.

Contractor shall include the nondiscrimination and compliance provisions of this clause in all subcontracts to perform work under the Agreement.

S. The Contractor shall certify in writing under penalty of perjury, the minimum, if not exact, percentage of recycled content, both post consumer waste and secondary waste as defined in the Public Contract Code, Sections 12161 and 12200, in materials, goods, or supplies offered or products used in the performance of this Agreement, regardless of whether the product meets the required recycled product percentage as defined in the Public Contract Code, Sections 12161 and 12200. Contractor may certify that the product contains zero recycled content. (PCC 10233, 10308.5, 10354).

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T. For any contract in excess of $100,000:

o the Contractor recognizes the importance of child and family support obligations and shall fully comply with all applicable state and federal laws relating to child and family support enforcement, including, but not limited to, disclosure of information and compliance with earnings assignment orders, as provided in Chapter 8 (commencing with section 5200) of Part 5 of Division 9 of the Family Code; and

o the Contractor, to the best of its knowledge is fully complying with the earnings assignment orders of all employees and is providing the names of all new employees to the New Hire Registry maintained by the California Employment Development Department."

U. The Government Code Chapter on Antitrust claims contains the following definitions:

o "Public purchase" means a purchase by means of competitive bids of goods, services, or materials by the State or any of its political subdivisions or public agencies on whose behalf the Attorney General may bring an action pursuant to subdivision (c) of Section 16750 of the Business and Professions Code).

o "Public Purchasing Body" means the State or the subdivision or agency making a public purchase. Government Code Section 4550 (b).

1) In submitting a bid to a public purchasing body, the bidder offers and agrees that if the bid is accepted, it will assign to the purchasing body all rights, title, and interest in and to all causes of action it may have under Section 4 of the Clayton Act (15 U.S.C. Sec. 15) or under the Cartwright Act (Chapter 2 (commencing with Section 16700) of Part 2 of Division 7 of the Business and Professions Code), arising from purchases of goods, materials, or services by the bidder for sale to the purchasing body pursuant to the bid. Such assignment shall be made and become effective at the time the purchasing body tenders final payment to the bidder. Government Code Section 4552.

2) If an awarding body or public purchasing body receives, either through judgment or settlement, a monetary recovery for a cause of action assigned under this chapter, the assignor shall be entitled to receive reimbursement for actual legal costs incurred and may, upon demand, recover from the public body any portion of the recovery, including treble damages, attributable to overcharges that were paid by the assignor but were not paid by the public body as part of the bid price, less the expenses incurred in obtaining that portion of the recovery. Government Code Section 4553.

3) Upon demand in writing by the assignor, the assignee shall, within one year from such demand, reassign the cause of action assigned under this part if the assignor has been or may have been injured by the violation of law for which the cause of action arose and (a) the assignee has not been injured thereby, or (b) the assignee declines to file a court action for the cause of action. Government Code Section 4554.

V. In the event that any provision of this Contract is unenforceable or held to be unenforceable, then the parties agree that all other provisions of this Contract have force and effect and shall not be effected thereby.

W. Contractor by signing this agreement hereby acknowledges the applicability of Government Code Section 16645 through Section 16649 to this agreement.

1) Contractor will not assist, promote or deter union organizing by employees performing work on a state service contract, including public works contract.

2) No state funds received under this agreement will be used to assist, promote or deter union organizing.

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3) Contractor will not, for any business conducted under this agreement, use any state property to hold meetings with employees or supervisors, if the purpose of such meetings is to assist, promote or deter union organizing, unless the state property is equally available to the general public for holding meetings.

4) If Contractor incurs costs, or makes expenditures to assist, promote or deter union organizing, Contractor will maintain records sufficient to show that no reimbursement from state funds has been sought for these costs, and that Contractor shall provide those records to the Attorney General upon request.

Contractor hereby certifies that no request for reimbursement, or payment under this agreement will seek reimbursement for costs incurred to assist, promote or deter union organizing.

X. Contractor declares that it is eligible to contract with the state pursuant to Public Contract Code section 10286.1, the California Taxpayer and Shareholder Protection Act of 2003, related to expatriate corporations and their subsidiaries."

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EXHIBIT A
SCOPE OF WORK

GLOSSARY

Specific terms and acronyms used throughout this work statement are defined as follows:

ACRONYM         DEFINITION
-------------   ----------------------------------------------------------------------------------
AC (or ac)      alternating current -- characterized by voltage and current varying with time
amp (A)         ampere -- a measure of electrical current
B/C             benefit-to cost ratio
CPR             Critical Project Review
DAS             data acquisition system
DC(or dc)       direct current -- characterized by non-time-varying voltage and current
DOE             U. S. Department of Energy
DUIT            Distributed Utility Integration Test Project
EES             electric energy storage
electrolyte     a liquid solution capable of conducting electric current
FCR             fixed charge rate
Gantt chart     a graph or picture showing start and completion dates of project tasks versus time
IEEE            The Institute of Electrical and Electronics Engineers
inverter        an electronics system that converts DC power to AC power
kW              kiloWatt -- one thousand Watts of power
kWh             kiloWatt-hour -- energy equal to 1 kW for one hour
MW              megaWatt -- one million Watts of power
MWH             megaWatt-hour -- energy equal to 1 MW for one hour
NPV             net present value
O&M             operations and maintenance (or the costs associated with them)
PCS             power conversion system -- also referred to as an inverter
PG&E            Pacific Gas & Electric Co.
PIER            Public Interest Energy Research (Program of the CEC)
PowerPlus       Anaheim-based technical support contractor for ZBB Energy Corporation
R&D             Research & Development
RD&D            Research, Development & Demonstration
RFP             Request for Proposal -- herein refers to CEC Research Solicitation #500-03-501
state of the
art             the most advanced technology of its type currently available
T&D             transmission & distribution
turn-key        supplied to the end-user in a fully-operational state
UCC. 1          Uniform Commercial Code (Financing Statement)
VAR             volt-ampere reactive
volt (V or v)   a measure of electrical potential
watt (W)        a measure of power
WBS             Work Breakdown Structure -- a project management tool
ZBB             ZBB Energy Corporation
ZnBr            Zinc-Bromine (battery technology)

1 of 17

Exhibit A

TECHNICAL TASK LEST

TASK #   CPR   TASK NAME
------   ---   -----------------------------------------------------------------------------------
1.1            Administration
2.0       X    Assemble Storage System
3.0            Installation of 500 kWh/500 kW Storage System at the PG&E Designated Test Facility
4.0       X    Utility Required Testing and Engineering
5.0       X    Pre-Commissioning Data Collection at Utility Demonstration Site
6.0            Installation of Storage System at Utility Demonstration Site
7.0            Data Acquisition System and Benefits Data Reporting Requirements
8.0            Technology Transfer Activities

KEY NAME LIST

TASK #    KEY PERSONNEL   KEY SUBCONTRACTOR(S)   KEY PARTNER(S)
------   --------------   --------------------   --------------
  1        Peter Lex              None                PG&E
  2        Peter Lex                                  PG&E
  3        Peter Lex                                  PG&E
  4      Bob Malahowski                               PG&E
  5      Bob Malahowski                               PG&E
  6      Bob Malahowski                               PG&E
  7         Peter Lex                                 PG&E
  8         Peter Lex                                 PG&E

PROBLEM STATEMENT

OVERVIEW

The growing electrical load in many parts of California, especially cities in the Central Valley, is stressing the capacity of the existing distribution infrastructure. This is particularly true during peak periods of several hours per day during the summer months. The standard utility practice in addressing this problem is to identify specific facilities that are nearing capacity limits, and schedule capital infrastructure upgrades to alleviate the constraint and to accommodate future load growth. The result is the financing of an expensive upgrade project, with yearly finance charges, but low utilization of the upgraded capacity in the near term years: the capacity is really needed for only a few hours per year.

In recent years, many technologies, such as internal combustion engines, microturbines, fuel cells, wind turbines, photovoltaics (PV) and storage systems, referred to as distributed resources (DR), have been proposed as alternatives to capital upgrades in situations where peak loading for a relatively few hours per year is the problem. It has been postulated that the installation of DR at critical points in the distribution system can provide the peak loading capacity in smaller increments better suited to matching load growth, at least for a few years, thereby deferring the capital upgrade as long as practical, and saving the cost of the carrying charges for that investment for those years. All of these DR technologies are mature and commercially viable to varying degrees. The issue with regard to distribution system deferral is proving the postulation: Can the application be successfully and reliably operated so as to achieve the hoped-for benefits of infrastructure deferral?

2 of 17

Exhibit A

To date, ZBB has participated in similar projects with Detroit Edison and United Energy (Australia), albeit on a smaller scale than proposed for this project. Utilities in the US have studied this application to some degree, but battery systems have only recently been available in large enough sizes and with favorable economics, to warrant utility-scale demonstrations.

TECHNOLOGY BARRIERS

The primary barrier to implementation of storage for distribution system deferral, in California and elsewhere, is unfamiliarity with the technology on the part of utilities. Questions remain as to the reliability of new technologies, how the utilities would be allowed to finance the equipment (i.e., earn a return on investment), new standards and operating procedures that would need to be developed, system impacts if the technology does not prove itself, and so on. Utilities are reluctant to spend money on something that might not work; regulatory agencies could disallow the expenses as imprudent. On the other hand, there are few regulatory incentives to utilities for trying new technologies.

This project will answer these questions by installing a suitable EES and acquiring sufficient data to provide qualitative analysis.

This project is designed to address the pressing need for validation and evaluation of the benefits of energy storage when applied to the deferral of distribution system upgrades. In addition to providing financial benefits, the system will demonstrate the use of energy storage in a practical grid-connected application. It will do so with essentially no air emissions or other environmental drawbacks, as opposed to other sources of generation such internal combustion engines or combustion turbines. A successful demonstration will open the door to future use of energy storage and a growing market for new technology. This is a critical time for energy providers to make decisions on the power systems of the future, so it is timely for the Commission to undertake this demonstration at this time.

RELATIONSHIP TO PIER GOALS

This Agreement meets the PIER Goals of Improving the Energy/Cost Value of California's Electricity, and Improving the Reliability, Quality, and Sufficiency of California's Electricity. By providing support to the distribution system, the flow of power to customers is assured, thus improving reliability and sufficiency. This project also meets the secondary goal of improving the energy cost/value of California's Electricity. By avoiding costly grid investments, the overall cost of electricity to California consumers maybe reduced.

GOALS OF THE AGREEMENT

The goal of this Agreement is to demonstrate and evaluate the economic benefits of distribution system upgrade deferral. This goal will be met by operating a ZBB zinc-bromine battery EES at a PG&E distribution node for a minimum of 18 months.

OBJECTIVES OF THE AGREEMENT

The objectives of this Agreement are to:

1. Validate the benefits of operating energy storage for distribution system support

2. Reduce the cost of electricity delivery

3. Increase the expected number of new technologies providing increased reliability / sufficiency of power to consumers by one

4. Increase the number of new technologies that are market ready by one

3 of 17

Exhibit A

5. Increase the adoption by the market of specific technologies, i.e., zinc-bromine energy storage

This project provides state-of-the-art zinc-bromine energy storage to California. A successful project will increase market share and penetration for this specific technology. It will also improve acceptance and thus the market for other energy storage technologies.

TASK 1.0 ADMINISTRATION

MEETINGS

TASK 1.1 ATTEND KICK-OFF MEETING

The goal of this task is to establish the lines of communication and procedures for implementing this Agreement.

THE CONTRACTOR SHALL:

o Attend a "kick-off" meeting with the Commission Contract Manager, the Contracts Officer, and a representative of the Accounting Office. The Contractor shall bring their Project Manager, Contracts Officer, Accounting Officer, and others designated by the Commission Contract Manager to this meeting. The administrative and technical aspects of this Agreement will be discussed at the meeting. Prior to the kick-off meeting, the Commission Contract Manager will provide an agenda to all potential meeting participants.

The administrative portion of the meeting shall include, but not be limited to, the following:

o Terms and conditions of the Agreement

o CPRs (Task 1.2)

o Match fund documentation (Task 1.7)

o Permit documentation (Task 1.8)

The technical portion of the meeting shall include, but not be limited to, the following:

o The Commission Contract Manager's expectations for accomplishing tasks described in the Scope of Work;

o An Updated Schedule of Deliverables

o An updated Gantt chart

o Progress Reports (Task 1.4)

o Technical Deliverables (Task 1.5)

o Final Report (Task 1.6)

The Commission Contract Manager shall designate the date and location of this meeting.

DELIVERABLES:

o An Updated Schedule of Deliverables

o An Updated Gantt Chart

o An Updated List of Match Funds

o An Updated List of Permits

4 of 17

Exhibit A

TASK 1.2 CPR MEETINGS

The goal of this task is to determine if the project should continue to receive Commission funding to complete this Agreement and if it should, are there any modifications that need to be made to the tasks, deliverables, schedule or budget.

CPRs provide the opportunity for frank discussions between the Commission and the Contractor. CPRs generally take place at key, predetermined points in the Agreement, as determined by the Commission Contract Manager and as shown in the Technical Task List above and in the Schedule of Deliverables. However, the Commission Contract Manager may schedule additional CPRs as necessary, and any additional costs will be borne by the Contractor.

Participants include the Commission Contract Manager, PG&E representative and the Contractor, and may include the Commission Contracts Officer, the PIER Program Team Lead, other Commission staff and Management as well as other individuals selected by the Commission Contract Manager to provide support to the Commission.

THE COMMISSION CONTRACT MANAGER SHALL:

o Determine the location, date and time of each CPR meeting with the Contractor. These meetings generally take place at the Commission, but they may take place at another location.

o Send the Contractor the agenda and a list of expected participants in advance of each CPR. If applicable, the agenda shall include a discussion on both match funding and permits.

o Conduct and make a record of each CPR meeting. One of the outcomes of this meeting will be a schedule for providing the written determination described below.

o Determine whether to continue the project, and if continuing, whether or not to modify the tasks, schedule, deliverables and budget for the remainder of the Agreement, including not proceeding with one or more tasks. If the Commission Contract Manager concludes that satisfactory progress is not being made, this conclusion will be referred to the Commission's Research, Development and Demonstration Policy Committee for its concurrence.

o Provide the Contractor with a written determination in accordance with the schedule. The written response may include a requirement for the Contractor to revise one or more deliverable(s) that were included in the CPR.

THE CONTRACTOR SHALL:

o Prepare a CPR Report for each CPR that discusses the progress of the Agreement toward achieving its goals and objectives. This report shall include recommendations and conclusions regarding continued work of the project. This report shall be submitted along with any other deliverables identified in this Scope of Work. Submit these documents to the Commission Contract Manager and any other designated reviewers at least 15 working days in advance of each CPR meeting.

o Present the required information at each CPR meeting and participate in a discussion about the Agreement.

5 of 17

Exhibit A

CONTRACTOR DELIVERABLES:

o CPR Report(s)

o CPR deliverables identified in the Scope of Work

COMMISSION CONTRACT MANAGER DELIVERABLES:

o Agenda and a List of Expected Participants

o Schedule for Written Determination

o Written Determination

TASK 1.3 FINAL MEETING

The goal of this task is to close out this Agreement.

THE CONTRACTOR SHALL:

o Meet with the Commission to present the findings, conclusions, and recommendations. The final meeting must be completed during the closeout of this Agreement.

This meeting will be attended by, at a minimum, the Contractor, the Commission Contracts Officer, and the Commission Contract Manager. The technical and administrative aspects of Agreement closeout will be discussed at the meeting, which may be two separate meetings at the discretion of the Commission Contract Manager.

The technical portion of the meeting shall present findings, conclusions, and recommended next steps (if any) for the Agreement. The Commission Contract Manager will determine the appropriate meeting participants.

The administrative portion of the meeting shall be a discussion with the Commission Contract Manager and the Contracts Officer about the following Agreement closeout items:

o What to do with any state-owned equipment (Options)

o Contractor or host facility may purchase equipment at fair market value

o Need to file UCC.1 form re: Commission's interest in patented technology

o Commission's request for specific "generated" data (not already provided in Agreement deliverables)

o Need to document Contractor's disclosure of "subject inventions" developed under the Agreement

o "Surviving" Agreement provisions, such as repayment provisions and confidential deliverables

o At the direction of the Commission Contract Manager, the Contractor shall remove and properly dispose of all items associated with the 2MW/2MWH electric energy storage system (consisting of the four (4) 500 kWh / 500 kW zinc-bromine battery systems and the associated site level installation items) from the demonstration site at no costs to the Commission.

o Upon receiving approval from the Commission Contracts Officer, the Contractor or host facility may purchase the items associated with the 2MW/2MWH electric energy storage system at fair Market Value (unless otherwise negotiate).

o Final invoicing and release of retention

6 of 17

Exhibit A

o Prepare a schedule for completing the closeout activities for this Agreement.

DELIVERABLES:

o Written documentation of meeting agreements and all pertinent information

o Schedule for completing closeout activities

REPORTING

TASK 1.4 MONTHLY PROGRESS REPORTS

The goal of this task is to periodically verify that satisfactory and continued progress is made towards achieving the research objectives of this Agreement.

THE CONTRACTOR SHALL:

o Prepare progress reports which summarize all Agreement activities conducted by the Contractor for the reporting period, including an assessment of the ability to complete the Agreement within the current budget and any anticipated cost overruns. Each progress report is due to the Commission Contract Manager within 5 working days after the end of the reporting period. Attachment A-1, Progress Report Format, provides the recommended specifications.

o Submit an additional copy of each monthly progress report to the U.S. Department of Energy contact listed in Task 1.5.

DELIVERABLES:

o Monthly Progress Reports

TASK 1.5 TEST PLANS, TECHNICAL REPORTS AND INTERIM DELIVERABLES

The goal of this task is to set forth the general requirements for submitting test plans, technical reports and other interim deliverables, unless described differently in the Technical Tasks.

THE CONTRACTOR SHALL:

o Submit a draft of each deliverable listed in the Technical Tasks to the Commission Contract Manager for review and comment in accordance with the approved Schedule of Deliverables. The Commission Contract Manager will provide written comments back to the Contractor on the draft deliverable within 15 working days of receipt. Once agreement has been reached on the draft, the Contractor shall submit the final deliverable to the Commission Contract Manager. The Commission Contract Manager shall provide written approval of the final deliverable within 10 working days of receipt. Key elements from this deliverable shall be included in the Final Report for this project.

o Submit an additional copy of each deliverable to U.S. Department of Energy contact:

Garth P. Corey
Sandia National Laboratories
PO Box 5800 MS-O710
Albuquerque, NM 87185-0710

TASK 1.6 FINAL REPORT

The goal of this task is to prepare a comprehensive written Final Report that describes the original purpose, approach, results and conclusions of the work done under this Agreement. The Commission Contract Manager will review and approve the Final Report. The Final Report must

7 of 17

Exhibit A

be completed on or before the termination date of the Agreement. Attachment A-2, Final Report Format, provides the recommended specifications.

The Final Report shall be a public document. If the Contractor has obtained confidential status from the Commission and will be preparing a confidential version of the Final Report as well, the Contractor shall perform the following subtasks for both the public and confidential versions of the Final Report.

TASK 1.6.1 FINAL REPORT OUTLINE

THE CONTRACTOR SHALL:

o Prepare a draft outline of the Final Report.

o Submit the draft outline of Final Report to the Commission Contract Manager for review and approval. Also submit a copy to the U.S. Department of Energy contact listed in Task 1.5. The Commission Contract Manager will provide written comments back to the Contractor on the draft outline within 5 working days of receipt. Once agreement has been reached on the draft, the Contractor shall submit the final outline to the Commission Contract Manager. The Commission Contract Manager shall provide written approval of the final outline within 2 working days of receipt.

DELIVERABLES:

o Draft Outline of the Final Report

o Final Outline of the Final Report

TASK 1.6.2 FINAL REPORT

THE CONTRACTOR SHALL:

o Prepare the draft Final Report for this Agreement in accordance with the approved outline.

o Submit the draft Final Report to the Commission Contract Manager for review and comment. Also submit a copy to the U.S. Department of Energy contact listed in Task 1.5. The Commission Contract Manager will provide written comments within 10 working days of receipt.

Once agreement on the draft Final Report has been reached, the Commission Contract Manager shall forward the electronic version of this report to the PIER Technology Transfer Group for final editing. Once final editing is completed, the Commission Contract Manager shall provide written approval to the Contractor within 2 working days.

o Submit one bound copy of the Final Report with the final invoice.

DELIVERABLES:

o Draft Final Report

o Final Report

MATCH FUNDS, PERMITS, AND ELECTRONIC FILE FORMAT

8 of 17

Exhibit A

TASK 1.7 IDENTIFY AND OBTAIN MATCHING FUNDS

The goal of this task is to ensure that the match funds planned for this Agreement are obtained for and applied to this Agreement during the term of this Agreement.

The costs to obtain and document match fund commitments are not reimbursable through this Agreement. While the PIER budget for this task will be zero dollars, the Contractor may utilize match funds for this task. Match funds shall be spent concurrently or in advance of PIER funds during the term of this Agreement. Match funds must be identified in writing, and the associated commitments obtained before the Contractor can incur any costs for which the Contractor will request reimbursement.

THE CONTRACTOR SHALL:

o Prepare a letter documenting the match funding committed to this Agreement and submit it to the Commission Contract Manager at least 2 working days prior to the kick-off meeting:

1. If no match funds were part of the proposal that led to the Commission awarding this Agreement and none have been identified at the time this Agreement starts, then state such in the letter.

2. If match funds were a part of the proposal that led to the Commission awarding this Agreement, then provide in the letter:

o A list of the match funds that identifies the:

o Amount of each cash match fund, its source, including a contact name, address and telephone number and the task(s) to which the match funds will be applied.

o Amount of each in-kind contribution, a description, documented market or book value, and its source, including a contact name, address and telephone number and the task(s) to which the match funds will be applied. If the in-kind contribution is equipment or other tangible or real property, the Contractor shall identify its owner and provide a contact name, address and telephone number, and the address where the property is located.

o A copy of the letter of commitment from an authorized representative of each source of cash match funding or in-kind contributions that these funds or contributions have been secured.

o Discuss match funds and the implications to the Agreement if they are significantly reduced or not obtained as committed, at the kick-off meeting. If applicable, match funds will be included as a line item in the progress reports and will be a topic at CPR meetings.

o Provide the appropriate information to the Commission Contract Manager if during the course of the Agreement additional match funds are received.

o Notify the Commission Contract Manager within 5 working days if during the course of the Agreement existing match funds are reduced. Reduction in match funds may trigger an additional CPR.

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Exhibit A

DELIVERABLES:

o A letter regarding Match Funds or stating that no Match Funds are provided

o Letter(s) for New Match Funds

o A copy of each Match Fund commitment letter

o Letter that Match Funds were Reduced (if applicable)

TASK 1.8 IDENTIFY AND OBTAIN REQUIRED PERMITS

The goal of this task is to obtain all permits required for work completed under this Agreement in advance of the date they are needed to keep the Agreement schedule on track. Permit costs and the expenses associated with obtaining permits are not reimbursable under this Agreement. While the PIER budget for this task will be zero dollars, the Contractor shall show match funds for this task. Permits must be identified in writing and obtained before the Contractor can incur any costs related to the use of the permits for which the Contractor will request reimbursement.

THE CONTRACTOR SHALL:

o Prepare a letter documenting the permits required to conduct this Agreement and submit it to the Commission Contract Manager at least 2 working days prior to the kick-off meeting:

1. If there are no permits required at the start of this Agreement, then state such in the letter.

2. If it is known at the beginning of the Agreement that permits will be required during the course of the Agreement, provide in the letter:

o A list of the permits that identifies the:

o Type of permit

o Name, address and telephone number of the permitting jurisdictions or lead agencies

o Schedule the Contractor will follow in applying for and obtaining these permits

o The list of permits and the schedule for obtaining them will be discussed at the kick-off meeting, and a timetable for submitting the updated list, schedule and the copies of the permits will be developed. The implications to the Agreement if the permits are not obtained in a timely fashion or are denied will also be discussed. If applicable, permits will be included as a line item in the progress reports and will be a topic at CPR meetings.

o If during the course of the Agreement additional permits become necessary, then provide the appropriate information on each permit and an updated schedule to the Commission Contract Manager.

o As permits are obtained, send a copy of each approved permit to the Commission Contract Manager.

o If during the course of the Agreement permits are not obtained on time or are denied, notify the Commission Contract Manager within 5 working days. Either of these events may trigger an additional CPR.

DELIVERABLES:

o A letter documenting the Permits or stating that no Permits are required

o Updated list of Permits as they change during the Term of the Agreement

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Exhibit A

o Updated schedule for acquiring Permits as it changes during the Term of the Agreement

o A copy of each approved Permit

TASK 1.9 ELECTRONIC FILE FORMAT

The goal of this task is to unify the formats of electronic data and documents provided to the Commission as contract deliverables. Another goal is to establish the computer platforms, operating systems and software that will be required to review and approve all software deliverables.

THE CONTRACTOR SHALL:

o Deliver documents to the Commission Contract Manager in the following formats:

o Data sets shall be in Microsoft (MS) Access or MS Excel file format.

o PC-based text documents shall be in MS Word file format.

o Documents intended for public distribution shall be in PDF file format, with the native file format provided as well.

o Project management documents shall be in MS Project file format.

o Request exemptions to the electronic file format in writing at least 90 days before the deliverable is submitted.

DELIVERABLES:

o A letter requesting exemption from the Electronic File Format (if applicable)

TECHNICAL TASKS

Unless otherwise provided in the individual Task, the Contractor shall prepare all deliverables in accordance with the requirements in Task 1.5.

TASK 2.0 ASSEMBLE STORAGE SYSTEM

The goal of this task is to assemble all components and subsystems into a complete, turn-key EES. The system will be based on ZBB zinc-bromine battery technology. The application size determined by the end-user, PG&E, is 2 MWh of storage, coupled to a power conversion system "PCS" capable of 2 MW output for 1 hour.

The Contractor will assemble four (4) trailer-mounted battery system modules, each with 500 kWh energy storage and 500 kW output capability (referred to as a 500kWh/500kW zinc-bromine battery EES). Each module will consist of ten, individual 50 kWh battery cells (two strings of 5 modules connected electrically in parallel) enclosed in a standard 20-foot shipping container. The batter container will be mounted along with the PCS on a 40-foot trailer for shipping and operation. Electrical connections between individual modules and the PCS will be completed prior to shipping.

The first 500kWh/500kW zinc-bromine battery EES will be delivered to the PG&E designated test facility within 12 months of the contract start, for acceptance testing and pre-engineering prior to field installation. The three remaining 500kWh/500kW zinc-bromine battery EESs will be assembled and delivered along with the first system to the utility demonstration site within 18

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Exhibit A

months of contract start. At the demonstration site, the four modules will be connected so as to constitute a 2MWh, 2 MW storage system, programmed to operate in a peak load shaving mode.

THE CONTRACTOR SHALL:

o Assemble one fully functional, trailer-mounted 500 kWh/500kW zinc-bromine battery EES for use at the site testing at PG&E Designated Test Facility.

o Prepare CPR Report as defined in Task 1.2.

o Conduct in CPR, as defined in Task 1.2, after the first trailer-mounted 500 kWh/500kW zinc-bromine battery EES is assembled.

o Transport one 500kWh/500kW zinc-bromine battery EES to the PG&E designated test facility (DUIT) for evaluation and assessment. Notify the Commission Contract Manager when unit has been delivered to test site.

o Assemble three (3) additional fully functional, trailer-mounted 500 kWh/500kW zinc-bromine battery EESs for use at the customer demonstration site. Notify the Commission Contract Manager and the Contracts Officer when assembly is complete.

CONTRACTOR DELIVERABLES:

o CPR Report

o A letter to the Commission Contract Manager stating that the first trailer-mounted 500 kWh/ 500kW zinc-bromine battery storage system has been assembled, shipped and received at the PG&E designated test facility.

o A letter to the Commission Contract Manager with a copy to the Contracts Officer stating that the remaining three (3) trailer-mounted 500 kWh / 500kW zinc-bromine battery storage system have been assembled. This letter shall include a complete list of the components and serial numbers on each trailer for the 3 completed modules.

COMMISSION CONTRACT MANAGER DELIVERABLES:

o CPR agenda

o List of Equipment upon completion of the trailer-mounted 500 kWh / 500kW zinc-bromine battery storage system)

TASK 3.0 INSTALLATION OF 500 kWh/500 kW STORAGE SYSTEM AT THE PG&E DESIGNATED TEST FACILITY

The first of the four trailer-mounted battery system modules constructed by ZBB is to be transported to the PG&E designated test facility at PG&E's San Ramon Site (location of the ongoing DUIT program). The purpose of sending the storage system to this controlled test location is twofold. First, testing the storage system at this site meets the requirements of PG&E to test its integration into PG&E's distribution and communication systems before it is allowed to be connected to the electric grid. Second, testing at this site will allow PG&E personnel to be trained in the operation of the storage system before it is placed in its commercial substation demonstration site.

THE CONTRACTOR SHALL:

o Deliver and commission a 500 kWh / 500 kW zinc-bromine battery system at the PG&E designated test facility, located in San Ramon, California, and notify Commission Contract Manager when system is commissioned

o Prepare a Draft Test Plan outlining the specific tests to be performed at the PG&E designated test facility. The test plan shall include, but not be limited to:

o Description of all test to be performed at the PG&E test facility

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Exhibit A

o Expected outcome of each proposed test

o Test objectives and technical approach

o A test matrix showing the number of test conditions and expected response

o Verify utility grid interface requirement with PG&E

o A description of the data analysis procedures and the interface role of the DOE Data Analysis contractors

o A description of the quality assurance procedures and plans for updating the remaining three 500 kWh/ 500 kW zinc-bromine battery systems with the information learned from this testing

o A Software Specification Plan for the operation of the 500 kWh / 500 kW zinc-bromine battery systems

o PG&E's review, comments and recommendations

DELIVERABLES:

o Draft Test Plan for the proposed operation of the 500 kWh / 500 kW zinc-bromine battery system at the PG&E designated test facility.

o Final Test Plan for the proposed operation of the 500 kWh / 500 kW zinc-bromine battery system at the PG&E designated test facility.

o Letter notifying the Commission Contract Manager that the 500 kWh / 500 kW zinc-bromine battery system has been commissioned at the PG&E designated test facility

TASK 4.0 UTILITY REQUIRED TESTING AND ENGINEERING

The goal of this task is to perform the engineering and analysis work required to prepare the storage system for operation in accordance with the intended application: distribution system upgrade deferral. There will be on-site software development and testing required to ensure the system responds correctly to conditions in the field, i.e., it operates when peak load requirements dictate. This development will take place in the controlled PG&E test facility environment where dispatching, maximum capabilities and other potential benefits will be tested before going to the commercial demonstration site. It is likely that such testing will reveal additional benefits (e.g., power quality, voltage support, etc.) beyond those already identified once the operations personnel are involved in this controlled environment testing.

THE CONTRACTOR SHALL:

o Prepare a Draft Test Report documenting the results from completing all the elements of the Test Plan for the operation of the 500 kWh / 500 kW zinc-bromine battery system at the PG&E Test Facility. This report shall also include PG&E's review, comments and recommendations. This document shall be submitted to the Commission Contract Manager in accordance with the procedure for Critical Project Reviews.

o Prepare the CPR report.

o Participate in the CPR.

o Modify the Draft Test Report in accordance with comments received during the Critical Project Review. Once agreement has been reached on the draft, the Contractor shall submit the final deliverable to the Commission Contract Manager. The Commission Contract Manager shall provide written approval of the final deliverable within 10 working days of receipt. Key elements from this document shall be included in the Final Report for this project.

DELIVERABLES:

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Exhibit A

o Draft Test Report.

o CPR Report

o Final Test Report

TASK 5.0 PRE-COMMISSIONING DATA COLLECTION AT UTILITY DEMONSTRATION SITE

The goal of this task is to gather data at the user site. This will document the problem to be solved by the installation of energy storage and provide input to the benefits analysis. The data will also help guide the design and optimization of interfaces and procedures for operation of the EES.

THE CONTRACTOR SHALL:

o Gather data on electric loads, utility system conditions, etc., as per the DAS Implementation Plan, at the proposed demonstration site where the storage unit is to be installed in the future. Prepare the Monthly Data Collection Reports.

o Prepare a Draft Demonstration Site Installation Plan shall include but not be limited to the following:

o The necessary requirements to complete utility and site level interface and interconnect requirements

o Preparation of all necessary electrical, mechanical and civil engineering drawings, schedule for obtaining any required site level permits or approvals

o Identification of all appropriate site level commissioning activities.

o Prepare CPR Report as defined in Task 1.2

o Conduct a CPR as defined in Task 1.2.

CONTRACTOR DELIVERABLES:

o Monthly Data Collection Reports.

o Draft Demonstration Site Installation Plan.

o Final Demonstration Site Installation Plan

o CPR Report

COMMISSION CONTRACT MANAGER DELIVERABLES:

o CPR agenda

TASK 6.0 INSTALLATION OF STORAGE SYSTEM AT UTILITY DEMONSTRATION SITE

The goal of this task is to install the fully functional EES at the host utility demonstration site (the exact location to be determined by PG&E), to demonstrate acceptable performance in the field, and to commission the facility so that the demonstration period may commence.

The storage system installed at the PG&E Test Facility will be moved to the demonstration location and interconnected according to the Demonstration Site Installation Plan. Simultaneously, the three other storage modules being built by ZBB will be delivered to the demonstration site. The four systems will be installed and configured to constitute a 2 MWh, 1 MW storage system, and will be commissioned according to the Demonstration Site Installation Plan.

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Exhibit A

THE CONTRACTOR SHALL:

o Prepare and ship turn-key system of four trailer-mounted 500 kWh / 500 kW zinc-bromine battery storage systems to user site and notify Commission Contract Manager when all four units have arrived at the demonstration site.

o Commission four trailer-mounted 500 kWh / 500 kW zinc-bromine battery storage systems at the demonstration site as defined in the Demonstration Site Installation Plan and notify Commission Contract Manager when all four units have been commissioned and are operating.

o Collect site level data as defined in the DAS Implementation Plan.

DELIVERABLES:

o A letter stating that all four trailer-mounted 500 kWh / 500 kW zinc-bromine battery storage systems have been shipped and received at the PG&E designated demonstration site location.

o A letter stating the four trailer-mounted 500 KWh / 500 kW zinc-bromine battery storage systems have been commissioned and are operating.

o DAS Reports as defined in the DAS Implementation Plan.

TASK 7.0 DATA ACQUISITION SYSTEM AND BENEFITS DATA REPORTING REQUIREMENTS

The goal of this task is to provide system level operation and performance information, including economic performance information, about this project, to the public. This goal will be achieved through the use of a Data Acquisition System (DAS) and additional reporting requirements to the standard PIER reporting requirements contained in Administrative Tasks 1.4 and 1.6 and Agreement Attachments A-l and A-2. This system will be maintained by and at the Contractor's site.

THE CONTRACTOR SHALL:

o Prepare a DAS Implementation Plan. This plan shall include, but not be limited to, the following:

o A method for providing secure communications capabilities for remote access and uploading of daily operational data to a central data collection site assigned responsibility for Data Management activities under a separate contract issued by DOE.

o Characteristics of the selected DAS, which must at a minimum record the following:

o Events that result in a change of system operational mode,

o Demonstration system response times to changes in operating conditions,

o Energy and power into and out of the EES demonstration system, for each AC phase in the system,

o System load,

o System duty cycle count,

o System Failures/Problems,

o Electrical performance of the Power Conditioning System.

o The DAS shall accommodate the secure storage of at least 365 days of historical data on site, and all data Shall be time stamped with resolution to 1 millisecond.

o Any flowcharts and operating manuals for the DAS.

o Method for obtaining historical utility system performance data. Utility system performance data for a minimum of 365 days prior to the installation of the demonstration system is required in order to provide credible baseline data on electrical system performance before and after the installation of the demonstration system. This data shall include, but not be limited to, load profiles, peaks, overloads, faults, power

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Exhibit A

quality events, and any other information required to fully characterize the operation of the electrical utility at the demonstration site prior to installation of the demonstration system.

o Procure a DAS system according to the approved DAS Implementation Plan.

o Prepare a DAS System Test Plan. This test plan shall include, but not be limited to:

o a description of the process to be tested

o the rationale for why the tests are required

o predicted performance based on calculations or other analyses

o test objectives and technical approach

o a test matrix showing the number of test conditions and replicated runs

o a description of the facilities, equipment, instrumentation required to conduct the tests

o a description of test procedures, including parameters to be controlled and how they will be controlled; parameters to be measured and instrumentation to measure them; calibration procedures to be used; recommended calibration interval; and maintenance of the test log

o a description of the data analysis procedures

o a description of quality assurance procedures

o contingency measures to be considered if the test objectives are not met

o Build and test the DAS system according to the approved DAS System Test Plan.

o Prepare a DAS System Test Report. The Test Report shall include, but not be limited to, the following:

o test results

o analysis

o conclusions

o recommendations

o photographs as appropriate.

o Collect historical utility system performance data according to the approved DAS Implementation Plan for a minimum of 365 days prior to system commissioning.

o Run and manage the DAS.

o Provide a secure access to data collected by the DAS that allows daily uploading of operational data to a central site. Protocols for supporting this remote data upload requirement shall be coordinated with the DOE's Data Management Contractor prior to the implementation of the system to insure standard communications protocol is used to fulfill this requirement. All data shall be time stamped with resolution to 1 millisecond.

o Prepare DAS operational summary information each month, and include this information in the Monthly Progress Reports described in Administrative Task 1.4. This information shall include, but not be limited to, the following:

o A written summary of the economic benefit derived for the month

o A written summary of all operations and maintenance activities for the month

o System dispatch information and use patterns associated with the project

o Energy consumption breakdown of parasitic loads introduced by the demonstration system

o System performance under typical utility fault conditions (e.g. lightning strikes)

o System performance under user fault conditions (e.g. fault in customer plant)

o System reliability, failure rates, and performance summary

o Utility system operational data after installation of the demonstration system

o A comparison, after the 2-month anniversary of system commissioning, of DAS data to the historical utility system performance data collected in this Task.

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Exhibit A

o Prepare benefits data information, and include this information on a quarterly basis in the Monthly Progress Reports described in Administrative Task 1.4. This information should be sufficient to demonstrate the economic benefits defined in the original proposal.

o Prepare Annual DAS Reports. These reports shall consolidate all the monthly DAS operational summary information and the quarterly benefits data information and summarize the operation of the system for the preceding year.

DELIVERABLES:

o Draft DAS Implementation Plan

o Final DAS Implementation Plan

o Draft DAS System Test Plan

o Final DAS System Test Plan

o Draft DAS System Test Report

o Final DAS System Test Report

o Draft Annual DAS Reports

o Final Annual DAS Reports

TASK 8.0 TECHNOLOGY TRANSFER ACTIVITIES

The goal of this task is to develop a Technology Transfer Plan to address has the knowledge gained from this effort will be shared with industry, California ratepayers, potential future customers and other interested parties

THE CONTRACTOR SHALL:

o Prepare a Draft Technology Transfer Plan. This plan will address as a minimum:

o Overview of the project and project status

o Expected benefits when the project was proposed.

o Observed benefits and values demonstrated during the project

o Future market opportunities for this demonstrated technology

o List of proposed technical presentations, project orientations, project tours and other activities where information will be transferred to appropriate individuals, organizations and agencies.

o Conduct technology transfer activities in accordance with the Technology Transfer Plan.

DELIVERABLES:

o Draft Technology Transfer Plan.

o Final Technology Transfer Plan.

o Technology transfer presentations and activities as defined in the Technology Transfer Plan

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Exhibit A

Execution Copy

THIS AGREEMENT is made on 9 February 2006 BETWEEN

(1) ZBB ENERGY CORPORATION a corporation registered in a Wisconsin and whose principal office is at N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin, USA 53051 (THE "COMPANY"); and

(2) MONTGOMERY CAPITAL PARTNERS L.P. a limited partnership registered in Delaware whose principal office is at 101 Hudson Street, Jersey City, NJ 07302 USA (the "LENDER").

BACKGROUND

On the terms as set out in this Agreement, the Lender has agreed to advance to the Company an amount of one million three hundred thousand Australian dollars (AUS$1,300,000) or such other amount of Australian dollars as, based on the Closing Date Exchange Rate, shall represent one million United States dollars (US$1,000,000).

