U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
20549
 

FORM 10-QSB/A
(Amendment No. 1)
 

 

/X/
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
 
/ /
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-32134
 
Z TRIM HOLDINGS, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
 
  ILLINOIS
  36-4197173
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification No.)
 
1011 CAMPUS DRIVE, MUNDELEIN, ILLINOIS 60060
(Address of Principal Executive Offices)

(847) 549-6002
(Issuer's Telephone Number, Including Area Code)

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

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

The registrant has a single class of common stock, par value $.00005 per share, of which there were 72,056,375 shares issued and outstanding as of August 9, 2007.

Transitional Small Business Disclosure Format (Alternative 2): Yes / / No /X/

 
Explanatory Note
 
On October 31, 2007, we determined that our financial statements for the quarters ended March 31, 2007 and June 30, 2007 should no longer be relied upon because of accounting errors in those financial statements relating to specific equity transactions.  Accordingly, we have restated our previously issued financial statements for those periods. Restated financial information is presented in this report, as well as in our Amended Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007. For a discussion of the errors and the adjustments made as a result of the restatement, see Note 2 of Notes to Interim Unaudited Consolidated Financial Statements included in “Part I — Item 1 — Financial Statements.” This amendment and restatement includes revisions to “Part I – Item 1 – Financial Statements”, “Part I – Item 2 – Management’s Discussion and Analysis or Plan of Operation – Summary of Financial Results – Results of Operations”,  “Part I – Item 2 – Management’s Discussion and Analysis or Plan of Operation – Summary of Financial Results – Liquidity and Capital Resources”, and “Part I – Item 3 – Controls and Procedures” only.  No attempt has been made in this Form 10-QSB/A to modify or update other disclosures presented in the original report on Form 10-QSB except as required to reflect the corrections described above. The Form 10-QSB/A does not reflect events occurring after the filing of the Form 10-QSB or modify or update those disclosures, including the exhibits to the Form 10-QSB and notes to the financial statements, affected by subsequent events. Information not affected by the correction is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-QSB on August 14, 2007. Accordingly, this Form 10-QSB/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-QSB, including any amendments to those filings. For convenience and ease of reference, we are filing our quarterly report in its entirety with the applicable changes.


PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

See Consolidated Financial Statements beginning on page F-1.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion is intended to assist in understanding the financial condition and results of operations of Z Trim Holdings, Inc. You should read the following discussion along with our financial statements and related notes included in this Form 10-QSB. The following discussion contains forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results, performance and achievements in 2007 and beyond may differ materially from those expressed in, or implied by, these forward looking statements.

Overview

Z Trim Holdings, Inc. (which changed its name from Circle Group Holdings in 2006) is an emerging growth company focused on the production, licensing, marketing and distribution of Z Trim®. Z Trim is a USDA-developed, all-natural, zero calorie fat replacement ingredient made from the healthy fiber of cereal grains. Currently corn or oats is used but Z Trim production can be derived from many other agricultural products. Current Z Trim products include gel or powder used to replace portions of fat, gums, starches and carbohydrates in foods and as a nutritional supplement to control appetite. Z Trim is now being used internationally by manufacturers, restaurants, schools, and consumers to replace as much as 80% of the fat and calories without changing taste, texture, appearance or digestive properties in baked goods, dairy products, snacks, deserts, sauces, dressings, processed meats and many other foods. Z Trim has demonstrated the capability to reduce up to 100% of the fats in several foods. The food industry is a multi-billion dollar opportunity. As the right product in the right place at the right time, Z Trim is dedicated to establishing itself within this sector as a key player in the war on obesity and weight health problems.
 
 
Z Trim recently became available as an Appetite Control formula that is 100% natural dietary fiber. The new breakthrough product has spectacular absorption capacity resulting in a feeling of fullness and a reduction in appetite allowing consumers to reduce the urge to overeat. In recent clinical studies, 3 out of 4 subjects achieved ½ to 2 pounds of weekly weight loss without making lifestyle changes and without causing any gastrointestinal or other negative side effects. Z Trim Appetite Control has recently become available at GNC stores and wide spectrum retail rollouts are in the works.

Three Z Trim books which will be available nationally are set for release in the third quarter of 2007. The Z Trim Advantage is a new recipe book that demonstrates Z Trim's special ability to make gourmet foods more delicious increasing fiber while significantly reducing fats, calories, cholesterol and sodium. The Z Trim Lifestyle is a unique new approach to sustainable effective weight management where small changes equal big results. The Z Trim Miracle is the amazing story about the evolution of this Government invented solution and the promise and hope it could generate in the future.

For decades, food manufactures have taken steps to make foods with less calories for the dieting consumer. They have been able to replace sugar and other sweeteners with modest success but have had little success replacing fat, usually creating products with poor taste and even worse textures. Sugar replacements such as saccharin, NutraSweet® and Splenda® can be found everywhere and have made their way into food products such as: soft drinks, snacks, desserts, etc. We believe that Z Trim, as a fat replacement, has the potential to become as commonplace as sugar substitutes, and will do this while maintaining the original taste and mouth feel of all foods in which it is used.

As a marketing driven company with a unique technology, Z Trim's mission is to establish a new paradigm in fiber rich, lower calorie, reduced saturated fat products that promote health beyond basic nutrition. By reducing the fat and calories from fat in foods without sacrificing taste or texture, we believe that Z Trim represents a quantum breakthrough in food science and technology.

After years of development, Z Trim is now commercialized. The Company currently manufactures and markets Z Trim as a competitive ingredient that dramatically improves the food industry's ability to deliver on its promises of healthier foods. The Company's primary objective in 2007 is to build on Z Trim's early successes in various food products and studies, with the goal of establishing Z Trim as an important ingredient in revolutionizing the food industry in a manner analogous to NutraSweet®. The Company is targeting the end consumer through (i) licensing agreements and direct sales to major food manufacturers, as well as several small and mid size companies, (ii) direct sales to the consumer, and (iii) direct sales to large food institutions such as those that supply to restaurants, hospitals, schools and cafeterias. In the United States, schools are currently serving over 50,000 meals a day containing Z Trim to replace fat and calories in dressings, mayonnaise, wet salads and baked goods. We expect these numbers to increase in the future based on the existing success Z Trim is having with students.

Z Trim is an all natural functional food and fat replacement ingredient made from plant fiber, essentially an amorphous cellulose gel. Based on a novel processing system that converts crude fiber grain components into cereal hydro-colloidal compositions, Z Trim is rich in soluble and insoluble fiber, devoid of fat and calories, neutral in taste and totally compatible in texture with foods that it is used in. In concrete terms, this patented, proven ingredient system can significantly improve the health benefits of foods without compromising the taste delivery and mouth-feel properties of full-fat products that are critical to consumers’ selection process and the protection of market share belonging to the brands of every major food company.

Z Trim was developed at the U.S. Department of Agriculture by Dr. George Inglett. The goal was to create a zero-calorie healthy natural food ingredient utilizing grain bi-products that would replace a large portion of high calorie fats in processed foods by harnessing the power of nature. Z Trim holds the exclusive United States and international manufacturing and marketing rights to the technology for all fields of use. The Company has spent the past five years and approximately 14 million dollars perfecting its patented and trade secret formulas, building a modern manufacturing facility and marketing rollout for production and use. The Company has dozens of U.S. and international patents issued or pending on the Z Trim application and process as well as numerous trade secrets on the proprietary technology. Processes based upon the Company’s intellectual property portfolio are now in use at the Z Trim plant located in Mundelein, Illinois.
 

 
Several consumer studies have been performed on Z Trim by independent focus groups, home use tests, state fairs and staged events at restaurants, and in the media which have been broadcast on NBC, CBS, WGN and FOX. All the results taken as a collective grouping have consistently demonstrated that people cannot tell the difference between a full fat recipe and the same recipe modified by replacing up to 50% of the fat with Z Trim. Seven out of ten consumers consistently believed the Z Trim recipe was the full-fat or better tasting version.

Z Trim adds water to recipes, so it improves textures resulting in creamier, moister, and juicier foods. The additional water also has the effect of cleansing the palette thereby diminishing aftertaste, greasiness and filminess. Z Trim is healthy soluble and insoluble fiber. Fiber has been shown to improve satiety and contribute to other benefits such as weight management, lowering of cholesterol and improved functioning of the digestive system and glycemic index.

Whether replacing fat in foods, or as an appetite control supplement, Z Trim consistently creates a feeling of non-bloated fullness without any gastrointestinal (G.I.) or other negative side effects.

The ever-expanding interest by consumers in nutrition and their on-going search to find an effective and healthy weight management solution that works in a majority of cases, without lifestyle modification, is helping to drive the increase in our sales. Z Trim makes most foods healthier, whether in the home, on grocery shelves or in institutional food service foods.

We are in the process of executing our marketing plans. The plans include both wholesale and retail products targeted to food companies, distributors, restaurants, schools, and consumers. They also include the direct supply of product, as well as license programs for manufacturers interested in production in their own plants. We have an aggressive plan to educate both the food industry and consumers about the uses and benefits of Z Trim products, and we continue to develop additional products to service these markets.

