U.S.
SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
DC


20549







FORM
10-Q/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,
2008




/
      /
            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 76,301,375 shares issued and outstanding as of August 10,
2008.





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





1






Explanatory
Note




On
September 12, 2008, we determined that we needed to amend our financial
statements for the second quarter of 2008 in order to clarify certain
information, be compliant with federal rule and regulations and correct an error
relating to our income statement presentation.  Specifically, this
amendment will address three things: (1)  a corrected consolidated
statement of operations to show information pertaining to both the three and six
months ended June 30, 2008 and 2007, (2) an explanation of the changes to the
previously reported June 30, 2007 numbers which changed due to its previously
corrected restatement of an expense previously recognized in the first quarter
of 2007 as well as the removal of items relating to discontinued operations, and
(3) compliant Exhibits 31.1. and 31.2.





This
amendment and restatement includes revisions to “Consolidated Financial
Statements, including the statements themselves and specifically Note 1 –Nature
of Business and Summary of Significant Accounting Policies”, and “Exhibit 31.1
and Exhibit 31.2” only.  No attempt has been made in this Form 10-Q/A
to modify or update other disclosures presented in the original report on Form
10-Q except as required to reflect the corrections described above. The Form
10-Q/A does not reflect events occurring after the filing of the Form 10-Q or
modify or update those disclosures, including the exhibits to the Form 10-Q 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-Q on August 20, 2008.
Accordingly, this Form 10-Q/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-Q, including any amendments to those filings. For convenience
and ease of reference, we are filing our annual 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 OF FINANCIAL CONDITION AND
RESULTS 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-Q. The following discussion contains forward-looking
statements that are subject to risks, uncertainties and assumptions. Our actual
results, performance and achievements in 2008 and beyond may differ materially
from those expressed in, or implied by, these forward looking
statements.




Overview.





Z Trim
Holdings, Inc. is an emerging growth company focused on the production,
marketing and distribution of custom functional food ingredient solutions for
both domestic and international markets. The Company’s namesake product is a
USDA-developed, all-natural, zero calorie functional food ingredients made from
healthy dietary fiber. The Company has an extensive intellectual property
portfolio, highlighted by an exclusive license from the USDA to make, use and
sell Z Trim both domestically and internationally.   Z Trim can be
produced from virtually any agricultural product, including corn and/or
oat.  Current Z Trim products include gels and powders used to replace
portions of fat, gums, starches and carbohydrates in foods.  In
addition to replacing fat and adding fiber, Z Trim’s products provide a number
of other value-added functionalities. Specifically, Z Trim’s products can
improve capacity and yield to a finished product line.  Z Trim’s
Products offer significant process improvements by reducing loss, reducing
breakage, and contributing toward waste reduction and
utilization.  Our products also offer moisture control, flavor
encapsulation, heat, pH and freeze/thaw stability, while enhancing mouthfeel and
texture.




2




The
Company currently manufactures and markets Z Trim products as competitive
ingredients that improve the food industry's ability to deliver on its promises
of healthier foods. The Company's primary goal is establishing Z Trim as an
important ingredient in revolutionizing the food industry.  The
Company is developing its market through (i) direct sales to major food
manufacturers, as well as small and mid size companies, and (ii) direct sales to
large food institutions such as those that supply to restaurants, hospitals,
schools and cafeterias. We have an aggressive plan to educate the food industry
about the uses and benefits of Z Trim products. Additionally, our research and
development team, including strategic industry partners, continues to develop
additional products.




Z Trim
Holdings, Inc. was incorporated in the State of Illinois on May 5, 1994 under
the original name Circle Group Entertainment Ltd.





Z Trim’s
products compete against fats, fat replacers, modified starches, gums, and
similar ingredients.  None of these other products functions
identically to our products.  Our business is part of the global
$25-30 billion per year (2006) business of food additives.  The global
hydrocolloid business is a comparably minor $3.80 billion per
year.  Specifically, the U.S. fat replacer and bulk dietary fiber
(supplement) markets are estimated to be $ 500 million each.  The
global business of hydrocolloids at large is intensely oligopolistic with few
major players and the food sector market, although growing at 6.5%, is still
very competitive.





The
Company protects an array of intangible assets that includes patents pending and
issued, as well as a wide array of trade secrets and know-how, trademarks and
copyrights.  Central to this portfolio is an exclusive license to US Patent
No. 5,766,662, including all related international patents, issued to Dr. George
Inglett of the USDA.  This license expires upon the expiration of the
underlying patent in late 2015.  Through the process of development and
commercialization of the technology, the Company has identified and sought
patent protection for improvements to the manufacturing process, product
applications and is currently developing several commercially promising spin-off
technologies.  The Company also maintains a stable of trademarks that
continues to gain value through usage and increased brand
recognition.




Presently,
the Company employs 24 full-time employees and no part-time
employees.








RECENT
MATERIAL DEVELOPMENTS





The
results of the last 6 months are the beginning of what we believe is a very
positive trend.  Although our net sales numbers are slightly down from
the first 6 months of 2007, that does not tell the whole story.  Since
new management took over in August of 2007, we have significantly changed our
marketing strategy.  In the first half of 2007, the vast majority of
our sales came directly through internet sales to individual
end-users.  Most of these sales were in very small quantities to
customers who were not necessarily repeat customers.  In the first six
months of 2008, the vast majority of our sales have been to food manufacturers,
who are purchasing in much greater quantities with repeat and expanding
orders.




3




In fact,
this trend in sales growth to food manufacturers, shows a 316% increase from the
first quarter of 2008 to the second quarter of 2008.  Early
indications are that sales growth will continue in the third quarter of
2008.




On May
15, 2008, the Company provided samples of three shelf-stable Heinz Heart Healthy
dressings made with Z Trim at the Z Trim booth #9554 during the National
Restaurant Show, May 17-20 in McCormick Place in Chicago.  The 1.5
ounce single-serving pouches of Heart Healthy Ranch, Heart Healthy Thousand
Island, and Heart Healthy French dressings each contain zero grams of trans fat,
zero grams of saturated fat, and zero milligrams of cholesterol, with a calorie
count ranging between 45 and 60 calories.  Interest generated by the
demonstration of the Z Trim natural functional fiber ingredient across most of
Heinz's "Heart Healthy" line of 1.5 ounce single-serving pouches of salad
dressings during the National Restaurant Show resulted in the transference of
the relevant sales leads from Z Trim to the marketing and sales department at
Heinz.  Z Trim's natural corn fiber ingredient also generated interest
during the NRA when introduced as a functional ingredient in the formulation for
a reduced fat lemon blueberry loaf, sold throughout the western regional network
of retail stores of a national beverage chain. A 136 gram serving of the loaf
contains just 10 total grams of fat, and 80 total calories from fat, and zero
trans fats. More details concerning nutritionals are available at http://www.starbucks.com/retail/nutrition_food_detail.asp?selProducts=%7B1ACFC
CB7%2DF9A7%2D43A7%2D9DDA%2D0B9A7AB59595%7D&store=559&foodZone=53.  The
company recently began formulating their Z Trim ingredient without use of soy
lecithin or sodium benzoate in order to further advance its appeal as a natural
ingredient.




On May
28, 2008 the American Stock Exchange ("Amex") notified Z Trim Holdings, Inc.
(the "Company") that the staff of the Amex has determined that the Company is
not in compliance with certain of Amex' continued listing standards.
Specifically, based upon a review of the Company's Form 10-Q for the period
ended March 31, 2008, the Amex Staff determined that the Company reported
$5,970,120 of shareholders' equity, which is less than the $6,000,000 threshold
for shareholders' equity after losses from continuing operations and net losses
in its five most recent fiscal years as required by Section 1003(a)(iii) of the
Company Guide. The Amex Staff further determined that the Company has sustained
losses which are so substantial in relation to its overall operations or its
existing financial resources, or its financial condition has become so impaired
that it appears questionable, in the opinion of the Amex, as to whether the
Company will be able to continue operations and/or meet its obligations as they
mature, in violation of Section 1003(a)(iv) of the Company Guide. The letter
constitutes a "Deficiency Letter" pursuant to Section 1009 of the Amex Company
Guide (the "Guide"). Amex has provided the Company the opportunity to submit a
compliance plan to resolve the deficiencies.





