Z Trim Holdings, Inc - Amended Annual Report (Small Business Issuers) (10KSB/A)

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-KSB/ A

(Amendment #1)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

OF 1934

For the fiscal year ended December 31, 2007

[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE

ACT OF 1934

COMMISSION FILE NUMBER: 001-32134

Z TRIM HOLDINGS, INC.

(Name of Small Business Issuer in its Charter)

	ILLINOIS	36-4197173
	(State or Other Jurisdiction of Identification No.)	(I.R.S. Employer)

1011 CAMPUS DRIVE	(847) 549-6002
MUNDELEIN, ILLINOIS 60060	(Registrant's Telephone Number, Including Area Code)
(Address of Principal Executive Offices, including Zip Code)

SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:

	Title of Each Class	Name of Each Exchange on Which Registered

	Common Stock, $.00005 par value	American Stock Exchange

SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:

None

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act [ ]

Check whether the issuer: (1) filed all reports required to be filed by Section 13 of 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 o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]

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

The issuer's revenues for its most recent fiscal year were: $616,848

The aggregate market value of the voting stock of the issuer held by non-affiliates of the issuer as of April 9, 2008 was $ 16,155,780. This aggregate market value is estimated solely for purposes of this report and are based on the closing price for the issuer's common stock on April 9, 2008, as reported on the American Stock Exchange. For the purpose of this report, it has been assumed that all officers and directors of the issuer are affiliates of the issuer. The statements made herein shall not be construed as an admission for determining the affiliate status of any person.

The number of shares of the registrant's common stock outstanding as of April 9, 2008 was 75,056,375.

Transitional Small Business Disclosure Format:

Yes o 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 Quarterly Report on Form 10-QSB for the quarter ended March 31, 2008. This amendment and restatement includes revisions to “Part II – Item 6– Management’s Discussion and Analysis or Plan of Operation – Summary of Financial Results – Results of Operations – Business Risks”, “Part II – Item 8A – Controls and Procedures – Report of Independent Registered Public Accounting Firm (Spector & Wong only)”, “Consolidated Financial Statements, including the statements themselves and specifically Note 9 –Release of Common Stock Stop Order, Note 10 – Net Loss Per Share, Note 13 – Income Taxes and Note 21 – Segment Information” only. No attempt has been made in this Form 10-KSB/A to modify or update other disclosures presented in the original report on Form 10-KSB except as required to reflect the corrections described above. The Form 10-KSB/A does not reflect events occurring after the filing of the Form 10-KSB or modify or update those disclosures, including the exhibits to the Form 10-KSB 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-KSB on April 15, 2008. Accordingly, this Form 10-KSB/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-KSB, 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

ITEM 1. DESCRIPTION OF BUSINESS.

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 6 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 R&D 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. In 2007 we had four operating subsidiaries: FiberGel Technologies, Inc., thebraveway.com, Inc., operating as The Brave Way Training Systems, On-Line Bedding Corp., and Z-Amaize Technologies, Inc. The Company dissolved thebraveway.com, Inc., Z-Amaize Technologies, Inc., and On-Line Bedding Corp. in 2007.

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.

The Company has spent $14,325 in 2007 and $4,231 in 2006 for research and development expense over the last two years, and is still innovating toward developing value-added products to add to its core line.

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

OPERATING SEGMENTS

In 2007 we operated three reportable segments, food product development, defense product development, and e-tailer. The defense product development and e-tailer segments were dissolved by year end 2007.

Our management reviews the operating companies' income to evaluate segment performance and allocate resources. Our operating companies' income for the reportable segments excludes income taxes and amortization of goodwill. Provision for income taxes is centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by our management.

DISCONTINUED OPERATIONS

As a result of discontinued operations in 2007, we have broken out our financial reporting to show only those segments (Z Trim and FiberGel) which are a part of continuing operations. As such, what we report here as 2006 numbers will differ from the consolidated statements reported for year end 2006.

For financial data on the reportable segments, you should refer to the Consolidated Financial Statements and the notes thereto.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act"), as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements are principally contained in the section entitled "Description of Business." These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to differ, perhaps materially, from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

·	Our product development efforts;

·	The commercialization of our products;

·	Anticipated operating losses and capital expenditures;

·	Our estimates regarding our needs for additional financing;

·	Our estimates for future revenues and profitability; and

·	Sources of revenues and anticipated revenues, including contributions from corporate collaborations, license agreements and other collaborative efforts for the development and commercialization of our product candidates, and the continued viability and duration of those agreements and efforts.

In some cases, you can identify forward-looking statements by terms such as

"may," "will," "should," "could," "would," "expect," "plan," anticipate," "believe," "estimate," "project," "predict," "intend," potential" and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail in the foregoing section under the heading "Risk Factors." Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report.

You should read this Annual Report and the documents that we reference in this Annual Report with the understanding that our actual future results may be materially different from what we expect. We do not intend to update any of these statements or to publicly announce the result of any revisions to any of these forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.

ITEM 2. DESCRIPTION OF PROPERTY.

We occupy approximately 44,000 square feet of leased space at 1011 Campus

Drive, Mundelein, Illinois. This space is leased for $26,900 per month, including property taxes, pursuant to a non-cancelable operating lease. The current lease term is through 2010, and the Company is currently negotiating an extension. All of our subsidiaries and divisions are operated out of this space. We also maintain a 5,000 square foot warehouse at 110 Terrace, Mundelein, Illinois at a cost of $2,750 per month.

ITEM 3. 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), who is negotiating a separate settlement on his own behalf, 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. 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. The warrants were valued at $400,549 and are included in additional paid-in-capital. 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 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.

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, and in favor of the Company finding the patent valid and enforceable. The Company has filed a notice of appeal with respect to the Court’s finding of non-infringement.

On January 18, 2007, the Company was served with a complaint by Daniel Caravette for breach of contract and violation of the Illinois Wage Payment and Collection Act, seeking damages in excess of $1,000,000. Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim. The case is set for trial in April 2008.

On July 7, 2007, the Company was served with a complaint by Joseph Sanfilippo and James Cluck for violation of the Consumer Fraud Act. Management believes that the allegations are frivolous and wholly without merit and will vigorously defend the claim.

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

The Company held its annual shareholders’ meeting on December 19, 2007. At that time, the shareholders voted in a new slate of directors, as described more fully herein below at Item 6. The vote tabulation for each director was as follows:

Cumulative votes	Votes

FOR DIRECTORS	RECEIVED	AGAINST	ABST.	BROKER NON-VOTES

Steve Cohen	43,685,541	n/a	n/a	0
Triveni Shukla	43,184,327	n/a	n/a	0
Brian Israel	42,992,605	n/a	n/a	0
Michael Donahue	63,143,524	n/a	n/a	0
Mark Hershhorn	63,214,678	n/a	n/a	0
Harvey Rosenfeld	63,212,578	n/a	n/a	0
Randal Hoff	63,213,978	n/a	n/a	0

Due to the use of cumulative voting, it is impossible to determine the number of votes against and the number of votes abstained.

The selection of Blackman Kallick, LLP as independent outside auditors of the Company for the fiscal year ending December 31, 2007 was submitted to the stockholders for ratification in December 2007. There were 56,209,361 votes cast in favor, 146,443 votes cast against and 365,661 abstentions and broker non-votes, which vote was sufficient for approval of Blackman Kallick, LLP as independent accountants of the Company for the fiscal year ending December 31, 2007.

PART II

ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

The following table sets forth, for the periods indicated, the high and low closing prices for our common stock, as quoted for trading on the American Stock Exchange under the symbol "ZTM." Our common stock began trading on the American Stock Exchange on March 31, 2004.

2006	HIGH		LOW

1st Quarter	$	1.38	$	0.78
2nd Quarter	$	1.84	$	1.03
3rd Quarter	$	1.39	$	1.03
4th Quarter	$	1.34	$	0.79

2007	HIGH		LOW

1st Quarter	$	1.60	$	0.90
2nd Quarter	$	1.49	$	0.95
3rd Quarter	$	1.11	$	0.61
4th Quarter	$	0.84	$	0.35

As of April 9, 2008, there were 386 record holders of the common stock. This number does not include shareholders whose shares are held in securities position listings. We have never paid any dividends on our common stock and do not anticipate paying any dividends in the foreseeable future.

EQUITY COMPENSATION PLAN INFORMATION

(AS OF DECEMBER 31, 2007)

NUMBER OF SHARES
REMAINING AVAILABLE
WEIGHTED-AVERAGE	FOR FUTURE ISSUANCE
EXERCISE PRICE OF	UNDER EQUITY
OUTSTANDING	COMPENSATION PLANS	NUMBER OF SHARES TO BE
OPTIONS,	(EXCLUDING SECURITIES	ISSUED UPON EXERCISE OF
WARRANTS AND	REFLECTED IN 1ST	OUTSTANDING OPTIONS,
RIGHTS	PLAN CATEGORY COLUMN)	WARRANTS AND RIGHTS

Equity compensation plans approved by security holders (consisting of the 2004 Stock Incentive Plan):


$	1.04	3,281,821	23,359,757

Plans not approved by shareholders: None

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

THE FOLLOWING DISCUSSION IS INTENDED TO ASSIST IN UNDERSTANDING THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF Z TRIM HOLDINGS, INC. YOU SHOULD READ THE FOLLOWING DISCUSSION ALONG WITH OUR FINANCIAL STATEMENTS AND RELATED NOTES INCLUDED ELSEWHERE IN THIS FORM 10-KSB. THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS, UNCERTAINTIES AND ASSUMPTIONS. OUR ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS IN 2007 AND BEYOND MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN, OR IMPLIED BY, THESE FORWARD LOOKING STATEMENTS.

Z Trim currently sits in a position of tremendous opportunity. The food industry, not just in the United States, but also globally, has been searching for foods that reduce fat, add fiber, or both. Z Trim, through an exclusive license to technology patented by the United States Department of Agriculture, has developed products that both reduce fat and add fiber, with the added benefit of maintaining taste and mouth-feel associated with full fat products. The market for Z Trim's line of products spans the entire food industry, both low-fat and full fat, including meats, baked goods, dairy and non-dairy products, snacks, beverages, dressings, sauces and dips. Despite historical significant net losses, we believe this makes the likelihood of Z Trim achieving success very high. Positive feedback from consumers, doctors and industry professionals have Z Trim convinced that its timing is right and thus presents enormous opportunity for success.

The Z Trim product line is the result of the extensive research and development efforts spearheaded by Dr. Triveni Shukla. Pricing strategies for the various product lines are still being developed based on the various added-value attributes that our products provide to each segment of the food industry. The Company fully intends to seek and maintain protection for all intellectual property deemed by the Company to be both valuable and protectable.

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.

As our current facility is a prototype plant, being the first of its kind to produce our innovative products, we are constantly seeking ways to improve efficiencies and achieve economies of scale. We are currently re-designing the process to make use of newer drying technologies and thereby optimize plant capacity. In order to fully realize the potential of our business model, the Company will eventually need to move to a larger facility, enter into strategic partnerships, or find some other means to produce greater volumes of finished product.

Several major food manufacturers have tested the Company's initial product lines and the response has been overwhelmingly positive. The product is being used and touted in several school districts nationwide, and is gaining national recognition as a product that can help make foods healthier while still retaining great taste. We have reason to believe that a number of large companies will launch national product lines incorporating Z Trim products in the near future.