The Company owns one of the top nutritional analysis web sites, known as Nutritional Analysis Technology Site according to Google Search results. Internet traffic to the Nutritional Analysis Technology Site (NATS) (http://nat.crgq.com/) provides a steady stream of new health seekers, allowing us to spread the good word about the benefits of our marketing message LIVE LIFE BETTER™ with Z Trim to an audience interested in health and nutrition. Visitors to the NATS site are also directed to purchase Z Trim products.

Z Trim Holdings has accumulated a substantial Intellectual Property Portfolio for its products and technologies including patents, trademarks, trade secrets and licensed rights. This portfolio will provide the company with the protection needed as it moves forward in the competitive business environment. Additional intellectual property will be added to the portfolio as advances in the existing technologies and new technologies are developed.

The company continues the expansion of the ZTM shareholder base by developing new investment banking relationships, and by contacting the investment community at the broker, MicroCap Fund, and individual levels to inform and educate them about Z Trim Holdings, Inc. and its technology, we feel is the "Answer to the Obesity Epidemic". Every customer becomes a potential product spokesperson and testimonial as well as a potential shareholder. We won't rest until every American embraces Z Trim.

We have four operating subsidiaries: FiberGel Technologies, Inc., thebraveway.com, Inc., operating as The Brave Way Training Systems, On-Line Bedding Corp., and Z-Amaize Technologies, Inc., and have exclusive worldwide licenses to the Nutrition Analysis Tool website, Mini-Raman Lidar System, and ThraxVac technology. The Company plans to dissolve thebraveway.com, Inc. and On-Line Bedding Corp. by the end of this year.
 
Recent Material Developments

The Company's Board of Directors has appointed David Lansky, age 54 to the board as an outside director bringing the total number of Directors to eight. David Lansky, Ph.D., a clinical psychologist, is currently the President of Family Business Innovations, Inc., and consults and works with family members, business owners, their advisors and other key parties to determine effective methods to develop leaders, enhance communications, resolve conflicts and work together as a team. David is a graduate of McGill University in Montreal, Canada, and obtained his Masters and Doctoral degrees from Rutgers University. He has served on the faculty of Northwestern University’s Family Institute and the Adler School of Professional Psychology. He is a nationally recognized expert on the family dynamics in business.
 

 
Material Developments As Previously Reported In The Company’s First Quarter Form 10qsb

Z Trim experienced increased coverage in the first quarter of 2007 on the web and in written media. The Company and its products received coverage in Business Week, First For Women magazine and the best selling book “You On A Diet” in the written media, and About.com for low fat cooking, 3 Fat Chicks on a Diet, Knobias, and many other fitness, wellness, cooking, and diet websites on the web. Z Trim received additional media coverage in the second quarter of 2007 as well.

We have recently made many additions and changes to our web site in order to continue to inform and educate the food industry and the public about the health benefits of and how to use Z Trim.

In April, 2007, the Company announced that at any of the 69 food service operations in the Volusia County, Florida Public School system's award-winning "School Way Cafe," students can choose from an assortment of baked goods made with or without Z Trim. Based on taste alone, they overwhelmingly prefer the reduced fat items with Z Trim. Volusia County is the 58th largest school district in the country.
 
Z Trim underwent a thorough review prior to use at Volusia schools. An evaluation phase was conducted by a certified research chef comparing Z Trim recipes to Control recipes. New and traditional menu items were prepared for tasting by school officials. A tasting panel consisting of students was formed as well.

In May 2007 the Company announced that its Z Trim Appetite Control Capsules can now be purchased at select GNC retail stores and from the GNC web site. This is one of the important steps in the Company's planned retail rollout to make Z Trim products accessible to people everywhere.
 
In May 2007 Z Trim Holdings, Inc. hired Alan Orlowsky as the Company's Chief Financial Officer. Mr. Orlowsky has served as a member of the Company's Board of Directors since January 2004 and most recently was the Chairman of the Company's Audit Committee and a member of the Company’s Compensation Committee. Mr. Orlowsky resigned those positions the end of April, 2007. Mr. Orlowsky will remain on the Company’s Board of Directors as an inside director. Dana Dabney, the Company's prior CFO, remains employed as Vice President and remains on the Company's Board of Directors. Mr. Orlowsky is moving into the CFO position at an important time of growth and expanding opportunity for the Company and his hiring is seen by the Company as a strategic benefit to operations going forward.

On May 3, 2007, the Company reported that by letter dated April 27, 2007, the American Stock Exchange ("AMEX") notified the Company pursuant to Section 1009(a)(i) of the AMEX Company Guide that “the Company appears to have issued certain shares of its common stock…without complying with applicable Amex requirements.” The Company believes that it has successfully and fully resolved this matter by rescinding the underlying transaction that gave rise to the issuance of the shares in question, thereby rendering moot any further question of noncompliance relating to thereto. Amex has taken no further action.
 
The Company's Board of Directors has appointed Brian Israel, age 49, to fill the vacancy created by Mr. Orlowsky's departure. In addition, Mr. Israel will serve as a member of the Compensation Committee and the Audit Committee, which he will Chair. Mr. Israel has spent more than 20 years in the real estate finance industry, where he managed teams responsible for production, operations, risk management, product and policy development, technology and project management functions for a major national lender and a large regional commercial bank.
 
Mr. Israel has long been active in legislative and consumer advocacy, is a former President of the Illinois Mortgage Bankers Association and has served on a variety of mortgage-related advisory bodies including the Federal Home Loan Mortgage Corporation's Affordable Housing Advisory Council and Regional Lender Advisory Board, and the Illinois Department of Financial and Professional Regulation's Residential Mortgage Advisory Board.
 
 
Currently, Mr. Israel provides strategic planning, training and project management services to businesses and non-profit entities as an independent consultant. He also serves as President of North Shore Custom Homes, Ltd., as a Mentor with Big Brothers and Big Sisters of Metropolitan Chicago, as a member of the Chicago Hospitality Resource Partnership Advisory Council and as President of the River North Residents Association.


SUMMARY OF FINANCIAL RESULTS

RESULTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2007 AS COMPARED TO THE SAME PERIODS ENDING JUNE 30, 2006

Revenues

Revenues increased 162% for the three months ended June 30, 2007 from $121,087 for the three months ended June 30, 2006 to $317,522. Revenues increased 170% for the six months ended June 30, 2007 from $236,530 for the six months ended June 30, 2006 to $639,986. The increase in revenues was primarily due to the increase in Z Trim product sales. The following table provides a breakdown of the revenues for our divisions for the periods indicated:
 
 
 
Three months ended June 30,
 
 
 
2007
 
2006
 
Products
  $
317,500
      $
120,515
 
Services
   
22
 
 
   
572
 
Total Revenues
  $
317,522
      $
121,087
 
 
       
 
       
   
Six months ended June 30,
 
 
 
2007
 
 
 
2006
 
Products
  $
638,908
      $
232,235
 
Services
   
778
 
 
   
4,295
 
Total Revenues
  $
639,986
      $
236,530
 
 
Operating expenses

Operating expenses consist of payroll and related costs, stock option expense, insurance, occupancy expenses, professional fees, and general operating expenses. Total operating expenses increased by $442,193 or 25% to $2,182,326 for the three months ended June 30, 2007 from $1,740,133 for the three months ended June 30, 2006. The increase in operating expenses was primarily due to the increase in stock option expense. Total operating expenses increased by $1,440,290 or approximately 33% to $5,739,681 for the six months ended June 30, 2007 from $4,299,391 for the six months ended June 30, 2006. The increase in operating expenses was primarily due to the increase in consulting and payroll expenses, net of the decrease in investor and public relations expenses.
 
The stock option expense for the three months ending June 30, 2007 was $1,063,302 compared to $472,639 for the three months ending June 30, 2006. The stock option expense for the six months ending June 30, 2007 was $1,370,257 compared to $1,566,139 for the six months ending June 30, 2006.
 

 
Stock options from the Company's stock option plan have been utilized in place of large salaries for management, staff, and plant employees, and as compensation for the advisory board members. Over the past year the Company has been building an Advisory Board of experts in the food industry, pharmaceutical industry, nutrition and fitness industry, medical profession, and other industries related to Z Trim's business. These current and former industry executives, doctors, chefs, food formulators, nutritionists, fitness experts, and others have been brought together to help Z Trim Holdings with its direction and contacts to help insure the growth and success of the Company. The company has also significantly increased the size of its workforce over that time in the production, sales, and marketing areas of the company to allow for the continued expansion and execution of its marketing, production, and sales plans. The incentive plan is based on three components: the amount of participation or attendance of the individual, the type, quality, and amount of service of the individual, and the results and value that the individuals provide to the Company with their service or participation. Each option grant is based on milestones that must be met in order for the options to be exercised. The Company feels strongly that the charge for the stock options under the new accounting rules is a wise investment in the company's future.

Other income (expense)

Total other income for the three months ended June 30, 2007 was $258,618 compared to $55,680 for the comparable period in fiscal 2006. Total other income for the six months ended June 30, 2007 was $268,985 compared to $61,377 for the comparable period in fiscal 2006. The increase was primarily due to a recovery of loan loss of $200,000.

Net loss

The Company reported a net loss for the second quarter of 2007 of $2,485,687 or $0.03 per share, a 13% increase from the net loss of $2,199,219 or $0.04 per share for the second quarter of 2006. This was due primarily to the increasing stock option and other expenses, net of increasing revenue.

