Z Trim Holdings, Inc - Amended Quarterly Report (10-Q/A)

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 March 31, 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 75,056,375 shares issued and outstanding as of May 10, 2008.

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

Explanatory Note

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.

Restated financial information is presented in this report, as well as in our Amended Annual Report on Form 10-KSB for the year ended December 31, 2008. This amendment and restatement includes revisions to “Part I – Item 2– Summary of Financial Results”, “Consolidated Financial Statements, including the statements themselves and specifically Note 1 –Nature of Business and Summary of Significant Accounting Policies” 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 May 14, 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 functional food ingredients and formulated foods for both domestic and international markets. The Company’s core product, Z Trim®, is a USDA-developed, all-natural, zero calorie functional food ingredient 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. Currently, corn and oats are used to make Z Trim, but it can be produced from virtually any other agricultural product. Current Z Trim products include gel and powder used to replace portions of fat, gums, starches and carbohydrates in foods. The Company’s core product portfolio of wellness foods and dietary fiber food ingredients includes corn Z Trim, non-GMO oat Z Trim, and functional emulsions and gels. The Company recently introduced finished products to its sales line, including salad dressings and mayonnaise. Z Trim is now being used by manufacturers, restaurants, schools, and consumers on six continents to replace as much as 80% of the fat and calories in foods without changing taste, texture, appearance or digestive properties in baked goods, dairy products, snacks, deserts, sauces, dressings, processed meats and many other foods.

After years of development, Z Trim is now commercialized. 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, (ii) direct sales to the consumer, and (iii) direct sales to large food institutions such as those that supply to restaurants, hospitals, schools and cafeterias. We have an aggressive plan to educate both the food industry and consumers about the uses and benefits of Z Trim products, and 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 core 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 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 has continued to gain value through usage and increased brand recognition.

Presently, the Company employs 26 full-time employees and no part-time employees.

RECENT MATERIAL DEVELOPMENTS

One of the most exciting and significant recent events is our development of a new line of food ingredient products that provide additional functionality and value-added propositions to the food industry. Under the direction of renowned food scientist Dr. Triveni Shukla, our R & D team has developed a new product stream similar in function to certain gum products. Remarkably, this derives from an improvement to the Z Trim manufacturing process and is therefore a cost effective means of producing incremental revenue from the same incoming raw materials. In fact, this innovation will enable our plant to nearly triple production capacity of saleable products while driving down the unit cost of goods sold.

We continue to explore additional capabilities and markets for these products, both individually and in combination with Z Trim in the form of customized blends and emulsions. We have already had sales of this new product, and it will be used as an ingredient in finished goods.

In August of 2007 we revitalized our marketing strategy and began cultivating relationships with innovative people who are well-positioned within the industry to exert influence over the purchasing decisions of major food companies. For example, we strengthened our relationship with Chef Eric Carre of Amazing Food Creations, who is a founding member of the Research Chefs’ Association and an industry leader in the development of innovative foods. Eric has become a champion of Z Trim, using our ingredients in many of the finished goods he prepares for major food manufacturers.

We also began executing a strategy of presenting finished food solutions to large food manufacturing companies. Instead of merely boasting about how well our products work, we are showing them tangible examples. Our creative R & D team has been developing our own finished formulations to demonstrate Z Trim’s amazing array of functional attributes, as well as how great the final products taste. Building on that strategy, we have brought some finished goods directly to the marketplace and we continue to tout the benefits of our products to the food service sector, particularly the schools. A limited release of our salad dressings and mayonnaise has been tremendously well-received, and more importantly, has helped us attract the attention of the major food companies that dominate the retail and food service spaces.

On February 26, 2008, the Company received a letter from Amex in which Amex stated that the Company has resolved the continued listing deficiencies referenced in the Amex letter dated August 17, 2007. As is the case for all listed issuers, Z Trim Holdings' continued listing eligibility will be assessed on an ongoing basis. However, the threat of de-listing resulting from the notification of non-compliance on August 17, 2007 no longer exists.

