U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                   FORM 10-QSB

(Mark One)

[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the quarterly period ended June 30, 2006.

[ ]  Transition  report  pursuant to Section 13 or 15(d) of the Exchange act for
the transition period            from               to

Commission File Number:    1-15695

                                  Avitar, Inc.
       (Exact name of small business issuer as specified in its charter)

Delaware                                               06-1174053
(State or other jurisdiction of                   (I.R.S. Employer
incorporation or organization)                     Identification No.)

          65 Dan Road, Canton, Massachusetts              02021
         (Address of principal executive offices)       (Zip Code)

                                 (781) 821-2440
                          (Issuer's telephone number)

(Former  name,  former  address and former  fiscal year,  if changed  since last
report)

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. [x]Yes [ ]No

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:

                             COMMON STOCK: 6,163,642
                              AS OF AUGUST 10, 2006

Transitional Small Business Disclosure Format
(Check One):               [  ] Yes ;       [x] No


                               Page 1 of 32 pages
                           Exhibit Index is on Page 28
<PAGE>

                                TABLE OF CONTENTS


                                                                          Page


PART I:           FINANCIAL INFORMATION                                     3


   Item 1   Consolidated Financial Statements
                     Balance Sheet                                          4
                     Statements of Operations                               5
                     Statement of Stockholders' Deficit                     6
                     Statements of Cash Flows                               7
                     Notes to Consolidated Financial Statements             8


   Item 2   Management's Discussion and Analysis or Plan of Operation      17


   Item 3   Controls and Procedures                                        23

PART II: OTHER INFORMATION                                                 25

   Item 2   Unregistered Sales of Equity Securities and Use of Proceeds    26

   Item 6   Exhibits                                                       26


SIGNATURES                                                                 27

EXHIBIT INDEX                                                              38
CERTIFICATIONS                                                             29

<PAGE>

                          PART I FINANCIAL INFORMATION























<PAGE>
Item 1.     FINANCIAL STATEMENTS

                          Avitar, Inc. and Subsidiaries
                           Consolidated Balance Sheet
                                 June 30, 2006
                                   (Unaudited)
<TABLE>
<CAPTION>

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

                                              ASSETS
CURRENT ASSETS:
<S>                                                                                        <C>
     Cash and cash equivalents                                                             $ 37,545
     Accounts receivable, net of reserve of $10,000                                         529,160
     Inventories                                                                            266,833
     Prepaid expenses and other current assets                                               96,758
                                                                                      --------------
          Total current assets                                                              930,296

PROPERTY AND EQUIPMENT, net                                                                 281,588
GOODWILL                                                                                    138,120
OTHER ASSETS                                                                                504,543
                                                                                      --------------
          Total Assets                                                                  $ 1,854,547
                                                                                      ==============

                      LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
     Notes payable                                                                        $ 158,988
     Convertible notes payable (Note 5)                                                     650,000
     Accounts payable                                                                       614,689
     Accrued expenses                                                                     1,036,280
     Deferred income                                                                         16,050
     Current portion of long-term capital leases                                             15,991
     Current portion of deferred lessor incentive                                            13,400
     Fair value of warrants (Note 11)                                                       478,975
     Fair value of embedded derivatives (Note 11)                                         1,254,034
                                                                                      --------------
          Total current liabilities                                                       4,238,407
                                                                                      --------------

LONG-TERM DEBT, LESS CURRENT PORTION, net of
     discount of $774,453 (Note 5)                                                        2,190,610
LONG-TERM CAPITAL LEASES, LESS CURRENT PORTION                                                2,823
DEFERRED LESSOR INCENTIVE, LESS CURRENT PORTION                                              40,200
                                                                                      --------------
          Total liabilities                                                               6,472,040
                                                                                      --------------

REDEEMABLE CONVERTIBLE AND CONVERTIBLE PREFERRED
      STOCK (Note 6)                                                                      2,875,361
                                                                                      --------------

COMMITMENTS

STOCKHOLDERS' DEFICIT:
     Series B convertible preferred stock, $.01 par value; authorized
          5,000,000 shares; 5,689 shares issued and outstanding                                  58
     Common Stock, $.01 par value; authorized 100,000,000 shares;
          4,916,124 shares issued and outstanding                                            49,161
     Additional paid-in capital                                                          49,223,821
     Accumulated deficit                                                                (56,765,894)
                                                                                      --------------
         Total stockholders' deficit                                                     (7,492,854)
                                                                                      --------------
         Total Liabilities, Preferred Stock and Stockholders' Deficit                   $ 1,854,547
                                                                                      ==============

</TABLE>


          See accompanying notes to consolidated financial statements.
<PAGE>
                          Avitar, Inc. and Subsidiaries
                      Consolidated Statements of Operations
                                   (Unaudited)
<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                         THREE MONTHS ENDED JUNE 30,   NINE MONTHS ENDED JUNE 30,
                                                         ----------------------------------------------------------
                                                            2006           2005           2006            2005
                                                         ------------   ------------   ------------   -------------
                                                                        (As Restated)                 (As Restated)
<S>                                                      <C>            <C>            <C>             <C>
SALES                                                    $ 1,308,575    $ 1,233,087    $ 3,513,111     $ 3,224,320
                                                         ------------   ------------   ------------   -------------
OPERATING EXPENSES
     Cost of sales                                           972,209        911,377      2,531,323       2,341,320
     Selling, general and administrative expenses            948,417      1,208,606      3,005,416       3,173,564
     Research and development expenses                       109,738        181,008        348,692         560,757
                                                         ------------   ------------   ------------   -------------
          Total operating expenses                         2,030,364      2,300,991      5,885,431       6,075,641
                                                         ------------   ------------   ------------   -------------

LOSS FROM OPERATIONS                                        (721,789)    (1,067,904)    (2,372,320)     (2,851,321)
                                                         ------------   ------------   ------------   -------------

OTHER INCOME (EXPENSE)
     Interest expense and financing costs                   (825,211)       (77,451)    (1,214,297)       (113,820)
     Other income (expense), net                             217,962        686,739        210,664         877,430
                                                         ------------   ------------   ------------   -------------
          Total other income (expense), net                 (607,249)       609,288     (1,003,633)        763,610
                                                         ------------   ------------   ------------   -------------

LOSS FROM CONTINUING OPERATIONS                           (1,329,038)      (458,616)    (3,375,953)     (2,087,711)
                                                         ------------   ------------   ------------   -------------

DISCONTINUED OPERATIONS
   Income from the disposal of USDTL                               -              -        120,000               -
                                                         ------------   ------------   ------------   -------------
   Income from discontinued operations                             -              -        120,000               -

                                                         ------------   ------------   ------------   -------------
NET LOSS                                                 $(1,329,038)    $ (458,616)   $(3,255,953)    $(2,087,711)
                                                         ============   ============   ============   =============

BASIC AND DILUTED LOSS PER SHARE FROM CONTINUING
   OPERATIONS (Note 9)                                       $ (0.31)       $ (0.50)       $ (0.81)        $ (1.50)

BASIC AND DILUTED INCOME PER SHARE FROM DISCONTINUED
   OPERATIONS (Note 9)                                             -              -           0.02               -
                                                         ------------   ------------   ------------   -------------

BASIC AND DILUTED LOSS PER SHARE (Note 9)                    $ (0.31)       $ (0.50)       $ (0.79)        $ (1.50)
                                                         ============   ============   ============   =============

WEIGHTED AVERAGE
     NUMBER OF COMMON SHARES OUTSTANDING                   4,480,981      3,211,978      4,301,369       2,924,128
                                                         ============   ============   ============   =============
</TABLE>


          See accompanying notes to consolidated financial statements.
<PAGE>
                          Avitar, Inc. and Subsidiaries
                 Consolidated Statement of Stockholders' Deficit
                         Nine Months Ended June 30, 2006
                                   (Unaudited)
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------
                                     Preferred Stock          Common Stock
                                   ....................  .......................                              Total
                                                                                 Additional    Accumulated  Stockholders'
                                    Shares     Amount      Shares      Amount   paid-in capital  deficit      Deficit
--------------------------------------------- ---------  -----------  ---------- ------------  -----------  -----------
<S>                                    <C>     <C>        <C>          <C>       <C>           <C>          <C>
Balance at September 30, 2005          5,689   $ 58.00    3,813,189    $ 38,132  $ 48,860,657  $(53,504,524)$(4,605,677)

Conversion of Series E preferred stock     -         -      790,942       7,909      278,507            -      286,416

Payment of convertible preferred stock
    dividend for Series A preferred stock  -         -            -           -            -       (5,417)      (5,417)

Conversion of long-term convertible note   -         -      215,000       2,150       32,787            -       34,937