IT IS AGREED:

1 DEFINITIONS

1.1 In this Agreement:

"ASTC SETTLEMENT RULES" means the settlement rules from time to time published by ASX Settlement and Transfer Corporation Pty Limited.

"ASX" means the Australian Stock Exchange Limited

"ASX RULES" means the listing rules from time to time published by the ASX.

"BLOOMBERG" means Bloomberg LP, a financial information provider.

"BUSINESS DAYS" shall mean any day, other than Saturday, Sunday or any other day in which the national banks in either Australia or the United States shall not be open for business.

"CASH PAYMENT" means any amount paid into the Lender's Bank Account in accordance with Clause 6.2 (or if applicable Clause 7.1).

"CASH PAYMENT DATE" means the date of a Cash Payment Notice.

"CASH PAYMENT DATE EXCHANGE RATE" means in relation to each Cash Payment Date the Australian dollar to US dollar spot exchange rate as quoted in the London edition of the Financial Times on such Cash Payment Date.

"CASH PAYMENT NOTICE" has the meaning given to it in Clause 6.1.

"CLOSING DATE" means a date that shall be the date on which the Company shall provide Lender with official notice of Shareholder Approval; provided, that such Closing Date shall be not later than twenty (20) Business Days following the date of this Agreement.

"CLOSING DATE EXCHANGE RATE" means, at any point in time, the Australian dollar to US dollar spot exchange rate as quoted in the London edition of the Financial Times on the Closing Date.

"COMMON SHARES" means the common stock of par value $0.01 per share each in the capital of the Company.

"CONVERSION AMOUNT" has the meaning set out in Clause 5.1 of this Agreement.

Execution Copy

"CONVERSION PRICE" means in respect of any Loan Notice Date (or for the purposes of Clause 7.4 the Financing Transaction Date) the lower of (i) the lowest VWAP reported during the 10 consecutive Trading Days prior to the Closing Date and (ii) 80% (eighty per cent) of the lowest VWAP for the 10 consecutive Trading Days immediately prior to the Loan Notice Date (or for the purposes of Clause 7.4 the Financing Transaction Date).

"CHESS" means the Clearing House Electronic Subregister System operated by ASX Settlement and Transfer Corporation Ply Limited (a wholly owned subsidiary of the ASX) under which securities may be held or transferred in uncertificated form.

"CUFS" means CHESS Depositary Interests for Common Shares in the form of CHESS Units of Foreign Financial Products that permit trades in Common Shares to be settled in CHESS.

"DELIVERY" in respect of any Lender's Shares means, at the sole option of the Lender, either:

(a) from and after the date that the Common Shares trade on any US Stock Exchange, the physical delivery of stock certificates evidencing such Lender's Shares registered in the name of the Lender or its nominee(s), or:

(b) whilst the Common Shares and/or CUFS maintain a Quotation on the ASX:

(i) the registration of CHESS Depository Nominees Pty Limited as holder of the legal title to such Lender's Shares;

(ii) the issue to the Lender of CUFS in respect of such Lender's Shares; and

(iii) the issue of a holding statement in respect of the CUFS to the Lender,

all In accordance with the ASTC Settlement Rules,

and "DELIVER" shall be construed accordingly.

"DELIVERY DATE" means the date on which Loan Shares are Delivered pursuant to a Loan Notice.

"FINANCING TRANSACTION" means the collective reference to (a) the Pipe Transaction, or (b) any other public or private financing of debt or equity securities of the Company that provides the Company with sufficient net proceeds to repay the Loan in full (and all other amounts owed to the Lender) pursuant to Clause 6.

"FINANCING TRANSACTION DATE" means the date upon which the PIPE Transaction or another Financing Transaction completes.

"FINANCING TRANSACTION DATE EXCHANGE RATE" means in relation to any Financing Transaction Date the Australian dollar to US dollar exchange rate as quoted in the London edition of the Financial Times on such Financing Transaction Date.

"FLOOR PRICE" shall in respect of a Loan Notice Date or a Subscription Notice Date mean six and one-quarter United States cents (US$0.0625) or the equivalent amount in Australian Dollars at the Loan Notice Date Exchange Rate, subject to adjustment as provided in Clause 10; PROVIDED, HOWEVER, that unless on or before 31 July 2006, the Company shall have tendered payment in full of the outstanding principal amount of the Loan and all interest thereon pursuant to clauses 6 or 7, and the Lender shall have either accepted such payment or converted the Loan in full into Loan Shares (as herein provided), from and after 1 August 2006, the Floor Price shall be zero (0).

"GROUP" means the Company and its subsidiaries (as defined in s736 Companies Act 1985) from time to time.

Execution Copy

"LENDER'S BANK ACCOUNT" means the Lender's account with JP Morgan Chase Bank, 1166 Avenue of the Americas, New York, NY 10036, sort code ABA number 021000021 account name Montgomery Equity Partners LP account number 957 201 613 or such other bank and/or account information as Lender may advise the Company in writing.

"LENDER'S SHARES" means any of the Common Shares or CUFS, including Loan Shares and Warrant Shares that may be issued to the Lender pursuant to this Agreement.

"LOAN" means the amount of one million three hundred thousand Australian dollars (AUS$1,300,000) or such other amount of Australian dollars as, based on the Closing Date Exchange Rate, shall represent one million United States dollars (US$1,000,000) to be advanced pursuant to Clause 2, or the principal amount outstanding for the time being of that loan (including any interest compounded with the Loan pursuant to Clause 4.1).

"LOAN NOTICE" has the meaning set out in Clause 5.1 of this Agreement.

"LOAN NOTICE DATE" means the date of a Loan Notice.

"LOAN NOTICE DATE EXCHANGE RATE" means in relation to each Loan Notice Date the Australian dollar to US dollar spot exchange rate as quoted in the London edition of the Financial Times on such Loan Notice Date.

"LOAN SHARES" means Common Shares and/or CUFS issued to the Lender pursuant to this Agreement upon any one or more conversions of the Loan (other than pursuant to Clause 7).

"PIPE SECURITIES" means the Common Shares, preferred or preference shares or notes or debentures that may be issued pursuant to the PIPE Transaction; provided, that, for purposes of this Agreement, the term "PIPE Securities" shall not mean Options or Warrants to purchase Common Shares.

"PIPE TRANSACTION" means the proposed private investment in public equity (PIPE) transaction to be arranged by Empire Financial Group, Inc. or any other placement agent acceptable to the Company, whereby the Company will issue the PIPE Securities to accredited investors by way of a private placement or any other similar financing transaction which provides the Company with sufficient net proceeds to repay the Loan (and all other amounts owed to the Lender) pursuant to Clause 6.

"QUOTATION" means official quotation by ASX and, if and when the Common Shares trade on a US Stock Exchange, as quoted on such US Stock Exchange and as reported by Bloomberg; and "Quote" or "Quoted" shall be construed accordingly.

"REDUCTION NOTICE" has the meaning set out in Clause 8.4 of this Agreement.

"REDUCTION NOTICE DATE" means the date of a Reduction Notice.

"REGISTRATION RIGHTS AGREEMENT" means the agreement in substantially the form of Exhibit A hereto, between Lender and the Company, pursuant to which the Company shall agree, following the Quotation of its Common Shares on a US Stock Exchange, to register for resale under the US Securities Act of 1933, as amended, all of the Lender's Shares.

"REDUCTION NOTICE DATE EXCHANGE RATE" means in relation to each Reduction Notice Date the Australian dollar to US dollar spot exchange rate as quoted in the London edition of the Financial Times on such Reduction Notice Date.

"SEC" means the United States Securities and Exchange Commission.

"SHAREHOLDER APPROVAL" means the approval by the shareholders of the Company at the Shareholders Meeting of this Agreement and all of the transactions contemplated hereby, including the issuance of all of the Lender's Shares, CUFS and the Warrant pursuant to this

Execution Copy

Agreement; in each case by the affirmative vote of the requisite number of outstanding Company Shares of the Company.

"SHAREHOLDERS MEETING" shall mean the special meeting of shareholders of the Company to be conducted not later than fifteen (15) Business Days following the date of execution of this Agreement, pursuant to which the Company shall seek Shareholder Approval.

"SUBSCRIPTION NOTICE" has the meaning set out in Clause 8.1 of this Agreement.

"SUBSCRIPTION NOTICE DATE" means the date of the Subscription Notice.

"TAXATION" means any of the following: (a) any tax, duty, impost or levy, past or present, of the United Kingdom or elsewhere, whether governmental, state, provincial, local governmental or municipal, including income tax (including income tax required to be deducted or withheld from or accounted for in respect of any payment under section 203 of the Taxes Act or otherwise), corporation tax, advance corporation tax, capital gains tax, inheritance tax, VAT, customs and other import or export duties, rates, stamp duty, stamp duty reserve tax, national insurance and social security contributions; and (b) any fine, penalty, surcharge, interest or other imposition relating to any tax, duty, impost or levy mentioned in paragraph(a) of this definition or to any account, record, form, return or computation required to be kept, preserved, maintained or submitted to any person for the purposes of any such tax, duty, impost or levy.

"TRADING DAY" means any day during which ASX is open for business.

"US STOCK EXCHANGE" means any one of the New York Stock Exchange, Inc., the American Stock Exchange Inc., the Nasdaq Stock Market, Inc., or the National Association of Securities Dealers ("NASD") OTC Bulletin Board.

"VWAP" means on any date, the volume weighted average price of the Common Shares as Quoted on the ASX; PROVIDED, HOWEVER, if the Common Shares shall subsequently be listed for trading on a US Stock Exchange, the term VWAP in relation to any period on or after such listing on a US Stock Exchange occurs shall mean the LOWER of (a) the volume weighted average price (as reported by Bloomberg) of the Common Shares as Quoted on such US Stock Exchange, or (b) if also Quoted on the ASX, the volume weighted average price of the Common Shares as Quoted on the ASX.

"WARRANT" means the subscription right or option held by the Lender to purchase Common Shares or CUFS, as contemplated by Clause 8 of this Agreement.

"WARRANT SHARES" means the aggregate number of Common Shares or CUFS issuable upon exercise of the Warrant.

1.2 References in this Agreement to Clauses are to the clauses of this Agreement.

2 LOAN

2.1 Subject to Clause 12.3 and the Lender approving the use of proceeds information provided by the Company, on or before the third Trading Day after the Closing Date the Lender shall advance to the Company the amount of one million three hundred thousand Australian dollars (AUS$1,300,000) or such other amount of Australian dollars as, based on the Closing Date Exchange Rate, shall represent one million United States dollars (US$1,000,000).

3 REPAYMENT

The Company shall pay or repay the Loan, together with all other amounts due to the Lender pursuant to this Agreement, on or before the second anniversary of the Closing Date. Any such payments or repayments shall be made as set out in this Agreement and in particular any payment or repayment in cash may only be made in accordance with Clause 6 or Clause 7.

Execution Copy

4 INTEREST

4.1 The Company shall pay interest to the Lender on the outstanding amount of the Loan at the rate of 10% (ten per cent) per annum to be compounded with the Loan monthly on the last day of each calendar month. Interest, as so compounded, shall be added to the principal amount of the Loan and shall be payable on the due date of the Loan; provided, that the Company may elect at any time to pay any one or more interest payments in cash on the last day of each calendar month.

4.2 If the Company fails to pay any amount payable by it under this Agreement on its due date, interest shall accrue on the overdue amount from the due date up to the date of actual payment (both before and after judgment) at the rate of 13% (thirteen per cent) per annum. Any interest accruing under this Clause 4.2 shall be immediately payable by the Company on demand by the Lender. Any such interest (if unpaid) arising on an overdue amount will be compounded daily with the overdue amount but will remain immediately due and payable.

5 ISSUE OF LOAN SHARES

5.1 The Company shall upon written notice (a "LOAN NOTICE") from the Lender at any time when any amounts are outstanding under this Agreement issue and Deliver to the Lender Loan Shares. The Loan Notice will specify the Australian dollar value of the Loan Shares to be issued pursuant to the Loan Notice (the "CONVERSION AMOUNT") which shall not exceed the total amount outstanding under this Agreement from time to time.

5.2 Unless the Company agrees otherwise or the Company notifies the Lender of a PIPE Transaction or other Financing Transaction pursuant to Clause 7.1, the Lender shall not, in any one period of seven consecutive days, be entitled to issue Loan Notices in respect of an aggregate Conversion Amount of more than AUS$130,000.

5.3 Subject to Clause 11.1 the number of Loan Shares to be issued and Delivered by the Company in respect of a Loan Notice shall be the Conversion Amount specified in that Loan Notice divided by the Conversion Price then in effect; provided that if the Conversion Price is lower than the Floor Price the Conversion Price shall be increased so that it is equal to the Floor Price. In the case of any fractional entitlements the number of Loan Shares to be issued shall be rounded up to the next whole number.

5.4 The amounts outstanding under this Agreement will be reduced on each Delivery Date by the Conversion Amount set out in the Loan Notice relating to that Loan Notice Date.

5.5 Notwithstanding any other provision of this Agreement the Lender may, in its sole discretion, elect to require the Company to satisfy in cash any amounts due to the Lender pursuant to either (i) Clause 4.2 or Clause 9.5, or (ii) any provision of this Agreement after this Agreement has been terminated in accordance with Clause 15.

5.6 Any payments received, or treated as being received pursuant to Clause 5.4, by the Lender shall be applied;

(a) firstly to pay any fees, expenses or other amounts due pursuant to this Agreement other than the amounts referred to in sub Clauses 5.6
(b) and (c) below;

(b) secondly to pay any amounts due to the Lender in respect of interest pursuant to Clause 4.1 of this Agreement to the extent such interest has not been compounded with the Loan;

6 OPTIONAL CASH PAYMENT

6.1 Subject to Clause 6.5, the Company shall be entitled at any time, or from time to time, to make a payment in cash in respect of all or any portion of any amount which is outstanding pursuant

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to this Agreement by giving the Lender written notice no less than three Trading Days prior to the date of payment (a "Cash Payment Notice").

6.2 The Cash Payment Notice will specify the cash amount to be paid by the Company and the date of payment. Any amount to be so paid shall be transferred to the Lender's Bank Account.

6.3 Each Cash Payment shall, subject to Clause 11.2, be applied:

(a) firstly to pay any fees, expenses or other amounts due pursuant to this Agreement other than the amounts referred to in sub Clauses 6.3(b) and (c) below;

(b) secondly to pay any amounts due to the Lender in respect of interest pursuant to Clause 4.1 of this Agreement to the extent such interest has not been compounded with the Loan;

6.4 Any part of a Cash Payment which is applied pursuant to Clause 6.3(c) shall reduce the outstanding amount of the Loan as follows:

(a) if such Cash Payment is made less than 120 days after the Closing Date, by an amount equal to 100 divided by 107.5 multiplied by the amount of the Cash Payment applied pursuant to Clause 6.39(c);

(b) if such Cash Payment is made 120 days or more but not more than 180 days, after the Closing Date, by an amount equal to 100 divided by 110 multiplied by the amount of the Cash Payment applied pursuant to Clause 6.3(c); or

(c) if such Cash Payment is made 180 days or more after the Closing Date, by an amount equal to 100 divided by 120 multiplied by the amount of the Cash Payment applied pursuant to Clause 6.3(c).

6.5 If a Cash Payment Notice is issued after or on the same date as a Loan Notice then the Loan Notice will be treated as having been received first. The amounts received or treated as being received in respect of the Loan Notice will therefore be applied first (as set out in Clause 5) and then any amounts received or treated as being received in respect of the Cash Payment Notice will be applied (as set out in the preceding provisions of this Clause 6).

7 MANDATORY CASH PAYMENT

7.1 On the Financing Transaction Date, the Company shall be required to make a payment in cash in respect of all amounts that are outstanding pursuant to this Agreement, subject to any adjustment required pursuant to Clause 11.4. Such payment shall be deemed a Cash Payment and subject to the provisions of Clause 6.3 and 6.4. Any amount to be so paid shall be transferred to the Lender's Bank Account.

7.2 As soon as reasonably practicable and in any case not less that ten (10) Trading Days before the Financing Transaction Date, the Company shall notify the Lender of the proposed completion date of the Financing Transaction or PIPE Transaction (as the case may be) and keep the Lender informed as to the progress of the Financing Transaction or PIPE Transaction, as the case may be.

7.3 Prior to the Financing Transaction Date, the Lender shall notify the Company of the total amount which is outstanding pursuant to this Agreement as referred to in Clause 7.1 and, subject to any adjustment required pursuant to Clause 11.4 the total number of shares which must be Delivered to the Lender on the Financing Transaction Date pursuant to Clause 7.4.

7.4 Subject to clause 7.5, on the Financing Transaction Date, the Company shall issue and Deliver to the Lender such number of Common Shares and/or CUFS as is equal to 50% of the amount which is determined by dividing (a) the outstanding amount required to be repaid to the Lender

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pursuant to this Agreement immediately prior to repayment pursuant to Clause 7.1, and (b) the applicable Conversion Price then in effect.

7.5 If the PIPE Securities do not rank pari passu in all respects with the Common Shares, then, at the option of the Lender, the Company shall issue and Deliver to the Lender PIPE Securities in lieu of Common Shares in order to discharge its obligation in Clause 7.4.

7.6 In respect of any payment in cash pursuant to either Clause 6 or 7, the Company, at its sole option, may elect to make such payment in US dollars or Australian dollars. If the Company elects to make a cash payment in US dollars, the US dollar to Australian dollar spot exchange rate (as quoted in the London edition of the Financial Times on the date of such cash payment is received by the Lender) shall be used for the purposes of calculating the equivalent amount of Australian dollars by which the outstanding amount of the Loan (and any other amounts outstanding under this Agreement) shall be reduced by. For the avoidance of doubt, such cash payment shall still be subject to increase due to exchange rate movements as provided for in clauses 11.2 and 11.4(a) (as applicable).

8 ADDITIONAL SUBSCRIPTION RIGHTS (WARRANTS)

8.1 The Company shall (in addition to the Loan Shares referred to above) upon receipt of one or more written notices (each a "Subscription Notice") from the Lender at any time after the Closing Date and on or prior to the fourth anniversary of the Closing Date, issue to the Lender, in accordance with this Clause 8 such number of Common Shares as are specified in the Subscription Notice.

8.2 The Lender shall be entitled to issue Subscription Notices in respect of up to 2,000,000 Warrant Shares less the number of Common Shares in respect of which Reduction Notices have been issued.

8.3 The Lender shall, within three Trading Days of any Common Shares being Delivered to the Lender pursuant to Clause 8.1, pay to the Company in respect of such Common Shares an amount per Common Share equal to the lower of (i) 80% of the VWAP on the 10 consecutive Trading Days prior to the Closing Date and (ii) 80% of the VWAP on the date of the relevant Subscription Notice provided that if the amount per Common Share is lower than the Floor Price such amount shall be increased so that it is equal to the Floor Price.

8.4 The Lender shall be entitled by notice in writing to the Company (a "Reduction Notice") to reduce the number of Common Shares in respect of which it may issue Subscription Notices. The Lender shall only be entitled to issue a Reduction Notice on or after the date which is 120 days after the Closing Date. During the period of one month immediately after the date which is 120 days after the Closing Date and during each period of one month immediately thereafter until the fourth anniversary of the Closing Date, the Lender shall be entitled to issue Reduction Notices in respect of up 10% of the Unexercised Warrants (as defined in Clause 8.6) in any one month.

8.5 The Company shall pay to the Lender an amount of AUS$0.10 (ten cents) for each Common Share in respect of which a Reduction Notice is issued. The Company shall, at its election either

(a) pay such amount (adjusted if applicable pursuant to Clause 11.3) in cash to the Lender (by transferring such amount to the Lender's Bank Account) within 2 Trading Days of the date of the relevant Reduction Notice; or

(b) issue Common Shares to the Lender in respect of such amount, in exactly the same way as if a Loan Notice had been issued on the date of the Reduction Notice for a Conversion Amount equal to the total amount due to the Lender in respect of that Reduction Notice.

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8.6 The Lender shall be entitled to issue Reduction Notices in respect of up to 2,000,000 Common Shares less the number of Common Shares which have been validly issued pursuant to a Subscription Notice or have been subject to a Reduction Notice (the "Unexercised Warrants").

9 ISSUE OF SHARES OR CUFS

9.1 In respect of any Lender's Shares, to be issued to the Lender pursuant to this Agreement the Company shall make application for Quotation of the Lender's Shares, as soon as possible after receipt of a Loan Notice or Subscription Notice. Any such Quotation is expected to be on the third Trading Day after such application is made.

9.2 The Lender shall with each Loan Notice or Subscription Notice advise the Company whether the Lender's Shares to be Delivered pursuant to such Loan Notice or Subscription Notice shall be in the form of certificated Common Shares Quoted on a US Stock Exchange or in CUFS. The relevant number of Lender's Shares or CUFS (as the case may be) shall be Delivered within seven (7) Trading Days of the date on which the Loan Notice or as the case may be, Subscription Notice is received (or deemed to have been received, in accordance with Clause 18). Any breach of this Clause 9.1 will amount to a serious breach of this Agreement which the Company acknowledges may cause the Lender significant financial loss.

9.3 On or before the Trading Day immediately prior to the anticipated date of Quotation of the Lender's Shares the following shall occur:

(a) the Company shall, conditional only upon Quotation of the Lender's Shares, allot and issue the relevant Lender's Shares to the Lender;

(b) the Company shall do all acts and things necessary to procure Quotation of the relevant Lender's Shares on the next following Trading Day including, without limitation to the forgoing, if the Lender requests that such Lender's Shares are to be in the form of Common Shares to be traded on a US Stock Exchange, the Company shall do all acts and things necessary to procure the SEC's declaration that the Company's registration statement covering such Lenders' Shares is effective; and;

(c) the Company shall give all necessary directions and instructions to its registrars to procure that the relevant Lenders Shares or CUFS are Delivered to the Lender on the date of Quotation.

9.4 The Lender's Shares to be issued to the Lender under this Agreement shall be allotted and issued by the Company fully paid and free from all claims, charges, liens, encumbrances, equities and third party rights whatsoever and (save for any Common Shares that are issued pursuant to Clause 7.4) will rank pari passu in all respects with the existing issued Common Shares including the right to receive all dividends or other distributions declared, made or paid after the date of allotment.

9.5 If the Company fails to Deliver any Lender's Shares in breach of its obligations under this Agreement to do so and such Lender's Shares still have not been issued seven (7) Trading Days after the date of the relevant Loan Notice, then the Company shall, without prejudice to any other rights which the Lender may have under this Agreement, pay to the Lender an amount equal to two (2%) per cent of the then outstanding amount of the Loan each calendar month (or part of a calendar month) that such Lender's Shares are not Delivered. The parties agree that this represents a genuine pre-estimate of loss and is not in any way intended to be a penalty. Any such payment shall be made within three (3) days of the end of the calendar month during which such seven (7) Trading Day period expires and within three (3) days of the end of any subsequent calendar month (or part thereof) in which such Lender's Shares remain outstanding.

10 STOCK SPLITS AND ADJUSTMENT PROVISIONS

10.1 In the event that, at any time prior to Delivery of a Loan Notice or a Subscription Notice, the Company shall effect any forward split of its outstanding Common Shares, the Floor Price shall

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be appropriately and equitably decreased and the aggregate number of Warrant Shares shall be appropriately and equitably increased.

10.2 In the event that, at any time prior to Delivery of a Loan Notice or a Subscription Notice, the Company shall effect any reverse split of its outstanding Common Shares, the Floor Price shall be appropriately and equitably increased and the aggregate number of Warrant Shares shall be appropriately and equitably decreased.

10.3 Except in connection with the contemplated PIPE Transaction or as otherwise consented to by the Lender, the Company shall not consummate any forward split or reverse split of its outstanding Common Shares at any time while the Loan shall be issued and outstanding.

10.4 In the event that the Company issues Common Shares (save in respect of options or warrants to purchase Common Shares) at any time on or after the Closing Date at a price below the Floor Price, the Floor Price shall be decreased to 100% of the lowest price at which Common Shares are issued by the Company.

11 EXCHANGE RATE MOVEMENTS

11.1 If on any Loan Notice Date, the Loan Notice Date Exchange Rate is less than the Closing Date Exchange Rate then the number of Loan Shares to be issued shall be increased by the same percentage as results from dividing the Closing Date Exchange Rate by the relevant Loan Notice Date Exchange Rate. By way of example, if the number of Loan Shares to be issued in respect of a particular Loan Notice would, but for this Clause 11.1, be 1,000 and if the Closing Date Exchange Rate is 1.80 and the relevant Loan Notice Date Exchange Rate is 1.75, then 1,029 Loan Shares will be issued in relation to that Loan Notice.

11.2 If on any Cash Payment Date, the Cash Payment Date Exchange Rate is less than the Closing Date Exchange Rate then the amount of cash required to satisfy the amounts due pursuant to Clause 6.3 shall be increased by the same percentage as results from dividing the Closing Date Exchange Rate by the relevant Cash Payment Date Exchange Rate.

By way of example, if the amount of cash required to repay all amounts due pursuant to Clause 6.3(a) would, but for this Clause 11.2, be US$1,000 and if the Closing Date Exchange Rate is 1.80 and the relevant Cash Payment Notice Date Exchange Rate is 1.75 then the amount of cash from the Cash Payment required to repay all amounts due pursuant to Clause 6.3(a) will be US$1,028.57. Accordingly only the surplus over US$1,028.57 from such Cash Payment will be applied (again in the same manner) towards any amounts due pursuant to Clause 6.3(b) and if any amount of the Cash Payment remains after all amounts so due pursuant to Clause 6.3(b) have been paid then the surplus will be applied (again in the same manner and after the application of Clause 6.4) to pay amounts pursuant to Clause 6.3(c).

11.3 If in relation to a Reduction Notice an amount is to be paid pursuant to Clause 8.5(a) and if in relation to that Reduction Notice the Reduction Notice Date Exchange Rate is less than the Closing Date Exchange Rate then the amount of cash required to satisfy the amount due pursuant to Clause 8.5(a) shall be increased by the same percentage as results from dividing the Closing Date Exchange Rate by the relevant Reduction Payment Date Exchange Rate. By way of example, if the amount of cash to be paid pursuant to Clause 8.5(a) would, but for this Clause 11.3, be US$1,000 and if the Closing Date Exchange Rate is 1.80 and the relevant Reduction Notice Date Exchange Rate is 1.75 then the amount of cash to be paid pursuant to Clause 8.5(a)in respect of that Reduction Notice will be US$1,028.57.

11.4 If on any Financing Transaction Date, the Financing Transaction Date Exchange Rate on such date is less than the Closing Date Exchange Rate then:

(a) the amount of cash required to satisfy the amounts due pursuant to Clause 7.1 shall be increased by the same percentage as results from dividing the Closing Date Exchange Rate by the relevant Financing Transaction Date Exchange Rate.

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(b) the number of shares to be issued pursuant to Clause 7.4 shall be increased by the same percentage as results from dividing the Closing Date Exchange Rate by the Financing Transaction Date Exchange Rate.

12 PAYMENT OF COSTS, EXPENSES, FEES AND COMMISSIONS

12.1 Each of the parties shall pay its own fees and expenses (including the fees of any solicitors, accountants, or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby, except that the Company will pay the fees and expenses of the solicitors to the Lender in the sum of US$20,000 (plus applicable VAT and expenses (including bank transfer fees)).

12.2 The Company shall pay to the Lender a due diligence fee of US$7,500, an arrangement fee of US$35,000 and a facility fee of US$20,000.

12.3 The legal fees and expenses referred to in Clause 12.1 and the arrangement fee referred to in Clause 12.2 shall be paid on or before the Closing Date and such amounts shall, if not already paid, be withheld from the advance of the Loan to be made pursuant to Clause 2.

13 SECURITY

The Company shall not provide any additional security under this Agreement.

14 INDEMNITIES

14.1 The Company shall indemnify the Lender against any loss or liability, costs or expenses incurred by the Lender as a direct or indirect result of any breach by the Company of any of its obligations under this Agreement including any failure by the Company to issue Common Shares and/or CUFS or pay, to the Lender any amount due under this Agreement on its due date.

14.2 The Company shall, within three Trading Days of a demand from the Lender, pay to the Lender the amount of all costs and expenses (including legal fees and any disbursements) properly and reasonably incurred by the Lender in connection with the enforcement of, or the preservation of any of the Lender's rights under, this Agreement.

15 TERMINATION

15.1 The Lender shall be entitled to terminate this Agreement by notice to the Company immediately at any time if:

(a) the Company fails to obtain at the Shareholders Meeting to be held by a date that shall be not more than twenty (20) Business Days from the date of this Agreement, all necessary Shareholder Approval.

(b) the Company fails to pay any amount payable by it under this Agreement on its due date;

(d) unless the Common Shares shall have been previously listed for trading on a US Stock Exchange, the Common Shares and/or CUFS cease to be Quoted on ASX or there shall occur any suspension of their Quotation on ASX;

(e) there shall occur any suspension or cessation of trading of the Common Shares on a US Stock Exchange or the Company is removed from the official list of the ASX or a US Stock Exchange while any amount is outstanding under this Agreement;

(f) the Company is or becomes unable to pay its debts as defined in section 123 of the Insolvency Act 1986;

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(g) any petition, application or order is made or resolution proposed for the winding up or administration of the Company or any other member of the Group provided that this shall not apply to any such petition which is removed within 21 days of being made; or

(h) a receiver is appointed over all or any part of the assets or undertaking of the Company.

15.2 If this Agreement is terminated by the Lender in accordance with its terms then any part of the Loan which has not been advanced shall immediately be cancelled and any part of the Loan, together with accrued interest, and all other amounts accrued or outstanding under this Agreement shall become immediately due and payable.

16 COVENANTS

16.1 The Company covenants to the Lender that (otherwise than with the prior written consent of the Lender) it;

(a) will use all reasonable endeavours to obtain all necessary Shareholder Approval at the Shareholders Meeting;

(b) will use all reasonable endeavours to maintain the Quotation of the Common Shares and/or CUFS and CUFS on ASX;

(c) in connection with the contemplated Financing Transaction, will use all reasonable endeavours to register its Common Shares under the United States Securities and Exchange Act of 1934, as amended, and list its Common Shares for trading on a US Stock Exchange;

(d) subject to compliance with Section 16.1(a) above, will ensure on each day for so long as any amount remains outstanding under this Agreement, that it has the necessary shareholder authority to issue the requisite number of Lender's Shares required to satisfy a Loan Notice issued on that day in respect of a Conversion Amount equal to at least the then outstanding amount of the Loan including any interest capable of becoming due pursuant to Clause 4.1;

(e) will comply with its covenants set forth in Clause 10.3 above;

(f) will not, except in relation to a Financing Transaction, issue or agree to issue Common Shares or any other shares in the share capital of the Company other than (i) pursuant to this Agreement (ii) shares which are already issued at the date of this Agreement or which the Company at the date of this Agreement is contractually obliged to issue;

(g) will file in a timely manner all reports and other documents required of it under the Companies Act 1985, the ASX Rules and all other laws or regulations applicable to it;

(h) until such time as

(A) the Company shall have become a full reporting company under the Securities Exchange Act of 1934, as amended,

(B) the Common Shares shall have been approved for Quotation on a US Stock Exchange, and

(C) the SEC shall have declared effective the Company's registration statement covering the Lender's Shares, all as provided in the Registration Rights Agreement,

the Company shall not take any action or file any document to terminate or suspend such registration or to terminate or suspend the Quotation of its Common Shares and/or CUFS on ASX or to have it removed from the official list of ASX and if seeking a listing

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on a US Stock Exchange, the Company will use all reasonable endeavours to procure completion of the steps set out in sub clauses 16.1(h)(A), (B) and (C) above;

(i) will take all steps reasonably necessary to preserve and continue the corporate existence of the Company;

(j) will immediately notify the Lender upon its becoming aware of:

(A) the suspension of the Common Shares and/or CUFS from Quotation on ASX or a US Stock Exchange;

(B) the Common Shares and/or CUFS ceasing to be Quoted on either ASX or a US Stock Exchange; or

(k) will not, at any time after the date hereof, until expiry of this Agreement effect any merger or consolidation of the Company whether by scheme of arrangement or otherwise with or into, or a transfer of all or any substantial part of the assets or undertaking of the Company to another entity (a "CONSOLIDATION EVENT") unless the resulting successor or acquiring entity (if not the Company) assumes by written instrument the obligation to deliver to the Lender such shares and/or securities as following such Consolidation Event the Lender is entitled to receive pursuant to this Agreement.

17 WITHHOLDING AND GROSSING-UP

17.1 Except as required by law, all payments due to the Lender under this Agreement will be made free and clear of all deductions and withholdings (whether in respect of Taxation, set- off, counter-claim or otherwise).

17.2 If any deduction or withholding is required by law to be made from any payment due to the Lender under this Agreement, the person who is obliged to make such payment will pay to the Lender such additional amount as is necessary to ensure that the Lender receives a net amount (after the deduction or withholding) equal to the amount which it would have received had the payment in question not been subject to the deduction or withholding.

17.3 If any payment received by the Lender under this Agreement from the Company (other than the fees and commissions referred to in Clause 12 is subject to Taxation, the person who is obliged to make such payment will pay to the Lender such additional amount as is necessary to ensure that the Lender receives and retains a net amount (after taking into account such Taxation and any Taxation payable in respect of such additional amount) equal to the full amount which it would have received and retained had the payment in question not been subject to Taxation.

18 NOTICES

18.1 Any demand, notice or other communication given or made under or in connection with this Agreement will be in writing and will, if otherwise given or made in accordance with this Clause 18 be deemed to have been duly given or made as follows:

(a) if sent by prepaid first class post, on the second Trading Day after the date of posting if posted in the UK for UK delivery and on the seventh Trading Day if posted for overseas delivery; or

(b) if delivered by hand, upon delivery; or

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provided however that, if it is delivered by hand or sent by facsimile or e-mail on a day which is not a Trading Day or after 4.00 pm London time on a Trading Day, it will instead be deemed to have been given or made on the next Trading Day.

Any such demand, notice or other communication will, in the case of service by post or delivery by hand, be addressed (subject as provided in this Clause) to the recipient at the recipient's address stated in this Agreement or at such other address as may from time to time be notified in writing by the recipient to the sender as being the recipient's address for service.

18.2 Any such demand, notice or other communication will, in the case of service by facsimile or e-mail be sent to the recipient using the facsimile number or e-mail set out below.

(a) Fax the Company: (262) 253-9822

(b) E-mail the Company: rparry@zbbenergy.com or gdhahn@zbbenergy.com

(d) E-mail the Lender: bpress@m-equity.com

18.3 The provisions of this Clause 18 will not apply, in the case of service of court documents, to the extent that such provisions are inconsistent with

Part 6 of the Civil Procedure Rules.

19 REMEDIES AND WAIVERS

No failure to exercise, nor any delay in exercising, on the part of the Lender, any right or remedy under this Agreement shall operate as a waiver, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise or the exercise of any other right or remedy. The rights and remedies provided in this Agreement are cumulative and not exclusive of any rights or remedies provided by law.

20 GOVERNING LAW AND JURISDICTION

This Agreement is governed by and is to be construed in accordance with English law and the courts of England have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement)

This Agreement has been entered into as a Deed on the date stated at the beginning of this Agreement.

SIGNED as a deed by                 )
ZBB ENERGY CORPORATION              )
acting by                           )


/s/ Robert John Parry
-------------------------------------
Robert John Parry
Chief Executive Officer
                                        DIRECTOR

                                        DIRECTOR /SECRETARY

SIGNED as a deed by MONTGOMERY      )
CAPITAL PARTNERS, L.P               )
acting by                           )

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18.2 Any such demand, notice or other communication will, in the case of service by facsimile or e-mail be sent to the recipient using the facsimile number or e-mail set out below.

(a) Fax the Company: (262) 253-9822

(b) E-mail the Company: rparry@zbbenergy.com or gdhahn@zbbenergy.com

(d) E-mail the Lender: bpress@m-equity.com

18.3 The provisions of this Clause 18 will not apply, in the case of service of court documents, to the extent that such provisions are inconsistent with

Part 6 of the Civil Procedure Rules.

19 REMEDIES AND WAIVERS

20 GOVERNING LAW AND JURISDICTION

This Agreement has been entered into as a Deed on the date stated at the beginning of this Agreement.

SIGNED as a deed by                 )
ZBB ENERGY CORPORATION              )
acting by                           )

                                        DIRECTOR

                                        DIRECTOR /SECRETARY


SIGNED as a deed by MONTGOMERY      )   /s/ ILLEGIBLE
CAPITAL PARTNERS, L.P               )   ----------------------------------------
acting by                           )   Portfolio Manager

[LOGO]

EMPIRE FINANCIAL GROUP, INC.

14 EAST 60TH STREET, 2ND FLOOR
NY, NY 10022
212-355-4849

November 9, 2005

Robert Parry
Chief Executive Officer
ZBB Energy Corporation
N93 W 14475 Whittaker Way
Menomonee Falls, WI 53051

Dear Mr. Parry:

This letter (the "AGREEMENT") constitutes the agreement between ZBB Energy Corporation (the "Company") and Empire Financial Group, Inc. ("EMPIRE") that Empire shall serve as the placement agent for the Company, in connection with a proposed offer and private placement (the "Offering") of shares of the Company's common stock and warrants to purchase additional shares of Company common stock (the "SECURITIES"). Empire a validly registered and licensed broker-dealer; duly authorized to act as a private placement agent and it is a member in good standing of the NASD. It is currently contemplated that the Offering will raise between $6-$12 million which is predicated on successful completion of the due diligence investigation by Empire. Prior to the Offering of the Securities, Empire will seek to obtain in a private placement a Bridge Loan of $1,100,000 for the Company. The contemplated terms and conditions of the Bridge Loan and Offering of Securities shall be as set forth in the Summary of Proposed Terms dated Friday, November 4, 2005, among the Company, Empire, Broadway Partners LLC and Wharton Equity LLC, a copy of which is annexed hereto as Annex A and made a part hereof (the "TERM SHEET").

A. FEES AND EXPENSES. In connection with the services described above, the Company shall pay to Empire the following:

1. PLACEMENT AGENT'S FEE. As compensation for its services in connection with the Offering and the Bridge Loan described below, the Company agrees to pay Empire a nonrefundable retainer fee of $12,500 upon execution of this letter agreement and an additional $12,500 upon completion of the Bridge Loan referred to below. The Company shall pay to Empire a cash placement fee equal to (i) $100,000 upon completion of the Bridge Loan described below, and
(ii) ten percent (10%) of the aggregate purchase price paid by each purchaser of Securities that were placed in the Offering (collectively, the "PLACEMENT AGENT'S FEE"). The Placement Agent's Fee will be deducted from the gross proceeds of the Bridge Loan and the Securities sold at the Closing. The amount of the retainer fee previously paid to Empire will be credited on a dollar for dollar basis toward the cash portion of the Placement Agent's Fee.

2. EXPENSES. In addition to any fees payable to Empire hereunder and regardless of whether an Offering is consummated, the Company hereby agrees to reimburse Empire, within ten (10) days after written request therefor, all reasonable travel and other actual and accountable out-of-pocket expenses incurred in connection with Empire's engagement, including the reasonable fees and expenses of Empire's counsel.

3. WARRANTS: In addition to the Placement Agent's Fee, upon the closing of the sale of securities in connection with the Offering, the Company shall issue to the Placement Agent warrants to purchase shares of common stock of the Company (the "WARRANTS") in an amount equal to 10% of the amount of Securities issued or issuable by the Company in the Offering. The Warrants shall be exercisable at 120% of the price of the Offering. The Warrants shall expire five years from the date of issuance. The Warrants shall be in the same form, including, without limitation, the same registration rights and anti-dilution provisions, as the securities sold in the Offering; provided, however, the Warrants shall include a "net issuance" exercise feature.

B. NO-SHOP. Until the Offering contemplated hereby is completed, but no later than 120 days from the date hereof (the "NO-SHOP PERIOD"), the Company agrees that it will not negotiate with any other person relating to a possible public or private offering or placement of the Company's securities; PROVIDED, HOWEVER, that the No-Shop Period shall expire on December 15, 2005 and the Company shall have the right to terminate this Agreement at any time after such date in the event that the $1,100,000 Bridge Loan financing shall not have been consummated by December 15, 2005.

