**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


WASHINGTON,
      DC


20549








**FORM
      10-QSB**










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




/
      /
      TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934





Commission
      file number: 001-32134




**Z
      TRIM HOLDINGS, INC.**


(Exact
      Name of Small Business Issuer as Specified in Its Charter)




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




1011
      CAMPUS DRIVE, MUNDELEIN, ILLINOIS 60060


(Address
      of Principal Executive Offices)





(847)
      549-6002


(Issuer's
      Telephone Number, Including Area Code)





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





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





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





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








PART
      I -
      FINANCIAL INFORMATION





**ITEM
      1. FINANCIAL STATEMENTS**





See
      Consolidated Financial Statements beginning on page F-1.





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





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





OVERVIEW





Z
      Trim
      Holdings, Inc. (which changed its name from Circle Group Holdings in 2006)
      is an
      emerging growth company focused on the production, licensing, marketing and
      distribution of Z Trim®. Z Trim is a USDA-developed, all-natural, zero calorie
      fat replacement ingredient made from the healthy fiber of cereal grains.
      Currently corn or oats is used but Z Trim production can be derived from many
      other agricultural products. Current Z Trim products include gel or powder
      used
      to replace portions of fat, gums, starches and carbohydrates in foods and as
      a
      nutritional supplement to control appetite. Z Trim is now being used
      internationally by manufacturers, restaurants, schools, and consumers to replace
      as much as 80% of the fat and calories without changing taste, texture,
      appearance or digestive properties in baked goods, dairy products, snacks,
      deserts, sauces, dressings, processed meats and many other foods. Z Trim has
      demonstrated the capability to reduce up to 100% of the fats in several foods.
      The food industry is a multi-billion dollar opportunity. As the right product
      in
      the right place at the right time, Z Trim is dedicated to establishing itself
      within this sector as a key player in the war on obesity and weight health
      problems.





Z
      Trim
      recently became available as an Appetite Control formula that is 100% natural
      dietary fiber. The new breakthrough product has spectacular absorption capacity
      resulting in a feeling of fullness and a reduction in appetite allowing
      consumers to reduce the urge to overeat. In recent clinical studies, 3 out
      of 4
      subjects achieved 1⁄2 to 2 pounds of weekly weight loss without making lifestyle
      changes and without causing any gastrointestinal or other negative side effects.
      Z Trim Appetite Control has recently become available at GNC stores and wide
      spectrum retail rollouts are in the works.





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





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





2


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





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





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





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





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





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





3


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





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





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





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





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





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





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




RECENT
      MATERIAL DEVELOPMENTS





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





4


MATERIAL
      DEVELOPMENTS AS PREVIOUSLY REPORTED IN THE COMPANY’S FIRST QUARTER FORM
      10QSB





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





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





In
      April,
      2007, the Company announced that at any of the 69 food service operations in
      the
      Volusia County, Florida Public School system's award-winning "School Way Cafe,"
      students can choose from an assortment of baked goods made with or without
      Z
      Trim. Based on taste alone, they overwhelmingly prefer the reduced fat items
      with Z Trim. Volusia County is the 58th largest school district in the
      country.




Z
      Trim
      underwent a thorough review prior to use at Volusia schools. An evaluation
      phase
      was conducted by a certified research chef comparing Z Trim recipes to Control
      recipes. New and traditional menu items were prepared for tasting by school
      officials. A tasting panel consisting of students was formed as well.





In
      May
      2007 the Company announced that its Z Trim Appetite Control Capsules can now
      be
      purchased at select GNC retail stores and from the GNC web site. This is one
      of
      the important steps in the Company's planned retail rollout to make Z Trim
      products accessible to people everywhere.




In
      May
      2007 Z Trim Holdings, Inc. hired Alan Orlowsky as the Company's Chief Financial
      Officer. Mr. Orlowsky has served as a member of the Company's Board of Directors
      since January 2004 and most recently was the Chairman of the Company's Audit
      Committee and a member of the Company’s Compensation Committee. Mr. Orlowsky
      resigned those positions the end of April, 2007. Mr. Orlowsky will remain on
      the
      Company’s Board of Directors as an inside director. Dana Dabney, the Company's
      prior CFO, remains employed as Vice President and remains on the Company's
      Board
      of Directors. Mr. Orlowsky is moving into the CFO position at an important
      time
      of growth and expanding opportunity for the Company and his hiring is seen
      by
      the Company as a strategic benefit to operations going forward.





On
      May 3,
      2007, the Company reported that by letter dated April 27, 2007, the American
      Stock Exchange ("AMEX") notified the Company pursuant to Section 1009(a)(i)
      of
      the AMEX Company Guide that “the Company appears to have issued certain shares
      of its common stock...without complying with applicable Amex requirements.” The
      Company believes that it has successfully and fully resolved this matter by
      rescinding the underlying transaction that gave rise to the issuance of the
      shares in question, thereby rendering moot any further question of noncompliance
      relating to thereto. Amex has taken no further action.




The
      Company's Board of Directors has appointed Brian Israel, age 49, to fill the
      vacancy created by Mr. Orlowsky's departure. In addition, Mr. Israel will serve
      as a member of the Compensation Committee and the Audit Committee, which he
      will
      Chair. Mr. Israel has spent more than 20 years in the real estate finance
      industry, where he managed teams responsible for production, operations, risk
      management, product and policy development, technology and project management
      functions for a major national lender and a large regional commercial
      bank.




5


Mr.
      Israel has long been active in legislative and consumer advocacy, is a former
      President of the Illinois Mortgage Bankers Association and has served on a
      variety of mortgage-related advisory bodies including the Federal Home Loan
      Mortgage Corporation's Affordable Housing Advisory Council and Regional Lender
      Advisory Board, and the Illinois Department of Financial and Professional
      Regulation's Residential Mortgage Advisory Board.




Currently,
      Mr. Israel provides strategic planning, training and project management services
      to businesses and non-profit entities as an independent consultant. He also
      serves as President of North Shore Custom Homes, Ltd., as a Mentor with Big
      Brothers and Big Sisters of Metropolitan Chicago, as a member of the Chicago
      Hospitality Resource Partnership Advisory Council and as President of the River
      North Residents Association.








SUMMARY
      OF FINANCIAL RESULTS





RESULTS
      OF OPERATIONS





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





Revenues





Revenues
      increased 162% for the three months ended June 30, 2007 from $121,087 for the
      three months ended June 30, 2006 to $317,522. Revenues increased 170% for the
      six months ended June 30, 2007 from $236,530 for the six months ended June
      30,
      2006 to $639,986. The increase in revenues was primarily due to the increase
      in
      Z Trim product sales. The following table provides a breakdown of the revenues
      for our divisions for the periods indicated:




Three
                  months ended June 30,2007
              
              2006Products
              
              $
              317,500
              
              $
              120,515Services
              
              
              22
              
              
              572Total
                  Revenues
              
              $
              317,522
              
              $
              121,087Six
                  months ended June 30,2007
              
              
              2006Products
              
              $
              638,908
              
              $
              232,235Services
              
              
              778
              
              
              4,295Total
                  Revenues
              
              $
              639,986
              
              $
              236,530


Operating
      expenses





Operating
      expenses consist of payroll and related costs, stock option expense, insurance,
      occupancy expenses, professional fees, and general operating expenses. Total
      operating expenses increased by $442,193 or 25% to $2,182,326 for the three
      months ended June 30, 2007 from $1,740,133 for the three months ended June
      30,
      2006. The increase in operating expenses was primarily due to the increase
      in
      stock option expense. Total operating expenses decreased by $741,885 or
      approximately 17% to $3,557,506 for the six months ended June 30, 2007 from
      $4,299,391 for the six months ended June 30, 2006. The decrease in operating
      expenses was primarily due to the decrease in investor and public relations,
      net
      of increase in payroll expenses.