On June 27, 2008, the Company submitted
its compliance Plan to Amex. On August 13, 2008, Z Trim Holdings, Inc.
announced that it intends to file an application with the Securities and
Exchange Commission concerning its voluntary withdrawal of its common stock from
listing on the American Stock Exchange and seeking withdrawal of registration of
its common stock under Section 12(b) of the Securities Exchange Act of 1934. Z
Trim anticipates that the application with the SEC will be filed on Monday
August 25, 2008 and the voluntary withdrawal will take effect on Friday
September 5, 2008. The Company is currently working with a sponsoring market
maker to complete the process to qualify trades in the Company's common stock to
be quoted on the Over-the-Counter Bulletin Board.




4




"The
Board of Directors and management of this company continue to take positive
steps toward righting our course," said Z Trim President Steve Cohen. "We are in
the process of evaluating and implementing a broad spectrum of beneficial
strategies toward that end," he added. "As regards the public trading of our
stock, we began as an over-the-counter issue and our current management believes
the OTC arena is, at this time, the better fit for us. After lengthy
consideration, our Board and management unanimously agree that this is in the
best interests of our shareholders."




The
decision follows an examination undertaken by Z Trim management comparing the
types of benefits generally realized by a listing on Amex versus the status of Z
Trim Holdings currently.




"While
there are benefits of an Amex listing for companies that fit a particular
profile, we are realizing no particular benefit at this point in our life
cycle," said Brian Chaiken, the company's Chief Financial Officer. "The direct
and indirect costs of such a listing in terms of finance, working capital, human
resources and time can be more efficiently managed as an OTC company.
Significantly, this move allows us to more quickly and easily gain access to
financing for working capital."




The
Company successfully resolved a prior finding of deficiency by Amex in regard to
reporting inaccuracies. According to Amex, new and unrelated deficiencies
stemming from historical financial performance remain.




"We
recognize that at first glance this move from Amex may not appear to be positive
to all," Cohen said. "After thorough examination of all information before us,
however, it is readily apparent that the added expenses relating to maintaining
our listing status do not fit with current management's goal of concentrating
all of our resources on building our business," he added. "We are committed to
executing our business model, achieving profitability and maximizing shareholder
value. As we continue to successfully execute our plans, we will reconsider
joining an exchange."




"We're
appreciative of Amex and its staff for their service over the past several
years," Cohen said. "We believe we will ultimately regain compliance with
listing standards regarding financial performance, irrespective of our listing
status," he added.




On July 22, 2008, the Company announced
that it isexhibiting and providing samples of healthier burgers,
dressings and snack bars to an estimated 7,000 food service directors and school
nutrition professionals at the School Nutrition Association's 2008 Annual
Nutrition Conference (ANC) July 20-23 in Philadelphia,
Pennsylvania.




5




The
exhibited products, made by a host of small to large food manufacturing firms
who sell their items to school food service, represent an increasingly broad
array of marketplace goods that are made healthier with Z Trim’s unique natural
corn bran fiber.




Multi-functional
Z Trim improves nutritional profiles while at the same time contributing other
benefits, such as helping one of the top privately held meat processors in the
United States to sustain juiciness in the leanest of meats throughout
cooking.




"American
Foods Group has been investing in the development of nutritious lean meat
products for many years," said Vincent Degrado, Corporate Vice President of
Technical Services for American Foods Group. "Our new turkey burger has only 120
calories and 7 grams of fat per serving, plus a gram of fiber," he said of the
turkey burger containing the Z Trim natural corn bran fiber. "Child nutrition is
a major focus of our R & D department and we have many ideas for other
better tasting, low calorie products to keep American kids healthy," he
added.




A varied
list of food producers selling to both retail and to schools is realizing the
benefits and attributes of Z Trim. Z Trim's successes within the school
districts of Florida gained the attention of one of the top dressing
manufacturers for retail and food service. That same company, which has since
become a customer of Z Trim, now makes and sells a line of reduced fat dressings
containing Z Trim to a group of 39 of the 67 school districts in Florida. That
group of 39 districts, which now includes Dade County, is the largest buying
entity for school food service in the nation, serving approximately 115 million
meals per year to Florida school children, according to Frank Mullins, MS, RD,
advisor to the school group.




Mullins
relays a healthy enthusiasm from the group toward Z Trim. "They like the taste
of these dressings so much that they have expressed interest in hearing about
any other products made with Z Trim," he said, "as would any of the states with
whom Florida has reciprocal buying arrangements." Those dressings will be
sampled at the Z Trim booth at the ANC.




Scott
Vrana, President of Houston-based Consolidated Mills, a producer of a broad
array of food products to the foodservice industry including baker's emulsions
and processed foods, sees Z Trim as an important option at the right time for
food manufacturers.




"Our
prime objective in using Z Trim is to reduce fat and caloric content of the
foods we manufacture along with offsetting the ever increasing cost of raw
materials," he said. "Z Trim allows us to provide a naturally healthier product
during a challenging economic period," he added. "It is a win-win for us as
manufacturers and for the consumer."




6




Mr. Vrana
notes both the improved nutritional profile and taste attributes Z Trim brings
to his items. "One of our sauces without Z Trim has 70 calories with 50 coming
from fat," he said. "With Z Trim, we are able to reduce the calories to 25 with
only 15 coming from fat while providing virtually an identical product in taste
and functionality," he said.




Bakery
items are another category well served by Z Trim, which not only replaces fat
with fiber in such applications, but can also assure that the other ingredients
used, such as in a filling, remain stable when blended.




"We
dedicate our efforts to baking as healthfully as we can for all the schools
throughout Texas and beyond," said Ignacio Alvarez, owner of San Antonio-based
Lux Bakery. "We are currently launching a Sunbutter & Grape Jelly Bar, as
well as other breakfast or after school bars, such as a Cinnamon-Apple-Cranberry
bar, an oatmeal cinnamon apple cranberry bar, and a sweet potato chocolate
flavor bar," he said. "All will feature Z Trim."






Rounding
out the array of food categories made healthier by Z Trim, the thousand island,
ranch, and French entries into the Heinz "Heart Healthy" line of portion packed
salad dressings will be sampled at the Heinz booth.






On June
18, 2008, the Company entered into a private placement agreement where it issued
8% Convertible Senior Secured Notes in the aggregate principal amount of
$1,400,000 (“Notes”).  This transaction is described more fully in
Note 7 to the Financial Statements set forth herein.










SUMMARY
OF FINANCIAL RESULTS





RESULTS
OF OPERATIONS





THREE AND
SIX MONTHS ENDING June 30, 2008 COMPARED TO THE THREE AND SIX MONTHS ENDING June
30, 2007





Revenues





Revenues,
excluding those from the discontinued on-line bedding segment (E-tailer),
decreased 21% for the three months ending June 30, 2008, from $217,115 for the
three months ending June 30, 2007 to $171,863 for the three months ending June
30, 2008.  Revenues, excluding those from the discontinued on-line
bedding segment (E-tailer), decreased approximately 45% for the six months
ending June 30, 2008 from $430,338 for the six months ending June 30, 2007 to
$238,307, as a result of a decrease in product revenues.  The decrease
in product revenue was primarily due to the decrease in Z Trim products sales
via the internet.  The following table provides a breakdown of the
revenues for the periods indicated:




Three months ending
      June 30,2008
            
            
            2007Products
            
            $
            171,863
            
            
            $
            217,213Services
            
            
            --
            
            
            
            98Total
      Revenues
            
            $
            171,863
            
            
            $
            217,235Six months ending
      June 30,2008
            
            
            2007Products
            
            $
            238,307
            
            
            $
            430,289Services
            
            
            --
            
            
            
            49Total
      Revenues
            
            $
            238,307
            
            
            $
            430,338




7




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 decreased by $895,345 or 41.5% to $1,261,468
for the three months ending June 30, 2008 from $2,156,813 for the three months
ending June 30, 2007. The decrease in operating expenses was due to a decrease
in production and stock based compensation expense.  However, these
decreases were offset by increases in fees paid to legal, accounting and
auditing professionals related to litigation and reconciliation and audit of
past financial statements.  Total operating expenses decreased by
$813,193 or approximately 22.9% to $2,745,179 for the six months ended June 30,
2008 from $3,558,372 for the six months ended June 30, 2007.




