**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D. C. 20549**




**FORM
      10-KSB**




**(Mark
      One)**




**x**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**




**For
      the fiscal year ended December 31, 2007**




**o**
            **TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**




**For
      the transition period from to**




**Commission
      file number: 000-052211**




**ZAGG
      INCORPORATED**


**(Name
      of small business issuer in its charter)**




**NEVADA**
            
            **20-2559624****(State
                or other jurisdiction of**
              **incorporation
                or organization)**
            
            **(I.R.S.
                Employer**
              **Identification
                No.)**




**3855
                S 500 W, Suite J, Salt Lake City, UT**
            
            **84115****(Address
                of principal executive offices)**
            
            **(Zip
                Code)**




**Issuer’s
      telephone number: (801) 263-0699**




**Securities
      registered under 12(b) of the Exchange Act: None**




**Securities
      registered under 12 (g) of the Exchange Act:**




**Common
      Stock, par value $0.001**


**(Title
      of Class)**




Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. Yes o No þ




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




Check
      if
      there is no disclosure of delinquent filings response to Item 405 of Regulation
      S-B contained in this form, and no disclosure will be contained, to the best
      of
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB. o




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




The
      issuer’s revenues for its most recent fiscal year were $5,135,715. The aggregate
      market value of the voting and non-voting common equity held by non-affiliates
      as of March 21, 2008 was $8,972,689. For purposes of the foregoing calculation
      only, directors and executive officers and holders of 10% or more of the
      issuer’s common capital stock have been deemed affiliates. The number of shares
      outstanding for the Registrant’s common stock as of March 21, 2008 was
      18,853,995.




Transitional
      Small Business Disclosure Format (Check one): Yes oNo þ









**ZAGG
      INCORPORATED**




**2007
      FORM 10-KSB**




**TABLE
      OF CONTENTS**





**Page****PART
                I****ITEM
                1.**
            DESCRIPTION
                OF BUSINESS AND RISK FACTORS
            **1****ITEM
                2.**
            DESCRIPTION
                OF PROPERTY
            **13****ITEM
                3.**
            LEGAL
                PROCEEDINGS
            **13****ITEM
                4.**
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            **13****PART
                II****ITEM
                5.**
            MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERSAND
                SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
            **14****ITEM
                6.**
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
            **18****ITEM
                7.**
            FINANCIAL
                STATEMENTS
            **25****ITEM
                8(T).**
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING
                AND FINANCIAL DISCLOSURE
            **25****ITEM
                8A.**
            CONTROLS
                AND PROCEDURES
            **26****ITEM
                8B.**
            OTHER
                INFORMATION
            **26****PART
                III****ITEM
                9.**
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS:
              COMPLIANCE
                WITH SECTION 16(a) OF THE EXCHANGE ACT
            **26****ITEM
                10.**
            EXECUTIVE
                COMPENSATION
            **29****ITEM
                11.**
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT
                AND RELATED STOCKHOLDER MATTERS
            **30****ITEM
                12.**
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS
            **31****ITEM
                13.**
            EXHIBITS
            **31****ITEM
                14.**
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            **32****SIGNATURES**
            
            **32**








**PART
      I**





***Special
      Note Regarding Forward-Looking Statements***




Information
      included or incorporated by reference in this Annual Report on Form 10-KSB
      contains forward-looking statements. All forward-looking statements are
      inherently uncertain as they are based on current expectations and assumptions
      concerning future events or future performance of the Company. Readers are
      cautioned not to place undue reliance on these forward-looking statements,
      which
      are only predictions and speak only as of the date hereof. Forward-looking
      statements usually contain the words “estimate,” “anticipate,” “believe,”
“expect,” or similar expressions, and are subject to numerous known and unknown
      risks and uncertainties. In evaluating such statements, prospective investors
      should carefully review various risks and uncertainties identified in this
      Report, including the matters set forth under the captions “Risk Factors” and in
      the Company’s other SEC filings. These risks and uncertainties could cause the
      Company’s actual results to differ materially from those indicated in the
      forward-looking statements. The Company undertakes no obligation to update
      or
      publicly announce revisions to any forward-looking statements to reflect future
      events or developments.




Although
      forward-looking statements in this Annual Report on Form 10-KSB reflect the
      good
      faith judgment of our management, such statements can only be based on facts
      and
      factors currently known by us. Consequently, forward-looking statements are
      inherently subject to risks and uncertainties and actual results and outcomes
      may differ materially from the results and outcomes discussed in or anticipated
      by the forward-looking statements. Factors that could cause or contribute to
      such differences in results and outcomes include, without limitation, those
      specifically addressed under the heading “Risk Factors Related to Our Business”
below, as well as those discussed elsewhere in this Annual Report on Form
      10-KSB. Readers are urged not to place undue reliance on these forward-looking
      statements, which speak only as of the date of this Annual Report on Form
      10-KSB. We file reports with the Securities and Exchange Commission (“SEC”). You
      can read and copy any materials we file with the SEC at the SEC’s Public
      Reference Room, 100 F. Street, NE, Washington, D.C. 20549. You can obtain
      additional information about the operation of the Public Reference Room by
      calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
      site (www.sec.gov) that contains reports, proxy and information statements,
      and
      other information regarding issuers that file electronically with the SEC,
      including us.




*We
      undertake no obligation to revise or update any forward-looking statements
      in
      order to reflect any event or circumstance that may arise after the date of
      this
      Annual Report on Form 10-KSB. Readers are urged to carefully review and consider
      the various disclosures made throughout the entirety of this annual report,
      which attempt to advise interested parties of the risks and factors that may
      affect our business, financial condition, results of operations and
      prospects.*





**ITEM
              1.**
            **DESCRIPTION
                OF BUSINESS AND RISK
                FACTORS**





**Our
      Business**





We
      are a
      fast-growth company in the consumer technology accessories business. We design,
      manufacture and distribute protective coverings for consumer electronic and
      hand-held devices under the brand name invisibleSHIELDTM. The invisibleSHIELD is
      a protective, high-tech film covering, designed for iPods ® ,
      laptops, cell phones, digital cameras, PDAs, watch faces, GPS systems, gaming
      devices, and other items. The product is “cut” to fit specific devices and
      packaged together with a moisture activating spray called “SHIELD *spray* ”TM
which
      makes the invisibleSHIELD adhere to the surface of the device literally “like a
      second skin” virtually invisible to the eye. The patent-pending invisibleSHIELD
      is the first scratch protection solution of its kind on the market. The
      invisibleSHIELD is not ornamental, but rather provides a long lasting barrier
      to
      preserve the brand new look of the surface of an electronic device. Currently,
      ZAGG offers over 2,000 precision pre-cut designs with a lifetime replacement
      warranty through online channels, resellers, college bookstores, Mac stores,
      and
      mall kiosks. The company plans to increase its product lines to offer electronic
      accessories to its tech-savvy customer base, as well as an expanded array of
      invisibleSHIELD products for other industries. With over 1,000,000
      invisibleSHIELDs sold to date by early adopters, we are poised to introduce
      the
      invisibleSHIELD product to mass market consumers worldwide.





Our
      key
      product, invisibleSHIELD, is made from a protective, film covering that was
      developed originally to protect the leading edges of rotary blades of military
      helicopters. We determined that this same film product could be configured
      to
      fit onto the surface of electronic devices and marketed to consumers for use
      in
      protecting such devices from everyday wear and tear including scratches,
      scrapes, debris and other surface blemishes. The film also permits touch
      sensitivity, meaning it can be used on devices that have a touch-screen
      interface. The invisibleSHIELD film material is highly reliable and durable
      since it was originally developed for use in a high friction, high velocity,
      aerospace context. The film provides long lasting protection for the surface
      of
      electronic devices subject to normal wear and tear. The film is a form of
      polyurethane substance, akin to a very thin, pliable, flexible and durable
      clear
      plastic that adheres to the surface and shape of the object it is applied
      to.




1




We
      also
      sell accessories for electronics devices including power cords, chargers and
      adapters. We have recently introduced the RockSticTM portable speaker system
      designed for Apple iPod and compatible with most digital media
      players.





We
      maintain our corporate offices and operational facility at 3855 South 500 West,
      Suites B, C, J and R, Salt Lake City, Utah, 84115. The telephone number of
      the
      Company is 801-263-0699. Our website addresses are www.invisibleshield.com and www.zagg.com .





**Our
      Corporate History**





We
      were
      formed as a Nevada corporation on April 2, 2004, under the name Amerasia Khan
      Enterprises Ltd (“AKE”). On February 8, 2007, AKE executed an Agreement and Plan
      of Merger (the “Merger Agreement”) by and between AKE and its wholly owned
      subsidiary, SZC Acquisition, Inc., a Nevada corporation (“Subsidiary”) on the
      one hand, and ShieldZone Corporation, a Utah corporation (“ShieldZone”) on the
      other hand. Pursuant to the Merger Agreement, ShieldZone merged with Subsidiary,
      with ShieldZone surviving the merger and Subsidiary ceasing to exist (the
“Merger”).





Following
      the Merger, ShieldZone was reincorporated in Nevada as a subsidiary of AKE.
      On
      March 7, 2007, ShieldZone was merged up and into AKE. At that time, AKE changed
      its name to ZAGG Incorporated, and the operations of the surviving entity (ZAGG
      Incorporated) are solely that of ShieldZone. As a result of these transactions,
      the historical financial statements of ZAGG Incorporated are the historical
      financial statements of ShieldZone. The fiscal year end of the Company is
      December 31.





We
      changed our name from ShieldZone Corporation to ZAGG Incorporated to better
      position the company to become a large and encompassing enterprise in the
      electronics’ accessories industry through organic growth and through making
      targeted acquisitions. The ShieldZone name was very specific to the
      invisibleSHIELD product line and although the invisibleSHIELD is and will
      continue to be our core product, the name change will enable us the opportunity
      to easily add new products to our product offering. ZAGG will continue to search
      out other complimentary proven products and companies that fit the ZAGG
      lifestyle and strategy for fast growth.




**Strategy**





At
      ZAGG,
      we are **“** ***Z*** *ealous* ***A*** *bout* ***G*** *reat* ***G*** *adgets* **.”** We
      believe that hand-held devices and gadgets have been developed to be
      aesthetically pleasing as designed and that bulky silicone, plastic or leather
      cases impede the overall end users’ enjoyment of the form and function of their
      device. Consumers purchase these types of accessories to help protect their
      devices from getting scratched and damaged. The invisibleSHIELD provides the
      end
      consumer with an alternative to bulky cases that provides unparalleled device
      protection without impeding the functionality and enjoyment of the consumers’
device.





We
      will
      continue to expand our product offering and focus on innovative products and
      services that we can target market to our customers based on their purchase
      history. When a customer purchases an invisibleSHIELD from ZAGG, we know exactly
      what type of device they have as the invisibleSHIELD is custom cut for each
      device. With that information we can develop specific marketing plans to sell
      additional products including power supplies, car charges, ear buds and other
      accessory items. We are currently developing a ZAGG branded line of accessory
      items that we will offer to our customers through our website at www.invisibleshield.com and we
      will make these available through our retail distribution channels as
      well.





As
      we
      continue to develop and enhance our brand name and reputation, we anticipate
      entering into additional complementary industries to provide our invisibleSHIELD
      product line.


2


**Design
      and Packaging**





We
      design
      and cut the ** invisibleSHIELD
      product for application on hundreds of specific electronic devices. We acquire
      raw materials from third party sources that are delivered to our facilities
      and
      assembled for packaging. In addition, we out-source high volume
      precision-cutting of the materials, which we consider to be more cost effective.
      We then packages the configured materials together with an installation kit,
      consisting of SHIELD *sprayTM* ,
      a
      moisture adhesive-activating solution, a squeegee, and instructions for
      application on specific electronic devices and also outsources some of these
      packaging processes to independent third-parties. We have developed
      relationships with package assembly and shipping and logistics companies that
      allow us to expand our production and shipping capacity as we continue to grow.
      On average, we process and ship over 59,000 finished packages per
      month.





We
      have a
      patent pending on the process of wrapping an entire gadget body in a
      transparent, durable and semi-permanent film. We also custom design each cut-out
      for the film and currently have unique designs for over 2,000 devices. The
      cut-out designs are developed internally and owned exclusively by us. We do
      not
      own the patent for the base materials, but believe that our relationship with
      the manufacturer of the raw material is on excellent terms and anticipate no
      interruption in our ability to acquire adequate supplies of the materials and
      produce products.





We
      have
      developed our retail packaging with the input of major retailers to appeal
      to
      the end consumer on a retail basis. We have designed the cardboard box packaging
      to be informative and attractive for point-of-sale displays.





**Market
      for Products**





The
      portable electronic device market, notably handheld devices, is continuing
      to
      see advancements in performance and functionality in existing models.
      Furthermore, the market is expanding as evidenced by new product developments
      in
      portable electronic devices. Correspondingly, the aesthetics of such devices
      is
      increasingly important to the extent that buyers are considering the look and
      feel of such devices, as much as performance, in making their purchasing
      decisions.





As
      a
      result, an industry and significant market has emerged in protecting portable
      electronic devices, notably the “high end” devices – both in terms of
      price, and design/functionality. Consumers are seeking ways to protect the
      device from wear and tear and damage, but not impede the look, feel, or
      functionality of the device.





We
      sell
      directly and through our distributors and retail sellers, the invisibleSHIELD
      to
      consumers of electronic household and hand-held devices. We sell a significant
      amount of product for use on Apple’s iPod and iPhone devices. The
      invisibleSHIELD covers and protects the iPod and iPhone without detracting
      in
      any manner from the look and feel of the device or its functionality. The
      handheld electronics industry has continued to market and develop devices with
      touch screen interfaces. The invisibleSHIELD is the ideal device protection
      offering for these types of gadgets as it does not interfere with the
      functionality of the device while offering complete scratch proof protection.
      We
      will continue to focus our marketing efforts around these types of gadgets
      as
      the premier protection solution while maintaining the overall form and
      functionality of the device.





To
      date,
      we have not partnered with any manufacturers of electronic devices to bundle
      our
      products with such devices on initial sale, or to include as part of the device,
      the application of our products. In the future, we may seek such an arrangement
      or an alternative co-marketing agreement, but we have not entered into
      definitive negotiations for such an arrangement as yet.





**Market
      Segments**





With
      over
      2,000 invisibleSHIELD products/product configurations available, we have a
      protective covering for all major market segments of handheld electronic
      devices, including: iPods, other brand MP3 players, PDAs, cell phones, laptops,
      GPS devices, watch faces, and similar devices and surfaces. We intend to
      continue to configure the invisibleSHIELD product for use in newly developed
      consumer devices. Unlike manufacturers of competing device cases that need
      months to design and manufacture customized accessories for new devices, the
      invisibleSHIELD can be quickly configured and packaged for new devices as they
      enter the consumer marketplace, making the invisibleSHIELD available for
      purchase ahead of competing accessories for new electronic devices.




3




One
      of
      our fastest growing market segments is the iPod consumer. Most often, iPod
      buyers are drawn to the device by its elegant design, as well as its easy-to-use
      functionality. However, everyday use often mars the iPod's finish, screen and
      other areas that receive wear and tear. Traditional protective products are
      bulky and detract from an iPod's elegance by covering it up. Other common
      protectors either do not offer enough protection — such as leaving the
      iPod's function buttons uncovered — or they are not durable enough to properly
      protect the device. However, an invisibleSHIELD covering is exactly that—
invisible— meaning it does not cover up the design, form or functionality of the
      iPod.





As
      sales
      of electronics continue to grow, we anticipate that sales of our complimentary
      products will continue to grow, as well. Four of the largest areas of our market
      opportunities relate to sales of iPods, cellular telephones, digital cameras
      and
      gaming systems. According to industry sources, over 51,600,000 iPods and over
      1,300,000 iPhones were sold in Apple Corporation’s most recent fiscal year, and
      over 22,000,000 iPods and over 2,300,000 iPhones were sold in the first quarter
      of its subsequent fiscal year. Over 1.1 billion cell phones were sold worldwide
      in 2007. Over 51,000,000 units of digital cameras were sold in 2007. Sony’s PSP
      sold over 25,000,000 units as of December 2007 and Nintendo’s DS Lite sold over
      45,000,000 units during the same period. ZAGG is positioned to serve all of
      these markets with its after-market invisibleSHIELD products.





**Marketing
      and Distribution**





We
      sell
      our products directly on our website, through distributors, through kiosk
      vendors in shopping malls and retail centers, and through electronics retailers.
      Our products are available for sale world wide via our website. Currently we
      advertise our products on the internet and through point of sale displays at
      retail locations. We also advertise our products on television and radio both
      locally and nationally. We intend to expand our advertising by implementing
      a
      broader television advertising strategy over the course of 2008. We are also
      seeking to create strategic partnerships with makers of iPod and electronic
      accessories.





We
      recently entered into an agreement to fund a bridge loan (the “Bridge Loan”) of
      up to $500,000 to Brighton Partners, LLC. The purpose of the secured loan is
      to
      fund the development of a superhero series created by Stan Lee and POW!
      Entertainment, Inc. in partnership with Brighton Partners, LLC, with the hope
      that we will benefit from the marketing exposure and any intellectual property
      created using our trademarks.





In
      consideration of the bridge loan, Brighton Partners, LLC executed a secured
      promissory note with a 3% origination fee and bearing 10% interest for the
      90
      day term of the note. The loan is collateralized by 100% of the ownership of
      Brighton until the loan is repaid in full. As part of the transaction, we
      entered into a cross-license agreement with Brighton pursuant to which we agreed
      to license ours trademarks in exchange for marketing and promotion rights to
      any
      property developed under the superhero series that bears our intellectual
      property. Further under the transaction, we acquired 10% of the membership
      interest in Brighton. We will share in the development of the superhero series
      as a partner of Brighton.





***Website
      Sales***





We
      sell
      our products worldwide directly to consumers on our website at www.invisibleshield.com .
      For the
      year ended December 31, 2007, we sold approximately $3,173,000 of product on
      our
      website, or approximately 62% of our overall sales for 2007.





We
      also
      generated revenue from shipping charges to customers. For the year ended
      December 31, 2007, we generated approximately $361,000 from shipping charges,
      or
      approximately 7% of our overall sales for 2007.





***Mall
      Vendors***





We
      sell
      our ** invisibleSHIELD
      products to kiosk vendors in shopping malls and retail centers. We enter into
      agreements with such vendors who purchase the products and resell them to
      consumers. For the year ended December 31, 2007, we sold approximately $669,000
      of product, or approximately 13% of our overall sales for 2007, through our
      corporate owned mall carts and to licensed cart owners. The third party licensed
      cart owners are required to enter into a standard license and resale agreement
      with us wherein we charge an upfront license fee that is recognized into revenue
      over the life of the license. For the year ended December 31, 2007, we
      recognized revenue related to the third party licensing agreements of
      approximately $74,000, or approximately 2% of our overall sales for
      2007.




4




***Electronics
      Retailers***





We
      sell
      our invisibleSHIELD products to electronics retailers, predominately
      independently owned retailers of Apple products and accessories and out of
      our
      storefront maintained in our headquarters. We estimate there are over 300 such
      independent Apple resellers worldwide and we currently have agreements with
      approximately 60, predominately in the United States. We also sell our
      invisibleSHIELD products to university bookstores and small independently owned
      consumer electronics stores. For the year ended December 31, 2007, we sold
      approximately $685,000 of product to specialty retailers, or approximately
      13%
      of our overall sales for 2007. The electronics retailers are required to enter
      into a standard reseller agreement with us.





***Distributors***





We
      utilize multiple distributors to market and place our products for sale in
      the
      United States and abroad. We have entered into distribution agreements for
      the
      United States, United Kingdom, Australia, Hong Kong, South Korea and South
      America for the marketing, distribution and sale of our products. For the year
      ended December 31, 2007, we sold approximately $174,000 of product to our
      distributors, or approximately 3% of our overall sales for 2007.





We
      are
      continuously negotiating for new distribution relationships in the United States
      and abroad to increase the marketing and sale of our products in retail
      locations.





**Company
      Organization**





Our
      operations are divided and organized as follows: marketing and sales, which
      includes the development and maintenance of our website, customer service,
      production, distribution and shipping, art and graphics, product design, and
      general and administration functions.





**Competitors**





Our
      chief
      competitors are companies that develop market and sell protective devices for
      consumer electronics. The market for sales to consumers for “after market”
accessories for electronic devices is very competitive. We are aware of some
      companies who have developed similar products to our invisibleSHIELD products
      using inferior films. There are numerous companies that sell protective devices
      for cell phones, iPods, MP3 players, laptop and computer screens and similar
      devices, none of which have specifications similar to our products. Rather
      such
      products tend to be larger, bulkier, heavier, ornamental and visually
      distracting and cover the design and features of the device, rather than enhance
      its design. These products are typically made from leather, plastic or silicone.
      While we compete with such companies for sales to consumers generally, we do
      not
      consider such other products per se to be competitive to the
      invisibleSHIELD.





