U.S.
      Securities and Exchange Commission


Washington,
      D.C. 20549


Form
      10-Q SB





(Mark
      One)





[x]
      Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the quarterly period ended December 31, 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 incorporation or
      organization) (I.R.S.
      Employer 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





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: 19,480,981


As
      of
      February 9, 2007





Transitional
      Small Business Disclosure Format


(Check
      One):   [
      ]
      Yes  ;  [x]
      No














Page
      1 of
      25 pages


Exhibit
      Index is on Page 21




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    15
 
 
 Item
        3   Controls
        and Procedures        17
 
 Part
        II:  Other
        Information 18
  Item
          1   Legal
          Proceedings 19
 
 Item
        2   Unregistered
        Sales of Equity Securities and Use of
        Proceeds 19
 
 
 Signatures             20
 
 Exhibit
        Index 21
 
 Certifications 22





Part
      I  Financial
      Information






























































Item
                  1. FINANCIAL STATEMENTSAvitar,
                  Inc. and SubsidiariesConsolidated
                  Balance SheetDecember
                  31, 2006(Unaudited)ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              205,423Accounts
                  receivable, less allowance for doubtful accounts of $7,000
              
              
              373,146Inventories
                  (Note 2)
              
              
              293,226Prepaid
                  expenses and other current assets
              
              
              113,715Total
                  current assets
              
              
              985,510PROPERTY
                  AND EQUIPMENT, net
              
              
              294,207OTHER
                  ASSETS
              
              
              776,244Total
              
              $
              2,055,961LIABILITIES
                  AND STOCKHOLDERS' DEFICITCURRENT
                  LIABILITIES:Notes
                  payable (Note 5)
              
              $
              156,423Convertible
                  notes payable (Note 5)
              
              
              650,000Accounts
                  payable
              
              
              546,895Accrued
                  expenses
              
              
              1,171,114Deferred
                  revenue
              
              
              2,000Current
                  portion of long-term capital leases
              
              
              11,018Current
                  portion of deferred lessor incentive
              
              
              13,400Fair
                  value of warrants (Note 10)
              
              
              303,435Fair
                  value of embedded derivatives (Note 10)
              
              
              1,613,545Total
                  current liabilities
              
              
              4,467,830CONVERTIBLE
                  LONG-TERM NOTES PAYABLE
              
              
              3,351,186DEFERRED
                  LESSOR INCENTIVE, LESS CURRENT PORTION
              
              
              33,500Total
                  liabilities
              
              
              7,852,516CONVERTIBLE
                  AND REDEEMABLE CONVERTIBLE PREFERREDSTOCK
                  (Note 6)
              
              
              3,184,882COMMITMENTSSTOCKHOLDERS'
                  DEFICITSeries
                  B convertible preferred stock, $.01 par value;authorized
                  5,000,000 shares; 5,689 shares issued andoutstanding
              
              
              58Common
                  Stock, $.01 par value; authorized 100,000,000 shares;16,024,359
                  shares issued and outstanding
              
              
              160,244Additional
                  paid-in capital
              
              
              49,449,176Accumulated
                  deficit
              
              
              (58,590,915
              )Total
                  stockholders' deficit
              
              
              (8,981,437
              )Total
              
              $
              2,055,961See
                  accompanying notes to consolidated financial statements.
 
  Avitar,
                  Inc. and SubsidiariesConsolidated
                  Statements of Operations(Unaudited)THREE
                  MONTHS ENDED DECEMBER 31,2006
              
              2005SALES
              
              $
              1,045,027
              
              $
              907,270OPERATING
                  EXPENSESCost
                  of
                  sales
              
              
              749,604
              
              
              658,993Selling,
                  general and administrative
              
              
              935,759
              
              
              1,038,607Research
                  and
                  development
              
              
              91,924
              
              
              129,706Total
                  operating expenses
              
              
              1,777,287
              
              
              1,827,306LOSS
                  FROM OPERATIONS
              
              
              (732,260
              )
              
              (920,036
              )OTHER
                  INCOME (EXPENSE)Interest
                  expense and financing costs
              
              
              (310,175
              )
              
              (213,235
              )Other
                  income, net
              
              
              99,047
              
              
              121,342Total
                  other expense, net
              
              
              (211,128
              )
              
              (91,893
              )LOSS
                  FROM CONTINUING OPERATIONS
              
              
              (943,388
              )
              
              (1,011,929
              )DISCONTINUED
                  OPERATIONS:Income
                  from the disposal of USDTL (Note 3)
              
              
              -
              
              
              120,000Income
                  from discontinued operations
              
              
              -
              
              
              120,000NET
                  LOSS
              
              $
              (943,388
              )
              $
              (891,929
              )BASIC
                  AND DILUTED LOSS PER SHARE FROM CONTINUINGOPERATIONS
                  (Note 8)
              
              $
              (0.08
              )
              $
              (0.26
              )BASIC
                  AND DILUTED NET LOSS PER SHARE (Note 8)
              
              $
              (0.08
              )
              $
              (0.23
              )WEIGHTED
                  AVERAGENUMBER
                  OF COMMON SHARES OUTSTANDING
              
              
              11,667,963
              
              
              4,045,403See
                  accompanying notes to consolidated financial statements.
 