Sale of common stock                       -         -        6,083          61        2,779            -        2,840

Conversion of Series C preferred stock     -         -       90,910         909       49,091            -       50,000

Net loss                                   -         -            -           -            -   (3,255,953)  (3,255,953)
--------------------------------------------- ---------  -----------  ---------- ------------  -----------  -----------

Balance at June 30, 2006               5,689      $ 58    4,916,124    $ 49,161  $ 49,223,821  $(56,765,894)$(7,492,854)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>



          See accompanying notes to consolidated financial statements.
<PAGE>
                          Avitar, Inc. and Subsidiaries
                 Condensed Consolidated Statements of Cash Flows
                                   (Unaudited)
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------------
                                                                                                      NINE MONTHS ENDED JUNE 30,
                                                                                                      ---------------------
                                                                                                        2006        2005
                                                                                                      ---------   ---------
CASH FLOWS FROM OPERATING ACTIVITIES:

<S>                                                                                                   <C>         <C>
     Net loss                                                                                         $(3,255,953)$(2,087,681)
     Adjustments to reconcile net loss to
          net cash used in operating activities:
               Depreciation and amortization                                                           130,996     116,307
               Amortization of debt discount and deferred financing                                    400,674      62,633
               Amortization of deferred rent expense                                                         -      93,575
               Amortization of deferred lessor incentive                                                10,050           -
               (Income) expense from changes in value of embedded derivatives
                                               and warrants                                           (215,856)   (876,277)
               Interest expense from warrant replacements for long-term notes                          605,000
               Changes in operating assets and liabilities:
                   Accounts receivable                                                                  48,971     176,806
                   Inventories                                                                         108,083     (27,318)
                   Prepaid expenses and other current assets                                           106,632      44,283
                   Other assets                                                                        (10,438)   (161,385)
                   Accounts payable and accrued expenses                                               243,395    (337,997)
                   Deferred revenue                                                                       (200)    (76,450)
                                                                                                      ---------   ---------
                        Net cash used in operating activities                                       (1,828,646) (3,073,504)
                                                                                                     ---------   ---------

CASH FLOWS FROM INVESTING ACTIVITIES:

     Purchases of property and equipment                                                               (90,384)    (28,967)
                                                                                                      ---------   ---------
                                                       Net cash used in investing activities           (90,384)    (28,967)
                                                                                                      ---------   ---------

CASH FLOWS FROM FINANCING ACTIVITIES:

     Proceeds (repayment) of notes payable and long-term debt                                         (131,211)    160,764
     Sales of redeemable preferred stock, common stock and warrants                                      2,840   2,497,575
     Net proceeds from issuance of convertible notes payable                                                 -     450,000
     Net proceeds from issuance of convertible long-term debt                                        1,840,000           -
     Redemption of Series A redeemable convertible preferred stock                                    (150,000)          -
     Payment of cash dividend on Series A redeemable convertible preferred stock                        (5,417)          -
                                                                                                      ---------   ---------
                                                        Net cash provided by financing activities    1,556,212   3,108,339
                                                                                                      ---------   ---------

NET DECREASE IN CASH AND CASH EQUIVALENTS                                                             (362,818)      5,868

CASH AND CASH EQUIVALENTS, beginning of the period                                                     400,363     508,876
                                                                                                      ---------   ---------

CASH AND CASH EQUIVALENTS, end of the period                                                          $ 37,545   $ 514,744
                                                                                                      =========   =========


SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
     Cash paid during period:
          Income taxes                                                                                $      -   $       -
          Interest                                                                                    $ 25,144   $  16,986
</TABLE>

          See accompanying notes to consolidated financial statements.

<PAGE>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
    FINANCING ACTIVITIES:
<TABLE>
<CAPTION>
<S>                                                                                                               <C>
           During the nine months ended June 30, 2006,  270,000 shares of
              Series E redeemable convertible preferred stock were converted into
              790,942 shares of common stock.

           During the nine months ended June 30, 2006,  8,333 shares of
              Series C convertible preferred stock were converted into
              90,910 shares of common stock.

           During the nine months ended June 30, 2006, $34,937 of
              long-term convertible notes were converted into
              215,000 shares of common stock.

           During the nine months ended June 30, 2005, 958 shares of
              Series A redeemable convertible preferred stock were converted
              into 264,118 shares of common stock.

           During the nine months ended June 30, 2005, 1500 shares of
              Series A convertible preferred stock were converted into
              343,464 shares of common stock.

           During the nine months ended June 30, 2005,  11,749 shares of
              common were issued as payment of dividends for Series A
              convertible and redeemable convertible preferred stock.

           During the nine months ended June 30, 2005, warrants to purchase                                       $ 32,802
              14,000 shares of common stock were issued in connection with
              the issuance of notes payable.

           During the nine months ended June 30, 2005, 21,515 shares                                              $ 125,000
              of common stock were issued as payment of investor and placement
              agent fees in connection with SEDA financing.
</TABLE>



          See accompanying notes to consolidated financial statements.


<PAGE>


                          AVITAR, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
================================================================================

1.   BASIS OF PRESENTATION

          Avitar,  Inc.  (the  "Company" or "Avitar")  through its  wholly-owned
     subsidiary  Avitar  Technologies,  Inc.  ("ATI")  develops,   manufactures,
     markets and sells  diagnostic  test  products and  proprietary  hydrophilic
     polyurethane foam disposables fabricated for medical,  diagnostics,  dental
     and consumer use. During FY2006,  the Company continued the development and
     marketing  of  innovative  point of care oral fluid  drugs of abuse  tests,
     which use the  Company's  foam as the means for  collecting  the oral fluid
     sample.  Through its wholly owned subsidiary,  BJR Security,  Inc. (`BJR"),
     the  Company  provides  specialized   contraband  detection  and  education
     services.

          The  Company's  one for fifty (1 for 50)  reverse  split of its common
     stock that was  authorized  by the Company's  shareholders  at their annual
     meeting  held on January 18, 2006 became  effective  at 5:00 PM on February
     17, 2006. Accordingly,  the numbers of common stock shares and related data
     presented  herein  reflect the results of the reverse split for current and
     prior reporting periods.

          In  December  2003,  the  Company  sold the  business  and net assets,
     excluding cash, of its wholly owned subsidiary,  United States Drug Testing
     Laboratories,  Inc.  ("USDTL")  which  operated a certified  laboratory and
     provided  specialized  drug testing services  primarily  utilizing hair and
     meconium as the  samples.  In November  2005,  the  Company  negotiated  an
     agreement  with the new owners of USDTL to settle all  outstanding  matters
     related to the sale of USDTL (see Note 3). Therefore, USDTL is considered a
     discontinued operation and this report reflects the continued operations of
     the Company.  Due to the current financial condition at Avitar, the Company
     may consider selling assets and/or operations,  including BJR. However,  at
     the present  time,  there can be no  assurances  that the Company  would be
     successful in these efforts.

          During the audit for  Fiscal  2005,  the  Company  was  advised by its
     independent  registered  public  accounting  firm that the  method  used to
     account for sales of certain  convertible  preferred  stock and convertible
     notes was not in accordance  with the  requirements of Emerging Issues Task
     Force  ("EITF")  Issue  No.  00-19  "Accounting  for  Derivative  Financial
     Instruments  Indexed To and Potentially Settled In, a Company's Own Stock".
     As a result, management determined that certain previously issued financial
     statements should not be relied upon. The consolidated financial statements
     included  herein  reflect the correct method to account for the issuance of
     various securities and the derivative features embedded therein.