**Warranties**





We
      offer
      a lifetime guaranty of the durability of our ** invisibleSHIELD
      products. If the invisibleSHIELD is ever scratched or damaged (in the course
      of
      normal use), a customer simply needs to send back the old product and we will
      replace it for free. To date only a nominal amount of our invisibleSHIELDS
      sold
      have been returned under the warranty program.




**Intellectual
      Property Rights**





**Patents**





We
      have
      filed a patent application for a Protective Covering for Electronic Device
      with
      the United States Patent and Trademark Office. The patent relates to the field
      of protective coverings and systems and methods for covering such devices with
      thin films. This includes both partial coverings and full coverings. The Patent
      Application will not be published until the Patent is issued.




5




**Trademarks**





We
      have
      filed the following Trademark Applications with the United States Patent and
      Trademark Office:





·
            INVISIBLESHEILD
                (with stylized logo image), Serial Number
                78905019


·
            INVISIBLE
                SHIELD, Serial Number 77096911


·
            ZAGG,
                Serial Number 77146689


·
            SHIELD
                ZONE filed on, Serial Number
                77146708


·
            SHIELD
                DESIGN filed on, Serial Number
                77148206




We
      also
      claim common law trademark rights in the following marks: “ShieldZone,”
“Shieldspray,” “Pay Once Protect Forever,” “Invisible Invincible,” “Protect Your
      Digital Life,” “Ultimate Scratch Protection” and “Zealous About Great
      Gadgets.”





We
      have
      also filed the following Trademark Applications with the European
      Community:





·
            INVISIBLE
                SHIELD, Serial Number 006157465


·
            ZAGG,
                Serial Number 006328215





**Government
      Regulations**





Our
      operations are subject to various federal, state and local employee workplace
      protection regulations including OSHA. We believe that compliance with federal,
      state and local environmental protection regulations will not have a material
      adverse effect on our capital expenditures, earnings and competitive and
      financial position. Although we believe that our worker and employee safety
      procedures are adequate and in compliance with law, we cannot completely
      eliminate the risk of injury to our employees, or that we may occasionally,
      unintentionally, be out of compliance with application law. In such event we
      could be liable for damages or fines or both.





**Employees**





We
      have
      59 full-time employees and 17 part time employees including our management
      team.
      We have 11 employees in sales and marketing including our website, 7 in general
      and administration, 23 in production, 2 in technology support, 3 in graphic
      design, and 13 customer service agents. We have 17 employees employed on an
      hourly or part-time basis at our retail cart/kiosk locations. No employee is
      represented by a labor union, and we have never suffered an interruption of
      business caused by labor disputes.





**Risk
      Factors**





An
      investment in our common stock involves a high degree of risk. You should
      carefully consider the risks described below and the other information in this
      prospectus before investing in our common stock. If any of the following risks
      occur, our business, operating results and financial condition could be
      seriously harmed. Currently, shares of our common stock are quoted and traded
      on
      the OTCBB. The
      OTCBB
      is a network of security dealers who buy and sell stock. The dealers are
      connected by a computer network that provides information on current “bids” and
“asks”, as well as volume information. As
      a
      result, the actual price of our stock is determined by prevailing market prices.
      The trading price of our common stock could decline due to any of these risks,
      and you may lose all or part of your investment.




6




***Risks
      Related to the Company and Its Business***





**If
      we are unable to raise capital, our business may fail.**





For
      the
      foreseeable future, we intend to fund our operations and capital expenditures
      from operations and our cash on hand largely from the proceeds of a recently
      conducted offering of our equity securities. If our capital resources are
      insufficient, we may need additional funds to continue our operations, pursue
      business opportunities (such as expansion, acquisitions of complementary
      businesses or the development of new products or services), to react to
      unforeseen difficulties or to respond to competitive pressures. We cannot assure
      you that at such time as we need funds that alternative financing arrangements
      will be available in amounts or on terms acceptable to us, if at all. If
      additional financing is not available when required or is not available on
      acceptable terms, we may be unable to fund our expansion, successfully promote
      our current products, license new products or enhance our products and services,
      take advantage of business opportunities, or respond to competitive pressures,
      any of which could have a material adverse effect on our business and the value
      of our common stock. If we choose to raise additional funds through the issuance
      of equity securities, this may cause significant dilution of our common stock,
      and holders of the additional equity securities may have rights senior to those
      of the holders of our common stock. If we obtain additional financing by issuing
      debt securities, the terms of these securities could restrict or prevent us
      from
      paying dividends and could limit our flexibility in making business
      decisions.





Without
      sufficient financing, we would be forced to limit our operations and otherwise
      fail to pursue the full measure of our business plan. If it turns out that
      we
      have not raised enough money to complete our business plan for the next twelve
      months, we will try to raise additional funds from another private placement
      or
      from loans, if available. In the event that we are unable to raise more
      financing to pursue our business plan, we will lose opportunities for growth
      necessary for our survival and investors may lose their entire
      investment.





**Because
      we may be forced to incur debt in the future on less than favorable terms,
      the
      resulting strain on our cash flow may impair our business
      operations.**





In
      order
      to fund operations, we may issue debt instruments which will have a senior
      claim
      on our assets in the event of a sale of assets. Future debt service may cause
      strain on cash flow and impair business operations.





**Because
      the markets for our products are subject to continuing change, they may impair
      our ability to successfully sell our products.**





The
      markets for our products are volatile and subject to continuing change. Consumer
      tastes and demands can be unpredictable. We must continuously adjust our
      marketing strategy to address the changing state of the markets for our
      products, we may not be able to anticipate changes in the market and, as a
      result, our product strategies may be unsuccessful.





**Because
      we are dependent on a third party source to acquire sufficient quantities of
      raw
      materials to produce our products, any interruption in that relationship could
      harm our results of operations and our revenues.**





We
      acquire substantially all of our raw materials that we use in our products
      from
      one distributor. While we believe our relationship with that distributor is
      excellent, and we foresee no interruption in our ability to obtain raw materials
      from such distributor, we might in the future need to find other sources or
      attempt to manufacture the raw materials, or a material substantially similar
      to
      them, ourselves. We believe we could obtain the raw materials from other
      sources, or obtain substantially similar raw materials, or even produce similar
      materials ourselves. We also keep an inventory of raw materials on hand which
      could support our operations even if our sources were interrupted. However
      any
      unexpected interruption in our acquisition of the raw materials and the
      production of our products could harm our results of operations and our
      revenues.





**Because
      we are dependent for our success on key executive officers, our inability to
      retain these officers would impede our business plan and growth strategies,
      which would have a negative impact on our business and the value of your
      investment.** ****





Our
      success depends on the skills, experience and performance of key members of
      our
      management team including Mr. Robert G. Pedersen II, our CEO, and Brandon T.
      O’Brien, our CFO. We do not have an employment agreement with Mr. Pedersen or
      Mr. O’Brien. We do not have employment agreements with any other members of our
      senior management team. Each of those individuals without long-term employment
      agreements may voluntarily terminate his employment with the Company at any
      time
      upon short notice. Were we to lose one or more of these key executive officers,
      we would be forced to expend significant time and money in the pursuit of a
      replacement, which would result in both a delay in the implementation of our
      business plan and the diversion of limited working capital. We can give you
      no
      assurance that we can find satisfactory replacements for these key executive
      officers at all, or on terms that are not unduly expensive or burdensome to
      our
      company. Although we intend to issue stock options or other equity-based
      compensation to attract and retain employees, such incentives may not be
      sufficient to attract and retain key personnel.




7




**If
      we fail to attract, train and retain sufficient numbers of our qualified
      personnel, our prospects, business, financial condition and results of
      operations will be materially and adversely affected.** ****





Our
      success depends to a significant degree upon our ability to attract, retain
      and
      motivate skilled and qualified personnel. Failure to attract and retain
      necessary technical personnel, sales and marketing personnel and skilled
      management could adversely affect our business. If we fail to attract, train
      and
      retain sufficient numbers of these highly qualified people, our prospects,
      business, financial condition and results of operations will be materially
      and
      adversely affected.





**Because
      we experience seasonal and quarterly fluctuations in demand for our products,
      no
      one quarter is indicative of our results of operations for the entire fiscal
      year.**





Our
      quarterly results may fluctuate quarter to quarter as a result of market
      acceptance of our products, the mix, pricing and presentation of the products
      offered and sold, the hiring and training of additional personnel, the timing
      of
      inventory write downs, the cost of materials, the incurrence of other operating
      costs and factors beyond our control, such as general economic conditions and
      actions of competitors. We are also affected by seasonal buying cycles of
      consumers, such as the holiday season, and the introduction of popular consumer
      electronics, such as a new generation of the iPod. Accordingly, the results
      of
      operations in any quarter will not necessarily be indicative of the results
      that
      may be achieved for a full fiscal year or any future quarter.





**Because
      we have limited protection on the intellectual property underlying our products,
      we may not be able to protect our products from the infringement of others
      and
      may be prevented from marketing our products.** ****





We
      do not
      own proprietary rights with respect to the film we use in our products. We
      have
      a patent pending with respect to the covering of electronic devices with thin
      films. In addition, we own and keep confidential the design configurations
      of
      the film and the process to cut the film which are our copyrights. We seek
      to
      protect our intellectual property rights through confidentiality agreements
      with
      our employees, consultants and partners. However, no assurance can be given
      that
      such measures will be sufficient to protect our intellectual property rights
      or
      that the intellectual property rights that we have are sufficient to protect
      other persons from creating and marketing substantially similar products. If
      we
      cannot protect our rights, we may lose our competitive advantage. Moreover,
      if
      it is determined that our products infringe on the intellectual property rights
      of third parties, we may be prevented from marketing our products.





**Because
      we may, at some time in the future, issue additional securities, shareholders
      are subject to dilution of their ownership.**





Although
      the Company has no plans to raise additional capital aside from the present
      Offering, it may at some time in the future do so. Any such issuance would
      likely dilute shareholders’ ownership interest in the Company and may have an
      adverse impact on the price of the Company’s common stock. In addition, from
      time to time we may issue shares of common stock in connection with equity
      financing activities or as incentives to our officers and business partners.
      We
      may expand the number of shares available under stock incentive and option
      plans, or create new plans. All issuances of common stock would be dilutive
      to
      your holdings in the Company. If your holdings are diluted, the overall value
      of
      your shares may be diminished and your ability to influence shareholder voting
      will also be harmed.





**If
      we fail to maintain proper inventory levels, our business could be
      harmed.** ****





We
      produce our products prior to the time we receive customers’ orders. We do this
      to minimize purchasing costs, the time necessary to fill customer orders and
      the
      risk of non-delivery. However, we may be unable to sell the products we have
      produced in advance. Inventory levels in excess of customer demand may result
      in
      inventory write-downs, and the sale of excess inventory at discounted prices
      could significantly impair our brand image and have a material adverse effect
      on
      our operating results and financial condition. Conversely, if we underestimate
      demand for our products or if we fail to produce the quality products that
      we
      require at the time we need them, we may experience inventory shortages.
      Inventory shortages might delay shipments to customers, negatively impact
      distributor relationships, and diminish brand loyalty.




8




**Because
      we face intense competition, including competition from companies with
      significantly greater resources than ours, if we are unable to compete
      effectively with these companies, our market share may decline and our business
      could be harmed.** ****





Our
      market is highly competitive with numerous competitors. Some of our competitors
      have greater financial, technological, manufacturing, marketing and distribution
      resources than we do. Their greater capabilities in these areas may enable
      them
      to compete more effectively on the basis of price and production and more
      quickly develop new products and technologies. They may also have more fully
      developed sales channels for consumer sales including large retail seller
      arrangements and international distribution capabilities. In addition, new
      companies may enter the markets in which we compete, further increasing
      competition in the laser industry. We may not be able to compete successfully
      in
      the future, and increased competition may result in price reductions, reduced
      profit margins, loss of market share and an inability to generate cash flows
      that are sufficient to maintain or expand our development and marketing of
      new
      products, which would adversely impact the trading price of our common
      shares.





**If
      we are unable to effectively manage our growth, our operating results and
      financial condition will be adversely affected.**





We
      intend
      to grow our business by expanding our sales, administrative and marketing
      organizations. Any growth in or expansion of our business is likely to continue
      to place a strain on our management and administrative resources, infrastructure
      and systems. As with other growing businesses, we expect that we will need
      to
      refine and expand our business development capabilities, our systems and
      processes and our access to financing sources. We also will need to hire, train,
      supervise and manage new employees. These processes are time consuming and
      expensive, will increase management responsibilities and will divert management
      attention. We cannot assure you that we will be able to:





·
            expand
                our systems effectively or efficiently or in a timely
                manner;


·
            allocate
                our human resources optimally;


·
            meet
                our capital needs;


·
            identify
                and hire qualified employees or retain valued employees;
                or


·
            incorporate
                effectively the components of any business or product line that we
                may
                acquire in our effort to achieve
                growth.





Our
      inability or failure to manage our growth and expansion effectively could harm
      our business and materially and adversely affect our operating results and
      financial condition.





**If
      our competitors misappropriate our proprietary know-how and trade secrets,
      it
      could have a material adverse affect on our business.**





We
      depend
      heavily on the expertise of our production team. If any of our competitors
      copies or otherwise gains access to similar products independently, we might
      not
      be able to compete as effectively. The measures we take to protect our designs
      may not be adequate to prevent their unauthorized use. Further, the laws of
      foreign countries may provide inadequate protection of such intellectual
      property rights. We may need to bring legal claims to enforce or protect such
      intellectual property rights. Any litigation, whether successful or
      unsuccessful, could result in substantial costs and diversions of resources.
      In
      addition, notwithstanding the rights we have secured in our intellectual
      property, other persons may bring claims against us that we have infringed
      on
      their intellectual property rights or claims that our intellectual property
      right interests are not valid. Any claims against us, with or without merit,
      could be time consuming and costly to defend or litigate and therefore could
      have an adverse affect on our business.





**If
      our facilities were to experience catastrophic loss, our operations would be
      seriously harmed.** ****





Our
      facilities could be subject to a catastrophic loss from fire, flood, earthquake
      or terrorist activity. All of our activities, including manufacturing, our
      corporate headquarters and other critical business operations are in one
      location. Any catastrophic loss at this facility could disrupt our operations,
      delay production, and revenue and result in large expenses to repair or replace
      the facility. While we have obtained insurance to cover most potential losses,
      we cannot assure you that our existing insurance coverage will be adequate
      against all other possible losses.




9




**New
      rules, including those contained in and issued under the Sarbanes-Oxley Act
      of
      2002, may make it difficult for us to retain or attract qualified officers
      and
      directors, which could adversely affect the management of our business and
      our
      ability to obtain or retain listing of our common stock.** ****





We
      may be
      unable to attract and retain qualified officers, directors and members of board
      committees required to provide for our effective management as a result of
      the
      recent and currently proposed changes in the rules and regulations which govern
      publicly-held companies, including, but not limited to, certifications from
      executive officers and requirements for financial experts on the board of
      directors. The perceived increased personal risk associated with these recent
      changes may deter qualified individuals from accepting these roles. The
      enactment of the Sarbanes-Oxley Act of 2002 has resulted in the issuance of
      a
      series of new rules and regulations and the strengthening of existing rules
      and
      regulations by the SEC. Further, certain of these recent and proposed changes
      heighten the requirements for board or committee membership, particularly with
      respect to an individual’s independence from the corporation and level of
      experience in finance and accounting matters. We may have difficulty attracting
      and retaining directors with the requisite qualifications. If we are unable
      to
      attract and retain qualified officers and directors, the management of our
      business could be adversely affected.





**Our
      internal controls over financial reporting may not be effective, and our
      independent registered public accounting firm may not be able to certify as
      to
      their effectiveness, which could have a significant and adverse effect on our
      business.** ****





We
      are
      subject to various regulatory requirements, including the Sarbanes-Oxley Act
      of
      2002. We, like all other public companies, must incur additional expenses and,
      to a lesser extent, diversion of our management’s time in our efforts to comply
      with Section 404 of the Sarbanes-Oxley Act of 2002 regarding internal controls
      over financial reporting. We have not evaluated our internal controls over
      financial reporting in order to allow management to report on, and our
      registered independent public accounting firm to attest to, our internal
      controls over financial reporting, as required by Section 404 of the
      Sarbanes-Oxley Act of 2002 and the rules and regulations of the SEC, which
      we
      collectively refer to as Section 404. We have never performed the system and
      process evaluation and testing required in an effort to comply with the
      management assessment and auditor certification requirements of Section 404,
      which may initially apply to us as of December 31, 2007 and December 31, 2008,
      respectively. Our lack of familiarity with Section 404 may unduly divert
      management’s time and resources in executing the business plan. If, in the
      future, management identifies one or more material weaknesses, or our external
      auditors are unable to attest that our management’s report is fairly stated or
      to express an opinion on the effectiveness of our internal controls, this could
      result in a loss of investor confidence in our financial reports, have an
      adverse effect on our stock price and/or subject us to sanctions or
      investigation by regulatory authorities.





**Economic,
      political, military or other events in the United States could interfere with
      our success or operations and harm our business.** ****





We
      market
      and sell our products and services in the United States and abroad. The
      September 11, 2001 terrorist attacks disrupted commerce throughout the United
      States and other parts of the world. The continued threat of similar attacks
      throughout the world and the military action, or possible military action,
      taken
      by the United States and other nations, in Iraq or other countries may cause
      significant disruption to commerce throughout the world. To the extent that
      such
      disruptions further slow the global economy or, more particularly, result in
      delays or cancellations of purchase orders for our products or extends the
      sales
      cycles with potential customers, our business and results of operations could
      be
      materially adversely affected. We are unable to predict whether the threat
      of
      new attacks or the responses thereto will result in any long-term commercial
      disruptions or if such activities or responses will have a long-term material
      adverse effect on our business, results of operations or financial
      condition.


10


***Risks
      Related to the Company’s Securities***





**An
      active market for our common stock may not develop.** ****





An
      active
      market for our common stock may never develop. Although we applied for quotation
      of our common stock on the NASD over-the-counter bulletin board and are traded
      on the NASDAQ OTC bulleting board, a public market for our stock may not be
      perpetuated. If our common stock does not continue to be traded on the bulletin
      board or if a public market for our common stock does not continue, investors
      may not be able to re-sell the shares of our common stock that they have
      purchased and may lose all of their investment.





**Because
      we will be subject to the “Penny Stock” rules if our shares are quoted on the
      over-the-counter bulletin board, the level of trading activity in our stock
      may
      be reduced.** ****





Broker-dealer
      practices in connection with transactions in "penny stocks" are regulated by
      penny stock rules adopted by the Securities and Exchange Commission. Penny
      stocks generally are equity securities with a price of less than $5.00 (other
      than securities registered on some national securities exchanges or quoted
      on
      NASDAQ). The penny stock rules require a broker-dealer, prior to a transaction
      in a penny stock not otherwise exempt from the rules, to deliver a standardized
      risk disclosure document that provides information about penny stocks and the
      nature and level of risks in the penny stock market. The broker-dealer also
      must
      provide the customer with current bid and offer quotations for the penny stock,
      the compensation of the broker-dealer and its salesperson in the transaction,
      and, if the broker-dealer is the sole market maker, the broker-dealer must
      disclose this fact and the broker-dealer's presumed control over the market,
      and
      monthly account statements showing the market value of each penny stock held
      in
      the customer's account. In addition, broker-dealers who sell these securities
      to
      persons other than established customers and "accredited investors" must make
      a
      special written determination that the penny stock is a suitable investment
      for
      the purchaser and receive the purchaser's written agreement to the transaction.
      Consequently, these requirements may have the effect of reducing the level
      of
      trading activity, if any, in the secondary market for a security subject to
      the
      penny stock rules, and investors in our common stock may find it difficult
      to
      sell their shares.





**Because
      our shares are quoted on the over-the-counter bulletin board, we will be
      required to remain current in our filings with the SEC and our securities will
      not be eligible for quotation if we are not current in our filings with the
      SEC.**





Because
      our shares are quoted on the over-the-counter bulletin board, we are required
      to
      remain current in our filings with the SEC in order for shares of our common
      stock to be eligible for quotation on the over-the-counter bulletin board.
      In
      the event that we become delinquent in our required filings with the SEC,
      quotation of our common stock will be terminated following a 30 or 60 day grace
      period if we do not make our required filing during that time. If our shares
      are
      not eligible for quotation on the over-the-counter bulletin board, investors
      in
      our common stock may find it difficult to sell their shares.





**Because
      of our status as a relatively unknown company with a small and thinly traded
      public float and lack of history as a public company which could lead to wide
      fluctuations in our share price, the market price for our common stock may
      be
      particularly volatile.** ****





The
      market for our common stock may be characterized by significant price volatility
      when compared to seasoned issuers, and we expect that our share price could
      continue to be more volatile than a seasoned issuer for the indefinite future.
      The potential volatility in our share price is attributable to a number of
      factors. First, as noted above, our shares of common stock may be sporadically
      and thinly traded. As a consequence of this lack of liquidity, the trading
      of
      relatively small quantities of shares by our stockholders may disproportionately
      influence the price of those shares in either direction. The price for our
      shares could, for example, decline precipitously in the event that a large
      number of our shares of common stock are sold on the market without commensurate
      demand, as compared to a seasoned issuer which could better absorb those sales
      without adverse impact on its share price. Many of these factors will be beyond
      our control and may decrease the market price of our common shares, regardless
      of our operating performance. We cannot make any predictions or projections
      as
      to what the prevailing market price for our common stock will be at any
      time.