For the six months ending June 30, 2007, the Company reported a net loss of $6,392,498 or $0.09 per share, which represents a 30% increase from the net loss of $4,904,918, or $0.09 per share for the six month period ending June 30, 2006. The increase was due primarily to non-cash consultant expenses recorded during the first quarter of 2007.

Assets

The Company reported an increase in assets as of June 30, 2007 of $13,471,847 from $10,014,265 for the comparable period in fiscal 2006. The increase was primarily due to the increase in current assets and plant assets less the decrease in other intangible assets.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2007 the Company had cash and cash equivalents of $5,997,478, an increase of $5,300,979 from December 31, 2006. The increase in cash is due to the proceeds of sales of stock, exercise of options and warrants net of capital lease payments, which totals $8,898,376, less cash used in operations of $3,094,334 and cash used in the purchase of property and equipment of $503,063. The Company’s total capital lease obligations were $2,160 at June 30, 2007.

Net cash used by operating activities increased by 24% to $3,094,334 for the six months ended June 30, 2007 as compared to $2,498,120 for the six months ended June 30, 2006. The increased cash usage was composed of a net loss of $6,392,498 adjusted for non-cash items, including depreciation and amortization of $334,149, stock option expense of $1,370,257, non-cash service expense of $2,302,2 7 9, net gains of $200,000, and for the net cash used from the net increases in assets and decreases in liabilities of approximately $482,462.

Net cash used by investing activities was $503,063 for the six months ended June 30, 2007, as compared to net cash used by investing activities of $55,599 for the six months ended June 30, 2006. The increase was due to increased acquisitions of manufacturing property and equipment for the plant in the current year.
 
Net cash provided by financing activities was $8,898,376 for the six months ended June 30, 2007 as compared to $5,464,610 for the six months ended June 30, 2006. Net cash provided by financing activities for the six months ended June 30, 2007 was primarily from the proceeds received from the sale of stock, options and warrants exercised and notes receivable for stock subscriptions of $8,910,290. Net cash provided by financing activities for the six months ended June 30, 2006 was primarily from the sale of stock, proceeds from stock subscription receivables, and from the exercising of options and warrants, which total $5,482,012.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B.

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION

Certain information set forth in this report contains "forward-looking statements" within the meaning of federal securities laws. Forward looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, and financing needs and other information that is not historical information. When used in this report, the words "estimates," "expects," "anticipates," "forecasts," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. Additional forward-looking statements may be made by us from time to time. All such subsequent forward-looking statements, whether written or oral and whether made by us or on our behalf, are also expressly qualified by these cautionary statements.

Our forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitation, our examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that our expectations, beliefs and projections will result or be achieved or accomplished. Our forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in, contemplated by or underlying the forward-looking statements contained in this report. Those risks and uncertainties include, but are not limited to, the risk that we do not regain compliance with the continued listing standards of the American Stock Exchange, risks relating to our material weakness in internal controls over financial reporting, our history of operating losses, lack thus far of significant market acceptance of our products, the fact that we may dilute existing shareholders through additional stock issuances, our reliance on our intellectual property, and the potential negative effects of manipulation in the trading of our common stock. Those risks and certain other uncertainties are discussed in more detail in our 2006 Annual Report on Form 10-KSB and our subsequent filings with the SEC. There may also be other factors, including those discussed elsewhere in this report that may cause our actual results to differ from the forward-looking statements. Any forward-looking statements made by us or on our behalf should be considered in light of these factors.

ITEM 3. CONTROLS AND PROCEDURES

This report includes the certifications of our President and Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). See Exhibits 31.1 and 31.2. This Item 3 includes information concerning the controls and control evaluations referred to in those certifications.

Background .  On October 31, 2007 we concluded that our previously issued financial statements for the first and second quarters of 2007 should no longer be relied upon because of certain accounting errors in those financial statements. Accordingly, we have restated our previously issued financial statements for those periods. See Note 2 of Notes to Interim Unaudited Consolidated Financial Statements included in “Part I — Item 1 — Financial Statements.”
 

 
In addition, on August 23, 2007, we announced we were conducting an internal investigation of our equity accounting and reporting practices in connection with our receipt of a deficiency letter from the American Stock Exchange (Amex).  That internal investigation identified deficiencies in our internal controls and procedures.  As a result of those findings, as well as the matters for which the restatement of this report is necessary, we have identified the following control deficiencies as of August 14, 2007 that constituted material weaknesses in our internal control over financial reporting:

  •   Account reconciliations over equity transactions were not always properly and timely performed, and the reconciliations and their supporting documentation were not consistently reviewed for completeness, accuracy, and timely resolution of reconciling items; and

  •   We did not design and maintain effective controls to ensure the completeness, accuracy, and timeliness of the recording and reporting of equity transactions.

Our management, under new leadership, has been actively engaged in the planning for, and implementation of, remediation efforts to address the material weaknesses.
 
We believe our remediation measures will remediate the material weaknesses we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and will continue to diligently review our financial reporting controls and procedures.

Evaluation of Disclosure Controls and Procedures .  Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the chief executive officer and the chief financial officer, to allow timely decisions regarding required disclosures.
 
 
In connection with the preparation of this amended Report, our President and Chief Financial Officer reassessed the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the restatement of previously issued financial statements described above, and the identification of certain material weaknesses in internal control over financial reporting (described above), which we view as an integral part of our disclosure controls and procedures, our President and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of August 14, 2007. Nevertheless, based on a number of factors, including the completion of our internal investigation our internal review that identified certain prior period adjustments, efforts to remediate the material weaknesses in internal control over financial reporting described above, and the performance of additional procedures by management designed to ensure the reliability of our financial reporting, we believe that the consolidated financial statements in this amended report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with GAAP.

Changes in Internal Control Over Financial Reporting .  There were no changes during the second quarter of 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  During the third and fourth quarters of 2007, we have begun the implementation of some remedial measures as described in our Current Report on Form 8-K filed on November 16, 2007.
 
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On August 8, 2007, the Company has entered into a settlement agreement with Farhad Zaghi and related parties (collectively, “Zaghi”) in which the Company had sued for collection of amounts owed on a promissory note. Zaghi had counterclaimed for fraud and other causes of action. Neither party admitted any wrongdoing. Pursuant to the settlement, which is designed to make the Company whole on the amounts owing under the promissory note, Zaghi paid the Company $100,000 in July 2007 as partial payment of the note and the Company released the related stock certificate. Additionally, the Company will issue and register for sale 1,950,000 shares of the Company’s common stock to a Zaghi affiliate. Zaghi will sell those shares in an orderly fashion, limited to 20,000 shares a day, via a mutually-acceptable broker. The proceeds from the sales will be divided between the Company and Zaghi pursuant to an established formula. Once the proceeds payable to the Company and Zaghi reach $800,000 and $2,591,000, respectively, then each party will dismiss with prejudice its claims against the other. In the event the amount of proceeds from the sales of shares by Zaghi does not total $2,591,000, the Company will be required to issue and register additional shares of common stock to a Zaghi affiliate, which will be similarly sold until the shortfall is satisfied. The registration of the original 1,950,000 shares is on a best-efforts basis. With respect to the registration of any additional required shares, the Company may be held in breach of the settlement agreement, resulting in confession of judgment, if such shares are not registered within 45 days of the final sale of the original shares. Prior to the settlement, the Company received an additional $200,000 as of June 30, 2007.
 
On November 23, 2005, the Company entered into a Letter of Agreement ("LOA") with George Foreman Enterprises, Inc. ("GFME") pursuant to which both parties would form a new limited liability company for the purpose of promoting the Company's zero calorie fat replacement food ingredient, Z Trim®. The parties did not reach any definitive Agreement as is required by the LOA. On May 9, 2006, the Company filed a lawsuit alleging breach of the Parties' nondisclosure agreement and trade secret misappropriation in the Circuit Court of the 19th Judicial District, Lake County, Illinois seeking damages and injunctive relief against GFME. On August 3, 2006 the court, based upon a finding that the Company has demonstrated a likelihood of success on the merits of the case, issued an order granting the Company a preliminary injunction enforcing the non-disclosure agreement between the parties. GFME subsequently appealed the preliminary injunction. The Appellate Court denied GFME’s appeal, and the injunctive order remains in place.
 
 
On July 17, 2006, George Forman Enterprises, Inc. filed a complaint against Z Trim Holdings, Inc. in the U.S. District Court seeking damages in excess of $70,000,000 for specific performance, breach of contract, promissory estoppel and unjust enrichment. The basis for all such claims is the underlying LOA, set forth above. Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.
 
On July 6, 2006, the Company filed a patent infringement suit in the United States District Court for the Western District of Wisconsin seeking unspecified damages and equitable relief against a manufacturer of a competing product. The case was dismissed by the court owing to a technicality and on March 20, 2007, the Company filed suit again. Trial is scheduled for February, 2008. In response to the dismissal order, the Defendant submitted a bill of costs seeking a total of $15,458 in taxable costs. The Court awarded Defendant $3608.00 in costs.
 
On January 18, 2007, the Company was served with a complaint by Daniel Caravette for breach of contract and violation of the Illinois Wage Payment and Collection Act, seeking damages in excess of $1,000,000. Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.
 