Additionally, the Company has launched its own retail line of salad dressings in four upscale grocery stores in the Chicago, Illinois area. These retail products have been very well received by buyers, and the Company is considering launching into more grocery chains in various geographic regions.

We have made a series of evolutionary changes to prepare for a steepening sales cycle in the months ahead. We are in the process of hiring a new sales manager, with years of specific industry experience, to work with our existing management team. We have created a number of internal committees that meet regularly to ensure that every aspect of our organization is on the same page with respect to production, financing, marketing and accounting issues. No material expenditures will be made without thoroughly considering all alternatives and reaching consensus on the best one.

RECENT MATERIAL DEVELOPMENTS

Resignation of Former CEO and Chairman

On August 20, 2007, Gregory J. Halpern resigned his positions of Chief Executive Officer and Director of the Company, effective immediately. The Board of Directors forfeited Mr. Halpern’s stock options under the Company’s 2004 Equity Incentive Plan. Mr. Halpern held options to purchase 2,848,182 shares as of August 19, 2007.

Management has taken steps to strengthen the Company with the implementation of several new policies, the addition of a number of employees in key areas, and several new board members with industry ties and experience. The Board has also appointed Steve Cohen to run the Company going forward. Implementing new policies and strengthening the Board and the staff are important for the Company’s growth; and by adding additional personnel to the sales, marketing, financial, and production areas of the Company, the Company has taken strong steps designed to improve its short-term and long-term future.

On November 9, 2007, the Board of Directors accepted David Lansky’s resignation from the Board. The Board appointed Michael Donahue to fill the vacancy created by Mr. Lansky’s departure, effective November 14, 2007. In connection with his service on the Board, Mr. Donahue received an option under the Company's 2004 Stock Equity Plan to purchase 100,000 shares of the Company's common stock with an exercise price equal to the market price of the Company's common stock as of the date of Mr. Donahue’s acceptance of his appointment.

Annual Shareholder’s Meeting, Board of Directors and Bylaws Changes.

In December 2007, the Company held its Annual Shareholders’ meeting. The shareholders voted for a slate of seven directors: Steven Cohen, Triveni Shukla, Michael Donahue, Mark Hershhorn, Brian Israel, Randal Hoff and Harvey Rosenfeld. The following directors were not re-elected: Steven Salgan, Alan Orlowsky, Stanford Levin, and Dana Dabney.

On November 1, 2007, the Company announced that the Company’s board of directors amended the Company’s bylaws to include a procedure for nomination of candidates to the board of directors.

On November 14, 2007, the Company’s board of directors amended the Company’s bylaws to change the number of seats on the Board from eight to seven.

Internal Investigation and Status with Respect to Amex Listing Requirements

Background. On August 17, 2007, we received a deficiency letter from the American Stock Exchange (“Amex”) notifying us that the staff of the Amex had determined we were not in compliance with certain of Amex’ continued listing standards. The deficiencies (which are described in our Current Report on Form 8-K filed August 23, 2007) included failure to report Section 16(a) filing delinquencies, failure of the board to subject a related party transaction to review by the Audit Committee, granting stock options in a manner contrary to our stock option plans, failure to properly account for stock option grants with exercise prices below fair market value on the date of grant, failure to provide certain information to Amex, and allowing internal control weaknesses to exist.

In response to the deficiency letter, we prepared and submitted to Amex a compliance plan outlining our proposal for regaining compliance with Amex’ continued listing standards and addressing the matters contained in the deficiency letter. The compliance plan was accepted by Amex on November 2, 2007 (as reported in our Current Report on Form 8-K filed November 5, 2007).

Internal Investigation. Pursuant to the compliance plan, we conducted an internal investigation relating to the primary issues of concern identified by Amex, principally including equity accounting and the related control environment. We engaged the independent accounting firm of Blackman Kallick, LLP (“Blackman”) to perform certain procedures to assist us with our internal investigation. The objective of Blackman’s engagement was to help us assess the financial reporting figures, processes, and internal controls related to our equity transactions for the period January 1, 2002 through June 30, 2007, and to make specific recommendations to strengthen the reporting and control environment. Blackman completed its investigation in early November 2007.

Some of the specific remedial actions our new management team has completed include the following:

·	We have implemented equity control policies and will seek to strengthen those policies.

·	Shareholders have elected new independent directors to our board.

·	Shareholders have elected new independent auditors (see Item 4 of this report).

·	We have invested in the implementation of additional and enhanced information technology systems commensurate with the needs of our business and our financial reporting requirements and have engaged an independent firm to advise us in this regard.

·	We have initiated a number of changes to our human resources policies and have engaged an independent firm to audit our human resources functions.

·	We have engaged a separate accounting firm to help us prepare for compliance with our upcoming Sarbanes-Oxley Section 404 compliance requirements.

·	We have applied (or reapply, as the case may be) with Amex to list the shares of common stock (and stock underlying warrants) issued by us without current Amex approval. Amex has since approved the listing of such shares.

We believe the measures described above have remediated the material weaknesses we have identified and strengthen our internal control over financial reporting. We are committed to continuing to improve our internal control processes and to diligently review our financial reporting controls and procedures. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures described above.

Conclusion. 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.

Restatements

On October 31, 2007, the Company determined that its financial statements for the quarters ended March 31, 2007 and June 30, 2007 should no longer be relied upon because of accounting errors in those financial statements relating to a specific equity transaction.

The March 31, 2007 consolidated financial statements have been restated to account for the shares released from restrictions on March 9, 2007. The Company recognized an expense of $2,182,175 related to the transaction. As a result of this correction, net loss for the three months ended March 31, 2007 has increased to $3,906,811 from $1,724,636, and net loss per share increased to $0.06 from $0.03. The June 30, 2007 consolidated financial statements have been restated to account for the shares released from restrictions on March 9, 2007. The Company recognized an expense of $2,182,175 related to the transaction. As a result of this correction, net loss for the six months ended June 30, 2007 has increased to $6,392,498 from $4,210,323, and net loss per share increased to $0.09 from $0.06. There was no change for the three months ended June 30, 2007.

Restatements – updated as of August 19, 2008

Sales and Operational Developments

On March 6, 2008 the Company announced that its specialty corn fiber gel ingredient Z Trim® is being used to enhance several innovative culinary-based prepared food items formulated, manufactured and marketed by Grayslake, Illinois-based Amazing Food Creations (AFC), manufacturers of the Chef Papillote Entrees(TM) line of unique, proprietary gourmet meal/packages. Z Trim is included in many of the Chef Papillote Entrees in addition to many of the frozen and refrigerated consumer packaged food products formulated by AFC for some of the world's best known brands. AFC also uses Z Trim to add texture and enhanced stability to sauces used in the meals they provide to international flights on several major airlines, as well as in some refrigerated entrees for top fundraising programs in schools.

On October 5, 2007, the Company announced that it has received an order from the food service operation of the Flagler County Public Schools in Florida. The transaction activates Z Trim's vendor partnership with the P.O.W.E.R. Buying Group (Purchasing Organization with Educational Results), a Florida buying consortium that consists of 38 county school districts, totaling over 900 schools and serving over 800,000 meals per school day. In addition, Z Trim continues to assist both students and district food service administration for Flagler County Public Schools in planning the school system's food service menu to meet USDA nutritional requirements. In the United States, schools are currently serving over 125,000 meals a day containing Z Trim to replace fat and calories in dressings, mayonnaise, wet salads and baked goods. Based upon the success Z Trim is having with student meal programs, we expect these numbers to continue to increase.

In October 2007, the Company’s management decided to no longer manufacture and sell the Company’s appetite control capsule product. The Company is in discussions with companies in the nutraceutical industry to expand Z Trim’s reach into the dietary supplement market.

On September 17, 2007, the Company announced recent sales of Z Trim products to Ball State University and Ohio University, signaling the launch of Z Trim Holdings, Inc. into the college and university food service sub-sector. The purchase of Z Trim's Mayo Spread by the food service operations at Ball State University in Muncie, Indiana, as well sales of the Z Trim gel natural specialty fiber food ingredient direct from Z Trim to Ohio University in Athens, Ohio, indicate a food service expansion for Z Trim Holdings beyond the national news stories that broke earlier this year when K-12 school cafeterias began using Z Trim as a solution that could satisfy both the taste and lower fat profiles sought by dietitians and food service directors in the USDA's school meals program.

On August 30, 2007, the Company announced that it had received from Kraki, market leader for value-adding ingredients and solutions to the South American food industry, two purchase orders for a total of over 12 tons of Z Trim functional food ingredient, dwarfing the previously largest order in Company history of approximately 5 tons. Over the last year, Kraki has ordered a cumulative total of over 17 tons of Z Trim.

RESULTS OF OPERATIONS

YEAR ENDING DECEMBER 31, 2007 COMPARED TO THE YEAR ENDING DECEMBER 31, 2006

Revenues

Revenues, excluding those from the discontinued on-line bedding segment, increased 493% for the year ended December 31, 2007 from $104,004 for the year ended December 31, 2006 to $616,848, as a result of an increase in product revenues. The increase in product revenue was primarily due to the increase in Z Trim products sales. The following table provides a breakdown of the revenues for the periods indicated:

	Year ended December 31,
	2007		2006

Products	$	616,799	$	103,269
Services		49		735

Total Revenues	$	616,848	$	104,004

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 $5,441,958 or 36.5% to $9,451,284 for the year ended December 31, 2007 from $14,893,242 for the year ended December 31, 2006. The de crease in operating expenses was primarily due to a decrease in stock option expense of $5,931,449. As a result of greater production, our cost of revenues increased as our production levels increased. However, our cost of revenue on a per unit basis decreases the more product we produce. The decrease in gross margin is the result of the increase in the sale of product that was produced at cost higher than its sales price.

The stock option expense for the year ended December 31, 2006 was $9,419,028.

The stock option expense for the year ended December 31, 2007 was $3,487,579.

Other income (expense)

Total other expense for the year ended December 31, 2007 was $847,190 compared to other income of $126,314 for the year ended December 31, 2006. The decrease from other income to other expense was primarily due to a settlement loss of $1,360,981 that was partially offset by a recovery of a loan loss of $300,000.

Net loss

The Company incurred a net loss of $12,443,142 for the year ended December 31, 2007 or $0.18 per share, a 24.3% decrease from the net loss of $16,430,884 for year ended December 31, 2006 or $0.28 per share. This was due to a combination of a decrease in stock option expense offset by an increase in the introduction and promotion of Z Trim products, and for a settlement loss. The Company does not anticipate or expect that its pending litigation and contingencies will have any material impact on its future results of operations.

LIQUIDITY AND CAPITAL RESOURCES

YEAR ENDING DECEMBER 31, 2007 COMPARED TO THE YEAR ENDING DECEMBER 31, 2006

At December 31, 2007, we had cash and cash equivalents of $2,436,581, compared to $675,043 at December 31, 2006. 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 increased by 34% to $6,564,026 for the year ended December 31, 2007 as compared to $4,882,891 for the year ended December 31, 2006. The increase resulted primarily from our net loss of $12,443,142, adjusted for non-cash items including: depreciation and amortization of $663,956, stock option expense of $3,487,579, loss on asset disposals of $107,905, stock and warrant settlements of $1,357,373, recovery of loan loss of $300,000. Remaining net cash used by operating activities resulted from net increase in assets and liabilities of approximately $406,000.