11




In
      addition, the market price of our common stock could be subject to wide
      fluctuations in response to:




·
            quarterly
                variations in our revenues and operating
                expenses;


·
            announcements
                of new products or services by us;


·
            fluctuations
                in interest rates;


·
            significant
                sales of our common stock, including “short”
                sales;


·
            the
                operating and stock price performance of other companies that investors
                may deem comparable to us; and


·
            news
                reports relating to trends in our markets or general economic
                conditions.




The
      stock
      market, in general, and the market prices for penny stock companies in
      particular, have experienced volatility that often has been unrelated to the
      operating performance of such companies. These broad market and industry
      fluctuations may adversely affect the price of our stock, regardless of our
      operating performance.




Stockholders
      should be aware that, according to SEC Release No. 34-29093, the market for
      penny stocks has suffered in recent years from patterns of fraud and abuse.
      Such
      patterns include (1) control of the market for the security by one or a few
      broker-dealers that are often related to the promoter or issuer; (2)
      manipulation of prices through prearranged matching of purchases and sales
      and
      false and misleading press releases; (3) boiler room practices involving
      high-pressure sales tactics and unrealistic price projections by inexperienced
      sales persons; (4) excessive and undisclosed bid-ask differential and markups
      by
      selling broker-dealers; and (5) the wholesale dumping of the same securities
      by
      promoters and broker-dealers after prices have been manipulated to a desired
      level, along with the resulting inevitable collapse of those prices and with
      consequent investor losses. Our management is aware of the abuses that have
      occurred historically in the penny stock market. Although we do not expect
      to be
      in a position to dictate the behavior of the market or of broker-dealers who
      participate in the market, management will strive within the confines of
      practical limitations to prevent the described patterns from being established
      with respect to our securities. The occurrence of these patterns or practices
      could increase the volatility of our share price.





**Limitations
      on director and officer liability and indemnification of our officers and
      directors by us may discourage stockholders from bringing suit against a
      director.**





Our
      articles of incorporation and bylaws provide, with certain exceptions as
      permitted by governing state law, that a director or officer shall not be
      personally liable to us or our stockholders for breach of fiduciary duty as
      a
      director, except for acts or omissions which involve intentional misconduct,
      fraud or knowing violation of law, or unlawful payments of dividends. These
      provisions may discourage stockholders from bringing suit against a director
      for
      breach of fiduciary duty and may reduce the likelihood of derivative litigation
      brought by stockholders on our behalf against a director. In addition, our
      articles of incorporation and bylaws may provide for mandatory indemnification
      of directors and officers to the fullest extent permitted by governing state
      law.





**Because
      we do not expect to pay dividends for the foreseeable future, investors seeking
      cash dividends should not purchase our common stock.**





We
      currently intend to retain any future earnings to support the development and
      expansion of our business and do not anticipate paying cash dividends in the
      foreseeable future. Our payment of any future dividends will be at the
      discretion of our board of directors after taking into account various factors,
      including but not limited to our financial condition, operating results, cash
      needs, growth plans and the terms of any credit agreements that we may be a
      party to at the time. In addition, our ability to pay dividends on our common
      stock may be limited by state law. Accordingly, investors must rely on sales
      of
      their Common Stock after price appreciation, which may never occur, as the
      only
      way to realize their investment.




12




**Our
      Chief Executive Officer and Chief Financial Officer own or control at least
      39%
      of our outstanding common stock, which may limit your ability and the ability
      of
      our other stockholders, whether acting alone or together, to propose or direct
      the management or overall direction of our company. Additionally, this
      concentration of ownership could discourage or prevent a potential takeover
      of
      our Company that might otherwise result in shareholders receiving a premium
      over
      the market price for our shares.**




We
      estimate that approximately 39% of our outstanding shares of common stock is
      owned and controlled by our Chief Executive Officer and our Chief Financial
      Officer. Such concentrated control of our company may adversely affect the
      price
      of our common stock. Our principal stockholders may be able to control matters
      requiring approval by our stockholders, including the election of directors,
      mergers or other business combinations. Such concentrated control may also
      make
      it difficult for our stockholders to receive a premium for their shares of
      our
      common stock in the event we merge with a third party or enter into different
      transactions which require stockholder approval. These provisions could also
      limit the price that investors might be willing to pay in the future for shares
      of our common stock. Accordingly, the existing principal stockholders together
      with our directors and executive officers will have the power to control the
      election of our directors and the approval of actions for which the approval
      of
      our stockholders is required. If you acquire shares, you may have no effective
      voice in the management of the Company.





**Because
      future sales of substantial amounts of our equity securities in the public
      market, or the perception that such sales could occur, could put downward
      selling pressure on our securities, the market for our common stock may be
      adversely affected.** ****





Our
      common shares are traded on the over-the-counter bulletin board (OTCBB). There
      can be no assurance however that a market will develop. Should a market develop,
      shares sold at a price below the current market price at which the common stock
      is trading will cause that market price to decline. Moreover, the offer or
      sale
      of a large number of shares at any price may cause the market price to fall.
      There is a risk that this downward pressure may make it impossible for an
      investor to sell his securities at any reasonable price, if at all.





**Because
      management will have substantial discretion over the use of the proceeds of
      any
      funds raised, investors will have no control over where the money will
      go.**





Our
      management will have significant flexibility in applying the net proceeds of
      any
      monies raised and may apply the proceeds in ways with which you do not agree.
      The failure of our management to apply these funds effectively could materially
      harm our business.





**ITEM
              2.**
            **DESCRIPTION
                OF PROPERTY**





**Real
      Property**





Our
      principal executive offices and manufacturing facilities are currently located
      in 16,300 square feet of office and warehouse space located at 3855 South 500
      West, Suites B, C, J and R, Salt Lake City, Utah 84115. In January 2008, we
      signed a master lease agreement covering all of the suites that expires January
      31, 2010 at a monthly lease rate of $9,900. We believe these facilities are
      adequate for the foreseeable future.





**ITEM
              3.**
            **LEGAL
                PROCEEDINGS**





The
      Company is not presently party to any legal proceedings.





**ITEM
              4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**





During
      the fourth quarter of the fiscal year ended December 31, 2007, no matter was
      submitted to a vote of security holders.


13


**PART
      II**





**ITEM
              5.**
            **MARKET
                FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
                ISSUER PURCHASES OF EQUITY
                SECURITIES**





Our
      common stock trades on the OTC Bulletin Board under the trading symbol “ZAGG.”
The figures set forth below reflect the quarterly high and low bid information
      for shares of our common stock since it began trading on July 25, 2007, as
      reported by the OTC Bulletin Board. These quotations reflect inter-dealer prices
      without retail markup, markdown, or commission, and may not represent actual
      transactions.





**2007
                Quarter Ended**
            
            **High**
            
            **Low**December
                31, 2007
            
            $
            0.87
            
            $
            0.56September
                30, 2007*
            
            $
            2.10
            
            $
            0.56




*Trading
                began on July 25, 2007





Our
      common stock is covered by an SEC rule imposing additional sales practice
      requirements on broker-dealers who sell such securities to persons other than
      established customers and accredited investors, which are generally institutions
      with assets in excess of $5,000,000, or individuals with networth in excess
      of
      $1,000,000 or annual income exceeding $200,000, or $300,000 jointly with a
      spouse. For transactions covered by the rule, the broker-dealer must make a
      special suitability determination for the purchaser and transaction prior to
      the
      sale. Consequently, the rule may affect the ability of broker-dealers to sell
      our securities, and also may affect the ability of purchasers of our stock
      to
      sell their shares in the secondary market. The rule may also cause fewer
      broker-dealers to be willing to make a market in our common stock, and it may
      affect the level of news coverage we receive.





**Holders
      of Common stock**





On
      March
      21, 2008, there were 104 registered holders or persons otherwise entitled to
      hold our common shares pursuant to a shareholders’ list provided by our transfer
      agent, Empire Stock Transfer. The number of registered shareholders excludes
      any
      estimate by us of the number of beneficial owners of common shares held in
      street name.





**Dividends**





We
      have
      not declared or paid cash dividends on our common stock since our inception,
      and
      our Board of Directors currently intends to retain all earnings for use in
      the
      business for the foreseeable future. Any future payment or dividends to holders
      of common stock will depend upon our results of operations, financial condition,
      cash requirements, and other factors deemed relevant by our Board of
      Directors.





**Securities
      Authorized for Issuance Under Equity Compensation Plans**


**Plan Category**
                  
                  **Number of**
                    **securities to be**
                    **issued upon exercise**
                    **of outstanding**
                    **option, warrants**
                    **and rights**
                  
                  **Weighted-average**
                    **exercise price of**
                    **outstanding options,**
                    **warrants and rights**
                  
                  **Number of securities**
                    **remaining available for**
                    **future issuances under**
                    **equity compensation**
                    **plans**Equity
                      compensation plans approved by security holders
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Equity
                      compensation plans notapproved
                      by security holders
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,800,000Total
                  
                  
                  —
                  
                  
                  —
                  
                  
                  2,800,000
  14
  On
        July
        24, 2007, the Board of Directors approved the issued 800,000 shares of our
        common stock to employees and consultants under a separate stock issuance
        plan.
 
 On
        November 13, 2007, the Board of Directors adopted the ZAGG Incorporated 2007
        Stock Incentive Plan wherein we may issue an aggregate of 2,000,000 options
        to
        purchase shares of our common stock or shares of our common stock. There
        were no
        shares issued or options issued under the plan as of December 31, 2007.
        Issuances after December 31, 2007 are noted in the Recent Sales of Unregistered
        Securities section of this 10-KSB.
 
 **Recent
        Sales of Unregistered Securities**
 
 We
        have
        sold or issued the following securities not registered under the Securities
        Act
        by reason of the exemption afforded under Section 4(2) of the Securities
        Act of
        1933 (the “Act”), during the last three years. Except as stated below, no
        underwriting discounts or commissions were payable with respect to any of
        the
        following transactions. The offer and sale of the following securities was
        exempt from the registration requirements of the Securities Act under Rule
        506
        insofar as (1) except as stated below, each of the investors was accredited
        within the meaning of Rule 501(a); (2) the transfer of the securities were
        restricted by the company in accordance with Rule 502(d); (3) there were
        no more
        than 35 non-accredited investors in any transaction within the meaning of
        Rule
        506(b), after taking into consideration all prior investors under Section
        4(2)
        of the Securities Act within the twelve months preceding the transaction;
        and
        (4) none of the offers and sales were effected through any general solicitation
        or general advertising within the meaning of Rule 502(c).
 
 At
        March
        24, 2005 (inception), ShieldZone issued 10,000,000 shares of common stock
        to its
        founder for $1,000.
 
 ShieldZone
        entered into a distribution agreement with a distributor (the “Distributor”) in
        March 2006. On December 12, 2006, under a settlement type purchase agreement
        we
        agreed to issue to the Distributor 75,000 of our common shares, $13,000 cash
        plus portion of payment due from a customer for which the Distributor was
        our
        distributor in order to early cancel the distribution agreement. The shares
        were
        valued and expensed at $26,250 or $0.35 per share which was a contemporaneous
        sale price in a private transaction where a former officer sold a portion
        of his
        common shares of the Company.
 
 In
        July
        2006, ShieldZone sold 100,000 common shares for $75,000 or $0.75 per share.
        The
        shares were issued pursuant to an exemption from registration provided by
        Rule
        506 of Regulation D, as they were issued without any form of general
        solicitation or general advertising and the purchaser qualified as an accredited
        investor and accepted the shares for his personal account and not with a
        view
        towards distribution.
 
 On
        December 27, 2006, ShieldZone issued a Secured Convertible Promissory Note
        in
        the principal amount of $250,000 to an accredited investor. The Note is
        convertible into shares of the Company’s common stock at a conversion price per
        share of $0.35. The Note was issued pursuant to an exemption from registration
        provided by Rule 506 of Regulation D, as it was issued without any form of
        general solicitation or general advertising and the purchaser qualified as
        an
        accredited investor and accepted the Note and underlying shares for its personal
        account and not with a view towards distribution. The holders of the note
        converted the outstanding principal balance into 714,286 shares of our common
        stock on February 8, 2007. These shares had piggyback registration
        rights.
 
 Empire
        Financial Group (“Empire”) acted as placement agent with respect to the offering
        and Empire or its designees received a cash fee equal to $47,250 and warrants
        to
        purchase 52,500 shares of our common stock at an exercise price of $0.35
        per
        share. The warrant shares are subject to equitable adjustment for stock splits,
        stock dividends and similar events, and had “piggyback” registration rights.
 
 On
        March
        6, 2007, we issued and sold 785,856 shares of common stock to accredited
        investors. The shares were sold at a price per share of $0.35. These shares
        had
        piggy back registration rights. The shares were issued pursuant to an exemption
        form registration provided by Rule 506 of Regulation D, as they were issued
        without any form of general solicitation or general advertising and the
        purchases qualified as accredited investors and accepted the shares for their
        personal accounts and not with a view towards distribution.
  15
  On
        February 8, 2007, we and Amerasia Khan Enterprises Ltd. a Nevada corporation
        (“AKE”) (nka ZAGG Incorporated), a publicly held entity, executed an Agreement
        and Plan of Merger (the “Merger Agreement”) by and between AKE and its wholly
        owned subsidiary, SZC Acquisition Corp., a Nevada corporation (“Subsidiary”) on
        the one hand and ShieldZone Corporation, a Utah corporation on the other
        hand.
        Pursuant to the Merger Agreement ShieldZone merged with the Subsidiary, with
        ShieldZone Corporation surviving the merger (the “Merger”). In consideration,
        the shareholders of ShieldZone were issued 10,175,000 shares of the common
        stock
        of AKE. Shareholders holding 3,941,765 of these shares claim to have piggyback
        registration rights in AKE. The issuance of the shares in connection with
        the
        Merger was made pursuant to an exemption form registration provided by Rule
        506
        of Regulation D, as they were issued without any form of general solicitation
        or
        general advertising and the purchasers qualified as accredited investors
        and
        accepted the shares for their personal accounts and not with a view towards
        distribution.
 
 During
        the quarter ended March 31, 2007, we repaid $50,000 of the principal balance
        of
        a $100,000 note issued in November 2006 to an affiliate of our Chief Executive
        Officer, and the remaining $50,000 of principal plus accrued interest of
        $1,749
        was converted into 147,853 shares of common stock. These shares had piggy
        back
        registration rights. The shares were issued pursuant to an exemption form
        registration provided by Rule 506 of Regulation D, as they were issued without
        any form of general solicitation or general advertising and the purchases
        qualified as accredited investors and accepted the shares for their personal
        accounts and not with a view towards distribution.
 
 On
        July
        10, 2007, we sold (i) 1,975,000 shares of our common stock, and (ii) five-year
        warrants to purchase 987,500 shares of common stock at an exercise price
        of
        $1.30 per share, pursuant to a Securities Purchase Agreement among our company
        and certain institutional investors (the “Purchasers”) signatory thereto. We
        received aggregate gross proceeds of approximately $1,975,000 from the sale
        of
        the common stock and warrants. The common stock and warrants were offered
        solely
        to “accredited investors” in reliance on the exemption from registration
        afforded by Section 4(2) of the Securities Act of 1933, as amended, and/or
        Rule
        506 of Regulation D promulgated thereunder.
 
 Under
        the
        applicable agreements, the Purchasers are entitled to certain contractual
        benefits, which are summarized as follows:
 
 1.
              The
                  right to participate in any subsequent financing of ours in the
                  next
                  twelve months;
  2.
              Except
                  for certain exempt issuances, restrictions on our ability to offer
                  securities in the next 90 days and beyond in certain circumstances;
 
 3.
              For
                  as long as any Purchaser holds our securities, restrictions on
                  our ability
                  to issue securities that are convertible into common stock at some
                  future
                  or variable price;
 
 4.
              For
                  twelve months, restrictions on our ability to undertake a reverse
                  or
                  forward stock split of its common stock;
 
 5.
              For
                  two years and except for certain exempt issuances, the right to
                  certain
                  anti-dilution provisions;
 
 6.
              The
                  right to rescind in the event we fail to meet certain deadlines.
 
 Empire
        Financial Group (“Empire”) acted as placement agent with respect to the offering
        and received a cash fee equal to $177,750 and warrants to purchase 197,500
        shares of our common stock at an exercise price of $1.30 per share.
  Pursuant
        to a Registration Rights Agreement, we agreed to file an initial registration
        statement covering the resale of the common stock and the shares of common
        stock
        underlying the warrants no later than 30 days from the closing of the offering
        and to have such registration statement declared effective no later than
        120
        days from the closing of the offering. If we did not timely file the
        registration statement or cause it to be declared effective by the required
        dates, then each investor in the offering would have been entitled to liquidated
        damages equal to 2% of the aggregate purchase price paid by such investor
        for
        the securities, and an additional 2% for each month that we did not file
        the
        registration statement or cause it to be declared effective. We were also
        subject to the same penalties for failure to perform the following acts in
        their
        respective timeframes:
  16
  1.
              File
                  with the Securities and Exchange Commission (the “Commission”) a
                  pre-effective amendment within ten trading days after the receipt
                  of
                  comments from the Commission;
  2.
              File
                  with the Commission a request for acceleration with five trading
                  days of
                  the date the Commission notifies the Company orally or in writing
                  that the
                  registration statement will not be reviewed or subject to further
                  review;
  3.
              Failure
                  to notify the Purchasers within one trading day of when we requested
                  effectiveness of the registration statement;
  4.
              Failure
                  to file a final prospectus within one trading day after effectiveness;
  5.
              Failure
                  to maintain an effective registration statement for more than ten
                  consecutive calendar days or more than an aggregate of fifteen
                  calendar
                  days in a twelve month period; and
  6.
              Failure
                  to register all of the common stock and the shares of common stock
                  underlying the warrants pursuant to one or more registration statements
                  on
                  or before December 28, 2007.
  We
        were
        able to meet all of the prescribed deadlines noted above and the registration
        statement was declared effective by the SEC on August 30, 2007.
  On
        July
        24, 2007, we issued 800,000 shares of common stock to employees and affiliates
        under our Stock Option and Stock Grant plan. On November 12, 2007, we issued
        60,000 shares of common stock to employees under our Stock Option and Stock
        Grant plan.
  On
        August
        7, 2007, we issued (i) 850,000 shares of our common stock, and (ii) five-year
        warrants to purchase 425,000 shares of common stock at an exercise price
        of
        $1.30 per share, pursuant to a Securities Purchase Agreement among our company
        and certain institutional investors (the “Purchasers”) signatory thereto. We
        received aggregate gross proceeds of approximately $850,000 from the sale
        of the
        common stock and warrants. The common stock and warrants were offered solely
        to
“accredited investors” in reliance on the exemption from registration afforded
        by Section 4(2) of the Securities Act of 1933, as amended, and/or Rule 506
        of
        Regulation D promulgated thereunder .
  Empire
        Financial Group (“Empire”) acted as placement agent with respect to the offering
        and received a cash fee equal to $76,500 and warrants to purchase 85,000
        shares
        of our common stock at an exercise price of $1.30 per share.
  On
        September 19, 2007, we entered into agreements with certain investors holding
        4,803,904 shares of common stock that acquired their shares as part of an
        exchange transaction that took place in connection with a merger involving
        our
        company in February 2007. These investors were not included along with certain
        institutional investors in a registered offering on Form SB-2 that went
        effective on August 30, 2007. As consideration for these shares not being
        included in that offering, on November 19, 2007, we granted these investors
        warrants to purchase 2,401,953 shares of our common stock at an exercise
        price
        of $1.30
  On
        March
        6, 2008, we granted options to purchase 507,000 of our common stock to employees
        and consultants. The options have an exercise price of $0.65 and an expiration
        date of March 6, 2013. The options vest equally over a three year
        period.
  **Use
        of Proceeds**
 
 On
        August
        30, 2007, the registration statement filed on Form SB -2 (Commission file
        number
        333-145299) was declared effective by the SEC. This offering has commenced
        and
        is ongoing. This registration statement registered 3,998,356 shares of our
        common stock on behalf of certain selling shareholders of the Company. We
        will
        not receive any proceeds from this offering and have not made any arrangements
        for the sale of these securities.
  On
        October 16, 2007, the registration statement filed on Form SB-2 (Commission
        file
        number 333-146320) was declared effective by the SEC. This offering has
        commenced and is ongoing. This registration statement registered 6,263,904
        shares of our common stock on behalf of certain selling shareholders of the
        Company. We will not receive any proceeds from this offering and have not
        made
        any arrangements for the sale of these securities.
  17
  **ITEM
                6.**
              **MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATIONS**
 
 The
        following discussion highlights what we believe are the principal factors
        that
        have affected our financial condition and results of operations as well as
        our
        liquidity and capital resources for the periods described. This discussion
        should be read in conjunction with our financial statements and related notes
        appearing elsewhere in this Annual Report. This discussion contains
“forward-looking statements,” which can be identified by the use of words such
        as “expects,” “plans,” “will,” “may,” “anticipates,” “believes,” “should,”
“intends,” “estimates” and other words of similar meaning. These forward-looking
        statements are subject to risks and uncertainties that may cause actual results
        to differ materially from those expressed or implied by these forward-looking
        statements. Such risks and uncertainties include, without limitation, the
        risks
        described on page 1 of this Annual Report, and the risks described at the
        end of
        Item 1 above.
 
