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 June 30, 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: YesxNo ̈.





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  ̈ No
x





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 filerxSmaller 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: 21,643,495 common shares as of August
7, 2009.







ZAGG
INCORPORATED AND SUBSIDIARY


FORM
10-Q





TABLE
OF CONTENTS





PagePART
      I - FINANCIAL INFORMATIONItem
      1.
                            Financial
      Statements (Unaudited)Condensed
      Consolidated Balance Sheets – As of June 30, 2009 and December 31,
      2008
                            3Condensed
      Consolidated Statements of Operations for the Three and Six Months
      EndedJune
      30, 2009 and 2008
                            4Condensed
      Consolidated Statements of Cash Flows for the Six Months
    EndedJune
      30, 2009 and 2008
                            5Notes
      to Condensed Consolidated Financial Statements
                            7Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            14Item
      3.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            21Item
      4T.
                            Controls
      and Procedures
                            22PART
      II - OTHER INFORMATIONItem
      1.
                            Legal
      Proceedings
                            22Item
      1A.
                            Risk
      Factors
                            22Item
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            22Item
      3.
                            Defaults
      Upon Senior Securities
                            23Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            23Item
      5.
                            Other
      Information
                            24Item
      6.
                            Exhibits
                            24







ZAGG
INCORPORATED AND SUBSIDIARY


CONDENSED
CONSOLIDATED BALANCE SHEETS


(Unaudited)





June 30,
                      
                      
                      December 31,2009
                      
                      
                      2008ASSETSCurrent
      assetsCash
                      
                      $
                      3,334,158
                      
                      
                      $
                      1,065,652Accounts
      receivable, net
                      
                      
                      5,088,329
                      
                      
                      
                      3,593,887Inventories
                      
                      
                      4,179,258
                      
                      
                      
                      1,913,297Prepaid
      expenses and other current assets
                      
                      
                      1,270,241
                      
                      
                      
                      676,077Notes
      receivable
                      
                      
                      513,000
                      
                      
                      
                      513,000Deferred
      income tax assets
                      
                      
                      -
                      
                      
                      
                      81,663Total
      current assets
                      
                      
                      14,384,986
                      
                      
                      
                      7,843,576Property
      and equipment, net
                      
                      
                      689,069
                      
                      
                      
                      549,370Deferred
      income tax assets
                      
                      
                      -
                      
                      
                      
                      4,937Deposits
      and other assets
                      
                      
                      9,688
                      
                      
                      
                      9,688Intangible
      assets, net
                      
                      
                      78,017
                      
                      
                      
                      47,344Total
      assets
                      
                      $
                      15,161,760
                      
                      
                      $
                      8,454,915LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilitiesNotes
      payable
                      
                      $
                      10,199
                      
                      
                      $
                      20,223Accounts
      payable
                      
                      
                      2,317,626
                      
                      
                      
                      1,626,390Accrued
      liabilities
                      
                      
                      137,396
                      
                      
                      
                      212,754Accrued
      wages and wage related expenses
                      
                      
                      129,784
                      
                      
                      
                      121,112Deferred
      revenue
                      
                      
                      214,052
                      
                      
                      
                      366,590Deferred
      income tax liability
                      
                      
                      1,243,165
                      
                      
                      
                      -Sales
      returns liability
                      
                      
                      544,563
                      
                      
                      
                      291,119Total
      current liabilities
                      
                      
                      4,596,785
                      
                      
                      
                      2,638,188Total
      liabilities
                      
                      
                      4,596,785
                      
                      
                      
                      2,638,188Stockholders'
      equityCommon
      stock, $0.001 par value; 50,000,000 shares authorized;21,141,112
      and 19,163,995 shares issued and outstanding, respectively
                      
                      
                      21,142
                      
                      
                      
                      19,165Warrants
      to purchase common stock
                      
                      
                      425,666
                      
                      
                      
                      739,338Additional
      paid-in capital
                      
                      
                      6,743,220
                      
                      
                      
                      3,808,280Cumulative
      translation adjustment
                      
                      
                      (203,781
                      )
                      
                      
                      (106,630
                      )Retained
      earnings
                      
                      
                      3,578,728
                      
                      
                      
                      1,356,574Total
      stockholders' equity
                      
                      
                      10,564,975
                      
                      
                      
                      5,816,727Total
      liabilities and stockholders' equity
                      
                      $
                      15,161,760
                      
                      
                      $
                      8,454,915





See
accompanying notes to condensed consolidated financial
statements.


3


ZAGG
INCORPORATED AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended
                          
                          
                          Three Months Ended
                          
                          
                          Six Months Ended
                          
                          
                          Six Months EndedJune 30, 2009
                          
                          
                          June 30, 2008
                          
                          
                          June 30, 2009
                          
                          
                          June 30, 2008Net
      sales
                          
                          $
                          9,214,971
                          
                          
                          $
                          2,739,176
                          
                          
                          $
                          17,290,146
                          
                          
                          $
                          5,584,597Cost
      of sales
                          
                          
                          3,699,517
                          
                          
                          
                          712,214
                          
                          
                          
                          6,581,748
                          
                          
                          
                          1,490,006Gross
      profit
                          
                          
                          5,515,454
                          
                          
                          
                          2,026,962
                          
                          
                          
                          10,708,398
                          
                          
                          
                          4,094,591Operating
      expenses:Advertising
      and marketing
                          
                          
                          1,393,194
                          
                          
                          
                          484,728
                          
                          
                          
                          2,846,248
                          
                          
                          
                          1,274,792Selling,
      general and administrative
                          
                          
                          2,259,150
                          
                          
                          
                          1,343,778
                          
                          
                          
                          4,395,148
                          
                          
                          
                          2,849,199Total
      operating expenses
                          
                          
                          3,652,344
                          
                          
                          
                          1,828,506
                          
                          
                          
                          7,241,396
                          
                          
                          
