UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q








(Mark
one)





[X]
            Quarterly
      Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the quarterly period ended March 31, 2009,
  or





[   ]
            Transition
      Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the transition period from ______________ to
      _____________.





Commission
File No. 000-52211


ZAGG
INCORPORATED


(Exact
name of registrant as specified in its charter)





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





3855
South 500 West, Suite J


Salt
Lake City, Utah 84115


(Address
of principal executive offices with zip code)





(801)
263-0699


(Registrant's
telephone number, including area code)





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





Indicate
by check mark whether the \registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
[ ] Large accelerated filer [ ]
Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting
company





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-25 of the Exchange Act).


Yes
[  ] No [X]





State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 19,820,015 common shares as of May
12, 2009.








ZAGG
INCORPORATED AND SUBSIDIARY


FORM
10-Q








TABLE
OF CONTENTS





PART
I - FINANCIAL INFORMATION





PageItem
      1.
                                    Financial
      Statements (Unaudited)Condensed
      Consolidated Balance Sheets – As of March 31, 2009, and December 31,
      2008
                                    3Condensed
      Consolidated Statements of Operations for the Three Months
      Ended
                                      March
      31, 2009 and 2008
                                    4Condensed
      Consolidated Statements of Cash Flows for the Three Months
      Ended
                                      March
      31, 2009 and 2008
                                    5Notes
      to Condensed Consolidated Financial Statements
                                    7Item
      2.
                                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                    12Item
      3.
                                    Quantitative
      and Qualitative Disclosures About Market Risk
                                    16Item
      4T.
                                    Controls
      and Procedures
                                    16PART
      II - OTHER INFORMATIONItem
      1.
                                    Legal
      Proceedings
                                    17Item
      1A.
                                    Risk
      Factors
                                    17Item
      2.
                                    Unregistered
      Sales of Equity Securities and Use of Proceeds
                                    17Item
      3.
                                    Defaults
      Upon Senior Securities
                                    18Item
      4.
                                    Submission
      of Matters to a Vote of Security Holders
                                    18Item
      5.
                                    Other
      Information
                                    18Item
      6.
                                    Exhibits
                                    19








ZAGG
INCORPORATED AND SUBSIDIARY


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





March
      31,
                
                
                December
      31,2009
                
                
                2008ASSETSCurrent
      assetsCash
                
                $
                1,028,547
                
                
                $
                1,065,652Accounts
      receivable, net
                
                
                4,267,669
                
                
                
                3,593,887Inventories
                
                
                3,128,715
                
                
                
                1,913,297Prepaid
      expenses and other current assets
                
                
                1,436,988
                
                
                
                676,077Notes
      receivable
                
                
                513,000
                
                
                
                513,000Deferred income tax assets
                
                
                -
                
                
                
                81,663Total
      current assets
                
                
                10,374,919
                
                
                
                7,843,576Property
      and equipment, net
                
                
                634,752
                
                
                
                549,370Deferred
      income tax assets
                
                
                -
                
                
                
                4,937Deposits
      and other assets
                
                
                9,688
                
                
                
                9,688Intangible assets, net
                
                
                46,220
                
                
                
                47,344Total assets
                
                $
                11,065,579
                
                
                $
                8,454,915LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesNotes
      payable
                
                $
                14,281
                
                
                $
                20,223Accounts
      payable
                
                
                2,301,625
                
                
                
                1,626,390Accrued
      liabilities
                
                
                184,386
                
                
                
                212,754Accrued
      wages and wage related expenses
                
                
                121,424
                
                
                
                121,112Deferred
      revenue
                
                
                182,654
                
                
                
                366,590Deferred
      income tax liability
                
                
                528,634
                
                
                
                -Sales returns liability
                
                
                533,017
                
                
                
                291,119Total current liabilities
                
                
                3,866,021
                
                
                
                2,638,188Total liabilities
                
                
                3,866,021
                
                
                
                2,638,188Stockholders'
      equityCommon
      stock, $0.001 par value; 50,000,000 shares authorized;19,392,328
      and 19,163,995 shares issued and outstanding, respectively
                
                
                19,393
                
                
                
                19,165Warrants
      to purchase common stock
                
                
                731,379
                
                
                
                739,338Additional
      paid-in capital
                
                
                4,171,662
                
                
                
                3,808,280Cumulative
      translation adjustment
                
                
                (107,339
                )
                
                
                (106,630
                )Retained earnings
                
                
                2,384,463
                
                
                
                1,356,574Total stockholders' equity
                
                
                7,199,558
                
                
                
                5,816,727Total liabilities and stockholders'
      equity
                
                $
                11,065,579
                
                
                $
                8,454,915





See
accompanying notes to condensed consolidated financial
statements.