On July 7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act. Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.
 
 
ITEM 6. EXHIBITS
 
 
Exhibit No.
Description
 
 
3(i)
Articles of Incorporation of Circle Group Holdings, Inc. (filed as Exhibit 2.1 to Circle Group's Registration Statement on Form 10-SB and incorporated herein by reference).

 
3(ii)
Bylaws of Circle Group Holdings, Inc. (filed as Exhibit 2.2 to Circle Group's Registration Statement on Form 10-SB and incorporated herein by reference).

 
4.1
Form of Subscription Agreement (filed as Exhibit 4.1 to the Company's Form 8-K filed on March 30, 2006 and incorporated herein by reference).

 
4.2
Form of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the Company's Form 8-K filed on March 30, 2006 and incorporated herein by reference).

 
4.3
Form of Registration Rights Agreement (filed as Exhibit 4.3 to the Company's Form 8-K filed on March 30, 2006 and incorporated herein by reference).

 
4.4
Form of Subscription Agreement (filed as Exhibit 4.5 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
4.5
Form of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
4.6
Form of Registration Rights Agreement (filed as Exhibit 4.7 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
10.1
Gregory J. Halpern Employment Agreement (filed as Exhibit 10.1 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).
 
 
 
10.2
Michael J. Theriault Employment Agreement (filed as Exhibit 10.2 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
10.3
Dana L. Dabney Employment Agreement (filed as Exhibit 10.3 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
10.4
Alan G. Orlowsky Employment Agreement (filed as Exhibit 10.4 to the Company’s Form 10-QSB filed on May 7, 2007 and incorporated herein by reference).
 
 
10.5
Brian S. Israel Board of Directors appointment letter (filed as Exhibit 10.5 to the Company’s Form 10-QSB filed on May 7, 2007 and incorporated herein by reference).
 
 
10.6
Steve Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form 10-QSB for the quarter ending June 20, 2006 and incorporated herein by reference).
 
 
10.7*
David Lansky Board of Directors appointment letter.

 
10.8
Circle Group Holdings,Inc. 1999 Stock Option Plan (filed as Exhibit 6.6 to Circle Group’s Registration Statement on Form 10-SB and incorporated herein by reference).

 
10.9
Circle Group Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the Circle Group's Proxy Statement for its Annual Meeting conducted on June 16, 2004 and approved by its Shareholders on that date and incorporated herein by reference).

 
10.10
Industrial Lease Agreement between CLO Enterprises and Circle Group Holdings, Inc. dated May 20, 1999 (filed as Exhibit 6.7 to Circle Group's Registration Statement on Form 10-SB and incorporated herein by reference).

 
10.11
Industrial Lease Agreement between CLO Enterprises and Circle Group Holdings, Inc. dated June 18, 1999 (filed as Exhibit 6.8 to Circle Group's Registration Statement on Form 10-SB and incorporated herein by reference).

 
10.12
Assignment of License Agreement between UTEK Corporation, Circle Group Holdings, Inc. and Brookhaven Science Associates dated March 26, 2003 (filed as Exhibit 10.14 to Circle Group's Form 10-QSB for the quarter ending September 30, 2003 and incorporated herein by reference).

 
10.13
Assignment of License Agreement between UTEK Corporation, Circle Group Holdings, Inc. and University of Illinois dated July 9, 2003 (filed as Exhibit 10.15 to Circle Group's Form 10-QSB for the quarter ending September 30, 2003 and incorporated herein by reference).

 
10.14
Assignment of License Agreement between Circle Group Holdings, Inc. and Brookhaven Science Associates dated July 22, 2003 (filed as Exhibit 10.16 to Circle Group's Form 10-QSB for the quarter ending September 30, 2003 and incorporated herein by reference).

 
31.1**
Statement Under Oath of Principal Executive Officer of the Company Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 
31.2**
Statement Under Oath of Principal Financial Officer of the Company Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
 
 
 
32.1**
Statement Under Oath of Principal Executive Officer of the Company Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
 
32.2**
Statement Under Oath of Principal Financial Officer of the Company Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
*
Previously filed
**
Filed herewith
 
SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of November 16, 2007.
 
 
Z TRIM HOLDINGS, INC.
 
       
 
By:
/s/ Steven J. Cohen  
    Steven J. Cohen,  
    President (Principal Executive Officer)  
       
 
By:
/s/ Alan G. Orlowsky  
    Alan G. Orlowsky,  
    Chief Financial Officer (Principal Financial Officer)  
       
 
  
 
 
INDEX OF EXHIBITS
 
 
 
Exhibit No.
Description
 
 
3(i)
Articles of Incorporation of Circle Group Holdings, Inc. (filed as Exhibit 2.1 to Circle Group's Registration Statement on Form 10-SB and incorporated herein by reference).

 
3(ii)
Bylaws of Circle Group Holdings, Inc. (filed as Exhibit 2.2 to Circle Group's Registration Statement on Form 10-SB and incorporated herein by reference).

 
4.1
Form of Subscription Agreement (filed as Exhibit 4.1 to the Company's Form 8-K filed on March 30, 2006 and incorporated herein by reference).

 
4.2
Form of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to the Company's Form 8-K filed on March 30, 2006 and incorporated herein by reference).

 
4.3
Form of Registration Rights Agreement (filed as Exhibit 4.3 to the Company's Form 8-K filed on March 30, 2006 and incorporated herein by reference).

 
4.4
Form of Subscription Agreement (filed as Exhibit 4.5 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
4.5
Form of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
4.6
Form of Registration Rights Agreement (filed as Exhibit 4.7 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
10.1
Gregory J. Halpern Employment Agreement (filed as Exhibit 10.1 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
10.2
Michael J. Theriault Employment Agreement (filed as Exhibit 10.2 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
10.3
Dana L. Dabney Employment Agreement (filed as Exhibit 10.3 to the Company’s Form 10-KSB filed on April 2, 2007 and incorporated herein by reference).

 
10.4
Alan G. Orlowsky Employment Agreement (filed as Exhibit 10.4 to the Company’s Form 10-QSB filed on May 7, 2007 and incorporated herein by reference).
 
 
10.5
Brian S. Israel Board of Directors appointment letter (filed as Exhibit 10.5 to the Company’s Form 10-QSB filed on May 7, 2007 and incorporated herein by reference).
 
 
10.6
Steve Cohen Employment Agreement (filed as Exhibit 10.12 to the Company’s Form 10-QSB for the quarter ending June 20, 2006 and incorporated herein by reference).
 
 
10.7*
David Lansky Board of Directors appointment letter.
 
 
 
10.8
Circle Group Holdings,Inc. 1999 Stock Option Plan (filed as Exhibit 6.6 to Circle Group’s Registration Statement on Form 10-SB and incorporated herein by reference).

 
10.9
Circle Group Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the Circle Group's Proxy Statement for its Annual Meeting conducted on June 16, 2004 and approved by its Shareholders on that date and incorporated herein by reference).

 
10.10
Industrial Lease Agreement between CLO Enterprises and Circle Group Holdings, Inc. dated May 20, 1999 (filed as Exhibit 6.7 to Circle Group's Registration Statement on Form 10-SB and incorporated herein by reference).

 
10.11
Industrial Lease Agreement between CLO Enterprises and Circle Group Holdings, Inc. dated June 18, 1999 (filed as Exhibit 6.8 to Circle Group's Registration Statement on Form 10-SB and incorporated herein by reference).

 
10.12
Assignment of License Agreement between UTEK Corporation, Circle Group Holdings, Inc. and Brookhaven Science Associates dated March 26, 2003 (filed as Exhibit 10.14 to Circle Group's Form 10-QSB for the quarter ending September 30, 2003 and incorporated herein by reference).

 
10.13
Assignment of License Agreement between UTEK Corporation, Circle Group Holdings, Inc. and University of Illinois dated July 9, 2003 (filed as Exhibit 10.15 to Circle Group's Form 10-QSB for the quarter ending September 30, 2003 and incorporated herein by reference).

 
10.14
Assignment of License Agreement between Circle Group Holdings, Inc. and Brookhaven Science Associates dated July 22, 2003 (filed as Exhibit 10.16 to Circle Group's Form 10-QSB for the quarter ending September 30, 2003 and incorporated herein by reference).