Net cash used by investing activities was $717,210 for the year ended December 31, 2007, as compared to $378,294 for the year ending December 31, 2006. The increase was due to additions of property and equipment for our manufacturing plant in the current year.

Net cash provided by financing activities was $8,996,217 for the year ended December 31, 2007, as compared to $5,953,837 for the year ended December 31, 2006. Net cash provided by financing activities for the year ended December 31, 2007 was primarily from the proceeds received from the sale of stock, options and warrants exercised. Net cash provided by financing activities for the year ended December 31, 2006 was primarily from the proceeds received from notes receivable, 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 is currently seeking sources of working capital financing sufficient to fund delinquent balances and meet on-going trade obligations. Given our current capital raise efforts, the Company does not anticipate or expect that its recurring losses will have any material impact on its internal and external sources of liquidity.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B.

RISK FACTORS

The following risks are material risks that we face. If any of the following risks occur, the business of the Company and its operating results could be seriously harmed.

BUSINESS RISKS

WE HAVE A HISTORY OF OPERATING LOSSES AND CANNOT GUARANTEE PROFITABLE OPERATIONS IN THE FUTURE. ANY FAILURE ON OUR PART TO ACHIEVE PROFITABILITY MAY CAUSE US TO REDUCE OR EVENTUALLY CEASE OPERATIONS.

We reported a net loss of $16,430,884 for the twelve months ending December 31, 2006 and a net loss of $12,443,142 for the twelve months ending December 31, 2007. At December 31, 2006 and December 31, 2007, respectively, we reported accumulated deficits of $48,472,124 and $62,939,618. If we continue to incur significant losses, our cash reserves may be depleted earlier than currently anticipated, and we may be required to limit our future growth objectives to levels corresponding with our then available cash reserves.

OUR SUCCESS IS DEPENDENT ON MARKET ACCEPTANCE OF OUR PRODUCT.

We have not conducted, nor have others made available to us, results of market research indicating how much market demand exists for Z Trim, our functional food ingredient. We are relying on the current concerns over obesity, weight-health issues, and the rising cost of health care to drive demand for Z Trim in the marketplace. We cannot assure you that we will be able to gain the market acceptance necessary to achieve profitability.

WE MAKE NO PROJECTIONS REGARDING THE VIABILITY OF OUR FUNCTIONAL FOOD INGREDIENT AND WE CANNOT ASSURE YOU THAT WE WILL ACHIEVE THE RESULTS DESCRIBED.

We make no projection with respect to our future income, assets or business. No expert has reviewed our business plan for accuracy or reasonableness. It is likely that our actual business and results of operations will differ from those presented herein.

WE WILL NEED ADDITIONAL FUNDING AND SUCH FUNDING MAY NOT BE AVAILABLE. IF SUCH FUNDING IS AVAILABLE, IT MAY NOT BE OFFERED ON SATISFACTORY TERMS.

We will require additional financing to fund ongoing operations, as our current sales and revenue growth are insufficient to meet our operating costs. The Company estimates that it will take from 18 to 30 months to achieve profitability. Our inability to obtain necessary capital or financing to fund these needs will adversely affect our ability to fund operations and continue as a going concern. Our inability to obtain necessary capital or financing to fund these needs could adversely affect our business, results of operations and financial condition. Additional financing may not be available when needed or may not be available on terms acceptable to us. If adequate funds are not available, we may be required to delay, scale back or eliminate one or more of our business strategies, which may affect our overall business results of operations and financial condition.

OUR MANUFACTURING FACILITY IS CURRENTLY OPERATING AT A LOSS.

We are presently operating at a negative gross margin in that the cost of production exceeds the sales price of the product. The changes that are being made to the manufacturing process to allow us to produce at a positive gross margin have yet to be completed and may not be successful. The current manufacturing facility is merely a pilot plant. In order to fully implement our business plans we will need to move the operations to a larger facility, develop strategic partnerships or find other means to produce greater volumes of finished product.

THE AVAILABILITY AND COST OF AGRICULTURAL PRODUCTS THAT WE USE IN OUR BUSINESS ARE SUBJECT TO WEATHER AND OTHER FACTORS BEYOND OUR CONTROL.

All of our current products depend on our proprietary technology using agricultural products, mainly corn and oat. Historically, the costs of corn and oat are subject to substantial fluctuations depending upon a number of factors which affect commodity prices in general and over which we have no control, including crop conditions, weather, government programs and purchases by foreign governments.

WE FACE COMPETITION.

Competition is intense in our targeted industries, including nutraceuticals, functional food ingredients, oils, gums and a large number of businesses engaged in the various fat replacement industries. Many of our competitors have established reputations for successfully developing and marketing their products, including products that are widely recognized as providing similar calorie reduction. In addition, many of our competitors have greater financial, managerial, and technical resources than us. If we are not successful in competing in these markets, we may not be able to attain our business objectives.

WE MAY EXPAND OUR OPERATIONS BY MAKING ACQUISITIONS WHICH COULD SUBJECT US TO A NUMBER OF OPERATIONAL RISKS.

In order to grow our business, we may expand our operations by acquiring other businesses in the future. We cannot predict whether or when any acquisitions will occur. Acquisitions commonly involve certain risks, and we cannot assure you that any acquired business will be successfully integrated into our operations or will perform as we expect. Any future acquisitions could involve certain other risks, including the assumption of additional liabilities, potentially dilutive issuances of equity securities, and diversion of management's attention from other business concerns. We may also enter into joint venture transactions. Joint ventures have the added risk that the other joint venture partners may have economic, business or legal interests or objectives that are inconsistent with our interests and objectives.

OUR INABILITY TO SECURE AND PROTECT OUR INTELLECTUAL PROPERTY MAY RESULT IN COSTLY AND TIME-CONSUMING LITIGATION AND COULD IMPEDE US FROM EVER ATTAINING MARKET SUCCESS.

We hold several patents as well as copyrights and trademarks with respect to our products and expect to continue to file applications in the future as a means of protecting our intellectual property. In addition, we seek to protect our proprietary information and know-how through the use of trade secrets, confidentiality agreements and other similar security measures. With respect to patents, there can be no assurance that any applications for patent protection will be granted, or, if granted, will offer meaningful protection.

Additionally, there can be no assurance that competitors will not develop, patent or gain access to similar know-how and technology, or reverse engineer our products, or that any confidentiality agreements upon which we rely to protect our trade secrets and other proprietary information will be adequate to protect our proprietary technology. The occurrence of any such events could have a material adverse effect on our results of operations and financial condition.

THE LOSS OF SERVICE OF KEY MANAGEMENT COULD HAVE A NEGATIVE IMPACT ON OUR PERFORMANCE.

Our success depends to a significant degree upon the performance of our Executive Vice-President of Technology and Marketing, Dr. Triveni Shukla. The loss of service of Dr. Shukla could have a material adverse effect on our operating performance and viability as a going concern.

OUR STOCK PRICE MAY DROP UNEXPECTEDLY DUE TO SHORT SELLING OF OUR COMMON STOCK IN THE MARKET.

Regulation SHO began on January 3, 2005 and was adopted to update short sale regulation in light of numerous market developments since short sale regulation was first adopted in 1938. We have experienced and may continue to experience unexpected declines in our stock price due to manipulation of the market by individuals who profit by short selling our common stock. Short selling occurs when an individual borrows shares from an investor through a broker and then sells those borrowed shares at the current market price. The "short seller" profits when the stock price falls because he or she can repurchase the stock at a lower price and pay back the person from whom he or she borrowed, thereby making a profit. We cannot assure you that short sellers will not continue to drive the stock price down in the future, causing decline in the value of your investment.

THE FLUCTUATION IN OUR STOCK PRICE MAY RESULT IN A DECLINE IN THE VALUE OF YOUR INVESTMENT.

The price of our common stock may fluctuate widely, depending upon many factors, including the differences between our actual financial and operating results and those expected by investors and analysts, changes in analysts' recommendations or projections, short selling of our stock in the market, changes in general economic or market conditions and broad market fluctuations. Companies that experience volatility in the market price of their securities often are subject to securities class action litigation. This type of litigation, if instituted against us, could result in substantial costs and divert management's attention and resources away from our business.

MARKET RISKS THE COMMON STOCK IS SUBJECT TO THE PENNY STOCK RULES.

The term "penny stock" generally refers to low-priced, speculative securities of very small companies. Before a broker-dealer can sell a penny stock, SEC rules require the broker-dealer to first approve the customer for the transaction and receive from the customer a written agreement to the transaction. The broker-dealer must furnish the customer a document describing the risks of investing in penny stocks. The broker-dealer must tell the customer the current market quotation, if any, for the penny stock and the compensation the broker-dealer and its broker will receive for the trade. Finally, the broker-dealer must send monthly account statements showing the market value of each penny stock held in the customer's account. These requirements make penny stocks more difficult to trade. Because the Common Stock is subject to the penny stock rules, the market liquidity of the Common Stock may be adversely affected.

SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.

From time to time, certain of our shareholders may be eligible to sell all or some of their shares of Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or shareholders whose shares are aggregated) who has satisfied a six-month holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of Common Stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any limitation, by our shareholders that are non-affiliates that have satisfied a one-year holding period. Any substantial sale of our Common Stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse effect on the market price of the Common Stock.

THE ISSUANCE OF ADDITIONAL COMMON STOCK COULD RESULT IN SUBSTANTIAL DILUTION.

We will need additional equity funding to provide the capital to achieve our objectives. Such equity issuance would cause a substantially larger number of shares to be outstanding, thereby diluting the ownership interest of our existing shareholders. In addition, public sales of substantial amounts of the Common Stock after this registration statement could reduce the market price for the Common Stock. If we raise capital in the future by issuing additional equity securities, investors may experience a decline in the value of their securities.

THE TRADING PRICE OF THE COMMON STOCK IS VOLATILE, WHICH COULD CAUSE THE VALUE OF AN INVESTMENT OUR SECURITIES TO DECLINE.

The market price of shares of our Common Stock has been volatile. The price of the Common Stock may continue to fluctuate in response to a number of factors, such as:

-	developments and resolution of current litigation that we are a party to;

-	our cash resources and our ability to obtain additional funding;

-	announcements by us or a competitor of business development or exhibition projects;

-	our entering into or terminating strategic business relationships;

-	changes in government regulations;

-	changes in our revenue or expense levels; and

-	negative reports on us by security analysts;

The occurrence of any of these events may cause the price of the Common Stock to fall. In addition, the stock market in general has experienced volatility that often has been unrelated to the operating performance or financial condition of individual companies. Any broad market or industry fluctuations may adversely affect the trading price of our Common Stock, regardless of operating performance or prospects.

WE DO NOT PLAN TO PAY DIVIDENDS TO HOLDERS OF COMMON STOCK.

We do not anticipate paying cash dividends to the holders of the Common Stock at any time. Accordingly, investors must rely upon subsequent sales after price appreciation as the sole method to realize a gain on investment. There are no assurances that the price of Common Stock will ever appreciate in value. Investors seeking cash dividends should not buy our securities.

ITEM 7. FINANCIAL STATEMENTS

See consolidated financial statements starting on page F-1 and the related footnotes thereto.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On December 19, 2007, the shareholders approved the change of accountants from Spector & Wong to Blackman Kallick, LLP.

ITEM 8A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures .

The Company maintains internal controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) designed to provide reasonable assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. These include controls and procedures designed to ensure that this 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.