3


ZAGG INCORPORATED AND
SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended March
31,2009
                      
                      
                      2008Net
      sales
                      
                      $
                      8,090,951
                      
                      
                      $
                      2,845,362Cost of sales
                      
                      
                      2,895,143
                      
                      
                      
                      777,742Gross profit
                      
                      
                      5,195,808
                      
                      
                      
                      2,067,620Operating
      expenses:Advertising
      and marketing
                      
                      
                      1,454,871
                      
                      
                      
                      790,022Selling, general and
      administrative
                      
                      
                      2,137,045
                      
                      
                      
                      1,504,843Total operating expenses
                      
                      
                      3,591,916
                      
                      
                      
                      2,294,865Income
      (loss) from operations
                      
                      
                      1,603,892
                      
                      
                      
                      (227,245
                      )Other
      income (expense):Interest
      expense
                      
                      
                      (2,442
                      )
                      
                      
                      (1,702
                      )Interest and other income
                      
                      
                      42,048
                      
                      
                      
                      47,776Total other income
                      
                      
                      39,606
                      
                      
                      
                      46,074Income
      (loss) before (provision) benefit for income taxes
                      
                      
                      1,643,498
                      
                      
                      
                      (181,171
                      )Income tax (provision)
    benefit
                      
                      
                      (615,258
                      )
                      
                      
                      67,000Net income (loss)
                      
                      $
                      1,028,240
                      
                      
                      $
                      (114,171
                      )Basic net income (loss) per common
      share
                      
                      $
                      0.05
                      
                      
                      $
                      (0.01
                      )Diluted net income (loss) per common
      share
                      
                      $
                      0.05
                      
                      
                      $
                      (0.01
                      )Weighted average number of shares outstanding -
      basic
                      
                      
                      19,185,642
                      
                      
                      
                      18,863,885Weighted average number of shares outstanding -
      diluted
                      
                      
                      19,869,440
                      
                      
                      
                      18,863,885





See
accompanying notes to condensed consolidated financial
statements.


4


ZAGG
INCORPORATED AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





For the Three Months Ended March
      31,2009
                                
                                
                                2008Cash
      flows from operating activitiesNet
      income (loss)
                                
                                $
                                1,028,240
                                
                                
                                $
                                (114,171
                                )Adjustments
      to reconcile net income (loss) to net cashused
      in operating activities:Non-cash
      expense related to stock-based compensation
                                
                                
                                126,985
                                
                                
                                
                                20,908Depreciation
      and amortization
                                
                                
                                52,246
                                
                                
                                
                                32,164Deferred
      income tax expense (benefit)
                                
                                
                                -
                                
                                
                                
                                (67,000
                                )Bad
      debt expense
                                
                                
                                60,421
                                
                                
                                
                                -Foreign
      currency translation adjustment
                                
                                
                                (709
                                )
                                
                                
                                450Changes
      in assets and liabilitiesAccounts
      receivable
                                
                                
                                (734,203
                                )
                                
                                
                                67,195Inventories
                                
                                
                                (1,215,418
                                )
                                
                                
                                (237,688
                                )Prepaid
      advertising
                                
                                
                                -
                                
                                
                                
                                (46,832
                                )Prepaid
      expenses and other current assets
                                
                                
                                (760,911
                                )
                                
                                
                                (117,174
                                )Other
      assets
                                
                                
                                -
                                
                                
                                
                                11Accounts
      payable
                                
                                
                                674,860
                                
                                
                                
                                94,793Accrued
      liabilities
                                
                                
                                (28,368
                                )
                                
                                
                                15,903Accrued
      wages and wage related expenses
                                
                                
                                312
                                
                                
                                
                                872Deferred
      revenues
                                
                                
                                (183,936
                                )
                                
                                
                                (9,458
                                )Deferred
      tax liabilities
                                
                                
                                615,234
                                
                                
                                
                                -Sales return liability
                                
                                
                                241,898
                                
                                
                                