6


The
      stock
      option expense for the three months ending June 30, 2007 was $1,063,302 compared
      to $472,639 for the three months ending June 30, 2006. The stock option expense
      for the six months ending June 30, 2007 was $1,370,257 compared to $1,566,139
      for the six months ending June 30, 2006.





Stock
      options from the Company's stock option plan have been utilized in place of
      large salaries for management, staff, and plant employees, and as compensation
      for the advisory board members. Over the past year the Company has been building
      an Advisory Board of experts in the food industry, pharmaceutical industry,
      nutrition and fitness industry, medical profession, and other industries related
      to Z Trim's business. These current and former industry executives, doctors,
      chefs, food formulators, nutritionists, fitness experts, and others have been
      brought together to help Z Trim Holdings with its direction


and
      contacts to help insure the growth and success of the Company. The company
      has
      also significantly increased the size of its workforce over that time in the
      production, sales, and marketing areas of the company to allow for the continued
      expansion and execution of its marketing, production, and sales plans. The
      incentive plan is based on three components: the amount of participation or
      attendance of the individual, the type, quality, and amount of service of the
      individual, and the results and value that the individuals provide to the
      Company with their service or participation. Each option grant is based on
      milestones that must be met in order for the options to be exercised. The
      Company feels strongly that the charge for the stock options under the new
      accounting rules is a wise investment in the company's future.





Other
      income (expense)





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





Net
      loss





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





For
      the
      six months ending June 30, 2007, the Company reported a net loss of $4,210,323
      or $0.06 per share, which is a 14% decrease from the net loss of $4,904,918,
      or
      $0.09 per share for the six month period ending June 30, 2006. This was due
      primarily to the combination of increasing revenue, decreasing operating
      expenses, and recovery of a loan loss.





Assets





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








7


LIQUIDITY
      AND CAPITAL RESOURCES





At
      June
      30, 2007 we had cash and cash equivalents of $5,997,478, an increase of
      $5,300,979 from December 31, 2006. The increase in cash is due to the proceeds
      of sales of stock, exercise of options and warrants, collection on notes
      receivable and increase in the sale of Z Trim products all totaling of
      $8,898,376, less cash used in operations of $3,094,334 and cash used in the
      purchase of property and equipment of $503,063. Our total capital lease
      obligations were $2,160 at June 30, 2007.





Net
      cash
      used by operating activities increased by 24% to $3,094,334 for the six months
      ended June 30, 2007 as compared to $2,498,120 for the six months ended June
      30,
      2006. The increased cash usage was composed of a net loss of $4,210,323 for
      non-cash items, including depreciation and amortization of $334,149, stock
      option expense of $1,370,257, non-cash services and losses of $153,526, net
      gains of $200,000, and for the net cash used from the net increases in assets
      and decreases in liabilities of approximately $482,462.





Net
      cash
      used by investing activities was $503,063 for the six months ended June 30,
      2007, as compared to net cash used by investing activities of $55,599 for the
      six months ended June 30, 2006. The increase was due to increased acquisitions
      of property and equipment for our manufacturing plant in the current
      year.





Net
      cash
      provided by financing activities was $8,898,376 for the six months ended June
      30, 2007 as compared to $5,464,610 for the six months ended June 30, 2006.
      Net
      cash provided by financing activities for the six months ended June 30, 2007
      was
      primarily from the proceeds received from the sale of stock, options and
      warrants exercised and notes receivable for stock subscriptions of $8,886,463.
      Net cash provided by financing activities for the six months ended June 30,
      2006
      was primarily from the sale of stock, proceeds from stock subscription
      receivables, and from the exercising of options and warrants totaling
      approximately $5,447,208.





OFF-BALANCE
      SHEET ARRANGEMENTS





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





CAUTIONARY
      STATEMENT FOR FORWARD LOOKING INFORMATION





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





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





8


There
      are
      a number of risks and uncertainties that could cause actual results to differ
      materially from those set forth in, contemplated by or underlying the
      forward-looking statements contained in this report. Those risks and
      uncertainties include, but are not limited to, our history of operating losses,
      lack thus far of significant market acceptance of our products, the fact that
      we
      may dilute existing shareholders through additional stock issuances,
      management's significant ownership of our common stock, our reliance on our
      intellectual property, and the potential negative effects of manipulation in
      the
      trading of our common stock. Those risks and certain other uncertainties are
      discussed in more detail in our 2006 Annual Report on Form 10-KSB. There may
      also be other factors, including those discussed elsewhere in this report that
      may cause our actual results to differ from the forward-looking statements.
      Any
      forward-looking statements made by us or on our behalf should be considered
      in
      light of these factors.





**ITEM
      3. CONTROLS AND PROCEDURES**





The
      Company's Chief Executive Officer and Chief Financial Officer have concluded
      that the Company's disclosure controls and procedures (as defined pursuant
      to
      Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934), based
      on
      their evaluation of such controls and procedures as of the end of the period
      covered by this report, are effective to ensure that information required to
      be
      disclosed by the Company in the reports it files under the Securities Exchange
      Act of 1934, as amended, is recorded, processed, summarized and reported within
      the time periods specified in the rules and forms of the Securities and Exchange
      Commission and that such information is accumulated and communicated to the
      Company's management, including its Chief Executive Officer and Chief Financial
      Officer, as appropriate to allow timely decisions regarding required
      disclosure.





There
      have been no changes in the Company's internal controls over financial reporting
      identified in connection with management's evaluation that occurred during
      the
      Company's last fiscal quarter that has materially affected, or is reasonably
      likely to materially affect, the Company's internal control over financial
      reporting.







**PART
      II - OTHER INFORMATION**





ITEM
      1.
      Legal Proceedings





On
      August
      8, 2007, the Company has entered into a settlement agreement with Farhad Zaghi
      and related parties (collectively, “Zaghi”) in which the Company had sued for
      collection of amounts owed on a promissory note. Zaghi had counterclaimed for
      fraud and other causes of action. Neither party admitted any wrongdoing.
      Pursuant to the settlement, which is designed to make the Company whole on
      the
      amounts owing under the promissory note, Zaghi paid the Company $100,000 in
      July
      2007 as partial payment of the note and the Company released the related stock
      certificate. Additionally, the Company will issue and register for sale
      1,950,000 shares of the Company’s common stock to a Zaghi affiliate. Zaghi will
      sell those shares in an orderly fashion, limited to 20,000 shares a day, via
      a
      mutually-acceptable broker. The proceeds from the sales will be divided between
      the Company and Zaghi pursuant to an established formula. Once the proceeds
      payable to the Company and Zaghi reach $800,000 and $2,591,000, respectively,
      then each party will dismiss with prejudice its claims against the other. In
      the
      event the amount of proceeds from the sales of shares by Zaghi does not total
      $2,591,000, the Company will be required to issue and register additional shares
      of common stock to a Zaghi affiliate, which will be similarly sold until the
      shortfall is satisfied. The registration of the original 1,950,000 shares is
      on
      a best-efforts basis. With respect to the registration of any additional
      required shares, the Company may be held in breach of the settlement agreement,
      resulting in confession of judgment, if such shares are not registered within
      45
      days of the final sale of the original shares. Prior to the settlement, the
      Company received an additional $200,000 as of June 30, 2007.