The stock
based compensation expense for the three months ended June 30, 2008 was $12,292
compared to $1,063,302 for the three months ended June 30, 2007 – a decrease of
98.85%.  The stock based compensation expense for the six months
ending June 30, 2008 was $249,711.  The stock based compensation
expense for the six months ending June 30, 2007 was $1,370,257 – a decrease of
81.78%.





Other
income (expense)





Total
other expense for the three months ended June 30, 2008 was $14,436 compared to
other income of $288,119 for the comparable period in 2007 -- a decrease of
1,050%. Total other income for the six months ending on June 30, 2008 was
$10,228 compared to other income of $298,485 for the six months ending on June
30, 2007.  In the second quarter of 2007, the Company recovered a loan
loss of $200,000.  In the second quarter of 2008, the Company had an
interest expense of $23,008.




8




Net
loss





The
Company incurred a net loss for the second quarter of 2008 of $1,658,253 or $.02
per share, a $827,434 decrease from the net loss of $2,485,687 or $.03 per share
for the second quarter of 2007.





The
Company incurred a net loss of $3,544,561 for the six months ending on June 30,
2008 or $(.05) per share, from the net loss of $4,210,324 for the six months
ending June 30, 2007 or $(.06) per share.





LIQUIDITY
AND CAPITAL RESOURCES





THREE AND
SIX MONTHS ENDING JUNE 30, 2008 COMPARED TO THE THREE AND SIX MONTHS ENDING JUNE
30, 2007





At June
30, 2008, we had cash and cash equivalents, of $719,591, compared to $5,918,435
at June 30, 2007. The Company raised approximately $8,898,376 in additional
equity capital through equity transactions during the first six months of
2007.





Net cash
used by operating activities increased by 0.9% to $3,181,198 for the six months
ending June 30, 2008 as compared to $3,153,691 for the six months ending June
30, 2007.  Cash provided by discontinued operations was $0 for the six
months ending June 30, 2008 and $12,507 for the six months ending June 30,
2007.





Net cash
used by investing activities was $28,618 for the six months ending June 30,
2008, as compared to $501,294 for the six months ending June 30, 2007. The
change was due to additions of property and equipment for our manufacturing
plant in 2007.





Net cash
provided by financing activities was $1,492,342 for the six months ending June
30, 2008, as compared to $8,898,377 for the six months ending June 30,
2007.  Net cash provided by financing activities for both the six
months ending June 30, 2008 and 2007 was primarily from the proceeds received
from the sale of stock, options and warrants exercised.





As of
June 30, 2008, our cash balance was approximately $719,591.  To
successfully grow our business, we must improve our cash position through
greater and sustainable sales of our product lines, increase the productivity of
the production process, as well as raise additional capital through a
combination of public or private equity offerings, strategic alliances or debt
financing to allow us to make necessary changes to our plant and to provide
working capital until we achieve profitability.  The Company estimates
that it will take from 18 to 27 months to achieve
profitability.  Given this estimate, the Company will likely need to
find sources of funding for both the short and long terms.  The
Company does not expect or anticipate that its concerns over its ability to
continue as a going concern will have any impact on its ability to raise capital
from internal and external sources.





OFF-BALANCE
SHEET ARRANGEMENTS





We have
no off-balance sheet arrangements.





9




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, 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 2007 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. QUANTITATIVE AND QUALITATIVE ANALYSIS OF
MARKET RISKS





There are
no material changes in the market risks faced by us from those reported in
our Annual Report on Form 10-K for the year ended December 31,
2007.





10




ITEM
4. CONTROLS AND PROCEDURES





The
Company maintains disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934) that are
designed to ensure that information required to be disclosed in the Company’s
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Commission’s rules and forms, and that such
information is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required
disclosure.  In designing and evaluating the disclosure controls and
procedures, management recognized that any controls or procedures, no matter how
well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, and management necessarily is required to apply
its judgment in evaluating the cost-benefit relationship of possible controls
and procedures.





Evaluation
of our Disclosure Controls and Procedures





The
Company’s management has evaluated the effectiveness of the Company’s disclosure
controls and procedures as of the end of the period covered by this
report.  Based on such evaluation and because of the material weakness
described below, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were not
effective, at the reasonable assurance level, to enable us to record, process,
summarize and report information required to be included in our periodic SEC
filings within the required time period to ensure the information required to be
disclosed by the Company in the reports it files or submits under the Securities
Exchange Act is accumulated an communicated to the Company’s management,
including its principal executive and principal financial officers, as
appropriate to allow timely decisions regarding the required
disclosure.





Material
Weakness in Internal Control over Financial Reporting





A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected.  Management identified the following material weakness as
of June 30, 2008 relating to the Company’s internal control over financial
reporting:





■
            The
      Company did not maintain, and lacked resources to maintain, a sufficient
      complement of personnel with an appropriate level of accounting knowledge,
      experience and training in the application of generally accepted
      accounting principles commensurate with the Company’s financial reporting
      requirements.  Specifically, the Company had deficiencies in
      finance and accounting staff with sufficient depth and skill in the
      application of U.S. generally accepted accounting principles with respect
      to a complex financing transaction involving convertible debt and warrants
      entered into by the Company in June
2008.





This
control deficiency could result in a misstatement in the aforementioned
reporting that would result in a material misstatement to our annual or interim
financial statements that would not be prevented or detected.





Remediation
Efforts





Management
has begun implementing the following actions to remediate the material weakness
and deficiencies in disclosure and procedures described above:




■
            Increase
      communication internally and with outside advisors.  We are in
      the process of implementing policies and processes to increase
      communication by and among senior management, external advisors and other
      third parties relevant to the disclosure
  process.




Changes in Internal Control Over
Financial Reporting.   During the second quarter of 2008,
there were no changes in internal controls over financial
reporting.





11




PART II –
OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS.







As
previously reported, the Company settled an outstanding case with Farhad Zaghi
and related parties (collectively, "Zaghi").  As soon as the S.E.C.
approves the registration statement for the shares of common stock issued
pursuant to the settlement agreement, the shares will become free-trading, and
the parties will be obligated to dismiss the case.




On July
7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James
Cluck for violation of the Consumer Fraud Act, purportedly due to the Company’s
refusal to allow for the exercise of 300,000 stock
options.  Management believes that the allegations are frivolous and
wholly without merit and will vigorously defend the claim.




On March
20, 2007, 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.  On January 28, 2008, the Court granted summary judgment in
favor of the Defendant, finding non-infringement.  The Company has
since filed an appeal.




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.




12




On July
17, 2006, George Foreman 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.  The Company received summary
judgment in its favor as to the count seeking promissory
estoppel.  Further, on September 18, 2007, the Court issued a number
of orders limiting the evidence that GFME may bring in support of its claims.
Management believes that GFME’s allegations are frivolous and wholly without
merit and will vigorously defend the claim.  The trial date of
February 2008 has been stricken, and reset for September 2008.




During
November 2007, the Company determined, through the course of its investigation
of all prior equity transactions, that 1,040,000 options that were issued in
2002 and 2003 to a former officer were both issued without proper authorization
and as non-qualified stock options, as opposed to qualified.  The
Company had previously treated these options as if properly issued and as
qualified “incentive stock options.”  The former officer exercised
these options in 2004 and 2005, resulting in the issuance of 1,040,000 shares of
common stock.  The Company shall seek to rescind these transactions
and thus recover the shares.  In order to do so, the Company would
have to reimburse the former officer the amount paid to exercise the options
(listed at $132,000).  If the Company is unsuccessful in recovering
the shares, it could potentially be responsible for unpaid FICA and Medicare
taxes resulting from the re-classification of the options from qualified to
non-qualified.  This potential liability would be for approximately
$166,000, half of which would be the responsibility of the Company, and half of
which would the responsibility of the former officer.




ITEM
1A.  RISK FACTORS





There have been no material changes to
the risk factors disclosed in Item 1A Risk Factors in our Annual Report for the
year ended December 31, 2007.





ITEM
2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





NONE





ITEM
3.  DEFAULTS UPON SENIOR SECURITIES





NONE





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





NONE





ITEM
5.  OTHER INFORMATION





NONE





ITEM
6.  EXHIBITS





A list of
the exhibits required to be filed as part of this report are presented in the
Exhibit Index.





13








SIGNATURES





In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized as of August 19, 2008.