  Avitar,
                  Inc. and SubsidiariesConsolidated
                  Statement of Stockholders' DeficitThree
                  Months Ended December 31, 2006(Unaudited)Preferred Stoc
              
              Common Stock
              
              
              
              
              
              TotalAdditional
              
              Accumulated
              
              Stockholders'Shares
              
              Amount
              
              Shares
              
              Amount
              
              paid-in
                  capital
              
              deficit
              
              DeficitBalance
                  at September 30, 2006
              
              
              5,689
              
              $
              58
              
              
              8,505,036
              
              $
              85,051
              
              $
              49,340,197
              
              $
              (57,608,867
              )
              $
              (8,183,561
              )Conversion
                  of Series E preferred stock
              
              
              -
              
              
              -
              
              
              3,319,323
              
              
              33,193
              
              
              38,008
              
              
              -
              
              
              71,201Conversion
                  of long-term convertible note
              
              
              -
              
              
              -
              
              
              4,200,000
              
              
              42,000
              
              
              28,239
              
              
              -
              
              
              70,239Stock
                  option compensation (Note 9)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              42,732
              
              
              
              
              
              42,732Accretion
                  of preferred stock dividends
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (38,660
              )
              
              (38,660
              )Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (943,388
              )
              
              (943,388
              )Balance
                  at December 31, 2006
              
              
              5,689
              
              $
              58
              
              
              16,024,359
              
              $
              160,244
              
              $
              49,449,176
              
              $
              (58,590,915
              )
              $
              (8,981,437
              )See
                  accompanying notes to consolidated financial statements.
 
  Avitar,
                  Inc. and SubsidiariesConsolidated
                  Statements of Cash Flows(Unaudited)THREE
                  MONTHS ENDED DECEMBER 31,2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (943,388
              )
              $
              (891,929
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              38,270
              
              
              43,666Amortization
                  of debt discount and deferred financing costs
              
              
              200,504
              
              
              152,114Amortization
                  of deferred lessor incentive
              
              
              (3,350
              )
              
              (3,350
              )Expense
                  for stock option compensation
              
              
              42,732
              
              
              -Income
                  from change in value of derivatives and warrants
              
              
              (98,480
              )
              
              (120,116
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              228,370
              
              
              94,627Inventories
              
              
              (21,428
              )
              
              (261,865
              )Prepaid
                  expenses and other current assets
              
              
              28,851
              
              
              85,690Other
                  assets
              
              
              -
              
              
              1,963Accounts
                  payable and accrued expenses
              
              
              37,805
              
              
              (16,959
              )Deferred
                  revenue
              
              
              (2,400
              )
              
              -Net
                  cash used in operating activities
              
              
              (492,514
              )
              
              (916,159
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Purchases
                  of property and equipment
              
              
              (7,126
              )
              
              (51,496
              )Net
                  cash used in investing activities
              
              
              (7,126
              )
              
              (51,496
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Repayment
                  of notes payable, long-term debt and capital lease
                  obligations
              
              
              (33,880
              )
              
              (141,704
              )Net
                  proceeds from issuance of convertible long-term debt
              
              
              458,400
              
              
              920,000Redemption
                  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
              
              
              424,520
              
              
              622,879NET
                  DECREASE IN CASH AND CASH EQUIVALENTS
              
              
              (75,120
              )
              
              (344,776
              )CASH
                  AND CASH EQUIVALENTS, beginning of the period
              
              
              280,543
              
              
              400,363CASH
                  AND CASH EQUIVALENTS, end of the period
              
              $
              205,423
              
              $
              55,587SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATIONCash
                  paid during period:Income
                  taxes
              
              $
              -
              
              $
              -Interest
              
              $
              5,026
              
              $
              18,484SUPPLEMENTAL
                  SCHEDULE OF NONCASH INVESTING ANDFINANCING
                  ACTIVITIES:During
                  the three months ended December 31, 2006, 69,522 shares ofSeries
                  E redeemable convertible preferred stock were converted
                  into3,319,323
                  shares of common stock.During
                  the three months ended December 31, 2006, convertible long-termdebt
                  of $70,239 was converted into 4,200,000 shares ofcommon
                  stock.During
                  the three months ended December 31, 2005, 224,712 shares ofSeries
                  E redeemable convertible preferred stock were converted
                  into509,162
                  shares of common stock.See
                  accompanying notes to consolidated financial statements.


























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 the first quarter of
      Fiscal 2007, 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 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, Avitar consummated the sale of the business and net assets,
      excluding cash, of its wholly-owned subsidiary, United States Drug Testing
      Laboratories, Inc. (“USDTL”). The Company received $500,000 in cash upon the
      closing of the sale and was entitled to receive an additional $500,000 if the
      buyer of USDTL achieved certain revenue targets. 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). The USDTL business has been
      treated as a discontinued operation. 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.





