**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 September 30, 2008,
                or





o
            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 xNo
o.**





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting
      company. **o** **Large accelerated filer o
      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 oNo
x**





State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: **19,143,995
      common shares as of November 12, 2008.**









**ZAGG
      INCORPORATED AND SUBSIDIARY**


**FORM
      10-Q**








**TABLE
      OF CONTENTS**





**PART
      I - FINANCIAL INFORMATION**




**Page**Item
                  1.
              
              Financial
                  Statements (Unaudited)Condensed
                  Consolidated Balance Sheets - As of September 30, 2008 and December
                  31,
                  2007
              
              3Condensed
                  Consolidated Statements of Operations for the Three and Nine Months
                  EndedSeptember
                  30, 2008 and 2007
              
              4Condensed
                  Consolidated Statements of Cash Flows for the Nine Months EndedSeptember
                  30, 2008 and 2007
              
              5Notes
                  to Condensed Consolidated Financial Statements
              
              7Item
                  2.
              
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              13Item
                  3.
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              19Item
                  4T.
              
              Controls
                  and Procedures
              
              19


**PART
                  II - OTHER
                  INFORMATION**Item
                  1.
              
              Legal
                  Proceedings
              
              20Item
                  1A.
              
              Risk
                  Factors
              
              20Item
                  2.
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              20Item
                  3.
              
              Defaults
                  Upon Senior Securities
              
              20Item
                  4.
              
              Submission
                  of Matters to a Vote of Security Holders
              
              21Item
                  5.
              
              Other
                  Information
              
              21Item
                  6.
              
              Exhibits
              
              21









**ZAGG
      INCORPORATED AND SUBSIDIARY**


**CONDENSED
      CONSOLIDATED BALANCE SHEETS**


**(Unaudited)**




**September
                  30,**
              
              **December
                  31,****2008**
              
              **2007****ASSETS****Current
                  assets**Cash
              
              $
              949,833
              
              $
              2,129,215Accounts
                  receivable, net
              
              
              2,756,822
              
              
              402,446Inventories
              
              
              847,709
              
              
              447,044Prepaid
                  advertising
              
              
              146,729
              
              
              204,976Prepaid
                  expenses and other current assets
              
              
              1,060,177
              
              
              122,107Deferred
                  income tax assets
              
              
              12,829
              
              
              12,829**Total
                  current assets**
              
              
              5,774,099
              
              
              3,318,617**Property
                  and equipment, net**
              
              
              464,297
              
              
              328,077**Deferred
                  income tax assets**
              
              
              -
              
              
              444,118**Deposits
                  and other assets**
              
              
              58,334
              
              
              30,547**Intangible
                  assets, net**
              
              
              45,365
              
              
              46,894**Total
                  assets**
              
              $
              6,342,095
              
              $
              4,168,253**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities**Notes
                  payable
              
              $
              24,060
              
              $
              42,090Accounts
                  payable
              
              
              1,147,982
              
              
              505,575Accrued
                  liabilities
              
              
              9,799
              
              
              35,814Accrued
                  wages and wage related expenses
              
              
              104,982
              
              
              95,537Deferred
                  licensing revenue
              
              
              108,509
              
              
              100,911Deferred
                  income tax liability
              
              
              122,117
              
              
              -Sales
                  returns liability
              
              
              230,035
              
              
              23,861**Total
                  current liabilities**
              
              
              1,747,484
              
              
              803,788**Total
                  liabilities**
              
              
              1,747,484
              
              
              803,788**Stockholders'
                  equity**Common
                  stock, $0.001 par value; 50,000,000 shares authorized;19,093,995
                  and 18,853,995 shares issued and outstanding, respectively
              
              
              19,095
              
              
              18,855Warrants
                  to purchase common stock
              
              
              739,338
              
              
              750,476Additional
                  paid-in capital
              
              
              3,613,796
              
              
              3,341,388Cumulative
                  translation adjustment
              
              
              14,495
              
              
              (3,866
              )Retained
                  earnings (deficit)
              
              
              207,887
              
              
              (742,388
              )**Total
                  stockholders' equity**
              
              
              4,594,611
              
              
              3,364,465**Total
                  liabilities and stockholders' equity**
              
              $
              6,342,095
              
              $
              4,168,253




See
        accompanying notes to condensed consolidated financial
        statements.




