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 December 31, 2007.
 
 [  ]  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:  134,188,868
 As
of February 8, 2008
 
 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
 Item
4                                Submission
of Matters to a Vote of Security
Holders.                                                                         
    19
 
 Item
6.                                Exhibits                                                                                                                                                      
      19
 
 Signatures                                                                                                                                                                                                                 20
 
 Exhibit
Index                                                                                                                                                                                                             21
 Certifications                                                                                                                                                                                                          22
  
 
 
 
 Part
I  Financial Information
 
 
 
 
 
 Avitar,
      Inc. and SubsidiariesConsolidated
      Balance SheetDecember
      31, 2007(Unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
              
              $
              3,268Accounts
      receivable, less allowance for doubtful accounts of $3,500
              
              
              172,745Inventories
      (Note 2)
              
              
              225,267Prepaid
      expenses and other current assets
              
              
              53,476Total
      current assets
              
              
              454,756PROPERTY
      AND EQUIPMENT, net
              
              
              204,940OTHER
      ASSETS
              
              
              792,360Total
              
              $
              1,452,056LIABILITIES AND STOCKHOLDERS'
      DEFICITCURRENT
      LIABILITIES:Notes
      payable (Note 5)
              
              $
              152,563Convertible
      notes payable (Note 5)
              
              
              650,000Current
      portion of long-term notes payable (Note 5)
              
              
              1,430,322Accounts
      payable
              
              
              691,211Accrued
      expenses
              
              
              1,178,659Current
      portion of deferred lessor incentive
              
              
              13,400Fair
      value of warrants (Note 10)
              
              
              471,359Fair
      value of embedded derivatives (Note 10)
              
              
              660,847Total
      current liabilities
              
              
              5,248,361CONVERTIBLE
      LONG-TERM NOTES PAYABLE (Note 5)
              
              
              4,067,043DEFERRED
      LESSOR INCENTIVE, LESS CURRENT PORTION
              
              
              20,100Total
      liabilities
              
              
              9,335,504CONVERTIBLE
      AND REDEEMABLE CONVERTIBLE PREFERREDSTOCK
      (Note 6)
              
              
              3,215,490COMMITMENTSSTOCKHOLDERS'
      DEFICITSeries
      B convertible preferred stock, $.01 par value;authorized
      5,000,000 shares; 5,689 shares issued andoutstanding
              
              
              57Common
      Stock, $.01 par value; authorized 800,000,000 shares;102,788,868
      shares issued and outstanding
              
              
              1,027,889Additional
      paid-in capital
              
              
              49,258,486Accumulated
      deficit
              
              
              (61,385,370
              )Total
      stockholders' deficit
              
              
              (11,098,938
              )Total
              
              $
              1,452,056See
      accompanying notes to consolidated financial statements.
 
 
 
 Avitar,
      Inc. and SubsidiariesConsolidated
      Statements of Operations(Unaudited)THREE
      MONTHS ENDED
                DECEMBER
      31,2007
              
              
              2006SALES
              
              $
              505,386
              
              
              $
              948,814OPERATING
      EXPENSESCost
      of sales
              
              
              438,885
              
              
              
              667,653Selling,
      general and administrative
              
              
              790,034
              
              
              
              898,279Research
      and development
              
              
              88,885
              
              
              
              91,924Total
      operating expenses
              
              
              1,317,804
              
              
              
              1,657,856LOSS
      FROM OPERATIONS
              
              
              (812,418
              )
              
              
              (709,042
              )OTHER
      INCOME (EXPENSE)Interest
      expense and financing costs
              
              
              (434,944
              )
              
              
              (310,175
              )Other
      income (expense), net
              
              
              (82,255
              )
              
              
              99,047Total
      other expense, net
              
              
              (517,199
              )
              
              
              (211,128
              )LOSS
      FROM CONTINUING OPERATIONS
              
              
              (1,329,617
              )
              
              
              (920,170
              )DISCONTINUED
      OPERATIONS:Loss
      from operations of BJR (Note 3)
              
              
              -
              
              
              
              (23,218
              )Loss
      from discontinued operations
              
              
              -
              
              
              
              (23,218
              )NET
      LOSS
              
              $
              (1,329,617
              )
              
              $
              (943,388
              )BASIC
      AND DILUTED NET LOSS PER SHARE FROM CONTINUINGOPERATIONS
      (Note 8)
              
              $
              (0.02
              )
              
              $
              (0.08
              )BASIC
      AND DILUTED NET LOSS PER SHARE (Note 8)
              
              $
              (0.02
              )
              
              $
              (0.08
              )WEIGHTED
      AVERAGENUMBER
      OF COMMON SHARES OUTSTANDING
              
              
              86,944,247
              
              
              
              11,667,963See
      accompanying notes to consolidated financial statements.
 