Z
      TRIM HOLDINGS, INC.By:
              /s/ Steven
      J. CohenSteven
      J. CohenDirector,
      and Chief Executive Officer





In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities as of August
19, 2008.






By:
              /s/ Steven
      J. CohenSteven
      J. CohenDirector
      and Chief Executive Officer(principal
      executive officer)






By:
              /s/ Brian
      ChaikenBrian
      ChaikenChief
      Financial Officer(principal
      financial or accounting officer)






14







INDEX OF
EXHIBITS








EXHIBIT
      NO.
            DESCRIPTION3(i)
            Articles
      of Incorporation of Z Trim Holdings, Inc. (filed as Exhibit 2.1 to the
      Company's Form 10-SB filed on August 21, 2000, and as Exhibit 3.3 to the
      Company's Form 10-QSB filed on August 16, 2004, and incorporated herein by
      reference).





3(ii)
            Bylaws
      of Z Trim Holdings, Inc., as amended (filed as Exhibit 2.2 to the
      Company’s Registration Statement on Form 10-SB, Exhibit 3(ii) to the
      Company’s Form 8-K filed on November 2, 2007, and as Exhibit 3(ii) to the
      Company’s Form 8-K filed on November 16, 2007, and incorporated herein by
      reference).





4.1
            Specimen
      Certificate for common stock (filed as Exhibit 3.1 to the Company's Form
      10-SB filed on August 21, 2000, and incorporated herein by
      reference).





4.2
            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).





4.3
            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).





4.4
            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).





4.5
            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).





4.6
            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).





4.7
            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
            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).





10.2
            Brian
      Chaiken Employment Agreement, dated October 17, 2007 (filed as Exhibit
      10.2 to the Company’s Form 10-KSB filed on April 15, 2008 and incorporated
      herein by reference).





10.3
            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).





10.4
            Z
      Trim Holdings, Inc. 2004 Equity Incentive Plan (filed as Appendix C to the
      Z Trim'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).





10.5
            Industrial
      Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc. dated
      May 20, 1999 (filed as Exhibit 6.7 the Company’s Registration Statement on
      Form 10-SB and incorporated herein by
  reference).





10.6
            Industrial
      Lease Agreement between CLO Enterprises and Z Trim Holdings, Inc. dated
      June 18, 1999 (filed as Exhibit 6.8 to Z Trim's Registration Statement on
      Form 10-SB and incorporated herein by
  reference).





10.7
            Assignment
      of License Agreement between UTEK Corporation, Z Trim Holdings, Inc. and
      Brookhaven Science Associates dated March 26 2003 (filed as Exhibit 10.14
      to Z Trim's Form 10-QSB for the quarter ending September 30, 2003 and
      incorporated herein by reference).





10.8
            Assignment
      of License Agreement between UTEK Corporation, Z Trim Holdings, Inc. and
      University of Illinois dated July 9, 2003 (filed as Exhibit 10.15 to Z
      Trim's Form 10-QSB for  the quarter ending September 30, 2003
      and incorporated herein by
reference).





10.9
            Assignment
      of License Agreement between Z Trim Holdings, Inc. and Brookhaven Science
      Associates dated July 22, 2003 (filed as Exhibit 10.16 to Z Trim'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.





----------------------


*Filed
herewith





15








INDEX TO
FINANCIAL STATEMENTS






PAGEConsolidated Balance
      Sheets at June 30, 2008 (unaudited) and December 31, 2007
            F-1Consolidated
      Statements of Operations for six months and three months ended as of June
      30, 2008 and 2007 (unaudited).
            F-2Consolidated
      Statements of Cash Flows as of June 30, 2008 and 2007
    (unaudited).
            F-3Notes to
      Consolidated Financial Statements as of June 30, 2008 and 2007
      (unaudited)
            F-4







Z
TRIM HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS


ASSETS


UnauditedCurrent
      Assets
              
              6/30/2008
              
              
              12/31/2007Cash
      and cash equivalents
              
              $
              719,591
              
              
              $
              2,436,581Accounts
      receivable (net of allowance of $10,067 in 2008and  $1,005
      in 2007)
              
              
              115,168
              
              
              
              7,522Inventory
              
              
              534,212
              
              
              
              592,666Prepaid
      expenses and other assets
              
              
              102,806
              
              
              
              152,597Net
      assets of discontinued operations
              
              
              -
              
              
              
              485Total
      current assets
              
              
              1,471,777
              
              
              
              3,189,851Property
      and equipment, net
              
              
              5,909,454
              
              
              
              6,221,653Other
      AssetsIntangible
      assets, net
              
              
              -
              
              
              
              140,001Prepaid
      Loan Cost
              
              
              427,917Deposits
              
              
              14,453
              
              
              
              14,453Total
      other assets
              
              
              442,370
              
              
              
              154,454TOTAL
      ASSETS
              
              $
              7,823,601
              
              
              $
              9,565,958








F-1


Z
TRIM HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS


LIABILITIES
      AND STOCKHOLDERS' EQUITYUnauditedCurrent
      Liabilities
              
              6/30/2008
              
              
              12/31/2007Accounts
      payable
              
              $
              994,252
              
              
              $
              709,027Accrued
      expenses and other
              
              
              619,966
              
              
              
              2,189,308Total
      Current Liabilities
              
              
              1,614,218
              
              
              
              2,898,335Notes
      Payable - Long Term
              
              
              16,397
              
              
              
              -Total
      Liabilities
              
              
              1,630,615
              
              
              
              2,898,335Stockholders'
      EquityCommon
      stock, $0.00005 par value; authorized 200,000,000shares;
      issued and outstanding 75,826,375 and72,056,375
      shares, respectively
              
              
              3,815
              
              
              
              3,600Additional
      paid-in capital
              
              
              72,649,285
              
              
              
              69,603,639Accumulated
      deficit
              
              
              (66,460,114
              )
              
              
              (62,939,616
              )Total
      Stockholders' Equity
              
              
              6,192,986
              
              
              
              6,667,623TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              7,823,601
              
              
              $
              9,565,958








F-2




Z
TRIM HOLDINGS, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (Unaudited)




Three
      months ended
              
              
              Six
      months endedJune
      30,
              
              
              June
      30,FOR
      THE SIX MONTHS ENDED JUNE 30
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007REVENUES:Products
              
              $
              171,863
              
              
              $
              217,213
              
              
              $
              238,307
              
              
              $
              430,289Services
              
              
              -
              
              
              
              (98
              )
              
              
              -
              
              
              
              49Total
      revenues
              
              
              171,863
              
              
              
              217,115
              
              
              
              238,307
              
              
              
              430,338COST
      OF REVENUES:Products
              
              
              554,212
              
              
              
              792,595
              
              
              
              1,047,917
              
              
              
              1,393,282Total
      cost of revenues
              
              
              554,212
              
              
              
              792,595
              
              
              
              1,047,917
              
              
              
              1,393,282GROSS
      MARGIN
              
              
              (382,349
              )
              
              
              (575,480
              )
              
              
              (809,610
              )
              
              
              (962,944
              )OPERATING
      EXPENSES:Selling,
      general and administrative
              
              
              1,394,526
              
              
              
              2,159,057
              
              
              
              2,713,056
              
              
              
              3,518,283Impairment
      of intangible assets
              
              
              -
              
              
              
              -
              
              
              
              136,668
              
              
              
              -Amortization
      of intangible assets
              
              
              -
              
              
              
              3,334
              
              
              
              3,333
              
              
              
              6,667Loss
      on asset disposals, net
              
              
              13
              
              
              
              3,922
              
              
              
              (74,987
              )
              
              
              3,922Total
      operating expenses
              
              
              1,394,539
              
              
              
              2,166,313
              
              
              
              2,778,070
              
              
              
              3,528,872OPERATING
      LOSS
              
              
              (1,776,888
              )
              
              
              (2,741,793
              )
              
              
              (3,587,680
              )
              
              
              (4,491,816
              )OTHER
      INCOME (EXPENSES):Rental
      and other income
              
              
              6,800
              
              
              
              10,500
              
              
              
              17,663
              
              
              
              21,000Interest
      income
              
              
              1,772
              
              
              
              78,288
              
              
              
              15,608
              
              
              
              79,530Recovery
      of loan loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Interest
      expense
              