                          4,123,991Income
      (loss) from operations
                          
                          
                          1,863,110
                          
                          
                          
                          198,456
                          
                          
                          
                          3,467,002
                          
                          
                          
                          (29,400
                          )Other
      income (expense):Interest
      expense
                          
                          
                          (178
                          )
                          
                          
                          (972
                          )
                          
                          
                          (2,620
                          )
                          
                          
                          (2,674
                          )Interest
      and other income
                          
                          
                          50,226
                          
                          
                          
                          81,149
                          
                          
                          
                          92,274
                          
                          
                          
                          129,536Total
      other income
                          
                          
                          50,048
                          
                          
                          
                          80,177
                          
                          
                          
                          89,654
                          
                          
                          
                          126,862Income
      before provision for income taxes
                          
                          
                          1,913,158
                          
                          
                          
                          278,633
                          
                          
                          
                          3,556,656
                          
                          
                          
                          97,462Income
      tax provision
                          
                          
                          (718,894
                          )
                          
                          
                          (103,930
                          )
                          
                          
                          (1,334,152
                          )
                          
                          
                          (36,930
                          )Net
      income
                          
                          $
                          1,194,264
                          
                          
                          $
                          174,703
                          
                          
                          $
                          2,222,504
                          
                          
                          $
                          60,532Basic
      net income per common share
                          
                          $
                          0.06
                          
                          
                          $
                          0.01
                          
                          
                          $
                          0.11
                          
                          
                          $
                          0.00Diluted
      net income per common share
                          
                          $
                          0.05
                          
                          
                          $
                          0.01
                          
                          
                          $
                          0.10
                          
                          
                          $
                          0.00Weighted
      average number of shares outstanding - basic
                          
                          
                          20,062,839
                          
                          
                          
                          18,884,105
                          
                          
                          
                          20,391,870
                          
                          
                          
                          18,884,050Weighted
      average number of shares outstanding – diluted
                          
                          
                          22,614,394
                          
                          
                          
                          18,936,055
                          
                          
                          
                          22,383,552
                          
                          
                          
                          18,976,547





See
accompanying notes to condensed consolidated financial
statements.


4


ZAGG
INCORPORATED AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





For the Six Months Ended June 30,2009
                      
                      
                      2008Cash
      flows from operating activitiesNet
      income
                      
                      $
                      2,222,504
                      
                      
                      $
                      60,532Adjustments
      to reconcile net income to net cashprovided
      by (used in) operating activities:Non-cash
      expense related to stock-based compensation
                      
                      
                      308,149
                      
                      
                      
                      80,821Depreciation
      and amortization
                      
                      
                      108,303
                      
                      
                      
                      69,961Deferred
      income tax expense
                      
                      
                      -
                      
                      
                      
                      36,930Bad
      debt expense
                      
                      
                      60,421
                      
                      
                      
                      19,170Gain
      on asset disposals
                      
                      
                      -
                      
                      
                      
                      (12,215
                      )Foreign
      currency translation adjustment
                      
                      
                      (97,151
                      )
                      
                      
                      4,748Changes
      in assets and liabilitiesAccounts
      receivable
                      
                      
                      (1,554,863
                      )
                      
                      
                      (437,885
                      )Inventories
                      
                      
                      (2,265,961
                      )
                      
                      
                      (233,465
                      )Prepaid
      advertising
                      
                      
                      -
                      
                      
                      
                      (39,506
                      )Prepaid
      expenses and other current assets
                      
                      
                      (594,164
                      )
                      
                      
                      (307,789
                      )Accounts
      payable
                      
                      
                      690,862
                      
                      
                      
                      (268,882
                      )Accrued
      liabilities
                      
                      
                      (75,358
                      )
                      
                      
                      6,183Accrued
      wages and wage related expenses
                      
                      
                      8,672
                      
                      
                      
                      5,746Deferred
      revenues
                      
                      
                      (152,538
                      )
                      
                      
                      (29,208
                      )Deferred
      tax liabilities
                      
                      
                      1,329,765
                      
                      
                      
                      -Sales
      return liability
                      
                      
                      253,444
                      
                      
                      
                      42,797Net
      cash provided by (used in) operating activities
                      
                      
                      242,085
                      
                      
                      
                      (1,002,062
                      )Cash
      flows from investing activitiesPayments
      for intangible assets
                      
                      
                      (32,921
                      )
                      
                      
                      (1,800
                      )Short-term
      loans
                      
                      
                      -
                      
                      
                      
                      (450,000
                      )Proceeds
      from disposal of equipment
                      
                      
                      -
                      
                      
                      
                      2,994Purchase
      of property and equipment
                      
                      
                      (245,730
                      )
                      
                      
                      (189,972
                      )Net
      cash used in investing activities
                      
                      
                      (278,651
                      )
                      
                      
                      (638,778
                      )Cash
      flows from financing activitiesPayments
      on debt
                      
                      
                      (10,024
                      )
                      
                      
                      (12,435
                      )Proceeds
      from issuance of common stock and warrants
                      
                      
                      2,315,096
                      
                      
                      
                      -Net
      cash provided by (used in) financing activities
                      
                      
                      2,305,072
                      
                      
                      
                      (12,435
                      )Net
      increase (decrease) in cash and cash equivalents
                      
                      
                      2,268,506
                      
                      
                      
                      (1,653,275
                      )Cash
      and cash equivalents at beginning of the period
                      
                      
                      1,065,652
                      
                      
                      
                      2,129,215Cash
      and cash equivalents at end of the period
                      
                      $
                      3,334,158
                      
                      
                      $
                      475,940Supplemental
      disclosure of cash flow informationCash
      paid during the period for interest
                      
                      $
                      2,620
                      
                      
                      $
                      2,674





See
accompanying notes to condensed consolidated financial
statements.


5


ZAGG
INCORPORATED AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


(Unaudited)





Supplemental
schedule of noncash investing and financing activities





For the Six Months Ended June 30,
2009:





None.