 
 
 
 Avitar,
      Inc. and SubsidiariesConsolidated
      Statement of Stockholders' DeficitThree
      Months Ended December 31, 2007(Unaudited)Preferred
      Stock
              
              
              Common
      Stock
              
              
              
              
              
              
              
              
              TotalAdditional
              
              
              Accumulated
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              paid-in
      capital
              
              
              deficit
              
              
              DeficitBalance
      at September 30, 2007
              
              
              5,689
              
              
              $
              57
              
              
              
              63,047,897
              
              
              $
              630,479
              
              
              $
              49,542,450
              
              
              $
              (60,018,697
              )
              
              $
              (9,845,711
              )Conversion
      of Series E redeemableconvertible
      preferred stock
              
              
              -
              
              
              
              -
              
              
              
              3,800,000
              
              
              
              38,000
              
              
              
              446
              
              
              
              -
              
              
              
              38,446Conversion
      of long-term convertible debt
              
              
              -
              
              
              
              -
              
              
              
              35,940,971
              
              
              
              359,410
              
              
              
              (308,075
              )
              
              
              -
              
              
              
              51,335Stock
      based compensation (Note 9)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              23,665
              
              
              
              
              
              
              
              23,665Accretion
      of preferred stock dividends
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (37,056
              )
              
              
              (37,056
              )Net
      loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,329,617
              )
              
              
              (1,329,617
              )Balance
      at December 31, 2007
              
              
              5,689
              
              
              $
              57
              
              
              
              102,788,868
              
              
              $
              1,027,889
              
              
              $
              49,258,486
              
              
              $
              (61,385,370
              )
              
              $
              (11,098,938
              )See
      accompanying notes to consolidated financial statements.
 
 Avitar,
      Inc. and SubsidiariesConsolidated
      Statements of Cash Flows(Unaudited)Three
      months ended December 31,
                
                2007
                
                
                2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss from continuing operations
                
                $
                (1,329,617
                )
                
                $
                (920,170
                )Net
      loss from discontinued operation
                
                
                -
                
                
                
                (23,218
                )Net
      loss
                
                $
                (1,329,617
                )
                
                $
                (943,388
                )Adjustments
      to reconcile net loss tonet
      cash used in operating activities:Depreciation
      and amortization
                
                
                17,958
                
                
                
                38,270Amortization
      of debt discount and deferred financing
                
                
                290,933
                
                
                
                200,504Amortization
      of deferred lessor incentive
                
                
                (3,350
                )
                
                
                (3,350
                )Expense
      for stock based compensation
                
                
                23,665
                
                
                
                42,732Income
      from changes in value of embedded derivativesand
      warrants
                
                
                82,255
                
                
                
                (98,480
                )Changes
      in operating assets and liabilities:Accounts
      receivable
                
                
                56,285
                
                
                
                215,155Inventories
                
                
                (111
                )
                
                
                (21,428
                )Prepaid
      expenses and other current assets
                
                
                32,276
                
                
                
                28,851Accounts
      payable and accrued expenses
                
                
                112,513
                
                
                
                35,574Deferred
      revenue
                
                
                -
                
                
                
                (2,400
                )Net
      cash used in continuing operations
                
                
                (717,193
                )
                
                
                (507,960
                )Net
      cash provided by discontinued operations
                
                
                -
                
                
                
                15,446Net
      cash used in operating activities
                
                
                (717,193
                )
                
                
                (492,514
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of property and equipment
                
                
                -
                
                
                
                (7,126
                )Net
      cash used in investing activities
                
                
                -
                
                
                
                (7,126
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayments
      of notes payable, long-term debt and capitallease
      obligations
                
                
                (23,608
                )
                