              
              (23,008
              )
              
              
              (669
              )
              
              
              (23,043
              )
              
              
              (2,045
              )Recovery
      of (provision for) loan
              
              
              -
              
              
              
              200,000
              
              
              
              -
              
              
              
              200,000Settlement
      (loss) gain
              
              
              133,071
              
              
              
              (29,500
              )
              
              
              32,891
              
              
              
              (29,500
              )Total
      other income (expenses)
              
              
              118,635
              
              
              
              258,619
              
              
              
              43,119
              
              
              
              268,985LOSS
      FROM CONTINUING OPERATIONS
              
              $
              (1,658,253
              )
              
              $
              (2,444,174
              )
              
              $
              (3,544,561
              )
              
              $
              (4,222,831
              )DISCONTINUED
      OPERATIONSIncome
      from discontinued operations(net
      of applicable tax of $0 in 2008 and 2007)
              
              $
              -
              
              
              $
              (2,513
              )
              
              $
              -
              
              
              $
              12,507NET
      LOSS
              
              $
              (1,658,253
              )
              
              $
              (2,444,687
              )
              
              $
              (3,544,561
              )
              
              $
              (4,210,324
              )Net
      Loss per Share from continuing operations-
      Basic and Diluted
              
              $
              (0.02
              )
              
              $
              (0.04
              )
              
              $
              (0.05
              )
              
              $
              (0.06
              )Net
      Loss per Share - Basic and Diluted
              
              $
              (0.02
              )
              
              $
              (0.04
              )
              
              $
              (0.05
              )
              
              $
              (0.06
              )Weighted
      Average Number of Shares Basic and Diluted
              
              
              75,804,708
              
              
              
              72,026,042
              
              
              
              75,430,542
              
              
              
              68,852,048










F-3




Z
TRIM HOLDINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Unaudited)


FOR
      THE SIX MONTHS ENDED  JUNE 30
              
              2008
              
              
              2007Cash
      Flows From Operating Activities From Continuing
Operations:Net
      loss
              
              $
              (3,544,561
              )
              
              $
              (4,210,324
              )Less:
      Income from discontinued operations, net of tax
              
              
              -
              
              
              
              12,507Adjustments
      to reconcile loss from continuing operations tonet
      cash used in operating activities:Depreciation
      and amortization
              
              
              303,423
              
              
              
              332,341Loss
      on asset disposal
              
              
              40,727
              
              
              
              3,922Provision
      for bad debt
              
              
              9,062
              
              
              
              -Issuance
      of common stock and warrants for services
              
              
              230,000
              
              
              
              6,765Amortization
      of noncash expenses associated with stock andwarrants
      issued for services
              
              
              -
              
              
              
              113,339Stock
      based compensation expense
              
              
              249,711
              
              
              
              1,370,257Recovery
      of loan loss
              
              
              -
              
              
              
              (200,000
              )Impairment
      of intangible assets
              
              
              136,668
              
              
              
              -Stock
      and warrant settlements
              
              
              28,901
              
              
              
              29,500Non-cash
      settlements of liabilities
              
              
              (111,792
              )
              
              
              -Amortization
      of noncash loan interest expense
              
              
              17,154
              
              
              
              -(Increase)
      in:Accounts
      receivable
              
              
              (116,708
              )
              
              
              (104,053
              )Inventory
              
              
              58,454
              
              
              
              (283,151
              )Prepaid
      expenses and other assets
              
              
              57,043
              
              
              
              (159,804
              )Increase
      in:
              
              
              -Accounts
      payable and accrued expenses
              
              
              (152,812
              )
              
              
              (39,976
              )Cash
      flows used in operating activities from continuing
    operations
              
              
              (2,794,730
              )
              
              
              (3,153,691
              )Cash
      Flows From Investing Activities From Continuing
Operations:Purchase
      of property and equipment
              
              
              (28,818
              )
              
              
              (502,794
              )Proceeds
      from asset disposals
              
              
              200
              
              
              
              1,500Cash
      flows used in investing activities from continuing
    operations
              
              
              (28,618
              )
              
              
              (501,294
              )Cash
      Flows From Financing Activities From Continuing
Operations:Net
      proceeds from convertible notes payable
              
              
              1,105,874
              
              
              
              -Net
      proceeds from sales of stock
              
              
              -
              
              
              
              7,838,001Exercise
      of options and warrants
              
              
              -
              
              
              
              872,289Payments
      on capital lease obligations
              
              
              -
              
              
              
              (11,913
              )Proceeds
      from notes receivable for stock, net
              
              
              -
              
              
              
              200,000Cash
      flows provided by financing activities from continuing
      operations
              
              
              1,105,874
              
              
              
              8,898,377Net
      cash and cash equivalents used in (provided by) continuing
      operations
              
              
              (1,717,474
              )
              
              
              5,243,392Net
      (decrease)increase in cash and cash equivalents
              
              
              (1,717,474
              )
              
              
              5,243,392Cash
      of discontinue segment beginning of period
              
              
              484
              
              
              
              -Cash
      and cash equivalents, at beginning of period
              
              
              2,436,581
              
              
              
              675,043Cash
      and cash equivalents, at end of period
              
              $
              719,591
              
              
              $
              5,918,435Supplemental
      Disclosures of Cash Flow Information:Interest
      paid
              
              $
              5,841
              
              
              $
              2,045Interest
      to be paid in stock
              
              $
              5,666
              
              
              $
              -Supplemental
      Schedule of Noncash Investing and Financing Activities:Issuance
      of common stock and warrants for services
              
              $
              1,771,800
              
              
              $
              6,765Stock
      subscription payable
              
              $
              -
              
              
              $
              150,000Issuance
      of common stock in settlement of accrual
              
              $
              903,700






F-4






Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007


NOTE 1 – NATURE OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES




Nature of
Business




Z Trim
Holdings, Inc. (the “Company”) manufactures a line of functional food
ingredients that can be used to replace fats and deliver fiber to a wide variety
of foods.  The Company’s products can be used by food manufacturers
and processors, restaurants, schools, and the general public worldwide. The
company continues to explore 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.




A summary
of significant accounting policies follows.




Presentation of Interim
Information





The
financial information at June 30, 2008 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-Q. 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, 2007.




The
results for the six months ended June 30, 2008 may not be indicative of results
for the year ending December 31, 2008 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.




On
September 17, 2007, the Company resolved to discontinue all subsidiaries, other
than FiberGel.  Accordingly, the accompanying consolidated financial
statements for the six months ended June 30, 2007 have been restated to present
the results of two out of three segments as discontinued
operations.




As a
result of this, and the reclassification of an investor relations expense
discussed hereinbelow, the following table shows all numbers that have changed
from what was previously reported for the period ended June 30,
2007:




Previously
      Reported
            
            
            Currently
      ReportedTotal Revenues (3
      months)
            
            $
            317,500
            
            
            $
            217,213Total Revenues (6
      months)
            
            $
            639,986
            
            
            $
            430,338Operating
      Expenses (3 months)
            
            $
            2,182,326
            
            
            $
            2,156,813Operating
      Expenses (6 months)
            
            $
            5,739,681
            
            
            $
            3,558,372Total Other
      Income (3 months)
            
            $
            258,618
            
            
            $
            288,119Total Other
      Income (6 months)
            
            $
            268,985
            
            
            $
            298,485Net Loss (6
      months)
            
            $
            6,392,498
            
            
            $
            4,210,324Cash and Cash
      Equivalents
            
            $
            5,997,478
            
            
            $
            5,918,435Net Cash used by
      operating activities
            
            $
            3,094,334
            
            
            $
            3,153,691Net Cash used by
      investing
    activities
            
            $
            503,063
            
            
            $
            501,294







F-5




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




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.




Revenue
Recognition




The
Company generally recognizes product revenue when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed or determinable, and
collectability is probable. In instances where the final acceptance of the
product is specified by the customer, revenue is deferred until all acceptance
criteria have been met. No provisions were established for estimated product
returns and allowances based on the Company’s historical
experience.