3




**ZAGG
      INCORPORATED AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**




**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30, 2008**
              
              **September
                  30, 2007**
              
              **September
                  30, 2008**
              
              **September
                  30, 2007****Net
                  sales**
              
              $
              6,854,916
              
              $
              1,437,408
              
              $
              12,460,812
              
              $
              3,034,714**Cost
                  of sales**
              
              
              2,416,988
              
              
              299,027
              
              
              3,920,003
              
              
              689,858**Gross
                  profit**
              
              
              4,437,928
              
              
              1,138,381
              
              
              8,540,809
              
              
              2,344,856**Operating
                  expenses:**Advertising
                  and marketing
              
              
              1,169,073
              
              
              227,624
              
              
              2,483,356
              
              
              467,410Selling,
                  general and administrative
              
              
              1,898,149
              
              
              1,660,722
              
              
              4,715,538
              
              
              2,921,952**Total
                  operating expenses**
              
              
              3,067,222
              
              
              1,888,346
              
              
              7,198,894
              
              
              3,389,362**Income
                  (loss) from operations**
              
              
              1,370,706
              
              
              (749,965
              )
              
              1,341,915
              
              
              (1,044,506
              )**Other
                  income (expense):**Interest
                  expense
              
              
              (796
              )
              
              (4,132
              )
              
              (3,470
              )
              
              (30,231
              )Interest
                  and other income
              
              
              49,139
              
              
              20,903
              
              
              178,069
              
              
              24,988**Total
                  other income (expense)**
              
              
              48,343
              
              
              16,771
              
              
              174,599
              
              
              (5,243
              )**Income
                  (loss) before benefit (provision) for income
                  taxes**
              
              
              1,419,049
              
              
              (733,194
              )
              
              1,516,514
              
              
              (1,049,749
              )**Income
                  tax benefit (provision)**
              
              
              (529,306
              )
              
              (234
              )
              
              (566,236
              )
              
              (2,544
              )**Net
                  income (loss)**
              
              $
              889,743
              
              $
              (733,428
              )
              $
              950,278
              
              $
              (1,052,293
              )**Basic
                  net income (loss) per common share**
              
              $
              0.05
              
              $
              (0.04
              )
              $
              0.05
              
              $
              (0.07
              )**Diluted
                  net income (loss) per common share**
              
              $
              0.05
              
              $
              (0.04
              )
              $
              0.05
              
              $
              (0.07
              )**Weighted
                  average number of shares outstanding - basic**
              
              
              18,981,386
              
              
              17,631,495
              
              
              18,956,290
              
              
              16,131,123**Weighted
                  average number of shares outstanding - diluted**
              
              
              19,436,146
              
              
              17,631,495
              
              
              19,290,502
              
              
              16,131,123




See
      accompanying notes to condensed consolidated financial statements.




4




**ZAGG
      INCORPORATED AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**




**For
                  the Nine Months Ended****September
                  30, 2008**
              
              **September
                  30, 2007****Cash
                  flows from operating activities**Net
                  income (loss)
              
              $
              950,278
              
              $
              (1,052,293
              )Adjustments
                  to reconcile net income (loss) to net cashused
                  in operating activities:Non-cash
                  expense related to stock-based compensation
              
              
              211,510
              
              
              800,000Depreciation
                  and amortization
              
              
              112,162
              
              
              58,430Deferred
                  income tax expense
              
              
              566,235
              
              
              2,950Bad
                  debt expense
              
              
              56,170
              
              
              -Gain
                  on asset disposals
              
              
              (12,215
              )
              
              -Currency
                  exchange loss (gain)
              
              
              18,361
              
              
              (54
              )Changes
                  in assets and liabilitiesAccounts
                  receivable
              
              
              (2,410,546
              )
              
              (74,518
              )Inventories
              
              
              (400,665
              )
              
              (226,403
              )Due
                  from employees
              
              
              -
              
              
              3,714Prepaid
                  advertising
              
              
              58,247
              
              
              (205,782
              )Prepaid
                  expenses and other current assets
              
              
              (475,855
              )
              
              (108,487
              )Other
                  assets
              
              
              (27,787
              )
              
              (18,593
              )Accounts
                  payable
              
              
              642,404
              
              
              21,280Accrued
                  liabilities
              
              
              (26,015
              )
              
              (1,288
              )Accrued
                  wages and wage related expenses
              
              
              9,445
              
              
              (48,766
              )Deferred
                  licensing revenues
              
              
              7,598
              
              
              8,152Sales
                  return liability
              
              
              206,174
              
              
              (15,401
              )Net
                  cash used in operating activities
              
              
              (514,499
              )
              
              (857,059
              )**Cash
                  flows from investing activities**Payments
                  for intangible assets
              
              
              (1,800
              )
              
              (48,764
              )Short-term
                  loans
              
              
              (450,000
              )
              
              -Proceeds
                  from disposal of equipment
              
              
              2,994
              
              
              -Purchase
                  of property and equipment
              
              
              (248,047
              )
              
              (114,356
              )Net
                  cash used in investing activities
              
              
              (696,853
              )
              
              (163,120
              )**Cash
                  flows from financing activities**Payments
                  on debt
              
              
              (18,030
              )
              
              (250,000
              )Proceeds
                  from notes payable
              
              
              -
              
              
              200,000Proceeds
                  from issuance of common stock and warrants
              
              
              50,000
              
              
              2,798,550Payments
                  on convertible note payable - officer
              
              
              -
              
              
              (50,000
              )Net
                  cash provided by financing activities
              
              
              31,970
              
              
              2,698,550**Net
                  (decrease) increase in cash and cash equivalents**
              
              
              (1,179,382
              )
              
              1,678,371**Cash
                  and cash equivalents at beginning of the period**
              
              
              2,129,215
              
              
              468,382**Cash
                  and cash equivalents at end of the period**
              
              $
              949,833
              
              $
              2,146,753**Supplemental
                  disclosure of cash flow information**Cash
                  paid during the period for interest
              
              $
              3,699
              
              $
              16,736




See
      accompanying notes to condensed consolidated financial statements.