C. TERM AND TERMINATION OF ENGAGEMENT. Except as set forth below, the term (the "TERM") of Empire's engagement will begin on the date hereof and end on the earlier of the consummation of the Offering of the Securities or 10 days after receipt by either Party hereto of written notice of termination; provided that no such notice may be given by the Company during the No Shop Period, subject to early termination as set forth in Paragraph B above. Notwithstanding any such expiration or termination, Paragraphs D through N shall survive and remain in full force and effect and be binding on the parties hereto, in accordance with their terms.

D. FEE TAIL. Empire shall be entitled to a Placement Agent's Fee, calculated in the manner provided in Paragraph A, with respect to any securities purchased in any subsequent offering ("SUBSEQUENT OFFERING") by investors whom Empire had introduced to the Company during the Term if such Subsequent Offering is consummated at any time within (i) the 24-month period following the consummation of this Offering and (ii), if no Offering shall have been consummated during the Term, the six month period following the expiration or termination of this Agreement.

E. FUTURE TRANSACTIONS. If, at any time during the Term, or within the 24-month period following consummation of the Offering of the Securities during the Term, the Company or any of its subsidiaries (i) disposes of or acquires business units or acquires any of its outstanding equity securities or makes any exchange or tender offer or enters into a merger, consolidation or other business combination or any recapitalization, reorganization, restructuring or other similar transaction, including, without limitation, an extraordinary dividend or distribution or a spin-off or split-off (each, a "TRANSACTION"), and the Company decides to retain a financial advisor for such Transaction, Empire shall have the right to act as one of the Company's financial advisors for any such Transaction; or (ii) decides to finance or refinance any indebtedness using a manager or agent, Empire (or any affiliate designated by Empire) shall have the right to act as a manager, placement agent or lead agent with respect to such financing or refinancing; or (iii) determines to raise funds by means of a public offering or a Offering of equity or debt securities using an underwriter or placement agent, Empire shall have the right to act as an underwriter, initial purchaser or placement agent for such financing. In each case where Empire so serves,

ZBB ENERGY CORPORATION 2

Empire shall be entitled to an allocation of such percentage of the total fees paid in connection with the foregoing Transaction as shall be mutually acceptable to the Company and the lead manager, agent or underwriter, provided, that in no event shall Empire's percentage allocation be less than 20% of such fees, unless otherwise agreed to in writing by it. If Empire or its affiliates decides to accept any such engagement, the agreement governing such engagement will contain, among other things, provisions for customary fees for Transactions of similar size and nature and the provisions of this Agreement, including indemnification, which are appropriate to such Transaction.

F. USE OF INFORMATION. The Company will furnish Empire such written information as Empire reasonably requests in connection with the performance of its services hereunder. The Company understands, acknowledges and agrees that, in performing its services hereunder, Empire will use and rely entirely upon such information as well as publicly available information regarding the Company and other potential parties to an Offering and that Empire does not assume responsibility for independent verification of the accuracy or completeness of any information, whether publicly available or otherwise furnished to it, concerning the Company or otherwise relevant to an Offering, including, without limitation, any financial information, forecasts or projections considered by Empire in connection with the provision of its services.

G. CONFIDENTIALITY. In the event of the consummation or public announcement of any Offering, Empire shall have the right to disclose its participation in such Offering, including, without limitation, the placement at its cost of "tombstone" advertisements in financial and other newspapers and journals. Empire agrees to keep confidential during the Term, and for five years after the expiration or any termination, of this Agreement, all material nonpublic information provided to it by the Company, except as required by law, pursuant to an order of a court of competent jurisdiction or the request of a regulatory authority having jurisdiction over Empire or its affiliates (a "REGULATORY REQUEST"), or as contemplated by the terms of this Agreement, provided Empire shall, if permitted by law, give notice to the Company of the request or order (other than a Regulatory Request) to furnish the nonpublic information. Notwithstanding any provision herein to the contrary, Empire may disclose nonpublic information to its affiliates, agents and advisors whenever Empire determines that such disclosure is necessary to provide the services contemplated hereunder, provided that Empire advises such persons of the obligation to maintain the confidentiality of such information and remains liable under this Agreement for any breach of confidentiality by such affiliates, agents and advisors. Notwithstanding any provision herein to the contrary, this Section G shall not bar disclosure of, and Empire and the Company and their respective representatives or agents may disclose, without limitation of any kind, any information with respect to the "tax treatment" and "tax structure" (in each case, within the meaning of Treasury Regulation Section 1.6011-4) of the Offering and related transactions and all materials of any kind (including opinions or other tax analyses) that are provided to Empire or the Company or such representatives or agents relating to such tax treatment and tax structure, provided that with respect to any document or similar item, this sentence shall only apply to such portions of the document or similar item that relate to the tax treatment or tax structure of the Transactions.

H. SECURITIES MATTERS. The Company shall be responsible for any and all compliance with the securities laws applicable to it, including Regulation D and the Securities Act of 1933, and Rule 506 promulgated thereunder, and unless otherwise agreed in writing, all state securities ("blue sky") laws. Empire agrees to cooperate with counsel to the Company in that regard.

I. INDEMNITY. Empire and the Company agree to the indemnification provisions as set forth in ANNEX B attached hereto.

ZBB ENERGY CORPORATION 3

J. LIMITATION OF ENGAGEMENT TO THE COMPANY. The Company acknowledges that Empire has been retained only by the Company, that Empire is providing services hereunder as an independent contractor (and not in any fiduciary or agency capacity) and that the Company's engagement of Empire is not deemed to be on behalf of, and is not intended to confer rights upon, any shareholder, owner or partner of the Company or any other person not a party hereto as against Empire or any of its affiliates, or any of its or their respective officers, directors, controlling persons (within the meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of 1934), employees or agents. Unless otherwise expressly agreed in writing by Empire, no one other than the Company is authorized to rely upon this Agreement or any other statements or conduct of Empire, and no one other than the Company is intended to be a beneficiary of this Agreement. The Company acknowledges that any recommendation or advice, written or oral, given by Empire to the Company in connection with Empire's engagement is intended solely for the benefit and use of the Company's management and directors in considering a possible Offering, and any such recommendation or advice is not on behalf of, and shall not confer any rights or remedies upon, any other person or be used or relied upon for any other purpose. Empire shall not have the authority to make any commitment binding on the Company. The Company, in its sole discretion, shall have the right to reject any investor introduced to it by Empire.

K. LIMITATION OF EMPIRE'S LIABILITY TO THE COMPANY. Empire and the Company further agree that neither Empire nor any of its affiliates or any of its their respective officers, directors, controlling persons (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act of 1934), employees or agents shall have any liability to the Company, its security holders or creditors, or any person asserting claims on behalf of or in the right of the Company (whether direct or indirect, in contract, tort, for an act of negligence or otherwise) for any losses, fees, damages, liabilities, costs, expenses or equitable relief arising out of or relating to this Agreement or the Services rendered hereunder, except for losses, fees, damages, liabilities, costs or expenses that arise out of or are based on any action of or failure to act by Empire and that are finally determined (by a court of competent jurisdiction and after exhausting all appeals) to have resulted solely from the gross negligence or willful misconduct of Empire. With respect to alleged breaches of the Confidentiality provisions herein by Empire, the Company shall have the right to pursue equitable relief in addition to any other remedy in equity or law.

L. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York. Any disputes which arise under this Agreement, even after the termination of this Agreement, will be heard only in the state or federal courts located in the City of New York, State of New York. The parties hereto expressly agree to submit themselves to the jurisdiction of the foregoing courts in the City of New York, State of New York. The parties hereto expressly waive any rights they may have to contest the jurisdiction, venue or authority of any court sitting in the City and State of New York. In the event of the bringing of any action, or suit by a party hereto against the other party hereto, arising out of or relating to this Agreement, the party in whose favor the final judgment or award shall be entered shall be entitled to have and recover from the other party the costs and expenses incurred in connection therewith, including its reasonable attorneys' fees.

M. NOTICES. All notices hereunder will be in writing and sent by certified mail, hand delivery, overnight delivery or telefax, if sent to Empire, to Empire Financial Group, Inc., 2170 West State Road 434 Suite #100 Longwood, FL 32779 Attention Messrs. Steven M. Rabinovici and Donald Wojnowski, Jr., with a copy to Morse, Zelnick, Rose & Lander, LLP, 405 Park Avenue, New York, NY 10022, Attention: Stephen A. Zelnick, Esq. and if sent to the Company, will be mailed, delivered or telefaxed and confirmed to ZBB Energy Corporation, N93 W14475 Whittaker Way, Menomonee Falls, Wl 53051, with a copy to Gersten Savage, LLP, 600 Lexington Avenue, New York, NY 10022, Attention: Stephen A. Weiss, Esq. Notices sent by certified mail shall be deemed received five days

ZBB ENERGY CORPORATION 4

thereafter, notices sent by hand delivery or overnight delivery shall be deemed received on the date of the relevant written record of receipt, and notices delivered by telefax shall be deemed received as of the date and time printed thereon by the telefax machine.

N. MISCELLANEOUS. This Agreement shall not be modified or amended except in writing signed by Empire and the Company. This Agreement shall not be assigned without the prior written consent of Empire and the Company; provided, however, that in the event of a Offering in which the Company is not the surviving corporation or entity, the Company's remaining obligations (except with respect to the Fee Tail and Future Offerings), if any, under this Agreement shall remain in full force and effect and become obligations of the surviving corporation or entity. This Agreement constitutes the entire agreement of Empire and the Company with respect to the subject matter hereof and supersedes any prior agreements. If any provision of this Agreement is determined to be invalid or unenforceable in any respect, such determination will not affect such provision in any other respect, and the remainder of the Agreement shall remain in full force and effect. This Agreement may be executed in counterparts (including facsimile counterparts), each of which shall be deemed an original but all of which together shall constitute one and the same instrument.

In acknowledgment that the foregoing correctly sets forth the understanding reached by Empire and the Company, please sign in the space provided below, whereupon this letter shall constitute a binding Agreement as of the date indicated above,

Very Truly Yours,
EMPIRE FINANCIAL GROUP, INC..

By: /s/ Don Vojnowski
    ------------------------------
    Don Vojnowski
    Chief Executive Officer

Confirmed and accepted as of
the 16 November 2005

ZBB ENERGY CORPORATION

By: Robert Parry
Robert Parry
Chief Executive Officer
16 November 2005

ZBB ENERGY CORPORATION 5

ANNEX A

SUMMARY OF PROPOSED TERMS

ZBB ENERGY CORPORATION

This Summary of Proposed Terms constitutes an indication of interest for discussion purposes only and is subject to further due diligence, negotiations and executed definitive agreements.

PROPOSED TERM SHEET FOR FINANCINGS AND UNITED STATES
COMMON STOCK LISTING

Unless otherwise indicated, all references to "dollars" or "$" mean United States dollars.

                      THE BRIDGE LOAN  A (U.S.) $1,100,000 loan (the
                                       "BRIDGE LOAN") and 8,800,000 shares of
                                       common stock, $0.001 par value per share
                                       (the "COMMON STOCK") of ZBB Energy
                                       Corporation (the "COMPANY").

                                       The Bridge Loan will be evidenced by the
                                       Company's non-interest bearing
                                       convertible note (the "BRIDGE NOTE") due
                                       and payable (unless converted) on a date
                                       that shall be 18 months from the date of
                                       funding (the "MATURITY DATE"). The Bridge
                                       Note may be converted by the holder(s) at
                                       any time on or before the Maturity Date
                                       at a price per share (the "CONVERSION
                                       PRICE") equal to 50% of the volume
                                       weighted average price per share of the
                                       Company" (described below), as traded on
                                       a U.S. National Securities Exchange
                                       (defined as the New York Stock Exchange,
                                       the American Stock Exchange, the Nasdaq
                                       Stock Market, or the NASD
                                       Over-the-Counter Bulletin Board
                                       ("OTC-BB") or (if not then traded on such
                                       National Securities Exchange) on the
                                       over-the-counter pink sheets; in either
                                       case, for the 20 consecutive trading days
                                       immediately prior to the date that notice
                                       of conversion is given; provided,
                                       however, that in no event shall the
                                       Conversion Price be less than $0.50 per
                                       share (the "FLOOR PRICE").

                                       The Bridge Loan will be sold to Investors
                                       in units of securities (the "UNITS");
                                       each Unit consisting of a minimum of
                                       $25,000 of Bridge Notes and 200,000
                                       shares of Company Common Stock
                                       (pre-split). The Bridge Loan subscription
                                       agreement will contain covenants
                                       prohibiting Bridge Note holders or their
                                       affiliates from shorting Company Common
                                       Stock.

                            INVESTORS  Persons and/or institutional investors
                                       investing either individually or through
                                       a limited partnership or other entity
                                       formed for the sole purpose of investing
                                       in the Company.

U.S. REGISTRATION AND LISTING ON A     On or before consummation of the Bridge
NATIONAL SECURITIES EXCHANGE           Loan, the Company shall cause to be filed
                                       with the United States Securities and
                                       Exchange Commission ("SEC") a Form 10
                                       registration statement in order to
                                       register the publicly traded shares of
                                       Company common stock under The Securities
                                       Exchange Act of 1934, as amended (the
                                       "1934 Act"), In addition, the Company
                                       shall cause to be filed with the National
                                       Association of Securities Dealers, Inc.
                                       ("NASD"), a Form 15c-211 to cause the
                                       Company Common stock to be listed for
                                       trading on the


ZBB ENERGY CORPORATION                 6

                                       OTC-BB.

                                       The Company shall use its best efforts to
                                       cause the Form 10 registration statement
                                       to be declared effective by the SEC and
                                       to have shares of Company Common Stock
                                       approved for trading on the OTC-BB or
                                       another National Securities Exchange (a
                                       "NATIONAL SECURITIES EXCHANGE LISTING")
                                       as soon as practicable.

WHARTON/BROADWAY                       The Company shall enter into a business
PARTNERS AGREEMENT                     development, marketing and financial
                                       consulting agreement (the "BUSINESS
                                       DEVELOPMENT AGREEMENT") with Wharton
                                       Equity Partners LLC ("WHARTON") and
                                       Broadway Partners LLC ("BROADWAY"). Such
                                       Business Development Agreement shall
                                       provide, inter alia, that Wharton and
                                       Broadway shall undertake for a period of
                                       two years to organize, initiate or
                                       otherwise provide the Company with
                                       potential joint venture partners,
                                       strategic alliances, marketing agreements
                                       and other financial assistance to enable
                                       the Company to develop its energy storage
                                       and related business (the "SERVICES"). It
                                       is contemplated that such Services shall
                                       include, without limitation, arranging
                                       for joint venture or related marketing
                                       agreements with business affiliates or
                                       associates engaged in (i) the
                                       development, engineering, production and
                                       marketing of thin film photovoltaic
                                       energy panels and equipment to
                                       manufacture such energy panels, (ii) the
                                       development of magnesium cell batteries,
                                       (iii) the marketing of the Company's
                                       energy storage systems in India and other
                                       developing countries.

                                       The Business Development Agreement shall
                                       provide that in sole consideration for
                                       such Services, the Company will issue to
                                       Wharton and Broadway in escrow, an
                                       aggregate of 16,000,000 shares of the
                                       Company's Common Stock (the "BUSINESS
                                       DEVELOPMENT STOCK"). Such shares of
                                       Business Development Stock shall provide
                                       that, for a period of 3D days, commencing
                                       12 months from the date of issuance (the
                                       "REDEMPTION PERIOD"), up to 90% of the
                                       shares of Business Development Stock
                                       shall be subject to redemption, for
                                       $0.001 per share, at the sole option of
                                       the Board of Directors of the Company if,
                                       in the exercise of the good faith
                                       discretion of the Board of Directors, the
                                       fair value of all of the Services
                                       actually provided by Wharton and Broadway
                                       to the Company during the 12 consecutive
                                       months following the date of the Business
                                       Development Agreement shall be less than
                                       $1.0 million; provided, however, if
                                       during such 12 month period:

                                              (a) the Company shall (in addition
                                       to the Bridge Financing) have been
                                       successful in completing a National
                                       Securities Exchange listing and one or
                                       more equity or equity type financings of
                                       not less than $6.0 million, all upon such
                                       terms and conditions as shall be
                                       satisfactory to the Board of Directors of
                                       the Company (the "Additional
                                       Financings"), none of the shares of
                                       Business Development Stock shall be
                                       subject to redemption; and

                                              (b) the Company shall have
                                       completed a National Securities Exchange
                                       Listing and shall have been successful in
                                       completing one

ZBB ENERGY CORPORATION                 7

                                       or more Additional Financings on terms
                                       satisfactory to the Board of Directors of
                                       the Company of $3.0 million or more, only
                                       a maximum of 50% of the shares of
                                       Business Development Stock shall be
                                       subject to redemption. The Business
                                       Development Agreement shall also provide
                                       that to the extent that shares of
                                       Business Development Stock are issuable
                                       to Wharton, there shall be an appropriate
                                       pro-rata cutback in the number of shares
                                       of Company Common Stock and warrants
                                       issued to the members of Wharton Energy
                                       Partners LLC ("WHARTON ENERGY") in
                                       exchange for the acquisition of 100% of
                                       the members interest of Wharton Energy
                                       (the holder of $2.45 million of Series A
                                       convertible Preferred Stock of Idea One
                                       Inc.) pursuant to the letter of intent
                                       dated October 6, 2005 between the Company
                                       and Wharton Energy (the "IDEA ONE LOI");
                                       provided, however, in no event shall the
                                       members of Wharton Energy receive less
                                       than 40% of the number of shares of
                                       Company Common Stock and warrants
                                       contemplated by Idea One LOI.

                                       Unless otherwise agreed by the Board of
                                       Directors of the Company, the term
                                       "ADDITIONAL FINANCINGS" shall not mean or
                                       include any debt or related "mezzanine"
                                       financing obtained by the Company prior
                                       to March 31, 2006, unless the same shall
                                       consist of or include notes convertible
                                       into shares of Company Common Stock. If
                                       any financings, not constituting an
                                       Additional Financing, are obtained by or
                                       through Wharton, in lieu of the
                                       provisions of an October 6, 2005
                                       consulting agreement between Wharton and
                                       the Company, Wharton shall be entitled to
                                       a finders fee equal to 7% of the amount
                                       of such debt or related "mezzanine"
                                       financing obtained.

THE REVERSE STOCK SPLIT                At the time of consummation of the
                                       initial Additional Financing, based upon
                                       an initial Additional Financing at an
                                       assumed minimum per share price of $2.00
                                       per share, the Company shall consummate a
                                       one-for-eight reverse split of its
                                       outstanding common stock (the "REVERSE
                                       STOCK SPLIT"). Pursuant to the Reverse
                                       Stock Split, each outstanding share of
                                       Company Common Stock (including the
                                       Business Development Stock issued to
                                       Broadway and Wharton) and each share of
                                       Company Common Stock issuable (i) under
                                       any stock option plan, (ii) upon exercise
                                       of outstanding stock options or warrants
                                       to purchase Common Stock, or (iii) upon
                                       conversion into Common Stock of the
                                       Bridge Notes, shall represent 1/8 of a
                                       share of Company Common Stock or the
                                       right to purchase or receive 1/8 of a
                                       share of Company Common Stock; provided,
                                       that fractional shares shall be rounded
                                       to the nearest whole share.

                                       In the event that, for any reason, the
                                       Board of Directors of the Company shall
                                       elect to consummate an Additional
                                       Financing at a minimum per share price of
                                       less than $2.00 per share, then there
                                       shall be an appropriate pro rata
                                       reduction in the amount of the Reverse
                                       Stock Split.

ZBB ENERGY CORPORATION                 8

THE ADDITIONAL FINANCING               Following completion of the Bridge Loan
                                       and the listing of the Company's Common
                                       Stock for trading on a National
                                       Securities Exchange, the Company will
                                       seek to consummate a private placement of
                                       between 3,000,000 and 6,000,000 shares of
                                       Common Stock (after giving effect to the
                                       1:8 Reverse Stock Split) at an assumed
                                       purchase price of $2.00 per share. Such
                                       Additional Financing may also include
                                       three year warrants to purchase up to 50%
                                       of the number of shaves of Common Stock
                                       sold in connection with the Additional
                                       Financing, at an exercise price of not
                                       less than 120% of the per share offering
                                       price of the Common Stock.

                                       Empire Financial Holding Company or one
                                       or more other investment bankers
                                       acceptable to the board of directors of
                                       the Company shall act as placement agent
                                       in connection with such Additional
                                       Financing. Empire and such other
                                       Placement Agents shall enter into a
                                       customary placement agency agreement with
                                       the Company that shall contain
                                       appropriate indemnification provisions
                                       for the placement agents and shall
                                       provide that such placement agents shall
                                       be entitled to receive customary
                                       compensation not to exceed 10% in cash
                                       and 10% in warrants.

CAPITALIZATION OF COMPANY              The Pro Forma Capitalization of the
                                       Company upon completion of the assumed
                                       1:8 Reverse Stock Split and the
                                       Additional Financing shall be as follows:

                                       (a) 10,245,578 shares of Company Common
                                       Stock owned by existing Company
                                       stockholders (based on 81,964,626
                                       currently outstanding shares);

                                       (b) approximately 3,000,000 shares of
                                       Company Common Stock issuable upon
                                       exercise of outstanding stock options
                                       (based on approximately 24,000,000
                                       currently outstanding options at exercise
                                       prices ranging from A$0.25 to US$0.50);
                                       provided, that (i) no outstanding options
                                       contain cashless exercise provisions, and
                                       (ii) except for approximately 6,500,000
                                       pre-split options (812,500 post split),
                                       all of such stock options are at exercise
                                       prices in excess of (U.S.) $0.25 ($2.00
                                       post-split), and approximately 5.4
                                       million (675,000 post split) of such "in
                                       the money" options expire on January 31,
                                       2006);

                                       (c) approximately 653,334 shares of
                                       Company Common Stock and 163,334 shares
                                       of Company Common Stock issuable upon
                                       exercise of warrants issued to acquire
                                       Wharton Energy under the Idea One LOI,
                                       and up to 653,334 contingent shares
                                       issuable upon commercialization of the
                                       Idea One magnesium cell battery
                                       technology;

                                       (d) a maximum of 2,000,000 shares of
                                       Company Common Stock held by Wharton and
                                       Broadway as Business Development Stock
                                       under the Business Development Agreement;

                                       (e) 1,000,000 shares of Company Common
                                       Stock held by the


ZBB ENERGY CORPORATION                 9

                                       Investors in connection with the Bridge
                                       Loan and 1,000,000 additional shares of
                                       Company Common Stock issuable upon
                                       conversion of the Bridge Notes;

                                       (f) between 3,000,000 and 6,000,000 new
                                       shares of Company Common Stock issued at
                                       an assumed per share price of $2.00 in
                                       connection with the Additional
                                       Financings; and

                                       (g) between 1,500,000 and 3,000,000
                                       shares of Company Common Stock issuable
                                       at an assumed per share price of $2.40
                                       upon exercise of warrants that may be
                                       included in the Additional Financings.

CLOSING DATE OF BRIDGE LOAN            On or before November 21, 2005.

ESTIMATED TIMETABLE                    Filing of Form 10 Registration Statement
                                       with the SEC -November 30,2005;

                                       Application to list Common Stock of
                                       Company on OTC Bulletin Board - November
                                       30, 2005;

                                       Receipt of comments form SEC and NASD --
                                       January 5, 2006;

                                       Approval of Form 10 and Form 15C-211
                                       listing application - January 31, 2006;

                                       Completion of Private Placement
                                       Memorandum - January 31, 2006;

                                       Completion of Additional Financings
                                       -March 31, 2006.

DOCUMENTATION FOR BRIDGE LOAN          Subscription Agreement; Bridge Notes;
                                       Business Development Agreement;
                                       and Registration Rights Agreement
                                       All documentation to be in form
                                       acceptable to counsel to the Company
                                       and the Investors.

The foregoing represents the substance of our mutual intention at this time, but in no way constitutes an agreement or an agreement to agree with respect to the above contemplated financing. The legal rights and obligations of each of the Company and the undersigned prospective Investor shall arise only pursuant to the terms of a duty executed subscription agreement and exhibits thereto, which shall be in form and substance satisfactory to each of the parties thereto and their respective legal counsel.

The above term sheet is further subject to the approval of the Board of Directors of the Company. This proposal shall remain open until the close of business (5:00 P.M. New York time) on Friday, November 11, 2005; after which it shall be null and void, unless approved by the Board of Directors of the Company.

Subject to the foregoing, please indicate below your willingness, in principle, to proceed with the above transaction.

Very Truly yours,

ZBB ENERGY CORPORATION 10

BROADWAY PARTNERS LLC                            WHARTON EQUITY LLC


By: s/ Robert M. Rubin                           By: s/ David Eisenberg
    -------------------------------------            ---------------------------
    Robert M. Rubin, Manager                         David Eisenberg, Manager

EMPIRE FINANCIAL GROUP INC.

By: s/ Ed Cabrera
    -------------------------------------
    Ed Cabrera, Head of Investment Banking

ACCEPTED AND AGREED TO SUBJECT
TO APPROVAL OF THE BOARD OF DIRECTORS:
DATED: THIS 4TH DAY OF NOVEMBER 2005:

ZBB ENERGY CORPORATION

By: /s/ Robert Parry
   ---------------------------------------
   Robert Parry, CEO

ZBB ENERGY CORPORATION 11

ANNEX B

November 9, 2005

Empire Financial Group, Inc.
14 East 60th Street, 2nd Floor
NY, NY 10022

Gentlemen:

In connection with our engagement of Empire Financial Group, Inc. ("Empire") as our placement agent, we hereby agree to indemnify and hold harmless Empire and its affiliates, and the respective controlling persons, directors, officers, shareholders, agents and employees of any of the foregoing (collectively the "Indemnified Persons"), from and against any and all claims, actions, suits, proceedings (including those of shareholders), damages, liabilities and expenses incurred by any of them (including the reasonable fees and expenses of counsel), (collectively a "Claim"), which are (A) related to or arise out of (i) any actions taken or omitted to be taken (including any untrue statements made or any statements omitted to be made) by the Company, or (ii) any actions taken or omitted to be taken by any Indemnified Person in connection with our engagement of Empire, or (B) otherwise relate to or arise out of Empire's activities on our behalf under Empire's engagement, and we shall reimburse any Indemnified Person for all out-of-pocket expenses (including the reasonable fees and expenses of counsel) incurred by such Indemnified Person in connection with investigating, preparing or defending any such Claim to which the Indemnified Person is, or is threatened to be made, a party. Notwithstanding anything to the contrary set forth above, we will not be responsible for any Claim, or for any reimbursement of any Indemnified Person's expenses in connection with such Claim, which is finally judicially determined to have resulted from the gross negligence or willful misconduct of any person seeking indemnification for such Claim. We further agree that no Indemnified Person shall have any liability to us for or in connection with our engagement of Empire except for any Claim incurred by us as a result of such Indemnified Person's gross negligence or willful misconduct.

We further agree that we will not, without the prior written consent of Empire, settle, compromise or consent to the entry of any judgment in any pending or threatened Claim in respect of which indemnification may be sought hereunder (whether or not any Indemnified Person is an actual or potential party to such Claim), unless such settlement, compromise or consent includes an unconditional, irrevocable release of each Indemnified Person hereunder from any and all liability arising out of such Claim.

Promptly upon receipt by an Indemnified Person of notice of any complaint or the assertion or institution of any Claim with respect to which indemnification is being sought hereunder, such Indemnified Person shall notify us in writing of such complaint or of such assertion or institution but failure to so notify us shall not relieve us from any obligation we may have hereunder, except and only to the extent such failure results in the forfeiture by us of substantial rights and defenses. If we so elect or are requested by such Indemnified Person, we will assume the defense of such Claim, including the employment of counsel reasonably satisfactory to such Indemnified Person and the payment of the fees and expenses of such counsel. In the event, however, that legal counsel to such Indemnified Person reasonably determines and provides written correspondence to us, that having common counsel would

ZBB ENERGY CORPORATION 12

present such counsel with a conflict of interest or if the defendant in, or target of, any such Claim, includes an Indemnified Person and us, and legal counsel to such Indemnified Person reasonably concludes that there may be legal defenses available to such Indemnified Person different from or in addition to those available to us, then such Indemnified Person may employ its own separate counsel to represent or defend it in any such Claim and we shall pay the reasonable fees and expenses of such counsel. Notwithstanding anything herein to the contrary, if we fail timely or diligently to defend, contest, or otherwise protect against any Claim, the relevant Indemnified Party shall have the right, but not the obligation, to defend, contest, compromise, settle, assert crossclaims, or counterclaims or otherwise protect against the same, and shall be fully indemnified by us therefor, in accordance with the terms of this Agreement, including without limitation, for the reasonable fees and expenses of its counsel and all amounts paid as a result of such Claim or the compromise or settlement thereof. In addition, with respect to any Claim in which we assume the defense, the Indemnified Person shall have the right to participate in such Claim and to retain its own counsel therefor at its own expense.

Empire agrees that it will indemnify and hold harmless the Company and each of its directors and officers, employees, agents, stockholders and affiliates against any Loss whatsoever (including, but not limited to, any and all legal fees and other expenses) to which the Company or any such person or entity may be subject solely as a result of statements made in the Private Placement Memorandum based solely upon information supplied by Empire to the Company in writing or based upon the gross negligence or willful misconduct of Empire or any of its employees or agents in acting as Placement Agent for the offering and sale hereunder.

We agree that if any indemnity sought by an Indemnified Person hereunder is held by a court to be unavailable for any reason then (whether or not Empire is the Indemnified Person), we and Empire shall contribute to the Claim for which such indemnity is held unavailable in such proportion as is appropriate to reflect the relative benefits to us, on the one hand, and Empire on the other, in connection with Empire's engagement referred to above, subject to the limitation that in no event shall the amount of Empire's contribution to such Claim exceed the amount of fees actually received by Empire from us pursuant to Empire's engagement. We hereby agree that the relative benefits to us, on the one hand, and Empire on the other, with respect to Empire's engagement shall be deemed to be in the same proportion as (a) the total value paid or proposed to be paid or received by us or our stockholders as the case may be, pursuant to the Offering (whether or not consummated) for which you are engaged to render services bears to (b) the fee paid or proposed to be paid to Empire in connection with such engagement.

Our indemnity, reimbursement and contribution obligations under this Agreement shall be in addition to, and shall in no way limit or otherwise adversely affect any rights that any Indemnified Party may have at law or at equity.

The validity and interpretation of this agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York applicable to agreements made and to be fully performed therein (excluding the conflicts of laws rules). Each of Empire and the Company hereby irrevocably submits to the jurisdiction of any court of the State of New York, County of New York or the United States District Court for the Southern District of New York for the purpose of any suit, action or other proceeding arising out of this agreement or the Offerings contemplated hereby, which is brought by or against Empire or the Company and in connection therewith, each of Empire and the Company (i) hereby irrevocably agrees that all claims in respect of any such suit, action or proceeding may be heard and determined in any such court, (ii) to the extent that it has acquired, or hereafter may acquire, any immunity from jurisdiction of any such court or from any legal process therein, it hereby waives, to the

ZBB ENERGY CORPORATION 13

fullest extent permitted by law, such immunity and (iii) agrees not to commence any action, suit or proceeding relating to this agreement other that in any such court. Each of Empire and the Company hereby waives and agrees not to assert in any such action, suit or proceeding, to the fullest extent permitted by applicable law, any claim that (a) it is not personally subject to the jurisdiction of any such court, (b) it is immune from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to its property of (c) any suit, action or proceeding is brought in an inconvenient forum.

The provisions of this Agreement shall remain in full force and effect following the completion or termination of Empire's engagement.

Very Truly Yours,

ZBB Energy Corporation

By:

/s/ Robert Parry
----------------
Robert Parry

Chief Executive Officer
16 November 2005

Confirmed and agreed to:
EMPIRE FINANCIAL GROUP, INC.

By:

/s/ Don Wojnowski
-----------------
Don Wojnowski
Chief Executive Officer


Date:

ZBB ENERGY CORPORATION 14

MEMORANDUM NO. ______________________

NAME OF OFFEREE _____________________

ZBB

ENERGY CORPORATION

A MAXIMUM OF US$2,500,000 OF BRIDGE NOTES DUE ON THE EARLIER
OF APRIL 15, 2007 OR UPON COMPLETION OF A MINIMUM EQUITY
FINANCING OF $6 MILLION

SUBSCRIPTION AND
INVESTMENT REPRESENTATION AGREEMENT

SUBSCRIPTION AND INVESTMENT REPRESENTATION AGREEMENT

US$2,500,000 OF 15% CONVERTIBLE BRIDGE NOTES DUE APRIL 15, 2007
(OR UPON COMPLETION OF A MINIMUM EQUITY FINANCING OF $6 MILLION) (THE "NOTES")

(Except as otherwise noted, all references to "dollars" or "$" are in United States dollars).

The undersigned, ___________________________________________ (the "undersigned" or the "Investor"), hereby subscribes for the purchase of Notes (the "Notes") of ZBB Energy Corporation, a Wisconsin corporation (the "Company"), in the aggregate principal amount of $___________. The undersigned herewith submits the undersigned's check or effects a wire transfer of immediately available funds in the amount of $_________ in full payment for such Notes (the "Subscription Price"). In exchange for such payment of the Subscription Price, the undersigned shall receive from the Company $________ principal amount of Notes.

Principal and interest on the Notes will be due and payable upon the earlier to occur of (i) April 15, 2007 and (ii) the closing by the Company of an initial public offering of the Company's common stock, par value $0.01 per share (the "Common Stock") or other equity financing yielding minimum proceeds of Six Million Dollars ($6,000,000) (the "Equity Offering"). All amounts of principal and interest remaining due under the Notes as of the closing of the Equity Offering shall be, at the option of each holder thereof, (i) payable in cash from the proceeds of the Equity Offering, together with two-year warrants to purchase shares of the Common Stock at a price equal to 120% of the price per share in the Equity Offering or (ii) convertible into shares of the Common Stock at a price per share equal to 50% of the price per share paid by investors in the Equity Offering.

The undersigned understands that (i) the Company is offering up to $2,500,000 in note principal, (ii) there is no minimum amount of note principal that must be sold to complete the offering, (iii) the offering is being made on best efforts basis by both the Company and Empire Financial Group, Inc. ("Empire"), as placement agent, and (iv) upon completion of this offering, Empire shall serve as investment banker to the Company in connection with other contemplated equity financings.

The undersigned hereby agrees to send payment of the $_________ Subscription Price either:

a. by mailing a check, payable to "ZBB Energy Corporation" to ZBB Energy Corporation, N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin 53051, attn: Robert Parry, Chief Executive Officer, or

b. wiring payment of the Subscription Price to the account set forth

below

Name of Bank:      M&I Marshall &Ilsley Bank
Address of Bank:   3470 Gateway Road, Brookfield, WI 53008
Account Name:      ZBB Energy Corporation
Account No:        00184 06531
ABA No:            075000051
Reference:         ZBB Energy Corporation Convertible Notes.

In either case, the undersigned agrees to execute this Subscription and Investment Representation Agreement and the Registration Rights Agreement attached hereto and mail same to ZBB Energy Corporation, N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin 53051, attn: Robert Parry, Chief Executive Officer.

Consummation of the sale of the Securities to the undersigned and to all other Investors in connection with the offering of a maximum of $2,500,000 of Notes shall be completed on or before 6 October, 2006 (the "Closing Date"), unless such Closing Date shall be extended by mutual agreement of the Company and Empire.

1. CERTAIN REPRESENTATIONS OF THE SUBSCRIBER

In connection with, and in consideration of, the sale of the Securities to the undersigned, the undersigned hereby represents and warrants to the Company and its officers, directors, employees, agents and shareholders that the undersigned:

(a) Has received and is familiar with (i) a copy of the Company's prospectus dated December 23, 2004 in connection with the Company's offering of 12,000,000 shares of Common Stock at A$0.50 per share and the listing of such shares for trading on the Australian Stock Exchange, (ii) copies of all announcements made by the Company to the ASX since the date of its listing,
(iii) the Company's 2005 and 2006 annual reports, and (iv) such other information as the undersigned has received from the Company upon requested (collectively, the "Company Materials").

(b) Has had an opportunity to review and ask questions of an officer of the Company, concerning the Company Materials and desires no further information respecting such Company Materials.

(c) Realizes that the Company has incurred losses since its inception and must raise additional funds to support its operations and to develop, manufacture and sell its energy storage products and technologies essential to its longer-term viability.

(d) Realizes and accepts the personal financial risk attendant to the fact that that purchase of the Securities represents a speculative investment involving a high degree of risk, and should not be purchased by any persons not prepared to lose their entire investment.

(e) Realizes that the Company has recently completed a private placement of $1,000,000 of convertible notes and warrants to purchase shares of Common Stock on terms and conditions that are the same as the terms of the Notes and Warrants offered hereby.

(f) Realizes that, in connection with a contemplated additional equity financing of up to $15 million that the Company will seek to consummate within the next six months, the Company presently intends to effect a one-for-eight reverse split of its outstanding Common Stock following (i) completion of this offering of Securities, and (ii) the listing of its shares of Common Stock for trading on the American Stock Exchange, NASD OTC-Bulletin Board or other United States securities exchange, and that, as a result of such Reverse Split, the aggregate number of shares that may be purchased on conversion of the Notes and included in the Securities shall be 12.5% of the number of shares of Common Stock issued and issuable to the undersigned on the closing date of this investment.

(g) Can bear the economic risk of an investment in the Securities for an indefinite period of time, can afford to sustain a complete loss of such investment, has no need for liquidity in connection with an investment in the Securities, and can afford to hold the Securities indefinitely.

(h) Realizes that there will be no market for the Securities, and that there are significant restrictions on the transferability of such Securities.

(i) Realizes that the Securities have not been registered for sale under the Securities Act of 1933, as amended (the "Act"), or applicable state securities laws (the "State Laws"), and they may be sold only pursuant to registration under the Act and State Law, or an opinion of counsel that such registration is not required.

(j) Is experienced and knowledgeable in financial and business matters, capable of evaluating the merits and risks of investing in the Securities and does not need or desire the assistance of a knowledgeable representative to aid in the evaluation of such risks (or, in the alternative, has a knowledgeable representative whom such investor intends to use in connection with a decision as to whether to purchase the Securities).

(k) Realizes that (a) there are substantial restrictions on the transfer of the Securities; (b) there is not currently a public market for the Securities, and it is unlikely that in the future there will exist a public market for the Notes, and accordingly, for the above and other reasons, the undersigned may not be able to liquidate an investment in such securities for an indefinite period.

2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to and agrees with Investor, as follows:

(a) The Company Materials as of their respective dates do not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.

(b) The Company is authorized to issue 150,000,000 shares of its Common Stock. As of the date hereof, an aggregate of 89,134,002 shares of Common Stock are issued and outstanding, a maximum of 8,000,000 shares are issuable upon conversion of an existing $1,000,000 convertible note due and 16,597,866 additional shares of Common Stock are reserved for issuance upon exercise of outstanding stock options and warrants.

(c) All of the outstanding shares of capital stock of the Company and the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable.

(d) The Company has the requisite corporate power and authority to enter into and execute, deliver and perform its obligations under this Agreement, the Notes and the Warrant (collectively, the "Transaction Documents"), including, without limitation to incur the Indebtedness evidenced by the Notes and to permit the conversion of such Notes into Common Stock of the Company. Each of the Transaction Documents has been duly and validly authorized by the Company and, when executed and delivered by the Company, will constitute a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms except as the enforcement thereof may be limited by (A) bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws now or hereafter in effect relating to or affecting creditors' rights generally or (B) general principles of equity and the discretion of the court before which any proceeding therefore may be brought (regardless of whether such enforcement is considered in a proceeding at law or in equity) (collectively, the "Enforceability Exceptions").

(e) The Securities have been duly authorized and, when issued upon payment thereof in accordance with this Agreement, will have been validly issued, fully paid and non-assessable. The Conversion Shares have been duly authorized by the Board of Directors and will be validly reserved for issuance, and when issued upon conversion of the Notes in accordance with the terms of the Notes, will have been validly issued, fully paid and non-assessable. The stockholders of the Company have no preemptive or similar rights with respect to the Common Stock. Upon conversion of the Notes, the delivery of the Conversion Shares to Investor, duly endorsed or accompanied by duly executed stock powers, will transfer to Investor good and indefeasible title to such shares, free and clear of all liens, proxies, encumbrances and claims of every kind and Company will forever warrant and defend (with counsel acceptable to Investor) such title, and indemnify Investor for all adverse claims, demands, or liability with respect to the validity of such title or transfer thereof, against any claimants thereto.