9




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




On
      July
      17, 2006, George Forman Enterprises, Inc. filed a complaint against Z Trim
      Holdings, Inc. in the U.S. District Court seeking damages in excess of
      $70,000,000 for specific performance, breach of contract, promissory estoppel
      and unjust enrichment. The basis for all such claims is the underlying LOA,
      set
      forth above. Management believes that the allegations are frivolous and wholly
      without merit and will vigorously defend the claim.




On
      July
      6, 2006, the Company filed a patent infringement suit in the United States
      District Court for the Western District of Wisconsin seeking unspecified damages
      and equitable relief against a manufacturer of a competing product. The case
      was
      dismissed by the court owing to a technicality and on March 20, 2007, the
      Company filed suit again. Trial is scheduled for February, 2008. In response
      to
      the dismissal order, the Defendant submitted a bill of costs seeking a total
      of
      $15,458 in taxable costs. The Court awarded Defendant $3608.00 in costs.




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




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





10






ITEM
      6.
      EXHIBITS




Exhibit
              No.
            Description  3(i)
            Articles
                of Incorporation of Circle Group Holdings, Inc. (filed asExhibit
                2.1 to Circle Group's Registration Statement on Form 10-SBand
                incorporated herein by reference).





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





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





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





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





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





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





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





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





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





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





10.4
            Alan
                G. Orlowsky Employment Agreement (filed as Exhibit 10.4 to theCompany’s
                Form 10-QSB filed on May 7, 2007 and incorporated herein
                byreference).




10.5
            Brian
                S. Israel Board of Directors appointment letter (filed as Exhibit
                10.5 to
                the Company’s Form 10-QSB filed on May 7, 2007 and incorporated herein by
                reference).






11





10.6
            Steve
                Cohen Employment Agreement (filed as Exhibit 10.12 to theCompany’s
                Form 10-QSB for the quarter ending June 20, 2006 andincorporated
                herein by reference).




10.7*
            David
                Lansky Board of Directors appointment
                letter.





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





10.9
            Circle
                Group Holdings, Inc. 2004 Equity Incentive Plan (filed asAppendix
                C to the Circle Group's Proxy Statement for its Annual Meetingconducted
                on June 16, 2004 and approved by its Shareholders on thatdate
                and incorporated herein by
                reference).





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





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





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





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





10.14
            Assignment
                of License Agreement between Circle Group Holdings, Inc. andBrookhaven
                Science Associates dated July 22, 2003 (filed as Exhibit10.16
                to Circle Group's Form 10-QSB for the quarter ending
                September30,
                2003 and incorporated herein by
                reference).





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





31.2*
            Statement
                Under Oath of Principal Financial Officer of the CompanyPursuant
                to Section 302 of Sarbanes-Oxley Act of
                2002




32.1*
            Statement
                Under Oath of Principal Executive Officer of the CompanyPursuant
                to Section 906 of Sarbanes-Oxley Act of
                2002




32.2*
            Statement
                Under Oath of Principal Financial Officer of the CompanyPursuant
                to Section 906 of Sarbanes-Oxley Act of
                2002





*
      Filed
      herewith





12




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 14, 2007. In accordance with the requirements of the
      Exchange Act, the Registrant caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.






**CIRCLE
                GROUP HOLDINGS, INC.**
              (Registrant)Date: August
              14, 2007
            By:
            /s/ Gregory
              J. HalpernGregory
                J. Halpern, President and
              Chief
                Executive Officer


13


**INDEX
      OF EXHIBITS**





Exhibit
                No.
              Description  3(i)
              Articles
                  of Incorporation of Circle Group Holdings, Inc. (filed asExhibit
                  2.1 to Circle Group's Registration Statement on Form 10-SBand
                  incorporated herein by reference).
 
 3(ii)
              Bylaws
                  of Circle Group Holdings, Inc. (filed as Exhibit 2.2 to CircleGroup's
                  Registration Statement on Form 10-SB and incorporated herein byreference).
 
 4.1
              Form
                  of Subscription Agreement (filed as Exhibit 4.1 to the Company'sForm
                  8-K filed on March 30, 2006 and incorporated herein by
                  reference).
 
 4.2
              Form
                  of Warrant to Purchase Common Stock (filed as Exhibit 4.2 to theCompany's
                  Form 8-K filed on March 30, 2006 and incorporated herein byreference).
 
 4.3
              Form
                  of Registration Rights Agreement (filed as Exhibit 4.3 to theCompany's
                  Form 8-K filed on March 30, 2006 and incorporated herein byreference).
 
 4.4
              Form
                  of Subscription Agreement (filed as Exhibit 4.5 to the Company’sForm
                  10-KSB filed on April 2, 2007 and incorporated herein byreference).
 
 4.5
              Form
                  of Warrant to Purchase Common Stock (filed as Exhibit 4.6 to theCompany’s
                  Form 10-KSB filed on April 2, 2007 and incorporated herein byreference).
 
 4.6
              Form
                  of Registration Rights Agreement (filed as Exhibit 4.7 to theCompany’s
                  Form 10-KSB filed on April 2, 2007 and incorporated herein byreference).
 
 10.1
              Gregory
                  J. Halpern Employment Agreement (filed as Exhibit 10.1 to theCompany’s
                  Form 10-KSB filed on April 2, 2007 and incorporated hereinby
                  reference).
 
 10.2
              Michael
                  J. Theriault Employment Agreement (filed as Exhibit 10.2 to theCompany’s
                  Form 10-KSB filed on April 2, 2007 and incorporated herein
                  byreference).
 
 10.3
              Dana
                  L. Dabney Employment Agreement (filed as Exhibit 10.3 to theCompany’s
                  Form 10-KSB filed on April 2, 2007 and incorporated herein
                  byreference).
 
 10.4
              Alan
                  G. Orlowsky Employment Agreement (filed as Exhibit 10.4 to theCompany’s
                  Form 10-QSB filed on May 7, 2007 and incorporated herein
                  byreference).
  10.5
              Brian
                  S. Israel Board of Directors appointment letter (filed as Exhibit
                  10.5 to
                  the Company’s Form 10-QSB filed on May 7, 2007 and incorporated herein by
                  reference).
   14
 
 10.6
              Steve
                  Cohen Employment Agreement (filed as Exhibit 10.12 to theCompany’s
                  Form 10-QSB for the quarter ending June 20, 2006 andincorporated
                  herein by reference).
  10.7*
              David
                  Lansky Board of Directors appointment
                  letter.
 
 10.8
              Circle
                  Group Holdings,Inc. 1999 Stock Option Plan (filed as Exhibit 6.6to
                  Circle Group’s Registration Statement on Form 10-SB and incorporatedherein
                  by reference).
 