SUMMARY OF FINANCIAL RESULTS

RESULTS OF OPERATIONS

THREE MONTHS ENDING MARCH 31, 2008 COMPARED TO THE THREE MONTHS ENDING MARCH 31, 2007

Revenues

Revenues, excluding those from the discontinued on-line bedding segment, decreased 221% for the three months ended March 31, 2008 from $213,223 for the three months ended March 31, 2007 to $66,444, 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:

	Quarter ended March 31,
	2008		2007
Products	$	66,444	$	213,076
Services				147
Total Revenues	$	66,444	$	213,223

Operating expenses

Operating expenses consist of payroll and related costs, stock option expense, insurance, occupancy expenses, professional fees, and general operating expenses. Total operating expenses increased by $20,972 or 1.5% to $1,383,531 for the first quarter that ended March 31, 2008 from $1,362,559 for the first quarter that ended March 31, 2007. The in crease in operating expenses was due to the impairment of intangible assets in the amount of $136,668. But for this impairment, total operating expenses would have decreased by $115,696 or 8.5% from the first three months of 2008 compared to the first three months of 2007 .

The stock based compensation expense for the first quarter ended March 31, 2008 is $237,419. The stock based compensation expense for the first quarter ended March 31, 2007 was $306,955.

Other income (expense)

Total other expense for the first quarter ending on March 31, 2008 was $75,516 compared to other income of $10,366 for the first quarter ending on March 31, 2007. The decrease from other income to other expense was due to a settlement loss of $100,180 resulting from a lawsuit described in Note 11.

Net loss

The Company incurred a net loss of $1,886,308 for the first quarter ending on March 31, 2008 or $(.03) per share, compared to the net loss of $1,724,637 for the first quarter ending March 31, 2007 or $(.03) per share. But for the impairment of intangible assets of $136,668, the net loss for the first quarter ending on March 31, 2008 would have been $1,749,640.

LIQUIDITY AND CAPITAL RESOURCES FIRST QUARTER ENDING MARCH 31, 2008 COMPARED TO THE FIRST QUARTER ENDING MARCH 31, 2007

At March 31, 2008, we had cash and cash equivalents, of $996,426, compared to $4,026,889 at March 31, 2007. The Company raised approximately $9,010,000 in additional equity capital through equity transactions during the year ended December 31, 2007.

Net cash used by operating activities decreased by 6.9% to $1,420,560 for the quarter ended March 31, 2008 as compared to $1,525,407 for the quarter ended March 31, 2007. Cash provided by discontinued operations was $485 for the quarter ended March 31, 2008 and net cash used by discontinued operations of $14,820 for the quarter ended March 31, 2007.

Net cash used by investing activities was $20,080 for the quarter ended March 31, 2008, as compared to $131,029 for the quarter ending March 31, 2007. The change was due to additions of property and equipment for our manufacturing plant in the prior year.

Net cash provided by financing activities was $0 for the quarter ended March 31, 2008, as compared to $5,023,102 for the quarter ended March 31, 2007. Net cash provided by financing activities for the quarter ended March 31, 2007 was primarily from the proceeds received from the sale of stock, options and warrants exercised.

As of March 31, 2008, our cash balance was approximately $996,426. 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 30 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.

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.

ITEM 4. CONTROLS AND PROCEDURES

As required by Rule 13a-15(b) under the Exchange Act, we conducted an evaluation, under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, of the effectiveness and the design and operation of our disclosure controls and procedures as of March 31, 2008, the end of the period covered by this report. Based upon that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and includes controls and procedures designed to ensure that information required to be disclosed in these reports is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding the required disclosure.

The Company’s Chief Executive Officer and Chief Financial Officer conclude that, as of March 31, 2008, internal control over financial reporting was effective.

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

As the Company previously reported, on November 29, 2007 the settlement agreement concerning the Company's litigation with Farhad Zaghi and related parties (collectively, "Zaghi") was deemed null and void by Zaghi.