NOTE 1 – NATURE OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Allowance for Doubtful
Accounts




Management
of the Company makes judgments as to its ability to collect outstanding
receivables and provide allowances for the portion of receivables when
collection becomes doubtful. Provisions are made based upon a specific review of
all significant outstanding invoices. For those invoices not specifically
reviewed, provisions are provided at differing rates, based upon the age of the
receivable. In determining these percentages, management analyzes its historical
collection experience and current economic trends. If the historical data the
Company uses to calculate the allowance for doubtful accounts does not reflect
the future ability to collect outstanding receivables, additional provisions for
doubtful accounts may be needed and the future results of operations could be
materially affected.  As of June 30, 2008, the allowance for doubtful
accounts was $10,067.  As of June 30, 2007 the allowance for doubtful
accounts was $0.




Cash and cash
equivalents




For
purposes of the statement of cash flows, the Company considers all highly liquid
investments with a maturity of three months or less to be cash
equivalents.




Fair value of financial
instruments




All
financial instruments are carried at amounts that approximate estimated fair
value.




Concentrations




Cash and
cash equivalents are maintained with several financial institutions. Deposits
held with banks may exceed the amount of insurance provided on such deposits.
Generally, these deposits may be redeemed upon demand and therefore bear minimal
risk.




Inventory




Inventory
is stated at the lower of cost or market, using the first-in, first-out
method.




Property and
Equipment




Property
and equipment are stated at cost.  Maintenance and repair costs are
expensed as incurred.  Depreciation is calculated on the accelerated
and straight-line methods over the estimated useful lives of the assets.
Estimated useful lives of five to ten years are used for machinery and
equipment, office equipment and furniture, and automobile. Estimated useful
lives of up to five years are used for computer equipment and related software.
Depreciation and amortization of leasehold improvements are computed using the
term of the lease.




Intangible
Assets




Intangible
assets were carried at the purchased cost less accumulated amortization.
Amortization was computed over the estimated useful lives of the respective
assets, generally from fifteen to twenty years.




F-6




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




Impairment of Long-Lived
Assets




Long-lived
assets and certain identifiable intangible assets to be held and used are
reviewed for impairment whenever events or changes in circumstance indicate that
the carrying amount of such assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of
an impairment loss for long-lived assets and certain identifiable intangible
assets that management expects to hold and use is based on the fair value of the
asset. Long-lived assets and certain identifiable intangible assets to be
disposed of are reported at the lower of carrying amount or fair value less
costs to sell.




NOTE 1 – NATURE OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




Income
Taxes




The
Company and its subsidiaries are included in the consolidated federal income tax
return filed by the Parent.  The amount of current and deferred taxes
payable or refundable is recognized as of the date of the financial statements,
utilizing currently enacted tax laws and rates.  Deferred tax expenses
or benefits are recognized in the financial statements for the changes in
deferred tax liabilities or assets between years.




Advertising
Costs




The
Company expenses all advertising costs as incurred.  The amount for
six months ended June 30, 2008 was $35,978.  The amount for the six
months ended June 30, 2007 was $329,987.




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 on a net
basis.




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 $12,292 and $1,063,302
for quarters ended June 30, 2008 and 2007, respectively.




NOTE 1 –NATURE OF BUSINESS
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)




New Accounting
Pronouncements




In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Financial Accounting Standards (“FAS”) No. 159, The Fair Value Option for Financial
Assets andFinancialLiabilities - 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. The Company
believes this has no impact on its current financial reporting.




F-7




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




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. FAS No. 157 is effective for the Company beginning January 1, 2008.
The adoption of FAS No. 157 did not affect the Company’s consolidated financial
statements.




In
December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and
SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements.  SFAS N. 141
(R) requires an acquirer to measure the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree at their
fair values on the acquisition date, with goodwill being the excess value over
the net identifiable assets acquired.  SFAS No. 160 clarifies that a
noncontrolling interest in a subsidiary should be reported as equity in the
consolidated financial statements.  The calculation of earnings per
share will continue to be based on income amounts attributable to the
parent.  SFAS No. 141 (R) and SFAS No. 160 are effective for financial
statements issued for fiscal years beginning after December 15,
2008.  Early adoption is prohibited.  We have not yet
determined the effect on our consolidated financial statements, if any, upon
adoption of SFAS No. 141 (R) or SFAS No. 160.




Reclassification.




On August
6, 2008, in connection with the United States Securities and Exchange
Commission’s review of our financial statements, we determined that we needed to
amend our financial statements for the year end 2007 in order to clarify certain
information, be compliant with federal rule and regulations and correct an error
relating to an expense recognized in the first quarter of 2007 that should have
been incurred in the fourth quarter of 2004. Specifically, the Company’s
recognition of expense of $2,182,175 relating to the release of restrictions on
shares of stock on March 9, 2007 was incorrect.  The Company has
restated the transaction to fully recognize the expense when the shares of stock
were issued, in the fourth quarter of 2004.  As a result, the investor
relation expense of $2,182,175 that was recognized in the first quarter of 2007
has been removed against additional paid in capital.  Further, as a
result of the recognition of expense as of the fourth quarter 2004, the
valuation of the unrecognized stock at fourth quarter of 2004 was $1,170,000
less than the valuation in the first quarter of 2007. This results in an
increase in investor relations expense in 2004 of $1,012,175 and a reduction in
retained earnings in 2004 of $1,012,175, with a corresponding reduction in
retained earnings for all periods thereafter.  For the year ended
December 31, 2007, the net result was an increase to retained earnings of
$1,170,000.  Further, the net loss per share for the year ending
December 31, 2007 was reduced from $0.21 per share to $0.18 per
share.




Additionally,
as a result of this reclassification, net loss per share for the six months
ended June 30, 2007 changed from $6,392,498 or $.09 per share to $4,210,324 or
$.06 per share.




NOTE 2 – GOING
CONCERN




The
Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business.  In
the near term, the Company expects operating costs to continue to exceed funds
generated from operations.  As a result, the Company expects to
continue to incur operating losses and may not have enough capital to grow its
business in the future.  The Company can give no assurance that it
will achieve profitability or be capable of sustaining profitable
operations.  As a result, operations in the near future are expected
to continue to use working capital.





To
successfully grow the business, the Company must decrease its cash outflows,
improve its cash position and its revenue base, and succeed in its ability to
raise additional capital through a combination of primarily public or private
equity offerings or strategic alliances.





The
Company is currently in the process of obtaining additional financing for its
current operations.




F-8




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




NOTE 3 –
INVENTORY




At June
30, 2008 and December 31, 2007, inventory consists of the
following:




6/30/2008
                
                
                12/31/2007Raw
      materials
                
                $
                42,850
                
                
                $
                30,402Work-in-process
                
                
                -
                
                
                
                4,850Packaging
                
                
                55,812
                
                
                
                67,421Finished
      goods
                
                
                435,549
                
                
                
                489,993Other
                
                
                
                
                
                
                -Total
      inventory
                
                $
                534,212
                
                
                $
                592,666




NOTE 4 – PROPERTY AND
EQUIPMENT, NET




At June
30, 2008 and December 31, 2007, property and equipment, net consists of the
following:




Three
      months ended
              
              
              
              
              
              Six
      months endedJune
      30
              
              
              
              
              
              June
      30,2008
              
              
              2007
              
              
              2008
              
              
              2007Production,
      engineering and other equipment
              
              
              5,301,635
              
              
              
              5,258,094
              
              
              
              5,230,198
              
              
              
              4,976,871Leasehold
      improvements
              
              
              2,801,053
              
              
              
              2,776,314
              
              
              
              2,801,053
              
              
              
              2,745,917Office
      equipment and furniture
              
              
              588,521
              
              
              
              596,750
              
              
              
              591,853
              
              
              
              574,960Computer
      equipment and related software
              
              
              150,584
              
              
              
              369,077
              
              
              
              188,179
              
              
              
              336,143Construction
      in process - equipment
              
              
              -
              
              
              
              -
              
              
              
              62,700
              
              
              
              -8,841,792
              
              
              
              9,000,235
              
              
              
              8,873,982
              
              
              
              8,633,891Accumulated
      depreciation
              
              
              (2,932,339
              )
              
              
              (2,565,565
              )
              
              
              (2,801,659
              )
              
              
              (2,398,629
              )Property
      and equipment, net
              
              
              5,909,454
              
              
              
              6,434,670
              
              
              
              6,072,324
              
              
              
              6,235,262


Depreciation
expense was $340,802 and $327,078 for the six months ended June 30, 2008 and
June 30, 2007, respectively. The depreciation expense was $171,393 and $168,704
for the three months ended June 30, 2008 and June 30, 2007
respectively.