                                12,722Net cash used in operating
      activities
                                
                                
                                (123,349
                                )
                                
                                
                                (347,305
                                )Cash
      flows from investing activitiesShort-term
      loans
                                
                                
                                -
                                
                                
                                
                                (450,000
                                )Purchase of property and
      equipment
                                
                                
                                (136,480
                                )
                                
                                
                                (97,658
                                )Net cash used in investing
      activities
                                
                                
                                (136,480
                                )
                                
                                
                                (547,658
                                )Cash
      flows from financing activitiesPayments
      on debt
                                
                                
                                (5,942
                                )
                                
                                
                                (6,997
                                )Proceeds from issuance of common stock and
      warrants
                                
                                
                                228,666
                                
                                
                                
                                -Net cash provided by (used in) financing
      activities
                                
                                
                                222,724
                                
                                
                                
                                (6,997
                                )Net
      decrease in cash and cash equivalents
                                
                                
                                (37,105
                                )
                                
                                
                                (901,960
                                )Cash and cash equivalents at beginning of the
      period
                                
                                
                                1,065,652
                                
                                
                                
                                2,129,215Cash and cash equivalents at end of the
      period
                                
                                $
                                1,028,547
                                
                                
                                $
                                1,227,255Supplemental
      disclosure of cash flow informationCash paid during the period for
      interest
                                
                                $
                                2,442
                                
                                
                                $
                                1,702





See
accompanying notes to condensed consolidated financial
statements.


5


ZAGG
INCORPORATED


CONDENSED
STATEMENTS OF CASH FLOWS (Continued)


(Unaudited)








Supplemental
schedule of noncash investing and financing activities





For the Three Months Ended March 31,
2009:





None.





For the Three Months Ended March 31,
2008:





None.


















See
accompanying notes to condensed consolidated financial
statements.


6


ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)








NOTE 1–SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Basis of
Presentation – The accompanying unaudited condensed consolidated
financial statements ofZAGG Incorporated
(collectively, the “Company” or “ZAGG”) have been prepared by the Company
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”).  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the following disclosures are adequate to make the
information presented not misleading.  The Company suggests that these
condensed consolidated financial statements be read in conjunction with
the  consolidated financial statements and the notes thereto included
in the Company’s 2008 Annual Report on Form 10-K.





These
condensed financial statements reflect all adjustments (consisting only of
normal recurring adjustments) that, in the opinion of management, are necessary
to present fairly the financial position and results of operations of the
Company for the periods presented.





Operating
results for the three months ended March 31, 2009, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009.





Nature of
Operations– The
Company designs, manufactures and distributes protective coverings, audio
accessories and power solutions for consumer electronic and hand-held devices
under the brand names invisibleSHIELDTM and ZAGGaudioTM.





Principles of
Consolidation–The
condensed consolidated financial statements include the accounts of ZAGG
Incorporated, and its wholly owned subsidiary ZAGG Europe Ltd.  All
significant intercompany transactions have been eliminated in consolidation.





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 consumersand 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 IssuesTask 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–
The Company’s return policy
generally allowsitsend 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.  The sales return liability was
$533,017 at March 31, 2009 and $291,119 at December 31, 2008.





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 three months ended March
31, 2009 and 2008, warranty expense and the reserve for warranty liability,
respectively, was not material.


7


ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





Shipping
and Handling Costs–
Amounts invoiced to customers for
shipping and handlings are included in sales and were$343,707 and $216,129 for the quarter
ended March 31, 2009 and 2008, respectively.Actual shipping and handling costs to
ship products to customers are included in cost of sales and were$1,239,637 and $275,496for thethree months ended March 31, 2009 and
2008, respectively.





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.  For the three months ended March 31, 2009, the Company
recognized stock-based compensation expense of $107,634, related to the issuance
of common stock and options issued under its stock incentive plan.





Advertising –Advertising is expensed as incurred. Advertising expenses were $1,454,871
and $790,022 for the quarter ended March 31, 2009 and 2008, respectively.





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.