The parties have since attended a court-ordered settlement conference, and all parties other than Greg Halpern (the Company's former CEO) have reached a new settlement agreement. Whereas the old agreement had two components: (1) the Company would have an open-ended obligation to issue common stock to Zaghi until he realized proceeds of approximately $1.7 million from the sale of stock before the litigation would be dismissed, and (2) the issuance of approximately 2.26 million warrants, the new agreement requires only that a fixed number of shares and warrants be issued to Zaghi. Specifically, under the new settlement agreement, the Company has agreed to issue to a Zaghi affiliate and register for resale 3 million shares of the Company's common stock and a warrant to purchase an additional 2.5 million shares of the Company's common stock. See also Note 11 for disclosure of the 2007 loss recognized. The warrant is immediately exercisable, with a three-year term and a variable exercise price equal to the lowest twelve-trading-day average closing price of the Company's common stock during the period between the date of issuance of the warrant and the date of notice of exercise. Under the new settlement agreement, the parties to the agreement have agreed to dismiss their cases without prejudice, and have exchanged covenants not to sue. The Company's registration obligation with respect to the settlement shares and the shares underlying the warrants is on a best-efforts basis, but because the registration was not effective by March 17, 2008, Zaghi has the right to terminate the agreement. The Company has already listed the shares with Amex, and filed a registration statement with the S.E.C. As soon as the S.E.C. approves the registration statement, 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 January 18, 2007, the Company was served with a complaint by Daniel Caravette for breach of contract and violation of the Illinois Wage Payment and Collection Act, seeking damages in excess of $1,000,000. The Company settled this case as set forth above in Note 11.

On November 23, 2005, the Company entered into a Letter of Agreement ("LOA") with George Foreman Enterprises, Inc. ("GFME") pursuant to which both parties would form a new limited liability company for the purpose of promoting the Company's zero calorie fat replacement food ingredient, Z Trim®. The parties did not reach any definitive Agreement as is required by the LOA. On May 9, 2006, the Company filed a lawsuit alleging breach of the Parties' nondisclosure agreement and trade secret misappropriation in the Circuit Court of the 19th Judicial District, Lake County, Illinois seeking damages and injunctive relief against GFME. On August 3, 2006 the court, based upon a finding that the Company has demonstrated a likelihood of success on the merits of the case, issued an order granting the Company a preliminary injunction enforcing the non-disclosure agreement between the parties. GFME subsequently appealed the preliminary injunction. The Appellate Court denied GFME’s appeal, and the injunctive order remains in place.

On July 17, 2006, George Forman Enterprises, Inc. filed a complaint against Z Trim Holdings, Inc. in the U.S. District Court seeking damages in excess of $70,000,000 for specific performance, breach of contract, promissory estoppel and unjust enrichment. The basis for all such claims is the underlying LOA, set forth above. 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 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. DEFAULS 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.

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. Cohen
		Steven J. Cohen
		Director, 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.

/s/ Steven J. Cohen

Steven J. Cohen

Director and Chief Executive Officer

(principal executive officer)

/S/ Brian Chaiken

Brian Chaiken

Chief Financial Officer

(principal financial

or accounting officer)

INDEX OF EXHIBITS

EXHIBIT NO.	DESCRIPTION

3(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

INDEX TO FINANCIAL STATEMENTS

	PAGE

Consolidated Balance Sheet at March 31, 2008 (unaudited) and December 31, 2007	F-2

Consolidated Statements of Operations as of March 31, 2008 and 2007 (unaudited)	F-3

Consolidated Statements of Cash Flows as of March 31, 2008 and 2007 (unaudited).	F-4

Notes to Consolidated Financial Statements as of March 31, 2008 and 2007 (unaudited)	F-5

F-1

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS


	Unaudited
Current Assets	3/31/2008		12/31/2007
Cash and cash equivalents	$	996,426	$	2,436,581
Accounts receivable (net of allowance of $1,005 in 2008
and $1,005 in 2007)		18,080		7,522
Inventory		672,740		592,666
Prepaid expenses and other assets		106,807		152,597
Net assets of discontinued operations		-		485

Total current assets		1,794,053		3,189,851

Property and equipment, net		6,072,324		6,221,653

Other Assets
Intangible assets, net		-		140,001
Deposits		14,453		14,453

Total other assets		14,453		154,454

TOTAL ASSETS	$	7,880,830	$	9,565,958

The accompanying notes are an integral part of the consolidated financial statements.