5





**ZAGG
      INCORPORATED**


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


**(Unaudited)**






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





**For
      the Nine Months Ended September 30, 2008:**





Issued
      80,000 shares of common stock for payment of consulting services.





Issued
      60,000 shares of common stock to employees.





**For
      the Nine Months Ended September 30, 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
      800,000 shares of common stock to employees and consultants.





Issued
      warrants to purchase 100,000 shares of common stock in connection with note
      payable.






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
      of ** ZAGG
      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 2007 Annual
      Report on Form 10-KSB.





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 nine months ended September 30, 2008, are not necessarily
      indicative of the results that may be expected for the year ending December
      31,
      2008.





***Nature
      of Operations*** **-** ****** The
      Company was 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.





The
      Company changed its name from ShieldZone Corporation to ZAGG Incorporated to
      better position it 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 the Company’s core product, the name change will enable the
      Company the opportunity to easily add new products to its product offering.
      ZAGG
      will continue to search out other complimentary proven products and companies
      that fit the ZAGG lifestyle and strategy for fast growth.





The
      Company has developed and sells, through the Internet, retail and wholesale
      distribution channels, patent-pending protective shields under the name of
      the *invisible* SHIELDTM
      for electronic devices.





***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 ***.***





***Business
      Condition*** **** -
      For the
      three months ended September 30, 2008 and 2007, the Company generated revenues
      of $6,854,916 and $1,437,408, respectively, and earned net income of $889,743
      and incurred a net loss of ($733,428), respectively. For the nine months ended
      September 30, 2008 and 2007, the Company generated revenues of $12,460,812
      and
      $3,034,714, respectively, and earned net income of $950,278 and incurred a
      net
      loss of ($1,052,293), respectively, and had negative cash flow from operating
      activities of ($514,499) and ($857,059), respectively. As of September 30,
      2008,
      the Company had stockholders’ equity of $4,594,611, retained earnings of
      $207,887, positive working capital of $4,026,615, accounts payable of
      $1,147,982, deferred licensing revenue of $108,509, accrued wages of $104,982,
      sales returns liability of $230,035 and accrued liabilities of $9,799.
      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.




7




**ZAGG
        INCORPORATED AND SUBSIDIARY**
 **Notes
        to Condensed Consolidated Financial Statements**
 **(Unaudited)**


***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” 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 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. The
      sales return liability was $230,035 at September 30, 2008 and $23,861 at
      December 31, 2007.





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 nine months ended September 30, 2008 and 2007,
      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 and
      were
      $744,293 and $199,711 for the nine months ended September 30, 2008 and 2007,
      respectively. Actual shipping and handling costs to ship products to customers
      are included in cost of sales and were $901,074 and $279,056 for the nine months
      ended September 30, 2008 and 2007, 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.





***Reclassification***  ***-*** Certain
      amounts in the 2007 condensed consolidated financial statements have been
      reclassified to conform to the 2008 condensed consolidated financial statement
      classification. The reclassifications have had no effect on net income reported
      for the quarter and nine months ended September 30, 2007.





***Advertising
      -*** Advertising
      is expensed as incurred. Advertising expenses were $2,483,356 and $467,410
      for
      the nine months ended September 30, 2008 and 2007, respectively ***.***





***Net
      Income (Loss) Per Common Share*** **** -
      Basic
      net income (loss) per share is computed by dividing net income (loss) by
      weighted average number of shares of common stock outstanding during each
      period. Diluted net income (loss) per share is computed by dividing net income
      (loss) by the weighted average number of shares of common stock, common stock
      equivalents and potentially dilutive securities outstanding during each period.




8


**ZAGG
        INCORPORATED AND SUBSIDIARY**
 **Notes
        to Condensed Consolidated Financial Statements**
 **(Unaudited)**


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**
              **Amount**Three
                months ended September 30, 2008:Basic
                EPS
            
            $
            889,743
            
            
            18,981,386
            
            $
            0.05Effect
                of common stock equivalents
            
            
            —
            
            
            454,760Diluted
                EPS
            
            $
            889,743
            
            
            19,436,146
            
            $
            0.05Three
                months ended September 30, 2007:Basic
                EPS
            
            $
            (733,428
            )
            
            17,631,495
            
            $
            (0.04
            )Effect
                of common stock equivalents
            
            
            —
            
            
            —Diluted
                EPS
            
            $
            (733,428
            )
            
            17,631,495
            
            $
            (0.04
            )