                
                (33,880
                )Proceeds
      from issuance of convertible long-term debt and warrants
                
                
                650,000
                
                
                
                458,400Net
      cash provided by financing activities
                
                
                626,392
                
                
                
                424,520NET
      DECREASE IN CASH AND CASH EQUIVALENTS
                
                
                (90,801
                )
                
                
                (75,120
                )CASH
      AND CASH EQUIVALENTS, beginning of the period
                
                
                94,069
                
                
                
                280,543CASH
      AND CASH EQUIVALENTS, end of the period
                
                $
                3,268
                
                
                $
                205,423SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid during period:Income
      taxes
                
                $
                -
                
                
                $
                -Interest
                
                $
                2,889
                
                
                $
                5,026SUPPLEMENTAL
      SCHEDULE OF NONCASH INVESTING ANDFINANCING
      ACTIVITIES:During
      the three months ended December 31, 2007, $632,417 of
      long-termnotes
      were issued for accrued interest on long-term convertibledebt.During
      the three months ended December 31, 2007, 38,000 shares
      ofSeries
      E redeemable convertible preferred stock were converted
    into3,800,000
      shares of common stock.During
      the three months ended December 31, 2007, convertible
      long-termdebt
      of $55,838 was converted into 35,940,971 shares ofcommon
      stock.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.See
      accompanying notes to consolidated financial statements.
 
 Avitar,
Inc. and Subsidiaries
 Notes
to Consolidated Financial Statements
 (Unaudited)
 
 1.
              Basis
      of Presentation
 
 Avitar, Inc. (“Avitar” or the “Company”), through its wholly-owned subsidiary
Avitar Technologies, Inc. (“ATI”) designs, develops, manufactures markets and
sells diagnostic test products and proprietary hydrophilic polyurethane foam
disposables for medical, diagnostic and consumer use. Avitar sells its products
and services to employers, diagnostic test distributors, large medical supply
companies, governmental agencies, and corporations. Through its wholly owned
subsidiary, BJR Security, Inc. (‘BJR”), the Company provided, until April 30,
2007, specialized contraband detection and education services.  The
Company operates in one reportable segment.
 
 Due to the financial condition at
Avitar, the Company had been considering selling assets and/or operations. On
May 1, 2007, Avitar consummated a sale of the business of its BJR subsidiary for
$40,000, payable no later than April 30, 2012.  As a result of the
length of the payment period, payments will be recorded as income when they are
received (see Note 3).  The BJR business has been treated as a
discontinued operation.
 
 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, 2007 are not
      necessarily indicative of the results that may be expected for the full
      fiscal year ending September 30, 2008.  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, 2007.
 
 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 $4,793,605 and a
      stockholders’ deficit of $11,098,938 as of December 31,
      2007.  In fiscal 2007, the Company raised gross proceeds of
      $1,895,000 from long-term convertible notes.  During November
      and December 2007, the Company raised gross proceeds of $650,000 from
      long-term convertible notes and executed long-term convertible notes for
      approximately $632,000 of accrued interest related to long-term debt (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, 2007, inventories consist of the following:
 
 Raw
Materials                                                                                      
$107,791
 Work-in-Process                                                                                      53,293
 Finished
Goods                                                                                     64,183
 Total                                                                                       $225,267
 
 3.   Discontinued
Operations
 
 On May 1,
2007, the Company consummated the sale of BJR’s business.  Under the
terms of the sale, the Company will be paid $40,000 no later than April 30,
2012.  Due  to the length of the payment period, payments
will be recorded as income when they are received.  The following is a
summary of the results of its operations for the three months ended December 31,
2007 and 2006:
 
 
 Three months ended December
31,              2007                      2006
 
 Sales                                                            
$            -            $      96,213
 Operating
expenses                                  
     
        -                  119,431
 
 Loss from discontinued
operations        $            -            $   (
23,218)
 
 
 4.
              Significant  Customers
 
 Customers
in excess of 10% of total sales are:
 
 Three Months Ended December
31,
 2007                                2006
 Customer
A                                                                           
$    86,940                         $             *
 Customer
B                                                                                        *                            
   122,093
 Customer
C                                                                                  56,250                           
 117,000
 
 *Customer was not in excess of 10% of
total sales.
 