          The accompanying consolidated financial statements of the Company have
     been prepared in accordance with generally accepted  accounting  principles
     for interim  financial  information,  the  instructions  to Form 10-QSB and
     Regulation S-B (including Item 310(b)  thereof).  Accordingly,  they do not
     include all of the information and footnotes required by generally accepted
     accounting principles for complete financial statements.  In the opinion of
     the  Company's  management,  all  adjustments  (consisting  only of  normal
     recurring accruals)  considered necessary for a fair presentation have been
     included. Operating results for the three and nine month periods ended June
     30, 2006 are not necessarily indicative of the results that may be expected
     for the full  fiscal year  ending  September  30,  2006.  The  accompanying
     consolidated  financial  statements  should be read in conjunction with the
     audited  financial  statements  of the  Company  for the fiscal  year ended
     September 30, 2005. The Company's  consolidated  financial  statements have
     been presented on the basis that it is a going concern,  which contemplates
     the realization of assets and the satisfaction of liabilities in the normal
     course  of  business.  The  Company  has  suffered  recurring  losses  from
     operations  and  has  a  stockholders'  deficit  as of  June  30,  2006  of
     $7,492,854.  The  Company  raised net  proceeds  aggregating  approximately
     $2,498,000  during the year ended September 30, 2005 from the sale of stock
     and warrants.  In addition,  the Company  raised gross proceeds of $900,000
     from short-term convertible notes and $1,000,000 from long-term convertible
     notes.  During the first nine months of FY2006,  the Company  raised  gross
     proceeds  of  $2,000,000  from  long-term  convertible  notes and  received
     $120,000  from  the  settlement  agreement  related  to the  sale of  USDTL
     described  above and in Note 3.  Subsequent  to June 30, 2006,  the Company
     raised gross proceeds of $750,000 from long-term convertible notes executed
     in July 2006. The Company is working with  placement  agents and investment
     fund managers to obtain additional  equity financing.  Based upon cash flow
     projections, the Company believes the anticipated cash flow from operations
     and most importantly,  the expected net proceeds from future debt or equity
     financings,  will be sufficient to finance the  Company's  operating  needs
     until the operations achieve profitability. There can be no assurances that
     forecasted  results will be achieved or that  additional  financing will be
     obtained.  The financial statements do not include any adjustments relating
     to the  recoverability  and  classification of asset amounts or the amounts
     and  classification  of  liabilities  that  might be  necessary  should the
     Company be unable to continue as a going concern.

2.   INVENTORIES

          At June 30, 2006, inventories consist of the following:

                           Raw Materials                            $196,446
                           Work-in-Process                            45,349
                           Finished Goods                             25,038
                                                                   ---------
                                    Total                           $266,833
                                                                    ========

3.   DISCONTINUED OPERATIONS

          On  December  16,  2003,  the  Company  consummated  a sale of USDTL's
     business and net assets,  excluding cash. Under the terms of that sale, the
     buyer must pay the  Company  10% of certain  annual  revenues  in excess of
     $1,500,000,  less any  amounts  due from the  Company  for the  purchase of
     services  from the buyer.  In  November  2005,  the Company  negotiated  an
     agreement  with the new owners of USDTL to settle all  outstanding  matters
     related  to the sale of  USDTL.  Under the  terms of this  settlement,  the
     Company  received an  immediate  lump sum  payment of $120,000  rather than
     waiting for the 10 to 14 years that the  Company  believed it would take to
     collect the entire $500,000 from uncertain  future  revenues of USDTL.  The
     accompanying   financial   statements   reflect  USDTL  as  a  discontinued
     operation.  The following is a summary of the results of its operations for
     the three months and nine months ended June 30, 2006 and 2005:

<TABLE>
<CAPTION>

                                                                Three Months                      Nine Months
                                                              Ended June 30,                     Ended June 30,

                                                        2006             2005                 2006             2005
                                                     ------------      ------------      --------------     -------------
<S>                                                <C>                <C>                 <C>               <C>
         Sales                                     $             -    $            -      $           -     $           -
         Operating expenses                                      -                 -                  -                 -
         Other income (expense)                                  -                 -            120,000                 -
                                                   ---------------    --------------      -------------     -------------
         Income from discontinued operations       $             -    $            -      $     120,000     $           -
                                                   ===============    ==============      =============     =============
</TABLE>



4.   MAJOR CUSTOMERS

          Customers in excess of 10% of total sales are:
<TABLE>
<CAPTION>

                                           Three Months Ended June 30,                   Nine Months Ended June 30,
                                        -------------------------------                -----------------------------
                                          2006                     2005                  2006                   2005
                                    ----------------          --------------       ---------------        ----------------
<S>                                 <C>                       <C>                   <C>                     <C>
                  Customer A        $ 212,272                 $  348,839            $  744,858              $   911,000
                  Customer B        $ 162,319                          *                     *                        *
                  Customer C        $ 142,132                          *                     *                        *
</TABLE>

                  * Not in excess of 10% during these periods.

          At June 30,  2006,  accounts  receivable  from these  major  customers
     totaled approximately $286,224.

5.   NOTES PAYABLE AND SHORT AND LONG-TERM CONVERTIBLE NOTES PAYABLE

          In September  2005,  October 2005,  February 2006,  April 2006 and May
     2006 the  Company  executed  notes  payable  with AJW  Partners,  LLC,  AJW
     Offshore,  Ltd., AJW Qualified  Partners,  LLC and New  Millennium  Capital
     Partners  II, LLC in the total  principal  amount of  $3,000,000  which are
     payable at maturity in September  2008,  October 2008,  February 2009 April
     2009 and May 2009, respectively. Interest on these notes is at 8% per annum
     and is  payable  quarterly  in cash or the  Company's  common  stock at the
     option of the Company.  The Company  originally issued warrants to purchase
     100,000  shares of  common  stock at  $12.50  per  share for five  years in
     connection  with these notes.  In May 2006, the  outstanding  warrants were
     cancelled and replaced with warrants to purchase 3,000,000 shares of common
     stock at $1.25 per share for seven years. In addition, the entire principal
     plus any  accrued  and  unpaid  interest  associated  with  these  notes is
     convertible,  at the holder's option,  into the Company's common stock at a
     conversion price of 65% of the average of the three lowest intraday trading
     prices of the common stock for the twenty  trading days  preceding the date
     that the holders  elect to convert.  A discount to debt  totaling  $968,006
     ($850,500 for the fair value of the  conversion  feature of these notes and
     $117,506 for the fair value of the warrants issued in connection with these
     notes) was recorded  during  FY2005 and the first nine months of FY2006 and
     is being amortized over the term of the notes. The unamortized discount was
     $774,453  as of June  30,  2006.  Non-cash  interest  expense  of  $605,000
     representing  the fair value of the warrants  issued as replacement for the
     outstanding warrants in May 2006 was recorded in the quarter ended June 30,
     2006. Fees of approximately  $385,000  incurred in connection with securing
     these loans were recorded as a deferred  financing  charge.  The collateral
     pledged by the  Company to secure  these notes  includes  all assets of the
     Company. A liability of approximately  $1,573,000 was recorded for the fair
     value of the warrants issued in connection with the $3,000,000 of notes and
     the  conversion  feature,   which  was  reduced  to  its  market  value  of
     approximately  $1,559,000  at June 30,  2006.  As of June 30,  2006,  notes
     totaling $34,937 were converted into 215,000 shares of common stock.

          From April to August 2005, the Company executed convertible notes with
     an  individual in the total  principal  amount of $650,000 with interest at
     10%.  Each note has a maturity date of six months from the date of the note
     and is payable in ten monthly installments plus accrued interest commencing
     on the maturity date of the note. The Company  issued  warrants to purchase
     13,000  shares  of  common  stock at $1.65 to $4.95 per share for three (3)
     years in connection  with these notes.  In addition,  the entire  principal
     plus accrued  interest  associated with these notes is convertible into the
     Company's  common stock at a conversion  price of the lesser of the closing
     price of the  common  stock  on the date of the loan or 85% of the  average
     closing  price of the common stock for the five (5) trading days  preceding
     the notice of conversion.  In no event shall the conversion  price be lower
     than 50% of the closing  price of the common stock on the date of the loan.
     A  discount  to debt  totaling  $172,930  ($156,800  for the  value  of the
     conversion feature of these notes and $16,130 for the value of the warrants
     issued in  connection  with these notes) was recorded  during FY2005 and is
     being  amortized  over the term of the  notes.  The  discount  was  totally
     amortized as of June 30, 2006.  A liability of  approximately  $173,000 was
     recorded for the fair value of the warrants  issued in connection  with the
     $650,000  of notes and the  conversion  feature  which was  reduced  to its
     market value of $328 at June 30, 2006.

6.   CONVERTIBLE AND REDEEMABLE CONVERTIBLE PREFERRED STOCK

          In  April  and  June  2005,   the  Company   raised  net  proceeds  of
     approximately  $1,335,000  from the sale of  1,500,000  shares  of Series E
     Redeemable  Convertible Preferred Stock with a face value of $1,500,000 and
     Warrants  to purchase  3,000  shares of the  Company's  common  stock.  The
     $1,500,000 of Series E Preferred Stock are convertible into Common Stock at
     the  lesser of $4.00 per share or 80% of the  average  of the three  lowest
     closing bid prices for the ten trading days immediately prior to the notice
     of conversion, subject to adjustments and limitations, and the Warrants are
     exercisable  at $4.20 per share for a period of three  years.  The warrants
     issued in connection  with the sale of 1,500,000  shares of preferred stock
     and the  conversion  feature  resulted in a deemed  dividend of  $1,087,000
     being recorded and included in the earnings per share  calculation  for the
     year ended September 30, 2005. A liability of approximately  $1,087,000 was
     recorded for the original  fair value of the warrants  issued in connection
     with the sale of the 1,500,000 shares of preferred stock and the conversion
     feature which was reduced to its market value of approximately  $157,000 at
     June 30, 2006. As of June 30, 2006,  769,639 shares of this preferred stock
     had been converted  into 1,037,336  shares of common stock and 730,361 were
     outstanding.  Upon the  occurrence of specific  events,  the holders of the
     Series E  Redeemable  Convertible  Preferred  Stock are  entitled to redeem
     these  shares  under  certain  provisions  of the  agreement  covering  the
     purchase of the preferred  stock.  Accordingly,  these  securities were not
     classified as permanent equity.