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




Net
      Income
                (Loss)
              
              Weighted
                Average
                Shares
              
              Per Share
                AmountThree
      months ended March 31, 2009:Basic
      EPS
              
              $
              1,028,240
              
              19,185,642
              
              
              $
              0.05Effect
      of common stock equivalents
              
              —
              
              683,798Diluted
      EPS
              
              $
              1,028,240
              
              19,869,440
              
              
              $
              0.05Three
      months ended March 31, 2008:Basic
      EPS
              
              $
              (114,171)
              
              18,863,885
              
              
              $
              (0.01)Effect
      of common stock equivalents
              
              —
              
              —Diluted
      EPS
              
              $
              (114,171)
              
              18,863,885
              
              
              $
              (0.01)





The
calculation above for the three months ended March 31, 2008 excludes the
exercise of the 4,249,453 outstanding warrants and 507,000 outstanding stock
options as the exercise of these warrants and stock options would have an
anti-dilutive effect on earnings per share.  There were no potentially
issuable shares with an anti-dilutive effect on earnings per share at March 31,
2009.


8


ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





NOTE2 –ACCOUNTS RECEIVABLE,
NET





Accounts receivable atMarch 31, 2009 andDecember 31, 2008was as follows:





March 31,
    2009
                  
                  
                  December 31,
      2008Accounts
      receivable
                  
                  $
                  4,547,026
                  
                  
                  $
                  3,812,823Less:
      Allowance for doubtful accounts
                  
                  
                  (279,357
                  )
                  
                  
                  (218,936
                  )Accounts
      receivable, net
                  
                  $
                  4,267,669
                  
                  
                  $
                  3,593,887





Bad debt expensefor thethree months ended March 31, 2009 and
2008 was $60,421 and $0, respectively.








NOTE3 –INVENTORIES





AtMarch 31, 2009 andDecember 31, 2008inventories consisted of the
following:





March 31, 2009
                  
                  
                  December 31, 2008Finished
      goods
                  
                  $
                  379,179
                  
                  
                  $
                  204,766Raw
      materials
                  
                  
                  2,749,536
                  
                  
                  
                  1,708,531$
                  3,128,715
                  
                  
                  $
                  1,913,297




NOTE
4 – PROPERTY AND EQUIPMENT





At March
31, 2009 and December 31, 2008, property and equipment consisted of the
following:


Useful Lives
                      
                      March 31, 2009
                      
                      
                      December 31, 2008Computer
      equipment and software
                      3 to
      5 years
                      
                      $
                      285,737
                      
                      
                      $
                      271,287Equipment
                      3
      to7 years
                      
                      
                      360,498
                      
                      
                      
                      314,412Furniture
      and fixtures
                      7
      years
                      
                      
                      58,470
                      
                      
                      
                      56,021Automobiles
                      5
      years
                      
                      
                      93,002
                      
                      
                      
                      84,955Leasehold
      improvements
                      1 to
      2.75 years
                      
                      
                      169,269
                      
                      
                      
                      103,821966,976
                      
                      
                      
                      830,946Less:
      accumulated depreciation
                      
                      
                      
                      (332,224
                      )
                      
                      
                      (281,126
                      )$
                      634,752
                      
                      
                      $
                      549,370





Depreciation
expense was $51,122 and $31,084 for the three months ended March 31, 2009 and
2008, respectively.





NOTE
5 – INTANGIBLE ASSETS





At March
31, 2009, intangible assets consist of legal fees paid in connection with the
Company’s patent application and amounts paid to secure the Company’s Internet
addresses.  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 March 31, 2009, 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.


9


ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





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


Useful Life
                  
                  March 31, 2009
                  
                  
                  December 31, 2008Internet
      addresses
                  10
      years
                  
                  $
                  44,968
                  
                  
                  $
                  44,968Patents
                  Indefinite
                  
                  
                  11,040
                  
                  
                  
                  11,040Less:
      accumulated amortization
                  
                  
                  
                  (9,788
                  )
                  
                  
                  (8,664
                  )$
                  46,220
                  
                  
                  $
                  47,344




Amortization
expense was $1,124 and $1,079 for the quarter ended March 31, 2009 and 2008,
respectively.








NOTE
6 – STOCKHOLDERS’ EQUITY





During
the three months ended March 31, 2009, the Company issued 20,000 shares of its
common stock to employees valued at $29,600 and recorded as compensation expense
in the accompanying financial statements.