 At
December 31, 2007, accounts receivable from three significant customers totaled
approximately $76,270
 
 5.
              Notes Payable and
      Short and Long-term Convertible Notes
  Payable
 
 From
September 2005 through December 2007 the Company executed notes payable with AJW
Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, New Millennium
Capital Partners II, LLC and AJW Master Fund in the total principal amount of
$6,815,000 which are payable at maturity dates from September 2008 to December
2010.  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.  In addition, as of November 16, 2007, the entire unpaid and
unconverted principal plus any accrued and unpaid interest associated with these
notes is convertible, at the holder’s option, into the Company’s common stock
ata conversion price of
40% 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.  The total amount of these notes issued in the quarter ended
December 31, 2007 amounted to $650,000.  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 from July 2006 through September
2007, the Company issued warrants to purchase a total of 65,500,000 shares of
common stock at $.01 to $.22 per share for seven years. For the notes executed
during fiscal 2008, the Company issued warrants to purchase a total of
55,000,000 shares of common stock at $.01 per share for seven years valued at
$130,000.  Fees of approximately $1,202,000 incurred in connection
with securing these loans were recorded as a deferred financing
charge.  On December 31, 2007, the Company executed notes payable with
AJW Partners, LLC, New Millennium Capital Partners II, LLC and AJW Master Fund
in the total principal amount of $632,417 to cover the accrued interest through
October 31, 2007 on all of the above notes.  These interest notes are
payable on December 31, 2010 with interest on these notes at 2% per annum that
is payable quarterly in cash or the Company’s common stock at the option of the
Company.  The entire unpaid and unconverted principal plus any accrued
and unpaid interest associated with these interest notes is convertible, at the
holder’s option, into the Company’s common stock ata conversion price of 40% 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 $2,648,864 ($1,708,258 for the
fair value of the conversion feature of these notes and $940,606 for the
incremental fair value of the warrants issued in connection with these notes)
was recorded during fiscal 2005, 2006, 2007 and 2008 and is being amortized over
the terms of the notes.  The unamortized discount was $1,500,341
($119,967 for note maturing September 2008 and $1,380,374 for the remainder of
the notes) as of December 31, 2007.  The collateral pledged by the
Company to secure these notes includes all assets of the Company. A liability of
approximately $3,254,000 was recorded for the fair value of the warrants issued
in connection with the $7,447,000 of notes and the conversion feature, which was
reduced to its market value of approximately $917,000 at December 31,
2007.  Through December 31, 2007, notes totaling $449,711 were
converted into 61,246,734 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, 2007. 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 stock ata 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 $0 at December 31,
2007.
 
 6.
              Convertible and
      Redeemable Convertible Preferred
Stock
 Instrument
                
                Number
                  of
                  Shares
                
                
                Face
                  Value
                
                
                Less
      Costs
                  and
                  Proceeds
                  Allocated
                  to
      Warrants
                  and
                  Conversion
                  Features
                
                
                Accretion
                  To
                  Redemption
                  Value
                
                
                Accretion
                  of
                  Dividends
                
                
                Carrying
                  ValueSeries E
                  Redeemable
                  Convertible
                  Preferred
                  Stock
                
                
                500,350
                
                
                $
                500,350
                
                
                $
                362,587
                
                
                $
                362,587
                
                
                $
                85,548
                
                
                $
                585,898Series
      C
                  Convertible
                  Preferred
                  Stock
                
                
                28,608
                
                
                
                145,000
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                145,0006%
                  Convertible
                  Preferred
                  Stock
                
                
                2,000
                
                
                
                2,000,000
                
                
                
                -
                
                
                
                -
                
                
                
                484,592
                
                
                
                2,484,592Total
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                570,140
                
                
                $
                3,215,490
 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, 2007.  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 $117,000 at December 31, 2007.  As of December 31, 2007,
999,650 shares of this preferred stock had been converted into 22,578,346 shares
of common stock and 500,350 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 $12 at December 31,
      2007. As of December 31, 2007, 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, 2007 or 2006.  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, 2007 or 2006.
 