For the Six Months Ended June 30,
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 consolidated 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 six months ended June 30, 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.





Critical
Accounting Policies–The discussion and analysis of the Company’s financial condition and
results of operations are based on the Company’s 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 the Company 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, the Company evaluates
its 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.





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 consumers and from the fees derived from the sale
of exclusive distributor licenses related to the kiosk program.  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.


7




ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





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 $544,563 at
June 30, 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 six months ended June 30,
2009 and 2008, warranty expense and the reserve for warranty liability,
respectively, was not material.





Shipping and
Handling Costs–
Amounts invoiced to customers for shipping and handling are included in sales
and were $753,708 and $402,716 for the six months ended June 30, 2009 and 2008,
respectively.  Actual shipping and handling costs to ship products to
customers are included in cost of sales and were $2,393,243 and $659,688 for the
six months ended June 30, 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 six months ended June 30, 2009, the Company
recognized stock-based compensation expense of $285,452, related to the issuance
of common stock and options issued under its stock incentive plan.





Advertising –Advertising is expensed as incurred. Advertising expenses were $2,846,247
and $1,274,792 for the six months ended June 30, 2009 and 2008,
respectively.





Net Income Per
Common Share– Basic net income per
share is computed by dividing net income by weighted average number of shares of
common stock outstanding during each period.  Diluted net income per
share is computed by dividing net income 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
                            
                            
                            Weighted
                              Average
                              Shares
                            
                            
                            Per Share
                              AmountThree months ended June 30,
      2009:Basic
      EPS
                            
                            $
                            1,194,264
                            
                            
                            
                            20,062,839
                            
                            
                            $
                            0.06Effect of common stock
      equivalents
                            
                            
                            —
                            
                            
                            
                            2,551,555Diluted EPS
                            
                            $
                            1,194,264
                            
                            
                            
                            22,614,394
                            
                            
                            $
                            0.05Three months ended June 30,
      2008:Basic EPS
                            
                            $
                            174,703
                            
                            
                            
                            18,884,105
                            
                            
                            $
                            0.01Effect of common stock
      equivalents
                            
                            
                            —
                            
                            
                            
                            51,950Diluted EPS
                            
                            $
                            174,703
                            
                            
                            
                            18,936,055
                            
                            
                            $
                            0.01





Net
                        Income
                      
                      
                      Weighted
                        Average
                        Shares
                      
                      
                      Per Share
                        AmountSix
      months ended June 30, 2009:Basic
      EPS
                      
                      $
                      2,222,504
                      
                      
                      
                      20,391,870
                      
                      
                      $
                      0.11Effect
      of common stock equivalents
                      
                      
                      —
                      
                      
                      
                      1,991,682Diluted
      EPS
                      
                      $
                      2,222,504
                      
                      
                      
                      22,383,552
                      
                      
                      $
                      0.10Six
      months ended June 30, 2008:Basic
      EPS
                      
                      $
                      60,532
                      
                      
                      
                      18,884,050
                      
                      
                      $
                      0.00Effect
      of common stock equivalents
                      
                      
                      —
                      
                      
                      
                      92,497Diluted
      EPS
                      
                      $
                      60,532
                      
                      
                      
                      18,976,547
                      
                      
                      $
                      0.00





The
calculation above for the three months ended June 30, 2008 excludes the exercise
of 4,096,953 outstanding warrants and 1,480,000 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 June 30, 2009.





NOTE
2 – RECENT ACCOUNTING PRONOUNCEMENTS





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard Number 157, Fair Value Measurements,
(SFAS 157) which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. The provisions of SFAS No. 157 related to
financial assets and financial liabilities were effective during
2008.  With respect to certain nonfinancial assets and nonfinancial
liabilities, SFAS No. 157 is effective for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years.  The adoption of this standard did not cause a material impact
on the Company’s consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements. SFAS No. 141(R) requires an acquirer to measure the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree at their fair values on the acquisition date, with
goodwill being the excess value over the net identifiable assets acquired. SFAS
No. 160 clarifies that a non-controlling interest in a subsidiary should be
reported as equity in the consolidated financial statements, consolidated net
income should be adjusted to include the net income attributed to the
non-controlling interest and consolidated comprehensive income shall be adjusted
to include the comprehensive income attributed to the non-controlling interest.
The calculation of earnings per share will continue to be based on income
amounts attributable to the parent. SFAS No. 141(R) and SFAS
No. 160 are effective for financial statements issued for fiscal years
beginning after December 15, 2008.  The adoption of this standard
did not cause a material impact on the Company’s consolidated financial
statements.


9




ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities.  SFAS No. 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. SFAS No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The adoption of this standard did not
cause a material impact on the Company’s consolidated financial
statements.





In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSB FAS 142-3). FSP FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS No. 141(R) and other generally accepted accounting principles.
FSP FAS 142-3 is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2008. The adoption of this standard
did not cause a material impact on the Company’s consolidated financial
statements.





In
November 2008, the FASB ratified EITF Issue No. 08-6, Equity Method Investment
Accounting Considerations (EITF 08-6). EITF 08-6 clarifies the accounting for
certain transactions and impairment considerations involving equity method
investments. EITF 08-6 is effective for fiscal years beginning after December
15, 2008.  The adoption of this standard did not cause a material
impact on the Company’s consolidated financial statements.