During
the three months ended March 31, 2009 the Company granted employee stock options
for 850,000 common shares exercisable at $1.23 per share expiring in 5 years and
vesting 33% at 12 months, 33% at 24 months and 33% at 36 months. The options
were valued at $513,719 or $0.60 per option using the Black-Scholes option
pricing method with the following assumptions: stock price $1.23, expected life
of 5 years, volatility of 59% (using historical volatility since the Company’s
options do not trade to provide an implied volatility) and a discount rate of
0.19%. Based on vesting provisions, the Company expensed $78,034 relating to
these new option grants for the three months ended March 31, 2009.





During
the three months ended March 31, 2009, the Company also granted stock options to
a legal consultant for 30,000 common shares exercisable at $1.42 per share
expiring in 5 years and vesting immediately.  The options were valued
at $20,863 or $0.70 per share using the Black-Scholes method with the following
assumptions: stock price $1.42, expected life of 5 years, volatility of 59%
(using historical volatility since the Company’s options do not trade to provide
an implied volatility) and a discount rate of 0.18%.  Based on vesting
provisions, the Company expensed $19,351 related to this option grant for the
three months ended March 31, 2009.





During
the three months ended March 31, 2009, the Company issued 103,333 shares of its
common stock in exercise of options to purchase 103,333 shares.  The
Company received proceeds of $92,166 related to the exercise of the
options.  The Company also issued 105,000 shares of its common stock
in exercise of warrants to purchase 105,000 shares.  The Company
received proceeds of $136,500 related to the exercise of the
warrants.





NOTE
7 – NOTES RECEIVABLE





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. As of March 31, 2009 the note had not yet been repaid and
the Company had not declared Brighton Partners in default under the promissory
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 and Pow! Entertainment
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.  Through March 31, 2009, the Company had advanced $438,000
to Brighton under the promissory note and has included this amount in notes
receivable in the accompanying consolidated financials.  Accrued
interest of $185,171 on the promissory note is included in prepaid expenses and
other current assets in the accompanying consolidated financial
statements.


10


ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





NOTE
8 – COMMITMENTS AND CONTINGENCIES





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
9 – SUBSEQUENT EVENTS





Subsequent
to March 31, 2009, the Company issued 427,687 shares of its common stock in
exercise of warrants to purchase 427,687 shares of common stock and received
proceeds of $548,512.

















11


ITEM 2.
            MANAGEMENT'S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




Certain
statements, other than purely historical information, including estimates,
projections, statements relating to our business plans, objectives, and expected
operating results, and the assumptions upon which those statements are based,
are “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of
1934.   These forward-looking statements generally are identified
by the words “believes,” “project,” “expects,” “anticipates,” “estimates,”
“intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will
continue,” “will likely result,” and similar
expressions.We
intend such forward-looking statements to be
covered by the safe-harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and are including this
statement for purposes of complying with those safe-harbor
provisions.Forward-looking
statements are based on current expectations and assumptions that are subject to
risks and uncertainties which may cause actual results to differ materially from
the forward-looking statements.Our
ability to predict results or the actual effect of future plans or
strategies is inherently uncertain.  Factors which could have a
material adverse affect on our operations and future prospects include, but are
not limited to: changes in economic conditions, legislative/regulatory changes,
availability of capital, interest
rates, competition, and generally accepted accounting principles. These risks
and uncertainties should also be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements.We
undertake noobligation
to
update or revise publicly any forward-looking statements, whether as a result of
new information, future events or otherwise.Further
information concerning our business, including additional factors that could
materially affect our financial results, is
included herein and in our other filings with the SEC.




Our
Business





Headquartered
in Salt Lake City, Utah, ZAGG Incorporated designs, manufactures and distribute
protective coverings, audio accessories and power solutions for consumer
electronic and hand-held devices under the brand names invisibleSHIELDTM and
ZAGGaudioTM.





Our
flagship 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 context within the aerospace industry. 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.





The
invisibleSHIELD is designed specifically 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 solution which makes the invisibleSHIELD
adhere to the surface of the device, literally “like a second skin,” and
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 3,000 precision pre-cut designs
with a lifetime replacement warranty through online channels, big-box retailers,
electronics specialty stores, resellers, college bookstores, Mac stores, and
mall kiosks.  We plan to increase our product lines to offer new
electronic accessories to our tech-savvy customer base, as well as an expanded
array of invisibleSHIELD products for other industries.