 **Recent
        Merger Transactions**
 
 On
        February 8, 2007, Amerasia Khan Enterprises Ltd. (“AKE”) a Nevada corporation
        (the “Registrant”) (nka ZAGG Incorporated) executed an Agreement and Plan of
        Merger (the “Merger Agreement”) by and between the Registrant and its wholly
        owned subsidiary, SZC Acquisition, Inc., a Nevada corporation (“Subsidiary”) on
        the one hand and ShieldZone Corporation, a Utah corporation (“ShieldZone” or
“Target”) on the other hand. Pursuant to the Merger Agreement, ShieldZone merged
        with Subsidiary, with ShieldZone surviving the merger and Subsidiary ceasing
        to
        exist (the “Merger”).
 
 Following
        the Merger, ShieldZone was reincorporated in Nevada as a subsidiary of AKE.
        On
        March 7, 2007, ShieldZone was merged up and into AKE. At that time AKE changed
        its name to ZAGG Incorporated, and the operations of the surviving entity
        (ZAGG
        Incorporated) are solely that of ShieldZone. As a result of these transactions,
        the historical financial statements of ZAGG Incorporated are the historical
        financial statements of ShieldZone. The fiscal year end of the Company is
        December 31.
 
 For
        purposes of the following discussion and analysis, references to ‘‘we’’,
‘‘our’’, ‘‘us’’ refers to ZAGG
        Incorporated.
 
 **Our
        Business**
 
 We
        custom-design, market and sell a form of protective covering for consumer
        electronic and hand held devices. Our key product “ *invisible* SHIELD”TM
        is made from a protective, film-like covering that was developed originally
        to
        protect the leading edges of rotary blades of military helicopters. We
        determined that this same film product could be configured to fit onto the
        surface of electronic devices and marketed to consumers for use in protecting
        such devices from everyday wear and tear including scratches, scrapes, debris
        and other surface blemishes. The film also permits touch sensitivity, meaning
        it
        can be used on devices that have a touch-screen interface. The *invisible* SHIELD
        film material is highly reliable and durable since it was originally developed
        for use in a high friction, high velocity, aerospace context. The film provides
        long lasting protection for the surface of electronic devices subject to
        normal
        wear and tear. The film is a form of polyurethane substance, akin to a very
        thin, pliable, flexible and durable clear plastic that adheres to the surface
        and shape of the object it is applied to.
 
 ***Critical
        Accounting Policies***
 
 The
        discussion and analysis of our financial condition and results of operations
        are
        based on our financial statements, which have been prepared in accordance
        with
        accounting principles generally accepted in the United States (U.S. GAAP).
        The
        preparation of these financial statements requires us to make estimates and
        judgments that affect the reported amounts of assets, liabilities, revenues
        and
        expenses, and related disclosure of contingent assets and liabilities. On
        an
        on-going basis, we evaluate our estimates based on historical experience
        and on
        various other assumptions that are believed to be reasonable under the
        circumstances, the results of which form the basis for making judgments about
        the carrying values of assets and liabilities that are not readily apparent
        from
        other sources. Actual results may differ from these estimates under different
        assumptions or conditions. Significant estimates include the allowance for
        doubtful accounts, inventory valuation allowances, sales returns and warranty
        liability, the useful life of property and equipment and the valuation allowance
        on deferred tax assets.
  18
  ***Revenue
        recognition***
 
 We
        follow
        the guidance of the Securities and Exchange Commission’s Staff Accounting
        Bulletin 104 for revenue recognition. In general, we record revenue when
        persuasive evidence of an arrangement exists or product delivery has occurred,
        the sales price to the customer is fixed or determinable, and collectability
        is
        reasonably assured. Our revenue
        is derived from sales of our products to retailers, resellers and end consumers
        and from the sale of distributor license fees. For sales of product, we record
        revenue when the product is shipped, net of estimated returns and discounts.
        For
        license fees, we recognize revenue on a prorated basis over the life of the
        distribution contract.
 
 The
        Company follows the guidance of Emerging Issues Task Force (EITF) Issue 01-9
        “Accounting for Consideration Given by a Vendor to a Customer” and (EITF) Issue
        02-16 “Accounting by a Customer (Including a Reseller) for Certain
        Considerations Received from Vendors.” Accordingly, any incentives received from
        vendors are recognized as a reduction of the cost of products. Promotional
        products given to customers or potential customers are recognized as a cost
        of
        sales. Cash incentives provided to our customers are recognized as a reduction
        of the related sale price, and, therefore, are a reduction in
        sales.
 
 ***Reserve
        for Sales Returns and Warranty Liability***
 
 Our
        return policy generally allows our end users and retailers to return purchased
        products for refund or in exchange for new products within 30 days of end
        user
        purchase. We estimate a reserve for sales returns and record that reserve
        amount
        as a reduction of sales and as a sales return reserve liability.
 
 We
        generally provide the ultimate consumer a warranty with each product and
        accrue
        warranty expense at the time of the sale based on our prior claims history.
        Actual warranty costs incurred are charged against the accrual when paid.
 
 ***Recently
        Issued Accounting Pronouncements***
 
 In
        December 2007, the Financial Accounting Standards Board issued Statement
        of
        Financial Accounting Standards No. 141 (revised 2007), *“* Business
        Combinations.” This accounting principle requires the fundamental requirements
        of acquisition accounting (purchase accounting) be applied to all business
        combinations in which control is obtained regardless of consideration and
        for an
        acquirer to be identified for each business combination. Additionally, this
        accounting principle requires acquisition-related costs and restructuring
        costs
        at the date of acquisition to be expensed rather than allocated to the assets
        acquired and the liabilities assumed; minority interests, including goodwill,
        to
        be recorded at fair value at the acquisition date; recognition of the fair
        value
        of assets and liabilities arising from contractual contingencies and contingent
        consideration (payments conditioned on the outcome of future events) at the
        acquisition date; recognition of bargain purchase (acquisition-date fair
        value
        exceeds consideration plus any noncontrolling interest) as a gain; and
        recognition of changes in deferred taxes. This accounting principle will
        be
        adopted January 2009. The accounting requirements will be adopted prospectively.
        Earlier adoption is prohibited. Adoption is not expected to have an impact
        on
        our consolidated financial position, results of operations or cash flows.
 
 In
        December 2007, the Financial Accounting Standards Board issued Statement
        of
        Financial Accounting Standards No. 160, “Noncontrolling Interests in
        Consolidated Financial Statements.” This accounting principle eliminates
        noncomparable accounting for minority interests. Specifically, minority
        interests are presented as a component of shareholders’ equity; consolidated net
        income includes amounts attributable to both the parent and minority interest
        and is disclosed on the face of the income statement; changes in the ownership
        interest are accounted for as equity transactions if ownership remains
        controlling; elimination of purchase accounting for acquisitions of
        noncontrolling interests and acquisitions of additional interests; and
        recognition of deconsolidated controlling interest based on fair value
        consistent with Statement of Financial Accounting Standards No. 141 (revised
        2007), *Business Combinations* .
        This
        accounting principle will be adopted January 2009. The accounting requirements
        will be adopted prospectively, however presentation and disclosure will be
        adopted retrospectively for all periods presented. Earlier adoption is
        prohibited. Adoption is not expected to have an impact on our consolidated
        financial position, results of operations or cash flows. **
  19
  In
        July
        2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
        (FIN) No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of
        FASB Statement No. 109.” This interpretation provides guidance for recognizing
        and measuring uncertain tax positions, as defined in SFAS No. 109,” Accounting
        for Income Taxes. “FIN No. 48 prescribes a threshold condition that a tax
        position must meet for any of the benefit of an uncertain tax position to
        be
        recognized in the financial statements. Guidance is also provided regarding
        de-recognition, classification, and disclosure of uncertain tax positions.
        FIN
        No. 48 is effective for fiscal years beginning after December 15, 2006. Adoption
        of this interpretation did not have a material impact on our financial position,
        results of operations, or cash flows.
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, “Fair Value Measurements” (“FAS 157”). This Statement defines fair value as
        used in numerous accounting pronouncements, establishes a framework for
        measuring fair value in generally accepted accounting principles and expands
        disclosure related to the use of fair value measures in financial statements.
        The Statement is to be effective for our financial statements issued in 2008;
        however, earlier application is encouraged. We are currently evaluating the
        timing of adoption and the impact that adoption might have on our financial
        position or results of operations.
 
 We
        have
        reviewed all other recently issued, but not yet adopted, accounting standards
        in
        order to determine their effects, if any, on our results of operation, financial
        position or cash flows. Based on that review, we believe that none of these
        pronouncements will have a significant material effect on our current or
        future
        earnings or operations.
 
 **Results
        of Operations**
 
 **YEAR
        ENDED DECEMBER 31, 2007 AS COMPARED TO THE YEAR ENDED DECMEBER 31,
        2006**
 
 ***Net
        sales***
 
 Net
        sales
        for the year ended December 31, 2007 were $5,135,715 as compared to net sales
        of
        $2,777,036 for the year ended December 31, 2006, an increase of $2,358,679
        or
        85%.
 
 The
        significant increase in product sales is mainly attributed to continued strong
        sales of our invisible SHIELD
        products with approximately 62% of our product being sold through our website
        to
        retail customers, 13% being sold through mall carts and kiosks, 13% through
        retail outlets including the store at our corporate headquarters, 3% to
        wholesale distributors, 7% from shipping and handling charges and 2% from
        license fees for licensed mall carts.
 
 ***Cost
        of sales***
 
 Cost
        of
        sales includes raw materials, packing materials and shipping costs. For the
        year
        ended December 31, 2007, cost of sales amounted to $1,340,850 or approximately
        26% of net sales as compared to cost of sales of $727,434 or 26% of net sales
        for the year ended December 31, 2006. Cost of sales has remained consistent
        as a
        percentage of sales from 2006 to 2007 primarily due to our favorable shipping
        rates.
 
 ***Gross
        profit***
 
 Gross
        profit for the year ended December 31, 2007 was $3,794,865 or approximately
        74%
        of net sales as compared to $2,049,602 or approximately 74% of net sales
        for the
        year ended December 31, 2006. We have been able to maintain or gross profit
        from
        2006 to 2007 primarily due to our continued strong internet sales and favorable
        shipping rates from our shipping vendors. There are no assurances that we
        will
        continue to recognize similar gross profit margins in the future.
 
 ***Operating
        expenses***
 
 Total
        operating expenses for year ended December 31, 2007 were $5,032,415, an increase
        of $2,758,195 from total operating expenses for year ended December 31, 2006
        of
        $2,274,220. The increases are primarily attributable to the
        following:
 
 ·
              For
                  the year ended December 31, 2007, we recognized $845,000 in expense
                  related to the issuance of restricted stock to employees and key
                  consultants of the Company. We also recognized $82,729 as settlement
                  expense related to the issuance of warrants to certain investors
                  whose
                  shares were not included in a registration statement filed with
                  the SEC on
                  August 9, 2007. Exclusive of these non-cash charges, total operating
                  expenses were $4,104,686 and the loss from operations was
                  ($309,821).
  20
  ·
              For
                  the year ended December 31, 2007, salaries and related taxes increased
                  by
                  $723,393 to $1,582,262 from $858,869 for the year ended December
                  31, 2006
                  due to the hiring of key management personnel and additional staff
                  to
                  facilitate our continued growth and development of our overall
                  business
                  plan and marketing strategy. At December 31, 2006 we had 35 employees
                  and
                  at December 31, 2007 we had 76
                  employees.
 
 ·
              For
                  the year ended December 31, 2007, consulting expense was $39,100,
                  a
                  decrease of $34,650 from the expense recognized for the year ended
                  December 31, 2006 of $73,750. The decrease is primarily due to
                  approximately $63,000 that was paid to a consultant who then became
                  our
                  president in 2006, partially offset by expenses incurred related
                  to the
                  hiring of key personnel during year ended December 31, 2007 of
                  $24,000 and
                  payments to a consulting firm for website optimization of
                  $10,000.
 
 ·
              For
                  the year ended December 31, 2007, legal and accounting expenses
                  were
                  $280,496, an increase of $91,511 as compared to $188,985 for the
                  year
                  ended December 31, 2006. The overall increase is attributable to
                  the
                  reverse merger that we effectuated in February 2007 and the overall
                  increased legal and accounting expenses associated with being a
                  public
                  company.
 
 ·
              For
                  the year ended December 31, 2007, marketing and advertising expenses
                  were
                  $944,715, an increase of $529,125 as compared to $415,590 for the
                  year
                  ended December 31, 2006. This increase is attributable to an increase
                  in
                  our marketing efforts as we roll out product and continue implementing
                  our
                  business plan. The primary marketing expenditures continue to be
                  in web
                  advertising and search engine optimization. We also spent approximately
                  $111,000 on television and radio advertising and $19,000 to redesign
                  our
                  consumer packaging for the year ended December 31, 2007. We expect
                  our
                  marketing and advertising expenses to increase as our revenues
                  increase
                  and expect to spend increased funds on adverting and promotion
                  of our
                  products and brand name as well as sales training.
 
 ·
              For
                  the year ended December 31, 2007, other selling, general and
                  administrative expenses were $1,258,113 as compared to $635,276
                  for the
                  year ended December 31, 2006. The increase was attributable to
                  the
                  increase in operations as we implement our business plan and is
                  summarized
                  below:
 
 **2007**
              
              **2006**Contract
                  labor
              
              $
              260,340
              
              $
              45,466Rent
              
              
              193,593
              
              
              57,644Credit
                  Card and bank fees
              
              
              127,195
              
              
              42,101Travel
                  and entertainment
              
              
              102,311
              
              
              64,359Depreciation
                  and amortization
              
              
              86,160
              
              
              41,503Investor
                  relations
              
              
              71,172
              
              
              —Insurance
              
              
              74,987
              
              
              24,847Telephone
                  and utilities
              
              
              58,861
              
              
              33,707Office
                  supplies
              
              
              51,960
              
              
              36,968Printing
                  expenses
              
              
              40,166
              
              
              39,016Other
              
              
              191,368
              
              
              249,645Total
              
              $
              1,258,113
              
              $
              635,276
  21
  ***(Loss)
        income from operations***
 
 We
        reported loss from operations of ($1,237,550) for the year ended December
        31,
        2007 as compared to a net loss from operations of income from operations
        of
        ($224,618) for the year ended December 31, 2006, an increased loss of
        $1,012,932. Net of the non-cash charges related to the issuance of stock
        to
        employees and key consultants of $845,000 and the settlement expense of $82,729,
        we had an operating loss of ($309,821). The loss from operations for the
        year
        ended December 31, 2007 as compared to loss from operations for the year
        ended
        December 31, 2006 is primarily attributable to $845,000 in expenses related
        to
        the issuance of restricted stock to employees and key consultants of the
        Company, $82,729 in settlement expense, increased salaries and related expenses
        of $723,393, increased legal and accounting fees of $91,511 primarily due
        to the
        recapitalization transaction, increased advertising and marketing expenses
        of
        $574,672, increased rent expense of $135,949 due primarily to the addition
        of
        corporate mall carts, increased credit card and bank fees of $85,094, increased
        travel and entertainment expense of $37,952, increased depreciation and
        amortization expense of $44,657, investor relations related expenses of $71,172,
        increased insurance expenses of $50,140, increased telephone and utilities
        expenses of $25,154, increased office supplies expense of $14,992 and increased
        printing expenses of $1,150, partially offset by decreased other expenses
        of
        $58,277.
 
 ***Other
        income***
 
 For
        the
        year ended December 31, 2007, total other income was $29,219 compared to
        other
        income of $3,947 for the year ended December 31, 2006. The increase is primarily
        attributed to interest income of $60,761 for the year ended December 31,
        2007
        compared to interest income of $6,760 for the year ended December 31, 2006
        due
        to increased cash balances in our depository accounts primarily attributable
        to
        the offerings completed during 2007. These increases were partially offset
        by
        interest expense of ($31,452) for the year ended December 31, 2007 compared
        to
        interest expense of ($2,813) for the year ended December 31, 2006 due to
        interest expense related to short-term borrowings during the first and second
        quarters of 2007. We recognized an income tax benefit for the year ended
        December 31, 2007 of $448,820.
 
 ***Net
        (loss) income***
 
 As
        a
        result of these factors, we reported a net loss of (759,511) or ($0.05) per
        share for the year ended December 31, 2007 as compared to a net loss of
        ($141,253) or ($0.01) per share for the year ended December 31, 2006.
 
 **YEAR
        ENDED DECEMBER 31, 2006 AS COMPARED TO THE PERIOD FROM** **MARCH
        24, 2005 (inception) TO DECEMBER 31, 2005**
 
 **Net
        sales**
 
 Net
        sales
        for the year ended December 31, 2006 were $2,777,036 as compared to net sales
        of
        $728,786 for the period from March 24, 2005 (inception) to December 31, 2005,
        an
        increase of $2,048,243 or 281%.
 
 The
        significant increase in product sales is mainly attributed to continued strong
        sales of our *invisible* SHIELD
        product with approximately 63% of our product being sold through our website
        to
        retail customers.
 
 **Cost
        of sales**
 
 Cost
        of
        sales includes raw materials, packing materials and shipping costs. For the
        year
        ended December 31, 2006, cost of sales amounted to $727,434 or approximately
        26%
        of net sales as compared to cost of sales of $119,410 or 16% of net sales
        for
        the period from March 24, 2005 (inception) to December 31, 2005. The increase
        in
        cost of sales as a percentage of net revenues for the year ended December
        31,
        2006 as compared to the period ended December 31, 2005 is attributable to
        an
        overall increase in shipping costs and packaging costs.
  22
  **Gross
        profit**
 
 Gross
        profit for the year ended December 31, 2006 was $2,049,602 or approximately
        74%
        of net sales as compared to $609,376 or approximately 84% of net sales for
        the
        period from March 24, 2005 (inception) to December 31, 2005. The decrease
        in
        gross profit percentage was attributable to an increase in shipping and
        packaging costs and changes in sales mix from website sales to retail and
        wholesale sales. There are no assurances that we will continue to recognize
        similar gross profit margin in the future.
 
 **Operating
        expenses**
 
 Total
        operating expenses for the year ended December 31, 2006 were $2,274,220,
        an
        increase of $1,907,125 from total operating expenses for the period from
        March
        24, 2005 (inception) to December 31, 2005 of $367,095. The increases are
        primarily attributable to the following:
 
 ·
              For
                  the year ended December 31, 2006, salaries and related taxes increased
                  by
                  $694,831 to $858,869 for the year ended December 31, 2006 from
                  $164,038
                  for the period from March 24, 2005 (inception) to December 31,
                  2005 due to
                  the hiring of staff to implement our business
                  plan.
 ·
              For
                  the year ended December 31, 2006, consulting expense increased
                  to $73,750
                  as compared to $0 from March 24, 2005 (inception) to December 31,
                  2005
                  primarily due to approximately $63,000 paid to a consultant who
                  then
                  became our president.
 ·
              For
                  the year ended December 31, 2006, we incurred settlement expenses
                  due to
                  the termination of a consulting contract of $62,500 and the termination
                  of
                  an exclusive distribution agreement of $39,250. We did not incur
                  any
                  settlement expenses for the period ended December 31,
                  2005.
 ·
              For
                  the year ended December 31, 2006, advertising and marketing expenses
                  were
                  $415,590 as compared to $22,626 for the period from March 24, 2005
                  (inception) to December 31, 2005, an increase of $392,964. This
                  increase
                  is attributable to an increase in our marketing efforts as we roll
                  out
                  product and implement our business plan. We expect our marketing
                  and
                  advertising expenses to increase as our revenues increase and expect
                  to
                  spend increased funds on adverting and promotion of our products
                  as well
                  as sales training. During fiscal 2007, we intend to significantly
                  expand
                  our marketing efforts related to our
                  products.
 