In April
2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”)
Opinion No. 28-1 (collectively, “FSP FAS 107-1”), Interim Disclosures about Fair
Value of Financial Instruments.  FSP FAS 107-1 amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, to require an entity to
provide disclosures about fair value of financial instruments in interim
financial information.  The FSP FAS 107-1 also amends APB Opinion No.
28, Interim Financial Reporting, to require those disclosures about the fair
value of financial instruments in summarized financial information at interim
reporting periods.  Under FSP FAS 107-1, we will be required to
include disclosures about the fair value of it financial instruments whenever it
issues financial information for interim reporting periods.  In
addition, we will be required to disclose in the body or in the accompanying
notes of the Company’s summarized financial information for interim reporting
periods and in the Company’s financial statements for annual reporting periods,
the fair value of all financial instruments for which it is practicable to
estimate that value, whether recognized or not recognized in the statement of
financial position.  FSP FAS 107-1 is effective for periods ending
after June 15, 2009 and the adoption did not have a material impact on the
Company’s financial position or results of operations.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events.  SFAS 165
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued.  SFAS 165 was effective for interim and
annual periods ending after June 15, 2009.  The adoption of this
standard did not have a material effect on the Company’s financial position or
results of operations.





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
TM and the Hierarchy of Generally Accepted Accounting Principles a replacement
of FASB Statement No. 162 (“SFAS 168”) which establishes the FASB Accounting
Standards Codification TM (Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with
GAAP.  Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants.  This Statement shall be
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.  On the effective date of this Statement,
all then-existing non-SEC accounting and reporting standards are superseded,
except as noted within the SFAS 168.  Concurrently, all
nongrandfathered, non-SEC accounting literature not included in the Codification
is deemed non-authoritative with some exceptions as noted within the
literature.  We do not anticipate that this pronouncement will have a
material impact on the Company’s results of operations or financial
position.


10





ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)





NOTE
3 – ACCOUNTS RECEIVABLE





Accounts
receivable at June 30, 2009 and December 31, 2008 was as
follows:





June30,2009
                  
                  
                  December31,2008Accounts
      receivable
                  
                  $
                  5,367,686
                  
                  
                  $
                  3,812,823Less:
      Allowance for doubtful accounts
                  
                  
                  (279,357
                  )
                  
                  
                  (218,936
                  )Accounts
      receivable, net
                  
                  $
                  5,088,329
                  
                  
                  $
                  3,593,887





Bad debt
expense for the six months ended June 30, 2009 and 2008 was $60,421 and $19,170,
respectively.





On May
13, 2009, the Company entered into an accounts receivable financing agreement
with Faunus Group International, Inc. (“FGI”).  The Company may offer
to sell our accounts receivable to FGI each month during the term of the
Agreement, up to a maximum amount outstanding at any time of
$4,000,000.  The Company can sell accounts receivable to FGI on either
a credit approved or full recourse basis.  Credit approved invoices
are sold to FGI with no recourse, FGI accepts all credit default risk on
invoices sold under the credit approved terms.  As of June 30, 2009,
the Company had only sold credit approved invoices.  The Company
accounted for the sale of the credit approved invoices as a reduction to
accounts receivable.  Under the terms of the agreement, the Company is
charged a monthly collateral management fee of 0.87% of the average monthly
outstanding balance and interest at 7% per annum.





NOTE
4 – INVENTORIES





At June
30, 2009 and December 31, 2008 inventories consisted of the
following:





June 30, 2009
                  
                  
                  December 31, 2008Finished
      goods
                  
                  $
                  1,635,976
                  
                  
                  $
                  204,766Raw
      materials
                  
                  
                  2,543,282
                  
                  
                  
                  1,708,531$
                  4,179,258
                  
                  
                  $
                  1,913,297





NOTE
5 – PROPERTY AND EQUIPMENT





At June
30, 2009 and December 31, 2008, property and equipment consisted of the
following:




Useful Lives
                      
                      June 30, 2009
                      
                      
                      December 31, 2008Computer
      equipment and software
                      
                      3
      to 5 years
                      
                      $
                      352,316
                      
                      
                      $
                      271,287Equipment
                      
                      3
      to7 years
                      
                      
                      395,598
                      
                      
                      
                      314,412Furniture
      and fixtures
                      
                      7
      years
                      
                      
                      61,170
                      
                      
                      
                      56,021Automobiles
                      
                      5
      years
                      
                      
                      93,002
                      
                      
                      
                      84,955Leasehold
      improvements
                      
                      1
      to 2.75 years
                      
                      
                      174,140
                      
                      
                      
                      103,8211,076,226
                      
                      
                      
                      830,496Less:
      accumulated depreciation
                      
                      
                      
                      
                      (387,157
                      )
                      
                      
                      (281,126
                      )$
                      689,069
                      
                      
                      $
                      549,370





Depreciation
expense was $105,834 and $67,802 for the six months ended June 30, 2009 and
2008, respectively.


11





ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)


NOTE
6 – 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 June 30, 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 June 30, 2009, the
Company had advanced $438,000 to Brighton under the promissory note and has
included this amount in notes receivable in the accompanying condensed
consolidated financial statements.  Accrued interest of $229,458 on
the promissory note is included in prepaid expenses and other current assets in
the accompanying condensed consolidated financial statements.





NOTE
7 – INTANGIBLE ASSETS





At June
30, 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 June 30, 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.





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





Useful Life
                      
                      June 30, 2009
                      
                      
                      December 31, 2008Internet
      addresses
                      
                      10
      years
                      
                      $
                      77,890
                      
                      
                      $
                      44,968Patents
                      
                      Finite
                      
                      
                      11,040
                      
                      
                      
                      11,040Less:
      accumulated amortization
                      
                      
                      
                      
                      (10,913
                      )
                      
                      
                      (8,664
                      )$
                      78,017
                      
                      
                      $
                      47,344





Amortization
expense was $2,248 and $2,159 for the six months ended June 30, 2009 and 2008,
respectively.





NOTE
8 – STOCKHOLDERS’ EQUITY





During
the six months ended June 30, 2009, the Company issued 40,000 shares of its
common stock to employees valued at $104,800 and recorded as compensation
expense in the accompanying condensed consolidated financial
statements.