 
31.1**
Statement Under Oath of Principal Executive Officer of the Company Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 
31.2**
Statement Under Oath of Principal Financial Officer of the Company Pursuant to Section 302 of Sarbanes-Oxley Act of 2002
 
 
32.1**
Statement Under Oath of Principal Executive Officer of the Company Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
 
32.2**
Statement Under Oath of Principal Financial Officer of the Company Pursuant to Section 906 of Sarbanes-Oxley Act of 2002

*      Previously filed
**           Filed herewith


 

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

Index to Financial Statements
[Missing Graphic Reference]
 
  Consolidated Balance Sheet at June 30, 2007 (unaudited)
 
 
F-1
 
 
 
 
 
 
  Consolidated Statement of Operations as of June 30, 2007(unaudited)
 
 
F-2
 
 
 
 
 
 
  Consolidated Statements of Cash Flows as of June30, 2007(unaudited)
 
 
F-3
 
 
 
 
 
 
  Notes to Interim Unaudited Consolidated Financial Statements
 
 
F-4
 
 
 
 
 
 
 
 
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)

JUNE 30, 2007 AND 2006  
 
 
ASSETS
           
Current Assets
 
2007
   
2006
 
   
(Restated)
       
  Cash and cash equivalents
  $
5,997,478
    $
2,935,890
 
  Accounts receivable
   
137,265
     
77,960
 
  Inventory
   
489,954
     
109,700
 
  Prepaid expenses and other assets
   
254,671
     
107,728
 
                 
    Total current assets
   
6,879,368
     
3,231,278
 
                 
Property and equipment, net
   
6,434,709
     
6,260,134
 
                 
Other Assets
               
  Intangible assets, net
   
146,667
     
511,750
 
  Deposits
   
11,103
     
11,103
 
                 
    Total other assets
   
157,770
     
522,853
 
                 
TOTAL ASSETS
  $
13,471,847
    $
10,014,265
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current Liabilities
               
  Accounts payable
  $
354,210
    $
437,407
 
  Accrued expenses
   
182,357
     
189,504
 
  Stock subscription payable
   
150,000
     
-
 
  Capital lease obligations
   
2,160
     
25,568
 
    Total current liabilities
   
688,727
     
652,479
 
                 
Long-Term Liabilities
               
  Capital lease obligations
   
-
     
2,098
 
                 
TOTAL LIABILITIES
   
688,727
     
654,577
 
                 
Stockholders' Equity
               
  Common stock, $0.00005 par value; authorized 200,000,000 shares;
               
   issued and outstanding 72,056,375 shares
   
3,600
     
3,043
 
  Additional paid-in capital
   
68,656,317
     
47,948,621
 
  Unamortized expenses
   
-
      (613,643 )
  Notes receivable for issuance of stock, net
   
-
      (20,000 )
  Accumulated Deficit
    (55,876,797 )     (37,958,333 )
                 
TOTAL STOCKHOLDERS' EQUITY
   
12,783,120
     
9,359,688
 
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $
13,471,847
    $
10,014,265
 
                 
 
See notes to interim unaudited consolidated financial statements
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
   
Three months ended
   
Six months ended      
 
   
June 30,      
   
June 30,      
 
   
2007
   
2006
   
2007
   
2006
 
REVENUES:
 
(Restated)
         
(Restated)
       
Products
  $
317,500
    $
120,515
    $
638,908
    $
232,235
 
Services
   
22
     
572
     
778
     
4,295
 
Total revenues
   
317,522
     
121,087
     
639,686
     
236,530
 
                                 
COST OF REVENUES:
                               
Products
   
879,501
     
635,853
     
1,561,488
     
903,434
 
    Total cost of revenues
   
879,501
     
635,853
     
1,561,488
     
903,434
 
                                 
GROSS MARGIN
    (561,979 )     (514,766 )     (921,802 )     (666,904 )
                                 
OPERATING EXPENSES:
                               
Selling, general and administrative
   
1,111,768
     
1,258,910
     
4,358,835
     
2,716,085
 
Stock option expense
   
1,063,302
     
472,639
     
1,370,257
     
1,566,139
 
Amortization of intangible assets
   
3,334
     
8,584
     
6,667
     
17,167
 
Loss on asset disposal
   
3,922
     
-
     
3,922
     
-
 
Total operating expenses
   
2,182,326
     
1,740,133
     
5,739,681
     
4,299,391
 
                                 
OPERATING LOSS
    (2,744,305 )     (2,254,899 )     (6,661,483 )     (4,966,295 )
                                 
OTHER INCOME (EXPENSES):
                               
Rental and other income
   
10,500
     
10,500
     
21,000
     
21,566
 
Interest income
   
78,287
     
51,429
     
79,530
     
51,429
 
Recovery of loan loss
   
200,000
     
-
     
200,000
     
-
 
Interest expense
    (669 )     (6,249 )     (2,045 )     (11,618 )
Settlment loss
    (29,500 )    
-
      (29,500 )    
-
 
    Total other income (expenses)
   
258,618
     
55,680
     
268,985
     
61,377
 
                                 
NET LOSS
  $ (2,485,687 )   $ (2,199,219 )   $ (6,392,498 )   $ (4,904,918 )
                                 
Net Loss per Share - Basic and Diluted
  $ (0.03 )   $ (0.04 )   $ (0.09 )   $ (0.09 )
                                 
Weighted Average Number of Shares
   
72,026,042
     
60,779,041
     
68,852,048
     
57,626,106
 
                                           
See notes to interim unaudited consolidated financial statements
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

For the Six Months Ended June 30,
 
2007
   
2006
 
   
(Restated)
       
Cash Flows From Operating Activities:
           
Net loss
  $ (6,392,498 )   $ (4,904,918 )
Adjustments to reconcile net loss to net cash used in operations:
               
Depreciation and amortization
   
334,149
     
324,758
 
Issuance of common stock and warrants for services
   
2,188,940
     
205,700
 
Amortization of noncash expenses
   
113,339
     
972,854
 
Stock option expense
   
1,370,257
     
1,566,139
 
Recovery of loan loss
    (200,000 )    
-
 
Loss on asset disposal
   
3,922
     
-
 
Stock settlement
   
29,500
     
-
 
(Increase) in:
               
Accounts receivable
    (66,089 )     (17,514 )
Inventory
    (270,349 )     (10,913 )
Prepaid expenses and other assets
    (160,254 )     (22,058 )
Decrease in:
               
Accounts payable and accrued expenses
    (45,251 )     (612,168 )
Cash flows used in operating activities
    (3,094,334 )     (2,498,120 )
                 
Cash Flows From Investing Activities:
               
Purchase of property and equipment
    (504,563 )     (55,599 )
Proceeds from asset disposal
   
1,500
     
-
 
Cash flows used in investing activities
    (503,063 )     (55,599 )
                 
Cash Flows From Financing Activities:
               
Net proceeds from sales of stock
   
7,838,000
     
5,156,462
 
Exercise of options and warrants
   
872,289
     
160,550
 
Net payments on capital lease obligations
    (11,913 )     (17,402 )
Proceeds from notes receviable for stock, net
   
200,000
     
165,000
 
Cash flows provided by financing activities
   
8,898,376
     
5,464,610
 
                 
Net increase in cash and cash equivalents
   
5,300,979
     
2,910,891
 
Cash and cash equivalents, at beginning of period
   
696,499
     
24,999
 
Cash and cash equivalents, at end of period
  $
5,997,478
    $
2,935,890
 
                 
Supplemental Disclosures of Cash Flow Information:
               
Interest paid
  $
2,045
    $
11,618
 
                 
Supplemental Schedule of Noncash Investing and Financing Activities:
               
Issuance of common stock and warrants for services
  $
2,188,940
    $
1,534,879
 
Stock subscription payable
  $
150,000
    $
-
 
Retirement of treasury stock
  $
-
    $
11,269
 
 
See notes to interim unaudited consolidated financial statements
 

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of Business

Z Trim Holdings, Inc. (the “Company”) manufactures a zero calorie fat substitute, Z Trim, and other Z Trim related products.  The company will continue exploring all available options for its other Z Trim technologies and related assets.

The Company has participated in several public and private offerings and has expanded its business.  In 2002, the Company acquired FiberGel Technologies, Inc. (“FiberGel”), which owns an exclusive license to Z Trim, an all-natural, agriculture-based fat replacement.

The Company has three reportable business unit segments: food product development, security product development and e-tailer.  The Company operates through its FiberGel, The Brave Way Training Systems, Inc., On-Line Bedding Corp., and Z-Amaize Technologies, Inc. divisions.

A summary of significant accounting policies follows.

Presentation of Interim Information

The financial information at June 30, 2007 and for the three and six months ended June 30, 2007 and 2006 is unaudited, but includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the financial information set forth herein, in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information, and with the instructions to Form 10-QSB and Item 310 (b) of Regulation S-B. Accordingly, such information does not include all of the information and footnotes required by U.S. GAAP for annual financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual Report on Form 10-KSB for the year ended December 31, 2006.
 
The results for the six months ended June 30, 2007 may not be indicative of results for the year ending December 31, 2007 or any future periods.
 
Principle of Consolidation and Presentation

The accompanying consolidated financial statements include the accounts of Z Trim Holdings Inc. and its subsidiaries after elimination of significantly all intercompany accounts and transactions.  Certain prior period items have been reclassified from operating expenses to cost of goods sold for ease of comparison. This reclassification affects neither the net loss nor the accumulated deficit of the Company.
 
Use of Estimates
 
The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Income (Loss) Per Common Share
 
Basic net income (loss) per share includes no dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common stock outstanding for the period. Diluted earnings per share is computed by dividing net income by the weighted average number of shares outstanding and, when, diluted, potential shares from options and warrants to purchase common stock using the treasury stock method. Diluted net loss per common share does not differ from basic net loss per common share since potential shares of common stock are anti-dilutive for all periods presented.
 
Cashless Exercise of Warrants
 
The Company has issued warrants to purchase common stock where the holder is entitled to exercise the warrant via a cashless exercise, when the exercise price is less than the fair value of the common stock. The Company accounts for the issuance of common stock on the cashless exercise of warrants as a cost of capital.
 
