**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**FORM      10-Q**

**Quarterly      Report Pursuant to Section 13 or 15 (d)**

**of      the Securities Exchange Act of 1934**

**AFP      Imaging Corporation**

|  New                York                                                       |  13-2956272                                    |
|------------------------------------------------------------------------------------------|-----------------------------------------------------|
| (State                or Other Jurisdiction of                                           | (I.R.S.                Employer Identification No.) |
| Incorporation                or Organization)                                            |                                                |
|                                                                                     |                                                |
|   250                Clearbrook Road, Elmsford, New York                  |  10523                                    |
|  (Address                of Principal Executive Offices)                            |                  (Zip Code)                    |
|                                                                                     |                                                |
|  914-592-6100                                                                  |
|  (Registrant's                Telephone Number, Including Area                Code) |

----

**AFP      Imaging Corporation**

|                        |                                                                                                                                                                                | Page   |
|-----------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                        |                                                                                                                                                                                |   |
| **Part                I.**  | **Financial                Information**                                                                                                                                            |   |
|                        |                                                                                                                                                                                |   |
| Item                1.      | Financial                Statements                                                                                                                                                 |   |
|                        |                                                                                                                                                                                |   |
|                        | Condensed                Consolidated                Balance                Sheets                as                of September 30, 2006 (unaudited) and June 30, 2006             | 4      |
|                        |                                                                                                                                                                                |   |
|                        | Condensed                Consolidated Statements of Operations for the                three months ended September 30, 2006 and 2005                (unaudited)                     | 5      |
|                        |                                                                                                                                                                                |   |
|                        | Condensed                Consolidated Statements of Shareholders’ Equity                for the three months ended September 30, 2006 and 2005                (unaudited)     | 6      |
|                        |                                                                                                                                                                                |   |
|                        | Condensed              Consolidated              Statements              of Cash Flows for the three months ended September 30, 2006 and              2005              (unaudited) | 7      |
|                        |                                                                                                                                                                                |   |
|                        | Notes                to                Consolidated                Interim Financial Statements                                                                                     | 8-12   |
|                        |                                                                                                                                                                                |   |
| Item                2.      | Management’s                Discussion                and Analysis of Financial Condition and Results of                Operations                                            | 13-16  |
|                        |                                                                                                                                                                                |   |
| Item                3.      | Quantitative                and                Qualitative Disclosures About Market Risk                                                                                            | 16     |
|                        |                                                                                                                                                                                |   |
| Item                4.      | Controls                and                Procedures                                                                                                                               | 16-17  |
|                        |                                                                                                                                                                                |   |
| **Part                II.** | **Other                Information**                                                                                                                                                |   |
|                        |                                                                                                                                                                                |   |
| Item                1       | Legal                Proceedings                                                                                                                                                    | 18     |
|                        |                                                                                                                                                                                |   |
| Item                6.      | Exhibits                                                                                                                                                                            | 18     |
|                        |                                                                                                                                                                                |   |
| Signatures                  | 19-25                                                                                                                                                                               |

----

| ·   | adverse                changes in general economic conditions, |
|--------------------|----------------------------------------------------------------|

| ·   | the                Company’s ability to repay its debts when due, |
|--------------------|-------------------------------------------------------------------------|

| ·   | changes                in the markets for the Company’s products and services, |
|--------------------|--------------------------------------------------------------------------------------|

| ·   | the                ability of the Company to successfully design, develop, manufacture                and                sell new products, |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                Company’s ability to successfully market its existing and new products, |
|--------------------|--------------------------------------------------------------------------------------------------|

| ·   | adverse                business conditions, |
|--------------------|---------------------------------------------|

| ·   | changing                industry and competitive                conditions, |
|--------------------|-----------------------------------------------------------------------------|

| ·   | the                effect of technological advancements on the marketability of the                Company’s                products, |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | maintaining                operating efficiencies, |
|--------------------|----------------------------------------------------|