**Net**
              **Income
                (Loss)**
            
            **Weighted
                Average**
              **Shares**
            
            **Per Share**
              **Amount**Nine
                months ended September 30, 2008:Basic
                EPS
            
            $
            950,278
            
            
            18,956,290
            
            $
            0.05Effect
                of common stock equivalents
            
            
            —
            
            
            334,212Diluted
                EPS
            
            $
            950,278
            
            
            19,290,502
            
            $
            0.05Nine
                months ended September 30, 2007:Basic
                EPS
            
            $
            (1,052,293
            )
            
            16,131,123
            
            $
            (0.07
            )Effect
                of common stock equivalents
            
            
            —
            
            
            —Diluted
                EPS
            
            $
            (1,052,293
            )
            
            16,131,123
            
            $
            (0.07
            )




The
      calculation above for the three and nine months ended excludes the exercise
      of
      the 3,000 stock options and 4,096,953 of the outstanding warrants as of
      September 30, 2008 and the 152,500 outstanding warrants at September 30, 2007
      as
      the exercise of these stock options and warrants would have an anti-dilutive
      effect on earnings per share.





**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 $275,000
      ($0.35 per share) and conversion of a $250,000 convertible promissory note
      for
      714,286 common shares. The Company also issued warrants in conjunction with
      the
      sale of the 785,856 common shares and the raise and conversion of the $250,000
      convertible promissory note. The Company issued warrants as a fee to purchase
      52,500 shares of our 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 have 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.




9




**ZAGG
        INCORPORATED AND SUBSIDIARY**
 **Notes
        to Condensed Consolidated Financial Statements**
 **(Unaudited)**




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 sheet 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.





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





**NOTE
      3** **-** **ACCOUNTS RECEIVABLE, NET**





Accounts
      receivable at September 30, 2008 and December 31, 2007 was as
      follows:





**September
                30, 2008**
            
            **December
                31, 2007**Accounts
                receivable
            
            $
            2,879,989
            
            $
            436,839Less:
                Allowance for doubtful accounts
            
            
            (123,167
            )
            
            (34,393
            )Accounts
                receivable, net
            
            $
            2,756,822
            
            $
            402,446





Bad
      debt
      expense for the nine months ended September 30, 2008 was $56,170.




**NOTE
      4** **-** **INVENTORIES**





At
      September 30, 2008 and December 31, 2007 inventories consisted of the
      following:





**September
                30, 2008**
            
            **December
                31, 2007**Finished
                goods
            
            $
            401,257
            
            $
            230,937Raw
                materials
            
            
            446,452
            
            
            216,107$
            847,709
            
            $
            447,044




**NOTE
        5 - PROPERTY AND EQUIPMENT**
 
 At
        September 30, 2008 and December 31, 2007, property and equipment consisted
        of
        the following:




**Useful
                Lives**
            
            **September
                30, 2008**
            
            **December
                31, 2007**Computer
                equipment and software
            
            
            3
                to 5 years
            
            $
            222,598
            
            $
            155,603Office
                equipment
            
            
            3
                to7 years
            
            
            264,339
            
            
            144,343Furniture
                and fixtures
            
            
            7
                years
            
            
            40,163
            
            
            15,209Automobiles
            
            
            5
                years
            
            
            68,995
            
            
            47,063Leasehold
                improvements
            
            
            1
                to 3.13 years
            
            
            102,346
            
            
            91,637698,441
            
            
            453,855Less:
                accumulated depreciation
            
            
            
            
            
            (234,144
            )
            
            (125,778
            )$
            464,297
            
            $
            328,077




10




**ZAGG
        INCORPORATED AND SUBSIDIARY**
 **Notes
        to Condensed Consolidated Financial Statements**
 **(Unaudited)**


Depreciation
      expense was $108,833 and $57,351 for the nine months ended September 30, 2008
      and 2007, respectively.





**NOTE
      6 - INTANGIBLE ASSETS**





At
      September 30, 2008, 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
      September 30, 2008, 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:




**Useful
                Life**
            
            **September
                30, 2008**
            
            **December
                31, 2007**Internet
                addresses
            
            
            10
                years
            
            $
            44,969
            
            $
            43,169Less:
                accumulated amortization
            
            
            
            
            
            (7,539
            )
            
            (4,210
            )$
            37,430
            
            $
            38,959




Amortization
      expense was $3,329 for the nine months ended September 30, 2008.





**NOTE
      7 - STOCKHOLDERS’ EQUITY**





During
      the nine months ended September 30, 2008, the Company issued 60,000 shares
      of
      its common stock to employees valued at $47,400, or an average of $0.79 per
      share based on the closing price of the Company’s common stock, and recorded as
      compensation expense in the accompanying financial statements.