The
ZAGGaudio line of electronics accessories and products was released in late
2008, and focuses on innovation and superior value.  The flagship
product within ZAGGaudio is the award winning, Z.budsTM.  Other
headphone, speaker and audio products have been released and we will release
additional products in the ZAGGaudio line in the coming months and
years.


12


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 address is www.ZAGG.com.





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.





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 ofourproducts to retailers, resellers and
end consumersand from the
sale of distributor license fees.For sales of product, we
recordrevenue 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.





We followthe 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 estimatea 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.





Results
of Operations





THREE
MONTHS ENDED MARCH 31, 2009 AND 2008





Net
sales





Net sales
for the quarter ended March 31, 2009 were $8,090,951 as compared to net sales of
$2,845,362 for the quarter ended March 31, 2008, an increase of $5,245,589 or
184%.


13


The
significant increase in product sales is mainly attributed to continued strong
sales of our invisibleSHIELD product with
approximately 45% of our product being sold through our website to retail
customers, 6% being sold through mall carts and kiosks, 45% through wholesale
channels and 4% from shipping and handling charges





Cost
of sales





Cost of
sales includes raw materials, packing materials, shipping and fulfillment costs.
For the quarter ended March 31, 2009, cost of sales amounted to $2,895,143 or
approximately 36% of net sales as compared to cost of sales of $777,742 or
approximately 27% of net sales for quarter ended March 31, 2008.  The
increase in cost of sales as a percentage of net revenues for the quarter ended
March 31, 2009 as compared to the quarter ended March 31, 2008 attributable to
the overall sales mix shift to wholesale customers which have a lower average
selling price than our internet sales which have historically represented a
larger percentage of the total sales.





Gross
profit





Gross
profit for the quarter ended March 31, 2009 was $5,195,808 or approximately 64%
of net sales as compared to $2,067,620 or approximately 73% of net sales for the
quarter ended March 31, 2008. The decrease in gross profit percentage was again
due to the sales mix shift from internet sales to wholesale customers which have
a lower average selling price.  There are no assurances that we will
continue to recognize similar gross profit margins in the future.





Operating
expenses





Total
operating expenses for the quarter ended March 31, 2009 were $3,591,916, an
increase of $1,297,051 from total operating expenses for the quarter ended March
31, 2008 of $2,294,865. The increases are primarily attributable to the
following:





·
            For
      the quarter ended March 31, 2009, salaries and related taxes increased by
      $123,434 to $837,602 from $714,168 for the quarter ended March 31,
      2008.  The increase is due to the increase in our staff as we
      continue to build the people infrastructure to meet the demand for our
      product.





·
            For
      the quarter ended March 31, 2009, marketing, advertising and promotion
      expenses were $1,454,871, an increase of $664,849 as compared to $790,022
      for the quarter ended March 31, 2008.  We continue to invest
      heavily in the development of the invisibleSHIELD brand through internet
      key word advertising and through traditional print media and radio
      advertising and through the use of coupons.  We expect our
      marketing and advertising expenses to continue to be a significant
      expenditure as our revenues increase and expect to spend increased funds
      on adverting and promotion of our products as well as sales
      training.  During the fiscal year 2009, we intend to continue to
      expand our marketing efforts related to our
  products.


14


·
            For the quarter ended March 31,
      2009, other selling, general and administrative expenses, net of salaries
      and related taxes described above, were $1,299,443 as compared to $790,675
      for the quarter ended March 31, 2008. The increase was attributable to the
      increase in operations as we implement our business plan and is summarized
      below:





Three
      Months
                    Ended
                    March 31, 2009
                  
                  
                  Three
      Months
                    Ended
                    March 31, 2008Professional
      fees
                  
                  $
                  70,066
                  
                  
                  $
                  49,693Contract
      labor
                  
                  
                  31,395
                  
                  
                  
                  235,436Insurance
                  
                  
                  54,465
                  
                  
                  
                  51,883Depreciation
      and amortization
                  
                  
                  52,246
                  
                  
                  
                  32,163Rent
                  
                  
                  97,620
                  
                  
                  
                  83,607Travel
      and entertainment
                  
                  
                  55,265
                  
                  
                  
                  44,837Telephone
      and utilities
                  
                  
                  30,550
                  
                  
                  
                  33,616Printing
      expenses
                  
                  
                  21,315
                  
                  
                  
                  12,201Office
      supplies
                  
                  
                  22,074
                  
                  
                  