(f) The Conversion Price, Floor Price and Conversion Shares issuable upon conversion of the Note issued to the undersigned under this Agreement, and all other terms and conditions of the Note are (i) as described in this Agreement and the Note, and (ii) identical in all material respects to the conversion price, terms and conditions of conversion and other provisions of the Securities issued to other Investors in the Securities.

(g) The execution, delivery and performance by the Company of the Transaction Documents and the consummation by the Company of the transactions contemplated thereby and the fulfillment of the terms thereof will not violate, conflict with or constitute or result in a breach of or a default under (i) the articles of incorporation or bylaws of any of the Company or the Subsidiaries (or similar organizational document) or (ii) any statute, judgment, decree, order, rule or regulation of any court or governmental agency or other body applicable to the Company or the Subsidiaries or any of their respective properties or assets.

3. COVENANTS AND AGREEMENTS OF THE COMPANY.

(a) Promptly following the Closing Date (and in no event later than sixty (60) days thereafter), the Company shall cause to be filed with the United States Securities and Exchange Commission ("SEC") either (i) a Form SB-2 registration statement pursuant to which the Company will offer to sell up to $15.0 million of its Common Stock pursuant to an initial public offering in the United States (the "IPO"), or (ii) a Form 10 registration statement in order to register the publicly traded shares of Company Common Stock under The Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition, the Company shall cause to be filed with the National Association of Securities Dealers, Inc. ("NASD"), a Form 15c-211 to cause the Company Common stock to be listed for trading on a "U.S. National Securities Exchange" defined below.

(b) The Company shall use its best efforts to cause the Form SB-2 registration statement or the Form 10 registration statement, as applicable (each a "Registration Statement"), to be declared effective by the SEC and to have shares of Company Common Stock approved for trading on any one of the American Stock Exchange, the Nasdaq Stock Market or the NASD OTC-Bulletin Board (a "U.S. National Securities Exchange"), as soon as practicable thereafter; PROVIDED, HOWEVER, the Company shall consummate either the IPO or the listing of shares of its Common Stock on a U.S. National Securities Exchange by not later than April 15, 2007 (the "Outside U.S. Listing Date").

(c) Following consummation of the Sale of the Securities, the Company will seek to raise between $6,000,000 and $15,000,000 from the sale of shares of Common Stock either (i) through the IPO, or (ii) in connection with a private placement of equity securities immediately following the listing of the Common Stock on a U.S. National Securities Exchange; in either case, through Empire and/or other investment bankers or registered broker/dealers acceptable to the Company and Empire (the "Additional Financing"). The Company shall use its best efforts (without being legally obligated) to consummate such Additional Financing as soon as reasonably practicable.

(e) Simultaneous with the closing of the Additional Financing, and based upon an initial Additional Financing at an assumed minimum price per share of Common Stock of $2.00 per share, the Company shall consummate a reverse split of its outstanding common stock (the "Reverse Stock Split").

BY HIS OR ITS EXECUTION OF THIS AGREEMENT, THE UNDERSIGNED INVESTOR ACKNOWLEDGES AND AGREES THAT THE COVENANTS AND AGREEMENTS OF THE COMPANY SET FORTH IN THIS
SECTION 3 REPRESENT ONLY THE COMPANY'S COMMITMENT TO USE ITS REASONABLE BEST EFFORTS TO CONSUMMATE THE U.S. NATIONAL SECURITIES EXCHANGE LISTING AND THE ADDITIONAL FINANCING CONTEMPLATED HEREBY. THERE CAN BE NO ASSURANCE THAT SUCH U.S NATIONAL SECURITIES EXCHANGE LISTING OR ADDITIONAL FINANCING SHALL BE CONSUMMATED PRIOR TO THE MATURITY DATE OF THE NOTES OR UPON THE TERMS AND CONDITIONS OUTLINED ABOVE, IF AT ALL. THE COMPANY SHALL HAVE NO LIABILITY TO THE INVESTOR OR ANY OTHER HOLDERS OF THE NOTES IN THE EVENT IT IS UNABLE, NOTWITHSTANDING ITS REASONABLE BEST EFFORTS, TO CONSUMMATE SUCH U.S. NATIONAL SECURITIES EXCHANGE LISTING OR ADDITIONAL FINANCING.

4. INVESTMENT INTENT

The undersigned has been advised that the Securities have not been registered under the Act or relevant State Laws but are being offered, and will be offered, and sold pursuant to exemptions from the Act and State Laws, and that the Company's reliance upon such exemption is predicated in part on the undersigned's representations contained herein. The undersigned represents and warrants that the Securities are being purchased for the undersigned's own account and for long term investment and without the intention of reselling or redistributing the Securities; that the undersigned has made no agreement with others regarding any of the Securities; and that the undersigned's financial condition is such that it is not likely that it will be necessary for the undersigned to dispose of any of the Securities in the foreseeable future. The undersigned is aware that (1) there is presently no public market for the Securities, and in the view of the Securities and Exchange Commission a purchase of securities with an intent to resell by reason of any

foreseeable specific contingency or anticipated change in market values, or any change in the liquidation or settlement of any loan obtained for the acquisition of any of the Securities and for which the Securities were or may be pledged as security would represent an intent inconsistent with the investment representations set forth above, and (2) the transferability of the Securities is restricted and (a) requires the written consent of the Company, and (b) will be further restricted by a legend placed on the certificate(s) representing the Securities containing substantially the following language:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER EITHER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE DISTRIBUTED FOR VALUE UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND SUCH LAWS COVERING SUCH SECURITIES, OR THE COMPANY RECEIVES AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANY STATING THAT SUCH SALE, TRANSFER, ASSIGNMENT, OFFER, PLEDGE OR OTHER DISTRIBUTION FOR VALUE IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SUCH ACT AND SUCH LAWS.

The undersigned further represents and agrees that if contrary to the undersigned's foregoing intentions, the undersigned should later desire to dispose of or transfer any of the Securities in any manner, the undersigned shall not do so without first obtaining (1) an opinion of counsel satisfactory to the Company that such proposed disposition or transfer may be made lawfully without the registration of such Securities pursuant to the Act and applicable State Laws, or (2) registration of such Securities (it being expressly understood that the Company shall not have any obligation to register such Securities except as explicitly provided by written agreement).

5. RESIDENCE

The undersigned represents and warrants that the undersigned is a bona fide resident of the State of _________________________ and that the Securities are being accepted by the undersigned in the undersigned's name solely for the undersigned's own beneficial interest and not as nominee for, on behalf of, for the beneficial interest of, or with the intention to transfer to, any other person, trust or organization except as specifically set forth in this Agreement).

PARAGRAPH 6 BELOW IS REQUIRED IN CONNECTION WITH EXEMPTIONS FROM THE ACT AND STATE LAWS BEING RELIED ON BY THE COMPANY WITH RESPECT TO OFFER AND SALE OF THE SHARES. ALL OF SUCH INFORMATION WILL BE KEPT CONFIDENTIAL AND WILL BE REVIEWED ONLY BY THE COMPANY, THE AGENT, AND THEIR COUNSEL. THE UNDERSIGNED AGREES TO FURNISH ANY ADDITIONAL INFORMATION WHICH THE COMPANY OR ITS COUNSEL DEEMS NECESSARY IN ORDER TO VERIFY THE RESPONSES SET FORTH ABOVE.

6. ACCREDITED STATUS

The undersigned represents and warrants as follows (check if applicable):

a. Accredited Investor: Individual

(1)_______ The undersigned is an individual with a net worth, or a joint net worth together with his or her spouse, in excess of $1,000,000. (In calculating net worth, you may include equity in personal property and real estate, including your principal residence, cash, short term investments, stock and securities. Equity in personal property and real estate should be based on the fair market value of such property minus debt secured by such property.)

(2)________ The undersigned is an individual who had an individual income in excess of $200,000 in each of the prior two years and reasonably expects an income in excess of $200,000 in the current year; or

(3)________ The undersigned is an individual who had with his/her spouse joint income in excess of $300,000 in each of the prior two years and reasonably expects an income in

excess of $300,000 in the current year.

(4)________ The undersigned is a director or executive officer of the Company.

b. Accredited Investor: Entity

(1)________ The undersigned is an entity all of whose equity owners meet one of the tests set forth in a through d above.

(2)________ The undersigned is an entity and is an "Accredited Investor" as defined in Rule 501(a) of Regulation D under the Act. This representation is based on the following (check one or more, as applicable):

(a)______ The undersigned (or in the case of a trust, the undersigned trustee) is a bank or savings and loan association as defined in Sections 3(a)(2) and 3(a)(5)(A) of the Act, acting either in its individual or fiduciary capacity.

(b)______ The undersigned is an insurance company as defined in Section 2(13) of the Act.

(c)_______ The undersigned is an investment company registered under the Investment Company Act of 1940 or a business development company as defined in Section 2(a)(48) of that Act.

(d)________ The undersigned is a Small Business Investment Company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958.

(e)________ The undersigned is an employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974 and either (check one of more, as applicable):

(i)________ the investment decision is made by a plan fiduciary, as defined in Section 3(21) of such Act, which is either a bank, savings and loan association, insurance company, or registered investment advisor; or

(ii)________ the employee benefit plan has total assets in excess of $5,000,000; or

(iii)________ the plan is a self-directed plan with investment decisions made solely by persons who are "Accredited Investors" as defined under the 1933 Act.

(f)________ The undersigned is a private business development company as defined in Section 202(a)(22) of the Investment Advisors Act of 1940.

(g)________ The undersigned has total assets in excess of $5,000,000, was not formed for the specific purpose of acquiring shares of the Company and is one or more of the following (check one or more, as appropriate):

(i)________an organization described in Section 501(c)(3) of the Internal Revenue Code; or

(ii)________ a corporation; or

(iii)________ a Massachusetts or similar business, trust; or

(iv)________ a partnership.

(h)_________ The undersigned is a trust with total assets exceeding $5,000,000, which was not formed for the specific purpose of acquiring shares of the Company and whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he/she is capable of evaluating the merits and risks of the investment in the Securities. IF ONLY THIS RESPONSE IS CHECKED, PLEASE CONTACT THE COMPANY TO RECEIVE AND COMPLETE AN INFORMATION STATEMENT BEFORE THIS SUBSCRIPTION CAN BE CONSIDERED BY THE COMPANY.

7. MANNER IN WHICH TITLE TO THE NOTES AND WARRANTS IS TO BE HELD

Please check one:

______Individual

______Joint Tenant with Right of Survivorship

______Partnership

______Tenants in Common

______Corporation

______Other (Specify_____________________)

8. MISCELLANEOUS

(a) The undersigned agrees that the undersigned understands the meaning and legal consequences of the agreements, representations, and warranties contained herein; agrees that such agreements, representations and warranties shall survive and remain in full force and effect after the execution of the Securities; and further agrees to indemnify and hold harmless the Company, each current and future officer, director, employee, agent and shareholder from and against any and all loss, damage or liability due to, or arising out of, a breach of any agreement, representation or warranty of the undersigned contained herein.

(b) This Agreement shall inure to the benefit of and be binding upon Investor and the Company and their respective successors and legal representatives. Neither the Company nor any Investor may assign this Agreement or any rights or obligation hereunder without the prior written consent of the other party.

(c) This Agreement, together with Transaction Documents, constitutes the entire agreement among the parties hereto and supersedes all prior agreements, understandings and arrangements, oral or written, among the parties hereto with respect to the subject matter hereof and thereof.

(d) If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby.

(e) THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO PROVISIONS RELATING TO CONFLICTS OF LAW TO THE EXTENT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY. THE PARTIES HEREBY IRREVOCABLY AND UNCONDITIONALLY AGREE THAT ACTIONS, SUITS OR PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT ONLY IN STATE OR FEDERAL COURTS LOCATED IN THE CITY OF NEW YORK, NEW YORK AND HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS FOR SUCH PURPOSE.

(f) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

(g) Facsimile signatures shall be construed and considered original signatures for purposes of enforcement of the terms of this agreement.

[SIGNATURE PAGE FOLLOWS - THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]

SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT

INDIVIDUAL SUBSCRIBERS:

Signature

Name (Typed or Printed)

Street Address

City, State and Zip Code

Home Telephone Number

Social Security Number

Tax Identification Number (for corporations or other entities)

ZBB Energy Corporation, hereby acknowledges receipt from __________________________________ of such subscriber's check in the amount of $______________________, and accepts this subscription of _________ Securities as of August__ 2006.

ZBB ENERGY CORPORATION

Signature

Name (Typed or Printed)

Title

1998 OUTSIDE DIRECTOR STOCK OPTION PLAN

ZBB ENERGY CORPORATION

ARTICLE 1

Establishment and Purpose of the Plan

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

1.2 Purpose of Plan. The purpose of the Plan is to promote the growth and development of the Corporation by providing the non-employee members of the Board of Directors of the Corporation (the "Outside Directors") with an opportunity to purchase shares of the Corporation's common stock (the "Common Stock") in gratitude for their past service to the Corporation and to serve as an incentive for them to advance the interests of the Corporation through future services.

ARTICLE 11

Legal Compliance

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

ARTICLE III

Administration

This Plan shall be administered by the Board of Directors of the Corporation (the "Board"); provided, however, that this Plan shall be administered in accordance with the provisions hereinafter set forth.

ARTICLE IV

Stock Subject to the Plan

4.1 Aggregate Shares. The aggregate number of shares of Common Stock which may be issued upon the exercise of Options granted at any time under this Plan shall be four hundred thousand (400,000) shares.

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

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

ARTICLE V

Eligibility of Recipients

Participation under this Plan will be limited to persons who are Outside Directors (the "Participants"). Options shall be awarded to the Participants under Article VI, below. Each Participant shall be notified in writing of his designation as a Participant and, in connection therewith, each Participant shall be required to execute an acknowledgment in the form attached hereto as Exhibit A.

ARTICLE VI

Grant of Option

As of the date hereof, the Plan has three (3) Participants. Accordingly, Options are granted to the Participants as follows:

     Participant              Title         Number of Options Granted
     -----------              -----         -------------------------
1. Thomas G. Folliard   Member of Board              120,000

2. Richard A. Payne     Member of Board              120,000

3. Michael J. Palmer    Chairman of Board            160,000

Notwithstanding the foregoing, if the Board appoints additional Outside Directors to serve on the Board and such Outside Directors become Participants hereunder, all Options granted pursuant to this Article VI which have not vested pursuant to the provisions of Article X hereof at the time such additional Outside Directors become Participants shall be reallocated so that each Participant (other than the Chairman of the Board) shall be granted that number of

Options equal to the product of (a) the number of unvested Options times (b) a fraction, the numerator of which is equal to 0.9 and the denominator of which is equal to the total number of Participants. The Chairman of the Board shall be granted that number of Options equal to the difference between the total number of unvested Options and the number of Options granted to the other Participants. A reallocation of unvested Options pursuant to this Article VI shall take place at any time the number of Participants is increased or whenever the Participant occupying the office of Chairman of the Board changes.

ARTICLE VII

Purchase Price of Option Shares

The exercise price per share of Common Stock for each Option granted hereunder shall be $0.75.

ARTICLE VIII

Payment of Option Price

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

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

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

ARTICLE IX

Term of Option

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

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

(b) the date stipulated in Paragraphs 9.2 or 9.3 in the case of a Participant whose membership of the Board ceases.

9.2 Termination of Board Membership. In the case of a Participant whose membership on the Board is terminated by reason of death, Disability, or by the Board or the shareholders without Cause (all as hereinafter defined), or voluntarily by the Participant at the request of the Board or voluntarily after the Participant has attained age sixty-five (65) or such earlier age as may be approved by the Board, each Option shall expire as provided in Paragraph 9.1(a). For purposes hereof, the terms "Disability" and "Cause" shall be defined as follows:

(a) The term "Disability" shall be determined pursuant to the Corporation's disability insurance plan, or if no such insurance plan is in effect, "Disability" shall be defined as the inability of the Participant to perform his normal duties as a member of the Board for a period of one hundred eight (180) consecutive days by reason of physical or mental illness or incapacity, or for periods of physical or mental illness or incapacity aggregating two hundred ten (210) days in any consecutive twelve
(12) month period. A physical or mental disability shall be deemed to include the written direction by a physician that the Participant shall, for medical reasons, terminate or substantially reduce his services as a member of the Board. If there is any dispute as to whether the termination of the Participant's membership on the Board was due to his physical or mental illness or incapacity, such question shall be submitted to a licensed physician for the purpose of make such determination. An examination of the Participant shall be made within thirty (30) days after written notice by the Corporation or the Participant. The Participant shall submit to such examination and provide such information that such physician may request. The determination of such physician as to the question of the Participant's physical or mental condition shall be binding and conclusive on all parties concerned for purposes of this Agreement. A Disability shall be deemed to be continuing unless the Participant performs his regular duties as a member of the Board for a continuous period of three (3) months. For the purposes hereof, the date of Disability shall be the earlier of either (i) the date the Corporation and the Participant agree that the Participant is disabled or (ii) the expiration of the 180 or 210 day period, as applicable.

(b) The term "Cause" shall be defined as the Participant's termination as a member of the Board upon the commission of any of the following:

(i) The continued failure of the Participant to substantially perform his duties as a member of the Board (other than by reason of illness or Disability) after a demand for performance is delivered to the Participant that specifically identifies the manner in which the Corporation believes the Participant has failed to perform his duties, and the Participant fails to resume substantial performance of his duties within thirty (30) days of receiving such demand.

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

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

(iv) Conviction of the Participant of a felony or misdemeanor which, in the reasonable judgment of the Board, is likely to have a material adverse effect upon the business or reputation of the Participant or the Corporation, or which substantially impairs the Participant's ability to perform his duties for the Corporation.

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

9.3 Other Termination. In the case of a Participant where membership on the Board is terminated for any reason other than as set forth in Paragraph 9.2, above, each Option which has not vested in accordance with the provisions of Article X hereof shall be immediately forfeited.

9.4 Reallocation. Any Options forfeited pursuant to the provisions of this Article IX shall be reallocated to the remaining Participants pursuant to the formula contained in Article VI hereof.

ARTICLE X

Vesting

10.1 Limitation. Except as specifically provided in Paragraph 9.2, each Option granted under this Plan may be exercised only while a Participant is a member of the Board.

10.2 Vesting. Each Option granted shall not be considered earned, vested or exercisable as of the date of such grant. Unless otherwise vested earlier or terminated pursuant to the provisions of the Plan, on January 2, 1999, and on the ensuing four (4) anniversaries of such date, twenty percent (20%) of the shares of Common Stock awarded pursuant to an Option shall become vested.

10.3 Earlier Vesting. Notwithstanding the provisions of Paragraph 10.2., shares subject to an Option granted hereunder shall vest as follows:

10.3.1 Private Placement. Twenty percent (20%) of the shares subject to an Option granted hereunder will be deemed fully vested upon the Corporation successfully entering into a private placement of its Common Stock to an Unrelated Purchaser (defined below) in one transaction or a series of transactions, which private placement results in proceeds to the Corporation of not less than Five Million Dollars ($5,000,000).

10.3.2 Sale of the Corporation. Twenty percent (20%) of the shares subject to an Option granted hereunder will be deemed fully vested upon the Sale of the Corporation to an Unrelated Purchaser (as hereinafter defined). "Sale of the Corporation" shall mean (i) a real to an Unrelated Purchases or Purchasers of more than fifty percent (50%) of all the outstanding shares of the Corporation's voting capital stock in a single transaction or in a series of related transactions, or (ii) a sale to an Unrelated Purchaser or Purchasers of substantially all of the assets of the Corporation in a single transaction or a series of related transactions. For purposes hereof, an "Unrelated Purchaser" shall be defined as any individual or entity other than, a shareholder of the spouse or issue of a shareholders of the Corporation, a corporation or other business enterprise in which the Corporation owns at least a majority of the outstanding shares entitled to vote for the Board of Directors, or in the case of a partnership or other unincorporated business, at least a majority of the capital interest in such enterprise or the right to receive at least a majority of the profits of such enterprise, or any corporation or other business enterprise which controls or is controlled by an entity which is under common control with any person or entity described in the preceding clauses.

10.3.3. Termination of Board Membership. Twenty percent (20%) of the shares subject to an Option granted hereunder will be deemed fully vested if the Participant's membership on the Board is terminated by reason of death, Disability, by the Board or the shareholders without Cause or voluntarily by the Participant at the request of the Board or voluntarily after the Participant has attained age sixty-five (65).

ARTICLE XI

Adjustments - Change in Shares

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

ARTICLE XII

Transferability of Options

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

ARTICLE XIII

Withholding Taxes

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

ARTICLE XIV

Administration

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

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

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

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

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

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

ARTICLE XV

Certain Rights and Obligations of Participants

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

ARTICLE XVI

Indemnification

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

ARTICLE XVII

Miscellaneous

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

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

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

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

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

EXHIBIT A

ACKNOWLEDGMENT OF PARTICIPANT

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

IN WITNESS WHEREOF, the undersigned has executed this Acknowledgment as of the _____ Day of ___________, 1998.

1998 KEY EMPLOYEE STOCK OPTION PLAN

ZBB ENERGY CORPORATION

ARTICLE 1

Establishment and Purpose of the Plan

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

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

ARTICLE II

Legal Compliance

ARTICLE III

Administration

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

ARTICLE IV

Stock Subject to the Plan

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

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

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

ARTICLE V

Eligibility of Recipients

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

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

ARTICLE VI

Grant of Option

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

ARTICLE VII

Purchase Price of Option Shares

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

ARTICLE VIII

Payment of Option Price

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

ARTICLE IX

Term of Option

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ARTICLE X

Vesting

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

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

ARTICLE XI

Adjustments - Change in Shares

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

ARTICLE XII

Transferability of Options

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

ARTICLE XIII

Withholding Taxes

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

ARTICLE XIV

Administration

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

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

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

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

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

ARTICLE XV

Certain Rights and Obligations of Participants

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

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

ARTICLE XVI

Indemnification

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

ARTICLE XVII

Miscellaneous

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

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

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

EXHIBIT A

ACKNOWLEDGMENT OF PARTICIPANT

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

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

           EXHIBIT B

   INITIAL PLAN PARTICIPANTS

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

EXHIBIT C

CONDITIONS FOR VESTING

1. Key Person or Employment Contracts

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

2. Grant by the Option Committee

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

2. Death of a participant

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

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

3. Disability of Participant

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

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

4. Termination of Employment of Participant Without Cause

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

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

5. Termination of Participant for Cause

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

TERMS AND CONDITIONS OF
ZBB ENERGY CORPORATION EMPLOYEE OPTION SCHEME

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

1. DEFINITIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

2. INTERPRETATION

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

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

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

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

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

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

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

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

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

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

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

3. NO EFFECT ON CONTRACT OF EMPLOYMENT

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

3.2 Nothing in this Option Scheme:

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

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

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

4. OPTION ENTITLEMENT

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

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

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

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

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

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

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

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

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

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

5. EXERCISE OF OPTIONS

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

(1) the Option Certificate;

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

(3) the subscription monies for the relevant Shares.

6. TERMS OF THE OPTIONS

The Options will have the following terms:

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

(2) The Options expire:

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

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

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

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

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

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

(4) The Options are not transferable.

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

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

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

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

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

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

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

7. COMPLIANCE WITH LAW AND ORDERS

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

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

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

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

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

8. REPLACEMENT OF CERTIFICATES

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

9. AMENDMENT OF TERMS AND CONDITIONS

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

10. NOTICES

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

11. GOVERNING LAWS

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

12. DUTIES AND TAXES

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

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

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SCHEDULE 1

APPLICATION FOR OPTIONS

The Secretary

ZBB ENERGY CORPORATION

Mr.

Mrs.

Miss. ________________________________

(PLEASE USE BLOCK LETTERS)

Full Address:

____________Postcode____________

Tax File Number: _______________________

hereby apply for:

________________________________________ (Number in Words)

________________________________________ (Number in Figures)

options in the ZBB ENERGY CORPORATION Employee Option Scheme.

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

Signature:

Date:

SCHEDULE 2

EXERCISE NOTICE

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

Number of Options being exercised: ________________________________________

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

____________Postcode____________

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

____________Postcode____________

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

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

Signed by the Optionholder

Date:

EXHIBIT A

CONDITIONS FOR VESTING

1. EMPLOYMENT AGREEMENT

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

2. GRANT BY THE BOARD

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

3. NO SPECIFIC TERMS

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

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

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

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

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

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

3. DEFINITIONS

In this Exhibit A:

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

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

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

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

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

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

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

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

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ZBB ENERGY CORPORATION
ARBN 082 338 789

EMPLOYEE OPTION
SCHEME

2002 STOCK OPTION PLAN

ZBB ENERGY CORPORATION

ARTICLE I

Establishment and Purpose of the Plan

1.1 Establishment of Plan. ZBB Energy Corporation (the "Corporation") hereby establishes the 2002 Stock Option Plan of ZBB Energy Corporation (the "Plan"). The effective date of this Plan shall be February 4, 2002.

1.2 Purpose of Plan. The purpose of the Plan is to promote the growth and development of the Corporation by providing certain key employees of the Corporation and non-employee members of the Board of Directors of the Corporation with an opportunity to purchase shares of the Corporation's common stock (the "Common Stock") in gratitude for their past service to the Corporation and to serve as an incentive to advance the interests of the Corporation and to otherwise facilitate the efforts of the Corporation to obtain and retain employees of outstanding ability.

ARTICLE II

Legal Compliance

ARTICLE III

Administration

This Plan shall be administered by the Option Committee of the Board of Directors of the Corporation (the "Committee"); provided, however, that this Plan shall be administered in accordance with the provisions hereinafter set forth, and provided that if any proposed participant in this Plan is also a member of the Board of Directors of the Corporation then the number of Options and the other terms in relation to such Options will be determined by the Board of Directors of the Corporation and not the Committee.

ARTICLE IV

Stock Subject to the Plan

4.1 Aggregate Shares. The aggregate number of shares of Common Stock which may be issued upon the exercise of Options granted at any time under this Plan shall be five million (5,000,000) shares

ARTICLE V

Eligibility of Recipients

5.1 Eligibility. Participation under this Plan will be limited to persons who are key salaried employees, including officers, of the Corporation, or non-employee members of the Board of Directors of the Corporation.

5.2 Designation of Participants. The participants under this Plan shall be those eligible employees of the Corporation or non-employee members of the Board of Directors of the Corporation who are from time to time designated by the Committee (the "Participants"). Options shall be awarded to the Participants under Article VI, below, and the designation as a Participant does not ensure that any particular Participant will be awarded Options hereunder. Each Participant shall be notified in writing of his designation as a Participant and, in connection therewith, each Participant shall be required to execute an acknowledgment in the form attached hereto as EXHIBIT A.

ARTICLE VI

Grant of Option

ARTICLE VII

Purchase Price of Option Shares

The exercise price per share of Common Stock for each Option granted hereunder shall be an amount determined by the Committee in good faith in its sole discretion.

ARTICLE VIII

Exercise of Option

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

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

ARTICLE IX

Term of Option

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

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

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

9.2 Termination of Service. In the case of a Participant whose employment with or membership on the Board of Directors of the Corporation is terminated by reason of death, Disability, or by the Corporation (or its shareholders in the case of a Director that is not also an employee of the Corporation) without Cause (all as hereinafter defined), or voluntarily by the Participant at the request of the Committee or voluntarily by the Participant after the Participant has attained age sixty-five (65) or such earlier age as may be approved by the Committee, each Option shall expire as provided in Paragraph 9.1(a), above. For purposes hereof, the terms "Disability" and "Cause" shall be defined as follows:

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

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

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

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

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

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

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

9.3 Other Termination. In the case of a Participant whose employment with or membership on the Board of Directors of the Corporation is terminated for any reason other than as set forth in Paragraph 9.2, above, each Option which has not vested in accordance with the provisions of Article X, below, shall immediately be forfeited, and each Option which has vested in accordance with the provisions of Article X, below, shall expire as provided in Paragraph 9.1(a), above..

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

ARTICLE X

Vesting

Each Option granted hereunder shall not be considered earned, vested or exercisable as of the date of such grant. Unless otherwise vested earlier or terminated pursuant to the provisions

of the Plan, an Option shall be deemed vested only upon the terms and conditions contained in EXHIBIT B attached hereto.

ARTICLE XI

Adjustments - Change in Shares

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

ARTICLE XII

Transferability of Options

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

ARTICLE XIII

Withholding Taxes

Committee and subject to such rules and regulations as the Committee may adopt from time to time, in shares of the Corporation's Common Stock) the entire amount or a portion of any taxes which the Corporation is required to withhold, in such amount as the Committee or the Corporation in is discretion may determine.

ARTICLE XIV

Administration

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

14.6 No Personal Liability. Neither the Committee, any member thereof, or the Corporation, nor any other person who is acting on behalf of the Committee, any member thereof, or the Corporation shall be liable for any act or failure to act hereunder except for willful misconduct or fraud.

ARTICLE XV

Certain Rights and Obligations of Participants

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

an employee shall not be affected in any manner by reason of the designation of such employee as a Participant under the Plan.

ARTICLE XVI

Indemnification

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

ARTICLE XVII

Miscellaneous

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

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

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

EXHIBIT A

ACKNOWLEDGMENT OF PARTICIPANT

The purpose of this form is to obtain your acknowledgment of your receipt of a copy of the 2002 Stock Option Plan of ZBB Energy Corporation (the "Plan") and information regarding your participation in the Plan, and your agreement to the terms and conditions of the Plan. As a designated "Participant" under the Plan, you are entitled to receive a copy of the Plan.

By completing this acknowledgment form, you are acknowledging or agreeing as follows:

(a) that, prior to or on the date set forth opposite your signature below, you received and reviewed a copy of the Plan which, pursuant to Article X of the Plan, sets forth the vesting schedule applicable to the Options granted to you under the Plan;

(b) that, effective as of __________,____, you have been designated as a Participant in the Plan;

(d) that, the exercise price per share of Common Stock for each Option granted is equal to __________;

(e) that, the Options granted to you under the Plan will be subject to expiration under Article IX of the Plan and a vesting schedule pursuant to Article X of the Plan; and

(f) that, in consideration of the benefits conferred upon you under the Plan, you shall be bound by the terms and conditions thereof.

Date: _____________________             ________________________________________

                                        ____________________________(Print Name)

Acknowledged and agreed to this
_____ day of ______________, _______.

ZBB ENERGY CORPORATION


By:
    ---------------------------------
               (Title)

EXHIBIT B

CONDITIONS FOR VESTING

1. Employment Agreement

In accordance with any specific terms and conditions with respect to the vesting of the Options contained in any agreement regarding the employment of the Participant by the Corporation approved by the Board of Directors of the Corporation (an "Employment Agreement").

2. Grant by the Committee

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

3. No Specific Terms

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

(a) Death of a participant

Upon the death of the Participant, all Options granted to such Participant which would vest in the fiscal year of such Participant's death shall immediately vest.

(b) Disability of Participant

Upon the Disability of the Participant, all Options granted to such Participant which would vest in the fiscal year of such Participant's Disability shall immediately vest.

Upon the termination of employment or service of the Participant without Cause, all Options granted to such Participant which would vest in the fiscal year of such Participant's termination of employment or service without Cause shall immediately vest.

(d) Termination of Participant for Cause

Upon the termination of employment or service of the Participant with Cause, all unvested Options granted to such Participant shall be immediately forfeited.

(e) Resignation of the Participant

Upon the resignation of the Participant prior to attaining age sixty-five
(65) or such earlier age as may be approved by the Committee, all unvested Options granted to the Participant shall be immediately forfeited.

EMPLOYMENT AGREEMENT

THIS AGREEMENT, made and entered into as of this 4th day of October, 2006 by and between ZBB ENERGY CORPORATION, a Wisconsin corporation, hereinafter referred to as the "CORPORATION," and GEOFFREY DAVID HANN, hereinafter referred to as the "EMPLOYEE."

W I T N E S S E T H:

WHEREAS, the Employee desires to be continued by the Corporation in the capacity of Chief Financial Officer; and

WHEREAS, the Corporation and the Employee desire to set forth in this Agreement the terms and conditions under which the Employee is to continue to be employed by the Corporation and intend to hereby replace in its entirety, the previous Employment Agreement between the parties, as amended.

NOW, THEREFORE, the Corporation and the Employee, in consideration of the mutual promises hereinafter set forth, do hereby promise and agree as follows:

ARTICLE I

Term

The term of the Employee's employment under this Agreement shall commence effective as of the date set forth in Section I of Exhibit A attached hereto and shall, except as it may otherwise be subject to termination hereunder, continue thereafter for a period of time as set forth in Section I of Exhibit A. The Corporation and the Employee acknowledge and agree that the term of the Employee's employment hereunder shall be automatically extended from year to year thereafter upon the same terms and conditions, unless terminated by either party hereto upon ninety (90) days written notice given prior to the expiration of the original term of this Agreement or any extension thereof.

ARTICLE II

Employment Duties

During the term of the Employee's employment hereunder, the Corporation shall employ the Employee and the Employee shall serve the Corporation as a full-time employee in such capacity and with such powers and duties as are set forth in Section II of Exhibit A. The Board of Directors of the Corporation may from time to time prescribe amended duties for the Employee. The Employee shall devote his entire working time and efforts to the business affairs of the Corporation and shall faithfully and to the best of his ability perform his duties hereunder.

ARTICLE III

Compensation

3.1. Salary and Benefits. During the term of the Employee's employment hereunder, the Employee shall be entitled to receive the salary and fringe benefits set forth in Section III of Exhibit A. The Employee acknowledges that he shall have no vested rights in any such fringe benefit programs except as expressly provided under the terms thereof and that such programs may be terminated as well as supplemented.

3.2. Withholding Taxes. The Corporation shall deduct from all payments to the Employee hereunder any federal, state or local withholding or other taxes or charges which the Corporation is from time to time required to deduct under applicable law, and all amounts payable to the Employee hereunder are stated herein before any such deductions. The Corporation shall have the right to rely upon written opinion of legal counsel, which may be independent legal counsel or legal counsel regularly employed by the Corporation, if any questions should arise as to any such deductions.

ARTICLE IV

Termination of Employment

4.1. Causes for Termination. Notwithstanding the term set forth in Article I, above, the Employee's employment hereunder shall be terminated prior to the expiration of such term upon the occurrence of any of the following events:

4.1.1. In the event of the Employee's death.

4.1.2. In the event of the disability of the Employee. For purposes of this Agreement, the term "disability" shall be defined as the inability of the Employee to perform his normal duties as a full-time employee of the Corporation for a period of ninety (90) consecutive days by reason of physical or mental illness or incapacity, or for periods of physical or mental illness or incapacity aggregating one hundred twenty (120) days in any consecutive twelve (12) month period. A physical or mental disability shall be deemed to include the written direction by a physician that the Employee shall, for medical reasons, terminate or substantially reduce his services to the Corporation. If there is any dispute as to whether the termination of the Employee's employment was due to his physical or mental illness or incapacity, such question shall be submitted to a licensed physician for the purpose of making such determination. An examination of the Employee shall be made within thirty (30) days after written notice by the Corporation or the Employee to the other by a licensed physician agreeable to the Corporation. The Employee shall submit to such examination and provide such information that such physician may request and the determination of such physician as to the question of the Employee's physical or mental condition shall be binding and conclusive on all parties concerned for purposes of this Agreement. no information that is not specifically authorized by the Employee to be disclosed by the physician need to be disclosed. A disability shall be deemed to be continuing unless the Employee performs his regular duties for the Corporation for a continuous period of one
(1) month.

4.1.3. Upon the commission of any of the following acts:

(a) The failure of the Employee to perform his duties for the Corporation (other than by reason of illness) after being given written notice specifying the breach and actions to be taken to cure such material breach and giving Employee reasonable time (not under 20 days) to cure such breach.

(b) Willful misconduct by the Employee which is demonstrably and materially injurious to the Corporation, monetarily or otherwise (for the avoidance of debt, any actions taken in good faith as an officer or director shall not be deemed misconduct).

(c) Conviction of the Employee of a felony or misdemeanor which, in the reasonable judgment of the Board of Directors of the Corporation, is likely to have a material adverse effect upon the business or reputation of the Corporation, or which substantially impairs the Employee's ability to perform his duties for the Corporation.

(d) Breach by the Employee of any agreement with the Corporation concerning noncompetition or the confidentiality of trade secrets or proprietary or other information after a notice of breach has been given specifying the actions to be taken and given opportunity to take cure such breach.

4.2. Consequences of Termination. If the Employee's employment with the Corporation is terminated, the following shall occur:

(a) If the Employee's employment is terminated prior to the expiration of this Agreement pursuant to any of the provisions of
Section 4.1.1 or 4.1.2, above, (1) the Corporation shall pay to the Employee or the Employee's estate, as the case may be, all compensation accrued under Article III, above, to the date of termination, (ii) the Corporation shall pay to the Employee or the Employee's estate, as the case may be, an amount equal to the Employee's annual salary paid to him in the one (1) year period immediately prior to his termination of employment which shall be payable in 12 equal consecutive monthly installments commencing upon the Employee's termination, (iii) the Employee or the Employee's estate, as the case may be shall be entitled to receive for a one (1) year period following the date of termination all benefits the Employee was receiving on the date of termination pursuant to Article III above, all in accordance with the terms of such plans including, without limitation, any forfeiture provisions set forth in such plans, and (iv) the Corporation shall cause all unvested benefits, if any, awarded to the Employee prior to the termination of his employment under any equity, stock or other option program of the Corporation (collectively the "Option Plans") to vest and become immediately exercisable by the Employee.

(b) If the Employee's employment is terminated prior to the expiration of this Agreement pursuant to the provisions of Section 4.1.3, above, (i) the Corporation shall pay to the Employee all compensation accrued under Article III, above, to the date of termination, (ii) the Employee shall be entitled to receive all benefits accrued to the date of termination of the Employee's employment with the Corporation, all in accordance with the terms of such plans including, without limitation, any forfeiture provisions set forth in such plans, and shall have all rights to COBRA or similar benefits and (iii) all vested benefits, if any, held by the Employee on the date of his termination of employment under the Option Plans shall become immediately exercisable by the Employee and all unused options or benefits shall be terminated as provided in such agreements or plans.

(c) If (i) the Corporation terminates the Employee's employment prior to the expiration of the Agreement for any reason other than as set forth in Section 4.1.3, above, or (ii) the Employee voluntarily terminates his employment with the Corporation because the Corporation materially adversely modifies or reduces the nature or scope of the Employee's authority or responsibility or the Corporation fails to pay the Employee amounts due under the Agreement, then (A) the Corporation shall continue to pay the Employee his annual base salary which he received pursuant to Article III, above, in the year immediately preceding the date of his termination of employment with the Corporation, for the greater of eighteen (18) months or the remaining, (B) the Employee shall be entitled to receive all benefits the Employee was receiving on the date of his termination of employment pursuant to Article III, above, for the greater of eighteen (18) months or the remaining term of the Agreement, and (C) all vested or unvested benefits, if any, which the Employee was entitled to receive during the term of this Agreement under the Option Plans shall vest and become immediately exercisable, PROVIDED THAT the provisions of paragraphs (A) and (B) shall not apply unless and until the common stock of the Corporation is listed for trading on the American Stock Exchange (the "AMEX") or any other U.S. market place similar or superior and the Corporation's securities known as CUFS (CHESS Units of Foreign Securities) cease trading or, and the Corporation is no longer subject to the rules of, on the Australian Stock Exchange Ltd (the "ASX").

4.3 Expiration of Term. Except as set forth in Section 4.2, above, upon the expiration of the term of this Agreement, the Corporation shall pay to the Employee an amount equal to the Employee's annual base salary paid to him pursuant to Article III, above, in the eighteen (18) month period immediately prior to the expiration of the term of this Agreement, in eighteen (18) equal consecutive monthly installments commencing upon the date of such expiration, PROVIDED THAT the provisions of this section 4.3 shall not apply unless and until the common stock of the Corporation is listed for trading on the AMEX or any other similar or superior U.S. market and the Corporation's securities known as CUFS (CHESS Units of Foreign Securities) cease trading on the ASX and the Corporation is no longer subject to the rules of the ASX.