On
      March
      6, 2008 the Company granted employee stock options for 507,000 common shares
      exercisable at $0.65 per share expiring in 5 years and vesting 33% at 12 months,
      33% at 24 months and 34% at 36 months. The options were valued at $163,652
      or
      $0.32 per option using a Black-Scholes option pricing method with the following
      assumptions: market price on grant date of $0.65, expected life of 5 years,
      volatility of 57% (using historical volatility since the Company’s options do
      not trade to provide an implied volatility) and a discount rate of 1.73%. On
      May
      12, 2008, the Company also granted stock options to a member of its board of
      directors for 1,000,000 common shares exercisable at $0.60 per share expiring
      in
      5 years and vesting 33% at 12 months, 33% at 24 months and 34% at 36 months.
      The
      options were valued at $290,687 or $0.29 per option using the Black-Scholes
      option pricing method with the following assumptions: market price on grant
      date
      of $0.60, expected life of 5 years, volatility of 55% (using historical
      volatility since the Company’s options do not trade to provide an implied
      volatility) and a discount rate of 1.70%. On September 22, 2008, the Company
      also granted stock options to an employee for 3,000 common shares exercisable
      at
      $1.13 per share expiring in 5 years and vesting 33% at 12 months, 33% at 24
      months and 34% at 36 months. The options were valued at $1,651 or $0.55 per
      option using the Black-Scholes option pricing method with the following
      assumptions: market price on grant date of $1.13, expected life of 5 years,
      volatility of 57% (using historical volatility since the Company’s options do
      not trade to provide an implied volatility) and a discount rate of 0.69%. Based
      on vesting provisions, for the nine months ended September 30, 2008, the Company
      expensed $109,710 as compensation expense related to these option
      grants.




11




**ZAGG
        INCORPORATED AND SUBSIDIARY**
 **Notes
        to Condensed Consolidated Financial Statements**
 **(Unaudited)**


**NOTE
      8 - 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 September 30, 2008 the note had not yet been repaid
      and the Company had not declared Brighton Partners in default under the
      promissory note. The Company anticipates that the note will be repaid during
      the
      fourth quarter of 2008. 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, we acquired 10% of the membership interest in Brighton. ZAGG will
      share in the development of the superhero series as a partner of Brighton.
      At
      September 30, 2008, the Company had advanced $438,000 to Brighton under the
      promissory note and has included this amount in prepaid expenses and other
      current assets in the accompanying condensed consolidated financials. Accrued
      interest of $96,598 on the promissory note is included in prepaid expenses
      and
      other current assets in the accompanying condensed consolidated financial
      statements.





**NOTE
      9 - 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
      10 - SUBSEQUENT EVENTS**





On
      October 1, 2008, the Company issued 50,000 shares of its common stock valued
      at
      $48,500, or $0.97 per share based on the closing price of the Company’s common
      stock, for services to be rendered by a consultant. ****




12




**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 no obligation 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**





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 2,500 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.





We
      also
      sell accessories for electronics devices including power cords, chargers and
      adapters.





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.





***Critical
      Accounting Policies***




13




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.





***Recent
      Accounting Pronouncements***





In
      February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB
      Statement No. 157 (“FSP FAS 157-2”).  FSP 157-2 delays the effective
      date of SFAS 157 for non-financial assets and non-financial liabilities, except
      those that are recognized or disclosed at fair value in the financial statements
      on a recurring basis (at least annually).  We will adopt FAS 157 for
      non-financial assets and non-financial liabilities on December 31, 2008,
      and we do not anticipate this adoption will have a material impact on our
      financial statements.





In
      March 2008, the FASB issued SFAS No. 161, “Disclosures about
      Derivative Instruments and Hedging Activities, an amendment of FASB Statement
      No. 133,” which will require increased disclosure about strategies and
      objectives for using derivative instruments; the location and amounts of
      derivative instruments in financial statements; how derivative instruments
      and
      related hedged items are accounted for under SFAS No 133, “Accounting for
      Derivative Instruments and Hedging Activities;” and how derivative instruments
      and related hedged items affect the financial position, financial performance,
      and cash flows.  Certain disclosures will also be required with respect to
      derivative features that are credit-risk related.  SFAS No 161 is effective
      for us beginning January 1, 2009 on a prospective basis.  We do not
      expect this standard to have a material impact on our consolidated results
      of
      operations or financial condition.





***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.





We
      follow
      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.




14




**Results
        of Operations**
 
 **THREE
        MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**
 
 ***Net
        sales***
 
 Net
        sales
        for the quarter ended September 30, 2008 were $6,854,916 as compared to net
        sales of $1,437,408 for the quarter ended September 30, 2007, an increase
        of
        $5,417,508 or 377%.
 
 The
        significant increase in revenue is mainly attributed to continued strong
        sales
        of our *invisible* SHIELD
        product with approximately 50% of our product being sold through our website
        to
        retail customers, 7% being sold through mall carts and kiosks, 38% through
        wholesale channels and 5% from shipping and handling charges.
 