 ·
              For
                  the year ended December 31, 2006, other selling, general and
                  administrative expenses amounts to $635,276 as compared to $157,931
                  for
                  the period from March 24, 2005 (inception) to December 31, 2005.
                  The
                  increase was attributable to the increase in operations as we implement
                  our business plan and is summarized
                  below:
 
 **2006**
              
              **2005**Contract
                  labor
              
              
              45,466
              
              
              26,628Insurance
              
              
              24,847
              
              
              3,454Depreciation
              
              
              41,503
              
              
              2,440Rent
              
              
              57,664
              
              
              5,918Travel
                  and entertainment
              
              
              64,359
              
              
              4,380Telephone
                  and utilities
              
              
              33,707
              
              
              5,292Printing
                  expenses
              
              
              39,016
              
              
              12,653Office
                  supplies
              
              
              36,968
              
              
              15,479Credit
                  card and bank fees
              
              
              42,101
              
              
              11,928Other
              
              
              249,645
              
              
              50,191Total
              
              $
              635,276
              
              $
              157,931
  23
  **(Loss)
        income from operations**
 
 We
        reported loss from operations of ($224,618) for the year ended December 31,
        2006
        as compared to income from operations of $242,281 for the period from March
        24,
        2005 (inception) to December 31, 2005, a decrease of $466,899. The decrease
        in
        income from operations in 2005 to a loss from operations in 2006 is attributable
        to overall cost increases associated with executing our business plan, including
        certain settlement costs, and professional fees incurred as a result of the
        recapitalization.
 
 **Other
        income (expense)**
 
 For
        the
        year ended December 31, 2006, total other income was $3,947 compared to other
        expense of $900 for the period from March 24, 2005 (inception) to December
        31,
        2005. The increase is primarily attributed to interest and other income $6,760
        partially offset by interest expense of $2,813 compared to interest expense
        of
        $900.
 
 **Income
        taxes**
 
 During
        the year ended December 31, 2006, we had no current income tax expense and
        recorded a deferred income tax benefit of $79,418. We computed and filed
        our
        Federal income tax return on a cash basis for 2005 and will file our federal
        income tax return on the accrual basis in 2006 and thereafter.
 
 **Net
        (loss) income**
 
 As
        a
        result of these factors, we reported a net loss of ($141,253) or ($0.01)
        per
        share for the year ended December 31, 2006 as compared to net income of $158,376
        or $0.02 per share for the period from March 24, 2005 (inception) to December
        31, 2005.
 
 **Liquidity
        and Capital Resources**
 
 Liquidity
        is the ability of a company to generate funds to support its current and
        future
        operations, satisfy its liabilities and otherwise operate on an ongoing basis.
 
 At
        December 31, 2007, we had a cash balance of $2,129,215.
 
 Our
        working capital position increased by $2,594,302 to working capital of
        $2,514,829 at December 31, 2007 from a working capital deficit of ($79,473)
        at
        December 31, 2006. This increase in working capital is primarily attributable
        to
        the overall increased current assets including cash of $1,660,833, prepaid
        expenses of $90,383, increased prepaid advertising of $204,976, increased
        inventories of $344,522, increased accounts receivable of $281,297, decreased
        wages payable of $26,191 and decreased convertible notes payable of $350,000,
        decreased deferred sales return liability of $8,139, partially offset by
        increased accounts payable of $258,884, increased notes payable of $42,090
        and
        increased deferred revenues of $14,110.
 
 Net
        cash
        used in operating activities for the year ended December 31, 2007 was ($842,490)
        as compared to cash provided by operating activities of $189,281 for the
        year
        ended December 31, 2006. For the year ended December 31, 2007, net cash used
        in
        operating activities was attributable primarily to our net loss of ($759,511),
        deferred income tax benefit of $449,566, increased inventories of $344,522,
        increased accounts receivable of $281,297, increased prepaid advertising
        of
        $204,976, increased prepaid expenses and other current assets of $50,002,
        decreased accrued wages and wage related expenses of $26,191, increased other
        assets of $18,428, decreased sales returns liability of $8,139 and currency
        exchange gain of $3,866, partially offset by non-cash expense related to
        issuance of stock to employees of $845,000, increased accounts payable of
        $210,196, non-cash settlement expense of $82,729, depreciation and amortization
        of $86,160, decreased prepaid income taxes of $44,361 and decreased accrued
        liabilities of $17,733.
 
 Net
        cash
        used in investing activities for the year ended December 31, 2007 was ($195,227)
        attributable to the purchase of property and equipment of $146,463 and payments
        for intangible assets of $48,764.
  24
  Net
        cash
        provided by financing activities was $2,698,550 for the year ended December
        31,
        2007. Net cash provided by financing activities for the year ended December
        31,
        2007 was attributable to the net proceeds from the sale of common stock of
        $2,798,550 and proceeds from notes payable of $200,000, partially offset
        by
        repayments of convertible debt - officer of $50,000 and repayment of notes
        payable of $250,000.
 
 We
        reported a net increase in cash for the year ended December 31, 2007 of
        $1,660,833.
 
 On
        July
        10, 2007, we completed a private placement offering wherein we raised $1,975,000
        less fees of $177,750. We issued 1,975,000 shares of our common stock and
        987,500 warrants to purchase our common stock at an exercise price of $1.30
        per
        share. These warrants are exercisable at the warrant holder’s option any time up
        through July 10, 2012. On August 7, 2007, we completed a private placement
        offering wherein we raised $850,000 less fees of $76,500. We issued 850,000
        shares of our common stock and 425,000 warrants to purchase our common stock
        at
        an exercise price of $1.30 per share. These warrants are exercisable at the
        warrant holder’s option at any time up through August 7, 2012.
 
 For
        the
        year ended December 31, 2007 and 2006, we generated revenues of $5,135,715
        and
        $2,777,036, respectively and incurred a net to loss of ($759,511) and
        ($141,253), respectively, had negative cash flow from operating activities
        of
        ($842,490) for the year ended December 31, 2007 and positive cash flow from
        operating activities of $189,281 for the year ended December 31, 2006. As
        of
        December 31, 2007, we had stockholders’ equity of $3,364,465, an accumulated
        deficit of ($742,388), working capital of $2,514,829, accounts payable of
        $505,575, deferred licensing revenue of $100,911, accrued wages and wage
        related
        expenses of $95,537, notes payable related to equipment financing of $42,090,
        accrued liabilities of $35,814 and sales returns liability of $23,861.
        Management believes that existing cash, along with cash generated from the
        collection of accounts receivable and the sale of products will be sufficient
        to
        meet the Company’s cash requirements during the next twelve months.
 
 **Off
        Balance Sheet Arrangements**
 
 As
        of
        December 31, 2007, there were no off balance sheet arrangements.
  **ITEM
                7.**
              **FINANCIAL
                  STATEMENTS**
 
 The
        full
        text of our audited consolidated financial statements for the fiscal years
        ended
        December 31, 2007 and 2006 begins on page F-1 of this report.
 
 **ITEM
                8.**
              **CHANGES
                  IN AND DISAGREEEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE**
 
 On
        March
        16, 2007, LBB & Associates Ltd., LLP, was dismissed as our auditors. There
        were no disagreements with LBB & Associates. On March 19, 2007, we retained
        Salberg & Company, P.A., as our auditors. We reported this change in
        auditors on Form 8-K filed March 21, 2007.
 
 On
        April
        17, 2007, Salberg & Company, P.A. was dismissed as our auditors. There were
        no disagreements with Salberg & Company. On April 17, 207, we retained
        Hansen, Barnett & Maxwell, P.C. as our auditors. We reported this change in
        auditors on Form 8-K filed April 20, 2007.
  25
  **ITEM
                8A.**
              **CONTROLS
                  AND PROCEDURES**
 
 **Evaluation
        of Disclosure Controls and Procedures**
  Under
        the
        supervision of and with the participation of our management, including our
        Chief
        Executive Officer and Chief Financial Officer, at December 31, 2007, the
        Company
        carried out an evaluation of the effectiveness of the design and operation
        of
        our disclosure controls and procedures, as defined in Rules 13a-15(e) and
        15d-15(e) of the Securities and Exchange Act of 1934, as amended (the “Exchange
        Act”). These disclosure controls and procedures are designed to provide
        reasonable assurance that the information required to be disclosed by the
        Company in its periodic reports with the SEC is recorded, processed, summarized
        and reported within the time periods specified by the SEC’s rules and forms, and
        that the information is accumulated and communicated to the Company’s
        management, including our Chief Executive Officer and Chief Financial Officer,
        as appropriate to allow timely decisions regarding required disclosure. The
        design of any disclosure controls and procedures is based in part on certain
        assumptions about the likelihood of future events, and there can be no assurance
        that any design will succeed in achieving its stated goals under all potential
        future conditions.
  During
        the course of our evaluation, our Chief Executive Officer and Chief Financial
        Officer have concluded that our disclosure controls and procedures were
        effective at the reasonable assurance level as of December 31, 2007.
 
 **Management’s
        Report on Internal Control Over Financial Reporting**
 
 Our
        management is responsible for establishing and maintaining adequate internal
        control over financial reporting, as defined in Exchange Act Rule 13a-15(f).
        Our
        internal control over financial reporting is designed to provide reasonable
        assurance regarding the reliability of financial reporting and the preparation
        of consolidated financial statements for external purposes in accordance
        with
        generally accepted accounting principles.
 
 Under
        the
        supervision and with the participation of our management, including our Chief
        Executive Officer and Chief Financial Officer, we conducted an evaluation
        of the
        effectiveness of our internal control over financial reporting based on the
        framework established by the Committee of Sponsoring Organizations of the
        Treadway Commission (COSO) as set forth in Internal Control - Integrated
        Framework. Based on our evaluation under the framework in Internal Control
        -
        Integrated Framework, our management concluded that our internal control
        over
        financial reporting was effective as of December 31, 2007.
 
 This
        annual report does not include an audit or attestation report of our registered
        public accounting firm regarding our internal control over financial reporting.
        Our management’s report was not subject to audit or attestation by our
        registered public accounting firm pursuant to temporary rules of the SEC
        that
        permit us to provide only management’s report in this annual
        report.
 
 Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements. It should be noted that any system of controls,
        however well designed and operated, can provide only reasonable, and not
        absolute, assurance that the objectives of the system will be met. In addition,
        the design of any control system is based in part upon certain assumptions
        about
        the likelihood of future events. Also, projections of any evaluation of
        effectiveness to future periods are subject to the risk that controls may
        become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
 
 **Changes
        in Internal Control Over Financial Reporting**
 
 No
        change
        in the Company’s internal control over financial reporting occurred during the
        quarter ended December 31, 2007, that materially affected, or is reasonably
        likely to materially affect, the Company’s internal control over financial
        reporting.
 
 **ITEM
                8B.**
              **OTHER
                  ITEMS**
 
 None.
 
 **ITEM
                9.**
              **DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS: COMPLIANCE WITH
                  SECTION
                  16(a) OF THE EXCHANGE ACT**
 
 The
        following table sets forth information regarding the members of our board
        of
        directors and our executive officers and other significant employees. All
        of our
        officers and directors were appointed on the effective date of the Merger.
        All
        of our directors hold office until the next annual meeting of stockholders
        and
        their successors are duly elected and qualify. Executive officers serve at
        the
        request of the board of directors.
  26
  **Name**
              
              **Age**
              
              **Position**Robert
                  G. Pedersen II
              
              41
              
              Chief
                  Executive Officer, DirectorBrandon
                  T. O’Brien
              
              37
              
              Chief
                  Financial Officer
  Set
        forth
        below is a brief description of the background and business experience of
        our
        current executive officers and directors.
  ***Robert
        G. Pedersen II -*** Mr.
        Pedersen provides the overall vision and leadership of ZAGG Incorporated.
        Mr.
        Pedersen has more than 20 years' experience in executive management, sales
        and
        marketing, communications, as well as owning and managing several start-up
        businesses and enterprises. Since 1998, Mr. Pedersen was a co-owner and
        executive manager for Del Sol, LC, a Utah-based international specialty retailer
        of apparel and accessories, where he implemented the in-line retail store
        model.
        Del Sol now has more than 80 stores world-wide. Additionally, Mr. Pedersen
        created and was the director of DelSol.com, Del Sol LC’s Internet presence. In
        2002 Mr. Pedersen founded PayTeck, Inc., a Utah provider of Internet-based
        payment processing services, which was later sold to Zion's Bank, a public
        company, in 2005. Mr. Pedersen joined ZAGG in October 2005 as a consultant
        and
        then in January 2006 joined the company as a full partner in a full time
        capacity and has served as its Chief Executive Officer and Chairman since
        that
        time. Mr. Pedersen is also the Company’s largest shareholder. Mr. Pedersen
        earned a degree in business administration (BSBA) from the University of
        Phoenix
        and a Masters Degree (MBA) from Brigham Young University in Business
        Administration with an emphasis in marketing, finance and organizational
        communications.
 
 ***Brandon
        T. O’Brien -*** Mr.
        O’Brien became our Chief Financial Officer on February 12, 2007. Prior to
        assuming his position as the Chief Financial Officer for the Company, Mr.
        O’Brien, served as the Vice President of Finance at Fonix Corporation, a speech
        recognition software company, from January 2003 to January 2007, and as an
        independent financial consultant from September 2001 to January 2003. Mr.
        O’Brien has extensive experience in mergers and acquisitions, accounting for
        financial transactions with foreign subsidiaries and the application of
        financial accounting standards and principles. Mr. O’Brien has broad experience
        with both small micro-cap public companies and with large multinational public
        companies. Mr. O’Brien is a licensed Certified Public Accountant and has
        attained the Certified Management Accountant and Certified Financial Manager
        designations. Mr. O’Brien earned a Bachelor of Science degree in Accounting from
        Utah State University in 1995 and a Masters of Business Administration from
        the
        University of Utah in 1996.
 
 **Term
        of Office**
 
 Our
        Directors are appointed for a one-year term to hold office until the next
        annual
        general meeting of our shareholders or until removed from office in accordance
        with our bylaws. Our officers are appointed by our board of directors and
        hold
        office until removed by the board.
 
 **Significant
        Employees**
 
 We
        have
        no significant employees other than our officers and directors.
 
 **Family
        Relationships**
 
 There
        are
        no family relationships among our directors, executive officers or persons
        nominated or chosen by us to become directors or executive
        officers.
 
 **Involvement
        in Certain Legal Proceedings**
 
 To
        the
        best of our knowledge, during the past five years, none of the following
        occurred with respect to a present or former director, executive officer,
        or
        employee of the Company: (1) any bankruptcy petition filed by or against
        any
        business of which such person was a general partner or executive officer
        either
        at the time of the bankruptcy or within two years prior to that time; (2)
        any
        conviction in a criminal proceeding or being subject to a pending criminal
        proceeding (excluding traffic violations and other minor offenses); (3) being
        subject to any order, judgment or decree, not subsequently reversed, suspended
        or vacated, of any court of competent jurisdiction, permanently or temporarily
        enjoining, barring, suspending or otherwise limiting his or her involvement
        in
        any type of business, securities or banking activities; and (4) being found
        by a
        court of competent jurisdiction (in a civil action), the SEC or the Commodities
        Futures Trading Commission to have violated a federal or state securities
        or
        commodities law, and the judgment has not been reversed, suspended or
        vacated.
  27
  **Compliance
        with Section 16(a) of The Exchange Act**
 
 Section
        16(a) of the Exchange Act requires our directors and executive officers and
        persons who beneficially own more than ten percent of a registered class
        of the
        Company’s equity securities to file with the SEC initial reports of ownership
        and reports of changes in ownership of common stock and other equity securities
        of the Company. Officers, directors and greater than ten percent beneficial
        shareholders are required by SEC regulations to furnish us with copies of
        all
        Section 16(a) forms they file. To the best of our knowledge based solely
        on a
        review of Forms 3, 4, and 5 (and any amendments thereof) received by us during
        or with respect to the year ended December 31, 2007, the following persons
        have
        failed to file, on a timely basis, the identified reports required by Section
        16(a) of the Exchange Act during fiscal year ended December 31, 2007:
  **Name
                  and principal position**
              
              **Number of**
                **late reports**
              
              **Transactions not**
                **timely reported**
              
              **Known failures to file a**
                **required form**Robert
                  G. Pedersen II
                Chief
                  Executive Officer, Chairman
              
              
              —
              
              
              5
              
              
              —Brandon
                  T. O’Brien
                Chief
                  Financial Officer
              
              
              —
              
              
              3
              
              
              —Johnny
                  Lee
                Former
                  Chief Executive Officer
              
              
              1
              
              
              —
              
              
              —David
                  Ho
                Former
                  Chief Financial Officer
              
              
              1
              
              
              —
              
              
              —SunCreek,
                  LLC
              
              
              1
              
              
              —
              
              
              —
  **Code
        of Ethics and Corporate Governance**
 
 We
        adopted a Code of Business Conduct and Ethics (the “Code”) on March 16, 2007
        that applies to all of our directors and employees, including our chief
        executive officer and chief financial officer. The purpose of the Code is
        to,
        among other things, focus our directors, officers and employees on areas
        of
        ethical risk, provide guidance to help them recognize and deal with ethical
        issues, provide mechanisms to report unethical or unlawful conduct and to
        help
        enhance and formalize our culture of integrity, respect and accountability.
        A
        printed copy of the Code may also be obtained free of charge by writing to
        ZAGG
        Incorporated, Attention: CFO, 3855 S 500 W, Suite J, Salt Lake City, UT 84115.
  **Audit
        Committee**
  We
        do not
        currently have a standing audit committee. The Company’s Chief Executive Officer
        is actively researching candidates for membership on the Board of Directors
        who
        would be “independent” and who, accordingly, could serve on an audit committee.
  **Audit
        Committee Financial Expert**
  We
        do not
        currently have an “audit committee financial expert” as defined under Item
        401(e) of Regulation S-B. As discussed above, our Board of Directors plans
        to
        form an Audit Committee. In addition, the Board is actively seeking to appoint
        an individual to the Board of Directors and the Audit Committee who would
        be
        deemed an audit committee financial expert.
  28
  **ITEM
                10.**
              **EXECUTIVE
                  COMPENSATION**
  **Summary
        of Executive Compensation**
  The
        following table sets forth information regarding the compensation earned
        by each
        of the named executives for the fiscal year ended December 31,
        2007.
  **Summary
        Compensation Table**
 
 **Name
                  and Principal Position**
              
              **Year**
              
              **Salary**
              
              **Bonus**
              
              **Stock**
                **Awards**
              
              **Option**
                **Awards**
              
              **All Other**
                **Compensation**
              
              **Total**Robert
                  G. Pedersen II President,
                Chief
                  Executive Officer and Director
              
              
              2007
              
              $
              120,000
              
              $
              12,000
              
              $
              95,000(1)
              
              
              —
              
              
              —
              
              $
              227,0002006
              
              $
              40,000
              
              $
              10,000
              
              
              —
              
              
              —
              
              
              —
              
              $
              40,000Brandon
                  T. O’Brien
                Chief
                  Financial Officer
              
              
              2007
              
              $
              101,846
              
              $
              12,000
              
              $
              120,000(2)
              
              
              —
              
              
              —
              
              $
              233,846(3)
  
 (1)
              Amount
                  expensed for the year ended December 31, 2007 is based upon the
                  aggregate
                  grant date fair value calculated in accordance with Statement of
                  Financial
                  Accounting Standards (“SFAS”) No. 123 R, Share Based Payments. This
                  represents the expense associated with the issuance of 95,000 shares
                  of
                  restricted stock.
  (2)
              Amount
                  expensed for the year ended December 31, 2007 is based upon the
                  aggregate
                  grant date fair value calculated in accordance with the SSFAS No.
                  123R,
                  Share Based Payments. This represents the expense associated with
                  the
                  issuance of 135,000 shares of restricted
                  stock.
  (3)
              Mr.
                  O’Brien was appointed our Chief Financial Officer on February 12,
                  2007.
 
 **Outstanding
        Equity Awards**
 
 The
        following table sets forth information concerning unexercised options, stock
        that has not vested and equity incentive plan awards for each named executive
        officer as of December 31, 2007.
 
 **Outstanding
        Equity Awards at Fiscal Year-End**
 **OPTION
                    AWARDS**
                
                **STOCK
                    AWARDS****Name of Executive**
                
                **Number of**
                  **Exercisable**
                  **Securities**
                  **Underlying**
                  **Unexercised**
                  **Options**
                
                **Number of**
                  **Unexercisable**
                  **Securities**
                  **Underlying**
                  **Unexercised**
                  **Options**
                
                **Option**
                  **Exercise**
                  **Price**
                
                **Option**
                  **Expiration**
                  **Date**
                
                **Number of**
                  **shares or**
                  **Units of**
                  **Stock that**
                  **Have Not**
                  **Vested**
                
                **Market**
                  **Value of**
                  **Shares or**
                  **Units of**
                  **Stock That**
                  **Have Not**
                  **Vested**
                
                **Equity**
                  **Incentive**
                  **Plan**
                  **Awards:**
                  **Number of**
                  **unearned**
                  **Shares,**
                  **Units or**
                  **Other**
                  **Rights**
                  **That Have**
                  **Not Vested**
                
                **Equity**
                  **Incentive Plan**
                  **Awards:**
                  **Market or**
                  **Payout Value**
                  **of Unearned**
                  **Shares, Units**
                  **or Other**
                  **Rights That**
                  **Have Not**
                  **Vested**Robert
                    G. Pedersen II
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —Brandon
                    T. O’Brien
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
  On
        November 13, 2007, the Board of Directors adopted the ZAGG Incorporated 2007
        Stock Incentive Plan wherein we may issue an aggregate of 2,000,000 options
        to
        purchase shares of our common stock, or shares of our common stock. There
        were
        no shares issued or options issued under the plan as of December 31,
        2007.
  29
  **ITEM
                11.**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS**
  The
        following table sets forth, as of March 21, 2008, certain information regarding
        the ownership of our capital stock by the following persons on such date:
        each
        of the directors and executive officers, each person who is known to be a
        beneficial owner of more than 5% of any class of our voting stock, and all
        of
        our officers and directors as a group. Unless otherwise indicated below,
        to our
        knowledge, all persons listed below had sole voting and investing power with
        respect to their shares of capital stock, except to the extent authority
        was
        shared by spouses under applicable community property laws.
 