12





ZAGG
INCORPORATED AND SUBSIDIARY


Notes
to Condensed Consolidated Financial Statements


(Unaudited)


During
the six months ended June 30, 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%.  The Company also granted employee stock options for 25,000
common shares exercisable at $2.53 per share expiring in 5 years and vesting
over a three year schedule.  The options were valued at $32,376 using
the Black-Scholes option pricing method with the following assumptions: stock
price $2.53, expected life of 5 years, volatility of 62% (using historical
volatility since the Company’s options do not trade to provide an implied
volatility) and a discount rate of 0.04%. The Company also granted employee
stock options for 3,000 common shares exercisable at $2.93 per share expiring in
5 years and vesting over a three year schedule.  The options were
valued at $4,503 using the Black-Scholes option pricing method with the
following assumptions: stock price $2.93, expected life of 5 years, volatility
of 62% (using historical volatility since the Company’s options do not trade to
provide an implied volatility) and a discount rate of 0.07%.  Based on
vesting provisions, the Company expensed $182,486 relating to these new option
grants and prior grants for the six months ended June 30 2009.





During
the six months ended June 30, 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 $20,863 related to this option grant for the
six months ended June 30, 2009.





During
the six months ended June 30, 2009, the Company issued warrants for consulting
services for 20,000 common shares exercisable at $2.05 per share expiring in 1
year and vesting immediately.  The warrants were valued at $21,155
using the Black-Scholes method with the following assumptions: stock price
$2.05, expected life of 5 years; volatility of 62% (using historical volatility
since the Company’s options do not trade to provide an implied volatility) and a
discount rate of 0.13%.





During
the six months ended June 30, 2009, the Company issued 295,999 shares of its
common stock in exercise of options to purchase 295,999 shares.  The
Company received proceeds of $265,499 related to the exercise of the
options.  The Company also issued 1,641,118 shares of its common stock
in exercise of warrants to purchase 1,641,118 shares.  The Company
received proceeds of $2,098,578 related to the exercise of the
warrants.





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.  As of
June 30, 2009, the Company did not have any outstanding legal
matters.





NOTE
10 – SUBSEQUENT EVENTS





Subsequent
to June 30, 2009, the Company issued 166,050 shares of its common stock in
exercise of warrants to purchase 166,050 shares of common stock and received
proceeds of $215,865.  The Company also issued 336,333 shares of
common stock in exercise of employee options to purchase 336,333 shares of
common stock and received proceeds of $201,950.


13


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





Headquartered
in Salt Lake City, Utah, ZAGG Incorporated 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.  ZAGG has also introduced beta testing of AppSpace.com, an
online destination for the fast-growing mobile app market, combined with the
networking power of social media.





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.


14





Our
common stock is currently traded on the OTC Bulletin Board under the trading
symbol “ZAGG.OB”. Subsequent to the reporting period, we applied to list our
common stock on the NASDAQ Capital Market.  Although we have applied for
listing on the NASDAQ Capital Market, there can be no assurance that we will be
accepted, or remain listed if accepted.





Unlike
the OTC Bulletin Board, the NASDAQ Capital Market has corporate governance and
other public interest standards, which we will have to meet. The NASDAQ Capital
Market requires that a majority of the members of our Board of Directors be
independent directors, as defined by NASDAQ Rule 5605(a)(2) and Rule 10A-3
promulgated under the Securities Exchange Act of 1934, as amended.  The
independent directors must have regularly scheduled meetings at which only
independent directors are present. Independent directors must determine (or
recommend to the full board for their determination) the compensation of the
chief executive officer and other executive officers.  Independent
directors must select (or recommend to the full board for their selection)
nominees for directors.  These functions can be performed either by
committees consisting solely of independent directors, or, alternatively, by a
majority of the company’s independent directors. We will also be required to
have an audit committee composed of at least three (3) members, all of whom are
independent, and who have not participated in the preparation of the financial
statements of the Company or any subsidiary of the Company during the past three
(3) years.  One member of the audit committee must have specified
employment experience in finance or accounting.





In
addition to the foregoing, there are other requirements that are associated with
listing on the NASDAQ Capital Market.  We currently meet some, but not all
of those requirements.  We are in the process of organizing
committees, establishing committee charters and appointing directors that meet
the requirements of independence.





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.





Recent
Accounting Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard Number 157, Fair Value Measurements,
(SFAS 157) which defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles and expands disclosures about
fair value measurements. The provisions of SFAS No. 157 related to
financial assets and financial liabilities were effective during
2008.  With respect to certain nonfinancial assets and nonfinancial
liabilities, SFAS No. 157 is effective for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years.  The adoption of this standard did not cause a material impact
on our consolidated financial statements.





In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and
SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements. SFAS No. 141(R) requires an acquirer to measure the
identifiable assets acquired, the liabilities assumed and any non-controlling
interest in the acquiree at their fair values on the acquisition date, with
goodwill being the excess value over the net identifiable assets acquired. SFAS
No. 160 clarifies that a non-controlling interest in a subsidiary should be
reported as equity in the consolidated financial statements, consolidated net
income should be adjusted to include the net income attributed to the
non-controlling interest and consolidated comprehensive income shall be adjusted
to include the comprehensive income attributed to the non-controlling interest.
The calculation of earnings per share will continue to be based on income
amounts attributable to the parent. SFAS No. 141(R) and SFAS
No. 160 are effective for financial statements issued for fiscal years
beginning after December 15, 2008.  The adoption of this standard
did not cause a material impact on our consolidated financial
statements.


15




In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities.  SFAS No. 161 is intended to improve financial
reporting about derivative instruments and hedging activities by requiring
enhanced disclosures to enable investors to better understand their effects on
an entity's financial position, financial performance, and cash flows. SFAS No.
161 is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008. The adoption of this standard did not
cause a material impact on our consolidated financial statements.





In April
2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of
Intangible Assets (FSB FAS 142-3). FSP FAS 142-3 amends the factors that should
be considered in developing renewal or extension assumptions used to determine
the useful life of a recognized intangible asset under SFAS No. 142, Goodwill
and Other Intangible Assets. The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under FAS
142 and the period of expected cash flows used to measure the fair value of the
asset under SFAS No. 141(R) and other generally accepted accounting principles.
FSP FAS 142-3 is effective for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2008. The adoption of this standard
did not cause a material impact on our consolidated financial
statements.