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-month period ended December 31, 2006 are not necessarily indicative of
      the
      results that may be expected for the full fiscal year ending September 30,
      2007.
      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, 2006. Avitar, Inc. (“Avitar” or the “Company”), through its
      wholly-owned subsidiaries, Avitar Technologies, Inc. (“ATI”), and BJR Security,
      Inc. (“BJR”), designs, develops, manufactures and markets diagnostic test and
      medical products and provides contraband detection services. Avitar sells its
      products and services to employers, diagnostic test distributors, large medical
      supply companies, governmental agencies, schools and corporations. The Company
      operates in one reportable segment since revenues of its contraband detection
      business represent an immaterial portion of its total revenues. 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 working capital deficit of $3,482,320
      and a stockholders’ deficit of $8,981,437 as of December 31, 2006. In
      fiscal 2006, the Company raised gross proceeds of $3,270,000 from long-term
      convertible notes. During December 2006, the Company raised gross proceeds
      of
      $520,000 from long-term convertible notes (see Note 5). The Company is working
      with placement agents and investment fund managers to obtain additional equity
      or debt financing. Based upon cash flow projections, the Company believes the
      anticipated cash flow from operations and most importantly, the expected net
      proceeds from future 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
      December 31, 2006, inventories consist of the following:





Raw
      Materials      $158,239


Work-in-Process 114,575


Finished
      Goods 20,412


Total $293,226





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 Company received
      $500,000 in cash upon the closing of the sale and was entitled to receive an
      additional $500,000 if the buyer of USDTL achieved certain revenue targets.
      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 ended December 31, 2006 and 2005:





*Three
      months ended December
      31,                                                       
2006                                             
2005*





Sales                                                                                                          
      $      
-                                        $  
          -


Operating
      expenses                                                                                          
-                                           
           -


Other
      income                                                                                                     
-                                           
120,000


Income
      from discontinued
      operations                                                 
$      
-                                        $ 
120,000










4.  Significant
      Customers





Customers
      in excess of 10% of total sales are:





Three
      Months Ended December 31,


2006  2005


Customer
      A      $            *   $ 221,830


Customer
      B      122,093                                           *


Customer
      C      117,000 *





*Customer
      was not in excess of 10% of total sales.





At
      December 31, 2006, accounts receivable from two significant customers totaled
      approximately $172,075.





5. Notes
      Payable and Short and Long-term Convertible Notes Payable




In
      September
      2005, October 2005, February 2006, April 2006, May 2006, July 2006 September
      2006 and December 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 $4,790,000 which are payable
      at maturity in September 2008, October 2008, February 2009 April 2009, May
      2009,
      July 2009, September 2009 and December 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 the notes executed from September 2005 to April 2006.
      In conjunction with the notes executed 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. For the notes executed in July,
      September and December 2006, the Company issued warrants to purchase a total
      of
      4,500,000 shares of common stock at $.15 to $.22 per share for seven years.
      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 fiscal 2006. Fees of approximately $812,000 incurred in connection
      with securing these loans were recorded as a deferred financing charge. 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 $1,697,471 ($1,357,865
      for the fair value of the conversion feature of these notes and $339,606 for
      the
      incremental fair value of the warrants issued in connection with these notes)
      was recorded during fiscal 2005, 2006 and 2007 and is being amortized over
      the
      terms of the notes. The unamortized discount was $1,228,504 as of December
      31,
      2006. The collateral pledged by the Company to secure these notes includes
      all
      assets of the Company. A liability of approximately $2,302,000 was recorded
      for
      the fair value of the warrants issued in connection with the $4,790,000 of
      notes
      and the conversion feature, which was reduced to its market value of
      approximately $1,657,000 at December 31, 2006. Through December 31, 2006, notes
      totaling $210,901 were converted into 7,095,000 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 notes, that were due in variable
                monthly installments plus accrued interest from October 1, 2005 and
                June
                30, 2006, were outstanding at December 31, 2006. Under the terms
                of the
                notes, the entire unpaid principal balance and accrued interest shall
                become due and payable upon the occurrence of any default by the
                Company
                in the payment of interest and principal on the due date thereof
                and any
                such default that remains unremedied for twenty business day following
                written notice to the Company by the holders. No written notice of
                default
                from the holders of these notes has been received by the Company.
                The
                Company issued warrants to purchase 650,000 shares of common stock
                at
                $1.65 to $4.95 per share for three 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 stockata
                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 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 fiscal year 2005 and was fully amortized
                over
                the term of the notes. 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 $28 at December 31, 2006.