 
 7.
              Common and Series B
      Convertible Preferred Stock
 
 During
the quarter ended December 31, 2007, the Company issued a total of 39,740,971
shares of common stock to holders who converted 38,000 shares of Series E
redeemable convertible preferred stock and $55,838 of long-term convertible
notes.   Dividends for Series B convertible preferred stock
amounted to $448 for the three months ended December 31, 2007 and the total
amount of unpaid and undeclared dividends was $10,428.
 
 
 8.  Loss Per Share
 
 The
      following data show the amounts used in computing earnings per
      share:
 Three Months Ended December
    31,
                
                2007
                
                
                2006Loss
      from continuing operations
                
                $
                (
      1,329,617
                )
                
                $
                ( 920,170
                )Less:
                  Preferred
      stock dividends
                
                
                ( 37,056
                )
                
                
                ( 39,108
                )Loss
      attributable to common stockholders
                  from
      continuing operations
                
                
                ( 1,366,673
                )
                
                
                ( 959,278
                )Add:
                  Loss from discontinued operations
                
                
                -
                
                
                
                ( 23,218
                )Net
      loss attributable to commonstockholders
                  used in basic anddiluted
      EPS
                
                $
                ( 1,366,673
                )
                
                $
                ( 982,496
                )Weighted
      average number of
                  common
      shares outstanding
                
                
                86,944,247
                
                
                
                11,667,963Loss
      per share attributable to common
                  stockholders
      before discontinuedoperations
                
                $
                ( 0.02
                )
                
                $
                ( 0.08
                )Impact
      of discontinued operations
                
                
                -
                
                
                
                -Basic
      and diluted loss per shareattributable
      to
                  common stockholders
                
                $
                ( 0.02
                )
                
                $
                ( 0.08
                )
 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 loss.  The Company recognizes stock-based compensation ratably
over the vesting period of the individual equity instruments.  All
unvested stock awards outstanding on October 1, 2006, or issued after that
date,  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
(loss) 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 $23,665 and $42,732 of stock based
compensation expense on its unaudited consolidated statement of operations for
the three months ended December 31, 2007 and 2006, respectively.
 
 During
the quarter ended December 31, 2007, no options were granted under stock option
plans and no shares subject to purchase under the employee stock purchase plan
were issued.
 
 The
unamortized fair value of stock options as of December 31, 2007 was $121,060
which is expected to be recognized over the weighted average remaining period of
1.6 years.
 
 The
following table summarizes activity under all stock option plans for the three
months ended December 31, 2007:
  Weighted
                
                
                WeightedAverage
                
                
                AverageShares
                
                
                
                
                
                Exercise
                
                
                Remaining
                
                
                AggregateAvailable
                
                
                Number
                
                
                Price
      Per
                
                
                Contractual
                
                
                Intrinsicfor
      Grant
                
                
                Outstanding
                
                
                Share
                
                
                Term (years)
                
                ValueBalance
      at September 30, 2007
                
                
                1,042,000
                
                
                
                158,628
                
                
                $
                21.20
                
                
                
                3.7
                
                
                $
                0.00Options
      authorized
                
                
                0
                
                
                
                0
                
                
                
                0Options
      granted
                
                
                0
                
                
                
                0
                
                
                
                0Options
      exercised
                
                
                0
                
                
                
                0
                
                
                
                0Options
      forfeited/expired
                
                
                0
                
                
                
                (2,508
                )
                
                
                1.11Balance
      at December 31, 2007
                
                
                1,042,000
                
                
                
                156,120
                
                
                $
                21.52
                
                
                
                3.3
                
                
                $
                0.00Exercisable
      at December 31, 2007
                
                
                
                
                
                
                105,266
                
                
                $
                24.39
                
                
                
                3.3
                
                
                $
                0.00














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, 2007,
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, 2007, the fair value was $ 660,847 for the embedded
derivatives and $471,359 for the warrants.





11.  Recent Accounting
Pronouncements





In July 2006, the Financial Accounting
Standards Board (“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 adoption of FIN 48 by the Company on October
1, 2007 has not had a material impact on its consolidated financial
statements.





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 was effective for the Company beginning January 1,
2007.  The adoption of EITF 06-03 has not had a material impact on its
consolidated financial statements.