 10.9
              Circle
                  Group Holdings, Inc. 2004 Equity Incentive Plan (filed asAppendix
                  C to the Circle Group's Proxy Statement for its Annual Meetingconducted
                  on June 16, 2004 and approved by its Shareholders on thatdate
                  and incorporated herein by
                  reference).
 
 10.10
              Industrial
                  Lease Agreement between CLO Enterprises and Circle GroupHoldings,
                  Inc. dated May 20, 1999 (filed as Exhibit 6.7 to CircleGroup's
                  Registration Statement on Form 10-SB and incorporated herein byreference).
 
 10.11
              Industrial
                  Lease Agreement between CLO Enterprises and Circle GroupHoldings,
                  Inc. dated June 18, 1999 (filed as Exhibit 6.8 to CircleGroup's
                  Registration Statement on Form 10-SB and incorporated herein byreference).
 
 10.12
              Assignment
                  of License Agreement between UTEK Corporation, Circle GroupHoldings,
                  Inc. and Brookhaven Science Associates dated March 26, 2003(filed
                  as Exhibit 10.14 to Circle Group's Form 10-QSB for the quarterending
                  September 30, 2003 and incorporated herein by
                  reference).
 
 10.13
              Assignment
                  of License Agreement between UTEK Corporation, Circle GroupHoldings,
                  Inc. and University of Illinois dated July 9, 2003 (filed asExhibit
                  10.15 to Circle Group's Form 10-QSB for the quarter endingSeptember
                  30, 2003 and incorporated herein by
                  reference).
 
 10.14
              Assignment
                  of License Agreement between Circle Group Holdings, Inc. andBrookhaven
                  Science Associates dated July 22, 2003 (filed as Exhibit10.16
                  to Circle Group's Form 10-QSB for the quarter ending
                  September30,
                  2003 and incorporated herein by
                  reference).
 
 31.1*
              Statement
                  Under Oath of Principal Executive Officer of the CompanyPursuant
                  to Section 302 of Sarbanes-Oxley Act of
                  2002
 
 31.2*
              Statement
                  Under Oath of Principal Financial Officer of the CompanyPursuant
                  to Section 302 of Sarbanes-Oxley Act of
                  2002
  32.1*
              Statement
                  Under Oath of Principal Executive Officer of the CompanyPursuant
                  to Section 906 of Sarbanes-Oxley Act of
                  2002
  32.2*
              Statement
                  Under Oath of Principal Financial Officer of the CompanyPursuant
                  to Section 906 of Sarbanes-Oxley Act of
                  2002


*
      Filed
      herewith










15


**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**


Index
      to Financial Statements





Consolidated
                  Balance Sheet at June 30, 2007(unaudited)
              
              
              F-1Consolidated
                  Statement of Operations as of June 30, 2007(unaudited)
              
              
              F-2Consolidated
                  Statements of Cash Flows as of June 30, 2007(unaudited)
              
              
              F-3Notes
                  to Interim Unaudited Consolidated Financial Statements
              
              
              F-4







16




**Z
      TRIM HOLDINGS, INC. AND SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS (Unaudited)**





**JUNE
      30, 2007 AND 2006**










**ASSETS**Current
                Assets
            
            **2007**
            
            2006Cash
                and cash equivalents
            
            **$**
            **5,997,478**
            
            $
            2,935,890Accounts
                receivable
            
            
            **137,265**
            
            
            77,960Inventory
            
            
            **489,954**
            
            
            109,700Prepaid
                expenses and other assets
            
            
            **254,671**
            
            
            107,728**Total
                current assets**
            
            
            **6,879,368**
            
            
            3,231,278Property
                and equipment, net
            
            
            **6,434,709**
            
            
            6,260,134Other
                AssetsIntangible
                assets, net
            
            
            **146,667**
            
            
            511,750Deposits
            
            
            **11,103**
            
            
            11,103**Total
                other assets**
            
            
            **157,770**
            
            
            522,853**TOTAL
                ASSETS**
            
            **$**
            **13,471,847**
            
            $
            10,014,265**LIABILITIES
                AND STOCKHOLDERS' EQUITY**Current
                LiabilitiesAccounts
                payable
            
            **$**
            **354,210**
            
            $
            437,407Accrued
                expenses
            
            
            **182,357**
            
            
            189,504Stock
                subscription payable
            
            
            **150,000**
            
            
            -Capital
                lease obligations
            
            
            **2,160**
            
            
            25,568**Total
                current liabilities**
            
            
            **688,727**
            
            
            652,479Long-Term
                LiabilitiesCapital
                lease obligations
            
            
            **-**
            
            
            2,098**TOTAL
                LIABILITIES**
            
            
            **688,727**
            
            
            654,577Stockholders'
                EquityCommon
                stock, $0.00005 par value; authorized 200,000,000 shares;issued
                and outstanding 72,056,375 shares
            
            
            **3,600**
            
            
            3,043Additional
                paid-in capital
            
            
            **66,474,142**
            
            
            47,948,621Unamortized
                expenses
            
            
            **-**
            
            
            (613,643
            )Notes
                receivable for issuance of stock, net
            
            
            **-**
            
            
            (20,000
            )Accumulated
                Deficit
            
            
            **(53,694,622**
            **)**
            
            (37,958,333
            )**TOTAL
                STOCKHOLDERS' EQUITY**
            
            
            **12,783,120**
            
            
            9,359,688**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            **$**
            **13,471,847**
            
            $
            10,014,265









**See
        notes to interim unaudited consolidated financial
        statements**


F-1
 **Z
              TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
              STATEMENTS OF OPERATIONS (Unaudited)**


**Three
                  months ended**
              
              **Six
                  months ended****June
                  30,**
              
              **June
                  30,****2007**
              
              2006
              
              **2007**
              
              2006**REVENUES:**Products
              
              **$**
              **317,500**
              
              $
              120,515
              
              **$**
              **638,908**
              
              $
              232,235Services
              
              
              **22**
              
              
              572
              
              
              **778**
              
              
              4,295**Total
                  revenues**
              
              
              **317,522**
              
              
              121,087
              
              
              **639,686**
              
              
              236,530**COST
                  OF REVENUES:**Products
              
              
              **879,501**
              
              
              635,853
              
              
              **1,561,488**
              
              
              903,434**Total
                  cost of revenues**
              
              
              **879,501**
              
              
              635,853
              
              
              **1,561,488**
              
              
              903,434**GROSS
                  MARGIN**
              
              
              **(561,979**
              **)**
              
              (514,766
              )
              
              **(921,802**
              **)**
              
              (666,904
              )**OPERATING
                  EXPENSES:**Selling,
                  general and administrative
              
              
              **1,111,768**
              
              
              1,258,910
              
              
              **2,176,660**
              
              
              2,716,085Stock
                  option expense
              
              
              **1,063,302**
              
              
              472,639
              
              
              **1,370,257**
              
              
              1,566,139Amortization
                  of intangible assets
              
              
              **3,334**
              
              
              8,584
              
              
              **6,667**
              
              
              17,167Loss
                  on asset disposal
              
              
              **3,922**
              
              
              -
              
              
              **3,922**
              
              
              -**Total
                  operating expenses**
              
              
              **2,182,326**
              
              
              1,740,133
              
              
              **3,557,506**
              
              
              4,299,391**OPERATING
                  LOSS**
              
              
              **(2,744,305**
              **)**
              
              (2,254,899
              )
              