6.  Convertible
      and Redeemable Convertible Preferred Stock





Instrument
              
              Number
                of
                Shares
              
              FaceValue
              
              Less
                  Costs and
                Proceeds
                Allocated
                toWarrants
                and
                ConversionFeatures
              
              Accretion
                To
                Redemption
                Value
              
              Accretion
                ofDividends
              
              Carrying
                ValueSeries
                  E
                Redeemable
                Convertible
                Preferred
                Stock
              
              618,339
              
              $
              618,339
              
              $
              448,090
              
              $
              448,090
              
              $
              56,949
              $
              
              675,288Series
                  C
                Convertible
                Preferred
                Stock
              
              28,608
              
              145,000
              
              -
              
              -
              
              -
              
              145,0006%
                Convertible
                Preferred
                Stock
              
              2,000
              
              
              2,000,000
              
              
              -
              
              
              -
              
              
              364,594
              
              
              2,364,594Total
              
              
              
              
              
              
              
              
              
              
              
              
              $
              421,543
              
              $
              3,184,882










The
      Series C and 6% Convertible preferred stock is carried on the balance sheet
      outside permanent equity as the Company cannot be sure it has adequate
      authorized shares for their conversion as of December 31, 2006. 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
      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 shares 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 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 and the
      conversion feature, which was reduced to its market value of approximately
      $135,000 at December 31, 2006. As of December 31, 2006, 881,661 shares of this
      preferred stock had been converted into 5,265,571 shares of common stock and
      618,339 were outstanding.





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, was 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
      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 and the conversion feature, which was
      reduced to its market value of $216 at December 31, 2006. As of December 31,
      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 $155,417 which included accrued dividends of $5,417.





The
      28,608 shares of Series C convertible preferred stock entitle the holder of
      each
      share, on each anniversary date of the investment, to convert into the number
      of
      shares of common stock derived by dividing the purchase price paid for each
      share of the preferred stock by the average price of the Company’s common stock
      for the five trading days prior to conversion subject to anti-dilution
      provisions and receive royalties of 5% of revenues related to disease diagnostic
      testing from the preceding fiscal year. There were no royalties earned for
      the
      quarters ended December 31, 2006 or 2005. After one year from the date of
      issuance, the Company may redeem all or any portion of this preferred stock
      by
      the issuance of the Company’s common stock, the number of shares of which shall
      be derived by dividing the redemption price, as defined, by the average closing
      price of the Company’s common stock for the five trading days prior to the
      redemption date, and liquidating distributions of an amount per share equal
      to
      the amount of unpaid royalties due to the holder in the event of liquidation.
      None of these shares was converted into common stock during the quarters ended
      December 31, 2006 or 2005.





7.  Common
      and Series B Convertible Preferred Stock





During
      the quarter ended December 31, 2006, the Company issued a total of 7,519,323
      shares of common stock to holders who converted 69,522 shares of Series E
      redeemable convertible preferred stock and $70,239 of long-term convertible
      notes. Dividends for Series B convertible preferred stock amounted to $448
      for
      the three months ended December 31, 2006 and the total amount of unpaid and
      undeclared dividends was $8,650.








8. Loss
      Per Share




T he
      following data show the amounts used in computing earnings per
      share:




Three
                Months Ended December 31,
            
            2006
            
            2005Loss
                from continuing operations
            
            $
            (
                943,388
            )
            $
            (1,011,929
            )Less:
              Preferred
                stock
                dividends
            
            
            (
                39,108
            )
            
            (
                42,435
            )Loss
                attributable to common stockholders
              from
                continuing operations
            
            
            (
                982,496
            
            
            (1,054,364
            )Add:Income
                from discontinued operations
            
            
            -
            
            
            120,000Net
                loss attributable to common
              stockholders
                used in basic and
              diluted
                EPS
            
            $
            (
                982,496
            )
            $
            (
                934,364
            )Weighted
                average number of
              common
                shares outstanding
            
            
            11,667,963
            
            
            4,045,403Loss
                per share attributable to common
              stockholders
                before discontinued
              operations
            
            $
            (
                0.08
            )
            $
            (
                0.26
            )Impact
                of discontinued operations
            
            
            -
            
            
            .03Basic
                and diluted loss per share
              attributable
                to
                common stockholders
            
            $
            (
                0.08
            )
            $
            (
                0.23
            )





9. Stock
      Based Compensation





The
      Company adopted SFAS No. 123 (Revised 2004), “Share-Based Payment” (‘SFAS
      123R”), effective October 1, 2006. SFAS 123R requires the recognition of fair
      value of stock-based compensation as an expense in the calculation of net
      income. The Company recognizes stock-based compensation ratably over the vesting
      period of the individual equity instruments. All stock awards outstanding on
      December 31, 2006 have been accounted for as equity instruments based on the
      provisions of SFAS 123R. Prior to October 1, 2006, the Company followed the
      Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to
      Employees”, and the related interpretations in accounting for stock-based
      compensation..





The
      Company elected the modified prospective transition method for adopting SFAS
      123R. Under this method, the provisions of SFAS 123R apply to all stock-based
      awards granted or other awards granted that are subsequently reclassified into
      equity. The unrecognized expense of awards not yet vested as of September 30,
      2006, the date of adoption of SFAS 123R by the Company, is now being recognized
      as expense in the calculation of net income using the same valuation method
      (Black-Scholes) and assumptions used prior to the adoption of SFAS
      123R.





Under
      the
      provisions of SFAS 123R, the Company recorded $42,732 of stock based
      compensation expense on its unaudited consolidated statement of operations
      for
      the three months ended December 31, 2006.