ARTICLE V

Covenant Not to Compete; Confidentiality

5.1. Restrictions. The Employee agrees that he shall not, at any time while he is employed by the Corporation or at any time during the eighteen (18) month period following the termination of his employment with the Corporation for any reason, either directly or indirectly, whether as agent, stockholder (except as the holder of not more than five percent (5%) of the stock of a publicly held company, provided the Employee does not participate in the business of such company or render advice or assistance to it), employee, officer, director, trustee, partner, consultant, proprietor or otherwise:

(a) Acquire an ownership interest in, work for or render advice or assistance to any business, incorporated or otherwise, operating within a fifty (50) mile radius of the Corporation's offices which is engaged in the sale, marketing and/or distribution of products or services sold or offered by the Corporation as of the date hereof or during the period in which the Employee is employed by the Corporation.

(b) Except on behalf of the Corporation, contact, sell or solicit to sell, or attempt to contact, sell or solicit to sell, products or services competitive with those offered or sold by the Corporation to any customer of the Corporation.

(i) During the term of the Employee's employment, the term "customer" shall mean those persons or entities to whom the Corporation or its predecessor entity has sold, or solicited to sell, products or services during the term of the Employee's employment.

(ii) During the period following the termination of the Employee's employment, the term "customer" shall mean any entity or person to whom the Corporation or its predecessor entity has sold, or solicited to sell, products or services during the two (2) year period prior to the termination of the Employee's employment.

5.2. Confidential Information. The Employee agrees that he shall not at any time while he is employed by the Corporation, and for a period of three years after termination of his employment with the Corporation for any reason, except on behalf of the Corporation, either directly or indirectly, disclose to any person other than an employee or agent of the Corporation having the need to know such information in the ordinary course of business, or to a person to whom such disclosure has been authorized by the Board of Directors of the Corporation, any "confidential information." The term "confidential information" shall mean: (A) all technical information relating to the Corporation's or its predecessor's business; (B) any information concerning any product or service under development by, or being tested by, the Corporation but

not yet offered for sale; (C) any information concerning the pricing policies of the Corporation, the prices charged by the Corporation to any customer, the volume of orders of any customer, any bids or negotiations being submitted by or being conducted by the Corporation and all other information concerning the transactions of the Corporation with any customer or proposed customer; (D) any information concerning the marketing programs or strategies of the Corporation; (E) any financial information concerning the Corporation or its substitutes or predecessors; (F) any information concerning the salaries or wages paid to, the work records of or any other personnel information relating to any employee of the Corporation; and (G) any other information determined by the Corporation to be confidential and proprietary and which is identified as such prior to or at the time of its disclosure to the Employee. Notwithstanding the foregoing, no information shall be considered to be confidential information which (i) is disclosed or published without the fault of the Employee, or (ii) is or becomes general public information without disclosure by the Employee. The Employee acknowledges and agrees that the provisions of this Section 5.2 shall not be construed to constitute: (a) a waiver by the Corporation of any of its rights in or to protect specific items of its proprietary information which constitutes trade secrets, or (b) a release of or a limit on the Employee's legal obligation not to disclose or misappropriate any trade secrets of the Corporation during or after his employment with the Corporation. Notwithstanding the foregoing, Employee shall be permitted to disclose any confidential information that was requested under subpoena, court order or regulatory requirements or enforcement proceedings of any governmental agency or such regulatory agency.

5.3. Surrender of Records. The Employee agrees upon termination of his employment with the Corporation immediately to surrender to the Corporation all correspondence, letters, contracts, manuals, mailing lists, customer lists, marketing data, ledgers, supplies, corporate checks and all other materials or records of any kind relating to the Corporation, its predecessor or their business then in his possession or under his control, as well as all copies of any of the foregoing.

5.4. Remedies. The Employee recognizes that irrevocable injury may result to the Corporation, its business and its property, in the event of a breach by him of the restrictions imposed by this Article V and that the Employee's acceptance of such restrictions was a material factor in the Corporation's decision to provide employment to the Employee. The Employee agrees that if he shall engage in any acts in violation of this Article V, the Corporation shall be entitled, in addition to such other remedies and damages as may be available to it, to an injunction prohibiting him from engaging in any such acts.

5.5. Notice to Subsequent Employers. The Employee agrees to fully disclose the terms of this Agreement to any person, firm, corporation or other entity by which or with whom he may hereafter become employed, or to which he may hereafter render services, prior to accepting any such employment or performing any such services and further agrees that the Corporation may, if it desires, send a copy of this Agreement to, or otherwise make the provisions hereof known, to any such employer.

ARTICLE VI

Assignment and Disclosure of Inventions and Patents

The Employee hereby sells, assigns and transfers to the Corporation all of his right, title and interest in and to any and all Inventions (as hereinafter defined) and agrees that all Inventions are or shall become the sole and exclusive property of the Corporation and that only the Corporation shall have the right to use, sell, license, assign or otherwise exploit such Inventions and products, articles, commodities, methods or processes employing them. The Employee shall make a full and complete written disclosure of any and all Inventions to the Corporation and shall promptly execute and deliver to the Corporation all documents which the Corporation may deem necessary or appropriate to effect a valid assignment of the Employee's right and title to any Invention to the Corporation or to prepare, file or prosecute any domestic or foreign patent application in connection therewith. The Employee further agrees to fully cooperate with the Corporation and to take such actions as the Corporation may request, including testimony in patent or other legal proceedings, in connection with the protection, establishment and/or enforcement of the Corporation's rights to any such Invention and/or to permit the Corporation to reduce the same to practice. The Corporation agrees to reimburse the Employee for any out-of-pocket expenses expended by the Employee in complying with the provisions of this Article VI. In addition thereto, the Corporation shall pay to the Employee an amount equal to Two Hundred Fifty Dollars ($250.00) for each patent application prepared and filed with respect to an Invention conceived by the Employee and One Hundred Fifty Dollars ($150.00) for each Invention conceived by the Employee which constitutes a trade secret of the Corporation. For purposes hereof, an "Invention" shall mean any idea, innovation, discovery, process, design, development, improvement, application, technique or invention, whether patentable or not, which in any way affects or relates to, or which is or may become capable of being used in the business of the Corporation and which the Employee may, either wholly or in part, and either solely or jointly with others, conceive, make or secure or may have conceived, made or secured at any time during the period of time he is employed by the Corporation or the Corporation's predecessor entity or during the six-month period following termination of his employment with the Corporation.

ARTICLE VII

Expenses

During the term of the Employee's employment hereunder, the Corporation shall pay or reimburse the Employee for all reasonable and necessary business expenses incurred by the Employee in the interest of the Corporation in accordance with the Corporation's reimbursement policies in effect from time to time. The Employee shall be required to submit an itemized account of such expenditures and such proof as may be necessary to establish to the satisfaction of the Corporation that the expenses incurred by the Employee were ordinary and necessary business expenses incurred on behalf of the Corporation.

ARTICLE VIII

Waiver of Breach

The waiver by the Corporation of any breach of any provision of this Agreement by the Employee shall not be deemed a waiver by the Corporation of any subsequent breach.

ARTICLE IX

Notice

Any notice required or permitted to be given hereunder shall be in writing and shall be deemed to be sufficiently given and received in all respects when personally delivered or three (3) days after when deposited in the United States mail, certified mail, postage prepaid, return receipt requested and addressed to the principal office of the Corporation or the residence of the Employee, as the case may be.

ARTICLE X

Assignment

This Agreement shall not be assignable by the Corporation without the written consent of the Employee, except that if the Corporation shall merge or consolidate with or into, or transfer substantially all of its assets, including goodwill, to another corporation or other form of business organization, this Agreement shall be binding upon and inure to the benefit of the successor of the Corporation resulting from such merger, consolidation or transfer. The Employee may not assign, pledge or encumber any interest in this Agreement or any part thereof without the written consent of the Corporation.

ARTICLE XI

Complete Agreement; Amendment

This Agreement contains the full and complete understanding and agreement of the parties hereto and supersedes all prior agreements or understandings, whether oral or written, between the parties hereto with respect to the subject matter hereof. This Agreement may not be modified, amended, terminated or discharged orally.

ARTICLE XII

Governing Law

This Agreement and all questions of its interpretation, performance, enforceability and the rights and remedies of the parties hereto shall be governed by and determined in accordance with the internal laws of the State of Wisconsin.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written.

CORPORATION:

ZBB ENERGY CORPORATION

By:
(Title)

EMPLOYEE:

Geoffrey David Hann

EXHIBIT A

SECTION I. TERM

The term of the employee's employment under this agreement shall commence effective as of July 1, 2006 and shall, except as it may otherwise be subject to termination hereunder, continue thereafter for a period of three (3) years.

SECTION II. POSITION AND DUTIES

The employee shall be employed by the Corporation in the capacity of Chief Financial Officer of the Corporation and in such capacity shall have responsibility for the overall management and control of the financial operations and reporting of the Corporation and its subsidiaries.

SECTION III. SALARY AND BENEFITS

The corporation shall pay to the employee an annual salary and benefits package equal to at least $160,000.00). The employee's salary shall be payable in equal installments not less frequently than monthly and shall be subject to increase in each year in an amount mutually agreed by the Employee and the Corporation and in any event by an amount not less than the Increase in the Consumer Price Index. As used herein, "Consumer Price Index" as of any date means the index published most recently preceding such date by the Bureau of Labor Statistics, United States Department of Labor, "Consumer Price Index, All urban Consumers, All Items, Milwaukee, Wisconsin (1982-84 =100)".

The employee shall also be entitled to participate in any individual or group life insurance, health insurance, qualified pension or profit sharing plan or any other fringe benefit program which the Corporation may from time to time make available to its management employees. In addition thereto, the employee shall be entitled to participate in a stock option benefit which shall be made available to the Corporation's management team.

EMPLOYMENT AGREEMENT

THIS AGREEMENT, made and entered into as of this 4th day of October, 2006 by and between ZBB ENERGY CORPORATION, a Wisconsin corporation, hereinafter referred to as the "CORPORATION," and ROBERT JOHN PARRY, hereinafter referred to as the "EMPLOYEE."

W I T N E S S E T H:

WHEREAS, the Employee desires to be continued employed by the Corporation in the capacity of Chief Executive Officer; and

WHEREAS, the Corporation and the Employee desire to set forth in this Agreement the terms and conditions under which the Employee is to continue to be employed by the Corporation and intend to herby replace in its entirety, the previous Employment Agreement between the parties, as amended.

NOW, THEREFORE, the Corporation and the Employee, in consideration of the mutual promises hereinafter set forth, do hereby promise and agree as follows:

ARTICLE I

Term

The term of the Employee's employment under this Agreement shall commence effective as of the date set forth in Section I of EXHIBIT A attached hereto and shall, except as it may otherwise be subject to termination hereunder, continue thereafter for a period of time as set forth in Section I of Exhibit A. The Corporation and the Employee acknowledge and agree that the term of the Employee's employment hereunder shall be automatically extended from year to year thereafter upon the same terms and conditions, unless terminated by either party hereto upon ninety (90) days written notice given prior to the expiration of the original term of this Agreement or any extension thereof.

ARTICLE II

Employment Duties

ARTICLE III

Compensation

3.1. Salary and Benefits. During the term of the Employee's employment hereunder, the Employee shall be entitled to receive the salary and fringe benefits set forth in Section III of EXHIBIT A. The Employee acknowledges that he shall have no vested rights in any such fringe benefit programs except as expressly provided under the terms thereof and that such programs may be terminated as well as supplemented.

ARTICLE IV

Termination of Employment

4.1.1. In the event of the Employee's death.

4.1.2. In the event of the disability of the Employee. For purposes of this Agreement, the term "disability" shall be defined as the inability of the Employee to perform his normal duties as a full-time employee of the Corporation for a period of ninety (90) consecutive days by reason of physical or mental illness or incapacity, or for periods of physical or mental illness or incapacity aggregating one hundred twenty (120) days in any consecutive twelve (12) month period. A physical or mental disability shall be deemed to include the written direction by a physician that the Employee shall, for medical reasons, terminate or substantially reduce his services to the Corporation. If there is any dispute as to whether the termination of the Employee's employment was due to his physical or mental illness or incapacity, such question shall be submitted to a licensed physician for the purpose of making such determination. An examination of the Employee shall be made within thirty (30) days after written notice by the Corporation or the Employee to the other by a licensed physician agreeable to the Corporation. The Employee shall submit to such examination and provide such information that such physician may request and the determination of such physician as to the question of the Employee's physical or mental condition shall be binding and conclusive on all parties concerned for purposes of this Agreement. No information that is not specifically authorized by the Employee to be disclosed by the physician need to be disclosed. A disability shall be deemed to be continuing unless the Employee performs his regular duties for the Corporation for a continuous period of one
(1) month.

4.1.3. Upon the commission of any of the following acts:

(a) The failure of the Employee to perform his duties for the Corporation (other than by reason of illness)after being given written notice specifying, the breach and actions to be taken to cure such material breach and giving Employee reasonable time (not under 20 business days) to cure such breach.

(d) Breach by the Employee of any agreement with the Corporation concerning noncompetition or the confidentiality of trade secrets or proprietary or other information, after a notice of breach has been given specifying the actions to be taken and given opportunity to take cure such breach.

4.2. Consequences of Termination. If the Employee's employment with the Corporation is terminated, the following shall occur:

ARTICLE V

Covenant Not to Compete; Confidentiality

ARTICLE VI

Assignment and Disclosure of Inventions and Patents

ARTICLE VII

Expenses

ARTICLE VIII

Waiver of Breach

The waiver by the Corporation of any breach of any provision of this Agreement by the Employee shall not be deemed a waiver by the Corporation of any subsequent breach.

ARTICLE IX

Notice

ARTICLE X

Assignment

ARTICLE XI

Complete Agreement; Amendment

ARTICLE XII

Governing Law

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day, month and year first above written.

CORPORATION:

ZBB ENERGY CORPORATION.

By:
(Title)

EMPLOYEE:

Robert John Parry

EXHIBIT A

SECTION I. TERM

SECTION II. POSITION AND DUTIES

The employee shall be employed by the Corporation in the capacity of Chief Executive Officer of the Corporation and in such capacity shall have responsibility for the overall management and control of policy and direction of the Corporation as provided for under Section 4.06 of the Corporations By-Laws. In addition, the Employee shall serve as an Executive Director of the Board of Directors of the Corporation.

SECTION III. SALARY AND BENEFITS

The corporation shall pay to the employee an annual salary and benefits package equal to at least $187,620.00). The employee's salary shall be payable in equal installments not less frequently than monthly and shall be subject to increase in each year in an amount mutually agreed by the Employee and the Corporation and in any event by an amount not less than the Increase in the Consumer Price Index. As used herein, "Consumer Price Index" as of any date means the index published most recently preceding such date by the Bureau of Labor Statistics, United States Department of Labor, "Consumer Price Index, All urban Consumers, All Items, Milwaukee, Wisconsin (1982-84 =100)".

LEASE SCHEDULE

1. LAND                    Jandakot agricultural area lot 253 and being lot 36
                           on plan 19944 and being the whole of the land
                           comprised in certificate of title volume 1631 folio
                           416 and being known as 240 Barrington Street, Bibra
                           Lakes, Western Australia, 6163.

2. PREMISES                The whole of the Land and the building and
                           improvements thereon.

3. TERM                    Commencement Date: 1 November 2001
                           Date of Expiry: 31 October 2006

4. RENT                    An annual rental of thirty two thousand dollars
                           ($32,000.00) to be paid in monthly instalments each
                           of $2,666.66

5. RENT REVIEW DATES       (a)  CPI REVIEWS

                                On the 1st, 3rd, 4th, 6th, 7th, 8th, 9th, 11th,
                                12th, 13th and 14th anniversaries of the
                                Commencement Date during the Term and any
                                further term of this Lease.

                           (b)  MARKET REVIEWS

                                On the 2nd, 5th and 10th anniversaries of the
                                Commencement Date during the Term and any
                                further term of this Lease.

6. PERMITTED USE           Offices, factory and research facility in relation
                           to zinc bromine battery technology.

7. PUBLIC RISK INSURANCE   The public risk insurance shall be in the sum of not
                           less than $5,000,000.00 or such higher amount as the
                           Landlord may reasonably specify from time to time

8. OPTION OF RENEWAL       Two (2) further terms each of five (5) years

9.  PAINTING               Every 5 years and in the 3 months prior to the Tenant
                           vacating the Premises

10. ADDRESS OF PARTNERS    LANDLORD

                           Address:   Level 2, Colord House,
                                      33 Colin Street,
                                      West Perth, WA, 6005

                           Fax:       61 8 9481 2434

                           Email:     rapayne@iinet.net.au

                           Attention: Richard Payne

                           TENANT

                           Address:   PO Box 2047,
                                      Kardinya, WA, 6153

                           Fax:       61 8 9310 9381

                           Email:     info@zbbenergy.com

Attention: The Directors

GUARANTOR

                           Address:   N93 W14475 Whittaker Way,
                                      Menomonee Falls
                                      Wisconsin, USA, 53051

                           Fax:       1 262 253 9822

                           Email:     zbbtec@zbbenergy.com

                           Attention: The Directors

11. SPECIAL CONDITIONS     A. APPROVALS

                           The Tenant is responsible for obtaining all
                           approvals required for carrying on the Tenant's
                           business from the Premises.

                           B. FITOUT

                           The Landlord agrees that the Tenant may construct
                           laboratories and other facilities reasonably
                           required for the Tenant's research, development and
                           manufacturing activities on the Premises (THE
                           FITOUT) on the following terms:

                           (i)   prior to commencement of construction of the
                                 fitout, the Tenant must prepare plans and
                                 specifications of the fitout (THE PLANS) and
                                 obtain all statutory and other approvals
                                 required by law to the same and the approval of
                                 the Landlord, whose approval shall not be
                                 unreasonably withheld.

                           (ii)  the Tenant shall cause the fitout to be
                                 constructed in an expeditious, professional and
                                 workmanlike manner:

                                 (a)  in accordance with the plans and any
                                      building licence issued in respect
                                      thereof; and

                                                                               3


                                 (b)  in compliance with all applicable
                                      building, design and engineering and other
                                      applicable standards.

                           (iii) on the termination of this Lease the Tenant
                                 must at its cost remove the fitout and make
                                 good any damage to the Premises and leave the
                                 Premises in the condition required by this
                                 Lease.

                           C. ASSIGNMENT

                           The Landlord agrees that clause 6.2 will not apply to
                           a transfer of shares to a related body corporate (as
                           that term is defined in section 50 of the
                           Corporations Law) of the Tenant's ultimate holding
                           company.

                           D. OPTION TO PURCHASE LAND

                           The Landlord grants to the Tenant the option of
                           purchasing the Land in fee simple absolutely on the
                           following terms:

                           (i)   the option shall be exercisable by notice in
                                 writing (but not by email) to the Landlord (THE
                                 NOTICE) at any time after 31 July 2006 but not
                                 later than one months before the expiration of
                                 the Term or any renewal or extension of the
                                 Term.

                           (ii)  the purchase price for the Land shall be the
                                 price to be agreed between the parties but
                                 should the parties fail to agree the price
                                 within 14 days of the giving of the Notice,
                                 then the price shall be equal to the then
                                 current market value of the Land determined as
                                 follows:

                                 (a)  the Landlord and the Tenant must each give
                                      notice to the other, within 21 days after
                                      the giving of the Notice, appointing a
                                      valuer licensed under the Land Valuers
                                      Licensing Act 1978. If any party fails to
                                      make the appointment, the other party may
                                      appoint both valuers.

                                 (b)  the two valuers must inform each other of
                                      their respective views and confer as to
                                      whether they can agree on a determination
                                      of the current market value of the Land.

                                 (c)  if the two valuers have not delivered a
                                      joint determination within 21 days after
                                      the appointment of the second valuer
                                      appointed, the price is to be determined
                                      by a third valuer licensed under the Land
                                      Valuers Licensing Act 1978 appointed by
                                      the President for the time being of the
                                      Australian Institute of Valuers and Land
                                      Economists (Inc.) (W.A. Division) or his
                                      nominee at the request of either party.
                                      The Landlord and the Tenant must ensure
                                      the third valuer makes and delivers his
                                      determination within 21 days of being
                                      called upon to act and deliver written
                                      reasons for his determination. The third
                                      valuer's determination shall be conclusive
                                      and binding on the Landlord and the
                                      Tenant.

                                 (d)  each valuer is to act as an expert and not
                                      as an arbitrator, and the price determined
                                      in accordance with this clause will be the
                                      purchase price payable by the Tenant for
                                      the Land.

                                 (e)  the Landlord and the Tenant must each pay
                                      the fees of the valuer appointed by it or
                                      on its behalf and half the fees of the
                                      third valuer, if any, appointed under
                                      sub-paragraph (c).

                                 (f)  the Landlord and the Tenant must each
                                      ensure the valuer appointed by it or on
                                      its behalf does everything contemplated by
                                      this clause.

                           (iii) if the option is exercised by the Tenant in
                                 accordance with this clause, the Land shall be
                                 sold upon the following terms and conditions:

                                 (a)  within 7 days after agreement or
                                      notification of the determination of the
                                      purchase price, the Tenant shall pay a
                                      deposit of ten per centum (10%) of the
                                      purchase price.

                                                                               4


                                 (b)  the balance of the purchase price shall be
                                      paid in full by a bank cheque within 30
                                      days of agreement or notification of the
                                      determination of the purchase price (THE
                                      SETTLEMENT DATE).

                                 (c)  if the Tenant, having given the Notice,
                                      shall fail to complete the purchase in
                                      accordance with this clause, the Tenant
                                      shall not be entitled at any subsequent
                                      time to exercise such option and such
                                      option shall be determined but without
                                      prejudice to any rights which the Landlord
                                      may have against the Tenant by reason of
                                      such default.

                                 (d)  save as expressly modified by the terms of
                                      this clause, the sale pursuant to the
                                      exercise of the option to purchase, shall
                                      be deemed to incorporate the conditions
                                      known as the Law Society of Western
                                      Australia (Inc.) and the Real Estate
                                      Institute of Western Australia (Inc.)
                                      Joint Form of General Conditions for the
                                      Sale of Land 2000 Revision (THE GENERAL
                                      CONDITIONS).

                                 (e)  the Tenant shall pay all GST on the
                                      purchase price.

                                 (f)  for all purposes connected with the
                                      exercise of the option time shall be of
                                      the essence.

                                 (g)  possession of the Land shall be given by
                                      the Landlord to the Tenant on the
                                      Settlement Date.

                                 (h)  the Land is sold subject to all easements
                                      rights interests orders and encroachments
                                      (if any) affecting the Land whether or not
                                      those easements rights interests orders or
                                      encroachments are mentioned on the
                                      certificate of title for the Land.

                           (iv)  the Tenant shall only have the benefit of this
                                 option to purchase the Land, so long as the
                                 Landlord's right of re-entry under this Lease
                                 shall not have arisen.

LEASE

THIS LEASE made the ______ day of ________________ 2001

BETWEEN   GEOFFREY DAVID HANN, ROBERT JOHN PARRY, MICHAEL JOHN PALMER and
          RICHARD ANDREW PAYNE all care of Level 2, Colord House, 33 Colin
          Street, West Perth, Western Australia, 6005 (THE LANDLORD)

          ZBB TECHNOLOGIES, LTD ACN 008 958 254 of Level 2, Colord House, 33
          Colin Street, West Perth, Western Australia, 6005 (THE TENANT)

AND       ZBB ENERGY CORPORATION ARBN 082 338 789 of N93 W14475 Whittaker Way,
          Menomonee Falls, Wisconsin, United States of America, 53051 (THE
          GUARANTOR)

RECITALS

A The Landlord is the registered proprietor of the Land.

B. The Landlord has agreed to lease and the Tenant has agreed to take on lease the Premises at the Rent reserved and upon and subject to the terms and conditions contained in this Lease.

OPERATIVE PROVISIONS

1. INTERPRETATION

1.1 DEFINITIONS

In this Lease unless the context otherwise requires:

COMMENCEMENT DATE means the date of commencement of the Term specified in Item 3 of the Schedule.

CPI means the Consumer Price Index (all groups) for Perth published from time to time by the Australian Bureau of Statistics, but in the event that there is any suspension or discontinuance of the Consumer Price Index (all groups) for Perth or its method of calculation is substantially altered then it shall mean any index published which reflects the fluctuations of the cost of living in Perth which the Landlord determines.

EVENT OF DEFAULT means any event specified in clause 11.2.

INSOLVENCY EVENT means the happening of any of the following events:

(a) a body corporate enters into, or resolves to enter into, a scheme of arrangement, deed of company arrangement or composition with, or assignment for the benefit of, all or any of its creditors, except to reconstruct or amalgamate on terms approved by the Landlord;

(b) an application is made to a court for an order or an order is made that a body corporate be wound up;

(c) an application is made to a court for an order appointing a liquidator or a provisional liquidator in respect of a body corporate, or one of them is appointed;

(d) a body corporate resolves to wind itself up, or otherwise dissolve itself, or gives notice of intention to do so, except to reconstruct or amalgamate on terms approved by the Landlord;

(e) a body corporate is insolvent as defined in s95A of the Corporations Law;

(f) as a result of the operation of s459F(1) of the Corporations Law, a body corporate is taken to have failed to comply with a statutory demand;

(g) a body corporate takes any step to obtain protection or is granted protection from its creditors, under any applicable legislation or an administrator is appointed to a body corporate;

(h) a person becomes insolvent under administration as defined in s9 of the Corporations Law;

(i) a controller (as defined in s9 of the Corporations Law) is appointed in respect of any part of the property of a body corporate;

(j) a natural person is unable to pay all his or her debts as and when they fall due and payable;

(k) a meeting is convened to place a natural person in bankruptcy or an application is made for a natural person to be made bankrupt;

(l) a trustee in bankruptcy is appointed to a natural person;

(m) a natural person proposes to enter into, or enters into, any form of arrangement whether formal or informal with any of its creditors; or

(n) anything analogous or having a substantially similar effect to any of the events specified above happens under the law of any applicable jurisdiction.

LAND means the land specified in Item 1 of the Schedule.

LEASE means this Lease including the Schedule and plan and annexure (if any) annexed hereto.

OPERATING EXPENSES means all the following moneys expended or payable by the Landlord in connection with the Land or the Landlord's ownership of the Land during the Term, namely:

(a) the Rates and Taxes;

(b) insurance premiums for the following insurances effected by the Landlord:

(i) insuring the Premises and any plant, equipment and other appliance, fixture and fittings on the Premises that is the property of the Landlord in respect of such usual and necessary risks against which a landlord can and does ordinarily insure to the full reinstatement value thereof;

(ii) insurance against damage to all glass and plate glass upon or in the Premises;

(iii) insurance in respect of public liability in relation to the Land; and

(iv) any other insurance the Landlord may reasonably take out relating to the Landlord's ownership or interest in the Premises.

PREMISES means the premises specified in Item 2 of the Schedule together with all the plant and equipment, fixtures, fittings, furniture, furnishings and effects in, on or fixed to such premises that are not the property of the Tenant.

RATE means the rate of interest per annum charged by the Landlord's bank from time to time on unsecured arranged overdrafts of less than $100,000 plus two per cent (2%).

RATES AND TAXES means:

(a) all rates, taxes, duties, impositions and fees payable to the local authority in respect of the Premises;

(b) all water, sewerage and drainage rates and charges payable for the supply of water to the Premises including, but not limited to, meter fees and charges for the disposal of storm water and sewerage; and

(c) any land tax or other tax in the nature of a tax upon land payable in respect of the Premises (but calculated on a single ownership basis).

RENT means the annual rental specified in Item 4 of the Schedule as reviewed pursuant to this Lease.

RENT REVIEW DATE means the dates specified in Item 5 of the Schedule as the date or dates upon which the Rent is to be reviewed.

SCHEDULE means the Lease Schedule at the beginning of this Lease.

TERM means the term of this Lease specified in Item 3 of the Schedule subject to the provisions in this Lease for early termination of the Term and, when the context requires, includes any further term and any period of holding over.

1.2 INTERPRETATION

In this Lease, unless the context otherwise requires:

(a) words importing the singular include the plural and vice versa.

(b) words of one gender include every other gender.

(c) words denoting individuals include a firm, body corporate, an unincorporated association and any governmental or other public body or authority of any kind and vice versa.

(d) references to any statute or other law shall mean such statute or other law as amended or replaced at any time whether before or after the date of this Lease.

(e) headings shall not effect the construction or interpretation of this Lease.

(f) references to a clause, paragraph or a schedule is a reference to the same in this Lease.

(g) a reference to "party" means a party to this Lease and includes that party's personal representatives, successors in title and assigns.

(h) an agreement, representation or warranty on the part of two or more persons binds them jointly and severally.

(i) an agreement, representation or warranty in favour of two or more persons is for the benefit of them jointly and severally.

(j) a reference to a document includes that document as amended or replaced.

(k) a reference to a professional body includes the successors to or substitutes for that body.

(l) the covenants and obligations on the part of the Tenant are binding upon and enforceable against not only the Tenant but also against any occupier whatever of the Premises or any part thereof from time to time.

(l) a BUSINESS DAY means a day other than a Saturday, Sunday or State public holiday in Western Australia.

2. GRANT OF LEASE

The Landlord leases to the Tenant and the Tenant takes a lease of the Premises for the Term upon and subject to the provisions of this Lease and the covenants and powers implied in every memorandum of lease by virtue of the Transfer of Land Act 1893 so far as they are not excluded or modified.

3. RENT

3.1 PAY RENT BY INSTALMENTS

The Tenant must pay the Rent to the Landlord at the address of the Landlord specified in this Lease or at such other place in Western Australia as is nominated by the Landlord from time to time by monthly instalments in advance.

3.2 TIME FOR PAYMENT OF RENT

The Tenant must pay the monthly instalments of Rent on the Commencement Date and thereafter on the first business day of each month. The first instalment and the last instalment shall (if necessary) be proportionate ones.

4. RENT REVIEW

4.1 CPI RENT REVIEW

From each Rent Review Date specified in Item 5(a) of the Schedule the Rent to be paid by the Tenant shall be an amount equal to the Rent for the 12 months prior to such Rent Review Date increased by the inflationary trends disclosed by any variation by way of increase in proportion that the CPI as determined immediately prior to the relevant Rent Review Date bears to the CPI as determined immediately prior to the Commencement Date (in the case of the first Rent Review Date) or the previous Rent Review Date (in each other case). The Landlord will give notice of the amount of such reviewed Rent to the Tenant.

4.2 MARKET RENT REVIEW

(a) From each Rent Review Date specified in Item 5(b) of the Schedule (MARKET REVIEW DATE) the Rent payable by the Tenant shall be the current market rent of the Premises determined in accordance with this clause 4.2.

(b) The Landlord may between the period three (3) months prior to and six
(6) months after each Market Review Date give to the Tenant a notice in writing of the rate at which the Landlord proposes the Rent shall be payable from the Market Review Date based on the Landlord's own determination of the current market rent of the Premises (THE PROPOSED RENT).

(c) If the Tenant does not within 10 business days of receiving notice of the Proposed Rent give the Landlord notice that he does not agree to pay the Proposed Rent, the Tenant is deemed to have agreed to pay the Proposed Rent. If the Tenant agrees, or is deemed to have agreed, to pay the Proposed Rent then the Rent from the relevant Market Review Date shall be the Proposed Rent.

(d) If within 10 business days of receiving notice of the Proposed Rent, the Tenant gives the Landlord notice that it does not agree to pay the Proposed Rent:

(i) the Landlord and Tenant must during the period of 10 business days after the Tenant gives notice that it does not agree to pay the Proposed Rent meet and negotiate in good faith with a view to agreeing the current market rent of the Premises.

(ii) unless the Landlord and the Tenant agree the current market rent of the Premises under sub-paragraph 4.2(d)(i), the current market rent of the Premises must be determined by a single qualified valuer licensed under the Land Valuers Licensing Act 1978 to be appointed by the President for the time being of the Australian Institute of Valuers and Land Economists (Inc.) (W.A. Division) at the request of either party.

(e) The valuer is to act as an expert and not as an arbitrator, and the current market rent of the Premises determined in accordance with this clause will be the Rent payable by the Tenant from the relevant Market Review Date.

(g) The valuer's determination shall be conclusive and binding on the Landlord and the Tenant. The Landlord and the Tenant must each pay one half the valuer's fees.

4.3 RENT MAY BE REVIEWED LATER

The Landlord shall not by reason of his failure to review the Rent at the time specified in clauses 4.1 or 4.2 forfeit its right to have the Rent reviewed from the relevant Rent Review Date and may at any time thereafter review the Rent in accordance with clauses 4.1 or 4.2, in which case such reviewed Rent shall date back to and be payable from the relevant Rent Review Date.

4.4 RENT UNTIL REVIEW

Until the Rent is reviewed the Rent payable immediately before the applicable Rent Review Date must be paid and any necessary adjustment shall be made on the next day for payment of the Rent after the amount of the Rent is agreed or determined.

5. OPERATING EXPENSES

5.1 PAYMENT OF OPERATING EXPENSES

The Tenant must pay:

(a) the Rates and Taxes by the due date for payment where they are assessed directly against the Tenant or the Premises; and

(b) to the Landlord the Operating Expenses (excluding the Rates and Taxes where the Tenant has paid them in accordance with paragraph (a)) within 10 business days of written demand being made by the Landlord to the Tenant.

5.2 DETERMINATION OF AMOUNT OF OPERATING EXPENSES

Payments on account of the Operating Expenses shall be determined by reference to accounts received by the Landlord from the relevant government, authority, contractor, agent or supplier in respect of the Operating Expenses.

5.3 UTILITY CHARGES

The Tenant must duly and punctually pay and discharge all charges and meter rents and connection and meter installation charges in respect of light, power, gas, water, garbage and waste disposal and all other utilities and services (including, but not limited to any telephone services) which are separately levied, charged, assessed or imposed against or in respect of the Premises.

6. ASSIGNMENT AND SUB-LETTING

6.1 PROHIBITION

The Tenant must not assign, sub-let, part with the possession of or dispose of the Premises, or any part thereof without the prior written consent of the Landlord, which consent will not be unreasonably withheld if:

(a) the proposed assignee or sub-lessee is a respectable, responsible and suitable person of good financial standing and reputation, the onus of proof of which to the reasonable satisfaction of the Landlord shall be upon the Tenant;

(b) no Event of Default has occurred which has not been remedied or waived;

(c) the Tenant procures the execution by such assignee or sub-lessee of an assignment or sub-lease of this Lease (prepared by the Landlord's solicitors at the Tenant's expense) to which the Landlord is a party in such form and upon such reasonable terms and conditions as the Landlord requires;

(d) the Tenant pays all the reasonable costs and expenses incurred by the Landlord in respect of the assignment or sub-letting of this Lease including, without limitation, any enquiries made in relation to any prospective assignee or sub-lessee; and

(e) if the assignee is a corporation, the Tenant must procure the guarantee and indemnity of the obligations to be assumed by the proposed assignee by the directors of that corporation on terms acceptable to the Landlord.

6.2 CHANGE IN SHARE HOLDING

Where the Tenant is a corporation, any change in the principal shareholders of the Tenant which has the effect of altering the effective control of the Tenant is deemed to be an assignment of this Lease. In this clause 6.2, "effective control" means control of the composition of the board of directors or control of more than 50% of the shares with the right to vote in general meetings of the corporation.

6.3 EXCLUSION OF STATUTORY PROVISIONS

Sections 80 and 82 of the Property Law Act 1969 are excluded from any assignment or sub-lease of this Lease.

7. OPERATION AND USE OF PREMISES

7.1 USE

The Tenant must use and occupy the Premises only for the purpose of conducting the business or permitted use specified in Item 6 of the Schedule.

7.2 RESTRICTIONS ON USE

The Tenant must not:

(a) use or permit to be used any part of the Premises as living quarters;

(b) carry on or do, or permit to be carried on or done, in or upon the Premises:

(i) any noxious or offensive art trade business or calling;

(ii) anything which is or may be unlawful, illegal or immoral;

(iii) anything which is or may become a nuisance, annoyance or damage to the owners or occupiers of any adjoining premises; and

(iv) anything which constitutes, or is likely to constitute, an infringement of any statute or regulation now or hereafter in force having control over or affecting the Premises or the Tenant's business;

(d) place, or allow to be placed or maintained on the roof or any exterior part of the Premises, any television or wireless antennae or mast or other apparatus of any kind without the prior written consent of the Landlord;

(e) use, or permit to be used, any method or form of lighting, heating or cooling in the Premises except those provided by the Landlord;

(f) without the prior approval of the Landlord install any electrical equipment on the Premises that overloads the cables switchboards or sub-boards through which electricity is conveyed to the Premises;

(g) keep any live animal, bird or reptile on the Premises without the prior written consent of the Landlord;

(h) use, or permit to be used, the lavatories, drains, grease traps and other sanitary appliances installed in the Premises for any purpose other than that for which they were constructed;

7.3 CONDUCT OF BUSINESS

The Tenant must conduct its business in a proper and businesslike manner.

7.4 SECURITY

The Tenant must use its best endeavours to protect and keep the Premises and any property therein safe from theft or robbery and keep all doors windows and other openings closed and securely fastened when the Premises are not open for business.

7.5 SUITABILITY

The Landlord does not expressly or impliedly warrant that the Premises are suitable or adequate for all or any of the purposes of the Tenant and all warranties (if any) as to suitability and adequacy of the Premises implied by law are excluded to the extent permitted by law.

7.6 APPROVALS

The Tenant must obtain any permits or approvals required from any governmental or other authority to enable the Tenant to use the Premises in the manner specified in Item 6 of the Schedule.

7.7 COMPLY WITH LEGISLATION

The Tenant must at all times comply with all statutes, regulations and by-laws and all notices, orders and requirements of any governmental or other competent authority including, without limiting the generality of the foregoing, the West Australian Fire Brigade Board and the Insurance Council of Australia which relate to the:

(a) Premises or any part thereof;

(b) use or occupancy of the Premises; or

7.8 SIGNS

The Tenant must not without the prior written consent of the Landlord (which consent will not be unreasonably withheld) construct display affix or exhibit on or to the exterior of the Premises any signs lights embellishments advertisements names or notices visible from outside the Premises. Should the Landlord grant its consent under this clause the Tenant shall be responsible for obtaining any approvals required from any local authorities or otherwise to affix or erect any signs light embellishments advertisements names or notices.

7.9 NOT TO ENCUMBER

The Tenant must not without the prior written consent of the Landlord mortgage, create any lien over, charge or otherwise encumber the interest or any part of the interest of the Tenant in this Lease.

7.10 LICENCES

If the Premises are licensed under any legislation, the Tenant must:

(a) carry on in a proper and orderly manner any activity in relation to the licence;

(b) comply with all laws and the requirements and orders of all authorities with respect to the licence;

(d) not during the Term without the Landlord's consent:

(i) remove or apply to remove the licence from the Premises;

(ii) surrender or attempt to surrender the licence;

(iii) dispose of, deal with or part with possession of any interest in the licence; or

(iv) create or allow to come into existence any encumbrance over the licence.

8. INSURANCE AND INDEMNITIES

8.1 TENANT TO EFFECT INSURANCE

The Tenant must maintain with insurers approved by the Landlord (which approval shall not be unreasonably withheld) at all times during the Term and, where required, in the respective names of the Tenant and the Landlord for their respective rights and interests:

(a) public risk insurance in the sum of not less than the amount specified in Item 7 of the Schedule;

(b) comprehensive insurance in respect of the plant, equipment, fittings, furniture, chattels, stock and effects of the Tenant on the Premises for full replacement value including but not limited to damage to the Premises arising from any actual or attempted unauthorised entry to the Premises;

(d) worker's compensation insurance with unlimited cover and extension cover for common law liability for at least the same amount specified in Item 7 of the Schedule.

8.2 PRODUCE POLICIES

The Tenant will whenever required produce to the Landlord the policies of insurance required to be taken out by the Tenant in accordance with this Lease and the receipts for the current year's premiums.

8.3 MAINTAIN INSURANCE

The Tenant must not vary, cancel or allow to lapse the insurance required to be effected by the Tenant under clause 8.1.