In
November 2008, the FASB ratified EITF Issue No. 08-6, Equity Method Investment
Accounting Considerations (EITF 08-6). EITF 08-6 clarifies the accounting for
certain transactions and impairment considerations involving equity method
investments. EITF 08-6 is effective for fiscal years beginning after December
15, 2008.  The adoption of this standard did not cause a material
impact on our consolidated financial statements.





In April
2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”)
Opinion No. 28-1 (collectively, “FSP FAS 107-1”), Interim Disclosures about Fair
Value of Financial Instruments.  FSP FAS 107-1 amends SFAS No. 107,
Disclosures about Fair Value of Financial Instruments, to require an entity to
provide disclosures about fair value of financial instruments in interim
financial information.  The FSP FAS 107-1 also amends APB Opinion No.
28, Interim Financial Reporting, to require those disclosures about the fair
value of financial instruments in summarized financial information at interim
reporting periods.  Under FSP FAS 107-1, we will be required to
include disclosures about the fair value of it financial instruments whenever it
issues financial information for interim reporting periods.  In
addition, we will be required to disclose in the body or in the accompanying
notes of our summarized financial information for interim reporting periods and
in our financial statements for annual reporting periods, the fair value of all
financial instruments for which it is practicable to estimate that value,
whether recognized or not recognized in the statement of financial
position.  FSP FAS 107-1 is effective for periods ending after June
15, 2009 and the adoption did not have a material impact on our financial
position or results of operations.





In May
2009, the FASB issued SFAS No. 165, Subsequent Events.  SFAS 165
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued.  SFAS 165 was effective for interim and
annual periods ending after June 15, 2009.  The adoption of this
standard did not have a material effect on our financial position or results of
operations.





In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
TM and the Hierarchy of Generally Accepted Accounting Principles a replacement
of FASB Statement No. 162 (“SFAS 168”) which establishes the FASB Accounting
Standards Codification TM (Codification) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with
GAAP.  Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants.  This Statement shall be
effective for financial statements issued for interim and annual periods ending
after September 15, 2009.  On the effective date of this Statement,
all then-existing non-SEC accounting and reporting standards are superseded,
except as noted within the SFAS 168.  Concurrently, all
nongrandfathered, non-SEC accounting literature not included in the Codification
is deemed non-authoritative with some exceptions as noted within the
literature.  We do not anticipate that this pronouncement will have a
material impact on our results of operations or financial
position.


16





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.





Results
of Operations





THREE
MONTHS ENDED JUNE 30, 2009 AND 2008





Net
sales





Net sales
for the quarter ended June 30, 2009 were $9,214,971 as compared to net sales of
$2,739,176 for the quarter ended June 30, 2008, an increase of $6,475,795 or
236%.





The
significant increase in product sales is mainly attributed to continued strong
sales of our invisibleSHIELD product with
approximately 31% of our product being sold through our website to retail
customers, 9% being sold through mall carts and kiosks, 56% 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 June 30, 2009, cost of sales amounted to $3,699,517 or
approximately 40% of net sales as compared to cost of sales of $712,214 or
approximately 26% of net sales for quarter ended June 30, 2008.  The
increase in cost of sales as a percentage of net revenues for the quarter ended
June 30, 2009 as compared to the quarter ended June 30, 2008 is attributable to
the overall sales mix shift to wholesale customers which have a lower average
selling price than our internet sales.





Gross
profit





Gross
profit for the quarter ended June 30, 2009 was $5,515,454 or approximately 60%
of net sales as compared to $2,026,962 or approximately 74% of net sales for the
quarter ended June 30, 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.


17





Operating
expenses





Total
operating expenses for the quarter ended June 30, 2009 were $3,652,344, an
increase of $1,828,838 from total operating expenses for the quarter ended June
30, 2008 of $1,823,506. The increases are primarily attributable to the
following:





·
            For
      the quarter ended June 30, 2009, salaries and related taxes increased by
      $427,161 to $1,083,232 from $656,071 for the quarter ended June 30,
      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 and compensation expense related to our stock based compensation
      plan of $181,164.





·
            For
      the quarter ended June 30, 2009, marketing, advertising and promotion
      expenses were $1,393,194, an increase of $908,466 as compared to $484,728
      for the quarter ended June 30, 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.





·
            For the quarter ended June 30,
      2009, other selling, general and administrative expenses, net of salaries
      and related taxes described above, were $1,175,918 as compared to $687,707
      for the quarter ended June 30, 2008. The increase was attributable to the
      increase in operations as we implement our business plan and is summarized
      below:





Three Months
                    Ended
                    June 30, 2009
                  
                  
                  Three Months
                    Ended
                    June 30, 2008Professional
      fees
                  
                  $
                  134,933
                  
                  
                  $
                  21,079Contract
      labor
                  
                  
                  28,490
                  
                  
                  
                  61,202Insurance
                  
                  
                  78,471
                  
                  
                  
                  62,300Depreciation
      and amortization
                  
                  
                  55,832
                  
                  
                  
                  37,181Rent
                  
                  
                  124,635
                  
                  
                  
                  99,241Travel
      and entertainment
                  
                  
                  53,270
                  
                  
                  
                  35,994Telephone
      and utilities
                  
                  
                  23,860
                  
                  
                  
                  28,461Printing
      expenses
                  
                  
                  13,454
                  
                  
                  
                  7,112Office
      supplies
                  
                  
                  24,292
                  
                  
                  
                  14,075Credit
      card and bank fees
                  
                  
                  172,215
                  
                  
                  
                  72,401Bad
      debt
                  
                  
                  —
                  
                  
                  
                  19,170Investor
      relations
                  
                  
                  104,379
                  
                  
                  
                  95,605Commissions
                  
                  
                  171,261
                  
                  
                  
                  40,239Other
                  
                  
                  190,826
                  
                  
                  
                  93,647Total
                  
                  $
                  1,175,918
                  
                  
                  $
                  687,707





Income
from operations





We
reported income from operations of $1,863,110 for the quarter ended June 30,
2009 as compared to income from operations of $198,456 for the quarter ended
June 30, 2008, an increase of $1,664,654.  The increase in income from
operations for the quarter ended June 30, 2009 as compared to the quarter ended
June 30, 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.