During
      the quarter ended December 31, 2006, no options were granted under stock option
      plans and no shares subject to purchase under the employee stock purchase plan
      were issued.





The
      Company has assumed an annualized forfeiture rate of 0.0% for its options.
      Under
      the true-up provisions of SFAS 123R, the Company will record a recovery of
      prior
      expense if the actual forfeiture is higher than estimated. The unamortized
      fair
      value of stock options as of December 31, 2006 was $275,000 which is expected
      to
      be recognized over the weighted average remaining period of 3.2
      years.





The
      following table summarizes activity under all stock option plans for the three
      months ended December 31, 2006:


Weighted
              
              WeightedAverage
              
              AverageShares
              
              
              
              Exercise
              
              Remaining
              
              AggregateAvailable
              
              Number
              
              Price
                  Per
              
              Contractual
              
              Intrinsicfor
                  Grant
              
              Outstanding
              
              Share
              
              Term(years)
              
              ValueBalance
                  at September 30, 2006
              
              1,042,000
              
              179,079
              
              $19.77
              
              4.6
              
              $0.00Options
                  authorized
              
              -
              
              -
              
              -Options
                  granted
              
              
              -
              
              -
              
              -Options
                  exercised
              
              -
              
              -
              
              -Options
                  cancelled
              
              
              -
              
              -
              
              -Balance
                  at December 31, 2006
              
              1,042,000
              
              179,079
              
              $19.77
              
              4.4
              
              $0.00Exercisable,
                  December 31, 2006
              
              
              
              101,245
              
              $25.29
              
              4.1
              
              $0.00






SFAS
      123R
      requires the presentation of pro forma information for the comparative period
      prior to the adoption as if we had accounted for all its employee stock options
      under the fair value method of the original SFAS 123. The following table
      illustrates the effect on net income and earnings per share if the Company
      had
      applied the fair value recognition provisions of SFAS 123R for stock-based
      employee compensation to the prior-year periods.





For
      the Three Months Ended December
      31,                                                                                                                   
2005


Net
      loss  $(
      891,929)


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 (
      30,595)


Pro
      forma net
      loss $(
      922,524)


Pro
      forma loss per
      share:


Basic
      and diluted -
      as
      reported                                                                                                                                        
$ (.23)


Basic
      and diluted -
      pro forma  (.23)







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:




December
      31   2005


Risk
      free interest
      rate 4.0%


Expected
      dividend
      yield -


Expected
      lives  5-9 years


Expected
      volatility 80%





No
      options were granted during the quarter ended December 31, 2006.







10. 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 December 31, 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. As of December
      31, 2006, the fair value was $1,613,545 for the embedded derivatives and
      $303,435 for the warrants.





11. Subsequent
      Events




From
      January 1 through February 9, 2007, 24,779 shares of Series E redeemable
      convertible preferred stock with a face value of $24,779 were converted into
      1,156,622 shares of common stock. In addition, $36,574 of long-term convertible
      debt was converted into 2,300,000 shares of common stock.





12. Recent
      Accounting Pronouncements








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 therefore was effective for the Company beginning October 1, 2006.  The
      adoption of SFAS 154 by the Company has not had a material impact on its
      consolidated results of operations or financial condition.





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 therefore, was
      effective for the Company beginning October 1, 2006. The adoption of
      SFAS 155 by the Company has not had a material impact on its consolidated
      financial statements.





In
      March
      2006, the FASB issued EITF 06−03, “How Taxes Collected from Customers and
      Remitted to Governmental Authorities Should Be Presented in the Income Statement
      (That is, Gross versus Net Presentation)”that clarifies how a company discloses
      its recording of taxes collected that are imposed on revenue-producing
      activities. EITF 06−03 is effective for the first interim reporting period
      beginning after December 15, 2006, and thus the Company is required to adopt
      this standard as of January 1, 2007, in the second quarter of its fiscal year
      2007. The Company is evaluating the impact, if any, that EITF 06−03 may have on
      its consolidated financial statements.





In
      September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” to provide guidance on the consideration of the effects of prior
      year misstatements in quantifying current year misstatements for the purpose
      of
      a materiality assessment. Under SAB No.108, companies should evaluate a
      misstatement based on its impact on the current year income statement, as well
      as the cumulative effect of correcting such misstatements that existed in prior
      years existing in the current year’s ending balance sheet. SAB No. 108 was
      effective for the Company beginning October 1, 2006. The adoption of SAB No.
      108
      Company has not had an effect on its consolidated financial
      statements.





In
      December 2006, the Financial Accounting Standards Board (FASB) issued FASB
      Staff
      Position Number 00-19-2, “Accounting for Registration Payment Arrangements”
("FSP EITF 00-19-2").  FSP EITF 00-19-2 addresses an issuer’s accounting
      for registration payment arrangements. FSP EITF 00-19-2 specifies that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as a
      separate agreement or included as a provision of a financial instrument or
      other
      agreement, should be separately recognized and measured in accordance with
      FASB
      Statement No. 5, Accounting for Contingencies. FSP
      EITF
      00-19-2 is effective immediately for registration payment arrangements and
      the
      financial instruments subject to those arrangements that are entered into or
      modified subsequent to the date of issuance of FSP EITF 00-19-2 (December 21,
      2006).