In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”.SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in U.S. generally
accepted accounting principles, and expands disclosures about fair value
measurements.  SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years.  The FASB has issued a one-year deferral of SFAS 157’s fair
value measurement requirement for non-financial assets and liabilities that are
not required or permitted to be measured at fair value on a recurring
basis.  For the quarter ended December 31, 2007, the Company utilized
SFAS No. 157 to measure the fair value of the embedded derivatives and
freestanding warrants described in Note 10 to the consolidated financial
statements. During this quarter, the Company recorded other expense of $82,255
to reflect the change in the value for these embedded derivatives and
freestanding warrants.





In
December 2006, the 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 adoption of FSP EITF
00-19-2 by the Company has not had an impact on its consolidated financial
statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of FASB
No 115”.This Statement
provides companies with an option to measure, at specified election dates, many
financial instruments and certain other items at fair value that are not
currently measured at fair value. The standard also establishes presentation and
disclosure requirements designed to facilitate comparison between entities that
choose different measurement attributes for similar types of assets and
liabilities. If the fair value option is elected, the effect of the first
remeasurement to fair value is reported as a cumulative effect adjustment to the
opening balance of retained earnings. The statement is to be applied
prospectively upon adoption. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
effect that the adoption of SFAS No. 159 will have on its consolidated financial
statements but does not expect that it will have a material impact.








12.  Subsequent
Events





From
      January 1, 2008 through February 8, 2008, 207,300 shares of Series E
      redeemable convertible preferred stock with a face value of $207,300 were
      converted into 20,730,000 shares of common stock.   In
      addition, $14,600 of long-term convertible debt was converted into
      16,000,000 shares of common stock.







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





Revenues


Sales for
the three months ended December 31, 2007 decreased $443,428 or approximately
47%, to $505,386 from $948,814 for the corresponding period of the prior
year.  The change for Fiscal 2008 reflects a decrease in the volume of
sales of approximately $326,000 for its Foam Products resulting mainly from the
change to a new US distributor on January 1, 2007 for Hydrasorb® wound dressings
and a decrease in diagnostic product revenue of approximately
$116,000.  The Company expects that operating revenues will grow
during the balance of Fiscal 2008 as employers expand their use of random drug
testing utilizing Avitar’s ORALscreen, and when the Company is able to find a
major US distributor for its Hydrasorb wound dressing products.





Operating
Expenses





Cost of
sales for the three months ended December 31, 2007 were approximately 86% of
sales compared to the cost of sales of approximately 70% of sales for the three
months ended December 31, 2006.  The change for the first quarter of
Fiscal 2008 resulted primarily from the decrease in sales described above,
offset in part by the expense reduction program put in place by the Company in
April 2007.




Selling, general and administrative expenses for the three months ended December 31, 2007
decreased $108,245, or approximately 12%, to $790,034 from $898,279 for the
corresponding period of the prior year.  The decrease for the three
months ended December 31, 2007 primarily resulted from expense reductions of
approximately $186,000 for salary and payroll related costs for various sales,
marketing and other administrative positions, $18,000 for travel expenses,
$10,000 for trade shows and promotion materials, $15,000 for stock based
compensation  and $24,000 for various other administrative items;
offset in part by an increase of approximately $49,000 for legal fees, $42,000
for investor relations, $30,000 for consulting expense and $24,000 for annual
meeting costs.  In order to achieve revenue growth, the Company will
need to incur increased expenses to hire additional direct sales staff and
expand marketing programs as sufficient additional funding becomes
available.





Research
and development expenses for the three months ended December 31, 2007 amounted
to $88,885 compared to $91,924 for the three months ended December 31,
2006.  The decrease for the quarter ended December 31, 2007 was
primarily attributable to lower salary and payroll related expenses associated
with the expense reduction program put in place by the Company in April
2007.  Although research and development expenses were lower for the
first quarter of Fiscal 2008, 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 2008 and beyond as
sufficient additional funding becomes available.





Other
Income and Expense





Interest expense and financing costs
were $434,944 for the three months ended December 31, 2007 compared to $310,175
incurred during the three months ended December 31, 2006.  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 $2,657,000 that were completed
by the Company from March 2007  through December 2007.




For the three months ended December 31, 2007, other expense amounted to $82,255 compared
to other income of $99,047 for the three months ended December 31,
2006.  The change for the quarter ended December 31, 2007 resulted
primarily from changes in the fair market value of derivative securities and
warrants.