| ·   | pricing                pressures, |
|--------------------|-----------------------------------|

| ·   | risks                associated with foreign sales, |
|--------------------|-----------------------------------------------------|

| ·   | the                Company’s ability to attract and retain key personnel, |
|--------------------|---------------------------------------------------------------------------------|

| ·   | difficulties                in maintaining adequate long-term financing to meet the Company’s                obligations and fund the Company’s                operations, |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | changes                in the nature or enforcement of laws and regulations concerning the                Company’s products, services, suppliers, or                customers, |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | determinations                in various outstanding legal                matters, |
|--------------------|------------------------------------------------------------------------------------|

| ·   | the                success of the Company’s strategy to increase its market share in the                industries in which it competes, |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                Company’s ability to successfully integrate the operations of any entity                acquired by the Company with the Company’s                operations, |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | changes                in currency exchange rates and regulations,                and |
|--------------------|---------------------------------------------------------------------------------------|

| ·   | other                factors set forth in this Quarterly Report on Form 10-Q, and the                Company’s                Annual Report on Form 10-K for the year ended June 30, 2006, and                from time                to time in the Company’s other filings with the Securities and Exchange                Commission. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**PART      I. Financial Information**

----

**Item      1: FINANCIAL STATEMENTS**

**AFP        Imaging Corporation and Subsidiaries**

**Condensed        Consolidated Balance Sheets - September 30, 2006 and        June 30, 2006**

| **Assets**                                                                                                                                              |   | **September                    30,****2006** |           | **June                    30,****2006** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|----------------|-----------------------------------------|--------|
|                                                                                                                                                    |   | (Unaudited)                             |           |                                    |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |
| Current                    Assets:                                                                                                                      |   |                                         |           |                                    |   |
| Cash                    and cash equivalents                                                                                                            |   | $                                            | 5,233,480      |                                    | $      | 5,213,289 |   |
| Accounts                    receivable, less                    allowance for doubtful accounts of $90,000 and $90,000,                    respectively |   |                                         | 2,398,562      |                                    |   | 2,757,114 |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
| Inventories                                                                                                                                             |   |                                         | 4,966,284      |                                    |   | 4,834,510 |   |
| Prepaid                    expenses and other current assets                                                                                            |   |                                         | 222,792        |                                    |   | 97,189 |   |
|                        Deferred income taxes                                                                                             |   |                                         | 680,000        |                                    |   | 680,000 |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
| **Total                    current assets**                                                                                                             |   |                                         | 13,501,118     |                                    |   | 13,582,102 |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
| Property                    and Equipment                                                                                                               |   |                                         |           |                                    |   |   |   |
| At                    cost                                                                                                                              |   |                                         | 1,866,617      |                                    |   | 1,828,149 |   |
| Less                    accumulated depreciation                                                                                                        |   |                                         | (1,506,427     | )                                       |   | (1,450,484 | ) |
|                                                                                                                                                    |   |                                         | 360,190        |                                    |   | 377,665 |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
|  Other                    Assets                                                                                                                   |   |                                         | 443,654        |                                    |   | 380,797 |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |
| **                         Total Assets**                                                                                      |   | **$**                                        | **14,304,962** |                                    | **$**  | **14,340,564** |   |
|                                                                                                                                                    |   |                                         |           |                                    |   |   |   |