The Disclosure Committee, which is made up of the Company’s Chief Executive Officer, Chief Financial Officer and other management staff, meets on a quarterly basis and has overview responsibility for this process. The Committee reviews a checklist of items during its meetings to document the review of any unusual items or issues raised. The Disclosure Committee conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures.

The Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2007, the Company’s disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting . During the fourth quarter of 2007, the Company made the following changes to its internal controls:

§	We implemented equity control policies and procedures.

§	We appointed a new independent director to our board and nominated additional independent directors, who were voted in by our shareholders.

§	We engaged new independent auditors.

§	We invested in the implementation of additional and enhanced information technology systems commensurate with the needs of our business and our financial reporting requirements and engaged an independent firm to advise us in this regard.

§	We initiated a number of changes to our human resources policies and received an audit from an independent firm on our human resources functions.

§	We engaged a separate accounting firm to help us prepare for compliance with our upcoming Sarbanes-Oxley Section 404 compliance requirements.

Management’s Annual Report on Internal Control over Financial Reporting. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes of accounting principles generally accepted in the United States.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Management, with the participation of the Chief Executive and Chief Financial Officers, evaluated the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on this evaluation, management, with the participation of the Chief Executive and Chief Financial Officers, concluded that, as of December 31, 2007, the Company’s internal control over financial reporting was effective based upon the COSO criteria. Additionally, based on management’s assessment, the Company determined that there were no material weaknesses in its internal control over financial reporting as of December 31, 2007.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has not been audited by the independent registered public accounting firm, who audited the Company’s financial statements as of and for the year ended December 31, 2007 as stated in their report which is included herein.

Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to the temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.

ITEM 8B. Other Information. None.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)OF THE ACT.

AGE	NAME	POSITION

52	Steve J. Cohen	Director and President

55	Michael J. Theriault	Chief Operating Officer

37	Brian Chaiken	Chief Financial Officer
		from January 14, 2008
50	Michael Donahue	Director from December 14, 2007

58	Mark Hershhorn	Director from December 19, 2007

55	Randal Hoff	Director from December 19, 2007

50	Brian Israel	Director from May 1, 2007

60	Harvey Rosenfeld	Director from December 19, 2007

65	Triveni P. Shukla	Director from December 19, 2007 and Executive
		Vice President –
		Marketing & Technology

Steven Cohen, the Company's President has been employed by Z Trim since 2002 when he was hired as its director of investor relations. He was promoted to Vice President of Corporate Development in 2003 and to President in 2006 when he also began serving on the Board of Directors. In August of 2007 Mr. Cohen assumed the role of chief executive officer. Prior to joining Z Trim, Mr. Cohen had 25 years' experience at the Chicago Mercantile Exchange where he worked in various brokerage house positions as well as a trader. Mr. Cohen attended college at the University of Illinois and Oakton Community College. Mr. Cohen, was a member of the U.S. Olympic team at the 1988 Olympics in Seoul and was a coach for the U.S. Olympic Team at the 2000 Olympics in Sydney Australia.

Michael Donahue is recognized around the world for his ability to change the fundamental way companies project their “story” under ever-evolving global business and market dynamics. During his twenty plus year career Mr. Donahue has been a trusted advisor to boards and CEOs of Fortune 500 companies requiring the need to build credibility and trust among a diverse group of constituents, employees, customers, shareholders, the media, and the public. In 2006, Mr. Donahue established a multidimensional communications, marketing and issue management firm. From 1987 to 2006, Mr. Donahue worked for McDonalds Corporation. During the first ten years of his career with McDonald’s, Mr. Donahue served in increasingly responsible positions to become an officer and senior executive as Vice President of Communications. Mr. Donahue brought clear vision to the office of the President and CEO and aligned cross-functional disciplines from the executive suite to the field. His actions were critical to establishing new brand relevance and consumer loyalty, which resulted in one of the most significant turnarounds in recent corporate history, i.e. from the first quarterly loss in thirty years to record breaking sales. Before joining McDonald’s, Mr. Donahue spent five years as a Manager/Director with the Illinois Retail Merchants Association, National Federation of Independent Business and 3M Corporation where he created favorable environments for small businesses to conduct business with minimal regulatory restriction. He then transitioned into public office to assist the incumbent Governor to address small business concerns as Deputy Director for the State of Illinois Commerce Department.

Triveni P. Shukla, Ph.D. is the Executive Vice President, Marketing & Technology for Z Trim Holdings, Inc. Prior to joining Z Trim, Dr. Shukla was the President of F.R.I. Enterprises LLC from 1985 through 2003. Dr. Shukla served as Corporate Manager, R&D, Technical Service, and Engineering for the Krause Milling Company, which became part of ADM in 1985, from 1973 through 1984. Dr. Shukla served as Associate Director, Research and Planning, for Phelco-Land O’Lake from 1969 through 1973. He was Quality Control Incharge for the National Dairy Research Institute, India and was the youngest gazetted Officer approved by Union Public Service Commission, India. Dr. Shukla was a third party expert for International Finance Corporation/Word Bank from 1991 through 2001. Dr. Shukla has provided advisory services to the following companies around the globe: US Feed Grains Council, Indian Council of Agricultural Research, Winrock International, Labbat Anderson Group, Anheuser-Busch, A.E. Staley, American Maize Co., Bimbo (Mexico), Cedarburg Dairy/Kemp, Cargill, ConAgra, Experience Inc., Frigo Cheese Co./Unigated Ltd., Grupo Minsa s.a. de c.v. (Mexico), Heinz Co./Ore-Ida Foods, Heinz Co./Foodways Natl., Hershey Foods Corporation, Illinois Cereal Mills, Kraft-General Foods, Mexican Accent Inc., Monsanto Company, Nabisco Brands, National Honey Board, Oscar Meyer Foods/Philip Morris, Procter & Gamble, Quaker Oats, Sigma Alimentos/Grupo Alpha (Mexico), Group Minsa of Mexico and Matrix Group of Malaysia. Dr. Shukla’s advisory services have been of the nature of privatization, business planning, innovation and R&D, plant start-up, and management of intangible assets. Dr. Shukla has designed turnkey facilities in Colombia, India, Malaysia, and Taiwan. Some of Dr. Shukla’s accomplishments include

▪	Congressional Liaison, Institute of Food Technology’s research Committee
▪	Chairman, Technical Board, American Corn Miller’s Federation, Washington, D.C.(1977-1984)

▪	Industry Member USDA’s NC-51 (1980-84)
▪	Panelist at Harvard’s Agriculture and Biotechnology Program

▪	Member, Advisory Panel, American Association of Cereal Chemists(1999-Present)
▪	Cornerstone Member, Council of Agricultural Science and Technology

▪	Member, Board of Directors, Matrix Specialties, K.L., Malaysia
▪	Business Planning Advisor to Universal Food’s, Milwaukee, WI and Pinahs Co., Waukesha, WI

Dr. Shukla received his B.Sc. (Agricultural Engineering) from the University of Gorakhpur, India, First in the University, and his M.Sc. (Food/ Engineering) from Agra University, India, First in the Faculty of Agriculture, and his Ph.D. (Food/Dairy Technology) from University of Illinois, Urbana-Champaign.

Mark Hershhorn has a background in the marketing and operations of nutrition systems, food industry marketing and transactional television. Mark currently serves as President and co-owner of CKS & Associates Management LLC; President and CEO of CKS & Associates; CEO of Midwest Real Estate Investment LLC; General Partner of New Horizons West LLP, and CEO of New Horizons Real Estate Holdings LLC. During much of the 1990’s, Mark served as President, CEO and director of National Media Corporation (NYSE-NMC) and as Chairman of the company’s international subsidiary, Quantum International Ltd. Prior to that, Mark served as Senior Vice President of food operations and joint ventures for Nutri/System, Inc. During the 1980’s, Mark was Chief Financial Officer, Treasurer, Vice President and director of the Franklin Mint. Mark has also held positions with companies such as Price-Waterhouse, Pfizer Diagnostics, and Wallace and Wampole Laboratories. Mark received his BS Degree in Economics from Rutgers University and an MBA from the Wharton School of Finance, University of Pennsylvania.

Randal Hoff is a senior executive with over thirty years of diverse general management, sales, financial, and administrative experience with the industrial group of a $2.5 billion multinational food company. Mr. Hoff has been Vice-President and General Manager of McCormick and Co, Inc.’s McCormick Flavor Division since 2000, where he managed the Ingredient, Seasoning and Flavor sub-divisions for their industrial business in the United States. He was additionally responsible for McCormick Canada and McCormick Pesa, the industrial divisions of McCormick in Canada and Mexico, with total sales of approximately $400 million with over 1100 employees and 6 manufacturing plants. From 1998 to 2000, Mr. Hoff was the Vice President – Sales and Marketing for McCormick Flavor Division, managing a direct sales force of over 20 Account Managers, 3 Regional Directors and sales organization to cover all major multi-national consumer product food companies in the United States. From 1997 to 1998, Mr. Hoff served as Vice President Business Development – Flavors for McCormick Flavor Division, creating a strong organizational and sales/marketing emphasis on the development and sale of Flavors by McCormick, where he achieved market credibility and double digit sales growth. Mr. Hoff served as President of McCormick & Wild, Inc. from 1994 through 1997, a $13 million joint venture specializing in the development, sale and manufacture of natural fruit flavors in North America. From 1982 through 1994, Mr. Hoff held various management positions in McCormick Flavor Group and McCormick & Wild, Inc. including Director of Finance and Administration, Account Manager, Director – MIS, Director – Quality Management, and Controller & CFO. Mr. Hoff has a B.A. in Accounting and Economics from Augustana College, an MBA in Finance and MIS from Northwestern University, J.L. Kellogg Graduate School of Management, and is a Certified Public Accountant.

Brian S. Israel was appointed in 2007 to fill a vacancy in the Company’s Board of Directors. He currently provides strategic planning, training and project management services to businesses and non-profit entities as an independent consultant. He also serves as President of North Shore Custom Homes, Ltd. Mr. Israel has spent more than 20 years in the real estate finance industry, during which he managed teams responsible for production, operations, risk management, product and policy development, technology and project management functions for a major national lender and a large regional commercial bank.

Harvey Rosenfeld has been the Chairman and CEO of U.S.A. Group, Inc. since July of 1987. He founded the third party administration company to provide plan services to wholesale and retail sectors of the employee benefits marketplace. Mr. Rosenfeld served as Vice President and Group Manager of Continental Illinois Bank from 1979 to 1987. At Continental, he was the Senior Manager with bottom line responsibility for one internationally-based and six domestic Trust businesses as well as the bank’s Safekeeping Division. From 1975 to 1979, Harvey served as Vice President and Manager of Southeast Banks, and from 1967 to 1975 he served as Vice President of Maryland National Bank. Mr. Rosenfeld established a global network covering financial institutions in twenty-three countries to facilitate trading of international securities and currencies, he has taught graduate level courses offered by the Wharton School of Business to industry executives, as well as the CEBS program to benefits professionals, and he is a frequent speaker at industry seminars and conventions and has authored articles on benefits issues for various publications.

The term of office of each director expires at each annual meeting of stockholders and upon the election and qualification of his successor. There are no arrangements with any director or officer regarding their election or appointment. There are no family relationships between any of our directors or executive officers.