8.4 TENANT NOT TO PREJUDICE INSURANCE

The Tenant must not do, or permit to be done, anything which:

(a) increases any insurance premium;

(b) adversely affects any insurance taken out by the Landlord; or

in connection with the Premises.

8.5 INDEMNITY

The Tenant must indemnify and keep indemnified the Landlord from and against all actions claims demands losses damages costs and expenses which the Landlord may sustain or incur in connection with:

(a) breach of covenant: loss damage or injury to property or person inside or outside the Premises to the extent caused by or contributed to by the act, omission, neglect or default of the Tenant or any employee, agent or contractor of the Tenant;

(b) misuse: the negligent use or misuse waste or abuse by the Tenant or any employee, agent or contractor of the Tenant of any water, gas or electricity or other services to the Premises;

(c) escape of harmful agent: the overflow, leakage or escape of water, fire gas, electricity or any other harmful agent in or from the Premises to the extent caused by or contributed to by the act, omission, neglect or default of the Tenant or any employee, agent or contractor of the Tenant; or

(d) use of the Premises: loss damage or injury from any cause whatsoever to property or person to the extent caused by or contributed to by the use of the Premises by the Tenant or any employee, agent or contractor of the Tenant or other person claiming through or under the Tenant.

8.6 RESTRICTIONS ON LIABILITY OF LANDLORD The Landlord shall not be liable to the Tenant:

(a) for any act or omission of any other person in the Premises;

(b) from any malfunction, interruption or failure in relation to the water, gas, electricity, air-conditioning, fire fighting equipment or other services to the Premises, including, without limitation, any other breakdown of any plant or equipment in the Premises;

(c) for any other accident, blockage or damage affecting the Premises or any of the appurtenances contained in the Premises including, without limitation, the blockage of any sewer, drain, gutter, or downpipe or break in any pipe or wire; or

(d) for any other loss or damage from any cause,

except for the Landlord's own negligence or that of any employee, agent or contractor of the Landlord.

9. REPAIR AND MAINTENANCE

9.1 REPAIR BY TENANT

The Tenant must maintain, repair and keep the Premises and every part thereof (including, but not limited to, all plant and equipment, glass and plate glass, floor and window coverings, partitioning, light fittings, air conditioning plant, lavatories, sinks, drains, fire hydrant, sewerage and plumbing facilities, gas and electrical installations and facilities and other fixtures, fittings, furniture and effects in, on or fixed to the Premises) in good and substantial repair order and condition, reasonable fair wear and tear and damage from any causes mentioned in the Landlord's insurance contract excepted save where the insurance moneys shall have been rendered irrecoverable by some act omission or default on the part of the Tenant or any employee, agent, contractor or visitor of the Tenant.

9.2 MAINTAIN DRAINS

The Tenant must:

(a) keep that part of any drains, pipes and other conduits originating in or connected to the Premises in a clean and free flowing condition;

(b) regularly clean and maintain any grease traps serving the Premises, whether or not within the Premises; and

9.3 LANDLORD MAY REPAIR IF FAILURE BY TENANT

If the Tenant fails to repair and maintain the Premises in accordance with this Lease within 10 business days of service of a notice upon the Tenant requiring the Tenant to do so, the Landlord and all persons authorised by the Landlord may thereafter enter the Premises with all necessary materials and appliances and carry out such maintenance and repair at the cost of the Tenant who shall pay such costs to the Landlord upon demand.

9.4 ENTRY AND REPAIR BY LANDLORD

The Landlord and persons authorised by the Landlord may after giving reasonable notice to the Tenant (or in an emergency without notice) enter the Premises:

(a) to view and inspect the state of repair and condition of the Premises;

(b) with workmen and others and all necessary materials for the purpose

of:

(i) complying with any notice or order of any authority having jurisdiction or authority over or in respect of the Premises for which the Tenant is not liable under this Lease; or

(ii) carrying out any repair, renovation, maintenance, alteration or replacement to the Premises; and

(c) to carry out any modification or structural alterations to the Premises which it considers necessary or other works required by any authority having jurisdiction or authority over or in respect of the Premises.

In the exercise of its rights under this clause the Landlord will cause as little inconvenience to the Tenant as practicable.

9.5 KEEP CLEAN

The Tenant must keep the Premises (including the windows) clean and clear of rubbish, debris and vermin.

9.6 ALTERATIONS

The Tenant must not without the written consent of the Landlord which consent shall not unreasonably withheld:

(a) make, or permit to be made, any alterations or additions to the Premises;

(b) remove or alter any partitioning;

(d) install fixtures and fittings in the Premises which consent shall not be unreasonably withheld in relation to fixtures and fittings necessary for the operation of the Tenant's business.

9.7 NO STRUCTURAL REPAIR BY TENANT

Despite anything in this clause 9, the Tenant has no obligation to carry out any structural maintenance, replacement or repair except when made necessary by any act neglect default or omission by the Tenant or any employee, agent, contractor, visitor or customer of the Tenant or by virtue of the Tenant's business on the Premises. The Landlord has no obligation to carry out any work made necessary by any act neglect default or omission by the Tenant or any employee, agent, contractor or customer of the Tenant or by virtue of the Tenant's business on the Premises.

9.8 PAINT

The Tenant must in each of the periods referred to in Item 9 of the Schedule paint the inside walls and other parts of the Premises now or usually painted with good quality and suitable materials in colours first approved by the Landlord (which approval will not be unreasonably withheld) in a good and workmanlike manner to the reasonable satisfaction of the Landlord.

9.9 MAKE GOOD DAMAGE

The Tenant must make good any breakage defect or damage to the Premises or to any adjoining premises or to any facility or appurtenance thereof caused by or contributed to by the act, omission, neglect or default of the Tenant or any employee, agent or contractor of the Tenant.

9.10 NOT TO OVERLOAD THE STRUCTURE

The Tenant must at all times ensure that the floors of the Premises or any walls, pillars or other parts thereof are not broken, strained or damaged by overloading or from any other cause.

9.11 PASS ON NOTICES TO LANDLORD

If the Premises are damaged, or if the Tenant receives any notice from any governmental authority with respect to the Premises, the Tenant must immediately give notice in writing to the Landlord of such damage or notice.

10. LANDLORD'S RIGHTS AND OBLIGATIONS

10.1 QUIET ENJOYMENT

If the Tenant complies with the Tenants obligations under this Lease, the Tenant may hold and enjoy the Premises during the Term without any interruption by the Landlord but subject to the rights of the Landlord under this Lease.

10.2 STRUCTURAL REPAIR BY LANDLORD

The Landlord undertakes to carry out structural maintenance, replacement or repair to the Premises that is necessary to maintain the Premises in a safe, weather proof and water tight condition and in respect of which the Tenant has given written notice to the Landlord, except that the Landlord is not required to undertake such

maintenance, replacement or repair when it is made necessary by any act neglect default or omission by the Tenant or any employee, agent, contractor, visitor or customer of the Tenant or by virtue of the Tenant's business on the Premises.

10.3 EXECUTION OF WORKS

The Landlord may:

(a) execute any works which by law it is bound and has been required to execute on the Premises or any part thereof;

(b) repair or rebuild any part of the Premises;

(c) construct, erect, lay down, alter, repair, cleanse or maintain any drain, ventilator, shaft, pipe or wire in connection with the Premises or any part thereof;

(d) underpin; or

(e) reinstate or re-build the Premises or any part thereof in case of damage,

and in any such case the Landlord may with or without employees, agents and contractors and appliances enter upon the Premises and carry out such works doing as little damage as practically possible to the Premises and restoring the same without unreasonable delay but without making compensation for any damage or inconvenience to the Tenant.

10.4 INSPECTION BY PROSPECTIVE TENANTS OR PURCHASERS

The Landlord, or a person authorised by the Landlord, may on giving the Tenant reasonable notice of entry or the display:

(a) enter the Premises when the Premises are open for trading to allow prospective purchasers or tenants of the Premises to inspect the Premises;

(b) display inside or outside the Premises a sign containing any information which the Landlord sees fit indicating the availability of the Land for purchase; and

(c) during the 3 months before the end of the Term display inside or outside the Premises a sign containing any information which the Landlord sees fit indicating the availability of the Premises for lease or other occupation.

10.5 CHANGE OF LANDLORD

If the Landlord sells the Land so that the Tenant becomes obliged to perform its obligations under this Lease in favour of another person, then:

(a) the Landlord is released from its obligations under this Lease arising after the Tenant receives notice of the sale; and

(b) the Tenant must at the cost of the Landlord enter into the documents the Landlord or the other person reasonably requires to enable the other person to enforce the benefit of all the obligations owed under this Lease in that other person's name.

11. DEFAULT

11.1 ESSENTIAL TERMS

Each of the obligations of the Tenant which are specified in this clause are essential terms of this Lease provided that the presence of this clause shall not mean or be deemed to mean that there are no other essential terms in this Lease:

(a) the obligations to pay money under clauses 3, 5.

(b) the obligations under clauses 6.1, 7.1, 7.9, 8.1, 9.1, 9.6, 17.2.

11.2 EVENT OF DEFAULT

An Event of Default occurs if:

(a) the Rent is at any time unpaid for 7 days after becoming due, whether formally demanded or not;

(b) the Tenant fails to comply with any other of its obligations under this Lease, whether or not an essential term, and the non-compliance is not remedied within 14 days after the Landlord notifies the Tenant of its occurrence;

(d) any execution is issued against the Tenant and is not stayed satisfied or withdrawn within 30 days thereof.

11.3 LANDLORD MAY TERMINATE LEASE

If an Event of Default occurs the Landlord may:

(a) terminate this Lease by re-entering the Premises, or any part of the Premises in the name of the whole, without notice, or if required by law, with notice; or

(b) terminate this Lease by notice to the Tenant.

11.4 DAMAGES FOR DEFAULT

(a) If an Event of Default occurs and as a result this Lease is terminated, the Tenant must indemnify and keep indemnified the Landlord against any liability, loss or damage arising from; and costs and expenses (including legal costs on a full indemnity basis) incurred:

(i) in connection with the termination of the Lease including, without limitation, the Landlord re-entering the Premises and the Landlord attempting to mitigate its loss;

(ii) as a result of the Landlord not receiving the benefit of the Tenant performing its obligations under this Lease from the date of termination until the expiry of the Lease by the passing of time.

(b) The Landlord shall be entitled to recover damages against the Tenant if an Event of Default occurs for the loss and damage suffered by the Landlord during the entire Term of this Lease, including the periods before and after such event of default.

(i) the Tenant abandoning or vacating the Premises;

(ii) the Landlord electing to re-enter or terminate this Lease;

(iii) the Landlord accepting the Tenant's repudiation; or

(iv) a party's conduct constituting a surrender by operation of law.

(d) The acceptance by the Landlord of Rent or other moneys under this Lease shall not constitute a waiver of a preceding breach or an acceptance of the repudiation of this Lease by the Tenant.

(e) After termination of this Lease the Landlord shall take reasonable steps to mitigate its loss but the Landlord's attempts to mitigate its loss is not an acceptance or waiver of the Tenant's breach or repudiation or a surrender by operation of law.

11.5 INTEREST

If the Tenant shall fail to pay to the Landlord any moneys which are payable by the Tenant to the Landlord under the terms of this Lease within 7 days from the due date for payment the Tenant shall pay to the Landlord on demand interest calculated daily at the Rate from the date the same was due and payable until the same shall be actually paid (and also upon any judgment which the Landlord may obtain against the Tenant from the date of any such judgment until the same shall be satisfied).

12. TENANT'S OBLIGATIONS ON TERMINATION

12.1 YIELDING UP

The Tenant must on the expiration or sooner determination of the Term peaceably vacate the Premises in the condition required by this Lease.

12.2 REMOVAL OF TENANT'S PROPERTY

At or prior to the determination of the Term the Tenant must remove from the Premises all plant, equipment, signs, fixtures, furnishings, fittings, chattels, effects and other articles upon the Premises brought upon the Premises by the Tenant (other than those the property of the Landlord) and in such removal the Tenant must make good to the reasonable satisfaction of the Landlord any damage which may be occasioned by such removal.

12.3 PROPERTY NOT REMOVED BY TENANT

Any plant, equipment, signs, fixtures, furnishings, fittings, chattels, effects and other articles not removed by the Tenant in accordance with clause 12.2 will be deemed abandoned by the Tenant and will become the absolute property of the Landlord (without prejudice to the other rights or remedies of the Landlord) and may in the absolute discretion of the Landlord be sold or stored at the cost of the Tenant. If any such items are sold the Landlord must account to the Tenant for the net proceeds but if the Tenant is indebted to the Landlord for any amount the Landlord may retain sufficient of these proceeds to offset that indebtedness.

12.4 KEYS

The Tenant must return to the Landlord on the expiry or sooner determination of the Term all keys provided by the Landlord for locks on doors or other openings in or from the Premises.

13. DESTRUCTION OR DAMAGE

13.1 DAMAGE OR DESTRUCTION BY FIRE OR OTHER CAUSE

If the Premises is damaged or destroyed, so that the whole or a substantial part of the Premises is unfit for occupation and use by the Tenant and have not been made good within 2 weeks after such damage or destruction occurred, then, subject to clause 13.2:

(a) a proportionate part of the Rent according to the nature and extent to which the Premises are not fit for occupation and use by the Tenant shall after the expiration of such 2 week period be abated by the Landlord until the Premises shall again be rendered fit for occupation and use;

(b) any dispute concerning such abatement shall be referred to the award of a single arbitrator in accordance with the provisions of the Commercial Arbitration Act 1985 (and either party may be represented by a legal practitioner or other qualified representative in any such proceeding); and

(c) the Tenant must pay full Rent without any deduction until the amount of the Rent to be reduced is agreed or the date of the award of the arbitrator referred to in paragraph (b) whereupon the Landlord shall refund any Rent which according to such award has been overpaid.

13.2 NO ABATEMENT IF INSURANCE RENDERED INEFFECTIVE

If the insurance policy insuring against the damage to or destruction of the Premises is rendered ineffective or payment of the policy moneys refused in consequence of some act or default of the Tenant or an employee, agent, contractor or customer of the Tenant, the Rent shall not be suspended and the Tenant shall not be entitled to any suspension or abatement of Rent.

13.3 NON-REINSTATEMENT OF PREMISES

If the Premises is damaged or destroyed, so that the whole or a substantial part of the Premises is unfit for occupation and use by the Tenant:

(a) the Landlord will use its reasonable endeavours to reinstate the Premises as soon as practicable after such occurrence, provided that the Landlord will be under no obligation to reinstate the Premises where such damage or destruction was caused, or the insurance in respect thereof rendered ineffective, by any act, omission or default of the Tenant or an employee, agent, contractor or customer of the Tenant.

(b) if the Premises are not reinstated by the Landlord within 4 months of such occurrence, then:

(i) either party shall be at liberty by notice in writing to the other to terminate this Lease from the date of the giving of such notice without prejudice to the right of the Landlord to take proceedings against the Tenant for any antecedent breach by the Tenant of its obligations under this Lease.

(ii) the Tenant shall not be entitled to determine this Lease under subparagraph (i) if such damage or destruction was caused, or the insurance in respect thereof rendered ineffective, by any act, omission or default of the Tenant or an employee, agent, contractor or customer of the Tenant.

14. OPTION TO RENEW

14.1 TENANT'S RIGHT TO RENEW

If the Tenant:

(a) has paid the Rent regularly during the Lease;

(b) has not failed to observe and perform its obligations during the Lease in a way which has been serious or persistent or both;

(d) between the time of notification and the end of the Term, duly and punctually pays the Rent and observes and performs its obligations under this Lease,

then the Landlord must grant and the Tenant must take a new lease of the Premises in accordance with the provisions set out in clauses 14.3 and 14.4.

14.2 NOTICE OF EXERCISE

Notice of exercise of option:

(a) must clearly state that the Tenant wishes to take a further lease of the Premises in accordance with the option contained in the Lease; and

(b) must be served on the Landlord not earlier than 6 months and not later than 3 months before the expiration of the Term.

14.3 LEASE FOR FURTHER TERM

The new lease is to be identical with this Lease except that:

(a) the new lease will begin immediately after the end of the Term and will be for the term first specified in Item 8 of the Schedule;

(b) the Rent shall continue to be subject to review in accordance with the terms of this Lease notwithstanding part of a Rent Period might have elapsed before this option for renewal was exercised; and

(i) if the particulars of the further term of new lease are the only particulars specified in Item 8 of the Schedule, by deleting this clause 14 and Item 8 of the Schedule from the new lease; or

(ii) if the particulars of more than one further term are specified in Item 8 of the Schedule, by deleting the particulars of the further term first specified from Item 8 of the Schedule in the new lease.

14.4 EXTENSION OF LEASE

To evidence the new lease of the Premises, the parties hereto shall as soon as practicable enter into a deed of extension of lease prepared by the Landlord's solicitors and the Tenant shall pay the Landlord's reasonable legal costs of preparing such deed and all stamp duty thereon.

14.5 WHERE NO FURTHER TERM

This clause 14 does not apply to this Lease if the words "Not Applicable" appear in Item 8 of the Schedule.

15. HOLDING OVER

That if the Tenant shall upon the expiration of the Term or any extension of the Term continue to occupy the Premises with the consent of the Landlord he shall do so as a monthly tenant at a monthly Rent equal to one twelfth (1/12th) of the total annual Rent paid by him for the last year or extended year of the Term upon the same terms as are contained in this Lease insofar as they are applicable, such tenancy being determinable by one month's notice in writing given by either party to the other.

16. RESTRICTIONS ON REGISTRATION AND CAVEATS

16.1 NO REGISTRATION AND ABSOLUTE CAVEAT

The Tenant must not register this Lease or lodge any absolute caveat over the title to the Land or any part thereof to protect the interest of the Tenant under this Lease and in the event of any such lease or caveat being registered or lodged the Tenant irrevocably appoints the Landlord the agent and attorney of the Tenant to surrender sign and withdraw any such lease or caveat.

16.2 SUBJECT TO CLAIM CAVEAT

The Tenant may lodge a subject to claim caveat over the title to the Land or any part thereof to protect the interest of the Tenant under this Lease. The Tenant must withdraw any such caveat upon the termination or earlier determination of this Lease. The Tenant irrevocably appoints the Landlord the agent and attorney of the Tenant to sign and withdraw any such caveat and the cost of any such signing and withdrawal shall be borne and paid by the Tenant upon demand.

17. COSTS AND EXPENSES

17.1 COSTS FOR PREPARATION

The Tenant must pay to the Landlord:

(a) all the reasonable costs of and incidental to the instructions for and the negotiation preparation execution and stamping of this Lease;

(b) all stamp duties payable on this Lease; and

(c) all reasonable costs incurred by the Landlord of and incidental to issuing any notices or making any applications (if applicable), to the Western Australian Planning Commission or any other governmental authority.

17.2 DEFAULT COSTS

The Tenant must pay to the Landlord on demand the reasonable costs and expenses of the Landlord in connection with the enforcement or preservation or exercise of rights under this Lease, including without limitation the costs charges and expenses of a notice under s81 of the Property Law Act 1969.

17.3 AMOUNT OF LEGAL COSTS

Any legal costs to be paid by the Tenant under this Lease are to be paid on the higher of a full indemnity basis or a solicitor and own client basis.

17.4 GOODS AND SERVICES TAX

(a) In this clause:

(i) GST means any goods and services tax, consumption tax or similar value added tax imposed on the sale of goods and supply of services and includes the goods and services tax (GST) imposed under the GST Act.

(ii) GST ACT means A New Tax System (Goods and Services Tax) Act 1999 and includes other GST related legislation and regulations under the legislation, as amended from time to time.

(iii) TENANT PAYMENT includes every amount (other than GST) payable by the Tenant to the Landlord pursuant to this deed including, but not limited to, Rent, Operating Expenses, any other expenses or payments, monetary compensation for breach of this Lease and any legal costs associated with that monetary compensation.

(iv) except for defined terms in this deed, terms used in this clause have the same meaning as in the GST Act.

(b) Each Tenant Payment is exclusive of GST.

(c) Each Tenant Payment must be increased by the GST applying to that Tenant Payment, or imposed on the Taxable Supply in respect of which that Tenant Payment is made, and the Tenant shall pay that GST at the same time the Tenant Payment is due under this Lease.

(d) The Landlord must provide the Tenant with a Tax Invoice as required by the GST Act in respect of each Tenant Payment to which GST applies or is imposed.

18. NOTICES

18.1 GIVING OF NOTICE

Any notice or other communication in connection with this Lease:

(a) must be in writing;

(b) may be signed by the party giving it or its solicitor or agent, provided that an email is not required to be signed; and

(i) in a manner authorised by law or by personal delivery;

(ii) sent by prepaid post to the address of the addressee specified in item 10 of the Schedule;

(iii) sent by fax to the fax number of the addressee specified in item 10 of the Schedule; or

(iv) sent by email to the email address of the addressee specified item 10 of the Schedule,

or if the addressee notifies another address, fax number or email address in accordance with this clause then to that address, fax number or email address.

18.2 TIME NOTICE GIVEN

Any notice or other communication in connection with this Lease takes effect from the time it is received and, unless a later time is specified, is taken to be received:

(a) if served or given by personal delivery, at the time it is delivered;

(b) if left at the address of the addressee, at the time it is left;

(c) if sent by prepaid ordinary post to the address of the addressee, at the expiration of 2 business days after posting;

(d) if sent by fax, on the next business day following the date the fax was transmitted provided that there is a transmission report by the machine from which the fax was sent which indicates that the fax was sent in its entirety to the fax number of the addressee without error; and

(e) if sent by email, on the next business day following the date the email was sent unless the sender is aware or the sender's internet service provider notifies the sender that the email was not sent successfully.

18.3 SERVICE OF PROCESS

The parties agrees that service of any legal process (including, without limitation, any writ of summons) may be effected by delivering or leaving it at any address referred to in clause 18.2 or by any other method permitted by law.

19. STRATA TITLE PROVISIONS

19.1 STRATA LOT

If the Premises are a lot or part of a lot under the Strata Titles Act, 1985 (THE ACT) the parties agree that:

(a) this Lease shall be subject in all respects to all easements rights reservations and powers mentioned in the Act except insofar as the same are hereby modified or negatived.

(b) the Tenant and the Tenant's permitted assigns and sub-tenants and the Tenant's employees, customers and contractors shall have the right in common with the Landlord and the registered proprietors of all the other strata lots comprised in the strata plan of which the Premises form part to use the common property comprised in the strata plan subject to the by-laws of the strata company and to all rules and regulations made by the strata company in relation thereto.

(d) the Tenant shall comply with the Act and all by-laws and rules and regulations for the time being in force made by the strata company pursuant to its by-laws.

(e) the Tenant has no claim or rights against the Landlord in consequence of the exercise by the strata company of any of the strata company's rights, duties or powers under the Act.

19.2 SUBDIVISION OR STRATA PLAN

If the Landlord wishes to subdivide the Land or register a strata plan in respect of the Land or a part which includes the Premises, the Tenant must upon request by the Landlord withdraw any caveat lodged by the Tenant. Registration of a plan of subdivision or the strata plan will not terminate this Lease but upon registration of a strata plan:

(a) the Landlord must furnish the Tenant with a complete copy of the by-laws of the strata company; and

(b) the Tenant must comply with the provisions of clause 19.1.

20. GENERAL PROVISIONS

20.1 SEVERANCE

If any provision of this Lease or its application to any person or circumstance is or becomes invalid or unenforceable the remaining provisions of this Lease shall continue in full force and effect to the fullest extent permitted by law.

20.2 MORATORIUM

Any present or future legislation which has the effect of varying the obligations of the Tenant under this Lease with the result that the Landlord's rights, powers or remedies are adversely affected is excluded so far as such exclusion is lawful.

20.3 CONSENTS AND APPROVALS

Save as otherwise provided in this Lease, the Landlord may grant or refuse its consent or approval or grant its consent or approval subject to such conditions as the Landlord in its absolute discretion determines.

20.4 WAIVER AND VARIATION

No party may waive or vary any provision of or right created by this Lease except in writing signed by the party or parties to be bound.

20.5 EXERCISE OF RIGHTS

The Landlord may exercise a right, power or remedy at its discretion separately or concurrently with any other right, power or remedy. An exercise of any right, power or remedy does not prevent a further exercise of a power right or remedy and a failure to exercise or a delay in exercising any power right or remedy does not prevent its exercise.

20.6 FURTHER ASSURANCES

If requested by the Landlord the Tenant must execute documents and do all other things necessary or appropriate to bind the Tenant under this Lease.

20.7 STATUTORY POWERS

The powers and covenants conferred or implied under any applicable statute and all regulations by-laws requisitions or orders made under any statute by any other competent authority shall (except to the extent inconsistent with the express terms expressed in this Lease) be in augmentation of all or any of the rights powers and remedies of the Landlord.

20.8 ENTIRE AGREEMENT

The provisions of this Lease comprise the entire agreement between the parties and supersede all prior agreements and understanding between the Landlord and the Tenant in relation to the Premises.

20.9 NO WARRANTY

The Tenant acknowledges that the Tenant has not been induced to enter into this Lease by any verbal or written representation or warranty by or on behalf of the Landlord. The Tenant shall be taken to have entered into this Lease in reliance solely upon the Tenant's own examination, inspection and inquiry and not on any representation or warranty made or alleged to have been made by or on behalf of the Landlord.

20.10 SPECIAL CONDITIONS

The special conditions (if any) as specified in Item 11 of the Schedule shall be and be deemed to be incorporated in this Lease as if fully set out herein and in the event that any inconsistency arises between the special conditions and any other provisions of this Lease the special conditions shall prevail.

20.11 PAYMENTS

The Tenant must make all payments under this Lease without any set-off or counterclaim and free and clear of any withholding or deduction.

20.12 ANTECEDENT BREACHES

The expiry or termination of this Lease does not affect the rights of the Landlord for a breach of this Lease by the Tenant before the expiry or termination of the Lease.

20.13 COUNTERPARTS

This Lease may consist of a number of counterparts which when taken together constitute one and the same instrument.

20.14 CERTIFICATE

A certificate signed by the Landlord or its solicitors or agent about a matter or about a sum payable to the Landlord in connection with this Lease is sufficient evidence of the amount or any other factual matter stated in the certificate in the absence of manifest error.

20.15 TRUST PROVISIONS

Where the Tenant executes this Lease in the capacity of a trustee pursuant to any trust deed, will, deed of settlement, or other instrument whatsoever
(in this clause THE TRUST DEED) such party (in this clause THE TRUSTEE)
enters into this Lease for itself and as trustee of such trust and warrants to the Landlord that:

(a) as the Trustee it has power under the Trust deed to:

(i) enter into and execute this Lease; and

(ii) be or become indebted to the Landlord and to enter into all other obligations in the manner and to the extent contemplated by this Lease.

(b) it is the sole trustee of the trusts created by the Trust Deed.

(c) during the Term it will not without the prior written consent of the Landlord, which shall not be unreasonably withheld:

(i) cause to vest or distribute prior to the final date for distribution under the Trust Deed the whole or any part of the trust property other than the income thereof;

(ii) vary alter or revoke either wholly or in part any of the terms of or powers under the Trust Deed;

(iii) appoint or procure or consent to or concur in the appointment of any person as a new or substitute or trustee under the Trust Deed;

(iv) do any act or thing or omit to do any act or thing so as to harm or impair or be likely to harm the interest of the Landlord under this Lease.

20.16 APPLICATION OF RETAIL SHOPS LEGISLATION

During any period when this Lease is a lease to which the Commercial Tenancy (Retail Shops) Agreement Act 1985 applies, the provisions of this Lease are subject to the provisions of that Act and any provision of this Lease which is prohibited, made void or otherwise unenforceable by that Act does not apply to the extent that the provision is so prohibited, made void or otherwise unenforceable, but without prejudice to the other provisions of this Lease which continue in full force and effect.

20.17 GOVERNING LAW

This Lease shall be governed by the law of Western Australia and the parties hereto agree to submit to the jurisdiction of the courts of Western Australia in all matters arising out of this deed and any court hearing appeals from those courts. Each party unconditionally submits to the jurisdiction of the courts mentioned above and waives any right it has to object to an action being brought in any of those courts.

21. GUARANTEE AND INDEMNITY

21.1 GUARANTEE

The Guarantor irrevocably guarantees to the Landlord that the Tenant will make all payments due to the Landlord under this Lease on time and meet all the Tenant's other obligations under this Lease.

21.2 INDEMNITY

In addition to the guarantee in clause 21.1, the Guarantor indemnifies and shall keep indemnified the Landlord against any loss and damage the Landlord suffers by reason of:

(a) a failure by the Tenant to make a payment due to the Landlord under this Lease on time or to meet any of the Tenant's other obligations under this Lease; or

(b) the Landlord being unable to enforce this Lease or any of its provisions for any reason.

21.3 GUARANTOR'S OBLIGATIONS NOT AFFECTED

The obligations of the Guarantor to the Landlord under this guarantee and indemnity shall not be prejudiced or affected by any of the following:

(a) the Landlord gives the Tenant extra time to make a payment or meet its obligations under this Lease or gives the Tenant some other indulgence;

(b) a payment made by the Tenant or any other person is held to be a preference, is set aside by a court or is not effective because of operation of law;

(c) the Landlord does not enforce or delays in enforcing any of its rights against the Tenant or the Guarantor under this Lease;

(d) any variation or assignment of this Lease, or any extension, renewal or holding over of the Term, without the consent of the Guarantor;

(e) the expiration or determination of the Lease for any reason;

(f) where the Tenant or any Guarantor is a natural person, the death of any one or more of them;

(g) any Insolvency Event occurs in respect of the Tenant or the Guarantor or any one or more of them,

(h) a change in the legal capacity, rights or obligations of the Tenant or the Guarantor or any one or more of them;

(i) the Landlord obtains a judgment against the Tenant or any other person for money owed to the Landlord under this Lease;

(j) in the event of any disclaimer of this Lease by a trustee, administrator or liquidator of the Tenant; or

(k) the Landlord is unable to enforce this Lease or any provision of it against the Tenant for any reason.

21.4 GUARANTOR IS PRINCIPAL DEBTOR

As between the Guarantor and the Landlord, the Guarantor is a principal debtor under this Lease and is liable to the Landlord jointly and severally with the Tenant.

21.5 CONTINUING OBLIGATIONS

The Guarantor's obligations under this guarantee and indemnity continue until all money payable by the Tenant to the Landlord have been paid and all the other obligations of the Tenant have been met, provided that any payment by the Tenant or the Guarantor later avoided by any law shall be deemed not to have discharged the Guarantor's liability and in such event the Landlord, the Tenant and the Guarantor shall be restored to the rights which each respectively would have had if the payment had not been made.

21.6 NO NOTICE OR DEMAND REQUIRED

The Landlord does not have to make demand on the Tenant before enforcing this guarantee and indemnity and is not obliged to give the Guarantor notice of any default by the Tenant.

21.7 PAYMENT BY GUARANTOR ON DEMAND

The Guarantor must pay all money owing to the Landlord under this Lease on demand by the Landlord. The Guarantor's obligations under this guarantee and indemnity are not affected by any claim or right of set-off which the Guarantor may have against the Tenant or any other person.

21.8 GUARANTOR MUST NOT COMPETE WITH LANDLORD

Whilst the Guarantor's obligations continue under this guarantee and indemnity:

(a) if the Tenant becomes bankrupt or enters into any composition, arrangement or assignment in favour of creditors, or enters into liquidation, or has appointed under any statute or instrument, or by order of any court, an administrator, trustee or liquidator, the Guarantor must not prove in competition with the Landlord and the Guarantor shall hold in trust for the Landlord any such proof and claim.

(b) the Guarantor must not recover from the Tenant any money the Tenant owes to the Guarantor.

(c) the Guarantor must not enforce any debt or liability due by the Tenant to the Guarantor or any security which the Guarantor holds over any of the Tenant's assets, and the Guarantor shall hold in trust for the Landlord any such debt, liability and security. The Guarantor agrees to sign any document and do anything necessary to transfer such debt, liability and security to the Landlord and to enable the Landlord to enforce such debt, liability and security for its own benefit.

EXECUTED as a deed

The COMMON SEAL of ZBB TECHNOLOGIES,     )
LTD ACN 008 958 254                      )
was hereunto affixed by authority        )
of the Directors in the presence of :    )


--------------------------------------       -----------------------------------
Director's name                              Director's signature


--------------------------------------       -----------------------------------
Director/Secretary's name                    Director/Secretary's signature


SIGNED for and on behalf of ZBB ENERGY   )
CORPORATION ARBN 082 338 789             )   -----------------------------------
in accordance with section 127(1) of     )   Director's signature
the Corporations Law                     )

                                             -----------------------------------
                                             Director's name


--------------------------------------
Director/Secretary's signature

--------------------------------------
Director/Secretary's name

                                                                              24


SIGNED by the said                       )
GEOFFREY DAVID HANN                      )
in the presence of:                      )   -----------------------------------
                                             Signature of Geoffrey David Hann


--------------------------------------
Witness signature


--------------------------------------
Name of witness

SIGNED by the said                       )
ROBERT JOHN PARRY                        )
in the presence of:                      )   -----------------------------------
                                             Signature of Robert John Parry


--------------------------------------
Witness signature


--------------------------------------
Name of witness


SIGNED by the said                       )
MICHAEL JOHN PALMER                      )
in the presence of:                      )   -----------------------------------
                                             Signature of Michael John Palmer


--------------------------------------
Witness signature


--------------------------------------
Name of witness


SIGNED by the said                       )
RICHARD ANDREW PAYNE                     )
in the presence of:                      )   -----------------------------------
                                              Signature of Richard Andrew Payne


--------------------------------------
Witness signature


--------------------------------------
Name of witness

DATED                                                                       2001

BETWEEN

GEOFFREY DAVID HANN
ROBERT JOHN PARRY
MICHAEL JOHN PALMER
and RICHARD ANDREW PAYNE

the Landlord

ZBB TECHNOLOGIES, LTD

the Tenant

AND

ZBB ENERGY CORPORATION

the Guarantor

Lease of
240 Barrington Road,
Bibra Lake

RICHARD PAYNE & ASSOCIATES

Commercial Solicitors

Level 2, Colord House, 33 Colin Street, West Perth, W.A. 6005 Telephone 61 8 9481 0844 Facsimile 61 8 9481 2434 P.O. Box 1275, West Perth, W.A. 6872 Australia e-mail - rapayne@iinet.net.au

                                TABLE OF CONTENTS

LEASE SCHEDULE.............................................................    1
1.  LAND...................................................................    1
2.  PREMISES...............................................................    1
3.  TERM...................................................................    1
4.  RENT...................................................................    1
5.  RENT REVIEW DATES......................................................    1
6.  PERMITTED USE..........................................................    1
7.  PUBLIC RISK INSURANCE..................................................    1
8.  OPTION OF RENEWAL......................................................    1
9.  PAINTING...............................................................    2
10. ADDRESS OF PARTNERS....................................................    2
11. SPECIAL CONDITIONS.....................................................    2
    A. Approvals...........................................................    2
    B. Fitout..............................................................    2
    C. Assignment..........................................................    3
    D. Option to purchase Land.............................................    3
LEASE......................................................................    5
1. INTERPRETATION..........................................................    5
   1.1    DEFINITIONS......................................................    5
   1.2    INTERPRETATION...................................................    7
2. GRANT OF LEASE..........................................................    7
3. RENT....................................................................    7
   3.1    PAY RENT BY INSTALMENTS..........................................    7
   3.2    TIME FOR PAYMENT OF RENT.........................................    7
4. RENT REVIEW.............................................................    8
   4.1    CPI RENT REVIEW..................................................    8
   4.2    MARKET RENT REVIEW...............................................    8
   4.3    RENT MAY BE REVIEWED LATER.......................................    8
   4.4    RENT UNTIL REVIEW................................................    8
5. OPERATING EXPENSES......................................................    8
   5.1    PAYMENT OF OPERATING EXPENSES....................................    8
   5.2    DETERMINATION OF AMOUNT OF OPERATING EXPENSES....................    9
   5.3    UTILITY CHARGES..................................................    9
6. ASSIGNMENT AND SUB-LETTING..............................................    9
   6.1    PROHIBITION......................................................    9
   6.2    CHANGE IN SHARE HOLDING..........................................    9
   6.3    EXCLUSION OF STATUTORY PROVISIONS................................    9
7. OPERATION AND USE OF PREMISES...........................................    9
   7.1    USE..............................................................    9
   7.2    RESTRICTIONS ON USE..............................................    9
   7.3    CONDUCT OF BUSINESS..............................................   10
   7.4    SECURITY.........................................................   10
   7.5    SUITABILITY......................................................   10
   7.6    APPROVALS........................................................   10
   7.7    COMPLY WITH LEGISLATION..........................................   10
   7.8    SIGNS............................................................   10
   7.9    NOT TO ENCUMBER..................................................   10
   7.10   LICENCES.........................................................   11
8. INSURANCE AND INDEMNITIES...............................................   11
   8.1    TENANT TO EFFECT INSURANCE.......................................   11
   8.2    PRODUCE POLICIES.................................................   11
   8.3    MAINTAIN INSURANCE...............................................   11

                                                                              ii


   8.4    TENANT NOT TO PREJUDICE INSURANCE................................   11
   8.5    INDEMNITY........................................................   11
   8.6    RESTRICTIONS ON LIABILITY OF LANDLORD............................   12
9. REPAIR AND MAINTENANCE..................................................   12
   9.1    REPAIR BY TENANT.................................................   12
   9.2    MAINTAIN DRAINS..................................................   12
   9.3    LANDLORD MAY REPAIR IF FAILURE BY TENANT.........................   12
   9.4    ENTRY AND REPAIR BY LANDLORD.....................................   12
   9.5    KEEP CLEAN.......................................................   13
   9.6    ALTERATIONS......................................................   13
   9.7    NO STRUCTURAL REPAIR BY TENANT...................................   13
   9.8    PAINT............................................................   13
   9.9    MAKE GOOD DAMAGE.................................................   13
   9.10   NOT TO OVERLOAD THE STRUCTURE....................................   13
   9.11   PASS ON NOTICES TO LANDLORD......................................   13
10. LANDLORD'S RIGHTS AND OBLIGATIONS......................................   13
   10.1   QUIET ENJOYMENT..................................................   13
   10.2   STRUCTURAL REPAIR BY LANDLORD....................................   13
   10.3   EXECUTION OF WORKS...............................................   14
   10.4   INSPECTION BY PROSPECTIVE TENANTS OR PURCHASERS..................   14
   10.5   CHANGE OF LANDLORD...............................................   14
11. DEFAULT................................................................   14
   11.1   ESSENTIAL TERMS..................................................   14
   11.2   EVENT OF DEFAULT.................................................   14
   11.3   LANDLORD MAY TERMINATE LEASE.....................................   15
   11.4   DAMAGES FOR DEFAULT..............................................   15
   11.5   INTEREST.........................................................   15
12. TENANT'S OBLIGATIONS ON TERMINATION....................................   15
   12.1   YIELDING UP......................................................   15
   12.2   REMOVAL OF TENANT'S PROPERTY.....................................   16
   12.3   PROPERTY NOT REMOVED BY TENANT...................................   16
   12.4   KEYS.............................................................   16
13. DESTRUCTION OR DAMAGE..................................................   16
   13.1   DAMAGE OR DESTRUCTION BY FIRE OR OTHER CAUSE.....................   16
   13.2   NO ABATEMENT IF INSURANCE RENDERED INEFFECTIVE...................   16
   13.3   NON-REINSTATEMENT OF PREMISES....................................   16
14. OPTION TO RENEW........................................................   17
   14.1   TENANT'S RIGHT TO RENEW..........................................   17
   14.2   NOTICE OF EXERCISE...............................................   17
   14.3   LEASE FOR FURTHER TERM...........................................   17
   14.4   EXTENSION OF LEASE...............................................   17
   14.5   WHERE NO FURTHER TERM............................................   17
15. HOLDING OVER...........................................................   17
16. RESTRICTIONS ON REGISTRATION AND CAVEATS...............................   18
   16.1   NO REGISTRATION AND ABSOLUTE CAVEAT..............................   18
   16.2   SUBJECT TO CLAIM CAVEAT..........................................   18
17. COSTS AND EXPENSES.....................................................   18
   17.1   COSTS FOR PREPARATION............................................   18
   17.2   DEFAULT COSTS....................................................   18
   17.3   AMOUNT OF LEGAL COSTS............................................   18
   17.4   GOODS AND SERVICES TAX...........................................   18
18. NOTICES................................................................   19
   18.1   GIVING OF NOTICE.................................................   19
   18.2   TIME NOTICE GIVEN................................................   19

                                                                             iii


   18.3   SERVICE OF PROCESS...............................................   19
19. STRATATITLE PROVISIONS.................................................   19
   19.1   STRATA LOT.......................................................   19
   19.2   SUBDIVISION OR STRATA PLAN.......................................   20
20. GENERAL PROVISIONS.....................................................   20
   20.1   SEVERANCE........................................................   20
   20.2   MORATORIUM.......................................................   20
   20.3   CONSENTS AND APPROVALS...........................................   20
   20.4   WAIVER AND VARIATION.............................................   20
   20.5   EXERCISE OF RIGHTS...............................................   20
   20.6   FURTHER ASSURANCES...............................................   20
   20.7   STATUTORY POWERS.................................................   20
   20.8   ENTIRE AGREEMENT.................................................   20
   20.9   NO WARRANTY......................................................   20
   20.10  SPECIAL CONDITIONS...............................................   21
   20.11  PAYMENTS.........................................................   21
   20.12  ANTECEDENT BREACHES..............................................   21
   20.13  COUNTERPARTS.....................................................   21
   20.14  CERTIFICATE......................................................   21
   20.15  TRUST PROVISIONS.................................................   21
   20.16  APPLICATION OF RETAIL SHOPS LEGISLATION..........................   21
   20.17  GOVERNING LAW....................................................   21
21. GUARANTEE AND INDEMNITY................................................   22
   21.1   GUARANTEE........................................................   22
   21.2   INDEMNITY........................................................   22
   21.3   GUARANTOR'S OBLIGATIONS NOT AFFECTED.............................   22
   21.4   GUARANTOR IS PRINCIPAL DEBTOR....................................   22
   21.5   CONTINUING OBLIGATIONS...........................................   22
   21.6   NO NOTICE OR DEMAND REQUIRED.....................................   22
   21.7   PAYMENT BY GUARANTOR ON DEMAND...................................   23
   21.8   GUARANTOR MUST NOT COMPETE WITH LANDLORD.........................   23

VARIATION OF LEASE SCHEDULE

1. PREMISES The premises described in the Lease (as varied by this deed).

2. LEASE Lease dated 31 October 2001 between the Landlord as landlord, the Tenant as tenant and the Guarantor as guarantor.