          In December 2004, the Company sold 1,285 shares of Series A Redeemable
     Convertible  Preferred  Stock and  Warrants  to purchase  12,000  shares of
     common  stock  for  which  it  received   net  proceeds  of   approximately
     $1,160,000.  The Series A Redeemable  Convertible  Preferred Stock,  with a
     face value of $1,285,000, is convertible into common stock at the lesser of
     $6.00  per share or 85% of the  average  of the three  lowest  closing  bid
     prices,  as reported by  Bloomberg,  for the ten trading  days  immediately
     prior to the notice of conversion  subject to adjustments and floor prices.
     The warrants are  exercisable  at $6.30 per share.  The warrants  issued in
     connection  with the sale of 1,285  shares of  preferred  stock and the put
     right  and  the  conversion  feature  resulted  in  a  deemed  dividend  of
     $1,058,260   being   recorded  and  included  in  the  earnings  per  share
     calculation  for  the  year  ended  September  30,  2005.  A  liability  of
     approximately  $1,058,260  was recorded for the original  fair value of the
     warrants  issued  in  connection  with  the  sale of the  1,285  shares  of
     preferred  stock and the conversion  feature,  which was $1,212 at June 30,
     2006. As of June 30, 2006,  1,135 shares of this  preferred  stock had been
     converted  into 452,156 shares of common stock and the remaining 150 shares
     of Series A redeemable  convertible  preferred stock,  with a face value of
     $150,000,  were redeemed by the Company in October 2005 for $155,415  which
     included accrued dividends of $5,417.

          28,608 shares of the Series C convertible  preferred stock with a face
     value of $145,000 and 2,000 shares of the 6%  Convertible  preferred  stock
     with a face value of  $2,000,000  are  carried at face value on the balance
     sheet  outside  permanent  equity  as the  Company  cannot  be  sure it has
     adequate authorized shares for their conversion as of June 30, 2006.

7.   COMMON AND PREFERRED STOCK

          During the nine months ended June 30, 2006, the Company issued 790,942
     shares of common stock to holders who converted  270,000 shares of Series E
     redeemable  convertible preferred stock, 90,910 shares of common stock to a
     holder who converted  8,333 shares of Series C convertible  preferred stock
     and 6,083 shares of common stock to employees who purchased  shares through
     the Company's  Employee Stock  Purchase  Plan.  Dividends for all preferred
     stock  amounted to $122,305 for the nine months ended June 30, 2006 and the
     total amount of unpaid and undeclared dividends was $364,212.

8.   GOODWILL

          As of  September  30,  2005,  the  Company's  goodwill was composed of
     $138,120 associated with the acquisition of BJR in 2001. In accordance with
     SFAS No.  142,  the  Company  evaluated  the  goodwill  related  to the BJR
     acquisition  and determined  that no adjustment to the goodwill  balance of
     $138,120 was deemed necessary since September 30, 2005.

9.   LOSS PER SHARE

          The  following  data show the amounts used in  computing  earnings per
     share:
<TABLE>
<CAPTION>

                                                               Three Months                  Nine  Months
                                                             Ended June 30,                  Ended June 30,
                                                       -------------------------   ----------------------------
                                                         2006            2005          2006           2005
                                                      -----------   ------------   ------------   --------------
<S>                                                  <C>            <C>            <C>            <C>
          Loss from continuing operations            $(1,329,038)   $  (458,616)   $(3,375,953)   $(2,087,711)
          Less:
                 Preferred Stock Dividends               (40,152)       (71,006)      (122,305)      (152,685)
                 Deemed dividends in connection
                  with Series A preferred
                  stock sales                                  -     (1,087,000)            (-)    (2,145,260)
                                                     -----------    -----------    -----------    -----------
           Loss attributable to common
                  stockholders from
                  continuing operations               (1,369,190)    (1,616,622)    (3,498,258)    (4,385,656)
           Add:
           Income (loss) from discontinued
                   operation                                   -              -        120,000             (-)
                                                     -----------    -----------    -----------    -----------


          Net loss attributable to common
               stockholders used in basic and
                 diluted EPS                        $( 1,369,190)  $( 1,616,622)   $(3,378,258)   $(4,385,656)
                                                     ===========    ===========    ===========    ===========

           Weighted average number of
                  common shares outstanding            4,480,981      3,211,978      4,301,369      2,924,128
                                                     ===========    ===========    ===========    ===========

           Loss per share attributable to common
                  stockholders before discontinued
                  operations                         $     (0.31)   $     (0.50)   $     (0.81)   $     (1.50)
            Impact of discontinued operations                  -              -            .02              -
                                                     -----------    -----------    -----------    -----------
               Basic and diluted loss per share
                   attributable to common
                   stockholders                      $     (0.31)   $     (0.50)   $     (0.79)   $     (1.50)
                                                     ===========    ===========    ===========    ===========
</TABLE>

10.  STOCK OPTIONS

          The Company accounts for its stock-based  compensation plans using the
     intrinsic value method in accordance with the provisions of APB Opinion No.
     25,  Accounting  for  Stock  Issued to  Employees,  and  complies  with the
     disclosure  provisions  of  SFAS  No.  123,  Accounting  for  Stock-  Based
     Compensation,  and SFAS No. 148,  Accounting for Stock-Based  Compensation-
     Transition and Disclosure.  No stock-based  employee  compensation cost was
     reflected  in net loss for the quarters and nine months ended June 30, 2006
     or 2005,  as all options  granted  under those plans had an exercise  price
     equal to the fair market value of the  underlying  common stock on the date
     of grant.
<PAGE>

          The following table illustrates,  in accordance with the provisions of
     SFAS No. 148,  Accounting  for  Stock-Based  Compensation  - Transition and
     Disclosure,  the effect on net loss and loss per share if the  Company  had
     applied the fair value recognition  provisions of SFAS No. 123,  Accounting
     for Stock-Based Compensation, to stock-based employee compensation.
<TABLE>
<CAPTION>

                                                  Three Months Ended June 30,             Nine Months Ended June 30,
                                                      2006             2005                 2006                2005
                                                  ------------     ------------          -------------    -------------
<S>                                               <C>              <C>                   <C>              <C>
Net loss                                          $(1,329,038)     $  (458,616)          $ (3,255,953)    $ (2,087,711)
 Add: stock based
     employee compensation
     expense included in reported net loss,
     net of tax                                             -                -                      -                -
Deduct: total stock based employee
     compensation expense determined
     under the fair value based method for
     all awards, net of tax                           (30,742)         (41,930)               (92,079)        (109,075)
                                                   -------------   ------------          -------------    ------------
Pro forma net loss                                $  (1,359,780)   $  (500,546)          $ (3,348,032)    $ (2,196,786)
                                                 ===============   =============         =============    =============
Loss per share:
Basic and diluted - as reported                   $    (.31)       $      (.50)          $       (.79)    $      (1.50)
Basic and diluted - pro forma                          (.31)              (.52)                  (.81)           (1.53)
</TABLE>

          In determining the pro forma amounts above, the Company  estimated the
     fair value of each option  granted using the  Black-Scholes  option pricing
     model with the following weighted-average assumptions:


        June 30                              2006                   2005
        -------                       ----------------    -------------------
        Risk free interest rate              4.3%                   3.8%
        Expected dividend yield              -                         -
        Expected lives                     5-9 years              5-9 years
        Expected volatility                 80%                   80%

          Options  granted  during the nine months  ended June 30, 2006  totaled
     7,000  while the options  granted  for the nine months  ended June 30, 2005
     amounted to 46,274.  The  weighted  average  fair value of options  granted
     during the nine  months  ended  June 30,  2006 and 2005 was $.42 and $3.50,
     respectively.