AUDIT COMMITTEE

The Board of Directors has an Audit Committee composed of two directors, Randal Hoff and Harvey Rosenfeld, each whom is considered an “independent director" under the rules of the American Stock Exchange and the Securities and Exchange Commission. The Board of Directors has determined that Randal Hoff qualifies as an "audit committee financial expert" under SEC rules. The function of the Audit Committee is to assist the Board of Directors in preserving the integrity of the financial information published by the Company through the review of financial and accounting controls and policies, financial reporting systems, alternative accounting principles that could be applied and the quality and effectiveness of the independent public accountants.

COMPENSATION OF DIRECTORS

Our outside directors currently receive $1,500 per meeting as cash compensation. This practice began as of December 19, 2007. Prior to that, no directors received any cash compensation for serving on our board, but were eligible to receive options and/or restricted shares of our common stock pursuant to our 2004 Stock Equity Plan. In 2007, Mr. Michael Donahue received 100,000 options, and Mr. Brian Israel received 200,000 options. The current board has also approved a grant of 200,000 shares of common stock per external director, as well as the ability to participate in a pool of an additional 500,000 shares of common stock based on the amount of time spent per director on Company affairs outside of monthly board meetings. The cumulative minimum number of annual External Director work hours required prior to any distribution of the pool is 1,000.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Pursuant to Section 16(a) of the Exchange Act and the rules promulgated thereunder, officers and directors of the company and persons who beneficially own more than 10% of our common shares are required to file with the SEC and furnish to the Company reports of ownership and change in ownership with respect to all equity securities of the company. Based solely on our review of the copies of such reports received by us during or with respect to the fiscal year ended December 31, 2007 and all prior years, and written representations from such reporting persons, we believe that those persons who were our officers, directors and 10% shareholders during any portion of the fiscal year ended December 31, 2007, complied with all Section 16(a) filing requirements applicable to such individuals with the exception of the following late filings: (a) Mr. Michael Theriault was late filing 1 Form 4 with respect to 7 transactions; (b) Mr. Alan Orlowsky was late filing 3 Form 4s with respect to 10 transactions; (c) Mr. Stanford Levin was late filing 1 Form 4 with respect to 5 transactions; (d) Mr. Dana Dabney was late filing 1 Form 4 with respect to 9 transactions; (e) Mr. Steve Salgan was late filing 1 Form 4 with respect to 4 transactions; (f) Mr. Steve Cohen was late filing 2 Form 4s with respect to 8 transactions; and (g) Messrs. Michael Donahue, Mark Hershhorn, Randal Hoff, Harvey Rosenfeld and Treveni Shukla were each late filing a Form 3.

CODE OF ETHICS

We have adopted a code of ethics, known as our Code of Ethics and Business Conduct that applies to all employees. This code of ethics can be found on our website at www.ztrim.com. Stockholders may also obtain a copy of the Code of Ethics and Business Conduct by submitting a request for such copy to Z Trim Holdings, Inc., 1011 Campus Drive, Mundelein, Illinois 60060.

ITEM 10. EXECUTIVE COMPENSATION.

The following table summarizes the compensation earned in the fiscal years ended December 31, 2007 and 2006 by our chief executive officer and the two most highly paid executive officers whose total salary and bonus awards exceeded $100,000 for the fiscal years ended December 31, 2007 and 2006. In this document, we refer to these individuals as our "named executive officers."

SUMMARY COMPENSATION TABLE

LONG-TERM COMPENSATION

ANNUAL COMPENSATION

								AWARDS
								SHARES
								UNDERLYING
								RESTRICTED
NAME AND PRINCIPAL						OTHER		OPTIONS
POSITION	YEAR	SALARY		BONUS		COMPENSATION		STOCK AWARDS

Gregory J. Halpern	2007	$	119,099	$	--	$	--		-
Former Chairman and
Chief Executive Officer	2006	$	142,538	$	--	$	--		1,225,000

Steve J. Cohen
Director and President	2007	$	131,175	$	--	$	--		-

Alan G. Orlowsky
Former Director and
Chief Financial Officer	2007	$	106,608	$	--	$	--		750,000

Triveni P. Shukla
Director and Executive
Vice President - Marketing & Technology	2007	$	119,400	$	--	$	--		-

OPTION GRANTS

The following table contains information concerning the grant of options to purchase shares of our common stock to each of the named executive officers during the fiscal year ended December 31, 2007. The percentage of total options granted to employees set forth below is based on an aggregate of 2,532,000 shares subject to options granted in 2007. All options are fully vested and exercisable.

OPTION GRANTS IN LAST FISCAL YEAR

INDIVIDUAL GRANTS

			PERCENT OF
	NUMBER OF		TOTAL
	SECURITIES		OPTIONS
	UNDERLYING		GRANTED			TO EXERCISE OR
	OPTIONS		EMPLOYEES			BASE PRICE		EXPIRATION
NAME	GRANTED		IN 2007			($/SHARE)		DATE
Gregory J. Halpern
(via grants to his children)		30,000		1.2	%	$	1.18	Rescinded by Board action

Steve J. Cohen		0		-			-		-
Alan G. Orlowsky		750,000		29.6	%	$	1.36	5/1/10
Triveni P. Shukla		0		-			-		-

OPTIONS EXERCISED DURING 2007 AND OPTIONS VALUES AT DECEMBER 31, 2007

The following table contains information regarding options exercised during 2007 and unexercised options held at December 31, 2007, by the named executive officers. All of the unexercised options are exercisable.

EXERCISED AND UNEXERCISED

OPTIONS FOR 2007

					IN-THE-MONEY		OUT-OF-MONEY
					OPTIONS AT		OPTIONS
	SHARES				DECEMBER 31, 2007		DECEMBER 31, 2007
	AQUIRED ON		VALUE		EXERCISABLE/		EXERCISABLE/
NAME	EXERCISED		REALIZED		UNEXERCISABLE		UNEXERCISABLE

Gregory J. Halpern		0	$	--		0		-
Steve J. Cohen		0	$	--		0		1,299,309
Alan G. Orlowsky		0	$	--		0		1,470,000
Triveni P. Shukla		0	$	--		0		840,000

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth information regarding the beneficial ownership of our common stock as of April 9, 2008, by the following individuals, entities or groups:

o each person or entity who we know beneficially owns more than five percent of our outstanding common stock;

o each of the named executive officers;

o each director and nominee; and

o all directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or investment power with respect to the shares. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options and warrants held by that person that are currently exercisable or convertible or will become exercisable or convertible within 60 days after April 9, 2008 are deemed outstanding, while the shares are not deemed outstanding for purposes of computing percentage ownership of any other person. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them.

Applicable percentage ownership in the following table is based on 75,056,375 shares of common stock outstanding as of April 9, 2008. Except as provided below, the address for each stockholder listed in the table is c/o Z Trim Holdings, Inc., 1011 Campus Drive, Mundelein, Illinois 60060.

NAME OF	NUMBER OF SHARES		PERCENTAGE OF SHARES
BENEFICIAL OWNER	BENEFICIALLY OWNED		BENEFICIALLY OWNED

BENEFICIAL OWNERS

Nurieel Akhamzadeh(1)		7,500,000		9.67	%
4020 Moorpark Avenue, #117
San Jose, CA 95117

FORMER DIRECTORS AND NAMED EXECUTIVE OFFICERS:

Gregory J. Halpern(2)		12,105,800		16.30	%

Alan G. Orlowsky(3)		1,470,000		1.95	%

CURRENT DIRECTORS AND EXECUTIVE OFFICERS

Steve J. Cohen(4)		1,299,400		1.73	%

Brian Chaiken(5)		500,000		0.66	%

Michael J. Theriault(6)		1,934,000		2.58	%

Michael Donahue(7)		100,000		0.13	%

Mark Hershhorn(8)		187,500		0.25	%

Randal Hoff(9)		0		0.00	%

Brian Israel(10)		200,000		0.27	%

Harvey Rosenfeld		483,870		0.64	%

Triveni P. Shukla(11)		840,000		1.11	%

Total of all Directors and Executive Officers(12)		5,544,770		7.39	%

(1) Based on the Schedule 13D filed by Nurieel Akhamzadeh with the SEC on April 3, 2008, with respect to 5,000,000 shares of common stock. Includes 2,500,000 warrants exercisable within 60 days of April 9, 2008.

(2) Gregory J. Halpern, as of August 20, 2007, was no longer an officer or director. Based on the Schedule 13D/A filed by Gregory J. Halpern with the SEC on April 9, 2008.

(3) Alan Orlowsky, as of January 14, 2008, was no longer an officer or director. His shares include 1,470,000 options exercisable within 60 days of April 9, 2008.

(4) Includes 1,299,309 options exercisable within 60 days of April 9, 2008.

(5) Includes 500,000 options exercisable within 60 days of April 9, 2008.

(6) Includes 1,755,000 options exercisable within 60 days of April 9, 2008.

(7) Includes 100,000 options exercisable within 60 days of April 9, 2008.

(8) Includes 37,500 warrants exercisable within 60 days of April 9, 2008.

(9) Intentionally left blank.

(10) Includes 200,000 options exercisable within 60 days of April 9, 2008.

(11) Includes 840,000 options exercisable within 60 days of April 9, 2008.

(12) Excludes the shares of Greg Halpern and Alan Orlowsky.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

The Company's independent directors are: Mark Hershhorn, Brian Israel, Michael Donahue, Randal Hoff, and Harvey Rosenfeld. In compliance with the American Stock Exchange's rules for director independence, more than 50% of the Company's directors are independent.

ITEM 13. EXHIBITS

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

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The following is a summary of the fees billed to us by Spector & Wong, LLP for professional services rendered for the fiscal year ended December 31, 2007 and December 31, 2006, respectively:

FEE CATEGORY	2007		2006

Audit Fees(1)	$	56,889	$	85,448

Audit-Related Fees(2)		-		-

Tax Fees(3)		-		-

All Other Fees(4)		-		-

Total Fees	$	56,889	$	85,448

The following is a summary of the fees billed to us by Blackman Kallick, LLP for professional services rendered for the fiscal year ended December 31, 2007 and December 31, 2006, respectively:

FEE CATEGORY	2007		2006

Audit Fees(1)	$	107,780		-

Audit-Related Fees(2)		-		-

Tax Fees(3)		-		-

All Other Fees(4)	$	295,115		-

Total Fees	$	402,895		-

(1) Audit Fees consist of fees billed for professional services rendered for the audit of our financial statements and for reviews of the interim financial statements included in our quarterly reports on Form 10-QSB.

(2) Audit-Related Fees consist of fees billed for professional services rendered for audit-related services, including consultation on SEC filings and the issuance of consents and consultations on other financial accounting and reporting related matters.

(3) Tax Fees consists of fees billed for professional services relating to tax compliance and other tax advice.

(4) All Other Fees consist of fees billed for all other services. These fees consist of fees for services stemming from the internal investigation of internal controls and equity transactions referenced hereinabove, as well as for a forensic accounting relating to prior management. The engagements from which these fees stem were initiated in late August or early September 2007 and were substantially completed in early November 2007.

PRE-APPROVAL POLICY

Our Audit Committee Charter provides that the Audit Committee shall pre-approve all auditing services, internal control-related services and permitted non-audit services (including the terms thereof) to be performed for us by our independent auditor, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, as amended, which are approved by the Committee prior to the completion of the service. The Committee may also form and delegate authority to sub-committees consisting of one or more members when appropriate, including the authority to grant pre-approvals of audit and permitted non-audit services, provided that decisions of such subcommittee to grant pre-approvals shall be presented to the full Committee at its next scheduled meeting. In accordance with the pre-approval policy, the Audit Committee has approved certain specified audit and non-audit services to be provided by Spector & Wong LLP for up to twelve (12) months from the date of the pre-approval. Any additional services to be provided by our independent auditors following such pre-approval requires the additional pre-approval of the Audit Committee.