 Beneficial
        ownership is determined in accordance with the rules of the Securities and
        Exchange Commission and generally includes voting or investment power with
        respect to securities. Shares of our common stock subject to options, warrants
        or convertible securities exercisable or convertible within 60 days of March
        21,
        2008 were deemed outstanding for computing the percentage of the person or
        entity holding such options, warrants or convertible securities but are not
        deemed outstanding for computing the percentage of any other person, and
        was
        based upon the number of shares of the Common Stock issued and outstanding,
        as
        of March 21, 2008 which was 18,873,995 shares.
  **Title of**
                **Class**
              
              **Name and Address**
                **Of**
                **Beneficial Owners (1)**
              
              **Amount and Nature**
                **Of Beneficial Ownership**
              
              **Percent**
                **Of**
                **Class (2)**Common
                  Stock
              
              Robert
                  G. Pedersen II
                President
                  and Chief Executive Officer (3)
              
              7,382,557
              
              37.62
              %Common
                  Stock
              
              Brandon
                  T. O’Brien
                Chief
                  Financial Officer
              
              331,780
              
              1.75
              %Common
                  Stock
              
              Andrew
                  C. Park
                201
                  Post Street, 11th Floor
                San
                  Francisco, CA 94108
              
              1,058,235
              
              5.61
              %Common
                  Stock
              
              SunCreek,
                  LLC
                2873
                  Tolcate Lane
                Holladay,
                  Utah 84121
              
              5,000,000
              
              26.49
              %All
                  officers, directors and director nominees as a group (2)
              
              7,714,337
              
              39.16
              %
 
 (1)
              Unless
                  otherwise noted, the address for each of the named beneficial owners
                  is:
                  3855 South 500 West, Suite J, Salt Lake City, Utah, 84115. Unless
                  otherwise indicated, beneficial ownership is determined in accordance
                  with
                  Rule 13d-3 promulgated under the Exchange Act and generally includes
                  voting and/or investment power with respect to securities. Shares
                  of
                  common stock subject to options or warrants that are currently
                  exercisable
                  or exercisable within sixty days of March 21, 2008, are deemed
                  to be
                  beneficially owned by the person holding such options or warrants
                  for the
                  purpose of computing the percentage of ownership set forth in the
                  above
                  table, unless otherwise indicated.
 
 (2)
              The
                  calculations of percentage of beneficial ownership are based on
                  18,873,995
                  shares of common stock outstanding as of March 18,
                  2008.
 
 (3)
              Includes
                  1,595,000 shares of Common Stock held directly by Mr. Pedersen,
                  5,000
                  shares of Common Stock held by Mr. Pedersen’s spouse and 5,000,000 shares
                  of Common Stock held by SunCreek, LLC, an entity wholly owned by
                  Mr.
                  Pedersen. Mr. Pedersen exercises sole voting and investment control
                  over
                  the shares held by SunCreek, LLC. Also includes 750,000 warrants
                  to
                  purchase shares of common stock at $1.30 per
                  share.
  30
  **ITEM
                12.**
              **CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS**
  In
        November 2006, the Company entered into a convertible note with an affiliate
        of
        the Company’s Chief Executive Officer in the original principal amount of
        $100,000. The note was convertible at the holder's option any time up to
        maturity at a conversion price equal to $0.35 per common share. The note
        was due
        on May 15, 2007, bore interest at 20% per year and was unsecured. In March
        2007,
        the Company repaid $50,000 of the principal balance of the note. In addition,
        the remaining $50,000 of principal plus accrued interest of $1,749 was converted
        into 147,853 shares of the Company’s common stock.
 
 The
        note
        was a conventional convertible instrument and the Company evaluated the
        conversion feature and determined that there was not a separate derivative
        instrument associated with the note and no derivative liability was recognized.
        The Company determined that there was no beneficial conversion feature
        associated with the note as the conversion price was equal to the deemed
        market
        value on the date of grant.
 
 **ITEM
                13.**
              **EXHIBITS**
 
 **Exhibit**
                **Number**
              
              **Description**2.1*
              
              Agreement
                  and Plan or Merger Dated February 8, 20072.2*
              
              Sale,
                  Assignment, Assumption and Indemnification Agreement dated February
                  8,
                  20073.1*
              
              Articles
                  of Incorporation of Registrant as filed with the State of
                  Nevada3.2*
              
              Bylaws
                  of Registrant10.1*
              
              Management
                  Services Agreement dated May 1, 200510.2*
              
              Extension
                  of Management Services Agreement dated May 1, 200510.3*
              
              Suspension
                  of Management Services Agreement Dated May 1, 200510.4*
              
              Academic
                  Regalia Purchase and Rental Agreement Dated June 15,
                  200510.5*
              
              Form
                  of Reseller Agreement10.6*
              
              Form
                  of License Agreement10.7*
              
              Form
                  of Distributorship Agreement10.8*
              
              Distribution
                  Agreement with CareFit USA dated October 3, 200610.9*
              
              Distribution
                  Agreement with ENVIOUS dated January 24, 200610.10*
              
              ZAGG
                  Incorporated 2007 Stock Incentive Plan14*
              
              Code
                  of Ethics16*
              
              Letter
                  on Change in Certifying Accountants21.1
              
              List
                  of subsidiaries23.1
              
              Consent
                  of Independent Registered Accounting Firm Salberg & Company,
                  P.A.31.1
              
              Section
                  302 Certification of Principal Executive Officer31.2
              
              Section
                  302 Certification of Principal Financial Officer32.1
              
              Section
                  906 Certification of Principal Executive Officer32.2
              
              Section
                  906 Certification of Principal Financial Officer99.1*
              
              Director’s
                  and Officer’s Letter of Resignation by Mr. Johnny Lee and Officer’s Letter
                  of Resignation and Conditional Director’s Resignation from Mr. David Ho to
                  the Board of Directors of Registrant
  
 ***** previously
        filed with the Securities and Exchange Commission
  31
  **ITEM
                14.**
              **PRINCIPAL
                  ACCOUNTANT FEES AND
                  SERVICES**
 
 Hansen,
        Barnett & Maxwell, P.C. (“HBM”) has served as our independent registered
        public accounting firm since April 17, 2007. For the fiscal year ended December
        31, 2007, HBM has billed us $46,500 for the annual audit and reviews of our
        quarterly financial statements and reviews of our various registration
        statements throughout 2007.
 
 Salberg
        & Co, P.A. served as our independent registered public accounting firm for
        the year ended December 31, 2006 and billed us $64,000 for the annual
        audit.
  **SIGNATURES**
  Pursuant
        to the requirements of section 13 or 15 (d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this Report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized.
  **ZAGG
                  INCORPORATED**Dated:March
                  27, 2008
              By:
              **/s/
                  ROBERT G. PEDERSEN II**Robert
                  G. Pedersen II
                President,
                  CEO and Chairman
                (Principal
                  Executive Officer)
 Dated:March
                  27, 2008
              By:
              **/s/
                  BRANDON T. O’BRIEN**Brandon
                    T. O’Brien
                Chief
                    Financial Officer
                (Principal
                    Accounting and Financial
                    Officer)
  32





**ZAGG
      INCORPORATED AND SUBSIDIARY**


**INDEX
      TO FINANCIAL STATEMENTS**





**CONTENTS**




**Page**Report
                of Independent Registered Public Accounting Firm Hansen Barnett &
                Maxwell, P.C.
            F-2Report
                of Independent Registered Public Accounting Firm Salberg & Company,
                P.A.
            F-3Financial
                Statements:Consolidated
                Balance Sheets at December 31, 2007 and 2006
            F-4Consolidated
                Statements of Operations for the years ended December 31, 2007 and
                2006
            F-5Consolidated
                Statements of changes in Stockholders’ Equity for the
                YearsEnded
                December 31, 2006 and 2007
            F-6Consolidated
                Statements of Cash Flows for the Years Ended December 31, 2007 and
                2006
            F-7Notes
                to Consolidated Financial Statements
            F-9




F-1


**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





To
      the
      Board of Directors and Shareholders of


ZAGG
      Incorporated





We
      have
      audited the accompanying consolidated balance sheet of ZAGG Incorporated and
      subsidiary as of December 31, 2007 and the related consolidated statements
      of
      operations, changes in stockholders' equity and cash flows for the year then
      ended. These consolidated financial statements are the responsibility of the
      Company's management. Our responsibility is to express an opinion on these
      financial statements based on our audit. The financial statements of ZAGG
      Incorporated as of December 31, 2006 were audited by other auditors whose report
      dated March 5, 2007, expressed an unqualified opinion on those
      statements.





We
      conducted our audit 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. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amount and disclosures
      in
      the financial statements, assessing the accounting principles used and
      significant estimates made by management, as well as evaluating the overall
      financial statement presentation. We believe that our audit provides a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of ZAGG Incorporated and subsidiary
      as
      of December 31, 2007, and the results of its operations and its cash flows
      for
      the year then ended, in conformity with accounting principles generally accepted
      in the United States of America.








/s/
      Hansen, Barnett & Maxwell, P.C.


HANSEN,
      BARNETT & MAXWELL, P.C.


Salt
      Lake
      City, UT


March
      26,
      2008


F-2




**REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
 
 To
        the
        Board of Directors and Shareholders’ of
 Zagg
        Incorporated (fka ShieldZone Corporation)
 
 We
        have
        audited the accompanying balance sheet of Zagg Incorporated (fka ShieldZone
        Corporation) as of December 31, 2006 and the related statements of operations,
        changes in stockholders' equity and cash flows for the year ended December
        31,
        2006. 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 audit.
 
 We
        conducted our audit 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 amount 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 audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Zagg Incorporated (fka ShieldZone
        Corporation) as of December 31, 2006, and the results of its operations and
        its
        cash flows for the year ended December 31, 2006, in conformity with accounting
        principles generally accepted in the United States of America.
  SALBERG
        & COMPANY, P.A.
 Boca
        Raton, Florida
 March
        5,
        2007





F-3





**ZAGG
      INCORPORATED AND SUBSIDIARY**


**CONSOLIDATED
      BALANCE SHEETS**





**December 31,****2007**
            
            **2006****ASSETS****Current
                assets**Cash
            
            $
            2,129,215
            
            $
            468,382Accounts
                receivable, net
            
            
            402,446
            
            
            121,149Inventories
            
            
            447,044
            
            
            102,522Prepaid
                income taxes
            
            
            -
            
            
            44,361Prepaid
                advertising
            
            
            204,976
            
            
            -Prepaid
                expenses and other current assets
            
            
            122,107
            
            
            31,724Deferred
                income tax assets
            
            
            12,829
            
            
            19,468Due
                from employees
            
            
            -
            
            
            3,714**Total
                current assets**
            
            
            3,318,617
            
            
            791,320**Property
                and equipment, net**
            
            
            328,077
            
            
            221,474**Deposits
                and other assets**
            
            
            30,547
            
            
            12,119**Intangible
                assets, net**
            
            
            46,894
            
            
            2,340**Total
                assets**
            
            $
            3,724,135
            
            $
            1,027,253**LIABILITIES
                AND STOCKHOLDERS' EQUITY****Current
                liabilities**Convertible
                note payable
            
            $
            -
            
            $
            250,000Convertible
                note payable - officer
            
            
            -
            
            
            100,000Notes
                payable
            
            
            42,090
            
            
            -Accounts
                payable
            
            
            505,575
            
            
            246,691Accrued
                liabilities
            
            
            35,814
            
            
            33,573Accrued
                wages and wage related expenses
            
            
            95,537
            
            
            121,728Deferred
                licensing revenue
            
            
            100,911
            
            
            86,801Sales
                returns liability
            
            
            23,861
            
            
            32,000**Total
                current liabilities**
            
            
            803,788
            
            
            870,793**Long-term
                liabilities**Non-current
                deferred income tax liability, net
            
            
            (444,118
            )
            
            12,087**Total
                liabilities**
            
            
            359,670
            
            
            882,880**Stockholders'
                equity**Common
                stock, $0.001 par value; 50,000,000 shares authorized;18,853,995
                and 10,175,000 shares issued and outstanding, respectively
            
            
            18,855
            
            
            10,175Warrants
                to purchase common stock
            
            
            750,476
            
            
            -Additional
                paid-in capital
            
            
            3,341,388
            
            
            117,075Cumulative
                translation adjustment
            
            
            (3,866
            )
            
            -Retained
                (deficit) earnings
            
            
            (742,388
            )
            
            17,123**Total
                stockholders' equity**
            
            
            3,364,465
            
            
            144,373**Total
                liabilities and stockholders' equity**
            
            $
            3,724,135
            
            $
            1,027,253




See
      accompanying notes to consolidated financial statements.


F-4





**ZAGG
      INCORPORATED AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**





**Years Ended December 31,****2007**
            
            **2006****Net
                sales**
            
            $
            5,135,715
            
            $
            2,777,036**Cost
                of sales**
            
            
            1,340,850
            
            
            727,434**Gross
                profit**
            
            
            3,794,865
            
            
            2,049,602**Operating
                expenses:**Salaries
                and related taxes
            
            
            1,582,262
            
            
            858,869Compensation
                expense related to stock issuance
            
            
            845,000
            
            
            -Consulting
            
            
            39,100
            
            
            73,750Settlement
                fees
            
            
            82,729
            
            
            101,750Advertising
                and marketing
            
            
            944,715
            
            
            415,590Legal
                and accounting
            
            
            280,496
            
            
            188,985Other
                selling, general and administrative
            
            
            1,258,113
            
            
            635,276**Total
                operating expenses**
            
            
            5,032,415
            
            
            2,274,220**Loss
                from operations**
            
            
            (1,237,550
            )
            
            (224,618
            )**Other
                income:**Interest
                expense
            
            
            (31,452
            )
            
            (2,813
            )Interest
                and other income
            
            
            60,671
            
            
            6,760**Total
                other income**
            
            
            29,219
            
            
            3,947**Loss
                before benefit for income taxes**
            
            
            (1,208,331
            )
            
            (220,671
            )**Income
                tax benefit**
            
            
            448,820
            
            
            79,418**Net
                loss**
            
            
            (759,511
            )
            
            (141,253
            )**Basic
                and diluted net loss per common share**
            
            $
            (0.05
            )
            $
            (0.01
            )**Weighted
                average number of shares outstanding - basic and
                diluted**
            
            
            16,139,177
            
            
            10,052,808




See
      accompanying notes to consolidated financial statements.


F-5


**ZAGG
        INCORPORATED AND SUBSIDIARY**
 **CONSOLIDATED
        STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY**
 **For
        the Years Ended December 31, 2007 and 2006**
 
 **Cumulative****Outstanding**
              
              
              
              **Foreign****Additional**
              
              **Warrants**
              
              **Retained**
              
              **Currency**
              
              **Total****Common Stock**
              
              **Paid-in**
              
              **to Purchase**
              
              **Earnings**
              
              **Translation**
              
              **Stockholders'****Shares**
              
              **Amount**
              
              **Capital**
              
              **Common Stock**
              
              **(Deficit)**
              
              **Adjustment**
              
              **Equity**Balances,
                  December 31, 2005
              
              
              10,000,000
              
              $
              10,000
              
              $
              (9,000
              )
              $
              -
              
              $
              158,376
              
              $
              -
              
              $
              159,376Capital
                  contribution
              
              
              -
              
              
              -
              
              
              25,000
              
              
              -
              
              
              -
              
              
              -
              
              
              25,000Issuance
                  of common stock for cash
              
              
              100,000
              
              
              100
              
              
              74,900
              
              
              -
              
              
              -
              
              
              -
              
              
              75,000Common
                  stock issued in settlement of contract
              
              
              75,000
              
              
              75
              
              
              26,175
              
              
              -
              
              
              -
              
              
              -
              
              
              26,250Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (141,253
              )
              
              -
              
              
              (141,253
              )Balances,
                  December 31, 2006
              
              
              10,175,000
              
              
              10,175
              
              
              117,075
              
              
              -
              
              
              17,123
              
              
              -
              
              
              144,373Issuance
                  of common stock and warrants for cash
              
              
              3,610,856
              
              
              3,611
              
              
              2,736,633
              
              
              -
              
              
              -
              
              
              -
              
              
              2,740,244Issuance
                  of common stock with reverse merger
              
              
              3,346,000
              
              
              3,346
              
              
              (3,346
              )
              
              -
              
              
              -
              
              
              -
              
              
              -Issuance
                  of common stock in conversion of debt
              
              
              862,139
              
              
              863
              
              
              299,138
              
              
              -
              
              
              -
              
              
              -
              
              
              300,001Issuance
                  of common stock to employees
              
              
              860,000
              
              
              860
              
              
              844,140
              
              
              -
              
              
              -
              
              
              -
              
              
              845,000Issuance
                  of warrants for settlement of dispute
              
              
              -
              
              
              -
              
              
              (652,252
              )
              
              734,981
              
              
              -
              
              
              -
              
              
              82,729Issuance
                  of warrants assoicated with short-term loan
              
              
              -
              
              
              -
              
              
              -
              
              
              15,495
              
              
              -
              
              
              -
              
              
              15,495Foreign
                  currency loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,866
              )
              
              (3,866
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (759,511
              )
              
              -
              
              
              (759,511
              )Balances,
                  December 31, 2007
              
              
              18,853,995
              
              $
              18,855
              
              $
              3,341,388
              
              $
              750,476
              
              $
              (742,388
              )
              $
              (3,866
              )
              $
              3,364,465
  See
        accompanying notes to consolidated financial statements.


F-6





**ZAGG
      INCORPORATED AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





**For the Years Ended December 31,****2007**
            
            **2006****Cash
                flows from operating activities**Net
                loss
            
            $
            (759,511
            )
            $
            (141,253
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Non-cash
                expense related to issuance of stock to employees
            
            
            845,000
            
            
            -Depreciation
                and amortization
            
            
            86,160
            
            
            41,503Loss
                on disposal of fixed assets
            
            
            -
            
            
            335Bad
                debt recovery
            
            
            -
            
            
            (2,307
            )Deferred
                income tax benefit
            
            
            (449,566
            )
            
            (79,418
            )Expense
                related to issuance of warrants
            
            
            82,729
            
            
            -Expense
                related to issuance of common stock for contract
                settlement
            
            
            -
            
            
            26,250Currency
                exchange gain
            
            
            (3,866
            )
            
            -Changes
                in assets and liabilitiesAccounts
                receivable
            
            
            (281,297
            )
            
            955Inventories
            
            
            (344,522
            )
            
            (92,050
            )Due
                from employees
            
            
            3,714
            
            
            (3,714
            )Prepaid
                income taxes
            
            
            44,361
            
            
            (44,361
            )Prepaid
                advertising
            
            
            (204,976
            )
            
            -Prepaid
                expenses and other current assets
            
            
            (50,002
            )
            
            39,074Due
                from related parties
            
            
            -
            
            
            6,364Other
                assets
            
            
            (18,428
            )
            
            (7,603
            )Accounts
                payable
            
            
            210,201
            
            
            203,326Income
                taxes payable
            
            
            -
            
            
            (3,468
            )Accrued
                liabilities
            
            
            17,733
            
            
            11,799Accrued
                wages and wage related expenses
            
            
            (26,191
            )
            
            121,728Deferred
                licensing revenues
            
            
            14,110
            
            
            86,801Sales
                return liability
            
            
            (8,139
            )
            
            25,320Net
                cash (used in) provided by operating activities
            
            
            (842,490
            )
            
            189,281**Cash
                flows from investing activities**Payments
                for intangible assets
            
            
            (48,764
            )
            
            -Proceeds
                from disposal of equipment
            
            
            -
            
            
            3,000Purchase
                of property and equipment
            
            
            (146,463
            )
            
            (189,543
            )Net
                cash used in investing activities
            
            
            (195,227
            )
            
            (186,543
            )**Cash
                flows from financing activities**Repayments
                on equipment financing payable
            
            
            -
            
            
            (10,017
            )Proceeds
                from issuance of common stock and warrants
            
            
            2,798,550
            
            
            75,000Payments
                on debt
            
            
            (250,000
            )
            
            -Proceeds
                from notes payable
            
            
            200,000
            
            
            -Payments
                on convertible note payable - officer
            
            
            (50,000
            )
            
            -Capital
                contribution
            
            
            -
            
            
            25,000Proceeds
                from convertible note payable - officer
            
            
            -
            
            
            250,000Proceeds
                from convertible note payable
            
            
            -
            
            
            100,000Net
                cash provided by financing activities
            
            
            2,698,550
            
            
            439,983**Net
                increase in cash and cash equivalents**
            
            
            1,660,833
            
            
            442,721**Cash
                and cash equivalents at beginning of the period**
            
            
            468,382
            
            
            25,661**Cash
                and cash equivalents at end of the period**
            
            $
            2,129,215
            
            $
            468,382**Supplemental
                disclosure of cash flow information**Cash
                paid during the period for interest
            
            $
            17,959
            
            $
            1,814Cash
                paid during the period for income taxes
            
            $
            -
            
            $
            1,000





See
      accompanying notes to consolidated financial statements.