NOTE 5 – INTANGIBLE
ASSETS




As of
April 16, 2008, management determined that it did not want to continue paying
the costs associated with the License Rights to our Nutritional Analysis Tools
System (“NATS”) website, and therefore the Company terminated the license
agreement and wrote off the asset as impaired.  At June 30, 2008, the
carrying cost of $136,668 was expensed.




Amortization
of intangibles was $0 and $3,337 for the quarters ended June 30, 2008 and 2007,
respectively.




F-9




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




NOTE 6 – ACCRUED EXPENSES
AND OTHER




At  June
30, 2008 and December 31, 2007 accrued expenses consist of the
following:




6/30/2008
              
              
              12/31/2007Accrued
      legal
              
              $
              38,469
              
              
              $
              457,747Accrued
      payroll and taxes
              
              
              18,764
              
              
              
              65,510Accrued
      settlements
              
              
              332,424
              
              
              
              1,328,273Accrued
      expenses and other
              
              
              230,310
              
              
              
              337,778Total
      accrued  expenses and other
              
              $
              619,967
              
              
              $
              2,189,308


NOTE 7 – STOCKHOLDERS'
EQUITY




Private Placement
Offerings




On June
18, 2008, the Company issued 8% Convertible Senior Secured Notes in the
aggregate principal amount of $1,400,000 (“Notes”).  Interest is
payable quarterly in registered shares of common stock of the Company at $0.26
per share.  Upon the event of a default, the stated interest rate of
the Notes will be increased to 18% per annum. The Notes mature in two years from
date of issuance.  The Notes and accrued interest are payable in full
at maturity.  All amounts due under the Notes may be converted at any
time, in part or in whole, at the written election of the holder thereof, into
shares of the Company’s common stock at a conversion price of $.26 per
share.  The Notes are secured by a first priority perfected interest
in all the assets of the Company.




Each
$100,000 principal amount of Notes is convertible, at the option of the holders,
into 384,615 shares of the Company’s common stock.  Holders of each
$100,000 principal amount of Notes received two five-year warrants, one to
purchase 230,769 shares of Common Stock with an exercise price of $0.01 per
share (the “$0.01 Warrants”), and the other to purchase 153,846 shares of Common
Stock with an exercise price of $0.26 per share (the “$0.26 Warrants” and,
together with the $0.01 Warrants, collectively the “Warrants”).  The
total warrants issued were 5,384,613 with a fair value of
$1,287,981.  Proceeds from the Notes have been allocated to
Convertible Notes Payable and Additional Paid-In Capital based upon the fair
value of these financial instruments in accordance with Accounting Principles
Board Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants.” The Notes have a beneficial conversion feature, which
have a value of $455,416, as defined by Emerging Issues Task Force Issue No.
98-5, “Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios.”  The warrants value and
the beneficial conversion value are discounted against the Notes and are being
amortized as interest expense using the effective interest method over the term
of the Notes.




The terms
of the Notes require redemption in cash at 115% of face value upon certain
defaults that are indexed to risks other than interest or credit
risk.  The put feature should be separately accounted for as a
derivative under FASB Statement No. 133 (SFAS 133), “Accounting for Derivative
Instruments and Hedging Activities.” The Company’s assessment of the value of
the put feature is de minimus.




In
connection with the issuance of the Notes and Warrants, the Company incurred
$1,340,085 of issuance costs, which primarily consisted of investment banker
fees in cash and warrants and legal and other professional fees.  The
costs have been allocated to the Warrants and Notes based upon the fair value of
these financial instruments.  The costs allocated to the Notes are
$435,159, of which $427,917 are noncurrent. These costs are being amortized as
interest expense using the effective interest method over the term of the
Notes.




The Notes
were sold to an “accredited investor” within the meaning of Rule 501 under the
Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the
private placement exemption afforded by Section 4(2) of the Securities Act and
of Regulation D promulgated under the Act.  In connection with the
issuance of the Notes, the Company entered into registration rights agreements
and has agreed to file with the Securities and Exchange Commission a
registration statement covering the resale of the Common Stock underlying the
Notes and the Warrants.




F-10




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




The
following is a summary of principal maturities of long-term debt during the next
five years:




2009
              
              $
              -2010
              
              
              1,400,000


Exercising of Stock Warrants
and Options




During
the first six months of 2008 no stock warrants and options were
exercised.  The Company received total proceeds of $1,469,000 by
virtue of 1,569,551 options and warrant exercised, and an additional 11,578
non-cash warrants exercised, in the first six months of 2007.




Common Stock Issued on the
Cashless Exercise of Warrants




No shares
of common stock were issued on the cashless exercise of warrants during the
first six months of 2008 or 2007.




Director’s Grant of
Equity




On
January 3, 2008, the Board of Directors approved a compensation plan that
includes a grant of 200,000 shares of common stock to each of the five external
directors.  A tax gross up of up to 35% will be
included.  These shares were issued in April of 2008.  The
Board also created a pool of an additional 500,000 shares of common stock that
will be awarded based on the amount of time spent per director on Company
affairs outside of monthly board meetings.




NOTE 8 – NET LOSS PER
SHARE




The
computation of basic and diluted net loss per share is as follows:




ThreeMonths
      EndedJune
      302008
              
              
              2007Numerator:Net
      loss from continuing operations
              
              $
              (1,658,253
              )
              
              $
              (2,483,174
              )Income
      from discontinued operations
              
              $
              -
              
              
              $
              (2,513
              )Net
      loss
              
              $
              (1,658,253
              )
              
              $
              (2,485,687
              )Denominator:Weighted
      average number of shares outstanding
              
              
              75,804,708
              
              
              
              72,026,042Net
      loss per share from continuing operations- basic and
    diluted
              
              $
              (0.02
              )
              
              $
              (0.03
              )Income
      per share from discontinued operations - basic and diluted
              
              $
              -
              
              
              $
              0.00Net
      loss per share-basic and diluted
              
              $
              (0.02
              )
              
              $
              (0.03
              )




F-11




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




As the
Company incurred net losses for the three and six months ended June 30, 2008 and
2007, the effect of dilutive securities totaling 2,206,128 and 3,906,811
equivalent shares, respectively, has been excluded from the calculation of
diluted loss per share because the effect was anti-dilutive.




Six Months
      EndedJune
      302008
              
              
              2007Numerator:Net
      loss from continuing operations
              
              $
              (3,544,561
              )
              
              $
              (4,222,831
              )Income
      from discontinued operations
              
              $
              -
              
              
              $
              12,507Net
      loss
              
              $
              (3,544,561
              )
              
              $
              (4,210,324
              )Denominator:Weighted
      average number of shares outstanding
              
              
              75,430,542
              
              
              
              68,852,048Net
      loss per share from continuing operations- basic and
    diluted
              
              $
              (0.05
              )
              
              $
              (0.06
              )Income
      per share from discontinued operations - basic and diluted
              
              $
              -
              
              
              $
              0.00Net
      loss per share-basic and diluted
              
              $
              (0.05
              )
              
              $
              (0.06
              )




NOTE 9 – STOCK OPTION PLAN
AND WARRANTS




The
Company has a Stock Option Plan (the Plan) effective January 2, 1999 and amended
in 2002 and 2004, which provides for the issuance of qualified options to all
employees and non-qualified options to directors, consultants and other service
providers.




A summary
of the status of stock options as of June 30, 2008 and December 31, 2007 is as
follows:




Six
      Months Ended
              
              
              Year
      Ended6/30/2008
              
              
              12/31/2007Weighted
              
              
              
              
              
              WeightedNumber
              
              
              Average
              
              
              Number
              
              
              Averageof
              
              
              Exercise
              
              
              of
              
              
              ExerciseShares
              
              
              Price
              
              
              Shares
              
              
              PriceOutstanding
      at beginning of year
              
              
              16,595,523
              
              
              $
              1.04
              
              
              
              20,285,749
              
              
              $
              0.99Granted
              
              
              100,000
              
              
              
              0.27
              
              
              
              2,532,000
              
              
              
              1.19Exercised
              
              
              -
              
              
              
              -
              
              
              
              (453,318
              )
              
              
              0.77Expired
      and Cancelled
              
              
              (1,426,750
              )
              
              $
              1.02
              
              
              
              (5,768,908
              )
              
              
              0.96Outstanding
      at end of period
              
              
              15,268,773
              
              
              $
              1.04
              
              
              
              16,595,523
              
              
              $
              1.04Exercisable
      at end of period
              
              
              15,143,773
              
              
              $
              1.04
              
              
              
              16,270,523
              
              
              $
              1.04


At June
30, 2008 the aggregate intrinsic value of all outstanding options was $0 with a
weighted average remaining contractual term of 1.5 years, of which 15,143,773 of
the outstanding options are currently exercisable with an aggregate intrinsic
value of $0, a weighted average exercise price of $1.04 and a weighted average
remaining contractual term of 1.5 years.  The total intrinsic value of
options exercised during the quarter ended June 30, 2008 was $0.  The
total fair value of options vested during the first quarter of 2008 was
$237,419.