Stock Based Compensation
 
Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment” (SFAS 123R), using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006 based on the grant date fair value calculated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R).
 
As a result of adopting SFAS 123(R) on January 1, 2006, the Company recognized pre-tax compensation expense related to stock options of $1,063,302 and $1,370,257 for the three and six months ended June 30, 2007, respectively and $472,639 and $1,566,139 for the three and six months ended June 30, 2006, respectively.  The 2007 stock option expense includes an additional charge of $12,607 from the modification of 45,000 out-of-money options.  These options were granted a two year extension.

New Accounting Pronouncements
 
In May 2007, the FASB issued FASB Staff Position No. FIN 48-1 (“FSP 48-1”), Definition of Settlement in FASB Interpretation No. 48 .  FSP 48-1 amended FIN 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.  FSP 48-1 required application upon the initial adoption of FIN 48.  The adoption of FSP 48-1 did not affect the Company’s condensed consolidated financial statements.
 
In February 2007, the Financial Accounting Standards Board (“FASB’) issued Financial Accounting Standards (“FAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 , which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. FAS No.159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.

In September 2006, the FASB issued FAS No. 157, Fair Value Measurements . FAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement addresses how to calculate fair value measurements required or permitted under other accounting pronouncements. Accordingly, this statement does not require any new fair value measurements. However, for some entities, the application of the statement will change current practice.
 

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
FAS No. 157 is effective for the Company beginning January 1, 2008. The Company is currently evaluating the impact of this standard.

In September 2006, the Securities and Exchange Commission ("SEC") staff issued Staff Accounting Bulletin No. 108 ("SAB 108"), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. The stated purpose of SAB 108 is to provide consistency between how registrants quantify financial statement misstatements.
 
Prior to the issuance of SAB 108, there have been two widely-used methods, known as the "roll-over" and "iron curtain" methods, of quantifying the effects of financial statement misstatements. The roll-over method quantifies the amount by which the current year income statement is misstated while the iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated. Neither of these methods considers the impact of misstatements on the financial statements as a whole.
 
SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the Company's financial statements and the related financial statement disclosures. This approach is referred to as the "dual approach" as it requires quantification of errors under both the roll-over and iron curtain methods.
 
SAB 108 allows registrants to initially apply the dual approach by either retroactively adjusting prior financial statements as if the dual approach had always been used, or by recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings.
 
The Company will initially apply SAB 108 using the cumulative effect transition method in connection with the preparation of the annual financial statements for the year ending December 31, 2006. The Company does not believe the adoption of SAB 108 will have a significant effect on its consolidated financial statements.
 
NOTE 2 – RESTATEMENT
 
On October 31, 2007, the Company determined that its financial statements for the quarters ended March 31, 2007 and June 30, 2007 should no longer be relied upon because of accounting errors in those financial statements relating to specific equity transactions.  Accordingly, the Company has restated its previously issued financial statements for those periods. Restated financial information is presented in this report, as well as in the Company’s Amended Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007.
 
The June 30, 2007 consolidated financial statements have been restated to account for shares released from restrictions on March 9, 2007 (see Note 6 – ‘Release of common stock stop order’). The Company recognized an expense of $2,182,175 related to the transaction. As a result of this correction, net loss for the six months ended June 31, 2007 has increased to $6,392,498 from $4,210,323, and net loss per share increased to $0.09 from $0.06.  There was no change for the three months ended June 30, 2007.
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 3-INVENTORY
 
At June 30, inventory consists of the following:
 
   
2007
   
2006
 
Raw materials
  $
30,925
    $
39,635
 
Work-in-process
   
1,359
     
7,206
 
Packaging
   
49,443
     
25,878
 
Finished goods
   
408,227
     
36,981
 
Total inventory
  $
489,954
    $
109,700
 
 
 
NOTE 4-PROPERTY AND EQUIPMENT, NET
 
At June 30, property and equipment, net consists of the following:
 
   
2007
   
2006
 
Production, engineering and other equipment
  $
5,258,094
    $
4,521,317
 
Leasehold improvements
   
2,776,314
     
2,658,517
 
Office equipment and furniture
   
622,857
     
601,067
 
Computer equipment and related software
   
369,077
     
324,393
 
Construction in process - equipment
   
-
     
100,976
 
     
9,026,342
     
8,206,270
 
Accumulated depreciation
    (2,591,633 )     (1,946,136 )
Property and equipment, net
  $
6,434,709
    $
6,260,134
 
 
NOTE 5 – INTANGIBLE ASSETS
 
During the first six months of fiscal 2007, no significant identified intangible assets were acquired and no identified intangible assets were impaired. The following table present details of the Company’s purchased intangible assets:
 
                   
   
Gross
             
   
Carrying
   
Accumulated
       
   
Amount
   
Amortization
   
Net
 
License Rights to
                 
Website
   
200,000
      (53,333 )    
146,667
 
                         
Total intangibles
  $
200,000
    $ (53,333 )   $
146,667
 
                         
 
Amortization of intangibles was $6,667 and $17,166 for the six months ended June 30, 2007 and 2006, respectively.
 
Based on the carrying amount of the intangibles as of June 30, 2007, and assuming no impairment of the underlying assets, the estimated future amortization is as follows:
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 5 – INTANGIBLE ASSETS (CONTINUED)
 
       
Years ended December 31,
     
2007 (July 1 to December 31)
   
6,666
 
2008
   
13,333
 
2009
   
13,333
 
2010
   
13,333
 
2011
   
13,333
 
Thereafter
   
86,669
 
Total amortization
  $
146,667
 
 
NOTE 6- STOCKHOLDERS' EQUITY
 
Private Placement Offerings
 
On February 2, 2007, the Company entered into an agreement with J.P. Turner & Company, L.L.C. to sell shares of the Company’s common stock, par value $0.00005 per share (“Common Stock”), and warrants exercisable for Common Stock (the “Warrants”).  The purchase price was $1.00 per share, which was greater than 70% of the volume weighted average price of the Company’s common stock for the 90 days from the day prior to the closing date, which was March 29, 2007.  The investors also received a 25% stock warrant at an exercise price equal to 120% of the purchase price.  The Warrants have a term of 5 years.
 
The offering closed on March 29, 2007.  In the aggregate the Company sold 8,000,000 shares of its common stock and 2,000,000 warrants.  J.P. Turner & Company, L.L.C received a placement fee of 10% of the gross proceeds and 15% warrant coverage with an exercise price equal to the purchase price.  The Company received $6,958,000 in proceeds, which is net of offering costs and commissions of $1,042,000.
 
The Company filed a Registration Statement covering the resale of the Common Stock underlying the units and Warrants with the SEC.  The Company has responded to all SEC comments and is waiting for the registration approval from the SEC.
 
In May 2007, the Company conducted a self-underwritten offering of the Company’s common stock.  The stock was sold for $100,000 per unit.  Each unit consisted of 100,000 shares of common stock and 25,000 warrants.  The warrants are exercisable at $1.20 per share and expire in five (5) years after purchase of the above-described unit.  The Company sold and issued 880,000 shares and received proceeds of $880,000 under the offering.  The Company has received a stock subscription for 150,000 shares of its common stock and 37,500 warrants under the offering.  The Company is waiting approval from the American Stock Exchange for issuance of the shares.
 
On March 24 through 30, 2006, the Company entered into private placement subscription agreements pursuant to which it sold unregistered shares of our common stock, par value $0.00005 per share (“Common Stock”), and warrants exercisable for Common Stock.  The Company sold approximately 205 units in the private placement, with each unit consisting of 40,323 shares of Common Stock.  In addition, investors who invested at least $500,000 in the private placement received a five-year warrant with an exercise price of $1.00 per share to purchase a number of shares of Common Stock equal to 10% of the number of shares of Common Stock purchased (the “Warrants”).  In the aggregate the Company sold 8,245,368 shares of Common Stock, and Warrants to purchase an additional 161,292 shares of Common Stock.  Proceeds from the sale, net of commissions and fees of $521,865, totaled $4,536,433.  The Company has registered the Common Stock and underlying Warrants with the SEC as free trading shares.
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 6- STOCKHOLDERS' EQUITY (continued)
 
National Securities Corporation (“National Securities”) served as the lead placement agent in connection with the private placement. National Securities received cash fees in the aggregate of $521,865 and warrants to purchase 824,537 shares of Common Stock on terms which are identical to the Warrants included in the units except that the exercise price is $0.68 per share and they contain an assignment provision.  In addition, the placement agent’s warrant has registration rights that are the same as those afforded to investors in the private placement.
 
The Company determined that all of the securities sold and issued in the private placement were exempt from registration under the Securities Act of 1933, as amended (the “Act”) pursuant Section 4(2) of the Act and Rule 506 of Regulation D Promulgated under the Act.  The Company based this determination on the non-public manner in which it offered the securities and on the representations of the persons purchasing such securities, which included, in pertinent part, that such persons were “accredited investors” within the meaning of Rule 501 of Regulation D promulgated under the Act, and that such persons were acquiring such securities for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to resale or distribution, and that each such persons understood such securities may not be sold to otherwise deposed of without registration under the Act or an applicable exemption there from.
 