3. DATE OF VARIATION 1 June 2002

4. VARIATIONS TO LEASE The Lease shall be amended by:

(a) deleting the deleting the description of the Premises in Item 2 of the Lease Schedule to the Lease and replacing with the following:

"The whole of the Land and the building and improvements thereon including, but not limited to, the improvements that have been constructed by the Tenant in the Premises which are now the property of the Landlord."

(b) deleting the description of the Rent in Item 4 of the Lease Schedule to the Lease and replacing with the following:

"An annual rental of forty nine thousand dollars four hundred and fifty five dollars ($49,455.00) to be paid in monthly instalments in advance each of $4,121.25."

"(d) if sent by fax to the fax number, or sent by email to the email address, of the addressee specified in the schedule hereto, when the addressee actually receives it in full and in legible form."

VARIATION OF LEASE

THIS DEED made the __________________ day of __________________________ 2002

BETWEEN   GEOFFREY DAVID HANN, ROBERT JOHN PARRY, MICHAEL JOHN PALMER and
          RICHARD ANDREW PAYNE all care of Level 2, Colord House, 33 Colin
          Street, West Perth, Western Australia, 6005 (THE LANDLORD)

          ZBB TECHNOLOGIES, LTD ACN 008 958 254 of 240 Barrington Street, Bibra
          Lake, Western Australia, 6163 (THE TENANT)

AND       ZBB ENERGY CORPORATION ARBN 082 338 789 of N93 W14475 Whittaker Way,
          Menomonee Falls, Wisconsin, United States of America, 53051 (THE
          GUARANTOR)

RECITALS

A. The Landlord is the registered proprietor of the Premises and the reversion expectant upon the determination of the Term is vested in the Landlord.

B. Pursuant to the Lease the Landlord leased the Premises to the Tenant for the Term at the rental and subject to the terms and conditions in the Lease.

C. The parties have agreed to vary the provisions of the Lease in the manner provided in this deed.

OPERATIVE PROVISIONS:

1. INTERPRETATION

1.1 DEFINITIONS

In this deed, unless the context otherwise requires:

DATE OF VARIATION means the date specified in Item 3 of the Schedule.

LEASE means the lease and assignments, extensions and variations (if any) to that lease specified in Item 2 of the Schedule.

PREMISES means the property demised by the Lease specified in Item 1 of the Schedule.

SCHEDULE means the variation of lease schedule at the beginning of this

deed.

1.2 DEFINITIONS IN LEASE

Except where the same have been amended by, and for the purpose of this deed, as set out in clause 1.1, the definitions specified in the Lease where used in this deed shall have the same meanings in this deed as they have in the Lease.

1.3 INTERPRETATION

In this deed, unless the context otherwise requires:

(a) words importing the singular include the plural and vice versa.

(b) words of one gender include every other gender.

(c) words denoting individuals include a firm, body corporate, an unincorporated association and any governmental or other public body or authority of any kind and vice versa.

(d) references to any statute or other law shall mean such statute or other law as amended or replaced at any time whether before or after the date of this deed.

(e) headings shall not effect the construction or interpretation of this deed.

(f) references to a clause, paragraph or a schedule is a reference to the same in this deed.

(g) a reference to party means a party to this deed and shall include that party's personal representatives, successors in title and assigns.

(h) an agreement, representation or warranty on the part of two or more persons binds them jointly and severally.

(i) an agreement, representation or warranty in favour of two or more persons is for the benefit of them jointly and severally.

(j) a reference to a document includes that document as amended or replaced.

2. VARIATION OF LEASE

The parties agree that from the Date of Variation the Lease shall be varied in the manner specified in Item 4 of the Schedule, from which date the Lease shall be read and construed with those variations incorporated in the Lease and shall bind the parties to this deed accordingly.

3. COVENANTS BY TENANT

From the Date of Variation the Tenant must duly and punctually observe and perform all the terms, covenants and conditions on the part of the Tenant contained in, or implied by, the Lease as varied by this deed.

4. POWERS OF LANDLORD

The Tenant and the Guarantor agree that from the Date of Variation the Landlord has all the rights, powers, authorities and remedies conferred on the Landlord by and under the Lease as varied by this deed.

5. COVENANT BY LANDLORD

The Landlord agrees, for the period the Landlord is the registered proprietor of the Premises, to observe and perform the terms, covenants and conditions on the part of the Landlord contained in, or implied by, the Lease as varied by this deed.

6. COVENANT BY GUARANTOR

The Guarantor consents to the variations to the Lease in the manner specified in Item 4 of the Schedule and agrees to continue to be bound by the covenants on its part contained or implied in the Lease as varied by this deed.

7. COSTS AND EXPENSES

The Tenant must pay to the Landlord's legal costs (including GST) of and incidental to the instructions for and the negotiation, preparation, execution and stamping of this deed and all stamp duties payable on this deed.

8. FURTHER ASSURANCES

If requested by the Landlord, the Tenant and the Guarantor must execute such documents and do all other acts and things as the Landlord considers necessary or appropriate to bind the Tenant and the Guarantor under the Lease as varied by this deed.

EXECUTED AS A DEED

The COMMON SEAL of ZBB TECHNOLOGIES,   )
LTD ACN 008 958 254 was hereunto       )
affixed by authority of the Directors  )
in the presence of :                   )


----------------------------------------   -------------------------------------
Name of director                           Signature of director


----------------------------------------   -------------------------------------
Name of director/secretary                 Signature of director/secretary

SIGNED for and on behalf of ZBB ENERGY )

CORPORATION ARBN 082 338 789           )
in accordance with section 127(1) of   )   -------------------------------------
the Corporations Act 2001:             )   Signature of director


----------------------------------------
Signature of director/secretary


                                           -------------------------------------
                                           Name of director


----------------------------------------
Name of director/secretary

SIGNED by the said                     )
GEOFFREY DAVID HANN                    )
in the presence of:                    )   -------------------------------------
                                           Signature of Geoffrey David Hann


----------------------------------------
Signature of witness


----------------------------------------
Name of witness

SIGNED by the said                     )
ROBERT JOHN PARRY                      )
in the presence of:                    )   -------------------------------------
                                           Signature of Robert John Parry


----------------------------------------
Signature of witness


----------------------------------------
Name of witness

                                                                               6


SIGNED by the said                     )
MICHAEL JOHN PALMER                    )
in the presence of:                    )   -------------------------------------
                                           Signature of Michael John Palmer


----------------------------------------
Signature of witness


----------------------------------------
Name of witness

SIGNED by the said                     )
RICHARD ANDREW PAYNE                   )
in the presence of:                    )   -------------------------------------
                                           Signature of Richard Andrew Payne


----------------------------------------
Signature of witness


----------------------------------------
Name of witness

DATED                                                                       2002

BETWEEN

GEOFFREY DAVID HANN
ROBERT JOHN PARRY
MICHAEL JOHN PALMER
and RICHARD ANDREW PAYNE

the Landlord

ZBB TECHNOLOGIES, LTD

the Tenant

AND

ZBB ENERGY CORPORATION

the Guarantor

Variation of lease of
240 Barrington Road,
Bibra Lake

RICHARD PAYNE & ASSOCIATES

Commercial Solicitors

Level 2, Colord House, 33 Colin Street, West Perth, W.A. 6005 Telephone 61 8 9481 0844 Facsimile 61 8 9481 2434 P.O. Box 1275, West Perth, W.A. 6872 Australia e-mail - rapayne@iinet.net.au

                                TABLE OF CONTENTS

VARIATION OF LEASE SCHEDULE.................................................   1
   1.  PREMISES.............................................................   1
   2.  LEASE................................................................   1
   3.  DATE OF VARIATION....................................................   1
   4.  VARIATIONS TO LEASE..................................................   1

VARIATION OF LEASE..........................................................   2
1. INTERPRETATION...........................................................   2
   1.1 DEFINITIONS..........................................................   2
   1.2 DEFINITIONS IN LEASE.................................................   3
   1.3 INTERPRETATION.......................................................   3

2. VARIATION OF LEASE.......................................................   3

3. COVENANTS BY TENANT......................................................   3

4. POWERS OF LANDLORD.......................................................   3

5. COVENANT BY LANDLORD.....................................................   4

6. COVENANT BY GUARANTOR....................................................   4

7. COSTS AND EXPENSES.......................................................   4

8. FURTHER ASSURANCES.......................................................   4

NEITHER THE OFFER NOR THE SALE OF THIS WARRANT OR THE SHARES ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAS BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). EXCEPT AS OTHERWISE SET FORTH HEREIN OR IN A NOTE PURCHASE AGREEMENT DATED AS OF JUNE 14, 2006, NEITHER THIS WARRANT NOR ANY OF SUCH SHARES MAY BE SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE ACT OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE, CUSTOMARY FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION IS NOT REQUIRED UNDER THE ACT OR UNLESS SOLD PURSUANT TO RULE 144 OR REGULATION S UNDER THE ACT.

STOCK PURCHASE WARRANT

THIS CERTIFIES THAT, for value received, ABS SOS-PLUS PARTNERS, LTD., or its registered assigns, (the "HOLDER") is entitled to purchase from ZBB ENERGY CORPORATION, a Wisconsin corporation, (the "COMPANY"), at any time or from time to time during the period specified in Section 2 hereof, 7,422,220 fully paid and nonassessable shares of the Company's Common Stock, par value $0.01 per share (the "COMMON STOCK"), at an exercise price per share equal to US$0.15 (the "EXERCISE PRICE"). The term "WARRANT SHARES," as used herein, refers to the shares of Common Stock purchasable hereunder. The Warrant Shares and the Exercise Price are subject to adjustment as provided in Section 4 hereof. The term "WARRANTS" means this Warrant and the other warrants issued pursuant to that certain Note Purchase Agreement, dated June 14, 2006, by and among the Company and the Buyers listed on the execution page thereof (the "NOTE PURCHASE AGREEMENT").

This Warrant is subject to the following terms, provisions, and conditions:

1. MANNER OF EXERCISE.

a. PROCEDURE. Subject to the provisions hereof, this Warrant may be exercised by the Holder, in whole or in part, by the surrender of this Warrant, together with a completed exercise agreement in the form attached hereto (the "EXERCISE AGREEMENT"), to the Company during normal business hours on any day that banks are generally open for business in New York City (a "BUSINESS DAY") at the Company's principal executive offices (or such other office or agency of the Company as it may designate by notice to the Holder), and upon (i) payment to the Company in cash, by certified or official bank check or by wire transfer for the account of the Company of the Exercise Price for the Warrant Shares specified in the Exercise Agreement or (ii) if the resale of the Warrant Shares by the Holder is not then registered pursuant to an effective registration statement under the Securities Act of 1933, as amended, (the "SECURITIES ACT") or under applicable state securities laws, delivery to the Company of a written notice of an election to effect a Cashless Exercise (as defined in Section 1(c) below) for the Warrant Shares specified in the Exercise Agreement. The Warrant Shares so purchased shall be deemed to be issued to the Holder or such Holder's designee, as the record owner of such shares, as of the close of business on the date on which the completed Exercise Agreement shall have been delivered, and payment shall have been made for such shares as set forth above. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the Holder (without restrictive legend

thereon when such exercise occurs while a registration statement registering under the Securities Act the resale of the Warrant Shares so purchased is effective or such Warrant Shares so purchased may be resold by the Holder pursuant to Rule 144(k) or any similar successor rule) within a reasonable time, not exceeding three (3) Business Days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be requested by the Holder and shall be registered in the name of the Holder or such other name as shall be designated by the Holder. If this Warrant shall have been exercised only in part, then, at the option of the Holder (i) the Holder may surrender this Warrant to the Company and, unless this Warrant has expired, the Company shall, at its expense, within a reasonable time, not exceeding three
(3) Business Days, after this Warrant shall have been so exercised, deliver to the Holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised, or (ii) the Holder may retain this Warrant and the Warrant Shares purchasable under this Warrant shall be reduced by such number of Warrant Shares so exercised by the Holder and properly delivered by the Company hereunder.

b. EXERCISE LIMIT. In no event, at any time that the Company has any class of its securities registered under Section 12(b) or Section 12(g) of the Securities Exchange Act of 1934, as amended, (the "EXCHANGE ACT"), shall the Holder of this Warrant be entitled to exercise any portion of this Warrant in excess of that portion of this Warrant upon exercise of which the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates (other than shares of Common Stock which may be deemed beneficially owned through the ownership of the unexercised portion of this Warrant and the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein) and (ii) the number of shares of Common Stock issuable upon exercise of the portion of this Warrant with respect to which the determination described herein is being made, would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock. For purposes of this Section 1(b), beneficial ownership shall be determined in accordance with Section 13(d) of Exchange Act and Regulation 13D-G thereunder, except as otherwise provided in clause (i) of the preceding sentence. The Holder may waive the provisions of this Section 1(b) as to itself (and solely as to itself) upon not less than 61 days' prior notice to the Company, and the provisions of this Section 1(b) shall continue to apply until such 61st day (or such later date as may be specified in such notice of waiver). No exercise in violation of this Section 1(b), but otherwise in accordance with this Warrant, shall affect the status of the Common Stock issued upon such exercise as validly issued, fully-paid and nonassessable.

c. CASHLESS EXERCISE. If the resale of the Warrant Shares by the Holder is not registered pursuant to an effective registration statement under the Securities Act, then the Holder may exercise this Warrant in whole or in part by presentation and surrender of this Warrant to the Company at its principal executive offices with a written notice of the Holder's intention to effect a cashless exercise, including a calculation of the number of shares of Common Stock to be issued upon such exercise in accordance with the terms hereof (a "CASHLESS EXERCISE"). In the event of a Cashless Exercise, in lieu of paying the Exercise Price in cash, the Holder shall surrender this Warrant for that number of shares of Common Stock determined by multiplying the number of Warrant Shares to which it would otherwise be entitled by a fraction, the numerator of which shall be the difference between (i) the average Market Price (as defined in Section 4) per share of the Common Stock for the five (5) Trading Days (as

defined in Section 4) immediately prior to the date the completed Exercise Agreement shall have been delivered to the Company (the "CASHLESS EXERCISE MARKET PRICE") and (ii) the Exercise Price, and the denominator of which shall be the Cashless Exercise Market Price.

2. PERIOD OF EXERCISE.

a. GENERAL. This Warrant is exercisable at any time or from time to time on or after a Trigger Date (as defined herein) and before 6:00 p.m., New York, New York time on June 14, 2010 (the "EXERCISE PERIOD").

b. Trigger Date. The Trigger Date shall be the first to occur of the following:

i. June 14, 2007;

ii. A Qualified Public Offering (as defined herein) has occurred;

iii. A Default or an Event of Default (as such terms are defined in the Note Purchase Agreement) has occurred;

iv. Thirty (30) days before a Fundamental Change occurs. The term "FUNDAMENTAL CHANGE" shall mean (i) any "PERSON" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than a trustee or other fiduciary holding securities of the Company under an employee benefit plan of the Company, becomes the "BENEFICIAL OWNER" (as defined in Rule 13d-3 promulgated under the Exchange Act), directly or indirectly, of securities of the Company representing 50% or more of (A) the outstanding shares of Common Stock of the Company or (B) the combined voting power of the Company's then-outstanding securities, (ii) the Company is party to a merger or consolidation, or series of related transactions, which results in the voting securities of the Company outstanding immediately prior thereto failing to continue to represent (either by remaining outstanding or by being converted into voting securities of the surviving or another entity) at least fifty (50%) percent of the combined voting power of the voting securities of the Company or such surviving or other entity outstanding immediately after such merger or consolidation, (iii) the sale or disposition of all or substantially all of the Company's assets (or consummation of any transaction, or series of related transactions, having similar effect), (iv) there occurs a change in the composition of the Board within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors (as defined herein),
(v) the dissolution or liquidation of the Company, or (vi) any transaction or series of related transactions that has the substantial effect of any one or more of the foregoing. "INCUMBENT DIRECTORS" will mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but will not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company).

3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and agrees as follows:

a. SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance in accordance with the terms of this Warrant, be validly issued, fully paid, and nonassessable and free from all taxes, liens, and charges with respect to the issue thereof.

b. RESERVATION OF SHARES. During the Exercise Period, the Company shall at all times have authorized, and reserved for the purpose of issuance upon exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant.

c. LISTING. If the Company's Common Stock is listed as of the date of this Warrant, or if so listed in the future, the Company shall maintain its listing of its Common Stock on each national securities exchange or automated quotation system, as the case may be, and shall maintain such listing of any other shares of capital stock of the Company issuable upon the exercise of this Warrant if and so long as any shares of the same class shall be listed on such national securities exchange or automated quotation system.

d. CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the Holder of this Warrant in order to protect the exercise privilege of the Holder of this Warrant against dilution or other impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, and (ii) will take all such actions as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.

e. SUCCESSORS AND ASSIGNS. This Warrant will be binding upon any entity succeeding to the Company by merger, consolidation, or acquisition of all or substantially all the Company's assets.

f. DELIVERY OF COMMON STOCK BY ELECTRONIC TRANSFER. In lieu of delivering physical certificates representing the Common Stock issuable upon exercise, provided the Company's transfer agent is participating in the Depository Trust Company ("DTC") Fast Automated Securities Transfer program and the Company has activated such programs, upon request of the Holder and its compliance with the provisions contained in Section 1, the Company shall use its best efforts to cause its transfer agent to electronically transmit the Common Stock issuable upon exercise to the Holder by crediting the account of Holder's Prime Broker with DTC through its Deposit Withdrawal Agent Commission system.

4. ANTIDILUTION PROVISIONS. During the Exercise Period, the Exercise Price and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Section 4. In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up to the nearest cent.

a. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES UPON ISSUANCE OF COMMON STOCK. Except as otherwise provided in Sections 4(c), 4(e) and 4(l) hereof, if and whenever on or after the date of issuance of this Warrant, the Company issues or sells, or in accordance with Section 4(b) hereof is deemed to have issued or sold, any shares of Common Stock for no consideration or for a consideration per share (before deduction of reasonable expenses or commissions or underwriting discounts or allowances in connection therewith) less than the Exercise Price on the date of issuance (a "DILUTIVE ISSUANCE"), then immediately upon the Dilutive Issuance, the Exercise Price will be reduced to the lower of (i) the amount of the consideration per share received by the Company in such Dilutive Issuance, and (ii) a price determined by multiplying the Exercise Price in effect immediately prior to the Dilutive Issuance by a fraction, (A) the numerator of which is an amount equal to the sum of (x) the number of shares of Common Stock actually outstanding immediately prior to the Dilutive Issuance, plus (y) the quotient of the aggregate consideration, calculated as set forth in Section 4(b) hereof, received by the Company upon such Dilutive Issuance divided by the Exercise Price in effect immediately prior to the Dilutive Issuance, and (B) the denominator of which is the total number of shares of Common Stock Deemed Outstanding (as defined below) immediately after the Dilutive Issuance; provided, however, that only one adjustment will be made for each Dilutive Issuance. No adjustment to the Exercise Price shall have the effect of increasing the Exercise Price above the Exercise Price in effect immediately prior to such adjustment.

b. EFFECT ON EXERCISE PRICE OF CERTAIN EVENTS. For purposes of determining the adjusted Exercise Price under Section 4(a) hereof, the following will be applicable:

i. ISSUANCE OF RIGHTS OR OPTIONS. If the Company in any manner issues or grants any warrants, rights or options, whether or not immediately exercisable, to subscribe for or to purchase Common Stock or other securities convertible into or exchangeable for Common Stock ("CONVERTIBLE SECURITIES") (such warrants, rights and options to purchase Common Stock or Convertible Securities are hereinafter referred to as "OPTIONS") and the price per share for which Common Stock is issuable upon the exercise of such Options is less than the Exercise Price on the date of issuance or grant of such Options, then the maximum total number of shares of Common Stock issuable upon the exercise of all such Options will, as of the date of the issuance or grant of such Options, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon the exercise of such Options" is determined by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the issuance or granting of all such Options, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the exercise of all such Options, plus, in the case of Convertible Securities issuable upon the exercise of such Options, the minimum aggregate amount of additional consideration payable upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the exercise of all such Options (assuming full conversion of Convertible Securities, if applicable). No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon the exercise of such Options or upon the conversion or exchange of Convertible Securities issuable upon exercise of such Options.

ii. ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any manner issues or sells any Convertible Securities, whether or not immediately convertible (other than where the same are issuable upon the exercise of Options) and the price per share for which Common Stock is issuable upon such conversion or exchange is less than the Exercise Price on the date of issuance, then the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities will, as of the date of the issuance of such Convertible Securities, be deemed to be outstanding and to have been issued and sold by the Company for such price per share. For the purposes of the preceding sentence, the "price per share for which Common Stock is issuable upon such conversion or exchange" is determined by dividing
(i) the total amount, if any, received or receivable by the Company as consideration for the issuance or sale of all such Convertible Securities, plus the minimum aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof at the time such Convertible Securities first become convertible or exchangeable, by (ii) the maximum total number of shares of Common Stock issuable upon the conversion or exchange of all such Convertible Securities. No further adjustment to the Exercise Price will be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities.

iii. CHANGE IN OPTION PRICE OR CONVERSION RATE. If there is a change at any time in (i) the amount of additional consideration payable to the Company upon the exercise of any Options; (ii) the amount of additional consideration, if any, payable to the Company upon the conversion or exchange of any Convertible Securities; or (iii) the rate at which any Convertible Securities are convertible into or exchangeable for Common Stock (other than under or by reason of provisions designed to protect against dilution), the Exercise Price in effect at the time of such change will be readjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold.

iv. TREATMENT OF EXPIRED OPTIONS AND UNEXERCISED CONVERTIBLE SECURITIES. If, in any case, the total number of shares of Common Stock issuable upon exercise of any Option or upon conversion or exchange of any Convertible Securities is not, in fact, issued and the rights to exercise such Option or to convert or exchange such Convertible Securities shall have expired or terminated, the Exercise Price then in effect will be readjusted to the Exercise Price which would have been in effect at the time of such expiration or termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such expiration or termination (other than in respect of the actual number of shares of Common Stock issued upon exercise or conversion thereof), never been issued.

v. CALCULATION OF CONSIDERATION RECEIVED. If any Common Stock, Options or Convertible Securities are issued, granted or sold for cash, the consideration received therefor for purposes of this Warrant will be the amount received by the Company therefor, before deduction of reasonable commissions, underwriting discounts or allowances or other reasonable expenses paid or incurred by the Company in connection with such issuance, grant or sale. In case any Common Stock, Options or Convertible Securities are issued or sold for a consideration part or all of which shall be other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except

where such consideration consists of securities, in which case the amount of consideration received by the Company will be the average Market Price per share of the Common Stock for the five (5) Trading Days immediately prior to the date of receipt. In case any Common Stock, Options or Convertible Securities are issued in connection with any acquisition, merger or consolidation in which the Company is the surviving corporation, the amount of consideration therefor will be deemed to be the fair value of such portion of the net assets and business of the non-surviving corporation as is attributable to such Common Stock, Options or Convertible Securities, as the case may be. The fair value of any consideration other than cash or securities will be determined in good faith by the Board of Directors of the Company.

vi. EXCEPTIONS TO ADJUSTMENT OF EXERCISE PRICE. No adjustment to the Exercise Price will be made upon (A) the exercise of any warrants or options or conversion of convertible securities granted, issued and outstanding on the date of issuance of this Warrant or (B) upon the exercise of any Warrants issued pursuant to the Note Purchase Agreement.

c. SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time subdivides (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a greater number of shares, then, after the date of record for effecting such subdivision, the Exercise Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time combines (by any reverse stock split, recapitalization, reorganization, reclassification or otherwise) the shares of Common Stock acquirable hereunder into a smaller number of shares, then, after the date of record for effecting such combination, the Exercise Price in effect immediately prior to such combination will be proportionately increased.

d. ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 4, the number of shares of Common Stock issuable upon exercise of this Warrant shall be adjusted by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of this Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price.

e. CONSOLIDATION, MERGER OR SALE. In case of any consolidation of the Company with, or merger of the Company into any other corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then as a condition of such consolidation, merger or sale or conveyance, adequate provision will be made whereby the Holder of this Warrant will have the right to acquire and receive upon exercise of this Warrant in lieu of the shares of Common Stock immediately theretofore acquirable upon the exercise of this Warrant, such shares of stock, securities or assets as may be issued or payable with respect to or in exchange for the number of shares of Common Stock immediately theretofore acquirable and receivable upon exercise of this Warrant had such consolidation, merger or sale or conveyance not taken place. In any such case, the Company will make appropriate provision to insure that the provisions of this Section 4 hereof will thereafter be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise of this Warrant. The Company will not effect any consolidation, merger or sale or conveyance unless

prior to the consummation thereof, the successor corporation (if other than the Company) assumes by written instrument the obligations under this Section 4 and the obligations to deliver to the Holder of this Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to acquire.

f. DISTRIBUTION OF ASSETS. In case the Company shall declare or make any distribution of its assets (including cash) to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise, then, after the date of record for determining shareholders entitled to such distribution, but prior to the date of distribution, the Holder of this Warrant shall be entitled upon exercise of this Warrant for the purchase of any or all of the shares of Common Stock subject hereto, to receive the amount of such assets which would have been payable to the Holder had the Holder been the holder of such shares of Common Stock on the record date for the determination of shareholders entitled to such distribution.

g. NOTICE OF ADJUSTMENT. Upon the occurrence of any event which requires any adjustment of the Exercise Price, then, and in each such case, the Company shall give notice thereof to the Holder of this Warrant, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease in the number of Warrant Shares purchasable at such price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Such calculation shall be certified by the Chief Financial Officer of the Company.

h. MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the Exercise Price shall be made in an amount of less than 1% of the Exercise Price in effect at the time such adjustment is otherwise required to be made, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than 1% of such Exercise Price.

i. NO FRACTIONAL SHARES. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the average Market Price per share of the Common Stock for the five (5) Trading Days immediately prior to the date of such exercise.

j. OTHER NOTICES. In case at any time:

i. the Company shall declare any dividend upon the Common Stock payable in shares of stock of any class or make any other distribution
(including dividends or distributions payable in cash out of retained earnings) to the holders of the Common Stock;

ii. the Company shall offer for subscription pro rata to the holders of the Common Stock any additional shares of stock of any class or other rights;

iii. there shall be any capital reorganization of the Company, or reclassification of the Common Stock, or consolidation or merger of the Company with or into, or sale of all or substantially all its assets to, another corporation or entity;

iv. there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company; or

v. any other Fundamental Change is about to occur,

then, in each such case, the Company shall give to the Holder of this Warrant
(a) notice of the date on which the books of the Company shall close or a record shall be taken for determining the holders of Common Stock entitled to receive any such dividend, distribution, or subscription rights or for determining the holders of Common Stock entitled to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, or other Fundamental Change, notice of the date (or, if not then known, a reasonable approximation thereof by the Company) when the same shall take place. Such notice shall also specify the date on which the holders of Common Stock shall be entitled to receive such dividend, distribution, or subscription rights or to exchange their Common Stock for stock or other securities or property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, or winding-up, as the case may be. Such notice shall be given at least thirty (30) days prior to the record date or the date on which the Company's books are closed in respect thereto. Failure to give any such notice or any defect therein shall not affect the validity of the proceedings referred to in clauses (i), (ii), (iii) and (iv) above.

k. CERTAIN DEFINITIONS.

i. "BLOOMBERG" shall mean Bloomberg, L.P. (or any successor to its function of reporting stock prices).

ii. "COMMON STOCK DEEMED OUTSTANDING" shall mean the number of shares of Common Stock actually outstanding (not including shares of Common Stock held in the treasury of the Company), plus (x) pursuant to Section 4(b)(i) hereof, the maximum total number of shares of Common Stock issuable upon the exercise of Options, as of the date of such issuance or grant of such Options, if any, and (y) pursuant to Section 4(b)(ii) hereof, the maximum total number of shares of Common Stock issuable upon conversion or exchange of Convertible Securities, as of the date of issuance of such Convertible Securities, if any.

iii. "MARKET PRICE" means, as of any Trading Day, (i) ) the average of the last reported sale prices for the shares of Common Stock on a national securities exchange which is the principal trading market for the Common Stock for the five (5) Trading Days immediately preceding such date as reported by Bloomberg or (ii) if no national securities exchange is the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for the Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the fair market value as reasonably determined in good faith by (A) the Board of Directors of the Company, or (B) at the option of a majority-in-interest of the holders of the outstanding Warrants by an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of

the Company. The manner of determining the Market Price of the Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder.

iv. "COMMON STOCK," for purposes of this Section 4, includes the Common Stock, $0.01 par value per share, and any additional class of stock of the Company having no preference as to dividends or distributions on liquidation, provided that the shares purchasable pursuant to this Warrant shall include only shares of Common Stock, $0.01 par value per share, in respect of which this Warrant is exercisable, or shares resulting from any subdivision or combination of such Common Stock, or in the case of any reorganization, reclassification, consolidation, merger, or sale of the character referred to in
Section 4(e) hereof, the stock or other securities or property provided for in such Section.

v. "TRADING DAY" shall mean any day on which the Common Stock is traded for any period on the principal securities exchange or other securities market on which the Common Stock is then being traded.

l. EXEMPT ISSUANCES. The provisions of Section 4(a) shall not apply to (i) the issuance of shares of Common Stock or options or warrants to purchase Common Stock to employees of the Company pursuant to any stock or option plan duly adopted by the Board of Directors of the Company on or before June 14, 2006, or (ii) the issuance of shares of Common Stock upon conversion of any of the Notes.

m. ADJUSTMENTS AFTER QUALIFIED PUBLIC OFFERING.

i. DEFINITIONS. The term "QUALIFIED PUBLIC OFFERING" shall mean the consummation of a sale in connection with an underwritten public offering by the Company under the Securities Act of Common Stock in which the aggregate gross proceeds to the Company equal or exceed $8,000,000 and the price per share is at least $2.00.

ii. GENERAL. Simultaneous with a Qualified Public Offering, (A) the Exercise Price shall be adjusted to an amount equal to the offering price of the Common Stock in the Qualified Public Offering (the "IPO PRICE") and (B) the number of Warrant Shares issuable upon exercise of this Warrant shall be equal to the difference between, but not below zero, of (x) (1) the number of Warrant Shares originally issuable under this Warrant multiplied by (2) the original Exercise Price as set forth in the introductory paragraph to this Warrant and divided by (3) the IPO Price, less (y) the number of Warrant Shares exercised and delivered to the Holder in accordance herewith prior to the Qualified Public Offering.

5. ISSUE TAX. The issuance of certificates for Warrant Shares upon the exercise of this Warrant shall be made without charge to the Holder of this Warrant or such shares for any issuance tax or other costs in respect thereof, provided that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than the Holder of this Warrant.

6. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the Holder to purchase Warrant Shares, and

no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the Exercise Price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

7. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.

a. RESTRICTION ON TRANSFER. This Warrant and the rights granted to the Holder are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed assignment in the form attached hereto, at the office or agency of the Company referred to in Section 7(e) below, provided, however, that any transfer or assignment shall be subject to the conditions set forth in Section 7(f) hereof and to the applicable provisions of the Note Purchase Agreement. Until due presentment for registration of transfer on the books of the Company, the Company may treat the registered holder hereof as the owner and holder hereof for all purposes, and the Company shall not be affected by any notice to the contrary. Notwithstanding anything to the contrary contained herein, the registration rights described in Section 8 are assignable only in accordance with the provisions of the Registration Rights Agreement.

b. WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is exchangeable, upon the surrender hereof by the Holder at the office or agency of the Company referred to in Section 7(e) below, for new Warrants of like tenor representing in the aggregate the right to purchase the number of shares of Common Stock, in not less than 1,000 increments, which may be purchased hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by the Holder at the time of such surrender.

c. REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor.

d. CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this Warrant in connection with any transfer, exchange, or replacement as provided in this Section 7, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses (other than legal expenses, if any, incurred by the Holder) and charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Section 7.

e. REGISTER. The Company shall maintain, at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the Holder), a register for this Warrant, in which the Company shall record the name and address of the person in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of this Warrant.

f. EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of the surrender of this Warrant in connection with any exercise, transfer, or exchange of this Warrant,

this Warrant (or, in the case of any exercise, the Warrant Shares issuable hereunder), shall not be registered under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such exercise, transfer, or exchange, (i) that the Holder furnish to the Company a written opinion of counsel, which opinion and counsel are acceptable to the Company, to the effect that such exercise, transfer, or exchange may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the Holder execute and deliver to the Company an investment letter in form and substance acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act; provided, however, that no such opinion, letter or status as an "accredited investor" shall be required in connection with a transfer pursuant to Rule 144 under the Securities Act. The first Holder of this Warrant, by taking and holding the same, represents to the Company that such Holder is acquiring this Warrant for investment and not with a view to the distribution thereof.

8. REGISTRATION RIGHTS. The initial Holder of this Warrant (and certain assignees thereof) is entitled to the benefit of such registration rights in respect of the Warrant Shares as are set forth in the Registration Rights Agreement dated June 14, 2006 by and among the Company the Initial Investors listed on the execution page thereof (the "REGISTRATION RIGHTS AGREEMENT").

9. NOTICES. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Holder of this Warrant shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to the Holder at the address shown for the Holder as provided in the Note Purchase Agreement, or at such other address as shall have been furnished to the Company by notice from the Holder. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Company shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to the office of the Company at N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin 53051, Attention Robert Parry, Chief Executive Officer, or at such other address as shall have been furnished to the Holder of this Warrant by notice from the Company. Any such notice, request, or other communication may be sent by facsimile, but shall in such case be subsequently confirmed by a writing personally delivered or sent by certified or registered mail or by recognized overnight mail courier as provided above. All notices, requests, and other communications shall be deemed to have been given either at the time of the receipt thereof by the person entitled to receive such notice at the address of such person for purposes of this Section 9, or, if mailed by registered or certified mail or with a recognized overnight mail courier upon deposit with the United States Post Office or such overnight mail courier, if postage is prepaid and the mailing is properly addressed, as the case may be.

10. GOVERNING LAW. THIS WARRANT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS. THE COMPANY HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS AND NEW YORK STATE COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS WARRANT, THE AGREEMENTS ENTERED INTO IN

CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THE COMPANY IRREVOCABLY WAIVES THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. THE COMPANY FURTHER AGREES THAT SERVICE OF PROCESS UPON IT MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE COMPANY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT THE HOLDER'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS WARRANT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.

11. COMPENSATION FOR BUY-IN ON FAILURE TO TIMELY DELIVER CERTIFICATES UPON EXERCISE. In addition to any other rights available to the Holder, if the Company fails for any reason to deliver to the Holder such certificate or certificates pursuant to Section 1 by the third (3rd) Business Day after exercise, and if after such third (3rd) Business Day after exercise the Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of Common Stock which the Holder anticipated receiving upon such exercise (a "BUY-IN"), then the Company shall (a) pay in cash to the Holder (in addition to any remedies available to or elected by the Holder) the amount by which (i) the Holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased exceeds (ii) the product of (A) the aggregate number of shares of Common Stock that such Holder anticipated receiving from the exercise at issue multiplied by (B) the actual sale price of the Common Stock at the time of the sale (including brokerage commissions, if any) giving rise to such purchase obligation and (b) at the option of the Holder, either reissue an identical Warrant to purchase such number of shares of Common Stock equal to attempted exercise or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its delivery requirements under Section 1. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In.

12. MISCELLANEOUS.

a. AMENDMENTS. This Warrant and any provision hereof may be amended by an instrument in writing signed by the Company and holders of a majority of the then-unexercised Warrant Shares underlying the Warrants issued pursuant to the Note Purchase Agreement. All such amendments shall be binding to all Holders of Warrants issued pursuant to the Note Purchase Agreement.

b. DESCRIPTIVE HEADINGS. The descriptive headings of the several sections of this Warrant are inserted for purposes of reference only, and shall not affect the meaning or construction of any of the provisions hereof.

c. REMEDIES. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Warrant will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this

Warrant, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Warrant and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.

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IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer.

ZBB ENERGY CORPORATION

By:

Robert Parry Chief Executive Officer

Dated as of June 14, 2006

FORM OF EXERCISE AGREEMENT
Dated: _________ __, 200_

To: ZBB Energy Corporation
N93 W14475 Whittaker Way
Menomonee Falls, WI 53051
Attn: Robert Parry, Chief Executive Officer

The undersigned, pursuant to the provisions set forth in the within Warrant, hereby agrees to purchase ________ shares of Common Stock covered by such Warrant, and makes payment herewith in full therefor at the price per share provided by such Warrant in cash or by certified or official bank check or by wired funds in the amount of, or, if the resale of such Common Stock by the undersigned is not currently registered pursuant to an effective registration statement under the Securities Act of 1933, as amended, by surrender of securities issued by the Company (including a portion of the Warrant) having a market value (in the case of a portion of this Warrant, determined in accordance with Section 1(c) of the Warrant) equal to $_________. Please issue a certificate or certificates for such shares of Common Stock in the name of and pay any cash for any fractional share to:

Name:

Signature:
Address:

Note: The above signature should correspond exactly with the name on the face of the within Warrant, if applicable.

and, if said number of shares of Common Stock shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned covering the balance of the shares purchasable thereunder less any fraction of a share paid in cash.

FORM OF ASSIGNMENT

FOR VALUE RECEIVED, the undersigned hereby sells, assigns, and transfers all the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock covered thereby set forth herein below, to:

Name of Assignee Address No of Shares

, and hereby irrevocably constitutes and appoints ______________________________ ________ as agent and attorney-in-fact to transfer said Warrant on the books of the within-named corporation, with full power of substitution in the premises.

Dated: ________ __, 200_

In the presence of:
Name:

Signature:
Title of Signing Officer or Agent (if any):

Address:

Note: The above signature should correspond exactly with the name on the face of the within Warrant, if applicable.