18





Other
income





For the
quarter ended June 30, 2009, total other income was $50,048 as compared to other
income of $80,177 for the quarter ended June 30, 2008.  The decrease
is primarily attributed to decreased interest income related to short-term loans
and interest earned on our bank balances.





Net
income





As a
result of these factors, we reported net income of $1,194,264 or $0.05 per share
on a fully diluted basis for the quarter ended June 30, 2009 as compared to net
income of $174,703 or $0.01 per share on a fully diluted basis for the quarter
ended June 30, 2008.





SIX
MONTHS ENDED JUNE 30, 2009 AND 2008





Net
sales





Net sales
for the six months ended June 30, 2009 were $17,290,146 as compared to net sales
of $5,584,597 for the six months ended June 30, 2008, an increase of $11,705,549
or 210%.





The
significant increase in product sales is mainly attributed to continued strong
sales of our invisibleSHIELD product with
approximately 38% of our product being sold through our website to retail
customers, 7% being sold through mall carts and kiosks, 51% 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 six months ended June 30, 2009, cost of sales amounted
to $6,581,748 or approximately 38% of net sales as compared to cost of sales of
$1,490,006 or approximately 27% of net sales for the six months ended June 30,
2008.  The increase in cost of sales as a percentage of net revenues
for the six months ended June 30, 2009 as compared to the six months ended June
30, 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 six months ended June 30, 2009 was $10,708,398 or approximately
62% of net sales as compared to $4,094,591 or approximately 73% of net sales for
the six months ended June 30, 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 six months ended June 30, 2009 were $7,241,396, an
increase of $3,117,405 from total operating expenses for the six months ended
June 30, 2008 of $4,123,991.  The increases are primarily attributable
to the following:





·
            For
      the six months ended June 30, 2009, salaries and related taxes increased
      by $550,714 to $1,920,834 from $1,370,120 for the six months ended June
      30, 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 and compensation expense related to our stock based compensation
      plan of $308,149.


19





·
            For
      the six months ended June 30, 2009, marketing, advertising and promotion
      expenses were $2,846,248, an increase of $1,571,456 as compared to
      $1,274,792 for the six months ended June 30, 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.





·
            For the six months ended June 30,
      2009, other selling, general and administrative expenses, net of salaries
      and related taxes described above, were $2,474,314 as compared to
      $1,479,079 for the six months ended June 30, 2008. The increase was
      attributable to the increase in operations as we implement our business
      plan and is summarized
below:





Six Months Ended
                    June 30, 2009
                  
                  
                  Six Months Ended
                    June 30, 2008Professional
      fees
                  
                  $
                  204,999
                  
                  
                  $
                  70,612Contract
      labor
                  
                  
                  59,885
                  
                  
                  
                  296,637Insurance
                  
                  
                  132,935
                  
                  
                  
                  114,182Depreciation
      and amortization
                  
                  
                  108,078
                  
                  
                  
                  69,345Rent
                  
                  
                  222,225
                  
                  
                  
                  180,546Travel
      and entertainment
                  
                  
                  108,535
                  
                  
                  
                  92,901Telephone
      and utilities
                  
                  
                  54,410
                  
                  
                  
                  62,076Printing
      expenses
                  
                  
                  34,769
                  
                  
                  
                  19,312Office
      supplies
                  
                  
                  46,366
                  
                  
                  
                  34,486Credit
      card and bank fees
                  
                  
                  348,747
                  
                  
                  
                  154,129Bad
      debt
                  
                  
                  60,421
                  
                  
                  
                  19,205Investor
      relations
                  
                  
                  208,772
                  
                  
                  
                  132,187Commissions
                  
                  
                  421,437
                  
                  
                  
                  46,587Other
                  
                  
                  462,735
                  
                  
                  
                  186,874Total
                  
                  $
                  2,474,314
                  
                  
                  $
                  1,479,079





Income
(loss) from operations





We
reported income from operations of $3,467,002 for the six months ended June 30,
2009 as compared to loss from operations of ($29,400) for the six months ended
June 30, 2008, an increase of $3,496,402.  The increase in income from
operations for the six months ended June 30, 2009 as compared to the six months
ended June 30, 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





For the
six months ended June 30, 2009, total other income was $89,654 as compared to
other income of $126,862 for the six months ended June 30, 2008.  The
decrease is primarily attributed to decreased interest income related to
short-term loans and interest earned on our bank balances.





Net
income





As a
result of these factors, we reported net income of $2,222,504 or $0.10 per share
on a fully diluted basis for the six months ended June 30, 2009 as compared to
net income of $60,532 or $0.00 per share on a fully diluted basis for the six
months ended June 30, 2008.


20


Liquidity
and Capital Resources





Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its liabilities and otherwise operate on an ongoing
basis.





At June
30, 2009, we had a cash balance of $3,334,158.





Our
working capital position increased by $4,582,813 to working capital of
$9,788,201 at June 30, 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 $6,541,410 due to increased cash balance of
$2,268,506, increased inventories of $2,265,961, increased accounts receivable
of $1,494,442, increased prepaid expenses and other current assets of $594,164,
decreased deferred revenue of $152,538, decreased accrued liabilities of $75,358
and decreased notes payable of $10,024, partially offset by increased deferred
tax liabilities of $1,243,165, increased accounts payable of $691,236, and
increased sales return liability of $253,444 and decreased deferred tax assets
of $81,663.