For
      registration payment arrangements and financial instruments subject to those
      arrangements that were entered into prior to the issuance of FSP EITF 00-19-2,
      this guidance shall be effective for financial statements issued for fiscal
      years beginning after December 15, 2006, and interim periods within those fiscal
      years. The
      Company is evaluating what effect, if any, FSP EITF 00-19-2 may have on its
      consolidated financial statements.










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.








**Results
      of Operations**





*Revenue* ***s***


Sales
      for
      the three months ended December 31, 2006 increased $137,757 or approximately
      15
      %, to $1,045,027 from $907,270 for the corresponding period of the prior year.
      The change for the three months ended December 31, 2006 primarily reflects
      an
      increase in volume of sales of $123,000 for its OralScreen® products and $42,000
      for its Foam Products, offset in part by a decrease of $27,000 in revenue from
      contraband detection services.





*Operating
      Expenses*





Cost
      of
      sales for the three months ended December 31, 2006 were approximately 72% of
      sales compared to the cost of sales of approximately 73% of sales for the three
      months ended December 31, 2005. The change for the first quarter of Fiscal
      2007
      resulted primarily from the increase in sales described above.





Selling,
      general and administrative expenses for the three months ended
      December


31,
      2006
      decreased $102,848, or approximately 10%, to $935,759 from $1,038,607 for the
      corresponding period of the prior year. The change for the three-month period
      ended December 31, 2006 primarily resulted from expense reductions of
      approximately $49,000 for consulting fees, $30,000 for salary and payroll
      related costs for the vacant Vice President of Sales position, $14,000 for
      insurance premiums and $97,000 for various other administrative items; offset
      in
      part by an increase of approximately $13,000 for legal fees, $38,000 for
      investor relations and $36,000 for stock-based compensation. Although selling,
      general and administrative expenses were lower during the first quarter of
      Fiscal 2007, the Company expects to incur increased expenses to hire additional
      direct sales staff and expand marketing programs during the remainder of Fiscal
      2007 and beyond in order to achieve revenue growth.





Research
      and development expenses for the three months ended December 31, 2006 amounted
      to $91,924 compared to $129,706 for the three months ended December 31, 2005.
      The decrease for the quarter ended December 31, 2006 was primarily attributable
      to lower salary and consulting expenses of approximately $41,000; offset in
      part
      by stock-based compensation of approximately $3,000. Although research and
      development expenses were lower for the first quarter of Fiscal 2007, the
      Company must continue developing and enhancing its ORALscreen products, and
      therefore will most likely incur increased expenses for research and development
      during the remainder of Fiscal 2007 and beyond.





*Other
      Income and Expense*





Interest
      expense and financing costs were $310,175 for the three months ended December
      31, 2006 compared to $213,235 incurred during the three months ended December
      31, 2005. The increase resulted primarily from the interest, amortization of
      deferred financing costs and amortization of debt discount associated with
      the
      additional long-term note borrowings totaling approximately $2,790,000 that
      were
      completed by the Company from February 2006 through December 2006.





For
      the
      three months ended December 31, 2006, other income amounted to
      $99,047


compared
      to other income of $121,342 for the three months ended December 31, 2005. The
      change for the quarter ended December 31, 2006 resulted primarily from changes
      in the fair market value of 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. No activity occurred for the
      three months ended December 31, 2006 compared to other income of $120,000 for
      the corresponding period of the prior year. The income for the quarter ended
      December 31, 2005 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
      $943,388 for the three months ended December 31, 2006, as compared to net loss
      of $891,929 for the three months ended December 31, 2005. The loss per share
      was
      $.08 per basic and diluted share for the three months ended December 31, 2006.
      The loss per share was $.23 per basic and diluted share for the three months
      ended December 31, 2005.





**Financial
      Condition and Liquidity**





At
      December 31, 2006, the Company had a stockholders’ deficit of $8,981,437 and
      cash and cash equivalents of $205,423. Cash flows from financing activities
      provided the primary source of funding during the quarter ended December 31,
      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
      three
      month period ended December 31, 2006:





December
                31,Sources
                (use) of cash flows
            
            2006Operating
                activities
            
            $
            (492,514
            )Investing
                activities
            
            
            (7,126
            )Financing
                activities
            
            
            424,520Net
                decrease in cash and equivalents
            
            $
            (75,120
            )





Operating
      Activities. The net
      loss of $943,388 (composed of expenses totaling $2,087,462 less revenues and
      other income of $1,144,074) 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, income from the changes in the fair market value of derivative securities
      and warrants and stock-based compensation, the cash needed to finance the net
      loss was $763,712. Working capital changes lowered operating cash requirements
      as a result of a reduction in accounts receivable of $228,370, a decrease in
      prepaid expenses and other current assets of $28,851 and an increase in accounts
      payable and accrued expenses of $37,805, primarily from the deferral of interest
      payments on long-term convertible debt. In addition, operating cash was needed
      to finance an increase of $21,428 in inventory levels to meet anticipated demand
      for our products during the next six months and there was a decrease in deferred
      revenue that became recognized revenue in Fiscal 2006 of $2,400.