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.



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



	By:	/s/ Brian Chaiken
		Brian Chaiken
		Chief Financial Officer
		(principal financial or accounting officer)



	By:	/s/ Mark Hershhorn
		Mark Hershhorn
		Director



	By:	/s/ Brian Israel
		Brian Israel
		Director



	By:	/s/ Michael Donahue
		Michael Donahue
		Director



	By:	/s/ Triveni P. Shukla
		Triveni P. Shukla
		Director



	By:	/s/ Randal Hoff
		Randal Hoff
		Director



	By:	/s/ Harvey Rosenfeld
		Harvey Rosenfeld
		Director

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

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).

21*	Subsidiaries.

23.1*

Consent of Blackman Kallick, LLP.

23.2*

Consent of Spector & Wong.

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
Report of Independent Registered Public Accounting Firm	F-1

Consolidated Balance Sheets	F-3

Consolidated Statements of Operations	F-5

Consolidated Statements of Stockholders' Equity (Deficit)	F-6

Consolidated Statements of Cash Flows	F-7

Notes to Consolidated Financial Statements	F-8

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Z Trim Holdings, Inc.

Mundelein, Illinois

We have audited the accompanying consolidated balance sheet of Z Trim Holdings, Inc. as of December 31, 2007 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the year then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Z Trim Holdings, Inc. as of December 31, 2007 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the Unites States of America.

The accompanying consolidated financial statements have been prepared assuming that the company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the company has suffered recurring losses from operations and requires additional financing to continue in operation. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty.

The consolidated financial statements for 2007 have been restated to correct an error with respect to the company's accounting for certain consulting arrangements paid for in compnay stock, as described in Note 3 to the consolidated financial statements.

/s/ Blackman Kallick, LLP

Chicago, Illinois

April 14, 2008 except for the second paragraph of the reclassification section of Note 3, and the last paragraph of the Release of Common Stock Stop Order section of Note 9, as to which the date is August 19, 2008

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of Z Trim Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Z Trim Holdings, Inc. as of December 31, 2006 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principals used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Z Trim Holdings, Inc. as of December 31, 2006 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Unites States of America.

/s/ Spector & Wong, LLP

Pasadena, California

March 30, 2007

F-2

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

ASSETS
Current Assets	2007		2006
Cash and cash equivalents	$	2,436,581	$	675,043
Accounts receivable (net of allowance of $1,005 in 2007
and $0 in 2006)		7,522		11,945
Inventory		592,666		204,536
Prepaid expenses and other assets		152,597		94,417
Net assets of discontinued operations		485		32,196

Total current assets		3,189,851		1,018,137

Property and equipment, net		6,221,653		6,262,971

Other Assets
Intangible assets, net		140,001		153,334
Deposits		14,453		11,103

Total other assets		154,454		164,437

TOTAL ASSETS	$	9,565,958	$	7,445,545

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

F-3

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities	2007			2006
Accounts payable	$	709,029		$	355,679
Accrued expenses		2,039,308			162,500
Other liabilities		150,000			-
Capital lease obligations		-			14,074

Total current liabilities		2,898,337			532,253

Stockholders' Equity
Common stock, $0.00005 par value; authorized 200,000,000
shares; issued and outstanding 72,056,375 and
61,984,484 shares, respectively		3,600			3,096
Additional paid-in capital		69,603,639			55,495,659
Unamortized expenses		-			(113,339	)
Accumulated deficit		(62,939,618	)		(48,472,124	)

Total stockholders' equity		6,667,621			6,913,292

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	9,565,958		$	7,445,545

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

F-4

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


FOR THE YEARS ENDED DECEMBER 31	2007			2006
REVENUES:
Products	$	616,799		$	103,269
Services		49			735
Total revenues		616,848			104,004

COST OF REVENUES:
Products		2,776,362			1,788,594
Total cost of revenues		2,776,362			1,788,594

GROSS MARGIN		(2,159,514	)		(1,684,590	)

OPERATING EXPENSES:
Selling, general and administrative		9,330,046			14,517,659
Reduction of intangible assets		-			341,250
Amortization of intangible assets		13,333			34,333
Loss on asset disposals, net		107,905			-
Total operating expenses		9,451,284			14,893,242

OPERATING LOSS		(11,610,798	)		(16,577,832	)

OTHER INCOME (EXPENSES):
Rental and other income		44,105			42,000
Interest income		173,256			90,873
Recovery of loan loss		300,000			-
Interest expense		(3,570	)		(14,059	)
Settlement (loss) gain		(1,360,981	)		7,500
Total other income (expenses)		(847,190	)		126,314

LOSS FROM CONTINUING OPERATIONS	$	(12,457,988	)	$	(16,451,518	)

DISCONTINUED OPERATIONS
Income from discontinued operations
(net of applicable tax of $0 in 2007 and 2006)	$	14,846		$	20,634

NET LOSS	$	(12,443,142	)	$	(16,430,884	)

Net Loss per Share from continuing operations
- Basic and Diluted	$	(0.18	)	$	(0.28	)
Net Loss per Share - Basic and Diluted	$	(0.18	)	$	(0.28	)

Weighted Average Number of Shares Basic and Diluted		70,454,211			59,635,899

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

F-5

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

				Common
				Stock and						Notes
	Shares of			Additional						Receivable
	Common			Paid-In			Unamortized			Issued for			Accumulated			Treasury
	Stock			Capital			Expenses			Stock			Deficit			Stock			Total
Balance at December 31, 2005		50,016,782		$	40,557,078		$	(257,318	)	$	(185,000	)	$	(34,065,590	)	$	(11,269	)	$	6,037,901

Stock issued for services		1,356,871			1,312,731			(744,600	)											568,131
Stock and warrants issued for cash, net of fees		9,487,304			5,156,433															5,156,433
Exercise of stock warrants and options		1,123,527			652,025															652,025
Warrants issued for services					437,079			(437,079	)											-
Proceeds from notes receivable											185,000									185,000
Stock options issued expense					9,419,028															9,419,028
Amortization of services								1,325,658												1,325,658
Treasury stock retired					(11,269	)											11,269
Net loss														(16,430,884	)					(16,430,884	)
Balance at December 31, 2006		61,984,484		$	57,523,105		$	(113,339	)	$	-		$	(50,496,474	)	$	-		$	6,913,292

Stock issued for services		6,150			6,765															6,765
Stock and warrants issued for cash, net of fees		8,880,000			7,838,000															7,838,000
Stock issued for settlement		285,000			29,500															29,500
Exercise of stock warrants and options		1,014,163			872,290															872,290
Cashless exercise of warrants		11,578			-															-
Stock options issued expense					3,487,579															3,487,579
Amortization of services								113,339												113,339
Retired shares		(125,000	)																	-
Retired shares in process		-			(150,000	)														(150,000	)
Net loss														(12,443,142	)					(12,443,142	)

Balance at December 31, 2007		72,056,375		$	69,607,239		$	-		$	-		$	(62,939,616	)	$	-		$	6,667,623

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

F-6

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31	2007			2006
Cash Flows From Operating Activities From Continuing Operations:
Net loss	$	(12,443,142	)	$	(16,430,884	)
Less: Income from discontinued operations, net of tax		14,846			20,634
Adjustments to reconcile loss from continuing operations to
net cash used in operating activities:
Depreciation and amortization		663,956			661,359
Provision for bad debt		1,005			-
Issuance of common stock and warrants for services		6,765			576,758
Amortization of noncash expenses associated with stock and
warrants issued for services		113,339			1,325,658
Stock based compensation expense		3,487,579			9,419,028
Recovery of loan loss		(300,000	)		-
Reduction of intangible assets		-			341,250
Loss on asset disposals, net		107,905			-
Stock settlement		1,357,373			-
(Increase) in:
Accounts receivable		3,418			2,823
Inventory		(388,130	)		(123,274	)
Prepaid expenses and other assets		(58,180	)		(12,099	)
Deposits		(3,350	)		-
Increase in:
Accounts payable and accrued expenses		902,282			(622,876	)
Cash flows used in operating activities from continuing operations		(6,564,026	)		(4,882,891	)

Cash Flows From Investing Activities From Continuing Operations:
Purchase of property and equipment		(784,685	)		(378,294	)
Proceeds from asset disposals		67,475			-
Cash flows used in investing activities from continuing operations		(717,210	)		(378,294	)

Cash Flows From Financing Activities From Continuing Operations:
Net proceeds from sales of stock		7,838,001			5,156,433
Exercise of options and warrants		872,290			643,398
Payments on capital lease obligations		(14,074	)		(30,994	)
Proceeds from notes receivable for stock, net		300,000			185,000
Cash flows provided by financing activities from continuing operations		8,996,217			5,953,837
Net cash and cash equivalents provided by continuing operations		1,714,981			692,652
Net cash and cash equivalents provided (used) by discontinued operations		46,557			(34,044	)
Net increase in cash and cash equivalents		1,761,538			658,608

Cash and cash equivalents, at beginning of period		675,043			16,435
Cash and cash equivalents, at end of period	$	2,436,581		$	675,043

Supplemental Disclosures of Cash Flow Information:
Interest paid	$	3,570		$	14,059

Supplemental Schedule of Noncash Investing and Financing Activities:
Issuance of common stock and warrants for services	$	6,765		$	1,758,437
Stock subscription payable	$	150,000		$	-

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

F-7

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 1 – NATURE OF BUSINESS

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.

Up to July 2007 the Company had three reportable business unit segments: food product development, security product development and e-tailer. The Company operates through its FiberGel, The Brave Way Training Systems, Inc. (“Braveway”), On-Line Bedding Corp. (“On-Line”), and Z-Amaize Technologies, Inc. divisions. On July 18, 2007 the Board of Directors resolved to dissolve and liquidate On-Line, which is the E-tailer operating segment. On September 17, 2007 the Board of Directors resolved to dissolve all company subsidiaries, other than FiberGel, by December 31, 2007. The related assets over liabilities of the dissolved segments have an approximate carrying deficit of $6,700, including intercompany payables of $6,200.

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 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 years ended December 31, 2007 and 2006 have been restated to present the results of two out of three segments as discontinued operations.

Reclassifications

Certain prior period items have been reclassified from operating expenses to cost of goods sold in order to correct an error. This reclassification affects neither the net loss nor the accumulated deficit of the Company. Specifically, manufacturing overhead costs in the amount of $1,183,724 were previously combined with selling, general and administrative expenses in 2006. Manufacturing overhead costs are now classified as products expense in the cost of revenues for the years ended December 31, 2007 and 2006.

F-8

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 3–SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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 December 31, 2007 the allowance for doubtful accounts is $1,005. As of December 31, 2006, no allowance for doubtful accounts was provided as management believed that all accounts as of those dates were fully collectible.

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.

F-9

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 3 –SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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.

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 2007 was $465,713. The amount for 2006 was $1,271,355.