Discontinued
Operations





On May 1,
2007, the Company consummated a sale of the business of its BJR
subsidiary.   No activity occurred for the three months ended
December 31, 2007 compared to a loss of $23,218 for the corresponding period of
the prior year.  See Note 3 to the accompanying consolidated financial
statements.





Net
Loss





Primarily
as a result of the factors described above, the Company had a net loss of
$1,329,617 for the three months ended December 31, 2007, as compared to net loss
of $943,388 for the three months ended December 31, 2006.  The loss
per share was $.02 per basic and diluted share for the three months ended
December 31, 2007.  The loss per share was $.08 per basic and diluted
share for the three months ended December 31, 2006.





Financial
Condition and Liquidity





At
December 31, 2007, the Company had a stockholders’ deficit of $11,098,938 and
cash and cash equivalents of $3,268.  Cash flows from financing
activities provided the primary source of funding during the quarter ended
December 31, 2007 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, 2007:





December 31,


Sources (use) of cash
flows                                                                        2007


Operating
activities                                                                                    $
(   717,193)


Investing
activities                                                                                                       -


Financing
activities                                                                                     626,392


Net
decrease in cash and
equivalents                                                     $
(     90,801)





Operating
Activities.  The net loss of $1,329,617 (composed of expenses
totaling $1,835,003 less revenues of $505,386) 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 and deferred
financing costs, expenses 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 $918,156.  Working capital changes lowered
operating cash requirements as a result of a reduction in accounts receivable of
$56,285, a decrease in prepaid expenses and other current assets of $32,276 and
an increase in accounts payable and accrued expenses of $112,513.  In
addition, operating cash was needed to finance a minimal increase in inventory
levels.





Investing and Financing
Activities.   To fulfill the major financing requirements
of the business, the Company generated $650,000 through the issuance of
long-term convertible notes (as described below), of which $23,608 was used to
repay various short-term notes payable and capital lease
obligations.





During FY
2008, 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.





From September
2005 through December 2007 the Company executed notes payable with AJW Partners,
LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC, New Millennium Capital
Partners II, LLC and AJW Master Fund in the total principal amount of $6,815,000
which are payable at maturity dates from September 2008 to December
2010.  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.  In addition, as of November 16, 2007, the entire unpaid and
unconverted principal plus any accrued and unpaid interest associated with these
notes is convertible, at the holder’s option, into the Company’s common stock
ata conversion price of
40% 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.  The total amount of these notes issued in the quarter ended
December 31, 2007 amounted to $650,000.  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 from July 2006 through August
2007, the Company issued warrants to purchase a total of 65,500,000 shares of
common stock at $.01 to $.22 per share for seven years. For the notes executed
during Fiscal 2008, the Company issued warrant to purchase 55,000,000 shares of
common stock at $.01 per share for seven years valued at
$130,000.  Fees of approximately $1,202,000 incurred in connection
with securing these loans were recorded as a deferred financing
charge.  On December 31, 2007, the Company executed notes payable with
AJW Partners, LLC, New Millennium Capital Partners II, LLC and AJW Master Fund
in the total principal amount of $632,417 to cover the accrued interest through
October 31, 2007 on all of the above notes.  These interest notes are
payable on December 31, 2010 with interest on these notes is at 2% per annum
that is payable quarterly in cash or the Company’s common stock at the option of
the Company. The entire unpaid and unconverted principal plus any accrued and
unpaid interest associated with these interest notes is convertible, at the
holder’s option, into the Company’s common stock ata conversion price of 40% 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 $2,648,864 ($1,708,258 for the
fair value of the conversion feature of these notes and $940,606 for the
incremental fair value of the warrants issued in connection with these notes)
was recorded during fiscal 2005, 2006, 2007 and 2008 and is being amortized over
the terms of the notes.  The unamortized discount was $1,500,341
($119,967 for note maturing September 2008 and $1,380,374 for the remainder of
the notes) as of December 31, 2007. The collateral pledged by the Company to
secure these notes includes all assets of the Company.  Through
December 31, 2007, notes totaling $449,711 were converted into 61,246,734 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, 2007.  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 ata 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.