F-7




**ZAGG
      INCORPORATED AND SUBSIDIARY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS (Continued)**


**For
      the Years Ended December 31, 2007 and 2006**


**Supplemental
      schedule of noncash investing and financing activities**





**For
      the Year Ended December 31, 2007:**





Issued
      714,286 shares of common stock in conversion of convertible note
      payable.





Issued
      147,853 shares of common stock in conversion of convertible note payable -
      officer and accrued interest.





Issued
      860,000 shares of common stock to employees and consultants.





Issued
      warrants to purchase 100,000 shares of common stock in connection with note
      payable valued at $15,495.





Issued
      warrants to purchase 2,401,953 shares of common stock in settlement of a
      dispute.


F-8




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


**NOTE** **1** – **ORGANIZATION
      AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***The
      Company***





ZAGG
      Incorporated (the “Company”) was incorporated in the State of Utah on March 25,
      2005 as Protective Solutions, Inc. On January 30, 2006, the Company amended
      its
      articles of incorporation and changed its name to ShieldZone Corporation. On
      February 8, 2007 the Company was acquired by an inactive publicly held company,
      Amerasia Khan Enterprises Ltd. in a transaction accounted for as a
      recapitalization of the Company. On March 1, 2007, the Company redomesticated
      its operating subsidiary by reincorporating it in the State of Nevada and on
      that same date the Company merged that subsidiary into Amerasia Khan Enterprises
      Ltd, the parent, who was the surviving entity. In connection with the merger
      the
      Company changed the name of Amerasia Khan Enterprises Ltd. to ZAGG Incorporated.
      The Company continues to operate the historical business of ShieldZone
      Corporation and may use the ShieldZone name as a tradename (see Note
      2).





The
      Company has developed and sells, through the Internet, retail and wholesale
      distribution channels, patent-pending protective shields under the name of
      the
      invisibleSHIELDTM for electronic devices. The Company also designs and sells
      accessory products for electronic devices.





The
      consolidated financial statements include the accounts of ZAGG Incorporated
      and
      its wholly owned subsidiary ZAGG Europe Limited. All intercompany transactions
      and balances have been eliminated in consolidation.





***Use
      of estimates***





The
      preparation of financial statements in conformity with generally accepted
      accounting principles 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 financial statements and
      the reported amounts of revenue and expenses during the reporting period. Actual
      results could differ from those estimates. Significant estimates in 2007 and
      2006 include the allowance for doubtful accounts, inventory valuation
      allowances, sales returns and warranty liability and the useful life of property
      and equipment.





***Cash
      and cash equivalents***





For
      purposes of the statements of cash flows, the Company considers all highly
      liquid instruments purchased with a maturity of three months or less and money
      market accounts to be cash equivalents.





***Fair
      value of financial instruments***





Statement
      of Financial Accounting Standards No. 107, *“Disclosures
      about Fair Value of Financial Instruments,”* requires
      disclosures of information about the fair value of certain financial instruments
      for which it is practicable to estimate the value. For purpose of this
      disclosure, the fair value of a financial instrument is the amount at which
      the
      instrument could be exchanged in a current transaction between willing parties,
      other than in a forced sale or liquidation.





The
      Company’s financial instruments consist mainly of accounts receivable and
      short-term obligations. The Company believes that the carrying amounts
      approximate their fair values due to the short term maturities of these
      instruments.





***Accounts
      Receivable***





The
      Company sells its products to end-users through retailers and other resellers
      who are extended credit terms after an analysis of their financial condition
      and
      credit worthiness.





The
      Company also accepts orders from its website store and corporate owned kiosk
      stores and receives credit card payments through its merchant
      bank.


F-9




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**




Credit
      terms to retailers and resellers, when extended, are based on evaluation of
      the
      customers' financial condition and, generally, collateral is not required.
      The
      Company maintains allowances for doubtful accounts for estimated losses
      resulting from the inability of customers to make required payments. Management
      regularly evaluates the allowance for doubtful accounts considering a number
      of
      factors. Accounts receivable are generally due within thirty days of the invoice
      date and considered past due after thirty days. Estimated losses are based
      on
      the aging of accounts receivable balances, a review of significant past due
      accounts, and historical write-off experience, net of recoveries. If the
      financial condition of the Company’s customers were to deteriorate, whether due
      to deteriorating economic conditions generally, in the industry, or otherwise,
      resulting in an impairment of their ability to make payments, additional
      allowances would be required.





Accounts
      receivable from merchant banks are due to the clearing time the merchant banks
      take to post the transactions to the Company’s bank account. There is typically
      a two to five day lag between the charge date and the posting date.





The
      Company establishes an allowance and charges bad debt expense on accounts
      receivable when they become doubtful of collection, and payments subsequently
      received on such receivables are credited to the bad debt expense in the period
      of recovery.





***Inventories***





Inventories,
      consisting primarily of finished goods and raw materials, are valued at the
      lower of cost or market and are accounted for on the first-in, first-out basis.
      Management performs periodic assessments to determine the existence of obsolete,
      slow moving and non-saleable inventories, and records necessary provisions
      to
      reduce such inventories to net realizable value. The Company recognizes all
      inventory reserves as a component of cost of sales.





***Property
      and equipment***





Property
      and equipment are stated at cost and depreciated using the straight-line method
      over their estimated useful lives. Leasehold improvements are amortized over
      the
      lesser of the useful life of the asset or the term of the lease. The useful
      lives are as follows:





**Useful Lives**Office, computer and other equipment
            3 to 10 yearsAutomobiles
            5 yearsLeasehold improvements
            1 to 3.13 years





Major
      additions and improvements are capitalized, while costs for minor replacements,
      maintenance and repairs that do not increase the useful life of an asset are
      expensed as incurred. Upon retirement or other disposition of property and
      equipment, the cost and related accumulated depreciation or amortization are
      removed from the accounts. The resulting gain or loss is reflected in other
      selling, general and administrative expense.





***Intangibles
      and other long-lived assets***





In
      accordance with Statement of Financial Accounting Standards (SFAS) No. 144,
      “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company
      reviews the carrying value of intangibles and other long-lived assets for
      impairment at least annually or whenever events or changes in circumstances
      indicate that the carrying amount of an asset may not be recoverable.
      Recoverability of long-lived assets is measured by comparison of its carrying
      amount to the undiscounted cash flows that the asset or asset group is expected
      to generate. If such assets are considered to be impaired, the impairment to
      be
      recognized is measured by the amount by which the carrying amount of the
      property, if any, exceeds its fair market value.


F-10




**ZAGG
        INCORPORATED AND SUBISDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2007 AND 2006**




***Accounting
      for Derivatives***





The
      Company evaluates its convertible debt, options, warrants or other contracts
      to
      determine if those contracts or embedded components of those contracts qualify
      as derivatives to be separately accounted for under Statement of Financial
      Accounting Standards 133 “Accounting for Derivative Instruments and Hedging
      Activities” and related interpretations including EITF 00-19 “Accounting for
      Derivative Financial Instruments Indexed to, and Potentially Settled in, a
      Company’s Own Stock”.





The
      result of this accounting treatment is that the fair value of the embedded
      derivative is marked-to-market each balance sheet date and recorded as a
      liability. In the event that the fair value adjustment is recorded as a
      liability, the change in fair value is recorded in the consolidated statement
      of
      operations as an other income or expense. Upon conversion or exercise of a
      derivative instrument, the instrument is marked to fair value at the conversion
      date and then that fair value is reclassified to equity. Equity instruments
      that
      are initially classified as equity that become subject to reclassification
      under
      SFAS 133 are reclassified to liability at the fair value of the instrument
      on
      the reclassification date.





***Contingencies***





Certain
      conditions may exist as of the date financial statements are issued, which
      may
      result in a loss to the Company, but which will only be resolved when one or
      more future events occur or fail to occur. The Company's management and its
      legal counsel assess such contingent liabilities, and such assessment inherently
      involves an exercise of judgment. In assessing loss contingencies related to
      legal proceedings that are pending against the Company or unasserted claims
      that
      may result in such proceedings, the Company's legal counsel evaluates the
      perceived merits of any legal proceedings or unasserted claims as well as the
      perceived merits of the amount of relief sought or expected to be sought
      therein. If the assessment of a contingency indicates that it is probable that
      a
      material loss has been incurred and the amount of the liability can be
      estimated, then the estimated liability would be accrued in the Company's
      financial statements. If the assessment indicates that a potentially material
      loss contingency is not probable but is reasonably possible, or is probable
      but
      cannot be estimated, then the nature of the contingent liability, together
      with
      an estimate of the range of possible loss if determinable and material, would
      be
      disclosed.





***Revenue
      recognition***





The
      Company follows the guidance of the Securities and Exchange Commission’s Staff
      Accounting Bulletin 104 for revenue recognition. In general, the Company records
      revenue when persuasive evidence of an arrangement exists or product delivery
      has occurred, the sales price to the customer is fixed or determinable, and
      collectability is reasonably assured. The Company’s revenue
      is derived from sales of its products to retailers, resellers and end consumers
      and from the sale of distributor license fees. For sales of product, the Company
      records revenue when the product is shipped, net of estimated returns and
      discounts. For license fees, the Company recognizes revenue on a prorated basis
      over the life of the distribution contract.





The
      Company follows the guidance of Emerging Issues Task Force (EITF) Issue 01-9
      “Accounting for Consideration Given by a Vendor to a Customer (Including a
      Reseller of the Vendor’s Products)” and (EITF) Issue 02-16 “Accounting by a
      Customer (Including a Reseller) for Certain Considerations Received from
      Vendors.” Accordingly, any incentives received from vendors are recognized as a
      reduction of the cost of products. Promotional products given to customers
      or
      potential customers are recognized as a cost of sales. Cash incentives provided
      to the Company’s customers are recognized as a reduction of the related sale
      price, and, therefore, are a reduction in sales.





***Reserve
      for Sales Returns and Warranty Liability***





The
      Company’s return policy generally allows its end users and retailers to return
      purchased products for refund or in exchange for new products within 30 days
      of
      end user purchase. The Company estimates a reserve for sales returns and records
      that reserve amount as a reduction of sales and as a sales return reserve
      liability. During the years ended December 31, 2007 and 2006 ,
      actual
      and estimated sales returns totaled $45,866 and $5,882, respectively. At
      December 31, 2007 and 2006 the sales return liability was $23,861 and $32,000,
      respectively.


F-11


**ZAGG
        INCORPORATED AND SUBISDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


The
      Company generally provides the ultimate consumer a warranty with each product
      and accrues warranty expense at the time of the sale based on the Company’s
      prior claims history. Actual warranty costs incurred are charged against the
      accrual when paid. During the years ended December 31, 2007 and 2006, warranty
      expense and the reserve for warranty liability, respectively, was not
      material.





** ***Shipping
      and Handling Costs***





Amounts
      invoiced to customers for shipping and handlings are included in sales. During
      the years ended December 31, 2007 and 2006 shipping and handling charges paid
      by
      customers were $360,513 and $243,267. Actual shipping and handling costs to
      ship
      products to the Company’s customers are included in cost of sales and were
      $607,745 and $310,584, respectively.





***Income
      taxes***





The
      Company recognizes deferred income tax assets or liabilities for expected future
      tax consequences of events that have been recognized in the financial statements
      or tax returns. Under this method, deferred income tax assets or liabilities
      are
      determined based upon the difference between the financial statement and income
      tax bases of assets and liabilities using enacted tax rates expected to apply
      when differences are expected to be settled or realized. Deferred income tax
      assets are reviewed for recoverability and valuation allowances are provided
      when it is more likely than not that a deferred tax asset is not realizable
      in
      the future. The effect on deferred tax assets and liabilities of a change in
      tax
      rates is recognized in income in the period that includes the enactment
      date.





***Stock-based
      compensation***





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123 (revised 2004), *Share
      Based Payment* (“SFAS
      No. 123R”). SFAS No. 123R establishes the financial accounting and reporting
      standards for stock-based compensation plans. As required by SFAS No. 123R,
      the
      Company recognizes the cost resulting from all stock-based payment transactions
      including shares issued under its stock option plans in the financial statements
      based upon the fair value of such equity instruments granted. As there were
      no
      common stock options granted or outstanding in 2007 or 2006, there was no
      financial effect to the Company upon implementation of SFAS No.
      123R.





Prior
      to
      January 1, 2006, the Company accounted for stock-based employee compensation
      plans (including shares issued under its stock option plans) in accordance
      with
      APB Opinion No. 25 and followed the pro forma net income, pro forma income
      per
      share, and stock-based compensation plan disclosure requirements set forth
      in
      the Statement of Financial Accounting Standards No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      No. 123”).





F-12




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


The
      following table summarizes the activity related to all Company stock options
      and
      warrants for the years ended December 31, 2007 and 2006:




Warrants
            
            Exercise
              Price Per
              Share
            
            Weighted
              Average
              Exercise Price
              Per Share**Outstanding
                at December 31, 2005**
            
            
            —
            
            
            —
            
            
            —Granted
            
            
            —
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —Cancelled
                or expired
            
            
            —
            
            
            —
            
            
            —**Outstanding
                at December 31, 2006**
            
            
            —
            
            
            —
            
            
            —Granted
            
            
            4,294,453
            
            
            $0.35 - $1.30
            
            $
            1.27Exercised
            
            
            —
            
            
            —
            
            
            —Cancelled
                or expired
            
            
            —
            
            
            —
            
            
            —**Outstanding
                at December 31, 2007**
            
            
            4,294,453
            
            
            $0.35 - $1.30
            
            $
            1.27**Outstanding
                and exercisable at December 31, 2007**
            
            
            4,294,453
            
            
            $0.35 - $1.30
            
            $
            1.27





***Research
      and development***





Research
      and development costs, if any, are expensed as incurred. For the years ended
      December 31, 2007 and 2006, research and development costs were not material
      and
      included in the accompanying statements of operations in other selling, general
      and administrative expenses.





***Advertising***





General
      advertising is expensed as incurred. Advertising expenses for the years ended
      December 31, 2007 and 2006 were $944,715 and $370,043, respectively. The Company
      capitalizes expenses related to its direct marketing campaign under the guidance
      of Statement of Position 93-7 *Reporting
      on Advertising Costs* (“SOP
      93-7”). The company has capitalized $190,787 as prepaid advertising related to
      the direct marketing campaign, these costs relate to the production of an
      infomercial spotlighting the *invisible* SHIELD
      product line. The Company did some testing of the campaign during the third
      quarter of 2007 and determined that further modifications needed to be made
      to
      the infomercial. As of December 31, 2007, these changes were underway and the
      Company plans to begin utilizing the direct marketing campaign during the second
      quarter of 2008, at which time the Company will begin to amortize these prepaid
      advertising costs as prescribed by SOP 93-7.





***Reclassifications***





Certain
      amounts in the 2006 financial statements have been reclassified to conform
      to
      the 2007 presentation.





***Recent
      accounting pronouncements*** ****





In
      December 2007, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 141 (revised 2007), *“* Business
      Combinations.” This accounting principle requires the fundamental requirements
      of acquisition accounting (purchase accounting) be applied to all business
      combinations in which control is obtained regardless of consideration and for
      an
      acquirer to be identified for each business combination. Additionally, this
      accounting principle requires acquisition-related costs and restructuring costs
      at the date of acquisition to be expensed rather than allocated to the assets
      acquired and the liabilities assumed; minority interests, including goodwill,
      to
      be recorded at fair value at the acquisition date; recognition of the fair
      value
      of assets and liabilities arising from contractual contingencies and contingent
      consideration (payments conditioned on the outcome of future events) at the
      acquisition date; recognition of bargain purchase (acquisition-date fair value
      exceeds consideration plus any noncontrolling interest) as a gain; and
      recognition of changes in deferred taxes. This accounting principle will be
      adopted January 2009. The accounting requirements will be adopted prospectively.
      Earlier adoption is prohibited. Adoption is not expected to have an impact
      on
      the Company’s consolidated financial position, results of operations or cash
      flows.


F-13




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**




In
      December 2007, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements.” This accounting principle eliminates
      noncomparable accounting for minority interests. Specifically, minority
      interests are presented as a component of shareholders’ equity; consolidated net
      income includes amounts attributable to both the parent and minority interest
      and is disclosed on the face of the income statement; changes in the ownership
      interest are accounted for as equity transactions if ownership remains
      controlling; elimination of purchase accounting for acquisitions of
      noncontrolling interests and acquisitions of additional interests; and
      recognition of deconsolidated controlling interest based on fair value
      consistent with Statement of Financial Accounting Standards No. 141
      (revised 2007), *Business Combinations* .
      This
      accounting principle will be adopted January 2009. The accounting requirements
      will be adopted prospectively, however presentation and disclosure will be
      adopted retrospectively for all periods presented. Earlier adoption is
      prohibited. Adoption is not expected to have an impact on the Company’s
      consolidated financial position, results of operations or cash
      flows. **





In
      July
      2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
      (FIN) No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of
      FASB Statement No. 109.” This interpretation provides guidance for recognizing
      and measuring uncertain tax positions, as defined in SFAS No. 109, “Accounting
      for Income Taxes.” FIN No. 48 prescribes a threshold condition that a tax
      position must meet for any of the benefit of an uncertain tax position to be
      recognized in the financial statements. Guidance is also provided regarding
      de-recognition, classification, and disclosure of uncertain tax positions.
      FIN
      No. 48 is effective for fiscal years beginning after December 15, 2006. Adoption
      of this interpretation did not have a material impact on the Company’s financial
      position, results of operations, or cash flows.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, “Fair Value Measurements” (“FAS 157”). This Statement defines fair value as
      used in numerous accounting pronouncements, establishes a framework for
      measuring fair value in generally accepted accounting principles and expands
      disclosure related to the use of fair value measures in financial statements.
      The Statement is to be effective for the Company’s financial statements issued
      in 2008; however, earlier application is encouraged. The Company is currently
      evaluating the timing of adoption and the impact that adoption might have on
      its
      financial position or results of operations.





Other
      accounting standards that have been issued or proposed by the FASB or other
      standards-setting bodies that do not require adoption until a future date are
      not expected to have a material impact on the financial statements upon
      adoption.


F-14




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


***Net
      (Loss) Income Per Common Share***





Basic
      net
      (loss) income per share is computed by dividing net (loss) income by weighted
      average number of shares of common stock outstanding during each period. Diluted
      net (loss) income per share is computed by dividing net (loss) income by the
      weighted average number of shares of common stock, common stock equivalents
      and
      potentially dilutive securities outstanding during each period. As of December
      31, 2007 and 2006, the Company did not have any dilutive
      securities.





The
      following is a reconciliation of the numerator and denominator used to calculate
      Basic and Diluted EPS:





**Net Loss**
            
            **Weighted Average**
              **Shares**
            
            **Per Share Amount**Year
                Ended December 31, 2006:Basic
                EPS
            
            $
            (141,253
            )
            
            10,052,808
            
            $
            (0.01
            )Effect
                of common stock equivalents
            
            
            —
            
            
            —
            
            
            —Diluted
                EPS
            
            $
            (141,253
            )
            
            10,052,808
            
            $
            (0.01
            )Year
                Ended December 31, 2007Basic
                EPS
            
            $
            (759,511
            )
            
            16,139,177
            
            $
            (0.05
            )Effect
                of common stock equivalents
            
            
            —
            
            
            —
            
            
            —Diluted
                EPS
            
            $
            (759,511
            )
            
            16,139,177
            
            $
            (0.05
            )




**NOTE
      2** **–** **RECAPITALIZATION**





On
      February 8, 2007 (the “recapitalization date”), the Company executed an
      Agreement and Plan of Merger (the “Merger Agreement”) by and between Amerasia
      Khan Enterprises Ltd. (a public shell), now known as ZAGG Incorporated, and
      its
      wholly-owned subsidiary, SZC Acquisition Inc., a Nevada corporation
      (“Subsidiary”) on the one hand and ShieldZone Corporation, (“ShieldZone”) a Utah
      corporation, on the other hand. Pursuant to the Merger Agreement, Subsidiary
      was
      merged into ShieldZone with ShieldZone surviving the merger. In consideration,
      the stockholders of ShieldZone received 10,175,000 shares of Amerasia Khan
      Enterprises Ltd., now known as ZAGG Incorporated, common stock which was
      approximately 69% of the total common shares outstanding just subsequent to
      the
      merger but before the simultaneous sale of 785,856 common shares for $275,050
      ($0.35 per share) and conversion of a $250,000 convertible promissory note
      for
      714,286 common shares. The Company issued warrants as a fee to Empire Financial
      in conjunction with the sale of the 785,856 common shares. The Company issued
      warrants to purchase 52,500 shares of its common stock at an exercise price
      of
      $0.35. These warrants may be exercised until March 18, 2012, at which time
      they
      will expire if not exercised. The warrant holders also had piggyback
      registration rights. In connection with the merger/recapitalization, the Company
      is deemed to have issued 4,600,000 common shares to the original stockholders’
of Amerasia Khan Enterprises Ltd. Subsequent to the merger/recapitalization,
      1,254,000 shares owned by certain original shareholders of Amerasia Khan
      Enterprises Ltd. were cancelled.