              **(4,479,308**
              **)**
              
              (4,966,295
              )**OTHER
                  INCOME (EXPENSES):**Rental
                  and other income
              
              
              **10,500**
              
              
              10,500
              
              
              **21,000**
              
              
              21,566Interest
                  income
              
              
              **78,287**
              
              
              51,429
              
              
              **79,530**
              
              
              51,429Recovery
                  of loan loss
              
              
              **200,000**
              
              
              -
              
              
              **200,000**
              
              
              -Interest
                  expense
              
              
              **(669**
              **)**
              
              (6,249
              )
              
              **(2,045**
              **)**
              
              (11,618
              )Settlment
                  loss
              
              
              **(29,500**
              **)**
              
              -
              
              
              **(29,500**
              **)**
              
              -**Total
                  other income (expenses)**
              
              
              **258,618**
              
              
              55,680
              
              
              **268,985**
              
              
              61,377**NET
                  LOSS**
              
              **$**
              **(2,485,687**
              **)**
              $
              (2,199,219
              )
              **$**
              **(4,210,323**
              **)**
              $
              (4,904,918
              )**Net
                  Loss per Share - Basic and Diluted**
              
              **$**
              **(0.03**
              **)**
              $
              (0.04
              )
              **$**
              **(0.06**
              **)**
              $
              (0.09
              )**Weighted
                  Average Number of Shares**
              
              
              **72,026,042**
              
              
              60,779,041
              
              
              **68,852,048**
              
              
              57,626,106







**See
              notes to interim unaudited consolidated financial
              statements**
 F-2
 **Z
              TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
              STATEMENTS OF CASH FLOWS (Unaudited)**


**For
                  the Six Months Ended June 30,**
              
              **2007**
              
              2006**Cash
                  Flows From Operating Activities:**Net
                  loss
              
              **$**
              **(4,210,323**
              **)**
              $
              (4,904,918
              )Adjustments
                  to reconcile net loss to net cash used in operations:Depreciation
                  and amortization
              
              
              **334,149**
              
              
              324,758Issuance
                  of common stock and warrants for services
              
              
              **6,765**
              
              
              205,700Amortization
                  of noncash expenses
              
              
              **113,339**
              
              
              972,854Stock
                  option expense
              
              
              **1,370,257**
              
              
              1,566,139Recovery
                  of loan loss
              
              
              **(200,000**
              **)**
              
              -Loss
                  on asset disposal
              
              
              **3,922**
              
              
              -Stock
                  settlement
              
              
              **29,500**
              
              
              -(Increase)
                  in:Accounts
                  receivable
              
              
              **(66,089**
              **)**
              
              (17,514
              )Inventory
              
              
              **(270,349**
              **)**
              
              (10,913
              )Prepaid
                  expenses and other assets
              
              
              **(160,254**
              **)**
              
              (22,058
              )Decrease
                  in:Accounts
                  payable and accrued expenses
              
              
              **(45,251**
              **)**
              
              (612,168
              )**Cash
                  flows used in operating activities**
              
              
              **(3,094,334**
              **)**
              
              (2,498,120
              )**Cash
                  Flows From Investing Activities:**Purchase
                  of property and equipment
              
              
              **(504,563**
              **)**
              
              (55,599
              )Proceeds
                  from asset disposal
              
              
              **1,500**
              
              
              -**Cash
                  flows used in investing activities**
              
              
              **(503,063**
              **)**
              
              (55,599
              )**Cash
                  Flows From Financing Activities:**Net
                  proceeds from sales of stock
              
              
              **7,838,000**
              
              
              5,156,462Exercise
                  of options and warrants
              
              
              **872,289**
              
              
              160,550Net
                  payments on capital lease obligations
              
              
              **(11,913**
              **)**
              
              (17,402
              )Proceeds
                  from notes receviable for stock, net
              
              
              **200,000**
              
              
              165,000**Cash
                  flows provided by financing activities**
              
              
              **8,898,376**
              
              
              5,464,610**Net
                  increase in cash and cash equivalents**
              
              
              **5,300,979**
              
              
              2,910,891Cash
                  and cash equivalents, at beginning of period
              
              
              **696,499**
              
              
              24,999**Cash
                  and cash equivalents, at end of period**
              
              **$**
              **5,997,478**
              
              $
              2,935,890Supplemental
                  Disclosures of Cash Flow Information:Interest
                  paid
              
              **$**
              **2,045**
              
              $
              11,618Supplemental
                  Schedule of Noncash Investing and Financing Activities:Issuance
                  of common stock and warrants for services
              
              **$**
              **6,765**
              
              $
              1,534,879Stock
                  subscription payable
              
              **$**
              **150,000**
              
              $
              -Retirement
                  of treasury stock
              
              **$**
              **-**
              
              $
              11,269
  **See
        notes to interim unaudited consolidated financial
        statements**


F-3




**Z
      TRIM HOLDINGS, INC. AND SUBSIDIARIES**


**NOTES
      TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**




JUNE
      30, 2007









**NOTE
      1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
      POLICIES**




Nature
      of Business





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





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





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





A
      summary
      of significant accounting policies follows.





Presentation
      of Interim Information





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





The
      results for the six months ended June 30, 2007 may not be indicative of results
      for the year ending December 31, 2007 or any future periods.





Principle
      of Consolidation and Presentation





The
      accompanying consolidated financial statements include the accounts of Z Trim
      Holdings Inc. and its subsidiaries after elimination of significantly all
      intercompany accounts and transactions. Certain prior period items have been
      reclassified from operating expenses to cost of goods sold for ease of
      comparison. This reclassification affects neither the net loss nor the
      accumulated deficit of the Company.





Use
      of
      estimates





The
      preparation of the accompanying consolidated financial statements in conformity
      with accounting principles generally accepted in the United States (U.S. GAAP)
      requires management to make certain estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenues and expenses during the reporting period. Actual results could
      differ from those estimates.








F-4
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







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




Income
      (Loss) Per Common Share




Basic
      net
      income (loss) per share includes no dilution and is computed by dividing net
      income (loss) available to common stockholders by the weighted average number
      of
      common stock outstanding for the period. Diluted earnings per share is computed
      by dividing net income by the weighted average number of shares outstanding
      and,
      when, diluted, potential shares from options and warrants to purchase common
      stock using the treasury stock method. Diluted net loss per common share does
      not differ from basic net loss per common share since potential shares of common
      stock are anti-dilutive for all periods presented.




Cashless
      Exercise of Warrants




The
      Company has issued warrants to purchase common stock where the holder is
      entitled to exercise the warrant via a cashless exercise, when the exercise
      price is less than the fair value of the common stock. The Company accounts
      for




the
      issuance of common stock on the cashless exercise of warrants as a cost of
      capital.




Stock
      Based Compensation




Effective
      January 1, 2006, the Company adopted the fair value recognition provisions
      of FASB Statement No. 123(R), “Share-Based Payment” (SFAS 123R), using the
      modified-prospective-transition method. Under that transition method,
      compensation cost recognized in 2006 includes: (a) compensation cost for
      all share-based payments granted prior to, but not yet vested as of
      January 1, 2006 based on the grant date fair value calculated in accordance
      with the original provisions of SFAS 123, and (b) compensation cost for all
      share-based payments granted subsequent to December 31, 2005, based on the
      grant-date fair value estimated in accordance with the provisions of SFAS
      123(R).