In January 2006, the Company conducted a self-underwritten offering of the Company’s common stock up to $1.24 million.  The stock was sold for $31,000 per unit.  Each unit consisted of 50,000 shares of common stock and 50,000 warrants.  The warrants are exercisable at $1.00 per share and expire in three (3) years after purchase of the above-described unit.  The Company sold and issued 1,000,000 shares and received proceeds of $620,000 under the offering.
 
Exercising of Stock Warrants and Options
 
During the first six months of 2007 and 2006, respectively, 1,014,163 and 506,400 stock warrants and options were exercised.  The Company received total proceeds of $872.289 and $160,500, respectively.  The 2007 warrants exercised are net of 879,996 shares rescinded by the Board of Directors on April 30, 2007.
 
Common Stock Issued on the Cashless Exercise of Warrants
 
During February 2007 the Company issued 11,578 shares of common stock on the cashless exercise of warrants.
 
Release of Common Stock Stop Order
 
On November 22, 2004, the Company entered into a two-year engagement with David Shemesh and Mordechai Tobian for investor relations services in consideration of 2,250,000 shares of restricted common stock of the Company (the "Shemesh/Tobian Shares") and a warrant to purchase 275,000 shares of restricted common stock at $.80 per share through November 21, 2007.
 
Based on a closing price of the Company's common stock of $.79 on November 22, 2004, the Company recorded paid-in-capital of $1,777,500 as of that date and began to recognize investor relation expenses on a quarterly basis over the life of the two-year contract.
 
On August 24, 2005, the Company took the position that Shemesh and Tobian had failed to perform as agreed and the Company purported to rescind the contract. Simultaneously, the Company placed a stop order on the Shemesh/Tobian Shares. Through that date, the Company had recognized $765,325 of expense relating to the contract. Accordingly, at September 30, 2005 the Company wrote off the remaining $1,012,175 against paid-in-capital.
 
Shemesh and Tobian disputed the Company's basis for rescinding the contract and because they were referred to the Company by Farhad Zaghi, the Company's purported rescission became an issue in the Company's ongoing litigation with Zaghi and his affiliates. In order to eliminate one of the issues of contention between the parties and facilitate further settlement negotiations, on March 9, 2007, the Company released the stop order on the Shemesh/Tobian Shares and allowed the shares to be traded. The Company recognized an expense to investor relations of $2,182,175, based on the closing price of the Company’s common stock on March 9, 2007.
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 6- STOCKHOLDERS' EQUITY (continued)
 
Restated financial information concerning this expense recognition is presented in this report, as well as in the Company’s Amended Quarterly Report on Form 10-QSB for the quarter ended March 31, 2007.  (See Note 2 – ‘Restatement’.)
 
NOTE 7 - NET LOSS PER SHARE
 
The following table sets forth the computation of basic and diluted net loss per share:
 
   
Three months ended
   
Six months ended      
 
   
June 30,      
   
June 30,      
 
Numerator:
 
2007
   
2006
   
2007
   
2006
 
   
(Restated)
         
(Restated)
       
                                 
  Net loss
  $ (2,485,687 )   $ (2,199,219 )   $ (6,392,498 )   $ (4,904,918 )
                                 
Denominator:
                               
  Weighted average number of
                               
shares outstanding
   
72,026,042
     
60,779,041
     
68,852,048
     
57,626,106
 
                                 
Net loss per share-basic and diluted
  $ (0.03 )   $ (0.04 )   $ (0.09 )   $ (0.09 )
 
As the Company incurred net losses for the three and six months ended June 30, 2007, the effect of dilutive securities totaling 5,394,801 and 5,583,098 equivalent shares, respectively, has been excluded from the calculation of diluted loss per share because their effect was anti-dilutive.
 
As the Company incurred net losses for the three and six months ended June 30, 2006, the effect of dilutive securities totaling 4,965,871 and 3,709,516 equivalent shares, respectively, has been excluded from the calculation of diluted loss per share because their effect was anti-dilutive.
 
NOTE 8 – STOCK OPTION PLAN
 
The Company has a Stock Option Plan (the Plan) effective January 2, 1999 and amended in 2004, which provides for the issuance of qualified options to all employees and non-qualified options to consultants and other service providers.
 
A summary of the status of stock options issued by the Company as of June 30, 2007 and 2006 is presented in the following table:
 
   
2007      
   
2006      
 
         
Weghted
         
Weghted
 
   
Number
   
Average
   
Number
   
Average
 
   
of
   
Exercise
   
of
   
Exercise
 
   
Shares
   
Price
   
Shares
   
Price
 
Outstanding at beginning of year
   
20,285,749
    $
0.99
     
12,892,939
    $
1.03
 
Granted
   
1,592,000
     
1.33
     
2,200,000
     
1.04
 
Exercised
    (453,318 )    
0.77
      (471,400 )    
0.29
 
Expired and Cancelled
    (1,535,000 )    
1.11
      (1,120,000 )    
0.84
 
Outstanding at end of period
   
19,889,431
    $
1.01
     
13,501,539
    $
1.08
 
                                 
Exercisable at end of period
   
19,539,431
    $
1.00
     
13,501,539
    $
1.08
 
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 8 – STOCK OPTION PLAN (CONTINUED)
 
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model.  This model uses the assumptions listed in the table below. Expected volatilities are based on the historical volatility of the Company’s stock.  The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
 
   
2007
   
2006
 
Weighted average fair value per option granted
  $
0.85
    $
0.71
 
Risk-free interest rate
    4.83 %     4.91 %
Expected dividend yield
    0.00 %     0.00 %
Expected lives
   
3.00
     
3.00
 
Expected volatility
    109.60 %     127.40 %
 
As of June 30, 2007, there was $301,900 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan.  The cost is expected to be recognized over a weighted average period of ten months.
 
The following table sets forth additional information about stock options outstanding at June 30, 2007:
 
         
Weighted
           
         
Average
 
Weighted
       
Range of
       
Remaining
 
Average
       
Exercise
   
Options
 
Contractual
 
Exercise
   
Options
 
Prices
   
Outstanding
 
Life
 
Price
   
Exercisable
 
$
0.01-$1.50
     
19,344,431
 
1.6 years
  $
0.98
     
18,994,431
 
$
1.51-$3.00
     
545,000
 
0.4 years
  $
2.09
     
545,000
 
         
19,889,431
 
1.6 years
  $
1.01
     
19,539,431
 
                               
 
As of June 30, 2007 and 2006, the Company has warrants outstanding to purchase 7,159,234 and 6,149,995 shares of the Company’s common stock, respectively, at prices ranging from $0.45 to $6.40 per share.  These warrants expire at various dates through May 2012.
 
NOTE 9 – SETTLEMENT LOSS
 
In April 2007, the Company and two former investor relation consultants entered into a revised settlement agreements to replace and rescind the original settlement agreements signed in October 2006. As a result, an additional 10,000 shares of the Company’s common stock at a fair value of $29,500 was issued and recorded.
 
NOTE 10 – MAJOR CUSTOMERS AND CREDIT CONCENTRATION
 
The Company’s principal customers are wholesale companies.  Two customers accounted for approximately 36% of the Food Product Development segment revenues for the six months ended June 30, 2007 and three customers accounted for approximately 70% for the six months ended June 30, 2006.
 
Two customers accounted for approximately 84% and 84% of the E-tailer segment revenues for the six months ended June 30, 2007 and 2006, respectively.  Management does not believe a significant credit risk exists at June 30, 2007.
 
The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits.  The Company periodically assesses the financial condition of the institutions and believes that the risk of any loss is minimal.
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 11 – PENDING LITIGATION
 
On August 8, 2007, the Company has entered into a settlement agreement with Farhad Zaghi and related parties (collectively, “Zaghi”) in which the Company had sued for collection of amounts owed on a promissory note.  Zaghi had counterclaimed for fraud and other causes of action.  Neither party admitted any wrongdoing.  Pursuant to the settlement, which is designed to make the Company whole on the amounts owing under the promissory note, Zaghi paid the Company $100,000 in July 2007 as partial payment of the note and the Company released the related stock certificate.  Additionally, the Company will issue and register for sale 1,950,000 shares of the Company’s common stock to a Zaghi affiliate.  Zaghi will sell those shares in an orderly fashion, limited to 20,000 shares a day, via a mutually-acceptable broker.  The proceeds from the sales will be divided between the Company and Zaghi pursuant to an established formula.  Once the proceeds payable to the Company and Zaghi reach $800,000 and $2,591,000, respectively, then each party will dismiss with prejudice its claims against the other.  In the event the amount of proceeds from the sales of shares by Zaghi does not total $2,591,000, the Company will be required to issue and register additional shares of common stock to a Zaghi affiliate, which will be similarly sold until the shortfall is satisfied.  The registration of the original 1,950,000 shares is on a best-efforts basis.  With respect to the registration of any additional required shares, the Company may be held in breach of the settlement agreement, resulting in confession of judgment, if such shares are not registered within 45 days of the final sale of the original shares.  Prior to the settlement, the Company received an additional $200,000 as of June 30, 2007.
 