 ***Cost
        of sales***
 
 Cost
        of
        sales includes raw materials, packing materials and shipping costs. For the
        quarter ended September 30, 2008, cost of sales amounted to $2,416,988 or
        approximately 35% of net sales as compared to cost of sales of $299,027 or
        21%
        of net sales for quarter ended September 30, 2007. The increase in cost of
        sales
        as a percentage of net revenues for the quarter ended September 30, 2008
        as
        compared to the quarter ended September 30, 2007 is 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 September 30, 2008 was $4,437,928 or approximately
        65% of net sales as compared to $1,138,381 or approximately 79% of net sales
        for
        the quarter ended September 30, 2007. 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 September 30, 2008 were $3,067,222,
        an
        increase of $1,178,876 from total operating expenses for the quarter ended
        September 30, 2007 of $1,888,346. The increases are primarily attributable
        to
        the following:
 
 ·
            For
                the quarter ended September 30, 2008, salaries and related taxes
                decreased
                by $484,484 to $766,592 from $1,251,076 for the quarter ended September
                30, 2008. The decrease is due to the non-cash expense recognized
                in 2007
                for stock-based compensation when we issued 800,000 shares of our
                common
                stock to employees and consultants of $800,000 partially offset by
                increased wage expenses incurred due to the addition of staff as
                we
                continue to build the people infrastructure to meet the demand for
                our
                product and non-cash expense related to equity based compensation
                of
                $80,821. 
 ·
            For
                the quarter ended September 30, 2008, marketing, advertising and
                promotion
                expenses were $1,169,073, an increase of $941,449 as compared to
                $227,624
                for the quarter ended September 30, 2007. We continue to invest heavily
                in
                the development of the invisibleSHIELD brand through internet key
                word
                advertising, 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 fiscal 2008, we intend to continue
                to
                expand our marketing efforts related to our
                products. 
 ·
            For
                the quarter ended September 30, 2008, other selling, general and
                administrative expenses, net of salaries and related taxes described
                above, were $1,131,557 as compared to $409,646 for the quarter ended
                September 30, 2007. The increase was attributable to the increase
                in
                operations as we implement our business plan and is summarized
                below:  15
  **Three
                  Months Ended****September
                  30, 2008**
              
              **Three
                  Months Ended****September
                  30, 2007**Professional
                  fees
              
              $
              42,441
              
              $
              25,795Contract
                  labor
              
              
              183,805
              
              
              80,421Insurance
              
              
              34,468
              
              
              24,327Depreciation
                  and amortization
              
              
              42,069
              
              
              21,455Rent
              
              
              97,028
              
              
              59,547Travel
                  and entertainment
              
              
              46,493
              
              
              29,518Telephone
                  and utilities
              
              
              33,393
              
              
              20,586Printing
                  expenses
              
              
              34,845
              
              
              12,068Office
                  supplies
              
              
              18,536
              
              
              17,636Credit
                  card and bank fees
              
              
              113,063
              
              
              37,434Investor
                  relations
              
              
              103,521
              
              
              48,185Commissions
              
              
              157,676
              
              
              2,533Consulting
              
              
              30,000
              
              
              --Other
              
              
              194,219
              
              
              30,141Total
              
              $
              1,131,557
              
              $
              409,646
 
 ***Income
        (loss) from operations***
 
 We
        reported income from operations of $1,370,706 for the quarter ended September
        30, 2008 as compared to loss from operations of ($749,965) for the quarter
        ended
        September 30, 2007, an increase of $2,120,671. The increased income from
        operations for the quarter ended September 30, 2008 as compared to the quarter
        ended September 30, 2007 is primarily attributable to our overall increased
        revenue growth due to increased market penetration and the continued expansion
        of our distribution channels to include additional retail outlets.
 
 ***Other
        income (expense)***
 
 For
        the
        quarter ended September 30, 2008, total other income was $48,343 compared
        to
        other income of $16,771 for the quarter ended September 30, 2007. The increase
        is primarily attributed to interest income related to short-term loans and
        interest earned on our bank balances of $48,648.
 
 ***Net
        income (loss)***
 
 As
        a
        result of these factors, we reported net income of $889,743 or $0.05 per
        share
        for the quarter ended September 30, 2008 as compared to a net loss of ($733,428)
        or ($0.04) per share for the quarter ended September 30, 2007.
 
 **NINE
        MONTHS ENDED SEPTEMBER 30, 2008 AND 2007**
 
 ***Net
        sales***
 
 Net
        sales
        for the nine months ended September 30, 2008 were $12,460,812 as compared
        to net
        sales of $3,034,714 for the nine months ended September 30, 2007, an increase
        of
        $9,426,098 or 311%.
 
 The
        significant increase in product sales is mainly attributed to continued strong
        sales of our *invisible* SHIELD
        product with approximately 56% of our product being sold through our website
        to
        retail customers, 9% being sold through mall carts and kiosks, 29% through
        wholesale channels and 6% from shipping and handling charges.
  16
  ***Cost
        of sales***
 
 Cost
        of
        sales includes raw materials, packing materials and shipping costs. For the
        nine
        months ended September 30, 2008, cost of sales amounted to $3,920,003 or
        approximately 31% of net sales as compared to cost of sales of $689,858 or
        23%
        of net sales for the nine months ended September 30, 2007. The increase in
        cost
        of sales as a percentage of net revenues for the nine months ended September
        30,
        2008 as compared to the nine months ended September 30, 2007 is primarily
        attributable 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 and overall increases
        in our
        packaging expenses.
 