As
      a
      result of adopting SFAS 123(R) on January 1, 2006, the Company recognized
      pre-tax compensation expense related to stock options of $1,063,302 and
      $1,370,257 for the three and six months ended June 30, 2007, respectively and
      $472,639 and $1,566,139 for the three and six months ended June 30, 2006,
      respectively. The 2007 stock option expense includes an additional charge of
      $12,607 from the modification of 45,000 out-of-money options. These options
      were
      granted a two year extension.





New
      Accounting Pronouncements





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





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





In
      September 2006, the FASB issued FAS No.
      157, *Fair
      Value Measurements* .
      FAS No.
      157 defines fair value, establishes a framework for measuring fair value in
      generally accepted accounting principles, and expands disclosures about fair
      value measurements. This statement addresses how to calculate fair value
      measurements required or permitted under other accounting pronouncements.
      Accordingly, this statement does not require any new fair value measurements.
      However, for some entities, the application of the statement will change current
      practice. FAS No. 157 is effective for the Company beginning January 1, 2008.
      The Company is currently evaluating the impact of this standard.








F-5
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







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




In
      September 2006, the Securities and Exchange Commission ("SEC") staff issued
      Staff Accounting Bulletin No. 108 ("SAB 108"), *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements.* The
      stated purpose of SAB 108 is to provide consistency between how registrants
      quantify financial statement misstatements.





Prior
      to
      the issuance of SAB 108, there have been two widely-used methods, known as
      the
      "roll-over" and "iron curtain" methods, of quantifying the effects of financial
      statement misstatements. The roll-over method quantifies the amount by which
      the
      current year income statement is misstated while the iron curtain method
      quantifies the error as the cumulative amount by which the current year balance
      sheet is misstated. Neither of these methods considers the impact of
      misstatements on the financial statements as a whole.





SAB
      108
      established an approach that requires quantification of financial statement
      misstatements based on the effects of the misstatement on each of the Company's
      financial statements and the related financial statement disclosures. This
      approach is referred to as the "dual approach" as it requires quantification
      of
      errors under both the roll-over and iron curtain methods.





SAB
      108
      allows registrants to initially apply the dual approach by either retroactively
      adjusting prior financial statements as if the dual approach had always been
      used, or by recording the cumulative effect of initially applying the dual
      approach as adjustments to the carrying values of assets and liabilities as
      of
      January 1, 2006 with an offsetting adjustment recorded to the opening balance
      of
      retained earnings.





The
      Company will initially apply SAB 108 using the cumulative effect transition
      method in connection with the preparation of the annual financial statements
      for
      the year ending December 31, 2006. The Company does not believe the adoption
      of
      SAB 108 will have a significant effect on its consolidated financial
      statements.




**NOTE
      2-INVENTORY**




At
      June
      30, inventory consists of the following:




2007
              
              2006Raw
                  materials
              
              $
              30,925
              
              $
              39,635Work-in-process
              
              
              1,359
              
              
              7,206Packaging
              
              
              49,443
              
              
              25,878Finished
                  goods
              
              
              408,227
              
              
              36,981Total
                  inventory
              
              $
              489,954
              
              $
              109,700




F-6
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







**NOTE
      3-PROPERTY AND EQUIPMENT, NET**




At
      June
      30, property and equipment, net consists of the following:


2007
              
              2006Production,
                  engineering and other equipment
              
              $
              5,258,094
              
              $
              4,521,317Leasehold
                  improvements
              
              
              2,776,314
              
              
              2,658,517Office
                  equipment and furniture
              
              
              622,857
              
              
              601,067Computer
                  equipment and related software
              
              
              369,077
              
              
              324,393Construction
                  in process - equipment
              
              
              -
              
              
              100,9769,026,342
              
              
              8,206,270Accumulated
                  depreciation
              
              
              (2,591,633
              )
              
              (1,946,136
              )Property
                  and equipment, net
              
              $
              6,434,709
              
              $
              6,260,134





**NOTE
      4 - INTANGIBLE ASSETS**






During
      the first six months of fiscal 2007, no significant identified intangible assets
      were acquired and no identified intangible assets were impaired. The following
      table present details of the Company’s purchased intangible assets:




GrossCarrying
              
              AccumulatedAmount
              
              Amortization
              
              NetLicense
                  Rights toWebsite
              
              
              200,000
              
              
              (53,333
              )
              
              146,667Total
                  intangibles
              
              $
              200,000
              
              $
              (53,333
              )
              $
              146,667




Amortization
      of intangibles was $6,667 and $17,166 for the six months ended June 30, 2007
      and
      2006, respectively.







F-7
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







**NOTE
      4 - INTANGIBLE ASSETS (CONTINUED)**






Based
      on
      the carrying amount of the intangibles as of June 30, 2007, and assuming no
      impairment of the underlying assets, the estimated future amortization is as
      follows:




Years
                  ended December 31,2007
                  (July 1 to December 31)
              
              
              6,6662008
              
              
              13,3332009
              
              
              13,3332010
              
              
              13,3332011
              
              
              13,333Thereafter
              
              
              86,669Total
                  amortization
              
              $
              146,667


**NOTE
      5- STOCKHOLDERS' EQUITY**




Private
      Placement Offerings




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




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




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




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




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







F-8
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







**NOTE
      5- STOCKHOLDERS' EQUITY (CONTINUED)**




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




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




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




Exercising
      of Stock Warrants and Options




During
      the first six months of 2007 and 2006, respectively, 1,014,163 and 506,400
      stock
      warrants and options were exercised. The Company received total proceeds of
      $872.289 and $160,500, respectively. The 2007 warrants exercised are net of
      879,996 shares rescinded by the Board of Directors on April 30,
      2007.




Common
      Stock Issued on the Cashless Exercise of Warrants




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




**NOTE
      6 - NET LOSS PER SHARE**




The
      following table sets forth the computation of basic and diluted net loss per
      share:




Three
                  months ended
              
              Six
                  months endedJune
                  30,
              
              June
                  30,**2007**
              
              2006
              
              **2007**
              
              2006Numerator:Net
                  loss
              
              **$**
              **(2,485,687**
              **)**
              $
              (2,199,219
              )
              **$**
              **(4,210,323**
              **)**
              $
              (4,904,918
              )Denominator:Weighted
                  average number ofshares
                  outstanding
              
              
              **72,026,042**
              
              
              60,779,041
              
              
              **68,852,048**
              
              
              57,626,106Net
                  loss per share-basic and diluted
              
              **$**
              **(0.03**
              **)**
              $
              (0.04
              )
              **$**
              **(0.06**
              **)**
              $
              (0.09
              )







F-9
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







**NOTE
      6 - NET LOSS PER SHARE (CONTINUED)**




As
      the
      Company incurred net losses for the three and six months ended June 30, 2007,
      the effect of dilutive securities totaling 5,394,801 and 5,583,098 equivalent
      shares, respectively, has been excluded from the calculation of diluted loss
      per
      share because their effect was anti-dilutive.