On November 23, 2005, the Company entered into Letter Agreement ("LOA") with George Foreman Enterprises, Inc. ("GFME") pursuant to which both parties would form a new limited liability company for the purpose of promoting the Company's zero calorie fat replacement food ingredient, Z Trim®.  The parties did not reach any definitive Agreement as is required by the LOA.  On May 9, 2006, the Company filed a lawsuit alleging breach of the Parties' nondisclosure agreement and trade secret misappropriation in the Circuit Court of the 19th Judicial District, Lake County, Illinois seeking damages and injunctive relief against GFME.  On August 3, 2006 the court, based upon a finding that the Company has demonstrated a likelihood of success on the merits of the case, issued an order granting the Company a preliminary injunction enforcing the non-disclosure agreement between the parties.  GFME subsequently appealed the preliminary injunction.  The Appellate Court denied GFME’s appeal, and the injunctive order remains in place.
 
On July 17, 2006, George Forman Enterprises, Inc. filed a complaint against Z Trim Holdings, Inc. in the U.S. District Court seeking damages in excess of $70,000,000 for specific performance, breach of contract, promissory estoppel and unjust enrichment.  The basis for all such claims is the underlying LOA, set forth above.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.
 
On July 6, 2006, the Company filed a patent infringement suit in the United States District Court for the Western District of Wisconsin seeking unspecified damages and equitable relief against a manufacturer of a competing product.  The case was dismissed by the court owing to a technicality and on March 20, 2007, the Company filed suit again.  Trial is scheduled for February, 2008.  In response to the dismissal order, the Defendant submitted a bill of costs seeking a total of $15,458 in taxable costs. The Court awarded Defendant $3608.00 in costs.
 
On January 18, 2007, the Company was served with a complaint by Daniel Caravette for breach of contract and violation of the Illinois Wage Payment and Collection Act, seeking damages in excess of $1,000,000.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.
 
On July 7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act.  Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.
 
NOTE 12 – RELATED PARTY TRANSACTIONS
 
As of June 30, 2007, the Company has a receivable from the CEO of $3,978 related to payroll taxes withheld on a check that was voided in July 2007.
 
As of June 30, 2007, the Company had a stock subscription receivable of $1,423 from the President related to exercising his stock options in April 2007.  The receivable was repaid on July 10, 2007.
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 12 – RELATED PARTY TRANSACTIONS (CONTINUED)
 
In May 2007, the Board of Directors resolved to rescind a consulting agreement issued for options on October 5, 2006.  The agreement was with the brother of the Vice President.  The related options were exercised for 200,000 shares at $0.75 per share or $150,000 in October 2006.  The Board further resolved to approve the related party to use the proceeds to subscribe the shares pursuant to the Company’s May 2007 self-underwritten offering (see Note 6).  The subscription is pending regulatory approval from the American Stock Exchange.  Common stock and paid in capital were decreased and stock subscription payable was recorded for $150,000.
 
On April 12, 2006, the Company advanced $2,500 to the President.  The advance was repaid on July 31, 2006.
 
As of June 30, 2006, the Company had a stock subscription receivable of $20,000 from the President related to exercising his stock options in 2005.  The stock subscription receivable was paid in full on September 30, 2006 including $675 of interest.
 
NOTE 13- GUARANTEES
 
The Company from time to time enters into certain types of contracts that contingently require the Company to indemnify parties against third party claims. These contracts primarily relate to: (i) divestiture agreements, under which the Company may provide customary indemnifications to purchasers of the Company’s businesses or assets; (ii) certain real estate leases, under which the Company may be required to indemnify property owners for environmental and other liabilities, and other claims arising from the Company’s use of the applicable premises; and (iii) certain agreements with the Company's officers, directors and employees, under which the Company may be required to indemnify such persons for liabilities arising out of their employment relationship.  The terms of such obligations vary. Generally, a maximum obligation is not explicitly stated. Because the obligated amounts of these types of agreements often are not explicitly stated, the overall maximum amount of the obligations cannot be reasonably estimated. Historically, the Company has not been obligated to make significant payments for these obligations, and no liabilities have been recorded for these obligations on its consolidated balance sheet as of June 30, 2007.

In general, the Company offers a one-year warranty for most of the products it sold.  To date, the Company has not incurred any material costs associated with these warranties.
 
NOTE 14 – APPOINTMENT OF PRINCIPAL OFFICERS/ AUDIT COMMITTEE CHAIRMAN
 
On May 1, 2007, the Board of Directors appointed Alan Orlowsky as the Company’s Chief Financial Officer (CFO).  Mr. Orlowsky has served as a member of the Company’s Board of Directors and was the Chairman of the Company’s Audit Committee.  He resigned those positions as of April 30, 2007.  The former CFO resigned his position as of April 30, 2007, and the Board of Directors appointed him as the Company’s Vice President effective May 1, 2007 and he remained on the Company’s Board of Directors.
 
The Board of Directors has appointed Brian Israel as the new audit committee chair of the Company to fill the vacancy created by Mr. Orlowsky’s departure.
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 15 – SEGMENT INFORMATION
 
The Company evaluates its reporting segments in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by SFAS No. 131. The Chief Executive Officer allocates resources to each segment based on their business prospects, competitive factors, net sales and operating results.
 
The Company’s structure includes three principal operating segments: (i) Food Product Development, (ii) Security Training and Products and (iii) E-tailer.  The food product development segment owns the exclusive, worldwide license to Z Trim(TM).  The Security training offers cost effective self-defense training courses and products with a uniquely targeted curriculum.  The e-tailer segment is a distributor of pillows, blankets, and other bedding products.  The Company also has other subsidiaries that do not meet the quantitative thresholds of a reportable segment.
 
The Company reviews the operating segments’ income to evaluate performance and to allocate resources. Operating companies' income for the reportable segments excludes income taxes, minority interest and amortization of goodwill. Provision for income taxes is centrally managed at the corporate level and, accordingly, such items are not presented by segment. The segments' accounting policies are the same as those described in the summary of significant accounting policies.
 
Intersegment transactions are recorded at cost.
 
Summarized financial information of the Company’s results by operating segment is as follows:
 
   
Three months ended
   
Six months ended      
 
   
June 30,      
   
June 30,      
 
   
2007
   
2006
   
2007
   
2006
 
Net Revenue:
                       
  Food Product Development
  $
217,213
    $
12,552
    $
430,289
    $
35,383
 
  Personal Safety Training and Products
   
120
     
376
     
729
     
3,903
 
  E-tailer
   
100,287
     
107,963
     
208,619
     
196,852
 
Net Revenue by  Reportable Segment
  $
317,620
    $
120,891
    $
639,637
    $
236,138
 
All Other Operating Revenue
    (98 )    
196
     
49
     
392
 
  Consolidated Net Revenue
  $
317,522
    $
121,087
    $
639,686
    $
236,530
 
Operating Income (Loss):
                               
  Food Product Development
  $ (975,768 )   $ (763,004 )   $ (1,741,677 )   $ (1,297,848 )
  Personal Safety Training and Products
    (1,515 )    
300
      (982 )    
3,756
 
  E-tailer
    (998 )     (318 )    
13,489
     
9,873
 
Operating Loss by  Reportable Segment
  $ (978,281 )   $ (763,022 )   $ (1,729,170 )   $ (1,284,219 )
All Other Operating Loss
    (1,766,024 )     (1,491,877 )     (4,932,313 )     (3,682,076 )
  Consolidated Operating Loss
  $ (2,744,305 )   $ (2,254,899 )   $ (6,661,483 )   $ (4,966,295 )
Net Income (Loss):
                               
  Food Product Development
  $ (975,771 )   $ (766,982 )   $ (1,741,907 )   $ (1,302,608 )
  Personal Safety Training and Products
    (1,515 )    
300
      (982 )    
3,756
 
  E-tailer
    (998 )     (318 )    
13,489
     
9,338
 
Net Loss by  Reportable Segment
  $ (978,284 )   $ (767,000 )   $ (1,729,400 )   $ (1,289,514 )
All Other Net Loss
    (1,507,403 )     (1,432,219 )     (4,663,098 )     (3,615,404 )
Consolidated Net Loss
  $ (2,485,687 )   $ (2,199,219 )   $ (6,392,498 )   $ (4,904,918 )
 
 
 
Z TRIM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2007  
 
NOTE 15 – SEGMENT INFORMATION (CONTINUED)
 
   
June 30,      
 
Total Assets:
 
2007
   
2006
 
Food Product Development
  $
6,637,668
    $
5,897,265
 
Personal Safety Training and Products
   
2,597
     
769
 
E-tailer
   
98,926
     
59,460
 
     
6,739,191
     
5,957,494
 
All other segments
   
6,732,656
     
4,056,771
 
Consolidated assets
  $
13,471,847
    $
10,014,265
 
 
NOTE 16 – SUBSEQUENT EVENTS/ DISCONTINUED OPERATIONS
 
On July 18, 2007 the Board of Directors resolved to dissolve and liquidate On-Line Bedding Corp. (“On-Line”), which is the E-tailer operating segment.  The Company expects On-Line to be fully dissolved by December 31, 2007.  The related assets over liabilities of the segment have an approximate carrying value of $5,000.
 
The Board of Directors unanimously resolved to modify the Company’s 2004 Stock Option Plan to add 20 million options to the pool of available options on July 18, 2007. The modification is subject to the shareholders’ approval.
 
 
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