11.  DERIVATIVES

          The Company has issued and  outstanding  convertible  debt and certain
     convertible  equity  instruments  with embedded  derivative  features.  The
     Company  analyzes these  financial  instruments in accordance with SFAS No.
     133 and EITF  Issue  Nos.  00-19 and  05-02 to  determine  if these  hybrid
     contracts have embedded derivatives which must be bifurcated.  In addition,
     free-standing  warrants  are  accounted  for as  equity or  liabilities  in
     accordance  with the  provisions  of EITF Issue No.  00-19.  As of June 30,
     2006, the Company could not be sure it had adequate  authorized  shares for
     the conversion of all  outstanding  instruments  due to certain  conversion
     rates  which vary with the fair  value of the  Company's  common  stock and
     therefore all embedded  derivatives and freestanding  warrants are recorded
     at fair value,  marked-to-market  at each reporting period, and are carried
     on separate lines of the accompanying  balance sheet. If there is more than
     one embedded derivative, their value is considered in the aggregate.

12.  SUBSEQUENT EVENTS

          Subsequent to June 30, 2006,  the Company  executed  additional  notes
     payable with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners,
     LLC and New  Millennium  Capital  Partners  II, LLC in the total  principal
     amount  of  $750,000.  Interest  on these  notes is at 8% per  annum and is
     payable  quarterly in cash or the  Company's  common stock at the option of
     the Company.  The Company issued warrants to purchase  1,500,000  shares of
     common  stock at $.23 per share for seven  years in  connection  with these
     notes.  In  addition,  the entire  principal  plus any  accrued  and unpaid
     interest  associated  with  these  notes is  convertible,  at the  holder's
     option, into the Company's common stock at a conversion price of 65% of the
     average of the three lowest intraday trading prices of the common stock for
     the  twenty  trading  days  preceding  the date that the  holders  elect to
     convert.

          During July 2006, the Company  issued to holders of convertible  notes
     880,000 shares of common stock upon  conversion of long-term notes totaling
     $56,500.  In  addition,  367,518  shares of common stock were issued to the
     holder of Series E preferred  stock upon conversion of 24,500 shares of its
     preferred stock.

13.  RECENT ACCOUNTING PRONOUNCEMENTS

          In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
     ("SFAS  123R"),  which  replaces  SFAS  123,  "Accounting  for  Stock-Based
     Compensation,"  and  supersedes APB Opinion no. 25,  "Accounting  for Stock
     Issued to  Employees."  SFAS 123R  requires  all  share-based  payments  to
     employees,  including grants of employee stock options, to be recognized in
     the financial statements based on their fair values. The effective date for
     entities that file as a small business issuer is as of the beginning of the
     first annual  reporting  period that begins on or after  December 15, 2005.
     Therefore,  under the current rules,  the Company will be required to adopt
     SFAS 123R in the first quarter of fiscal 2007.

          Under SFAS 123R, pro forma  disclosures  previously  permitted will no
     longer be an alternative to financial  statement  recognition.  The Company
     must  determine  the  appropriate  fair value  model to be used for valuing
     share-based payments to employees, the amortization method for compensation
     cost and the  transition  method  to be used at the date of  adoption.  The
     transition methods include modified prospective and retrospective  adoption
     options.  Additionally,  SFAS 123R  clarifies  the timing  for  recognizing
     compensation  expense  for  awards  subject to  acceleration  of vesting on
     retirement  and  also  specifies  the  treatment  of  excess  tax  benefits
     associated with stock compensation.

          In March 2005, the SEC issued Staff Accounting  Bulletin No. 107 ("SAB
     107") regarding the SEC's  interpretation of SFAS 123R and the valuation of
     share-based  payments  for  public  companies.  Avitar  is  evaluating  the
     requirements of SFAS 123R and SAB 107 and expects that the adoption of SFAS
     123R will  have a  material  impact on  Avitar's  consolidated  results  of
     operations  and earnings per share.  The Company has not yet determined the
     method of  adoption  or the effect of  adopting  SFAS 123R,  and it has not
     determined  whether the adoption will result in amounts that are similar to
     the current pro forma disclosures under SFAS 123.

          In November  2004,  the FASB issued  SFAS No. 151,  "Inventory  Costs"
     ("SFAS 151"), an amendment of Accounting  Research Bulletin ("ARB") No. 43,
     Chapter 4, "Inventory Pricing". SFAS 151 amends previous guidance regarding
     treatment of abnormal amounts of idle facility expense,  freight,  handling
     costs, and spoilage. This statement requires that those items be recognized
     as current period charges  regardless of whether they meet the criterion of
     "so abnormal" which was the criterion specified in ARB No. 43. In addition,
     this Statement  requires that allocation of fixed  production  overheads to
     the cost of the  production be based on normal  capacity of the  production
     facilities.  This  pronouncement  was effective  for the Company  beginning
     October 1, 2005.  The  adoption  of SFAS 151 by the  Company did not have a
     material  impact on its  consolidated  results of operations  and financial
     condition.

          In May 2005,  the FASB issued SFAS No.  154,  "Accounting  Changes and
     Error  Corrections"  ("SFAS  154")  which  replaces  APB  Opinions  No.  20
     "Accounting  Changes"  and SFAS No. 3,  "Reporting  Accounting  Changes  in
     Interim Financial  Statements" An Amendment of APB Opinion No. 28. SFAS 154
     provides guidance on the accounting for and reporting of accounting changes
     and error corrections.  It establishes  retrospective  application,  or the
     latest  practicable  date, as the required method for reporting a change in
     accounting  principle and the  reporting of a correction of an error.  SFAS
     154 is effective for accounting  changes and  corrections of errors made in
     fiscal  years  beginning  after  December  15,  2005 and is  required to be
     adopted  by Avitar in the first  quarter  of fiscal  2007.  The  Company is
     currently  evaluating the effect that the adoption of SFAS 154 will have on
     its consolidated  results of operations and financial  condition,  but does
     not expect it will have a material impact.


          In July 2006, the FASB issued  Interpretation  No. 48,  Accounting for
     Uncertainty in Income Taxes - an  Interpretation of FASB Statement No. 109.
     FIN 48 clarifies the accounting for uncertainty in income taxes  recognized
     in a company~s  financial  statements in accordance with FASB Statement No.
     109,  Accounting for Income Taxes.  FIN 48 prescribes the  recognition  and
     measurement  of a tax  position  taken  or  expected  to be  taken in a tax
     return.  It  also  provides  guidance  on  derecognition,   classification,
     interest and  penalties,  accounting  in interim  periods,  disclosure  and
     transition.  FIN 48 is effective for fiscal years  beginning after December
     15, 2006. The Company is currently  evaluating the effect that the adoption
     of FIN 48 will have on its consolidated  financial  statements but does not
     expect that it will have a material impact.

          In February  2006,  the FASB issued SFAS 155,  Accounting  for Certain
     Hybrid  Financial   Instruments  which  amends  SFAS  133,  Accounting  for
     Derivative  Instruments and Hedging Activities and SFAS 140, Accounting for
     Transfers  and  Servicing  of  Financial  Assets  and   Extinguishments  of
     Liabilities.  SFAS 155 simplifies  the  accounting for certain  derivatives
     embedded in other  financial  instruments  by allowing them to be accounted
     for as a whole if the holder elects to account for the whole  instrument on
     a fair  value  basis.  SFAS 155 also  clarifies  and amends  certain  other
     provisions  of  SFAS  133 and  SFAS  140.  SFAS  155 is  effective  for all
     financial instruments acquired,  issued or subject to a remeasurement event
     occurring  in  fiscal  years  beginning  after  September  15,  2006 and is
     therefore  required  to be adopted by the  Company in the first  quarter of
     fiscal  quarter of fiscal  2007.  The Company is currently  evaluating  the
     effect  that  the  adoption  of SFAS  155  will  have  on its  consolidated
     financial  statements  but does not  expect  that it will  have a  material
     impact.

<PAGE>

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

     The following  discussion and analysis  should be read in conjunction  with
the Company's  consolidated financial statements and the notes thereto appearing
elsewhere in this report.

ONE FOR FIFTY (1 FOR 50) REVERSE SPLIT OF COMMON STOCK

     The  Company's  one for fifty (1 for 50) reverse  split of its common stock
that was authorized by the Company's  shareholders  at their annual meeting held
on  January  18,  2006  became  effective  at  5:00  PM on  February  17,  2006.
Accordingly,  common stock share and per share data presented herein reflect the
results of the reverse split for current and prior reporting periods.

RESULTS OF OPERATIONS

Revenues
     Sales for the three  months  ended  June 30,  2006  increased  $75,488,  or
approximately 6%, to $1,308,575 from $1,233,087 for the corresponding  period of
the prior  year.  For the nine  months  ended  June 30,  2006,  sales  increased
$288,791, or approximately 9%, to $3,513,111 from $3,224,320. The change for the
three months ended June 30, 2006 primarily reflects an increase in the volume of
sales for its  OralScreen(R)  and Foam Products of $77,000,  offset in part by a
decrease of $2,000 in revenue from contraband detection services. The change for
the nine months ended June 30, 2006 primarily reflects an increase in the volume
of sales for its OralScreen(R) and Foam products of $292,000,  offset in part by
a decrease of $3,000 in revenue from contraband detection services.