F-2

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY


	Unaudited
Current Liabilities	3/31/2008			12/31/2007
Accounts payable	$	893,147		$	709,027
Accrued expenses and other		1,017,562			2,189,308
Total current liabilities		1,910,709			2,898,335

Stockholders' Equity
Common stock, $0.00005 par value; authorized 200,000,000
shares; issued and outstanding 75,056,375 and
72,056,375 shares, respectively		3,753			3,600
Additional paid-in capital		70,792,295			69,603,639
Accumulated deficit		(64,825,927	)		(62,939,616	)

Total stockholders' equity		5,970,121			6,667,623

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	7,880,830		$	9,565,958

The accompanying notes are an integral part of the consolidated financial statements.

F-3

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)



FOR THE THREE MONTHS ENDED MARCH 31	2008			2007
REVENUES:
Products	$	66,444		$	213,076
Services		-			147
Total revenues		66,444			213,223

COST OF REVENUES:
Products		493,705			600,687
Total cost of revenues		493,705			600,687

GROSS MARGIN		(427,261	)		(387,464	)

OPERATING EXPENSES:
Selling, general and administrative		1,318,530			1,359,226
Impairment of intangible assets		136,668			-
Amortization of intangible assets		3,333			3,333
Loss on asset disposals, net		(75,000	)		-
Total operating expenses		1,383,531			1,362,559

OPERATING LOSS		(1,810,792	)		(1,750,023	)

OTHER INCOME (EXPENSES):
Rental and other income		10,863			10,500
Interest income		13,836			1,242
Interest expense		(35	)		(1,376	)
Settlement (loss) gain		(100,180	)		-
Total other income (expenses)		(75,516	)		10,366

LOSS FROM CONTINUING OPERATIONS	$	(1,886,308	)	$	(1,739,657	)

DISCONTINUED OPERATIONS
Income from discontinued operations
(net of applicable tax of $0 in 2008 and 2007)	$	-		$	15,020

NET LOSS	$	(1,886,308	)	$	(1,724,637	)

Net Loss per Share from continuing operations
- Basic and Diluted	$	(0.03	)	$	(0.03	)
Net Loss per Share - Basic and Diluted	$	(0.03	)	$	(0.03	)

Weighted Average Number of Shares Basic and Diluted		75,056,375			65,678,053

The accompanying notes are an integral part of the consolidated financial statements.

F-4

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


FOR THE THREE MONTHS ENDED MARCH 31	2008			2007
Cash Flows From Operating Activities From Continuing Operations:
Net loss	$	(1,886,308	)	$	(1,724,637	)
Less: Income from discontinued operations, net of tax		-			15,020
Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:
Depreciation and amortization		172,742			162,071
Issuance of common stock and warrants for services		-			6,765
Amortization of noncash expenses associated with stock and
warrants issued for services		-			113,339
Stock based compensation expense		237,419			306,955
Impairment of intangible assets		136,668			-
Stock and warrant settlement		97,026			-
		(46,846	)
(Increase) in:
Accounts receivable		(10,558	)		(40,800	)
Inventory		(80,074	)		(136,563	)
Prepaid expenses and other assets		45,790			(127,946	)
Increase in:		-
Accounts payable and accrued expenses		(86,418	)		(69,570	)
Cash flows used in operating activities from continuing operations		(1,420,560	)		(1,525,407	)

Cash Flows From Investing Activities From Continuing Operations:
Purchase of property and equipment		(20,080	)		(131,029	)
Cash flows used in investing activities from continuing operations		(20,080	)		(131,029	)

Cash Flows From Financing Activities From Continuing Operations:
Net proceeds from stock subscription receivable		-			3,559,025
Exercise of options and warrants		-			1,469,906
Payments on capital lease obligations		-			(5,829	)
Cash flows provided by financing activities from continuing operations		0			5,023,102
Net cash and cash equivalents used in (provided by) continuing operations		(1,440,640	)		3,366,666
Net cash and cash equivalents provided (used) by discontinued operations		485			(14,820	)
Net (decrease)increase in cash and cash equivalents		(1,440,155	)		3,351,846

Cash and cash equivalents, at beginning of period		2,436,580			675,043
Cash and cash equivalents, at end of period	$	996,426		$	4,026,889

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	35		$	1,376

Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of common stock and warrants for services	$	-		$	6,765
Issuance of common stock in settlement of accrual	$	840,000
Stock subscriptions receivable incurred for issuance of stock	$	-		$	3,398,976

The accompanying notes are an integral part of the consolidated financial statements.