 ***Gross
        profit***
 
 Gross
        profit for the nine months ended September 30, 2008 was $8,540,809 or
        approximately 69% of net sales as compared to $2,344,856 or approximately
        77% of
        net sales for the nine months ended September 30, 2007. The decrease in gross
        profit percentage was primarily attributable to the overall sales mix shift
        to
        more wholesale customers and overall increased packaging costs. There are
        no
        assurances that we will continue to recognize similar gross profit margins
        in
        the future.
 
 ***Operating
        expenses***
 
 Total
        operating expenses for the nine months ended September 30, 2008 were $7,198,894,
        an increase of $3,809,532 from total operating expenses for the nine months
        ended September 30, 2007 of $3,389,362. The increases are primarily attributable
        to the following:
 
 ·
            For
                the nine months ended September 30, 2008, salaries and related taxes
                increased by $231,193 to $2,136,712 from $1,905,519 for the nine
                months
                ended September 30, 2007. The increase is due to the increase in
                our
                management and production staff as we continue to build the people
                infrastructure to meet the demand for our product, the payment of
                a
                discretionary bonus of $155,000 during the first quarter to our employees
                and non-cash expense related to equity based compensation of $157,110,
                partially offset by the non-cash expense recognized for the nine
                months
                ended September 30, 2007 of $800,000 related to the 800,000 shares
                of our
                common stock issued to employees and
                consultants. 
 ·
            For
                the nine months ended September 30, 2008, marketing, advertising
                and
                promotion expenses were $2,483,356, an increase of $2,015,946 as
                compared
                to $467,410 for the nine months ended September 30, 2007. 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. During the nine months ended September 30, 2008,
                we
                have also printed coupons and handed them out at various trade shows
                and
                events wherein customers logged onto our website through a specific
                link
                and were able to redeem the coupon. These coupons ran for specific
                time
                frames with expiration dates and the redemption of the coupons of
                $915,113
                was recognized as marketing and advertising expense. 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 fiscal 2008, we intend to continue to expand our marketing
                efforts
                related to our products.  17
  ·
            For
                the nine months ended September 30, 2008, other selling, general
                and
                administrative expenses net of salaries and related taxes described
                above,
                were $2,578,826 as compared to $978,203 for the nine months ended
                September 30, 2007. The increase was attributable to the increase
                in
                operations as we implement our business plan and is summarized
                below: 
 **Nine
                  Months Ended****September
                  30, 2008**
              
              **Nine
                  Months Ended****September
                  30, 2007**Professional
                  fees
              
              $
              113,053
              
              $
              248,240Contract
                  labor
              
              
              480,443
              
              
              120,650Insurance
              
              
              148,650
              
              
              52,536Depreciation
                  and amortization
              
              
              111,413
              
              
              58,430Rent
              
              
              277,574
              
              
              114,538Travel
                  and entertainment
              
              
              139,394
              
              
              68,565Telephone
                  and utilities
              
              
              95,469
              
              
              44,893Printing
                  expenses
              
              
              54,157
              
              
              31,719Office
                  supplies
              
              
              53,023
              
              
              41,776Credit
                  card and bank fees
              
              
              267,192
              
              
              73,447Investor
                  relations
              
              
              235,708
              
              
              52,584Commissions
              
              
              204,263
              
              
              5,399Consulting
              
              
              71,500
              
              
              38,500Other
              
              
              326,987
              
              
              65,156Total
              
              $
              2,578,826
              
              $
              1,016,433
 
 ***Income
        (loss) from operations***
 
 We
        reported income from operations of $1,341,915 for the nine months ended
        September 30, 2008 as compared to a loss from operations of ($1,044,506)
        for the
        nine months ended September 30, 2007, an increase of $2,386,421. The increased
        income from operations for the nine months ended September 30, 2008 as compared
        to the nine months ended September 30, 2007 is primarily attributable the
        overall increase in sales due to deeper market penetration and continued
        expansion of the distribution channel for our products combined with the
        decrease in professional fees that were attributable to our reverse merger
        transaction in 2007.
 
 ***Other
        income (expense)***
 
 For
        the
        nine months ended September 30, 2008, total other income was $174,599 compared
        to other expense of ($5,243) for the nine months ended September 30, 2007.
        The
        increase is primarily attributed to interest income related to short-term
        loans,
        gains recognized on disposition of assets and interest earned on our cash
        balance of $178,461 and a decrease in interest expense of $26,761.
 
 ***Net
        income (loss)***
 
 As
        a
        result of these factors, we reported net income of $950,278 or $0.05 per
        share
        for the nine months ended September 30, 2008 as compared to a net loss of
        ($1,052,293) or ($0.07) per share for the nine months ended September 30,
        2007.
 
 **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.


18




At
      September 30, 2008, we had a cash balance of $949,833.