                  20,411Credit
      card and bank fees
                  
                  
                  176,532
                  
                  
                  
                  81,728Bad
      debt
                  
                  
                  60,421
                  
                  
                  
                  --Investor
      relations
                  
                  
                  104,393
                  
                  
                  
                  36,582Commissions
                  
                  
                  250,177
                  
                  
                  
                  6,348Other
                  
                  
                  272,924
                  
                  
                  
                  102,170Total
                  
                  $
                  1,299,443
                  
                  
                  $
                  790,675





Income
(loss) from operations





We
reported income from operations of $1,603,892 for the quarter ended March 31,
2009 as compared to loss from operations of ($227,245) for the quarter ended
March 31, 2008, an increase of $1,831,137.  The increase in income
from operations for the quarter ended March 31, 2009 as compared to the quarter
ended March 31, 2008 is primarily attributable to our overall increased revenue
growth due to increased market penetration and product offerings and the
continued expansion of our distribution channels to include additional retail
outlets.





Other
income (expense)





For the
quarter ended March 31, 2009, total other income was $39,606 as compared to
other income of $46,074 for the quarter ended March 31, 2008.  The
decrease is primarily attributed to decreased interest income related to
short-term loans and interest earned on our bank balances and a slight increase
in interest expense.





Net
income





As a
result of these factors, we reported net income of $1,028,240 or $0.05 per share
for the quarter ended March 31, 2009 as compared to a net loss of ($114,171) or
($0.01) per share for the quarter ended March 31, 2008.





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.


15


At March
31, 2009, we had a cash balance of $1,028,547.





Our
working capital position increased by $1,303,510 to working capital of
$6,508,898 at March 31, 2009 from working capital of $5,205,388 at December 31,
2008. This increase in working capital is primarily attributable to the overall
increase in current assets of $2,531,343, increased inventories of $1,215,418,
increased prepaid expenses and other current assets of $760,911, increased
accounts receivable of $673,782, decreased deferred revenue of $183,936,
decreased accrued liabilities of $28,368 and decreased notes payable of $5,942,
partially offset by increased accounts payable of $675,235, increased deferred
tax liabilities of $528,634, and increased sales return liability of $241,898
and decreased cash of $37,105.





Net cash
used in operating activities for the three months ended March 31, 2009 was
($123,349) as compared to net cash used in operating activities of ($347,305)
for the three months ended March 31, 2008.  For the three months ended
March 31, 2009, net cash used in operating activities was attributable primarily
to increased inventory of $1,215,418, increased prepaid expenses and other
current assets of $760,911 and decreased accrued liabilities of $28,368
partially offset by increased accounts payable of $674,860, increased deferred
tax liabilities of $615,234, increased sales returns liabilities of $241,898,
non-cash expense related to stock based compensation of $126,985, bad debt
expense of $60,421 and depreciation and amortization of $52,246.





Net cash
used in investing activities for the three months ended March 31, 2009 was
($136,480) attributable to the purchase of property and equipment of
$136,480.





Net cash
provided by financing activities for the three months ended March 31, 2009 was
$222,724 attributable to proceeds from the exercise of options and warrants of
$228,666, partially offset by payments on short-term debt of
$5,942.





We
reported a net decrease in cash for the three months ended March 31, 2009 of
$37,105.





For the
three months ended March 31, 2009 and 2008, we generated revenues of $8,090,951
and $2,845,362, respectively and reported net income of $1,028,240 and incurred
a net to loss of ($114,171), respectively.  For the three months ended
March 31, 2009, we had negative cash flow from operating activities of
($123,349), negative cash flow from investing activities of ($136,480) and cash
flows from financing activities of $222,724.  As of March 31, 2009, we
had stockholders’ equity of $7,199,558, retained earnings of $2,384,463, working
capital of $6,508,898, accounts payable of $2,301,625, deferred licensing
revenue of $182,654, accrued wages and wage related expenses of $121,424, notes
payable related to equipment financing of $14,281, accrued liabilities of
$184,386, deferred income tax liability of $528,634 and sales returns liability
of $533,017.  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
March 31, 2009, there were no off balance sheet arrangements.





Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk





A smaller
reporting company is not required to provide the information required by this
Item.