| **Liabilities                    and Shareholders' Equity**                                                                                                                                                                                                                                                                                                                                         |   | **September                    30,****2006** |           | **June                    30,****2006** |                                |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|----------------|-----------------------------------------|-------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                |   | (Unaudited)                                  |           |                                    |                                |
| Current                    Liabilities:                                                                                                                                                                                                                                                                                                                                                             |   |                                         |           |                                    |                                |
|                        Current portion of long-term debt                                                                                                                                                                                                                                                                                                                             |   | $                                            | 1,062,545      |                                    | $                                   | - |   |
|                        Accounts payable                                                                                                                                                                                                                                                                                                                                              |   |                                         | 1,447,414      |                                    |                                | 2,035,117 |   |
|                        Accrued expenses                                                                                                                                                                                                                                                                                                                                              |   |                                         | 1,597,915      |                                    |                                | 1,565,174 |   |
|                          **Total current liabilities**                                                                                                                                                                                                                                                                                                                     |   |                                         | 4,107,874      |                                    |                                | 3,600,291 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |                                         |           |                                    |                                |   |   |
|  Deferred                    Rent                                                                                                                                                                                                                                                                                                                                                              |   |                                         | 66,119         |                                    |                                | 71,204 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |                                         |           |                                    |                                |   |   |
|                          **Total                    liabilities**                                                                                                                                                                                                                                                                                                          |   |                                         | 4,173,993      |                                    |                                | 3,671,495 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |                                         |           |                                    |                                |   |   |
| Common                    Stock subject to registration rights                                                                                                                                                                                                                                                                                                                                      |   |                                         | 4,744,323      |                                    |                                | 4,744,323 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |                                         |           |                                    |                                |   |   |
| Shareholders’                  Equity:                                                                                                                                                                                                                                                                                                                                                        |   |                                         |           |                                    |                                |   |   |
| Preferred                  stock - $.01 par value; authorized 5,000,000 shares, none issued                                                                                                                                                                                                                                                                                                         |   |                                         | -              |                                    |                                | - |   |
| Common                    stock, $.01 par value; authorized                      30,000,000 shares, issued and outstanding                    12,428,800 and 12,345,994                      (including 2,777,777 shares subject to                      registration rights) shares at September  30,                    2006, and June 30, 2006, respectively  |   |                                         | 96,510         |                                    |                                | 95,682 |   |
|  Common                    stock warrants                                                                                                                                                                                                                                                                                                                                                      |   |                                         | 91,131         |                                    |                                | 110,931 |   |
|  Paid-in                    capital in excess of par                                                                                                                                                                                                                                                                                                                                           |   |                                         | 11,854,584     |                                    |                                | 11,805,852 |   |
|  Accumulated                    deficit                                                                                                                                                                                                                                                                                                                                                        |   |                                         | (6,655,579     | )                                       |                                | (6,087,719)7 | ) |
| ** Total                    shareholders’ equity**                                                                                                                                                                                                                                                                                                                                       |   |                                         | 5,386,646      |                                    |                                | 5,924,746 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |                                         |           |                                    |                                |   |   |
| ** Total                    Liabilities and Shareholders’ **Equity****                                                                                                                                                                                                                                                                                                                   |   |                    **$**                | **14,304,962** |                                         |                     **$** | **14,340,564** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                |   |                                         |           |                                    |                                |   |   |
| The                    accompanying notes to condensed consolidated financial statements                    are an                    integral part of these statements.                                                                                                                                                                                                                            |   |