F-12




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




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.


2008
              
              
              2007Weighted
      average fair value per option granted
              
              $
              0.27
              
              
              $
              1.35Risk-free
      interest rate
              
              
              2.91
              %
              
              
              4.89
              %Expected
      dividend yield
              
              
              0.00
              %
              
              
              0.00
              %Expected
      lives
              
              
              3.00
              
              
              
              3.00Expected
      volatility
              
              
              98.59
              %
              
              
              108.95
              %


As of
June 30, 2008, the unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the plan was $16,162, which
had an average expense recognition period of 135 days.




As of
June 30, 2008, the Company had reserved 20.0 million shares for issuance under
the Plan.  As of June 30, 2008, the Company had 3.77 million options
available for grant under the Plan.




Stock
options outstanding at June 30, 2008 are as follows:




WeightedAverage
              
              
              WeightedRange
      of
              
              
              
              
              
              Remaining
              
              
              AverageExercise
              
              
              Options
              
              
              Contractual
              
              
              Exercise
              
              
              OptionsPrices
              
              
              Outstanding
              
              
              Life
              
              
              Price
              
              
              Exercisable$
              0.01-1.50
              
              
              
              14,773,773
              
              
              
              1.5
              
              
              $
              0.99
              
              
              
              14,648,773$
              1.51-3.00
              
              
              
              495,000
              
              
              
              1.7
              
              
              $
              2.35
              
              
              
              495,00015,268,773
              
              
              
              1.5
              
              
              $
              1.03
              
              
              
              15,143,773


As of
June 30, 2008 and 2007, the Company has warrants outstanding to purchase
5,056734 and 4856,734 shares of the Company’s common stock, respectively, at
prices ranging from $0.26 to $1.20 per share.  These warrants expire
at various dates through May 2012.   There were 200,000 warrants
issued in the second quarter of 2008 and 220,000 warrants issued in the second
quarter of 2007, respectively.  These numbers exclude the warrants
issued pursuant to the private placement executed by the Company on June 18,
2008 and described more fully in Note 7 hereinabove.




NOTE 10 – SETTLEMENT
LOSSES




In April
2008, the Company settled a case with a former employee, Daniel
Caravette.  The Company agreed to pay $50,000 cash, and to provide
245,000 shares of unrestricted common stock with a fair value of $63,700 and
200,000 three-year warrants at a strike price of $0.26, with a fair value of
$33,326, in exchange for a release of all claims.




The
Company executed an agreement with Farhad Zaghi on February 8,
2008.  Pursuant to the agreement, 3,000,000 shares of the Company’s
common stock were issued at a fair value of $840,000 as of February 8, 2008 and
2,500,000 warrants are to be issued with a fair value of $332,424 as of June 30,
2008.




F-13




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




NOTE 11 – MAJOR CUSTOMERS
AND CREDIT CONCENTRATION




The
Company’s customers are food manufacturers, school districts and the general
public that orders directly over the internet.  There were three
significant customers that accounted for greater than 9% (each) for the quarter
ended June 30, 2008. These three customers accounted for 45 %, 12% and 9 % of
total sales.  There were no significant customers for the quarter
ended June 30, 2007.  There were no outstanding amounts at June 30,
2008.




The
Company maintains cash deposits with major banks, which from time to time may
exceed federally insured limits.  At June 30, 2008 and December 31,
2007, $619,591 and $2,336,581 respectively, were in excess of federally insured
limits.  The Company periodically assesses the financial condition of
the institutions and believes that the risk of any loss is minimal.




NOTE 12 –
COMMITMENTS




Building
Lease




The
Company leases a combined production and office facility located in Mundelein,
Illinois.  The facility is approximately 44,000 square
feet.  The Company extended the lease until March 2010 and the
required monthly rental payments increased to $21,000, exclusive of property
taxes.   The Company also is responsible for payment of all
property taxes.  Insurance and maintenance are billed when
due.




The
Company subleases approximately 9,800 square feet of the facility to two
tenants.  Both tenants terminated their respective leases in
2008.




The
Company also leases a 5,000 square foot warehouse in Mundelein,
Illinois.  The lease commenced on August 1, 2007 and ends July 31,
2011.  The monthly net rent is $2,750.




The
future minimum annual rental payments and sub-lease income for the years ended
December 31 under the lease terms are as follows:






Year
      Ended
              
              Rentals2009
              
              
              286,4332010
              
              
              98,4662011
              
              
              21,046$
              405,945


NOTE 13 – PENDING
LITIGATION/ CONTINGENT LIABILITY




As
previously reported, the Company settled an outstanding case with Farhad Zaghi
and related parties (collectively, "Zaghi").  As soon as the S.E.C.
approves the registration statement for the shares of common stock issued
pursuant to the settlement agreement, the shares will become free-trading, and
the parties will be obligated to dismiss the case.




On July
7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James
Cluck for violation of the Consumer Fraud Act, purportedly due to the Company’s
refusal to allow for the exercise of 300,000 stock
options.  Management believes that the allegations are frivolous and
wholly without merit and will vigorously defend the claim.




On March
20, 2007, 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.  On January 28, 2008, the Court granted summary judgment in
favor of the Defendant, finding non-infringement.  The Company has
since filed an appeal.




F-14




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




NOTE 14 – PENDING
LITIGATION/ CONTINGENT LIABILITY (CONTINUED)




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 Foreman 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.  The Company received summary
judgment in its favor as to the count seeking promissory
estoppel.  Further, on September 18, 2007, the Court issued a number
of orders limiting the evidence that GFME may bring in support of its claims.
Management believes that GFME’s allegations are frivolous and wholly without
merit and will vigorously defend the claim.  The trial date of
February 2008 has been stricken, and reset for September 2008.




During
November 2007, the Company determined, through the course of its investigation
of all prior equity transactions, that 1,040,000 options that were issued in
2002 and 2003 to a former officer were both issued without proper authorization
and as non-qualified stock options, as opposed to qualified.  The
Company had previously treated these options as if properly issued and as
qualified “incentive stock options.”  The former officer exercised
these options in 2004 and 2005, resulting in the issuance of 1,040,000 shares of
common stock.  The Company shall seek to rescind these transactions
and thus recover the shares.  In order to do so, the Company would
have to reimburse the former officer the amount paid to exercise the options
(listed at $132,000).  If the Company is unsuccessful in recovering
the shares, it could potentially be responsible for unpaid FICA and Medicare
taxes resulting from the re-classification of the options from qualified to
non-qualified.  This potential liability would be for approximately
$166,000, half of which would be the responsibility of the Company, and half of
which would the responsibility of the former officer.




NOTE 15 – RELATED PARTY
TRANSACTIONS




There
were no related party transactions for the first six months of
2008.  There were no related party transactions for the first six
months of 2007.




NOTE 16 –
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,
2008.




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.




F-15




Z
TRIM HOLDINGS, INC.
  NOTES
TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 JUNE
30, 2008 AND 2007




NOTE 17 – RESIGNATION OF
CHIEF OPERATING OFFICER/ SUBSEQUENT EVENT




On August
18, 2008 the Company’s Chief Operating Officer (“COO”), Michael Theriault,
resigned from his position as COO, and has accepted a position as Director of
Operational Logistics.  The Company appreciates Mr. Theriault’s service and
dedication over the years.  This move is a strategic re-deployment of
expertise toward facilitating the long-term growth of the Company.  The
Company, as of this time, has not hired a replacement.












F-16