As
      the
      Company incurred net losses for the three and six months ended June 30, 2006,
      the effect of dilutive securities totaling 4,965,871 and 3,709,516 equivalent
      shares, respectively, has been excluded from the calculation of diluted loss
      per
      share because their effect was anti-dilutive.




**NOTE
      7 - STOCK OPTION PLAN**




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




A
      summary
      of the status of stock options issued by the Company as of June 30, 2007 and
      2006 is presented in the following table:




2007
              
              2006Weghted
              
              
              
              WeghtedNumber
              
              Average
              
              Number
              
              Averageof
              
              Exercise
              
              of
              
              ExerciseShares
              
              Price
              
              Shares
              
              PriceOutstanding
                  at beginning of year
              
              
              20,285,749
              
              $
              0.99
              
              
              12,892,939
              
              $
              1.03Granted
              
              
              1,592,000
              
              
              1.33
              
              
              2,200,000
              
              
              1.04Exercised
              
              
              (453,318
              )
              
              0.77
              
              
              (471,400
              )
              
              0.29Expired
                  and Cancelled
              
              
              (1,535,000
              )
              
              1.11
              
              
              (1,120,000
              )
              
              0.84Outstanding
                  at end of period
              
              
              19,889,431
              
              $
              1.01
              
              
              13,501,539
              
              $
              1.08Exercisable
                  at end of period
              
              
              19,539,431
              
              $
              1.00
              
              
              13,501,539
              
              $
              1.08




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
              
              2006Weighted
                  average fair value per option granted
              
              $
              0.85
              
              $
              0.71Risk-free
                  interest rate
              
              
              4.83
              %
              
              4.91
              %Expected
                  dividend yield
              
              
              0.00
              %
              
              0.00
              %Expected
                  lives
              
              
              3.00
              
              
              3.00Expected
                  volatility
              
              
              109.60
              %
              
              127.40
              %






As
      of
      June 30, 2007, there was $301,900 of total unrecognized compensation cost
      related to non-vested share-based compensation arrangements granted under the
      plan. The cost is expected to be recognized over a weighted average period
      of
      ten months.







F-10
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







**NOTE
      7 - STOCK OPTION PLAN (CONTINUED)**




The
      following table sets forth additional information about stock options
      outstanding at June 30, 2007:





WeightedAverage
              
              WeightedRange
                  of
              
              
              
              Remaining
              
              AverageExercise
              
              Options
              
              Contractual
              
              Exercise
              
              OptionsPrices
              
              Outstanding
              
              Life
              
              Price
              
              Exercisable$0.01-$1.50
              
              
              19,344,431
              
              
              1.6
                  years
              
              $
              0.98
              
              
              18,994,431$1.51-$3.00
              
              
              545,000
              
              
              0.4
                  years
              
              $
              2.09
              
              
              545,00019,889,431
              
              
              1.6
                  years
              
              $
              1.01
              
              
              19,539,431




As
      of
      June 30, 2007 and 2006, the Company has warrants outstanding to purchase
      7,159,234 and 6,149,995 shares of the Company’s common stock, respectively, at
      prices ranging from $0.45 to $6.40 per share. These warrants expire at various
      dates through May 2012.




**NOTE
      8 - SETTLEMENT LOSS**




In
      April
      2007, the Company and two former investor relation consultants entered into
      a
      revised settlement agreements to replace and rescind the original settlement
      agreements signed in October 2006. As a result, an additional 10,000 shares
      of
      the Company’s common stock at a fair value of $29,500 was issued and
      recorded.




**NOTE
      9 - MAJOR CUSTOMERS AND CREDIT CONCENTRATION**




The
      Company’s principal customers are wholesale companies. Two customers accounted
      for approximately 36% of the Food Product Development segment revenues for
      the
      six months ended June 30, 2007 and three customers accounted for approximately
      70% for the six months ended June 30, 2006.




Two
      customers accounted for approximately 84% and 84% of the E-tailer segment
      revenues for the six months ended June 30, 2007 and 2006, respectively.
      Management does not believe a significant credit risk exists at June 30,
      2007.




The
      Company maintains cash deposits with major banks, which from time to time may
      exceed federally insured limits. The Company periodically assesses the financial
      condition of the institutions and believes that the risk of any loss is
      minimal.







F-11
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







**NOTE
      10 - PENDING LITIGATION**






On
      August
      8, 2007, the Company has entered into a settlement agreement with Farhad Zaghi
      and related parties (collectively, “Zaghi”) in which the Company had sued for
      collection of amounts owed on a promissory note. Zaghi had counterclaimed for
      fraud and other causes of action. Neither party admitted any wrongdoing.
      Pursuant to the settlement, which is designed to make the Company whole on
      the
      amounts owing under the promissory note, Zaghi paid the Company $100,000 in
      July
      2007 as partial payment of the note and the Company released the related stock
      certificate. Additionally, the Company will issue and register for sale
      1,950,000 shares of the Company’s common stock to a Zaghi affiliate. Zaghi will
      sell those shares in an orderly fashion, limited to 20,000 shares a day, via
      a
      mutually-acceptable broker. The proceeds from the sales will be divided between
      the Company and Zaghi pursuant to an established formula. Once the proceeds
      payable to the Company and Zaghi reach $800,000 and $2,591,000, respectively,
      then each party will dismiss with prejudice its claims against the other. In
      the
      event the amount of proceeds from the sales of shares by Zaghi does not total
      $2,591,000, the Company will be required to issue and register additional shares
      of common stock to a Zaghi affiliate, which will be similarly sold until the
      shortfall is satisfied. The registration of the original 1,950,000 shares is
      on
      a best-efforts basis. With respect to the registration of any additional
      required shares, the Company may be held in breach of the settlement agreement,
      resulting in confession of judgment, if such shares are not registered within
      45
      days of the final sale of the original shares. Prior to the settlement, the
      Company received an additional $200,000 as of June 30, 2007.




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




On
      July
      17, 2006, George Forman Enterprises, Inc. filed a complaint against Z Trim
      Holdings, Inc. in the U.S. District Court seeking damages in excess of
      $70,000,000 for specific performance, breach of contract, promissory estoppel
      and unjust enrichment. The basis for all such claims is the underlying LOA,
      set
      forth above. Management believes that the allegations are frivolous and wholly
      without merit and will vigorously defend the claim.




On
      July
      6, 2006, the Company filed a patent infringement suit in the United States
      District Court for the Western District of Wisconsin seeking unspecified damages
      and equitable relief against a manufacturer of a competing product. The case
      was
      dismissed by the court owing to a technicality and on March 20, 2007, the
      Company filed suit again. Trial is scheduled for February, 2008. In response
      to
      the dismissal order, the Defendant submitted a bill of costs seeking a total
      of
      $15,458 in taxable costs. The Court awarded Defendant $3608.00 in costs.




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




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




**NOTE
      11 - RELATED PARTY TRANSACTIONS**




As
      of
      June 30, 2007, the Company has a receivable from the CEO of $3,978 related
      to
      payroll taxes withheld on a check that was voided in July 2007.




As
      of
      June 30, 2007, the Company had a stock subscription receivable of $1,423 from
      the President related to exercising his stock options in April 2007. The
      receivable was repaid on July 10, 2007.