The
      merger was accounted for as a recapitalization of ShieldZone, a Utah corporation
      because on a post-merger basis, the former stockholders of ShieldZone
      Corporation held a majority of the outstanding common stock on a voting and
      fully-diluted basis and had Board and management control. As a result,
      ShieldZone is deemed to be the acquirer for accounting purposes. In March 2007,
      ShieldZone Corporation was merged into its parent, Amerasia Khan Enterprises
      Ltd., now known as ZAGG Incorporated, and the name of the surviving entity,
      Amerasia Khan Enterprises Ltd., was changed to ZAGG Incorporated.





Accordingly
      the balance sheets just subsequent to the recapitalization date consists of
      the
      balance sheets of both companies at historical cost and the statement of
      operations consists of the historical operations of ShieldZone and the
      operations of Amerasia Khan Enterprises Ltd., now known as ZAGG Incorporated,
      from the recapitalization date.


F-15


**ZAGG
        INCORPORATED AND SUBISDIARY**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


All
      share
      and per share data in the accompanying financial statements have been
      retroactively changed to reflect the effect of the merger and
      recapitalization.





**NOTE
      3** **–** **ACCOUNTS RECEIVABLE, NET**





Accounts
      receivable consisted of the following:





December 31,2007
            
            2006Accounts
                receivable
            
            $
            436,839
            
            $
            141,342Less:
                Allowance for doubtful accounts
            
            
            (34,393
            )
            
            (20,193
            )**Accounts
                receivable, net**
            
            $
            402,446
            
            $
            121,149





Bad
      debt
      expense for the year ended December 31, 2007 was $14,263 and for the year ended
      December 31, 2006, bad debt recovery was $2,307.





**NOTE
      4** **–** **INVENTORIES**





Inventory
      consisted of the following components:





December 31,2007
            
            2006Finished
                goods
            
            $
            230,937
            
            $
            67,257Raw
                materials
            
            
            216,107
            
            
            35,265**Total
                inventory**
            
            $
            447,044
            
            $
            102,522




**NOTE
        5 – PROPERTY AND EQUIPMENT**
 
 Property
        and equipment consisted of the following:


December 31,2007
            
            2006**Useful Lives**Computer
                Equipment and Software
            
            
            3
                to 5 years
            
            $
            155,603
            
            $
            58,790Equipment
            
            
            3
                to10 years
            
            
            144,343
            
            
            58,407Furniture
                and Fixtures
            
            
            7
                years
            
            
            15,209
            
            
            9,405Automobiles
            
            
            5
                years
            
            
            47,063
            
            
            47,063Leasehold
                improvements
            
            
            1
                to 3.13 years
            
            
            91,637
            
            
            91,637453,855
            
            
            265,302Less
                Accumulated Depreciation
            
            
            
            
            
            (125,778
            )
            
            (43,828
            )**Net
                property and equipment**
            
            
            
            
            $
            328,077
            
            $
            221,474




For
      the
      years ended December 31, 2007 and 2006, depreciation expense was $81,950 and
      $41,503, respectively. During 2006, the Company purchased an asset for $3,450
      and recorded accumulated depreciation on that asset of $115 before selling
      the
      asset for proceeds of $3,000. A loss of $335 was recognized on the sale of
      the
      asset in the accompanying financial statements.


F-16




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**




**NOTE
      6 – INTANGIBLE ASSETS**





At
      December 31, 2007, intangible assets consist of legal fees paid in connection
      with the Company’s patent application of $7,935 and amounts paid to secure the
      Company’s Internet addresses. At December 31, 2006, intangible assets consisted
      solely of legal fees paid in connection with the Company’s patent application of
      $2,340. The costs relating to the definite-lived intangible assets are amortized
      over their estimated useful lives using straight-line amortization. The useful
      life for Internet addresses is 10 years. As of December 31, 2007, the patent
      had
      not been granted. Accordingly, the Company has not begun to amortize the patent
      costs and will begin amortizing the patent over the legal life of the patent,
      when the patent is granted.





The
      Company has contractual rights customary in the industry to use its Internet
      addresses. However, the Company does not have and cannot acquire any property
      rights to the internet addresses. The Company does not expect to lose its rights
      to use the Internet addresses; however, there can be no assurance in this regard
      and such loss could have a material adverse effect on the Company’s financial
      position and results of operations.





The
      Company’s definite-lived intangible assets are summarized in the table
      below:





December 31, 2007
            
            Gross
              Carrying
              Amount
            
            Accumulated
              Amortization
            
            Net
              Carrying
              AmountInternet
                addresses
            
            $
            43,169
            
            $
            (4,210
            )
            $
            38,959





**NOTE
      7 – EQUIPMENT FINANCING PAYABLE**





During
      September and October 2005, the Company entered in two equipment financing
      arrangements totaling $25,004 in connection with the acquisition of office
      equipment. Under the financing arrangements, the Company was to make five equal
      payments, without interest, of approximately $5,000 each through December 2006.
      At December 31, 2005, amounts due under equipment financing arrangements
      amounted to $10,016. At December 31, 2006, the amount had been paid in
      full.





**NOTE
      8 - INCOME TAXES**





The
      following table shows the Company’s deferred and current income tax (benefit)
      expense for the year ended December 31, 2007 and the period ended December
      31,
      2006, as follows:





2007
            
            2006Deferred
                income tax (benefit) expense
            
            $
            (448,820
            )
            $
            (79,418
            )Current
                income tax (benefit) expense
            
            
            —
            
            
            —$
            (448,820
            )
            $
            (79,418
            )





The
      following is a reconciliation of the income taxes computed using the federal
      statutory rate to the provision for income taxes:





2007
            
            2006Tax
                at statutory rate (34%)
            
            $
            (412,089
            )
            $
            (75,028
            )Non-deductible
                expense and other
            
            
            3,266
            
            
            2,893State
                tax, net of federal tax rate
            
            
            (39,997
            )
            
            (7,283
            )$
            (448,820
            )
            $
            (79,418
            )


F-17




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


The
      tax
      effects of temporary differences that gave rise to significant portions of
      deferred tax assets and liabilities at December 31, 2007 and 2006 are as
      follows:


2007
              
              2006Deferred
                  tax assets:Net
                  operating loss carryforward
              
              $
              481,322
              
              $
              4,422Allowance
                  for doubtful accounts
              
              
              12,829
              
              
              7,532Charitable
                  contributions
              
              
              811
              
              
              —Sales
                  returns accrual
              
              
              8,900
              
              
              11,936Total
                  gross deferred tax assets
              
              
              503,862
              
              
              23,890Less
                  valuation allowance
              
              
              —
              
              
              —Net
                  deferred tax assets
              
              $
              503,862
              
              $
              23,890Deferred
                  tax liabilities:Property
                  and equipment
              
              $
              46,915
              
              $
              16,509Total
                  gross deferred tax liabilities
              
              
              46,915
              
              
              16,509Net
                  deferred tax assets
              
              $
              456,947
              
              $
              7,381Deferred
                  tax assets, net **–** current
              
              $
              12,829
              
              $
              19,468Deferred
                  tax assets, net **–** non-current
              
              
              444,118
              
              
              (12,087
              )Net
                  deferred tax assets
              
              $
              456,947
              
              $
              7,381





There
      was
      no valuation allowance at December 31, 2007 as management believes it is more
      likely than not that it can realize its deferred tax assets.





At
      December 31, 2007, the Company had a net operating loss carryforward of
      approximately $1,274,130 available to offset future taxable income through
      2027.





**NOTE
      9 – STOCKHOLDER’S EQUITY**





*Change
      in Authorized Shares*





On
      January 30, 2006, the Company amended its articles of incorporation and
      increased the numbers of authorized shares of the Company to 10,000,000, of
      which 4,000,000 shares, no par value, shall be common stock and 6,000,000 shares
      of no par value shall be preferred stock with such designations, rights and
      preferences as may be determined from time to time by the Board of Directors.
      In
      November 2006, the Company amended its articles of incorporation to cancel
      the
      preferred shares previously authorized and increase the number of authorized
      common shares to 10,500,000. In February 2007 the Company recapitalized with
      a
      public shell and authorized shares became 50,000,000 at $0.001 par value (See
      Note 2). The new authorized shares are reflected retroactively in the
      accompanying balance sheet.





*Forward
      Stock Splits*





In
      January 2006, the Company authorized a 2 for 1 forward stock split and then
      a
      1980.198 for 1 forward stock split on the outstanding common stock.
      Additionally, in November 2006, the Company authorized a 2.525 for 1 forward
      stock split on the common stock. All share and per share data in the
      accompanying financial statements has been retroactively adjusted to account
      for
      these forward stock splits.


F-18




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


*Common
      Stock*





At
      March
      24, 2005 (inception), the Company issued 10,000,000 shares of common stock
      to
      its founder for $1,000.





On
      January 13, 2006, under an agreement between the then sole shareholder of the
      Company (the “Shareholder”) and a then third party, the shareholder sold 50% of
      his equity holdings consisting of common shares in the Company, to the current
      Chief Executive Officer who was not an officer or related party at the time
      of
      the sale (see Note 10). At the agreement date the third party was appointed
      as
      an officer and director. The sale price was $25,000 cash ($.005 per share).
      The
      selling shareholder simultaneously contributed the $25,000 consideration back
      to
      the Company which amount was recorded as $25,000 of contributed
      capital.





In
      July
      2006, the Company sold 100,000 common shares for $75,000 or $0.75 per
      share.





On
      September 22, 2006, as amended on December 15, 2006, the Company entered into
      a
      one-year investor relations agreement, whereby the consultants agreed to assist
      the Company in structuring a transaction in order to attract investment capital
      and prospective public merger candidates. As compensation to the consultants,
      the Company agreed to pay the consultants 15% of the Company’s common stock, on
      a fully-diluted basis, to be retained as of the date of closing of any
      transaction principally involving closing of a funding and reverse merger
      transaction following which the Company’s existing stockholders shall become
      stockholders of a public company. No shares were earned or paid as of December
      31, 2006.





The
      Company entered into a distribution agreement with a distributor (the
“Distributor”) in March 2006. On December 12, 2006, under a settlement type
      purchase agreement the Company agreed to issue to the Distributor 75,000 of
      its
      common shares, $13,000 cash plus a portion of payment due from a customer for
      which the Distributor was the Company’s distributor in order to early cancel the
      distribution agreement. The shares were valued and expensed at $26,250 or $0.35
      per share which was a contemporaneous sale price in a private transaction where
      a former officer sold a portion of his common shares of the
      Company.





On
      February 8, 2007, the Company issued 714,286 shares of common stock in
      conversion of a convertible note payable (see Note 11) with a principal balance
      of $250,000. The Company also issued 3,346,000 shares of common stock in
      conjunction with the reverse merger transaction (see Note 2).





On
      March
      6, 2007, the Company issued 785,856 shares of its common stock in a private
      placement wherein the Company received $275,050 and paid fees of $47,250 and
      fee
      warrants to purchase 52,500 shares of the Company’s common stock at a strike
      price of $0.35.





On
      March
      30, 2007, the Company issued 147,853 shares of its common stock in conversion
      of
      a note payable of $50,000 plus accrued interest of $1,749 (see Note
      10).





On
      May
      30, 2007 the Company issued warrants to purchase 100,000 shares of the Company’s
      common stock at a strike price of $0.50 in connection with short-term
      financing.





On
      July
      10, 2007, the Company issued 1,975,000 shares of its common stock and warrants
      to purchase 987,500 shares of its common stock at a strike price of $1.30 in
      a
      PIPE transaction wherein the Company received $1,975,000 and paid fees of
      $177,750 and fee warrants to purchase 197,500 shares of the Company’s common
      stock at a strike price of $1.30.





On
      July
      24, 2007, the Company issued 800,000 shares to employees and affiliates valued
      at $800,000 and recorded as compensation expense in the accompanying financial
      statements. On November 12, 2007, the Company issued an additional 60,000 shares
      to employees valued at $45,000 and recorded as compensation expense in the
      accompanying financial statements.





On
      August
      7, 2007, the Company issued 850,000 shares of its common stock and warrants
      to
      purchase 425,000 shares of its common stock at a strike price of $1.30 in a
      private placement wherein the Company received $850,000 and paid fees of $76,500
      and fee warrants to purchase 85,000 shares of the Company’s common stock at a
      strike price of $1.30.


F-19




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**




On
      November 29, 2007, the Company issued warrants to purchase 2,401,953 shares
      of
      the Company’s common stock at a strike price of $1.30 to certain investors
      holding 4,803,905 shares of its common stock that were not included with certain
      institutional investors in a registration statement that went effective on
      August 30, 2007.





On
      November 13, 2007, the Board of Directors adopted the ZAGG Incorporated 2007
      Stock Incentive Plan wherein the Company may issue an aggregate of 2,000,000
      options to purchase shares of the Company’s common stock or shares of the
      Company’s common stock. There were no shares issued or options issued under the
      plan as of December 31, 2007.





**NOTE
      10 – CONVERTIBLE NOTE PAYABLE - OFFICER**





In
      November 2006, the Company entered into a convertible note with an affiliate
      of
      the Company’s Chief Executive Officer in the original principal amount of
      $100,000. The note was convertible at the holder's option any time up to
      maturity at a conversion price equal to $0.35 per common share. The note was
      due
      on May 15, 2007, bore interest at 20% per year and was unsecured. In March
      2007,
      the Company repaid $50,000 of the principal balance of the note. In addition,
      on
      March 31, 2007, the remaining $50,000 of principal plus accrued interest of
      $1,749 was converted into 147,853 shares of the Company’s common
      stock.





The
      note
      was a conventional convertible instrument and the Company evaluated the
      conversion feature and determined that there was not a separate derivative
      instrument associated with the note and no derivative liability was recognized.
      The Company determined that there was no beneficial conversion feature
      associated with the note as the conversion price was equal to the deemed market
      value on the date of grant.





**NOTE
      11 – CONVERTIBLE NOTE PAYABLE**





On
      December 27, 2006, the Company entered into a Secured Convertible Note Purchase
      Agreement (the “Convertible Note Agreement”). Pursuant to the Convertible Note
      Agreement, the Company issued a convertible note to an unrelated investor in
      the
      original principal amount of $250,000. The note was convertible at the holder's
      option any time up to maturity at a conversion price equal to $0.35 per common
      share. The note was due on March 1, 2007, bore interest at 4% per year, and
      was
      secured by substantially all of the assets of the Company. Interest was payable
      at maturity and was computed on the basis of a 360-day year. In February 2007,
      the note holder converted the principal balance of the note into 714,286 shares
      of the Company’s common stock.





The
      note
      was a conventional convertible instrument and the Company evaluated the
      conversion feature and determined that there was not a separate derivative
      instrument associated with the note and no derivative liability was recognized.
      The Company determined that there was no beneficial conversion feature
      associated with the note as the conversion price was equal to the deemed market
      value on the date of grant.





The
      weighted average interest rate for the two notes discussed above was
      8.57%.





**NOTE
      12 – NOTES PAYABLE**





On
      May 8,
      2007, the Company entered into a promissory note agreement with an unrelated
      third party in the amount of $200,000. The note bore interest at an annual
      percentage rate of 18% and was due and payable on August 15, 2007. The Company
      also issued 100,000 warrants with an exercise price of $0.50. The warrants
      expire on May 30, 2012 and are exercisable any time at the option of the warrant
      holder. The Company recorded a discount on the note payable of $15,031 as that
      was the value of the warrants as calculated using the Black-Scholes valuation
      model using the following assumptions: volatility of 10%, risk free rate of
      return of 4.65%, estimated life of 5 years and an estimated dividend of $0.
      The
      discount was amortized as additional interest expense in the accompanying
      statements. The note was paid in full on August 15, 2007.


F-20




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**




On
      September 27, 2007, the Company entered into a promissory note and loan
      agreement with an unrelated third party in the amount of $45,498. The note
      bears
      interest at 11.45% and requires monthly installment payments of $2,130. The
      note
      relates to the purchase of certain computer hardware and software products.
      For
      the year ended December 31, 2007, the Company paid interest of $852. At December
      31, 2007, the balance remaining on the note was $42,090.





**NOTE
      13 – COMMITMENTS AND CONTINGENCIES**





*Operating
      Leases*





The
      Company leases office and warehouse space and mall cart locations under
      operating leases that expire through June 2009. Future minimum rental payments
      required under the operating leases at December 31, 2007 are as follows:





2008
            
            $
            138,1952009
            
            
            12,192Total
            
            $
            150,387





For
      the
      years ended December 31, 2007 and 2006, rent expense was $193,593 and $56,264,
      respectively.





From
      time
      to time the Company may become subject to proceedings, lawsuits and other claims
      in the ordinary course of business, including proceedings related to
      environmental and other matters. Such matters are subject to many uncertainties,
      and outcomes are not predictable with assurance.





**NOTE
      14 – RELATED PARTY TRANSACTIONS**





In
      October 2005 the Company executed a 9 month consulting agreement with a then
      third party entity where the third party would provide corporate management
      services. The compensation was $85,000 cash which was paid in December 2005.
      As
      of December 31, 2005, $63,750 of the $85,000 was reflected as a prepaid asset.
      In January 2006 the sole owner of the third party entity became a related party
      by purchasing a 50% interest in the equity of the Company and being appointed
      Chief Executive Officer and Director of the Company.





**NOTE
      15 – CONCENTRATIONS**





*Concentration* *of
      c* *redit
      risk*





Financial
      instruments which potentially subject the Company to concentrations of credit
      risk consist principally of cash and accounts receivable. The Company places
      its
      cash with high credit quality financial institutions. The Company maintains
      its
      cash in bank deposit accounts, which, at times, exceed federally insured limits.
      The Company has not experienced any losses in such accounts
      through December 31, 2007.





*Concentration
      of supplier*





The
      Company purchases its raw materials primarily from one source. Management is
      aware of similar raw materials that would be available from other sources if
      required and has current plans to immediately engage such resources if
      necessary.





*Concentration
      of accounts receivable*





At
      December 31, 2007, approximately 19% of the balance of accounts receivable
      was
      due from one merchant bank for credit card sales.


F-21




**ZAGG
      INCORPORATED AND SUBISDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**FOR
      THE YEARS ENDED DECEMBER 31, 2007 AND 2006**


**NOTE
      16 – SEGMENTS**





For
      the
      years ended December 31, 2007 and 2006, the Company operated in one segment.
      The
      percentage of sales by geographic region for the years ended December 31, 2007
      and 2006 were approximately:




**2007**
            
            **2006**United
                States
            
            
            78
            %
            
            86
            %Europe
            
            
            6
            %
            
            5
            %Other
            
            
            6
            %
            
            9
            %





No
      single
      customer accounted for more than 10% of the Company’s sales for the years ended
      December 31, 2007 or 2006.





**NOTE
      17 – SUBSEQUENT EVENTS**





On
      March
      6, 2008, the Company granted options to purchase 507,000 of its common stock
      to
      employees and consultants. The options have an exercise price of $0.65 and
      an
      expiration date of March 6, 2013. The options vest equally over a three year
      period.





On
      March
      11, 2008 ZAGG Incorporated entered into an agreement to fund a bridge loan
      (the
“Bridge Loan”) of up to $500,000 to Brighton Partners, LLC. The purpose of the
      secured loan is to fund the development of a superhero series created by Stan
      Lee and POW! Entertainment, Inc. in partnership with Brighton Partners, LLC,
      with the hope that ZAGG will benefit from the marketing exposure and any
      intellectual property created using ZAGG’s trademarks.





In
      consideration of the bridge loan, Brighton Partners, LLC executed a secured
      promissory note with a 3% origination fee and bearing 10% interest for the
      90
      day term of the note. The loan is collateralized by 100% of the ownership of
      Brighton until the loan is repaid in full. As part of the transaction, ZAGG
      entered into a cross-license agreement with Brighton pursuant to which ZAGG
      agreed to license its trademarks in exchange for marketing and promotion rights
      to any property developed under the superhero series that bears ZAGG’s
      intellectual property. Further under the transaction, the Company acquired
      10%
      of the membership interest in Brighton. ZAGG will share in the development
      of
      the superhero series as a partner of Brighton.





On
      January 30, 2008, the Company extended its lease on its corporate headquarters
      through January 31, 2010. The monthly lease payment is $9,900. On January 1,
      2008 and February 21, 2008 the Company entered into two new lease agreements
      for
      its mall cart program. With the addition of these new leases, the Company’s
      future minimum lease payments at are as follows:





2008
            
            $
            290,2832009
            
            
            160,9002010
            
            
            9,900Total
            
            $
            461,083


F-22