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 $3,487,579 and $9,419,028 for years ended December 31, 2007 and 2006, respectively. The 2007 stock option expense includes an additional charge of $1,731,545 from the modification of 13,791,773 out-of-money options. Of these options, 345,000 were granted a two year extension, 45,000 of these options were modified for an increase of $2.70 to the exercise price, 310,000 were re-issued and granted a one year extension not to exceed an exercise date of August 20, 2010 and 13,091,773 were granted a one year extension not to exceed an exercise date of August 20, 2010. The 2006 stock option expense includes an additional charge of $1,199,402 from the modification of 1,620,000 out-of-money options. These options were granted a lower exercise price and a two year extension.

F-10

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 3 –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 is currently evaluating the impact of this standard.

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 Company is currently evaluating the impact of this standard.

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.

NOTE 4 – INVENTORY

At December 31, inventory consists of the following:

	2007		2006
Raw materials	$	30,402	$	27,527
Work-in-process		4,850		11,414
Packaging		67,422		17,622
Finished goods		489,992		147,973
Total inventory	$	592,666	$	204,536

F-11

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 5 – PROPERTY AND EQUIPMENT, NET

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

	2007			2006
Production, engineering and other equipment	$	5,213,084		$	4,717,341
Leasehold improvements		2,798,972			2,745,917
Office equipment and furniture		591,384			601,067
Computer equipment and related software		185,603			305,005
Construction in process - equipment		64,859			133,532
		8,853,902			8,502,862
Accumulated depreciation		(2,632,249	)		(2,239,891	)
Property and equipment, net	$	6,221,653		$	6,262,971

Depreciation expense was $650,623 and $627,026 for the years ended December 31, 2007 and 2006, respectively.

NOTE 6 – INTANGIBLE ASSETS

During 2007, no significant identified intangible assets were acquired and no identified intangible assets were impaired.

At December 31, 2007, intangible assets, net, consist of the following:

License Rights to
Website	2007			2006

Gross Carrying Amount	$	200,000		$	200,000

Accumulated Amortization	$	(59,999	)	$	(46,666	)

Net	$	140,001		$	153,334

Amortization of intangibles was $13,333 and $34,333 for the years ended December 31, 2007 and 2006, respectively.

Based on the carrying amount of the intangibles as of December 31, 2007, and assuming no impairment of the underlying assets, the estimated future amortization is as follows:


Years ended December 31,
2008	$	13,333
2009		13,333
2010		13,333
2011		13,333
2012		13,333
Thereafter		73,336
Total amortization	$	140,001

F-12

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 7 – ACCRUED EXPENSES

At December 31, accrued expenses consist of the following:

	2007		2006
Accrued legal	$	458,145	$	109,513
Accrued payroll and taxes		66,102		-
Accrued settlements		1,327,873		52,987
Other accrued expenses		187,188		-
Total accrued expenses	$	2,039,308	$	162,500

NOTE 8 – 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 years ended December 31, 2007 and 2006.

The following table presents the future minimum lease payments under the capital leases together with the present value of the minimum lease payments at December 31, 2006. The leases were paid in full in 2007.

Year Ending December 31,
2007	$	14,895
Total minimum lease payments		14,895
Lease amount representing interest		821
Present value of minimum lease payments		14,074
Less: current portion		14,074
Non-current portion	$	-

The leases had interest rates ranging from 17.29% to 20.88%.

F-13

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 9 – 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.

In May 2007, the Company conducted a self-underwritten offering of the Company’s common stock. The stock was sold for $100,000 per unit. Each unit consisted of 100,000 shares of common stock and 25,000 warrants. The warrants are exercisable at $1.20 per share and expire in five (5) years after purchase of the above-described unit. The Company sold and issued 880,000 shares and received proceeds of $880,000 under the offering. The Company has received a stock subscription for 150,000 shares of its common stock and 37,500 warrants under the offering.

On March 24 through 30, 2006, the Company entered into private placement subscription agreements pursuant to which it sold unregistered shares of common stock, par value $0.00005 per share (“Common Stock”), and warrants exercisable for Common Stock. The Company sold approximately 205 units in the private placement, with each unit consisting of 40,323 shares of Common Stock. In addition, investors who invested at least $500,000 in the private placement received a five-year warrant with an exercise price of $1.00 per share to purchase a number of shares of Common Stock equal to 10% of the number of shares of Common Stock purchased (the “Warrants”). In the aggregate the Company sold 8,245,368 shares of Common Stock, and Warrants to purchase an additional 161,292 shares of Common Stock. Proceeds from the sale, net of commissions and fees of $521,865, totaled $4,536,433. The Company has registered the Common Stock and underlying Warrants with the SEC as free trading shares.

National Securities Corporation (“National Securities”) served as the lead placement agent in connection with the private placement. National Securities received cash fees in the aggregate of $521,865 and warrants to purchase 824,537 shares of Common Stock on terms which are identical to the Warrants included in the units except that the exercise price is $0.68 per share and they contain an assignment provision. In addition, the placement agent’s warrant has registration rights that are the same as those afforded to investors in the private placement.

In January 2006, the Company conducted a self-underwritten offering of the Company’s common stock up to $1.24 million. The stock was sold for $31,000 per unit. Each unit consisted of 50,000 shares of common stock and 50,000 warrants. The warrants are exercisable at $1.00 per share and expire in three (3) years after purchase of the above-described unit. The Company sold and issued 1,000,000 shares and received proceeds of $620,000 under the offering.

The Company determined that all of the securities sold and issued in the private placements were exempt from registration under the Securities Act of 1933, as amended (the “Act”) pursuant Section 4(2) of the Act and Rule 506 of Regulation D Promulgated under the Act. The Company based this determination on the non-public manner in which it offered the securities and on the representations of the persons purchasing such securities, which included, in pertinent part, that such persons were “accredited investors” within the meaning of Rule 501 of Regulation D promulgated under the Act, and that such persons were acquiring such securities for investment purposes for their own respective accounts and not as nominees or agents, and not with a view to resale or distribution, and that each such persons understood such securities may not be sold to or otherwise disposed of without registration under the Act or an applicable exemption there from.

F-14

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 9 – STOCKHOLDERS' EQUITY/ SUBSEQUENT EVENT (CONTINUED)

Exercising of Stock Warrants and Options

During 2007, 1,014,163 stock warrants and options were exercised. The Company received total proceeds of $872,290. The 2007 warrants exercised are net of 879,996 shares rescinded by the Board of Directors on April 30, 2007.

During 2006, 1,273,527 stock warrants and options were exercised. The Company received total proceeds of $643,398. The Company applied $8,627 of proceeds due from a consultant exercising options during 2006 against services rendered for the Company. There was no actual tax benefit realized for the tax deductions from option and warrant exercises for the years ended December 31, 2007 and 2006.

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

During February 2007 the Company issued 11,578 shares of common stock on the cashless exercise of warrants.

Release of Common Stock Stop Order

On November 22, 2004, the Company entered into a two-year engagement with David Shemesh and Mordechai Tobian for investor relations services in consideration of 2,250,000 shares of restricted common stock of the Company (the "Shemesh/Tobian Shares") and a warrant to purchase 275,000 shares of restricted common stock at $.80 per share through November 21, 2007.

Based on a closing price of the Company's common stock of $.79 on November 22, 2004, the Company recorded paid-in-capital of $1,777,500 as of that date and began to recognize investor relation expenses on a quarterly basis over the life of the two-year contract.

On August 24, 2005, the Company took the position that Shemesh and Tobian had failed to perform as agreed and the Company purported to rescind the contract. Simultaneously, the Company placed a stop order on the Shemesh/Tobian Shares. Through that date, the Company had recognized $765,325 of expense relating to the contract. Accordingly, at September 30, 2005 the Company wrote off the remaining $1,012,175 against paid-in-capital.

Shemesh and Tobian disputed the Company's basis for rescinding the contract and because they were referred to the Company by Farhad Zaghi, the Company's purported rescission became an issue in the Company's ongoing litigation with Zaghi and his affiliates. In order to eliminate one of the issues of contention between the parties and facilitate further settlement negotiations, on March 9, 2007, the Company released the stop order on the Shemesh/Tobian Shares and allowed the shares to be traded. The Company recognized an expense to investor relations of $2,182,175, based on the closing price on March 9, 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 have yet to be issued. The fair market value of the stock on January 3, 2008 was $.37, which results in a total cost of $370,000 for the shares granted. 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.

F-15

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 10 – NET LOSS PER SHARE

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

	Years ended
	December 31,
	2007			2006
Numerator:
Net loss from continuing operations	$	(12,457,988	)	$	(16,451,518	)
Income from discontinued operations	$	14,846		$	20,634
Net loss	$	(12,443,142	)	$	(16,430,884	)
Denominator:

Weighted average number of shares outstanding		70,454,211			59,635,899

Net loss per share from continuing operations- basic and diluted	$	(0.18	)	$	(0.28	)
Income per share from discontinued operations - basic and diluted	$	0.00		$	0.00
Net loss per share-basic and diluted	$	(0.18	)	$	(0.28	)

As the Company incurred net losses for the year ended December 31, 2007 and 2006, the effect of dilutive securities totaling 3,006,621 and 4,178,620 equivalent shares, respectively, has been excluded from the calculation of diluted loss per share because the effect was anti-dilutive.

NOTE 11 – 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 issued by the Company as of December 31, 2007 and 2006 are as follows:

	2007					2006
				Weghted					Weghted
	Number			Average		Number			Average
	of			Exercise		of			Exercise
	Shares			Price		Shares			Price
Outstanding at beginning of year		20,285,749		$	0.99		12,892,939		$	1.03
Granted		2,532,000			1.19		10,826,337			1.05
Exercised		(453,318	)		0.77		(1,113,527	)		0.46
Expired and Cancelled		(5,768,908	)		0.96		(2,320,000	)		1.00
Outstanding at end of period		16,595,523		$	1.04		20,285,749		$	0.99

Exercisable at end of period		16,270,523		$	1.04		19,985,749		$	0.98

F-16

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 11 – STOCK OPTION PLAN AND WARRANTS (CONTINUED)

At December 31, 2007, the aggregate intrinsic value of all outstanding options was $71,095 with a weighted average remaining contractual term of 2.0 years, of which 16,270,523 of the outstanding options are currently exercisable with an aggregate intrinsic value of $65,095, a weighted average exercise price of $1.04 and a weighted average remaining contractual term of 2.1 years. The total intrinsic value of options exercised during the year ended December 31, 2007 was $273,694. The total fair value of options vested during 2007 was $3,487,579.

The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option valuation model. This model uses the assumptions listed in the table below. Expected volatilities are based on the historical volatility of the Company’s stock. The risk-free rate for periods within the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

	2007			2006
Weighted average fair value per option granted	$	0.32		$	0.76
Risk-free interest rate		3.07	%		4.73	%
Expected dividend yield		0.00	%		0.00	%
Expected lives		3.00			3.00
Expected volatility		90.72	%		120.08	%

As of December 31, 2007, the unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan was $253,581, which had an average expense recognition period of 44.3 days. Pursuant to a Separation and Release agreement with the former CFO, Alan Orlowsky, during January 2008, the Company will recognize $229,338 of unrecognized compensation cost related to the immediate vesting of non-vested shares. The remaining $24,243 is expected to be recognized over the subsequent nine months.

As of December 31, 2007, the Company had reserved 20.0 million qualified options for issuance under the Plan. As of December 31, 2007, the Company had 3.28 million options available for grant under the Plan.