F-12


**Z
        TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
        TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
        30, 2007**  ****




**NOTE
      11 - RELATED PARTY TRANSACTIONS (continued)**




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




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




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




**NOTE
      12- GUARANTEES**




The
      Company from time to time enters into certain types of contracts that
      contingently require the Company to indemnify parties against third party
      claims. These contracts primarily relate to: (i) divestiture agreements, under
      which the Company may provide customary indemnifications to purchasers of the
      Company’s businesses or assets; (ii) certain real estate leases, under which the
      Company may be required to indemnify property owners for environmental and
      other
      liabilities, and other claims arising from the Company’s use of the applicable
      premises; and (iii) certain agreements with the Company's officers, directors
      and employees, under which the Company may be required to indemnify such persons
      for liabilities arising out of their employment relationship. The terms of
      such
      obligations vary. Generally, a maximum obligation is not explicitly stated.
      Because the obligated amounts of these types of agreements often are not
      explicitly stated, the overall maximum amount of the obligations cannot be
      reasonably estimated. Historically, the Company has not been obligated to make
      significant payments for these obligations, and no liabilities have been
      recorded for these obligations on its consolidated balance sheet as of June
      30,
      2007.





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




**NOTE
      13 - APPOINTMENT OF PRINCIPAL OFFICERS/ AUDIT COMMITTEE
      CHAIRMAN**




On
      May 1,
      2007, the Board of Directors appointed Alan Orlowsky as the Company’s Chief
      Financial Officer (CFO). Mr. Orlowsky has served as a member of the Company’s
      Board of Directors and was the Chairman of the Company’s Audit Committee. He
      resigned those positions as of April 30, 2007. The former CFO resigned his
      position as of April 30, 2007, and the Board of Directors appointed him as
      the
      Company’s Vice President effective May 1, 2007 and he remained on the Company’s
      Board of Directors.




The
      Board
      of Directors has appointed Brian Israel as the new audit committee chair of
      the
      Company to fill the vacancy created by Mr. Orlowsky’s departure.







F-13
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







**NOTE
      14 - SEGMENT INFORMATION**




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




The
      Company’s structure includes three principal operating segments: (i) Food
      Product Development, (ii) Security Training and Products and (iii) E-tailer.
      The
      food product development segment owns the exclusive, worldwide license to Z
      Trim(TM). The Security training offers cost effective self-defense training
      courses and products with a uniquely targeted curriculum. The e-tailer segment
      is a distributor of pillows, blankets, and other bedding products. The Company
      also has other subsidiaries that do not meet the quantitative thresholds of
      a
      reportable segment.




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




Intersegment
      transactions are recorded at cost.




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




Three
                  months ended
              
              Six
                  months endedJune
                  30,
              
              June
                  30,**2007**
              
              2006
              
              **2007**
              
              2006Net
                  Revenue:Food
                  Product Development
              
              **$**
              **217,213**
              
              $
              12,552
              
              **$**
              **430,289**
              
              $
              35,383Personal
                  Safety Training and Products
              
              
              **120**
              
              
              376
              
              
              **729**
              
              
              3,903E-tailer
              
              
              **100,287**
              
              
              107,963
              
              
              **208,619**
              
              
              196,852Net
                  Revenue by Reportable Segment
              
              **$**
              **317,620**
              
              $
              120,891
              
              **$**
              **639,637**
              
              $
              236,138All
                  Other Operating Revenue
              
              
              **(98**
              **)**
              
              196
              
              
              **49**
              
              
              392Consolidated
                  Net Revenue
              
              **$**
              **317,522**
              
              $
              121,087
              
              **$**
              **639,686**
              
              $
              236,530Operating
                  Income (Loss):Food
                  Product Development
              
              **$**
              **(975,768**
              **)**
              $
              (763,004
              )
              **$**
              **(1,741,677**
              **)**
              $
              (1,297,848
              )Personal
                  Safety Training and Products
              
              
              **(1,515**
              **)**
              
              300
              
              
              **(982**
              **)**
              
              3,756E-tailer
              
              
              **(998**
              **)**
              
              (318
              )
              
              **13,489**
              
              
              9,873Operating
                  Loss by Reportable Segment
              
              **$**
              **(978,281**
              **)**
              $
              (763,022
              )
              **$**
              **(1,729,170**
              **)**
              $
              (1,284,219
              )All
                  Other Operating Loss
              
              
              **(1,766,024**
              **)**
              
              (1,491,877
              )
              
              **(2,750,138**
              **)**
              
              (3,682,076
              )Consolidated
                  Operating Loss
              
              **$**
              **(2,744,305**
              **)**
              $
              (2,254,899
              )
              **$**
              **(4,479,308**
              **)**
              $
              (4,966,295
              )Net
                  Income (Loss):Food
                  Product Development
              
              **$**
              **(975,771**
              **)**
              $
              (766,982
              )
              **$**
              **(1,741,907**
              **)**
              $
              (1,302,608
              )Personal
                  Safety Training and Products
              
              
              **(1,515**
              **)**
              
              300
              
              
              **(982**
              **)**
              
              3,756E-tailer
              
              
              **(998**
              **)**
              
              (318
              )
              
              **13,489**
              
              
              9,338Net
                  Loss by Reportable Segment
              
              **$**
              **(978,284**
              **)**
              $
              (767,000
              )
              **$**
              **(1,729,400**
              **)**
              $
              (1,289,514
              )All
                  Other Net Loss
              
              
              **(1,507,403**
              **)**
              
              (1,432,219
              )
              
              **(2,480,923**
              **)**
              
              (3,615,404
              )Consolidated
                  Net Loss
              
              **$**
              **(2,485,687**
              **)**
              $
              (2,199,219
              )
              **$**
              **(4,210,323**
              **)**
              $
              (4,904,918
              )







F-14
 **Z
            TRIM HOLDINGS, INC. AND SUBSIDIARIES**
 **NOTES
            TO INTERIM UNADUITED CONSOLIDATED FINANCIAL STATEMENTS**
 
 **JUNE
            30, 2007**  ****







**NOTE
      14 - SEGMENT INFORMATION (CONTINUED)**






June
                  30,Total
                  Assets:
              
              **2007**
              
              2006Food
                  Product Development
              
              **$**
              **6,637,668**
              
              $
              5,897,265Personal
                  Safety Training and Products
              
              
              **2,597**
              
              
              769E-tailer
              
              
              **98,926**
              
              
              59,460**6,739,191**
              
              
              5,957,494All
                  other segments
              
              
              **6,732,656**
              
              
              4,056,771Consolidated
                  assets
              
              **$**
              **13,471,847**
              
              $
              10,014,265







**NOTE
      15 - SUBSEQUENT EVENTS/ DISCONTINUED OPERATIONS**






On
      July
      18, 2007 the Board of Directors resolved to dissolve and liquidate On-Line
      Bedding Corp. (“On-Line”), which is the E-tailer operating segment. The Company
      expects On-Line to be fully dissolved by December 31, 2007. The related assets
      over liabilities of the segment have an approximate carrying value of
      $5,000.




The
      Board
      of Directors unanimously resolved to modify the Company’s 2004 Stock Option Plan
      to add 20 million options to the pool of available options on July 18, 2007.
      The
      modification is subject to the shareholders’ approval.