F-5

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 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 Inter im Information

The financial information at March 31, 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 three months ended March 31, 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 three months ended March 31, 2007 have been restated to present the results of two out of three segments as discontinued operations.

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.

F-6

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

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 March 31, 2008, the allowance for doubtful accounts was $1,005. As of March 31, 2007 the allowance for doubtful accounts is $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 are carried at the purchased cost less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets, generally from fifteen to twenty years.

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.

F-7

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

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 March 31, 2008 was $29,586. The amount for March 31, 2007 was $120,768.

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 $237,419 and $306,955 for quarters ended March 31, 2008 and 2007, respectively. The March 31, 2007 stock option expense includes an additional charge of $12,607 from the modification of 45,000 out-of-money options. These options were granted a two year extension.

F-8

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

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

New Accounting Pronouncements

In May 2007, the FASB issued FASB Staff Position No. FIN 48-1 (“FSP 48-1”), Definition of Settlement in FASB Interpretation No. 48 . FSP 48-1 amended FIN 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP 48-1 required application upon the initial adoption of FIN 48. The adoption of FSP 48-1 did not affect the Company’s consolidated financial statements.

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“FAS”) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities - Including an amendment of FASB Statement No. 115 , which permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. A business entity is required to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. This statement is expected to expand the use of fair value measurement. FAS No.159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company believes this has no impact on its current financial reporting.

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

F-9

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

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.

NOTE 3 – INVENTORY

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

	3/31/2008		12/31/2007
Raw materials	$	36,195	$	30,402
Work-in-process		-		4,850
Packaging		61,558		67,421
Finished goods		574,987		489,993
Other				-
Total inventory	$	672,740	$	592,666

NOTE 4 – PROPERTY AND EQUIPMENT, NET

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

	3/31/2008			12/31/2007
Production, engineering and other equipment	$	5,230,198		$	5,213,084
Leasehold improvements		2,801,053		$	2,798,971
Office equipment and furniture		591,853		$	591,384
Computer equipment and related software		188,179		$	185,603
Construction in process - equipment		62,700		$	64,860
		8,873,982			8,853,903
Accumulated depreciation		(2,801,659	)		(2,632,250	)
Property and equipment, net	$	6,072,324		$	6,221,653

Depreciation expense was $169,409 and $158,374 for the quarters ended March 31, 2008 and December 31, 2007, respectively.

F-10

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

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 March 31, 2008, the carrying cost of $136,668 was expensed.

Amortization of intangibles was $3,333 and $3,337 for the quarters ended March 31, 2008 and 2007, respectively.

NOTE 6 – ACCRUED EXPENSES AND OTHER

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

	3/31/2008		12/31/2007
Accrued legal	$	205,632	$	457,747
Accrued payroll and taxes		34,793		65,510
Accrued settlements		500,729		1,328,273
Accrued expenses and other		276,408		337,778
Total accrued expenses and other	$	1,017,562	$	2,189,308

NOTE 7 – CAPITAL LEASE OBLIGATION

In August 2002, the Company sold certain property and equipment to an unrelated party for $121,500 and leased the equipment back from the party under three lease agreements that were classified as capital leases in accordance with SFAS 13, “Accounting for Leases.” These assets are being depreciated over their estimated useful economic lives and are included in the depreciation expense for the quarters ended March 31, 2008 and 2007.

NOTE 8 – STOCKHOLDERS' EQUITY/ SUBSEQUENT EVENT

Private Placement Offerings

On February 2, 2007, the Company entered into an agreement with J.P. Turner & Company, L.L.C. to sell shares of the Company’s common stock, par value $0.00005 per share (“Common Stock”), and warrants exercisable for Common Stock (the “Warrants”). The purchase price was $1.00 per share, which was greater than 70% of the volume weighted average price of the Company’s common stock for the 90 days from the day prior to the closing date, which was March 29, 2007. The investors also received a 25% stock warrant at an exercise price equal to 120% of the purchase price. The Warrants have a term of 5 years.