Stock options outstanding at December 31, 2007 are as follows:

				Weighted
				Average	Weighted
Range of				Remaining	Average
Exercise		Options		Contractual	Exercise		Options
Prices		Outstanding		Life	Price		Exercisable
$	0.01-$1.50		16,100,523	2.0 years	$	1.00		15,775,523
$	1.51-$5.00		495,000	2.2 years	$	2.35		495,000
			16,595,523	2.0 years	$	1.04		16,270,523

As of December 31, 2007 and 2006, the Company has warrants outstanding to purchase 7,089,234 and 5,931,824 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 3,420,000 and 2,897,765 warrants issued in 2007 and 2006 respectively.

NOTE 12 – SETTLEMENT LOSSES/ SUBSEQUENT EVENT

In April 2007, the Company and two former investor relations consultants entered into revised settlement agreements to replace and rescind the original settlement agreements signed in October 2006. As a result, an additional 10,000 shares of the Company’s common stock at a fair value of $29,500 were issued and recorded. On April 1, 2007, 275,000 shares were issued in excess of the revised agreement and will be cancelled pending regulatory approval from the American Stock Exchange.

In July 2007, the Company paid court awarded costs of $3,608 in a patent infringement suit that was dismissed owing to a technicality.

F-17

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 12 – SETTLEMENT LOSSES/ SUBSEQUENT EVENT (CONTINUED)

On November 19, 2007, the Company settled a dispute with Basic Investors, Inc. and agreed to issue 375,000 warrants with a fair value of $87,324.

The Company executed an agreement with Farhad Zaghi on February 8, 2008 (Note 16). 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 were issued with a fair value of $400,549.

The amount of the settlement losses for the twelve months ended December 31, 2007 was $1,360,981 for the four afore-mentioned agreements. See also Note 16.

NOTE 13 – INCOME TAXES

The deferred net tax assets consist of the following at December 31:

	2007			2006
Tax benefit on net operating loss carryforward	$	17,400,208		$	12,056,813
Temporary difference in depreciation and amortization		(542,580	)		(523,441	)
Temporary difference in goodwill					-
Tax credits and carryforwards		11,603			229,802
Stock based expense and stock services		822,961			1,132,653
Less: valuation allowance		(17,692,192	)		(12,895,827	)
Net deferred tax assets	$	-		$	-

The reconciliation between the U.S. federal statutory income tax rate of 34% and our effective tax rate is shown below for calendar years 2007 and 2006:

	2007			2006
Income tax benefit at U.S. federal stautory rates		(34.0	) %		(34.0	) %
State income taxes		7.3			7.3
Valulation allowance		26.7			26.7
		0.0	%		0.0	%

At December 31, 2007, net federal and state operating losses of approximately $44 million and $31 million, respectively, are available for carry-forward against future years’ taxable income and expire through 2027. The Company’s ability to utilize its net operating loss carry forwards is uncertain and thus a valuation reserve has been provided against the Company’s net deferred tax assets. The company has $837,171 of carry forward deductions relating to stock options exercised as of December 31, 2007. These will be carried forward and utilized after the Company utilizes its current net operating loss carry forwards.

NOTE 14 – 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 no significant customers for the year ended December 31, 2007. There was one significant customer that accounted for approximately 25% for the year ended December 31, 2006. There were no outstanding amounts at December 31, 2007.

The Company maintains cash deposits with major banks, which from time to time may exceed federally insured limits. At December 31, 2007 and 2006, $2.337,048 and $575,043, 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-18

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 15 – 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		Sub-Lease Rentals		Minimum Annual Rentals, Net
2008	$	285,000	$	28,500	$	256,500
2009		285,000		22,000		263,000
2010		96,000		-		96,000
2011		19,250		-		19,250
	$	685,250	$	50,500	$	634,750

Royalties

In accordance with the licensing agreement to a website (see Note 6), the Company is subject to a minimum royalty payment of $5,000 per year beginning July 1, 2005 for fourteen years.

The future minimum annual royalty payments at December 31 under the agreement are as follows:

	Amount
2008	$	5,000
2009		5,000
2010		5,000
2011		5,000
2012		5,000
Thereafter		30,000

Employment/ Separation Agreements

During 2007, the Company entered into four employment agreements with its principal officers. The annual salaries range from $102,000 to $185,000. The agreements expire May 2009 through January 2010.

On January 14, 2008, the Company and Alan Orlowsky, the CFO, entered into a Separation and Release Agreement terminating the officer’s employment. Pursuant to the agreement, Mr. Orlowsky received a lump-sum severance payment equal to six weeks salary and the immediate vesting of 250,000 options not previously vested. At that time Mr. Orlowsky also resigned from the Board of Directors.

F-19

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 16 – PENDING LITIGATION/ CONTINGENT LIABILITY/ SUBSEQUENT EVENT

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 12 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 November 19, 2007, the Company settled a dispute with Basic Investors, Inc. (“Basic Investors”). The Company agreed to issue Basic Investors, 375,000 three year warrants at an exercise price of $.70 per share. The Company also agreed to provide an attorney letter and corporate authorization to remove any restrictions on 355,000 shares of the Company’s common stock previously issued to Basic under a Consulting Agreement dated February 21, 2006. The parties exchanged mutual releases. In the event that American Stock Exchange does not approve the transaction, the agreement would be deemed null and void. The Company has accrued $87,324 at December 31, 2007 as a settlement expense for this agreement.

F-20

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 16 – PENDING LITIGATION/ CONTINGENT LIABILITY/ SUBSEQUENT EVENT (CONTINUED)

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.

NOTE 17 – RELATED PARTY TRANSACTIONS

As of December 31, 2007 there were employees’ advances of $3,275. These advances will be repaid during 2008.

In May 2007, the Board of Directors resolved to rescind a consulting agreement pursuant to which options were issued on October 5, 2006. The agreement was with the brother of the Vice President. The related options were exercised for 200,000 shares at $0.75 per share or $150,000 in October 2006. The Board further resolved to approve the related party to use the proceeds to subscribe the shares pursuant to the Company’s May 2007 self-underwritten offering (see Note 6). The subscription is pending regulatory approval from the American Stock Exchange. Common stock and paid in capital were decreased and other liabilities was increased for $150,000.

The Company had a stock subscription receivable of $20,000 from the President related to exercising his stock options in 2005. The stock subscription receivable was paid in full on September 30, 2006 including $675 of interest.

On April 12, 2006, the Company advanced $2,500 to the President, prior to his assuming the position of President. The advance was repaid on July 31, 2006.

NOTE 18 – 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 December 31, 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.

F-21

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 19 – RESIGNATION OF CHIEF EXECUTIVE OFFICER/ REPLACEMENT

On August 20, 2007 the founder and Chief Executive Officer (“CEO”), Gregory J. Halpern, resigned as CEO and member of the Board of Directors. Steve J. Cohen, the Company’s President, replaced Mr. Halpern as the Company’s chief executive and also serves on the Company's Board of Directors.

The company entered into a Resignation Agreement and Release with Mr. Halpern pursuant to which the company awarded Mr. Halpern three months' severance pay and six months' health insurance benefits. In addition, under the Agreement the Company was to receive a release of claims from Mr. Halpern. In addition, under the provisions of the company's stock option plan, Mr. Halpern's and his immediate family members’ outstanding stock options have been rescinded. The company allowed Mr. Halpern until August 31, 2007 to rescind the Agreement.

On August 31, 2007 Gregory Halpern exercised his right to revoke the Resignation Agreement and Release he signed on August 20, 2007. Mr. Halpern's revocation of the Agreement does not affect his prior resignation as an officer and director of the Company and does not affect the Board of Directors' previous forfeiture of Mr. Halpern's stock options under the Company's 2004 Equity Incentive Plan.

NOTE 20 – DISCONTINUED OPERATIONS

In the third quarter 2007, the Company resolved to discontinue all subsidiaries, other than FiberGel.

Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the accompanying consolidated financial statements have been reclassified to reflect the discontinued business. Accordingly, the revenues, costs and expenses, assets and liabilities, and cash flows of the discontinued business have been segregated in the consolidated statements of operations, consolidated balance sheet and consolidated cash flows. The net operating results, net assets and net cash flows of this business have been reported as “Discontinued Operations.”

Following is summarized financial information for the discontinued operations:

	Years ended
	December 31,
	2007		2006
REVENUES:	$	227,629	$	497,540

INCOME FROM DISCONTINUED OPERATIONS
(NET OF TAX OF $0) (a)	$	14,846	$	20,634

NET ASSETS OF DISCONTINUED OPERATIONS
Current Assets
Cash	$	485	$	21,456
Accounts receivable		-		59,231
Inventory		-		15,069
Net other assets		-		79
Current Liabilities
Accounts payable		-		(63,639	)
Net assets of discontinued operations (b)	$	485	$	32,196

(a) No gain or loss on disposal of discontinued operations was recognized for the years ended December 31, 2007 and 2006.
(b) All assets and liabilities of discontinued operations are current.

F-22

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 20 – DISCONTINUED OPERATIONS (CONTINUED)

Summarized cash flow information for the discontinued operations is as follows:

	Years ended
	December 31,
	2007		2006
Net cash used by operating activites of
discontinued operations	$	46,557	$	(34,044	)

NET CASH USED BY DISCONTINUED
OPERATIONS	$	46,557	$	(34,044	)

The discontinued opertations did not provide or use any cash in investing or financing activities for the years ended December 31, 2007 and 2006.

NOTE 21 – 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-23

Z TRIM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2007

NOTE 21 – SEGMENT INFORMATION (CONTINUED)

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

	Years ended
	December 31,
	2007			2006
Net Revenue:
Food Product Development	$	616,799		$	103,269
Net Revenue by Reportable Segment	$	616,799		$	103,269
All Other Operating Revenue		49			735
Consolidated Net Revenue	$	616,848		$	104,004
Operating Income (Loss):
Food Product Development	$	(3,971,429	)	$	(2,899,880	)
Operating Loss by Reportable Segment	$	(3,971,429	)	$	(2,899,880	)
All Other Operating Loss		(7,639,369	)		(13,677,952	)
Consolidated Operating Loss	$	(11,610,798	)	$	(16,577,832	)
Net Loss:
Food Product Development	$	(3,971,718	)	$	(2,904,646	)
Net Loss by Reportable Segment	$	(3,971,718	)	$	(2,904,646	)
All Other Net Loss		(8,486,270	)		(13,546,872	)
Consolidated Net Loss from
Continuing Operations	$	(12,457,988	)	$	(16,451,518	)
Net (Loss) Income from Discontinued
Operations
Personal Safety Training and Products	$	1,725		$	5,866
E-tailer		13,121			14,768
Net (Loss) Income from
Discontinued Operations	$	14,846		$	20,634
Consolidated Net Loss	$	(12,443,142	)	$	(16,430,884	)

	December 31,
Total Assets:	2007		2006
Food Product Development	$	6,397,484	$	6,036,440
All other segments		3,167,989		1,376,909
		9,565,473		7,413,349
Discontinued Operations:
Personal Safety Training and Products		485		3,102
E-tailer		-		29,094
		485		32,196
Consolidated assets	$	9,565,958	$	7,445,545

All Other Operating Loss consists of expenses that related to discontinued operations, selling, general and administrative expenses (that were spread out over all operations), investor relations expense, professional fees (including legal and accounting), and stock option expense.

F-24

Z-Trim Holdings, (AMEX:ZTM)
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