Operating Expenses

     Cost of sales for the three months  ended June 30, 2006 were  approximately
74% of sales compared to the cost of sales of approximately 74% of sales for the
three months ended June 30, 2005.  For the nine months ended June 30, 2006,  the
cost of sales was 72%  compared  to 73% of sales  for the same  period of Fiscal
2005.  The  improvement  for Fiscal 2006 resulted  from the overall  increase in
sales described above.

     Selling,  general and  administrative  expenses  for the three months ended
June 30, 2006  decreased  $260,189,  or  approximately  22%,  to  $948,417  from
$1,208,606 for the  corresponding  period of the prior year. For the nine months
ended June 30, 2006,  selling,  general and  administrative  expenses  decreased
$168,148 or approximately  5%, to $3,005,416 from $3,173,564 for the nine months
ended  June 30,  2005.  The  change  for the nine  months  ended  June 30,  2006
primarily  resulted  from  expense  reductions  for legal,  investor  relations,
travel,   staffing   adjustments   within  sales  personnel  and  various  other
administrative  items during the quarter ended June 30, 2006,  offset in part by
increases in expenses of $92,041  primarily related to the addition of sales and
marketing  resources  that  occurred  during the first six months of FY2006.  In
order to achieve  revenue  growth,  the Company will most likely incur increased
expenses to hire  additional  direct sales staff and expand  marketing  programs
during the remainder of FY2006 and beyond.

     Expenses for research and  development  for the three months ended June 30,
2006 amounted to $109,738 compared to $181,008 for the  corresponding  period of
the prior year, a decrease of $71,270.  For the nine months ended June 30, 2006,
expenses for research and development were $348,692 versus $560,757 for the nine
months ended June 30, 2005, a decrease of $212,065. The decrease for the quarter
ended June 30, 2006 was primarily  attributable to a reduction in salary expense
of $14,000,  consulting expense of $34,000 and material and various  development
related expenses of $23,000.  The change for the nine months ended June 30, 2006
resulted  primarily from reduced salary and fringe benefit  expenses of $54,000,
consulting expense of $88,000, material and various development related expenses
of $70,000.  Although research and development  expenses were lower for the nine
months of Fiscal 2006,  the Company must continue  developing  and enhancing its
ORALscreen products and therefore, will most likely incur increased expenses for
research and development during the final months of FY2006 and beyond.

     Other Income and Expense

     Interest  expense and  financing  costs were  $825,211 for the three months
ended June 30, 2006 compared to $77,451  incurred  during the three months ended
June 30, 2005.  For the nine months ended June 30,  2006,  interest  expense and
financing  costs amounted to $1,214,297  versus  $113,820 for the  corresponding
period of Fiscal  2005.  The  increase  for the three months ended June 30, 2006
resulted  primarily from interest  expense of  approximately  $66,000,  non-cash
interest expense of $605,000  representing the fair value of the warrants issued
as  replacement  for the  outstanding  warrants in May 2006 was  recorded in the
quarter ended June 30, 2006 and  amortization  of deferred  financing  costs and
debt discount of approximately  $77,000 associated with the short-term notes and
convertible  short and long-term  notes totaling  approximately  $3,900,000 that
were executed by the Company in FY2005 and the first nine months of FY2006.  For
the nine  months  ended  June 30,  2006,  the  change  primarily  resulted  from
increased interest expense of approximately $157,000,  non-cash interest expense
of $605,000  representing  the fair value of the warrants  issued as replacement
for the outstanding  warrants in May 2006 was recorded in the quarter ended June
30, 2006 and higher  amortization of deferred  financing costs and debt discount
of approximately  $338,000  associated with the short-term notes and convertible
short and long-term notes totaling  approximately  $3,900,000 that were executed
by the Company in FY2005 and the first nine months of FY2006.

     For the three months ended June 30, 2006, other income amounted to $217,962
compared to other  income of $686,739  for the three months ended June 30, 2005.
Other income for the nine months  ended June 30, 2006 was  $210,664  compared to
other income of $877,430  for the nine months  ended June 30, 2005.  The changes
for the  quarter  and nine  months  ended June 30,  2006 from the  corresponding
periods of Fiscal 2005  occurred  primarily  from the changes in the fair market
value of embedded derivative securities and warrants.

     Discontinued Operations

     On December 16, 2003, the Company  consummated the sale of the business and
net assets,  excluding cash, of its USDTL subsidiary.  For the nine months ended
June 30, 2006, other income amounted to $120,000 compared to no activity for the
corresponding  period of the prior year. The income for the first nine months of
Fiscal 2006 resulted from the settlement described in Note 3 of the Consolidated
Financial Statements.


     Net Loss

         Primarily as a result of the factors described above, the Company had a
net loss of $1,329,038 for the three months ended June 30, 2006, as compared to
net loss of $458,616 for the three months ended June 30, 2005. For the nine
months ended June 30, 2006, the Company had a net loss of $3,255,953 versus
$2,087,711 for the corresponding period of Fiscal 2005. The loss per share was
$.31 per basic and diluted share for the three months ended June 30, 2006
compared to a loss per share of $.50 per basic and diluted share for the three
months ended June 30, 2005. For the nine months ended June 30, 2006, the loss
per share was $.79 per basic and diluted share versus a loss per share of $1.50
per basic and diluted share for the nine months ended June 30, 2005.


FINANCIAL CONDITION AND LIQUIDITY

     At June 30, 2006, the Company had a stockholders' deficit of $7,492,854 and
cash and cash equivalents of $37,545.  Our cash flows from financing  activities
provided  the primary  source of funding  during the nine months  ended June 30,
2006  and the  Company  will  continue  to rely on this  type of  funding  until
profitability  is  reached.  The  following  is a summary  of cash flows for the
nine-month period ended June 30, 2006:

                                                          June 30,
         Sources (use) of cash flows                        2006
         ---------------------------                  ------------
         Operating activities                         $(1,828,646)
         Investing activities                             (90,384)
         Financing activities                           1,556,212
                                                      -------------
         Net decrease in cash and equivalents         $  (362,818)
                                                      =============

     Operating  Activities.  The net loss of  $3,255,953  (comprised of expenses
     totaling  $6,889,064 less revenues and income from discontinued  operations
     of $3,633,111)  was the major use of cash by operations.  When the net loss
     is adjusted for non-cash  expenses such as depreciation  and  amortization,
     amortization of debt discounts,  deferred  financing costs,  deferred rent,
     non-cash interest expense for warrant  replacements for long-term notes and
     changes in the fair market value of derivative securities and warrants, the
     cash  needed  to  finance  the net loss  was  $2,325,089.  Working  capital
     requirements  necessitated  the use of $10,638  for  addition of $10,438 of
     other assets and the  reduction of $200 in deferred  revenue.  Decreases in
     accounts receivable of $48,971,  inventories of $108,083,  prepaid expenses
     of $106,632 along with increases in accounts  payable and accrued  expenses
     of $243,395 reduced working capital needs by $507,081.

     Investing and  Financing  Activities.  Cash used in investing  consisted of
     cash paid of $90,384 for  additions to property,  plant and  equipment.  To
     finance the business,  long-term  notes (as described  below) were executed
     and  approximated  $1,840,000;  of which $131,211 was used to repay various
     short and long-term debt and $155,417 was used to redeem  remaining  shares
     of the Series A  redeemable  convertible  preferred  stock and the  accrued
     dividends for these shares. Sales of common stock generated $2,840.

     During FY 2006,  the Company's  cash  requirements  are expected to include
primarily the funding of operating losses,  the payment of outstanding  accounts
payable,  the  repayment  of certain  notes  payable,  the funding of  operating
capital to grow the Company's drugs of abuse testing products and services,  and
the continued  funding for the  development of its  ORALscreen  product line. In
September 2005, October 2005, February 2006, April 2006 and May 2006 the Company
executed notes payable with AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified
Partners, LLC and New Millennium Capital Partners II, LLC in the total principal
amount of $3,000,000  which are payable at maturity in September  2008,  October
2008,  February  2009 April 2009 and May 2009,  respectively.  Interest on these
notes is at 8% per  annum  and is  payable  quarterly  in cash or the  Company's
common  stock at the  option  of the  Company.  The  Company  originally  issued
warrants to purchase 100,000 shares of common stock at $12.50 per share for five
years in connection with these notes. In May 2006, the outstanding warrants were
cancelled  and replaced  with  warrants to purchase  3,000,000  shares of common
stock at $1.25 per share for seven years. In addition, the entire principal plus
any accrued and unpaid interest  associated with these notes is convertible,  at
the holder's  option,  into the Company's  common stock at a conversion price of
65% of the average of the three  lowest  intraday  trading  prices of the common
stock for the twenty  trading days  preceding the date that the holders elect to
convert.  Fees of  approximately  $385,000  incurred in connection with securing
these loans were recorded as a deferred financing charge. The collateral pledged
by the Company to secure these notes  includes all assets of the Company.  As of
June 30, 2006,  notes  totaling  $34,938 were  converted  into 215,000 shares of
common stock.