The offering closed on March 29, 2007. In the aggregate the Company sold 8,000,000 shares of its common stock and 2,000,000 warrants. J.P. Turner & Company, L.L.C received a placement fee of 10% of the gross proceeds and 15% warrant coverage with an exercise price equal to the purchase price. The Company received $6,958,000 in proceeds, which is net of offering costs and commissions of $1,042,000.

The Company filed a Registration Statement covering the resale of the Common Stock underlying the units and Warrants with the SEC. The Company has responded to all SEC comments and is waiting for the registration approval from the SEC.

Exercising of Stock Warrants and Options

During the first three 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 quarter of 2007.

F-11

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

On August 20, 2007, the Board cancelled all outstanding options held by the former CEO Gregory J. Halpern and his family. This resulted in the cancellation of 3,462,682 options.

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 three months of 2008. During the first three months of 2007, the Company issued 11,578 shares of common stock on the cashless exercise of warrants.

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 not issued in the first three months 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 9 – NET LOSS PER SHARE

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

	Three Months Ended
	March 31
	2008			2007
Numerator:
Net loss from continuing operations	$	(1,886,308	)	$	(1,739,657	)
Income from discontinued operations	$	-		$	15,020
Net loss	$	(1,886,308	)	$	(1,724,637	)
Denominator:

Weighted average number of shares outstanding		75,056,375			65,678,053

Net loss per share from continuing operations- basic and diluted	$	(0.03	)	$	(0.03	)
Income per share from discontinued operations - basic and diluted	$	-		$	0.00
Net loss per share-basic and diluted	$	(0.03	)	$	(0.03	)

As the Company incurred net losses for the three months ended March 31, 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.

F-12

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

NOTE 10 – 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 March 31, 2008 and 2007

	3/31/2008					12/31/2007
				Weighted					Weighted
	Number			Average		Number			Average
	of			Exercise		of			Exercise
	Shares			Price		Shares			Price
Outstanding at beginning of year		16,595,523		$	1.04		20,285,749		$	0.99
Granted		-			-		262,000			1.19
Exercised		-			-		(254,210	)		0.77
Expired and Cancelled		(491,750	)	$	1.06		(470,000	)		0.96
Outstanding at end of period		16,103,773		$	1.04		19,823,539		$	1.04

Exercisable at end of period		16,053,773		$	1.04		19,498,539		$	1.04

At March 31, 2008 the aggregate intrinsic value of all outstanding options was $0 with a weighted average remaining contractual term of 1.8 years, of which 16,053,773 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 1.8 years. The total intrinsic value of options exercised during the quarter ended March 31, 2008 was $0. The total fair value of options vested during the first quarter of 2008 was $237,419.

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.

F-13

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

	2008			2007
Weighted average fair value per option granted	$	-		$	0.85
Risk-free interest rate		0.00	%		4.54	%
Expected dividend yield		0.00	%		0.00	%
Expected lives		-			3.00
Expected volatility		0.00	%		112.92	%

As of March 31, 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 March 31, 2008, the Company had reserved 20.0 million shares for issuance under the Plan. As of March 31, 2008, the Company had 3.77 million options available for grant under the Plan.

Stock options outstanding at March 31, 2008 are as follows:

				Weighted
				Average	Weighted
Range of				Remaining	Average
Exercise		Options		Contractual	Exercise		Options
Prices		Outstanding		Life	Price		Exercisable
$	0.01-$1.50		15,608,773	1.8 years	$	1.00		15,558,773
$	1.51-$3.00		495,000	1.9 years	$	2.35		495,000
			16,103,773	1.8 years	$	1.04		16,053,773

As of March 31, 2008 and 2007, the Company has warrants outstanding to purchase 6,879,234 and 4,347,048 shares of the Company’s common stock, respectively, at prices ranging from $0.68 to $1.28 per share. These warrants expire at various dates through May 2012. There were 0 warrants issued in the first quarters of 2008 and 2007, respectively.

NOTE 11 – SETTLEMENT LOSSES/ SUBSEQUENT EVENT

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 and 2,500,000 warrants are to be issued with a fair value of $353,703 as of March 31, 2008.