Investing
      and Financing Activities .
      Cash of
      $7,126 was used for additions to property, plant and equipment. To fulfill
      the
      major financing requirements of the business, the Company generated $458,400
      through the issuance of long-term convertible notes (as described below); of
      which $33,880 was used to repay various short-term notes payable and capital
      lease obligations.




During
      FY
      2007, 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, May 2006, July 2006
        September 2006 and December 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 $4,790,000
        which are payable at maturity in September 2008, October 2008, February 2009
        April 2009, May 2009, July 2009, September 2009 and December 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 the notes executed from September 2005
        to
        April 2006. In conjunction with the notes executed 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. For the notes executed
        in
        July, September and December 2006, the Company issued warrants to purchase
        a
        total of 4,500,000 shares of common stock at $.15 to $.22 per share for seven
        years. 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 Fiscal 2006. Fees of approximately $812,000 incurred in connection
        with securing these loans were recorded as a deferred financing charge. 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 $1,697,471 ($1,357,865
        for the fair value of the conversion feature of these notes and $339,606
        for the
        incremental fair value of the warrants issued in connection with these notes)
        was recorded during Fiscal 2005, 2006 and 2007 and is being amortized over
        the
        terms of the notes. The unamortized discount was $1,228,504 as of December
        31,
        2006. The collateral pledged by the Company to secure these notes includes
        all
        assets of the Company. A liability of approximately $2,302,000 was recorded
        for
        the fair value of the warrants issued in connection with the $4,790,000 of
        notes
        and the conversion feature, which was reduced to its market value of
        approximately $1,657,000 at December 31, 2006. As of December 31, 2006, notes
        totaling $210,901 were converted into 7,095,000 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 notes, that were due in variable monthly installments plus accrued
      interest from October 1, 2005 and June 30, 2006, were outstanding at December
      31, 2006. Under the terms of the notes, the entire unpaid principal balance
      and
      accrued interest shall become due and payable upon the occurrence of any default
      by the Company in the payment of interest and principal on the due date thereof
      and any such default that remains unremedied for twenty business day following
      written notice to the Company by the holder. No written notice of default from
      the holders of these notes has been received by the Company. The Company issued
      warrants to purchase 650,000 shares of common stock at $1.65 to $4.95 per share
      for three 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 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 fiscal
      year
      2005 and was fully amortized over the term of the notes. 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 $28 at December 31, 2006.




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 shares 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. A liability of approximately $1,087,000 was recorded for the
      original fair value of the warrants and the conversion feature, which was
      reduced to its market value of approximately $135,000 at December 31, 2006.
      As
      of December 31, 2006, 881,661 shares of this preferred stock had been converted
      into 5,265,571 shares of common stock and 618,339 shares remained. 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, was 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. A liability
      of
      approximately $1,058,260 was recorded for the original fair value of the
      warrants and the conversion feature, which was reduced to its market value
      of
      $216 at December 31, 2006. As of December 31, 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
      $155,417 which included accrued dividends of $5,417.




The
      cash
      available at December 31, 2006 and the anticipated customer receipts are
      expected to be sufficient to fund the operations of the Company through February
      2007. 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 Fiscal 2007 from the sales of equity and/or
      debt securities. 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.


Management
        continues to expect that operating revenues will grow during Fiscal 2007
        and
        beyond as employment continues to rise in the United States as employers
        expand
        their use of random drug testing, and the Company is able to convert employers
        to using ORALscreen, Avitar’s oral fluid drug testing products. In order to
        achieve the revenue growth, the Company has begun to significantly 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, 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
        financings 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 future 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 control discretionary 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 2006 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 of the date of such report (December 11, 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
      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 therefore, was effective for the Company beginning October 1, 2006. 
The adoption of SFAS 154 by the Company has not had a material impact on its
      consolidated results of operations or financial condition.





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 therefore, was
      effective for the Company beginning October 1, 2006. The adoption of
      SFAS 155 by the Company has not had a material impact on consolidated
      financial statements.





In
      March
      2006, the FASB issued EITF 06−03, “How Taxes Collected from Customers and
      Remitted to Governmental Authorities Should Be Presented in the Income Statement
      (That is, Gross versus Net Presentation)”that clarifies how a company discloses
      its recording of taxes collected that are imposed on revenue-producing
      activities. EITF 06−03 is effective for the first interim reporting period
      beginning after December 15, 2006, and thus the Company is required to adopt
      this standard as of January 1, 2007, in the second quarter of its fiscal year
      2007. The Company is evaluating the impact, if any, that EITF 06−03 may have on
      its consolidated financial statements.