Net cash
provided by operating activities for the six months ended June 30, 2009 was
$242,085 as compared to net cash used in operating activities of ($1,002,062)
for the six months ended June 30, 2008.  For the six months ended June
30, 2009, net cash provided by operating activities was attributable primarily
to our net income of $2,222,504, increased deferred tax liabilities of
$1,329,765, increased accounts payable of $690,862, non-cash expense related to
stock based compensation of $308,149, increased sales returns liabilities of
$253,444, depreciation and amortization of $108,303 and bad debt expense of
$60,421 partially offset by increased inventory of $2,265,961, increased
accounts receivable of $1,554,863, increased prepaid expenses and other current
assets of $594,164, decreased deferred revenue of $152,538 and decreased accrued
liabilities of $75,358.





Net cash
used in investing activities for the six months ended June 30, 2009 was
($278,651) attributable to the purchase of property and equipment of $245,730
and payments for intangible assets of $32,921.





Net cash
provided by financing activities for the six months ended June 30, 2009 was
$2,305,072 attributable to proceeds from the exercise of options and warrants of
$2,315,096, partially offset by payments on short-term debt of
$10,024.





We
reported a net increase in cash for the six months ended June 30, 2009 of
$2,268,506.





For the
six months ended June 30, 2009 and 2008, we generated revenues of $17,290,146
and $5,584,597, respectively and reported net income of $2,222,504 and $60,532,
respectively.  For the six months ended June 30, 2009, we had cash
flow from operating activities of $242,085, negative cash flow from investing
activities of ($278,651) and cash flows from financing activities of
$2,305,072.  As of June 30, 2009, we had stockholders’ equity of
$10,564,975, retained earnings of $3,578,728, working capital of $9,788,201,
accounts payable of $2,317,626, deferred revenue of $214,052, accrued wages and
wage related expenses of $129,784, notes payable related to equipment financing
of $10,199, accrued liabilities of $137,396, deferred income tax liability of
$1,243,165 and sales returns liability of $544,563.  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
June 30, 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.


21


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.





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 six months ended June 30, 2009, we issued the following
securities:





§
            40,000
      shares of common stock to employees valued at
  $104,800;





§
            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%;




22


§
            warrants
      for consulting services for 20,000 common shares exercisable at $2.05 per
      share expiring in 1 year and vesting immediately.  The warrants
      were valued at $21,155 using the Black-Scholes method with the following
      assumptions: stock price $2.05, expected life of 5 years; volatility of
      62% (using historical volatility since the Company’s options do not trade
      to provide an implied volatility) and a discount rate of
      0.13%.





§
            stock
      options for 25,000 common shares exercisable at $2.53 per share expiring
      in 5 years and vesting over a three year schedule.  The options
      were valued at $32,376 using the Black-Scholes option pricing method with
      the following assumptions: stock price $2.53, expected life of 5 years,
      volatility of 62% (using historical volatility since the Company’s options
      do not trade to provide an implied volatility) and a discount rate of
      0.04%.





§
            stock
      options for 3,000 common shares exercisable at $2.93 per share expiring in
      5 years and vesting over a three year schedule.  The options
      were valued at $4,503 using the Black-Scholes option pricing method with
      the following assumptions: stock price $2.93, expected life of 5 years,
      volatility of 62% (using historical volatility since the Company’s options
      do not trade to provide an implied volatility) and a discount rate of
      0.07%.





§
            295,999
      shares of common stock in exercise of options to purchase 295,999
      shares.  We received proceeds of $265,499 related to the
      exercise of the options; and





§
            1,641,118
      shares of common stock in exercise of warrants to purchase 1,641,118
      shares.  We received proceeds of $2,098,578 related to the
      exercise of the warrants;





Subsequent
to June 30, 2009, we issued 166,050 shares of common stock in exercise of
warrants to purchase 166,050 shares of common stock and received proceeds of
$215,865.  We also issued 336,333 shares of common stock in exercise
of options to purchase 336,333 shares of common stock and received proceeds of
$201,950.





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





On July
16, 2009, we held the annual meeting of our security holders. The meeting was
called for the purpose of electing two directors, confirming the appointment of
HANSEN, BARNETT & MAXWELL, P.C. as the Company’s independent certified
public accountants for the fiscal year ended December 31, 2009, approving an
amendment to the ZAGG Incorporated 2007 Stock Incentive Plan and transacting any
other items of business that may properly come before the meeting. The total
number of shares of common stock outstanding at the record date, May 12, 2009,
was 19,820,015 shares. The number of votes represented at this meeting was
17,972,163 shares, or 90.7% of shares eligible to vote.





The
results for the election of directors were as follows:





Director
                            
                            Votes Cast For
                            
                            Votes Cast Against
                            
                            AbstentionsRobert G. Pedersen II
                            
                            17,652,543
                            
                            316,734
                            
                            2,886Larry Harmer
                            
                            17,858,900
                            
                            99,457
                            
                            13,805





The
security holders confirmed the appointment of HANSEN, BARNETT & MAXWELL,
P.C. as the Company’s independent certified public accountants for the fiscal
year ended December 31, 2008 and the results were as follows:





Votes Cast For
                        
                        Votes Cast Against
                        
                        Abstentions17,858,126
                        
                        105,662
                        
                        8,375


23


The
security holders approved the amendment to the ZAGG Incorporated 2007 Stock
Incentive Plan and the results were as follows:





Votes Cast For
                        
                        Votes Cast Against
                        
                        Abstentions10,521,175
                        
                        684,233
                        
                        2,701





No other
matters were acted upon by our security holders at our annual
meeting.





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 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:
      August 13, 2009
              /s/
      ROBERT G. PEDERSEN IIRobert
      G. Pedersen II,President
      and Chief Executive OfficerDate:
      August 13, 2009
              /s/ BRANDON T. O’BRIENBrandon
      T. O’Brien,Chief
      Financial Officer(Principal
      financial officer)




24