Our
      working capital position increased by $1,511,786 to working capital of
      $4,026,615 at September 30, 2008 from working capital of $2,514,829 at December
      31, 2007. This increase in working capital is primarily attributable to the
      overall increase in accounts receivable of $2,354,376, increased prepaid
      expenses and other assets of $938,070, increased inventories of $400,665 and
      decreased accrued liabilities of $26,015, partially offset by decreased cash
      balances of $1,179,382, increased accounts payable of $642,407, increased sales
      returns liability of $206,174, increased accrued wages and wage related expenses
      of $9,445 and increased deferred licensing revenue of $7,598.





Net
      cash
      used in operating activities for the nine months ended September 30, 2008 was
      ($514,499) as compared to cash used in operating activities of ($857,059) for
      the nine months ended September 30, 2007. For the nine months ended September
      30, 2008, net cash used in operating activities was attributable primarily
      to
      increased accounts receivable of $2,410,546, increased prepaid expenses and
      other current assets of $475,855, increased inventories of $400,655, increased
      other assets of $27,787, decreased accrued liabilities of $26,015, and the
      gain
      on disposal of fixed assets of $12,215 partially offset by net income of
      $950,278, increased accounts payable of $642,404, deferred income tax expense
      of
      $566,235, non-cash expense related to stock compensation of $211,510, increased
      sales return liability of $206,174, depreciation and amortization of $112,162,
      decreased prepaid advertising of $58,247, bad debt expense of $56,170, foreign
      currency exchange loss of $18,361, increased accrued wages and wage related
      expenses of $9,445 and increased deferred licensing revenues of $7,598.





Net
      cash
      used in investing activities for the nine months ended September 30, 2008 was
      ($696,853) attributable to short-term loans made of $450,000, the purchase
      of
      property and equipment of $248,047 and payments for intangible assets of $1,800,
      partially offset by proceeds from the sale of fixed assets of
      $2,994.





Net
      cash
      provided by financing activities for the nine months ended September 30, 2008
      was $31,970 attributable to proceeds from the exercise of warrants of $50,000,
      partially offset by payments on equipment financing of $18,030.





We
      reported a net decrease in cash for the nine months ended September 30, 2008
      of
      $1,179,382.





For
      the
      nine months ended September 30, 2008 and 2007, we generated revenues of
      $12,460,812 and $3,034,714, respectively and reported net income of $950,278
      and
      incurred a net loss of ($1,052,293), respectively. For the nine months ended
      September 30, 2008, we had negative cash flow from operating activities of
      ($514,499), negative cash flow from investing activities of ($696,853) and
      cash
      provided by financing activities of $31,970. As of September 30, 2008, we had
      stockholders’ equity of $4,594,611, retained earnings of $207,887, working
      capital of $4,026,615, accounts payable of $1,147,982, deferred licensing
      revenue of $108,509, accrued wages and wage related expenses of $104,982, notes
      payable related to equipment financing of $24,060, accrued liabilities of $9,799
      and sales returns liability of $230,035. Management believes that existing
      cash,
      along with cash generated from the collection of accounts receivable, short
      term
      loans 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
      September 30, 2008, 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 his review of our disclosure controls and
      procedures, they have concluded that our disclosure controls and procedures
      are
      effective in timely alerting them 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.




19




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**





The
      information set forth below relates to our issuances of securities without
      registration under the Securities Act during the reporting period which were
      not
      previously included in a Current Report on Form 8-K.





During
      the nine months ended September 30, 2008, we issued 60,000 shares of our common
      stock to employees valued at $47,400. These shares were issued pursuant to
      Section 4(2) of the Securities Act. The investors represented their intention
      to
      acquire the securities for investment only and not with a view towards
      distribution. The investors were given adequate information about us to make
      an
      informed investment decision. We did not engage in any general solicitation
      or
      advertising.





On
      July
      30, 2008, we issued 80,000 shares of our common stock valued at $54,400 for
      services to be rendered by a consultant. These shares were issued pursuant
      to
      Section 4(2) of the Securities Act. The consultants represented their intention
      to acquire the securities for investment only and not with a view towards
      distribution. The consultants were given adequate information about us to make
      an informed investment decision. We did not engage in any general solicitation
      or advertising.





On
      October 1, 2008, we issued 50,000 shares of our common stock valued at $48,500
      for services to be rendered by a consultant.





**Item
              3.**
            **Defaults
                Upon Senior Securities**





None.




20




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





None.





**Item
              5.**
            **Other
                Information**





None.





**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 toSection
                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 toSection
                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 toSection
                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 toSection
                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
              INCORPORATED**Date:
              November 14, 2008
            
            **/s/
              ROBERT
              G. PEDERSEN II**Robert
              G. Pedersen II,President
              and
              Chief Executive Officer





Date:
                November 14, 2008
              
              **/s/
                BRANDON T. O’BRIEN**Brandon
                T. O’Brien,Chief
                Financial Officer(Principal financial
                officer)
  21