In
      September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior
      Year Misstatements when Quantifying Misstatements in Current Year Financial
      Statements” to provide guidance on the consideration of the effects of prior
      year misstatements in quantifying current year misstatements for the purpose
      of
      a materiality assessment. Under SAB No.108, companies should evaluate a
      misstatement based on its impact on the current year income statement, as well
      as the cumulative effect of correcting such misstatements that existed in prior
      years existing in the current year’s ending balance sheet. SAB No. 108 was
      effective for the Company beginning October 1, 2006. The adoption of SAB No.
      108
      Company has not had an effect on its consolidated financial
      statements.





In
      December 2006, the Financial Accounting Standards Board (FASB) issued FASB
      Staff
      Position Number 00-19-2, “Accounting for Registration Payment Arrangements”
("FSP EITF 00-19-2").  FSP EITF 00-19-2 addresses an issuer’s accounting
      for registration payment arrangements. FSP EITF 00-19-2 specifies that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as a
      separate agreement or included as a provision of a financial instrument or
      other
      agreement, should be separately recognized and measured in accordance with
      FASB
      Statement No. 5, Accounting for Contingencies.  FSP EITF 00-19-2 is
      effective immediately for registration payment arrangements and the financial
      instruments subject to those arrangements that are entered into or modified
      subsequent to the date of issuance of FSP EITF 00-19-2 (December 21, 2006).
      For
      registration payment arrangements and financial instruments subject to those
      arrangements that were entered into prior to the issuance of FSP EITF 00-19-2,
      this guidance shall be effective for financial statements issued for fiscal
      years beginning after December 15, 2006, and interim periods within those fiscal
      years. The Company is evaluating what effect, if any, FSP EITF 00-19-2 may
      have
      on its consolidated financial statements.











**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.
  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 December 31, 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.



















Part
      II  Other
      Information







I tem
      1.
      Legal Proceedings





As
      previously reported, on August 16, 2006, a Complaint was filed in United States
      District Court, District of New Jersey, by Sun Biomedical Laboratories, Inc.,
      Plaintiff, against Avitar Technologies, Inc., Defendant, a wholly-owned
      subsidiary of Avitar. In the Complaint, Plaintiff alleged among other things
      breaches of contract, patent infringement and unfair competition and it seeks
      damages and injunctions. A Summons in this case was not issued until September
      22, 2006 and the Summons was not delivered to Avitar until October 13, 2006.





The
      alleged breach of contract is based upon an agreement made in 1999 related
      to
      the development of products and sales of goods. The last invoice issued to
      the
      Defendant was sent by Plaintiff in August 2002. In September 2002, Avitar
      advised the Plaintiff that the Defendant owes nothing to the Plaintiff and
      that
      the Plaintiff would owe substantial amounts for its failures to perform in
      accordance with their agreement.





In
      its
      answer to this Complaint filed with the court on December 4, 2006, the Company
      denied substantially all allegations of the Plaintiff and made a significant
      counter claim against the Plaintiff for damages suffered by the Company as
      a
      result of the Plaintiff’s failure to perform in accordance with the 1999 Product
      Development Agreement. In January 2007, the Plaintiff denied substantially
      all
      of the allegations included in the Company’s counterclaim against the Plaintiff.





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





During
      the quarter ended December 31, 2006 the Company issued to holders of the Series
      E preferred stock 3,319,323 shares of the Company’s common stock upon the
      conversion of 69,522 shares of their preferred stock. In addition, the Company
      issued 4,200,000 shares of common stock to note holders upon conversion of
      long-term debt of $70,239. 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.
            Document31.1
              
              
              
              31.2
              
              
              
              32.1
              
              
              
              32.2
            Certification
                Pursuant to 18 U.S.C. Section 1350, as
              Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley
              Act
                of 2002
              
              Certification
                Pursuant to 18 U.S.C. Section 1350, as
              Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley
              Act
                of 2002
              
              Certification
                Pursuant to 18 U.S.C. Section 1350, as
              Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley
              Act
                of 2002
              
              Certification
                Pursuant to 18 U.S.C. Section 1350, as
              Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley
              Act
                of 2002















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:
      February 14, 2007     /S/
      Peter P. Phildius


Peter
      P.
      Phildius


Chairman
      and Chief Executive
      Officer


(Principal
      Executive Officer)














Dated:
      February 14, 2007     /S/
      J.C. Leatherman, Jr.


J.C. Leatherman, Jr.


Chief
      Financial Officer


(Principal
      Accounting and Financial
      Officer)
















EXHIBIT
      INDEX








Exhibit
                No.
            Document31.1
              
              
              
              31.2
              
              
              
              32.1
              
              
              
              32.2
            Certification
                Pursuant to 18 U.S.C. Section 1350, as
              Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley
              Act
                of 2002
              
              Certification
                Pursuant to 18 U.S.C. Section 1350, as
              Adopted
                Pursuant to Section 302 of the Sarbanes-Oxley
              Act
                of 2002
              
              Certification
                Pursuant to 18 U.S.C. Section 1350, as
              Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley
              Act
                of 2002
              
              Certification
                Pursuant to 18 U.S.C. Section 1350, as
              Adopted
                Pursuant to Section 906 of the Sarbanes-Oxley
              Act
                of 2002