Item
      4T.
            Controls
      and Procedures





As of the
date of this report, our Chief Executive Officer and Chief Financial Officer
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-15b under the Securities
Exchange Act of 1934.  Based on their review of our disclosure controls and
procedures, they have concluded that our disclosure controls and procedures are
effective in timely alerting him to material information relating to us that is
required to be included in our periodic SEC filings. Further, there were no
significant changes in the internal controls or in other factors that could
significantly affect these disclosure controls after the evaluation date and the
date of this report. Nor were there any significant deficiencies or material
weaknesses in such disclosure controls and procedures requiring corrective
actions. As a result, no corrective actions were taken.  We have made no
changes in our internal controls over financial reporting in the most recent
quarterly reporting period that have materially affected, or are reasonably
likely to affect, our internal controls over financial
reporting.


16


Limitations on the
Effectiveness of Internal Controls





Our
management does not expect that our disclosure controls and procedures or our
internal control over financial reporting will necessarily prevent all fraud and
material error. An internal control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues and instances of fraud, if
any, within the Company have been detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the internal control. The design of
any system of controls also is based in part upon 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.
Over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.





PART
II - OTHER INFORMATION





Item
      1.
            Legal
      Proceedings





We are
not presently party to any legal proceedings.  We are not aware of any
pending legal proceeding to which any of our officers, directors, or any
beneficial holders of 5% or more of our voting securities are adverse to us or
have a material interest adverse to us.





Item
      1A:
            Risk
      Factors





A smaller
reporting company is not required to provide the information required by this
Item.





Item
      2.
            Unregistered
      Sales of Equity Securities and Use of
Proceeds





During
the three months ended March, 31, 2009, we issued the following
securities:





§
            20,000
      shares of common stock to employees valued at
  $29,600;





§
            stock
      options for 850,000 common shares exercisable at $1.23 per share expiring
      in 5 years and vesting 33% at 12 months, 33% at 24 months and 33% at 36
      months. The options were valued at $513,719 or $0.60 per option using the
      Black-Scholes option pricing method with the following assumptions: stock
      price $1.23, expected life of 5 years, volatility of 59% (using historical
      volatility since the Company’s options do not trade to provide an implied
      volatility) and a discount rate of
0.19%;





§
            stock
      options to a legal consultant for 30,000 common shares exercisable at
      $1.42 per share expiring in 5 years and vesting
      immediately.  The options were valued at $20,863 or $0.70 per
      share using the Black-Scholes method with the following assumptions: stock
      price $1.42, expected life of 5 years, volatility of 59% (using historical
      volatility since the Company’s options do not trade to provide an implied
      volatility) and a discount rate of
0.18%;





§
            103,333
      shares of common stock in exercise of options to purchase 103,333
      shares.  We received proceeds of $92,166 related to the exercise
      of the options; and


17


§
            105,000
      shares of common stock in exercise of warrants to purchase 105,000
      shares.  We received proceeds of $136,500 related to the
      exercise of the warrants;





Subsequent
to March 31, 2009, we issued 427,687 shares of common stock in exercise of
warrants to purchase 427,687 shares of common stock and received proceeds of
$548,512.





These
securities were issued pursuant to Section 4(2) of the Securities Act of 1933,
as amended.





Item
      3.
            Defaults
      Upon Senior Securities





None.





Item
      4.
            Submission
      of Matters to a Vote of Security
Holders





No
matters have been submitted to our security holders for a vote, through the
solicitation of proxies or otherwise, during the quarter ended March 31,
2009.





Item
      5.
            Other
      Information





None.





18


Item
      6.
            Exhibits





a.  Exhibits:
The following Exhibits are filed with this Form 10-Q pursuant to Item 601(a) of
Regulation S-K:





Exhibit No.
                Description of Exhibit31.1
                Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
                Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32.1
                Certification
      of Chief Executive Officer pursuant to 18 U.S. C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.32.2
                Certification
      of Chief Financial Officer pursuant to 18 U.S. C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of
  2002.





SIGNATURES





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








ZAGG
      INCORPORATEDDate:
      May 14, 2009
              /s/
      ROBERT G. PEDERSEN IIRobert
      G. Pedersen II,President
      and Chief Executive OfficerDate:
      May 14, 2009
              /s/
      BRANDON T. O’BRIENBrandon
      T. O’Brien,Chief
      Financial Officer(Principal
      financial officer)





19