     In July 2006,  the  Company  executed  additional  notes  payable  with AJW
Partners,  LLC,  AJW  Offshore,  Ltd.,  AJW  Qualified  Partners,  LLC  and  New
Millennium  Capital  Partners II, LLC in the total principal amount of $750,000.
Interest on these notes is at 8% per annum and is payable  quarterly  in cash or
the  Company's  common  stock at the option of the Company.  The Company  issued
warrants  to  purchase  1,500,000  shares of common  stock at $.23 per share for
seven years in connection  with these notes. In addition,  the entire  principal
plus any accrued and unpaid interest associated with these notes is convertible,
at the holder's option, into the Company's common stock at a conversion price of
65% of the average of the three  lowest  intraday  trading  prices of the common
stock for the twenty  trading days  preceding the date that the holders elect to
convert.

     From April to August 2005, the Company executed  convertible  notes with an
individual in the total principal  amount of $650,000 with interest at 10%. Each
note has a maturity  date of six months from the date of the note and is payable
in ten monthly  installments  plus accrued  interest  commencing on the maturity
date of the note.  The Company  issued  warrants to  purchase  13,000  shares of
common stock at $1.65 to $4.95 per share for three (3) years in connection  with
these notes. In addition,  the entire principal plus accrued interest associated
with these notes is convertible  into the Company's common stock at a conversion
price of the lesser of the closing  price of the common stock on the date of the
loan or 85% of the average  closing  price of the common  stock for the five (5)
trading  days  preceding  the  notice  of  conversion.  In no  event  shall  the
conversion  price be lower than 50% of the closing  price of the common stock on
the date of the loan.

     In April and June 2005,  the Company  raised net proceeds of  approximately
$1,335,000 from the sale of 1,500,000 shares of Series E Redeemable  Convertible
Preferred  Stock with a face value of $1,500,000  and Warrants to purchase 3,000
shares of the Company's common stock. The $1,500,000 of Series E Preferred Stock
are convertible into Common Stock at the lesser of $4.00 per share or 80% of the
average  of the  three  lowest  closing  bid  prices  for the ten  trading  days
immediately  prior to the  notice of  conversion,  subject  to  adjustments  and
limitations, and the warrants are exercisable at $4.20 per share for a period of
three years.  As of June 30, 2006,  769,639 shares of this  preferred  stock had
been  converted  into  1,017,336   shares  of  common  stock  and  730,361  were
outstanding. Upon the occurrence of specific events, the holders of the Series E
Redeemable Convertible Preferred Stock are entitled to redeem these shares under
certain  provisions  of the  agreement  covering the  purchase of the  preferred
stock.

     In December  2004,  the Company  sold 1,285  shares of Series A  Redeemable
Convertible  Preferred  Stock and Warrants to purchase  12,000  shares of common
stock for which it received net proceeds of approximately $1,160,000. The Series
A Redeemable  Convertible  Preferred Stock, with a face value of $1,285,000,  is
convertible  into  common  stock at the  lesser of $6.00 per share or 85% of the
average of the three lowest  closing bid prices,  as reported by Bloomberg,  for
the ten trading days  immediately  prior to the notice of conversion  subject to
adjustments  and  floor  prices.  As of June  30,  2006,  1,135  shares  of this
preferred  stock had been  converted into 452,156 shares of common stock and the
remaining 150 shares of Series A redeemable  convertible preferred stock, with a
face value of  $150,000,  were  redeemed  by the  Company  in  October  2005 for
$155,415 which included accrued dividends of $5,417.

     The cash  available  at June  30,  2006,  the  proceeds  from the  $750,000
convertible note financing in July 2006, and the anticipated  customer  receipts
are expected to be  sufficient  to fund the  operations  of the Company  through
August 2006. Beyond that time, the Company will require  significant  additional
financing  from outside  sources to fund its  operations.  The Company  plans to
continue working with placement agents and/or  investment fund managers in order
to raise  additional  capital during FY2006 from the sales of equity and/or debt
securities. The investors involved in the September 2005, October 2005, February
2006, April 2006 and May 2006  convertible note financings  described above have
expressed their intent to provide an additional $2,000,000 of financing on terms
to be negotiated, of which $750,000 was received in July 2006. The Company plans
to use the proceeds from these financings to provide working capital and capital
equipment funding to operate the Company, to expand the Company's  business,  to
further develop and enhance the ORALscreen drug screening  systems and to pursue
the development of in-vitro oral fluid  diagnostic  testing  products.  However,
there can be no assurance that these  financings will be achieved.  In addition,
the Company may  consider  selling  assets  and/or  operations,  including  BJR.
However,  at the present time, there can be no assurances that the Company would
be successful in these efforts.

     Operating revenues are expected to continue growing during the remainder of
Fiscal 2006 as increasing  number of employers in the United States and overseas
convert to using ORALscreen, Avitar's oral fluid drug testing products. In order
to achieve the revenue  growth,  the  Company  will need to increase  its direct
sales force and implement an expanded,  targeted marketing program.  ORALscreen,
as an instant on-site diagnostic test, is part of the fastest growing segment of
the diagnostic test market.  Inventories are currently at appropriate levels for
anticipated sales volumes and the Company,  with its production capacity and the
arrangements with its current contract manufacturing sources, expects to be able
to maintain  inventories at optimal levels.  Based on current sales, expense and
cash flow  projections,  the Company believes that the current level of cash and
cash-equivalents on hand and, most importantly, a portion of the anticipated net
proceeds from the future  financing  mentioned above would be sufficient to fund
operations until the Company achieves  profitability.  There can be no assurance
that the Company will consummate the above-mentioned  financings, or that any or
all of the net proceeds sought thereby will be obtained.  Furthermore, there can
be no assurance that the Company will have  sufficient  resources to achieve the
anticipated  growth.  Once the Company achieves  profitability,  the longer-term
cash requirements of the Company to fund operating activities,  purchase capital
equipment, expand the existing business and develop new products are expected to
be met by the  anticipated  cash  flow from  operations  and  proceeds  from the
financings  described  above.  However,  because there can be no assurances that
sales will  materialize  as  forecasted,  management  will  continue  to closely
monitor  and  attempt to  control  costs at the  Company  and will  continue  to
actively seek the needed additional capital.

     As a result of the Company's  recurring  losses from operations and working
capital deficit, the report of its independent registered public accounting firm
relating to the financial  statements  for Fiscal 2005  contains an  explanatory
paragraph  expressing  substantial doubt about the Company's ability to continue
as a going concern.  Such report states that the ultimate outcome of this matter
could not be  determined  as the date of such report  (January  20,  2006).  The
Company's plans to address the situation are presented above. However, there are
no assurances that these endeavors will be successful or sufficient.

RECENT ACCOUNTING PRONOUNCEMENTS

     In December  2004,  the FASB issued SFAS No.  123R,  "Share-Based  Payment"
("SFAS  123R"),   which   replaces  SFAS  123,   "Accounting   for   Stock-Based
Compensation,"  and supersedes APB Opinion no. 25,  "Accounting for Stock Issued
to  Employees."  SFAS 123R  requires  all  share-based  payments  to  employees,
including  grants of employee stock  options,  to be recognized in the financial
statements based on their fair values. The effective date for entities that file
as a small business issuer is as of the beginning of the first annual  reporting
period that begins on or after  December 15, 2005  Therefore,  under the current
rules,  the Company will be required to adopt SFAS 123R in the first  quarter of
fiscal 2007.

     Under SFAS 123R, pro forma disclosures  previously permitted will no longer
be an alternative to financial statement recognition. The Company must determine
the appropriate fair value model to be used for valuing share-based  payments to
employees,  the  amortization  method for  compensation  cost and the transition
method  to be used at the  date of  adoption.  The  transition  methods  include
modified prospective and retrospective adoption options. Additionally, SFAS 123R
clarifies the timing for recognizing  compensation expense for awards subject to
acceleration of vesting on retirement and also specifies the treatment of excess
tax benefits associated with stock compensation.