NOTE 12 – 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 four significant customers that accounted for greater than 10% (each) for the quarter ended March 31, 2008. There were no significant customers for the quarter ended March 31, 2007. There were no outstanding amounts at March 31, 2008.

The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits. At March 31, 2008 and December 31, 2007, $896,426 and $2,337,048 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.

F-14

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

NOTE 13 – 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	Rentals
2009		285,000
2010		96,000
2011		19,250
	$	400,250

NOTE 14 – PENDING LITIGATION/ CONTINGENT LIABILITY/ SUBSEQUENT EVENT

F-15

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

NOTE 14 – PENDING LITIGATION/ CONTINGENT LIABILITY/ SUBSEQUENT EVENT (CONTINUED)

NOTE 15 – RELATED PARTY TRANSACTIONS

There were no related party transactions for the first three months of 2008. There were no related party transactions for the first three 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 March 31, 2008.

F-16

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

In general, the Company offers a one-year warranty for most of the products it sold. To date, the Company has not incurred any material costs associated with these warranties.

NOTE 17 – SEGMENT INFORMATION

The Company evaluates its reporting segments in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. The Chief Executive Officer has been identified as the Chief Operating Decision Maker as defined by SFAS No. 131. The Chief Executive Officer allocates resources to each segment based on their business prospects, competitive factors, net sales and operating results.

The Company’s structure includes three principal operating segments: (i) Food Product Development, (ii) Security Training and Products and (iii) E-tailer. The food product development segment owns the exclusive, worldwide license to Z Trim(TM). The Security training offers cost effective self-defense training courses and products with a uniquely targeted curriculum. The e-tailer segment is a distributor of pillows, blankets, and other bedding products. In third quarter of 2007, the Company resolved to discontinue all subsidiaries, other than Fiber-Gel. As a result, the security training and products segment and e-tailer segment are reclassified to discontinued operations and the food product development segment remains as the Company’s reportable segment The Company also has other subsidiaries that do not meet the quantitative thresholds of a reportable segment.

The Company reviews the operating segments’ income to evaluate performance and to allocate resources. Operating companies' income for the reportable segments excludes income taxes, minority interest and amortization of goodwill. Provision for income taxes is centrally managed at the corporate level and, accordingly, such items are not presented by segment. The segments' accounting policies are the same as those described in the summary of significant accounting policies.

Intersegment transactions are recorded at cost.

F-17

Z TRIM HOLDINGS, INC.

NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2008 AND 2007

NOTE 17 – SEGMENT INFORMATION (CONTINUED)

Summarized financial information of the Company’s results by operating segment is as follows:

	Three Months Ended
	March 31
	2008			2007
Net Revenue:
Food Product Development	$	66,444		$	213,076
Net Revenue by Reportable Segment	$	66,444		$	213,076
All Other Operating Revenue		-			147
Consolidated Net Revenue	$	66,444		$	213,223
Operating Income (Loss):
Food Product Development	$	(756,346	)	$	(765,909	)
Operating Loss by Reportable Segment	$	(756,346	)	$	(765,909	)
All Other Operating Loss		(1,054,446	)		(984,114	)
Consolidated Operating Loss	$	(1,810,792	)	$	(1,750,023	)
Net Loss:
Food Product Development	$	(756,346	)	$	(766,136	)
Net Loss by Reportable Segment	$	(756,346	)	$	(766,136	)
All Other Net Loss		(1,129,962	)		(973,521	)
Consolidated Net Loss from
Continuing Operations	$	(1,886,308	)	$	(1,739,657	)
Net (Loss) Income from Discontinued
Operations
Personal Safety Training and Products	$	-		$	533
E-tailer		-			14,487
Net (Loss) Income from
Discontinued Operations	$	-		$	15,020
Consolidated Net Loss	$	(1,886,308	)	$	(1,724,637	)

	March 31
Total Assets:	2008		2007
Food Product Development	$	6,290,528	$	6,365,973
All other segments		1,590,302		3,137,949
		7,880,830		9,503,922
Discontinued Operations:
Personal Safety Training and Products		-		62,036
E-tailer		-		-
		-		62,036
Consolidated assets	$	7,880,830	$	9,565,958