The cash
available at December 31, 2007, the anticipated proceeds of approximately
$640,000 from additional financings from the NIR Group in February and March
2008 and the anticipated customer receipts are expected to be sufficient to fund
the operations of the Company through early March 2008.  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 2008 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 expects that operating revenues will grow during the remainder of
Fiscal 2008 as employers expand their use of random drug testing utilizing
Avitar’s ORALscreen and if the Company is able to find a major US distributor
for its Hydrasorb wound dressing products.  However, funding
constraints described above have resulted in a decrease in the Company’s direct
sales force and has delayed the implementation of 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.  Funding
constraints have also resulted in the Company having difficulty in maintaining
raw material inventories at sufficient levels for manufacturing products to meet
anticipated sales volumes.  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, the  net proceeds from the
immediate and 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 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 find a major US distributor for its Hydrasorb products or 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 2007 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 24,
2007).  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
July 2006, the Financial Accounting Standards Board (“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 adoption of FIN
48 by the Company on October 1, 2007 has not had a material impact on its
consolidated financial statements.





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 was effective for the Company beginning January 1,
2007.  The adoption of EITF 06-03 has not had a material impact on its
consolidated financial statements.








In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements”.SFAS No. 157 defines
fair value, establishes a framework for measuring fair value in U.S. generally
accepted accounting principles, and expands disclosures about fair value
measurements.  SFAS 157 is effective for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years.  The FASB has issued a one-year deferral of SFAS 157’s fair
value measurement requirement for non-financial assets and liabilities that are
not required or permitted to be measured at fair value on a recurring
basis.  For the quarter ended December 31, 2007, the Company utilized
SFAS No. 157 to measure the fair value of the embedded derivatives and
freestanding warrants described in Note 10 to the consolidated financial
statements. During this quarter, the Company recorded other expense of $82,255
to reflect the change in the value for these embedded derivatives and
freestanding warrants.





In
December 2006, the 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 adoption of FSP EITF
00-19-2 by the Company has not had an impact on its consolidated financial
statements.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an Amendment of FASB
No 115”.This Statement
provides companies with an option to measure, at specified election dates, many
financial instruments and certain other items at fair value that are not
currently measured at fair value. The standard also establishes presentation and
disclosure requirements designed to facilitate comparison between entities that
choose different measurement attributes for similar types of assets and
liabilities. If the fair value option is elected, the effect of the first
remeasurement to fair value is reported as a cumulative effect adjustment to the
opening balance of retained earnings. The statement is to be applied
prospectively upon adoption. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is currently evaluating the
effect that the adoption of SFAS No. 159 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.





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,
2007, 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













Item
1.    Legal Proceedings





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.  In April and October 2007, conferences were
held with the Judge assigned to this case and schedules were established and
revised for the discovery process and the trial.





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





During the quarter ended December 31,
2007 the Company issued to holders of the Series E   preferred
stock 3,800,000 shares of the Company’s common stock upon the conversion of
38,000 shares of their preferred stock.  In addition, the Company
issued 35,940,971 shares of common stock to note holders upon conversion of
long-term debt of $55,838.  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
4.      Submission of Matters to a
Vote of Security Holders





The
annual meeting of the shareholders was held on December 18, 2007.  All
members of the Board of Directors were elected by more than 64% of the total
shares outstanding and more than 77% of the shares voted.  In
addition, the reappointment of BDO Seidman, LLP as auditors was approved and the
tabulation of votes for all matters was as follows:


For
              
              
              Withheld
              
              
              Against
              
              
              AbstainElection
      of Directors
              
              
              51,004,852
              
              
              
              15,177,574
              
              
              
              N/A
              
              
              
              N/AApproval
      of Amendment to Certificateof
      Incorporation to effect an increase
                of
      Authorized Shares of Common from 100,000,000 to
800,000,000
              
              
              46,771,142
              
              
              
              N/A
              
              
              
              19,385,887
              
              
              
              25,397Ratify
      BDO Seidman, LLP asCompany’s
      IndependentRegistered
      Public Firm
              
              
              59,578,126
              
              
              
              N/A
              
              
              
              6,384,859
              
              
              
              219,441


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,
2008                                                                    /S/ Peter P.
Phildius


Peter P. Phildius


Chairman and Chief


Executive Officer


(Principal Executive
Officer)














Dated:  February
14,
2008                                                                    /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