THIS WARRANT AND THE SECURITIES ISSUABLE HEREUNDER HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAW. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION UNDER THE SECURITIES ACT AND ANY APPLICABLE SECURITIES LAWS OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT OR SAID LAWS.

ZBB ENERGY CORPORATION

Warrant to Purchase Shares of Common Stock

Warrant No: ______ Number of Shares: _______

THIS CERTIFIES THAT, for value received, _______________________ ____________, or its registered assigns (the "Holder"), is entitled to purchase from ZBB Energy Corporation, a Wisconsin corporation (the "Company"), at any time or from time to time during the period specified in Section 2 hereof, in whole or in part, that number of fully paid and non-assessable shares of the Company's common stock, par value $.01 per share (the "Common Stock") as shall equal (a) $___________[insert principal amount of Holder's 15% convertible note], divided by (b) 100% of the initial per share offering price in connection with the Company's "Equity Financing"(as that term is defined in the Note referred to below).

The per share exercise price shall be 120% of the initial per share offering price in connection with the Company's "Equity Financing," as such term is defined in the Note referred to below(the "Exercise Price"). The term "Warrant Shares," as used herein, refers to the shares of Common Stock purchasable hereunder. The Warrant Shares and the Initial Exercise Price are subject to adjustment as provided in Paragraph 4 hereof.

This Warrant is issued pursuant to the 15% Convertible Promissory Note, dated as of April __, 2006, issued by the Company in favor of the Holder (the "Note"). Each capitalized term used herein, and not otherwise defined, shall have the meaning ascribed thereto in the Note.

This Warrant is subject to the following terms, provisions, and conditions:

1. MANNER OF EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES.

(a) GENERAL. Subject to the provisions hereof, this Warrant may be exercised at any time within two years of the date hereof, by the Holder, in whole or in part, by the surrender of this Warrant, together with a completed exercise agreement in the form attached hereto (the "Exercise Agreement"), to the Company's transfer agent (the "Transfer Agent") during normal business hours on any business day at the Transfer Agent's principal executive offices (or such

other office or agency of the Transfer Agent as it may designate by notice to the Holder hereof), together with payment to the Company of the Exercise Price for the Warrant Shares specified in the Exercise Agreement in cash, by certified or official bank check or by wire transfer for the account of the Company, except as otherwise set forth below. The Warrant Shares so purchased shall be deemed to be issued to the Holder hereof or such Holder's designee, as the record owner of such shares, as of the close of business on the date on which this Warrant shall have been surrendered, the completed Exercise Agreement shall have been delivered, and payment shall have been made for such Warrant Shares as set forth above. The Company shall cause certificates for the Warrant Shares so purchased, representing the aggregate number of Warrant Shares specified in the Exercise Agreement, to be delivered by the Transfer Agent to the Holder hereof within a reasonable time, not exceeding three (3) business days after this Warrant shall have been so exercised, together with cash in lieu of any fraction of a share, as hereinafter provided. The certificates so delivered shall be in such denominations as may be requested by the Holder hereof and shall be registered in the name of such Holder or such other name as shall be designated by such Holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall cause the Transfer Agent to, at Company's expense, at the time of delivery of such certificates, deliver to the Holder a new Warrant representing the number of Warrant Shares with respect to which this Warrant shall not then have been exercised, which new Warrant shall in all other respects be identical with this Warrant.

(b) CASHLESS EXERCISE. If, at any time following the expiration of the Restricted Period (as such term is defined in the Investor Rights Agreement), the Holder desires to exercise all or any portion of this Warrant and the Warrant Shares are not the subject of an effective registration statement under the Securities Act, then, in lieu of payment of the Exercise Price in cash, the Holder may make such payment, by way of cashless exercise, as follows:

(i) by delivery of shares of Common Stock with an aggregate Market Price (as defined below) on the date of exercise equal to the Exercise Price, subject, however, to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); or

(ii) through the written election of the Holder to have withheld by the Company from the shares of Common Stock otherwise deliverable upon exercise, Common Stock having an aggregate Market Price on the date of exercise equal to the Exercise Price.

(c) FAILURE TO DELIVER CERTIFICATES FOR WARRANT SHARES UPON EXERCISE. If the Company or its Transfer Agent shall fail for any reason or for no reason to issue to the Holder, within ten (10) days of receipt of the Exercise Agreement (including payment of the full amount of the Exercise Price for that portion of this Warrant exercised as specified in such Exercise Agreement, whether in cash or by way of cashless exercise, if permitted by Section 1(b)), a certificate for the number of Warrant Shares to which the Holder is entitled or to credit the Holder's balance account with The Depository Trust Company for such number of Warrant Shares to which the Holder is entitled upon the Holder's exercise of this Warrant, the Company shall, in addition to any other remedies under this Warrant or the Investor Rights Agreement or

otherwise available to such Holder, pay as additional damages in cash to such Holder on each day the issuance of such certificate for Warrant Shares is not timely effected an amount equal to 0.025% of the product of (A) the sum of the number of Warrant Shares not issued to the Holder on a timely basis and to which the Holder is entitled, and (B) the Market Price of the Common Stock for the trading day immediately preceding the last possible date which the Company could have issued such Common Stock to the Holder without violating this Section 1.

(d) FAILURE TO DELIVER CERTIFICATES FOR WARRANT SHARES UPON EXERCISE. If within ten (10) days after the Company's receipt of the Exercise Agreement (including payment of the full amount of the Exercise Price for that portion of this Warrant exercised as specified in such Exercise Agreement whether in cash or by way of cashless exercise, if permitted by Section 1(b)), the Company fails to deliver a new Warrant to the Holder for the number of Warrant Shares, if any, to which such Holder remains entitled pursuant to Section 1 hereof, then, in addition to any other available remedies under this Warrant or the Investor Rights Agreement, or otherwise available to such Holder, the Company shall pay as additional damages in cash to such Holder on each day after such tenth (10th) day that such delivery of such new Warrant is not timely effected in an amount equal to 0.25% of the product of (A) the number of Warrant Shares represented by the portion of this Warrant which is not being exercised and (B) the Market Price of the Common Stock for the trading day immediately preceding the last possible date which the Company could have issued such Warrant to the Holder without violating this Section 1(d).

(e) LIMITATION ON EXERCISE. Notwithstanding anything in this Warrant to the contrary, in no event shall the Holder be entitled to exercise this Warrant for a number of Warrant Shares (or portions thereof) in excess of that number of Warrant Shares which, upon giving effect to such exercise, would cause the aggregate number of shares of Common Stock beneficially owned by the Holder to exceed 4.99% of the outstanding shares of Common Stock following such exercise, except within sixty (60) days of the Expiration Date. For purposes of the foregoing, the aggregate number of shares of Common Stock beneficially owned by the Holder shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which the determination is being made, but shall exclude shares of Common Stock which would be issuable upon (i) exercise of the remaining, unexercised Warrants beneficially owned by the Holder and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company beneficially owned by the Holder (including, without limitation, any convertible notes or preferred stock) subject to a limitation on conversion or exercise analogous to the limitation contained herein. Except as set forth in the preceding sentence, for purposes of this paragraph, beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act. For purposes of this Warrant, in determining the number of outstanding shares of Common Stock the Holder may rely on the number of outstanding shares of Common Stock as reflected in (1) the Company's most recent Form 10-QSB or Form 10-KSB, as the case may be, (2) a more recent public announcement by the Company or (3) any other notice by the Company or its Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written request of any holder, the Company shall promptly, but in no event later than one business day following the receipt of such notice, confirm in writing to the Holder the number of shares of Common Stock then outstanding. In

any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the exercise of this Warrant by the Holder since the date as of which such number of outstanding shares of Common Stock was reported.

2. PERIOD OF EXERCISE. Subject to the vesting schedule set forth in Section 1 hereof, this Warrant is exercisable at any time or from time to time after the date hereof until 5:00 p.m. New York City time, on April 30, 2008 (such time and date, the "Expiration Date").

3. CERTAIN AGREEMENTS OF THE COMPANY. The Company hereby covenants and agrees as follows:

(a) SHARES TO BE FULLY PAID. All Warrant Shares will, upon issuance in accordance with the terms of this Warrant, be validly issued, fully paid, and non-assessable and free from all taxes, liens, and charges with respect to the issue thereof.

(b) RESERVATION OF SHARES. The Company covenants and agrees that it shall reserve and set apart and have at all times, free from preemptive rights, the number of authorized but unissued shares of Common Stock deliverable upon the exercise in full of this Warrant, and it shall have at all times any other rights or privileges provided for therein sufficient to enable it at any time to fulfill all of its obligations hereunder. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to permit the exercise in full of this Warrant, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose, including, without limitation, taking appropriate board action, recommending such an increase to the holders of Common Stock, holding stockholders' meetings and soliciting votes and proxies in favor of such increase to obtain the requisite stockholder approval, and upon such approval, the Company shall reserve and keep available such additional shares solely for the purpose of permitting the exercise of this Warrant.

(c) REGISTRATION OF SHARES. The Company shall arrange for the registration of the Warrant Shares with the Securities and Exchange Commission in accordance with the Investor Rights Agreement, of even date herewith, by and between the Holder and the Company.

(d) CERTAIN ACTIONS PROHIBITED. The Company will not, by amendment of its charter or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed by it hereunder, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may reasonably be requested by the Holder of this Warrant in order to protect the exercise privilege of the Holder of this Warrant against impairment, consistent with the tenor and purpose of this Warrant. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any shares of Common Stock receivable upon the exercise of this Warrant above the Exercise Price then in effect, and (ii) will take all such actions as may be

necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable shares of Common Stock upon the exercise of this Warrant.

(e) SUCCESSORS AND ASSIGNS. This Warrant will be binding upon the Company and any entity succeeding to the Company by merger, consolidation, or acquisition of all or substantially all the Company's assets or otherwise.

4. ANTIDILUTION PROVISIONS. Until the Expiration Date, the Exercise Price and the number of Warrant Shares shall be subject to adjustment from time to time as provided in this Paragraph 4.

In the event that any adjustment of the Exercise Price as required herein results in a fraction of a cent, such Exercise Price shall be rounded up to the nearest cent.

(a) SUBDIVISION OR COMBINATION OF COMMON STOCK. If the Company at any time shall:

(i) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, shares of Common Stock,

(ii) subdivide (by any stock split, stock dividend, recapitalization, reorganization, reclassification or otherwise) its outstanding shares of Common Stock into a greater number of shares of Common Stock, or

(iii) combine (by reverse stock split, recapitalization, reorganization, reclassification or otherwise) its outstanding shares of Common Stock into a smaller number of shares of Common Stock,

then (x) the number of shares of Common Stock for which this Warrant is exercisable immediately after the occurrence of any such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the occurrence of such event would own or be entitled to receive after the happening of such event, and (y) the Exercise Price shall be adjusted to equal (A) the Exercise Price multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (B) the number of shares for which this Warrant is exercisable immediately after such adjustment.

(b) CONSOLIDATION, MERGER OR SALE. In case the Company after the date hereof shall (i) consolidate with or merge into any other entity and shall not be the continuing or surviving corporation of such consolidation or merger, or permit any other entity to consolidate with or

merge into the Company and the Company shall be the continuing or surviving corporation, but, in connection with such consolidation or merger, the Common Stock shall be changed into or exchanged for stock or other securities of any other entity or cash or any other property, (ii) sell, convey or otherwise transfer all or substantially all of its properties or assets to any other entities in one or more related transactions or (iii) effect a capital reorganization or reclassification of the Common Stock, then as a condition of such consolidation, merger or sale or conveyance, the Company shall make or cause to be made adequate provision whereby the Holder of this Warrant will have the right to acquire and receive upon exercise of this Warrant in lieu of the shares of Common Stock immediately theretofore acquirable upon the exercise of this Warrant, the Holder of this Warrant, upon the exercise hereof at any time after the consummation of such transaction, shall be entitled to receive (at the aggregate Exercise Price in effect at the time of such consummation for all Common Stock issuable upon such exercise immediately prior to such consummation), in lieu of the Common Stock issuable upon such exercise prior to such consummation, the amount of securities, cash or other property to which such Holder would actually have been entitled as a stockholder upon such consummation if such Holder had exercised this Warrant immediately prior thereto, subject to adjustments (subsequent to such consummation) as nearly equivalent as possible to the adjustments provided for in this Paragraph 4. In any such case, the Company will make appropriate provision to ensure that the provisions of this Paragraph 4 hereof will thereafter be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise of this Warrant. The Company will not effect any consolidation, merger or sale or conveyance unless prior to the consummation thereof, the successor corporation (if other than the Company) assumes by written instrument this Warrant, including, without limitation, the obligations under this Paragraph 4 and the obligations to deliver to the Holder of this Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, the Holder may be entitled to acquire.

(c) DISTRIBUTION OF ASSETS. In case the Company shall declare or make any distribution of its assets (including cash) to holders of Common Stock as a partial liquidating dividend, by way of return of capital or otherwise, then, after the date of record for determining stockholders entitled to such distribution, but prior to the date of distribution, the Holder of this Warrant shall be entitled upon exercise of this Warrant for the purchase of any or all of the shares of Common Stock subject hereto, to receive the amount of such assets which would have been payable to the Holder had such Holder been the holder of such shares of Common Stock on the record date for the determination of stockholders entitled to such distribution.

(d) NOTICE OF ADJUSTMENT. Upon the occurrence of any event which requires any adjustment pursuant to this Paragraph 4, then, and in each such case, the Company shall give notice thereof to the Holder of this Warrant, which notice shall state the Exercise Price resulting from such adjustment and the increase or decrease in the number of Warrant Shares purchasable at such Exercise Price upon exercise, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Such calculation shall be certified by the principal financial officer of the Company.

(e) MINIMUM ADJUSTMENT OF EXERCISE PRICE. No adjustment of the Exercise Price shall be made in an amount of less than $0.01, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which, together with any adjustments so carried forward, shall amount to not less than $0.01.

(f) NO FRACTIONAL SHARES. No fractional shares of Common Stock are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fractional share which would otherwise be issuable in an amount equal to the same fraction of the Market Price of a share of Common Stock on the date of such exercise.

(g) OTHER NOTICES. In case at any time:

(i) the Company shall declare any dividend upon the Common Stock payable in shares of stock of any class or make any other distribution
(including dividends or distributions payable in cash out of retained earnings) to the holders of the Common Stock;

(ii) the Company shall offer for subscription pro rata to the holders of the Common Stock any additional shares of stock of any class or other rights;

(iii) there shall be any capital reorganization of the Company, or reclassification of the Common Stock, or consolidation or merger of the Company with or into, or sale of all or substantially all its assets to, another corporation or entity; or

(iv) there shall be a voluntary or involuntary dissolution, liquidation or winding-up of the Company;

then, in each such case, the Company shall give to the Holder of this Warrant (a) notice of the date on which the books of the Company shall close or a record shall be taken for determining the holders of Common Stock entitled to receive any such dividend, distribution, or subscription rights or for determining the holders of Common Stock entitled to vote in respect of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up and (b) in the case of any such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation or winding-up, notice of the date (or, if not then known, a reasonable approximation thereof by the Company) when the same shall take place. Such notice shall also specify the date on which the holders of Common Stock shall be entitled to receive such dividend, distribution, or subscription rights or to exchange their Common Stock for stock or other securities or property deliverable upon such reorganization, re-classification, consolidation, merger, sale, dissolution, liquidation, or winding-up, as the case may be. Such notice shall be given at least 30 days prior to the record date or the date on which the Company's books are closed in respect thereto. In furtherance of the foregoing, the Holder shall be entitled to the same rights to receive notice of corporate action as any holder of Common Stock.

(h) CERTAIN EVENTS. If any event occurs of the type contemplated by the adjustment provisions of this Paragraph 4 but not expressly provided for by such provisions, the Company will give notice of such event as provided in Paragraph 4(d) hereof, and the Company's Board of Directors will make an appropriate adjustment in the Exercise Price and the number of shares of Common Stock acquirable upon exercise of this Warrant so that the rights of the Holder shall be neither enhanced nor diminished by such event.

(i) CERTAIN DEFINITIONS.

(i) "MARKET PRICE," as of any date, (i) means the average of the last reported sale prices for the shares of Common Stock on the Over-the-Counter Bulletin Board (the "OTC Bulletin Board") for the ten (10) trading days immediately preceding such date as reported by Bloomberg, or (ii) if the OTC Bulletin Board is not the principal trading market for the shares of Common Stock, the average of the last reported sale prices on the principal trading market for shares of Common Stock during the same period as reported by Bloomberg, or (iii) if market value cannot be calculated as of such date on any of the foregoing bases, the Market Price shall be the fair market value as reasonably determined in good faith by (a) the Board of Directors of the Company or, at the option of a majority-in-interest of the Holders of the outstanding Warrants by (b) an independent investment bank of nationally recognized standing in the valuation of businesses similar to the business of the Company. The manner of determining the Market Price of the shares of Common Stock set forth in the foregoing definition shall apply with respect to any other security in respect of which a determination as to market value must be made hereunder.

(ii) "COMMON STOCK" includes the Common Stock, par value $.01 per share, and any additional class of stock of the Company having no preference as to dividends or distributions on liquidation, provided that the shares purchasable pursuant to this Warrant shall include shares of Common Stock, par value $.01 per share, in respect of which this Warrant is exercisable, or shares resulting from any subdivision or combination of such Common Stock, or in the case of any reorganization, reclassification, consolidation, merger, or sale of the character referred to in Paragraph 4(b) hereof, the stock or other securities or property provided for in such Paragraph.

(iii) "EXERCISE PRICE" means the Initial Exercise Price, as adjusted from time to time pursuant to the provisions of this Paragraph 4.

6. NO RIGHTS OR LIABILITIES AS A STOCKHOLDER. This Warrant shall not entitle the Holder hereof to any voting rights or other rights as a stockholder of the Company. No provision of this Warrant, in the absence of affirmative action by the Holder hereof to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the Holder hereof, shall give rise to any liability of such Holder for the Exercise Price or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

7. TRANSFER, EXCHANGE, AND REPLACEMENT OF WARRANT.

(a) RESTRICTION ON TRANSFER. This Warrant and the rights granted to the Holder hereof are transferable, in whole or in part, upon surrender of this Warrant, together with a properly executed assignment in the form attached hereto, at the office or agency of the Company referred to in Paragraph 7(e) below, provided, however, that any transfer or assignment shall be subject to the conditions set forth in Paragraph 7(f) hereof and to the applicable provisions of the Investor Rights Agreement. Until due presentment for registration of transfer on the books of the Company, the Company may treat the registered Holder hereof as the owner and Holder hereof for all purposes, and the Company shall not be affected by any notice to the contrary.

(b) WARRANT EXCHANGEABLE FOR DIFFERENT DENOMINATIONS. This Warrant is exchangeable, upon the surrender hereof by the Holder hereof at the office or agency of the Company referred to in Paragraph 7(e) below, for new Warrants of like tenor representing in the aggregate, the right to purchase the number of shares of Common Stock or other securities which may be purchased hereunder, each of such new Warrants to represent the right to purchase such number of shares as shall be designated by the Holder hereof at the time of such surrender.

(c) REPLACEMENT OF WARRANT. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft, or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company, or, in the case of any such mutilation, upon surrender and cancellation of this Warrant, the Company, at its expense, will execute and deliver, in lieu thereof, a new Warrant of like tenor.

(d) CANCELLATION; PAYMENT OF EXPENSES. Upon the surrender of this Warrant in connection with any transfer, exchange, or replacement as provided in this Paragraph 7, this Warrant shall be promptly canceled by the Company. The Company shall pay all taxes (other than securities transfer taxes) and all other expenses (other than legal expenses, if any, incurred by the Holder or transferees) and charges payable in connection with the preparation, execution, and delivery of Warrants pursuant to this Paragraph 7.

(e) REGISTER. The Company shall maintain, at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the Holder hereof), a register for this Warrant, in which the Company shall record the name and address of the person

in whose name this Warrant has been issued, as well as the name and address of each transferee and each prior owner of this Warrant.

(f) EXERCISE OR TRANSFER WITHOUT REGISTRATION. If, at the time of the surrender of this Warrant in connection with any exercise, transfer, or exchange of this Warrant, this Warrant (or, in the case of any exercise, the Warrant Shares issuable hereunder), shall not be registered under the Securities Act and under applicable state securities or blue sky laws, the Company may require, as a condition of allowing such exercise, transfer, or exchange, (i) that the Holder or transferee of this Warrant, as the case may be, furnish to the Company a written opinion of counsel, which opinion and counsel are reasonably acceptable to the Company, to the effect that such exercise, transfer, or exchange may be made without registration under the Securities Act and under applicable state securities or blue sky laws, (ii) that the Holder or transferee execute and deliver to the Company an investment letter in form and substance reasonably acceptable to the Company and (iii) that the transferee be an "accredited investor" as defined in Rule 501(a) promulgated under the Securities Act; provided that no such opinion, letter or status as an "accredited investor" shall be required in connection with a transfer pursuant to Rule 144 under the Securities Act. The first Holder of this Warrant, by taking and holding the same, represents to the Company that such Holder is acquiring this Warrant for investment and not with a view to the distribution hereof.

8. NOTICES. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Holder of this Warrant shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to such Holder at the address shown for such Holder on the books of the Company, or at such other address as shall have been furnished to the Company by notice from such Holder. All notices, requests, and other communications required or permitted to be given or delivered hereunder to the Company shall be in writing, and shall be personally delivered, or shall be sent by certified or registered mail or by recognized overnight mail courier, postage prepaid and addressed, to the office of the Company at 10990 Wilshire Blvd., Suite 1220, Los Angeles, CA 90024, Attention: Chief Executive Officer, or at such other address as shall have been furnished to the Holder of this Warrant by notice from the Company. Any such notice, request, or other communication may be sent by facsimile, but shall in such case be subsequently confirmed by a writing personally delivered or sent by certified or registered mail or by recognized overnight mail courier as provided above. All notices, requests, and other communications shall be deemed to have been given either at the time of the receipt thereof by the person entitled to receive such notice at the address of such person for purposes of this Paragraph 8, or, if mailed by registered or certified mail or with a recognized overnight mail courier upon deposit with the United States Post Office or such overnight mail courier, if postage is prepaid and the mailing is properly addressed, as the case may be.

9. GOVERNING LAW. THIS WARRANT SHALL BE ENFORCED, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED ENTIRELY WITH SUCH STATE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICT OF LAWS.

THE PARTIES HERETO HEREBY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE UNITED STATES FEDERAL COURTS LOCATED IN NEW YORK, NEW YORK WITH RESPECT TO ANY DISPUTE ARISING UNDER THIS WARRANT, THE AGREEMENTS ENTERED INTO IN CONNECTION HEREWITH OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. BOTH PARTIES IRREVOCABLY WAIVE THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH SUIT OR PROCEEDING. BOTH PARTIES FURTHER AGREE THAT SERVICE OF PROCESS UPON A PARTY MAILED BY FIRST CLASS MAIL SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE PARTY IN ANY SUCH SUIT OR PROCEEDING. NOTHING HEREIN SHALL AFFECT EITHER PARTY'S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. BOTH PARTIES AGREE THAT A FINAL NON-APPEALABLE JUDGMENT IN ANY SUCH SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON SUCH JUDGMENT OR IN ANY OTHER LAWFUL MANNER. THE PARTY WHICH DOES NOT PREVAIL IN ANY DISPUTE ARISING UNDER THIS WARRANT SHALL BE RESPONSIBLE FOR ALL FEES AND EXPENSES, INCLUDING ATTORNEYS' FEES, INCURRED BY THE PREVAILING PARTY IN CONNECTION WITH SUCH DISPUTE.

10. MISCELLANEOUS.

(a) AMENDMENTS. This Warrant and any provision hereof may only be amended by an instrument in writing signed by the Company and the Holder hereof.

(b) DESCRIPTIVE HEADINGS. The descriptive headings of the several paragraphs of this Warrant are inserted for purposes of reference only, and shall not affect the meaning or construction of any of the provisions hereof.

(c) REMEDIES. The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder, by vitiating the intent and purpose of the transaction contemplated hereby. Accordingly, the Company acknowledges that the remedy at law for a breach of its obligations under this Warrant will be inadequate and agrees, in the event of a breach or threatened breach by the Company of the provisions of this Warrant, that the Holder shall be entitled, in addition to all other available remedies at law or in equity, and in addition to the penalties assessable herein, to an injunction or injunctions restraining, preventing or curing any breach of this Warrant and to enforce specifically the terms and provisions thereof, without the necessity of showing economic loss and without any bond or other security being required.

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer.

ZBB ENERGY CORPORATION

By:

Name: Robert Parry Title: President and Chief Executive Officer

Dated as of _______________

FORM OF EXERCISE AGREEMENT

Dated: ________ __, 20___

To: ZBB ENERGY CORPORATION

CHECK ONE:

__________ PAYMENT CASH (payment made in cash or by certified or official bank check in the amount of $_____________;

__________ CASHLESS EXERCISE:

[_] payment made by surrender of shares of Common Stock having a Market Price equal to $______________.

[_] election of Holder to have withheld by the Company from the shares of Common Stock otherwise deliverable upon exercise, Common Stock having a Market Price equal to $______________.

Capitalized terms used and not defined herein have the meaning set forth in the within Warrant.

Please issue a certificate or certificates for such shares of Common Stock in the name of and pay any cash for any fractional share to:

Name:

Signature:
Address:

Note: The above signature should correspond exactly with the name on the face of the within Warrant, if applicable.

and if said number of shares of Common Stock shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned covering the balance of the shares purchasable thereunder less any fraction of a share paid in cash.

FORM OF ASSIGNMENT

Name of Assignee Address No of Shares

_____, _____ and _____ hereby irrevocably constitutes and appoints ___________________________________ as agent and attorney-in-fact to transfer said Warrant on the books of the within named corporation, with full power of substitution in the premises.

Dated: ______________, 200__

In the presence of:

Name:

Signature:

Title of Signing Officer or Agent (if any):

Address:

Note: The above signature should correspond exactly with the name on the face of the within Warrant, if applicable.

THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), NOR QUALIFIED UNDER ANY APPLICABLE STATE SECURITIES LAWS AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNLESS (I) A REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAW REQUIREMENTS HAVE BEEN MET OR (II) ZBB ENERGY CORPORATION RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO ZBB ENERGY CORPORATION THAT EXEMPTIONS FROM THE REGISTRATION REQUIREMENTS UNDER THE SECURITIES ACT AND THE REGISTRATION OR QUALIFICATION REQUIREMENTS OF APPLICABLE STATE SECURITIES LAWS ARE AVAILABLE.

No. _____ $________

ZBB ENERGY CORPORATION

15% CONVERTIBLE PROMISSORY NOTE

___________ __, 2006

ZBB Energy Corporation, a Wisconsin corporation (the "Company") with an address at N93 W14475 Whittaker Way, Menomonee Falls, Wisconsin, USA 53051, for value received hereby promises to pay to the order of _____________________________________ (the "Holder"), or his or its registered assigns, the sum of ______________________________________ Dollars ($_________) or such lesser amount as shall then be outstanding hereunder. The principal amount hereof shall be due and payable, together with any interest accrued thereon, upon the earlier to occur of (i) April 15, 2007 and (ii) the closing by the Company of an initial public offering of the Company's common stock, par value $0.01 per share (the "Common Stock") or other equity financing yielding minimum proceeds of Six Million Dollars ($6,000,000) (the "Equity Offering") (the earlier to occur of (i) and (ii) being, hereinafter, the "Maturity Date"). All amounts of principal and interest remaining due hereunder as of the closing of the Equity Offering shall, at the option of the Holder, (i) be payable in cash from the proceeds of the Equity Offering, or (ii) be convertible into shares of the Common Stock at a price per share equal to 50% of the initial offering price per share paid by investors in the Equity Offering in accordance with the provisions of Section 4 hereof.

Payment for all amounts of cash or securities due hereunder shall be made by mail to the registered address of the Holder. The Holder has received and has executed, in connection with the purchase hereof, a subscription and investment representation agreement, dated of even date herewith (the "Purchase Agreement"). Capitalized terms used but not defined herein shall have the meanings assigned to them in the Purchase Agreement.

The following is a statement of the rights of the Holder of this Note and the conditions to which this Note is subject, and to which the Holder hereof, by the acceptance of this Note, agrees:

1. Definitions. As used in this Note, the following terms, unless the context otherwise requires, have the following meanings:

(i) "Company" includes any corporation that may succeed to or assume the obligations of the Company under this Note.

(ii) "Holder," when the context refers to a holder of this Note, shall mean any person who shall at the time be the registered holder of this Note.

2. Interest. This Note shall bear interest at the annual rate of fifteen percent (15%) which shall accrue quarterly and be payable on the Maturity Date. Notwithstanding the foregoing, if this Note shall not be satisfied in full on the Maturity Date, this Note shall bear interest, commencing on the Maturity Date, at the rate of fifteen (15%) per annum, payable on the last day of each month following the Maturity Date, until such time as the entire unpaid principal amount of this Note, together with all interest accrued hereon shall have been paid in full.

3. Events of Default. If any of the events specified in this Section 3 shall occur (herein individually referred to as an "Event of Default"), the Holder of the Note may, so long as such condition exists, declare the entire principal and unpaid accrued interest hereon immediately due and payable.

(i) Default in the payment of the principal amount of this Note when due on the Maturity Date; or

(ii) The failure of the Company, after expiration of all applicable grace periods to cure, to observe or perform any material term, covenant, or agreement contained in the Registration Rights Agreement; or

(iii) The (A) merger, consolidation of the Company with or into any other entity, or the sale or all or substantially all of the assets of the Company to any other entity, in each case where the ability to elect the members of the board of directors of the Company or its successor in interest shall be vested in persons who are not presently shareholders of the Company (a "Sale of Control"), or (B) dissolution or termination of existence of the Company; or

(iv) The institution by the Company of proceedings to be adjudicated as bankrupt or insolvent, or the consent by it to institution of bankruptcy or insolvency proceedings against it or the filing by it of a petition or answer or consent seeking reorganization or release under the federal Bankruptcy Act, or any other applicable federal or state law, or the consent by it to the filing of any such petition or the appointment of a receiver, liquidator, assignee, trustee or other similar official of the Company, as applicable, or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the taking of corporate action by the Company in furtherance of any such action; or

(v) If, within sixty (60) days after the commencement of an action against the Company (and service of process in connection therewith on the Company) seeking any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar relief under any present or future statute, law or regulation, such action shall not have been resolved in favor of the Company, as applicable, or all orders or proceedings thereunder affecting the operations or the business of the Company, as applicable, stayed, or if the stay of any such order or proceeding shall thereafter be set aside, or if, within sixty (60) days after the appointment without the consent or acquiescence of the Company, as applicable, of any trustee, receiver or liquidator of the

Company, as applicable, or of all or any substantial part of the properties of the Company, such appointment shall not have been vacated; or

(vi) The cessation of the Company's business for more than thirty (30) days.

4. Conversion.

4.1 Voluntary Conversion. If the closing of the Equity Offering has occurred prior to April 15, 2007, the Holder of this Note shall have the right, at the Holder's option, at any time prior to the payment in full of the principal and accrued interest on this Note, to convert all or any portion of said principal and interest hereon, in accordance with the provisions of this
Section 4, into fully paid and non-assessable shares of Common Stock of the Company. The price per share (the "Conversion Price") into which this Note may be so converted shall be equal to fifty (50%) percent of the initial offering price per share paid by investors in the Equity Offering. In the event that the Equity Offering shall not have occurred by April 15, 2007, then the Holder of this Note shall have the right, at the Holder's option, at any time prior to the payment in full of the principal and accrued interest on this Note, to convert all or any portion of said principal and interest hereon, in accordance with the provisions of this Section 4, into fully paid and non-assessable shares of the Common Stock of the Company at a Conversion Price that shall be equal to 100% of the price per share at which the Company Common Stock shall then be trading on the Australian Stock Exchange, Ltd. In either event, the number of shares of Common Stock into which this Note may be converted (the "Conversion Shares") shall be determined by dividing the principal amount of the Note by the Conversion Price.

4.2 Notice of Conversion. If the Holder elects to convert this Note into shares of Common Stock, it shall, within thirty days of the Maturity Date, surrender this Note at the principal office of the Company and shall give written notice by certified or registered mail, postage prepaid, to the Company at its principal corporate office, of the election to convert the same pursuant to Section 4.1, and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued (the "Conversion Notice"). The Company shall, as soon as practicable thereafter (but in no event more than five (5) Business Days), issue and deliver at such office to the Holder of this Note a certificate or certificates for the number of shares of Common Stock to which the Holder of this Note shall be entitled as aforesaid. Such conversion shall be deemed to have been made on the date of the Conversion Notice, and the person or persons entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date.

4.3 Delivery of Stock Certificates. As promptly as practicable after the conversion of this Note (but in no event more than five (5) Business Days after delivery of the Conversion Notice and surrender of this Note for conversion), the Company at its expense will issue and deliver to the Holder of this Note a certificate or certificates for the number of full shares of Common Stock issuable upon such conversion (bearing such legends as are required by the Purchase Agreement and applicable state and federal securities laws in the opinion of counsel to the Company), together with any other securities and property to which the Holder is entitled upon such conversion under the terms of this Note. In addition to the foregoing, in the event that the shares of Common Stock of the Company shall not then be traded on a U.S. National Securities Exchange, the Holder of this Note may convert all or a portion of this Note and receive CUFS or the equivalent of American Depositary Receipts representing freely tradable beneficial interests in the Company's Common Stock.

4.4 Mechanics and Effect of Conversion. No fractional shares of Common Stock shall be issued upon conversion of this Note. In lieu of the Company issuing any fractional shares to the Holder upon the conversion of this Note, the Company shall pay to the Holder an amount in cash

applicable to such fractional shares. In addition, in the event and to the extent that less then the entire principal amount of this Note is converted, the Company shall either deliver to the Holder a new Note in principal amount equal to the unconverted portion thereof, or on the Maturity Date pay to the Holder a cash payment equal to the unconverted principal amount of this Note. Upon full conversion of this Note, the Company shall be forever released from all of its obligations and liabilities under this Note.

5. Conversion Price Adjustments.

5.1 Adjustments for Stock Splits and Subdivisions. In the event the Company should at any time or from time to time after the date of issuance hereof fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as "Common Stock Equivalents") without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents, then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), the Conversion Price of this Note shall be appropriately decreased so that the number of shares of Common Stock issuable upon conversion of this Note shall be increased in proportion to such increase of outstanding shares.

5.2 Adjustments for Reverse Stock Splits. If the number of shares of Common Stock outstanding at any time after the date hereof is decreased by a reverse stock split or other combination of the outstanding shares of Common Stock, then, following the record date of such reverse split or combination, the Conversion Price for this Note shall be appropriately increased and that the number of Conversion Shares of Common Stock issuable on conversion of this Note shall be decreased in proportion to such decrease in outstanding shares.

6. Notices of Record Date, etc. In the event of:

6.1 Any taking by the Company of a record of the holders of any class of securities of the Company for the purpose of determining the holders thereof who are entitled to any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right; or

6.2 Any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all of the assets of the Company to any other person or any consolidation or merger involving the Company; or

6.3 Any voluntary or involuntary dissolution, liquidation or winding up of the Company, then the Company will mail to the holder of this Note at least ten (10) business days prior to the earliest date specified therein, a notice specifying:

6.3.1 The date on which any such record is to be taken for the purpose of such right, and the amount and character of such right; and

6.3.2 The date on which any such reorganization, reclassification, transfer, consolidation, merger, dissolution, liquidation or winding up is expected to become effective and the record date for determining stockholders entitled to vote thereon.

7. Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the Note such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of the Note; and if at any time the number of authorized but

unissued shares of Common Stock shall not be sufficient to effect the conversion of the entire outstanding principal amount of this Note, in addition to such other remedies as shall be available to the holder of this Note, the Company will use its best efforts to take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes.

8. Treatment of Note. To the extent permitted by generally accepted accounting principles, the Company will treat, account and report the Note as debt and not equity for accounting purposes and with respect to any returns filed with federal, state or local tax authorities.

9. No Stockholder Rights. Nothing contained in this Note shall be construed as conferring upon the Holder or any other person the right to vote or to consent or to receive notice as a stockholder in respect of meetings of stockholders for the election of directors of the Company or any other matters or any rights whatsoever as a stockholder of the Company; and no interest shall be payable or accrued in respect of the Conversion Shares obtainable hereunder until, and only to the extent that, this Note shall have been converted.

10. Prepayment. Prior to the Maturity Date, this Note may be prepaid by the Company in whole or in part, without prepayment penalty or premium of any kind.

11. Assignment. Subject to the restrictions on transfer described in
Section 13 below, the rights and obligations of the Company and the Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and transferees of the parties.

12. Waiver and Amendment. Any provision of this Note may be amended, waived or modified upon the written consent of the Company and the holders of at least a majority of the face amount of all then outstanding Notes issued pursuant to the Purchase Agreement.

13. Transfer of This Note. With respect to any offer, sale or other disposition of this Note, the Holder will give written notice to the Company prior thereto, describing briefly the manner thereof, together with a written opinion of such Holder's counsel reasonably acceptable to the Company, to the effect that such offer, sale or other distribution may be effected without registration or qualification (under any federal or state law then in effect). Promptly upon receiving such written notice and reasonably satisfactory opinion, if so requested, the Company shall notify such Holder that such Holder may sell or otherwise dispose of this Note, all in accordance with the terms of the notice delivered to the Company. If a determination has been made pursuant to this Section 13 that the opinion of counsel for the Holder is not reasonably satisfactory to the Company, the Company shall so notify the Holder promptly after such determination has been made. Each Note thus transferred and each certificate representing the securities thus transferred shall bear a legend as to the applicable restrictions on transferability in order to ensure compliance with the Securities Act, unless in the opinion of counsel for the Company such legend is not required. The Company may issue stop transfer instructions to its transfer agent in connection with such restrictions.

14. Notices. Any notice, request or other communication required or permitted hereunder shall be in writing and shall be deemed to have been duly given on the date of service if personally served on the party to whom such notice is to be given, on the date of transmittal of service via telecopy to the party to whom notice is to be given (with a confirming copy delivered within 24 hours thereafter), or on the third day after mailing if mailed to the party to whom notice is to be given, by first class mail, registered or certified mail, postage prepaid, or via a recognized overnight courier providing a receipt for delivery and properly addressed at the respective addresses of the parties as set forth herein. Any party hereto may by notice so given change its address for future notice hereunder.

15. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Wisconsin, excluding that body of law relating to conflict of laws.

16. Heading; References. All headings used herein are used for convenience only and shall not be used to construe or interpret this Note. Except where otherwise indicated, all references herein to Sections refer to Sections hereof.

[signature page follows]

IN WITNESS WHEREOF, the Company has caused this Note to be issued this _____ day of April 2006.

ZBB ENERGY CORPORATION

By:

Name: Robert Parry Title: President and Chief Executive Officer

EXHIBIT A

FORM OF WARRANT

EXHIBIT B

NOTICE OF CONVERSION

(To Be Signed Only Upon Conversion of Note)

The undersigned, the holder of the foregoing Note, hereby surrenders such Note for conversion into shares of Common Stock of ZBB Energy Corporation, or its successor-in-interest, to the extent of $__________ unpaid principal amount of such Note, and requests that the certificates for such shares be issued in the name of, and delivered to, _____________, whose address is

Dated:

(Signature must conform in all respects to name of holder as specified on the face of the Note)

(Address)

ZBB ENERGY CORPORATION
SUBSIDIARIES

o ZBB Technologies, Ltd.

o ZBB Technologies, Inc.

o ZBB China PTY Ltd.

EXHIBIT 23.1

PKF
Certified Public Accountants
A Professional Corporation

PKF
29 Broadway
New York, NY 10006
USA

Tel 212 867 8000
Fax 212 687 4346
www pkfnewyork.com
E-mail info@pkfny.com

Consent of Independent Registered Public Accounting Firm

We consent to the inclusion in this Registration Statement of ZBB Energy Corporation and Subsidiaries (the "Company") on Form SB-2, of our report dated July 28, 2006 (except for Note 18 which is dated October 18, 2006), with respect to our audits of the Company's consolidated financial statements as of June 30, 2006 and for the two years in the period then ended, which report appears in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under the heading "Experts" in such Prospectus.

                                             /s/ PKF



New York, NY
October 27, 2006

Member of PKF International Limited, an association of legally independent firms.