     In March 2005, the SEC issued Staff Accounting Bulletin No. 107 ("SAB 107")
regarding the SEC's interpretation of SFAS 123R and the valuation of share-based
payments for public  companies.  Avitar is evaluating the  requirements  of SFAS
123R and SAB 107 and expects that the adoption of SFAS 123R will have a material
impact on Avitar's  consolidated  results of operations  and earnings per share.
The  Company  has not yet  determined  the method of  adoption  or the effect of
adopting SFAS 123R, and it has not  determined  whether the adoption will result
in amounts that are similar to the current pro forma disclosures under SFAS 123.

     In November  2004, the FASB issued SFAS No. 151,  "Inventory  Costs" ("SFAS
151"), an amendment of Accounting  Research  Bulletin ("ARB") No. 43, Chapter 4,
"Inventory  Pricing".  SFAS 151 amends previous guidance regarding  treatment of
abnormal  amounts  of  idle  facility  expense,  freight,  handling  costs,  and
spoilage.  This  statement  requires  that those items be  recognized as current
period  charges  regardless  of whether they meet the criterion of "so abnormal"
which was the  criterion  specified in ARB No. 43. In addition,  this  Statement
requires  that  allocation  of  fixed  production  overheads  to the cost of the
production  be based on  normal  capacity  of the  production  facilities.  This
pronouncement  was  effective  for the Company  beginning  October 1, 2005.  The
adoption  of SFAS 151 by the  Company  did not  have a  material  impact  on its
consolidated results of operations and financial condition.

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections"  ("SFAS  154")  which  replaces  APB  Opinions  No. 20  "Accounting
Changes"  and SFAS No. 3,  "Reporting  Accounting  Changes in Interim  Financial
Statements"  An Amendment  of APB Opinion No. 28. SFAS 154 provides  guidance on
the accounting for and reporting of accounting changes and error corrections. It
establishes  retrospective  application,  or the latest practicable date, as the
required method for reporting a change in accounting principle and the reporting
of a correction of an error.  SFAS 154 is effective for  accounting  changes and
corrections of errors made in fiscal years beginning after December 15, 2005 and
is required  to be adopted by Avitar in the first  quarter of fiscal  2007.  The
Company is  currently  evaluating  the effect that the adoption of SFAS 154 will
have on its consolidated results of operations and financial condition, but does
not expect it will have a material impact.

     In July  2006,  the FASB  issued  Interpretation  No.  48,  Accounting  for
Uncertainty in Income Taxes - an  Interpretation  of FASB Statement No. 109. FIN
48 clarifies the  accounting  for  uncertainty  in income taxes  recognized in a
company~s  financial  statements  in  accordance  with FASB  Statement  No. 109,
Accounting for Income Taxes.  FIN 48 prescribes the  recognition and measurement
of a tax  position  taken  or  expected  to be taken  in a tax  return.  It also
provides  guidance on  derecognition,  classification,  interest and  penalties,
accounting in interim  periods,  disclosure and transition.  FIN 48 is effective
for fiscal years  beginning  after  December 15, 2006.  The Company is currently
evaluating the effect that the adoption of FIN 48 will have on its  consolidated
financial statements but does not expect that it will have a material impact.

     In February 2006,  the FASB issued SFAS 155,  Accounting for Certain Hybrid
Financial   Instruments  which  amends  SFAS  133,   Accounting  for  Derivative
Instruments  and Hedging  Activities and SFAS 140,  Accounting for Transfers and
Servicing of  Financial  Assets and  Extinguishments  of  Liabilities.  SFAS 155
simplifies the accounting for certain  derivatives  embedded in other  financial
instruments by allowing them to be accounted for as a whole if the holder elects
to  account  for the  whole  instrument  on a fair  value  basis.  SFAS 155 also
clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155
is effective  for all  financial  instruments  acquired,  issued or subject to a
remeasurement event occurring in fiscal years beginning after September 15, 2006
and is therefore  required to be adopted by the Company in the first  quarter of
fiscal  quarter of fiscal 2007.  The Company is currently  evaluating the effect
that the adoption of SFAS 155 will have on its consolidated financial statements
but does not expect that it will have a material impact.


FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

     Except for the historical  information  contained  herein,  the matters set
forth herein are "forward-looking  statements" within the meaning of Section 27A
of the  Securities Act of 1933,  Section 21E of the  Securities  Exchange Act of
1934 and the Private  Securities  Litigation  Reform Act of 1995. We intend that
such  forward-looking  statements be subject to the safe harbors created thereby
when and if applicable

     Such   forward-looking   statements   involve  known  and  unknown   risks,
uncertainties and other factors which may cause our actual results,  performance
or achievements to be materially different from any future results,  performance
or achievement  expressed or implied by such  forward-looking  statements.  Such
factors include, but are not limited to the following: product demand and market
acceptance  risks,  the  effect of  economic  conditions,  results of pending or
future  litigation,  the impact of  competitive  products and  pricing,  product
development  and  commercialization,   technological  difficulties,   government
regulatory  environment  and  actions,  trade  environment,  capacity and supply
constraints or difficulties,  the result of financing efforts,  actual purchases
under agreements and the effect of the Company's accounting policies.

ITEM 3.           CONTROLS AND PROCEDURES

     (a) Evaluation of Disclosure Controls and Procedures

     Our management,  including our chief executive  officer and chief financial
officer,  have carried out an evaluation of the  effectiveness of our disclosure
controls  and  procedures  as of June 30,  2006,  pursuant to Exchange Act Rules
13a-15(e)  and  15(d)-15(e).  Based upon that  evaluation,  our chief  executive
officer and chief  financial  officer have  concluded  that as of such date, our
disclosure controls and procedures in place are adequate and effective to ensure
material  information and other information  requiring  disclosure is identified
and communicated on a timely basis.


     (b) Changes in Internal Control Over Financial Reporting

     There was no change in our internal  control over  financial  reporting (as
defined in Rule  13a-15(f) of the Exchange Act) that occurred  during the fiscal
quarter  covered by this  Quarterly  Report on Form 10-QSB  that has  materially
affected,  or is reasonably  likely to materially  affect,  our internal control
over financial reporting.
<PAGE>



                                    PART II OTHER INFORMATION























<PAGE>


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

     During the quarter  ended June 30, 2006,  the Company  issued to holders of
convertible  notes  215,000  shares of common  stock  upon  conversion  of notes
totaling $34,937. In addition, 281,780 shares of common stock were issued to the
holder of Series E  preferred  stock  upon  conversion  of 45,288  shares of its
preferred  stock.  The exemption for  registration of these  securities is based
upon  Section  4(2) of the  Securities  Act because the  issuances  were made to
accredited investors in private placements.


ITEM 6.           EXHIBITS

(a) Exhibits:

       Exhibit No.             Document

       31.1        Rule 13a-14(a)/15d-14(a) Certification , as
                   Adopted Pursuant to Section 302 of the Sarbanes-Oxley
                   Act of 2002

       31.2        Rule 13a-14(a)/15d-14(a) Certification , as
                   Adopted Pursuant to Section 302 of the Sarbanes-Oxley
                   Act of 2002

       32.1        Certification Pursuant to 18 U.S.C. Section 1350, as
                   Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                   Act of 2002

       32.2        Certification Pursuant to 18 U.S.C. Section 1350, as
                   Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                   Act of 2002


<PAGE>

                                   SIGNATURES

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


                                                     AVITAR, INC.
                                                     (Registrant)




Dated:  August 14, 2006                           /S/ Peter P. Phildius
                                                  ------------------------------
                                                  Peter P. Phildius
                                                  Chairman and Chief
                                                  Executive Officer
                                                  (Principal Executive Officer)




Dated:  August 14, 2006                           /S/ J.C. Leatherman, Jr.
                                                  ---------------------------
                                                  J.C. Leatherman, Jr.
                                                  Chief Financial Officer
                                                  (Principal Accounting and
                                                  Financial Officer)

<PAGE>

                                  EXHIBIT INDEX


       Exhibit No.               Document

       31.1          Rule 13a-14(a)/15d-14(a) Certification, as
                     Adopted Pursuant to Section 302 of the Sarbanes-Oxley
                     Act of 2002

       31.2          Rule 13a-14(a)/15d-14(a) Certification, as
                     Adopted Pursuant to Section 302 of the Sarbanes-Oxley
                     Act of 2002

       32.1          Certification Pursuant to 18 U.S.C. Section 1350, as
                     Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                     Act of 2002

       32.2          Certification Pursuant to 18 U.S.C. Section 1350, as
                     Adopted Pursuant to Section 906 of the Sarbanes-Oxley
                     Act of 2002