----

| **AFP                  Imaging Corporation and Subsidiaries**                         |
|---------------------------------------------------------------------------------------|
| **Condensed                  Consolidated Statements of                  Operations** |
| (Unaudited)                                                                           |
|                                                                                  |   |   |   |
|                                                                                  |   | **Three                  Months Ended****September                  30,** |   |
|                                                                                  |   |   |   |   |   |
|                                                                                  |   | **2006** |   | **2005** |   |
|                                                                                  |   |   |   |   |   |
| **Net                  sales**                                                        |   | **$** | **5,492,128** |   | **$** | **5,130,114** |   |
|                                                                                  |   |   |   |   |   |   |   |
| Cost                  of sales                                                        |   |   | 3,781,925 |   |   | 3,282,596 |   |
|                                                                                  |   |   |   |   |   |   |   |
| Gross                  profit                                                         |   |   | 1,710,203 |   |   | 1,847,518 |   |
|                                                                                  |   |   |   |   |   |   |   |
| Selling,                  general and administrative expenses                         |   |   | 2,131,972 |   |   | 1,775,574 |   |
| Research                  and development expenses                                    |   |   | 178,480 |   |   | 154,685 |   |
|                                                                                  |   |   | 2,310,452 |   |   | 1,930,259 |   |
|                                                                                  |   |   |   |   |   |   |   |
| Operating                  loss                                                       |   |   | (600,249 | ) |   | (82,741 | ) |
|                                                                                  |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |
| Interest                  income, net of (interest expense)                           |   |   | 32,389 |   |   | (27,155 | ) |
|                                                                                  |   |   |   |   |   |   |   |
| Loss                  before provision for income taxes                               |   |   | (567,860 | ) |   | (109,96 | ) |
|                                                                                  |   |   |   |   |   |   |   |
| Provision                  for income taxes                                           |   |   | --- |   |   | --- |   |
|                                                                                  |   |   |   |   |   |   |   |
| **Net                  loss**                                                         |   |   | **($567,860** | **)** |   | **($109,896** | **)** |
|                                                                                  |   |   |   |   |   |   |   |
|                                                                                  |   |   |   |   |   |   |   |
| Net                  loss per common share:                                           |   |   |   |   |   |   |   |
| Basic                  and diluted                                                    |   |   | ($.05 | ) |   | ($.01 | ) |
|                                                                                  |   |   |   |   |   |   |   |
| Weighted                  average outstanding common stock:                           |   |   |   |   |   |   |   |
| Basic                  and diluted                                                    |   |   | 12,374,607 |   |   | 9,539,375 |   |

| The                  accompanying notes to condensed consolidated financial statements                  are an                  integral part of these                  statements. |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **AFP                  Imaging Corporation and Subsidiaries****Condensed                  Consolidated Statements of Shareholders’                  Equity****For                  the Three Months Ended September 30, 2006 and                  2005**(Unaudited) |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                      |   |   | **Common****Stock** |   |   | **Common****Stock****Warrants** |   |   | **Paid-in****Capital                  In****Excess                  of Par** |   |   | **Accumulated****Deficit** |   |   | **Total** |   |
|                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance                  June 30, 2005**                                                                                                                                                                                                                                |   | **$** | **94,077** |   | **$** | **19,800** |   | **$** | **11,641,821** |   | **$** | **(7,093,067** | **)** | **$** | **4,662,631** |   |
|                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Issuance of 160,500 shares of                      common stock in connection with the                      exercise of stock options                                                                         |   |   | 1,605 |   |   | --- |   |   | 81,633 |   |   | --- |   |   | 83,238 |   |
|                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Stock-based compensation expense                                                                                                                                                                                                            |   |   | --- |   |   | --- |   |   | 17,644 |   |   | --- |   |   | 17,644 |   |
|                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                     Net loss for three months                      ended September 30, 2005                                                                                                                                                      |   |   | --- |   |   | --- |   |   | --- |   |   | (109,896 | ) |   | (109,896 | ) |
| **Balance                  September 30, 2005**                                                                                                                                                                                                                           |   | **$** | **95,682** |   | **$** | **19,800** |   | **$** | **11,741,098** |   | **$** | **(7,202,963** | **)** | **$** | **4,653,617** |   |
|                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Balance                  June 30, 2006**                                                                                                                                                                                                                                |   | **$** | **95,682** |   | **$** | **110,931** |   | **$** | **11,805,852** |   | **$** | **(6,087,719** | **)** | **$** | **5,924,746** |   |
|                                                                                                                                                                                                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

|                     Issuance of 82,800 shares of common                      stock in connection with the exercise                      of common stock warrants |   |   | 828        |   |   | (19,800    | )      |   | 18,972         |   |   | ---            |   |   | ---           |         |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|--------|------------|--------|--------|----------------|--------|--------|----------------|--------|--------|---------------|--------------|
|                                                                                                                                                                                                     |   |   |       |   |   |       |   |   |           |   |   |           |   |   |          |         |
|                     Stock-based compensation expense                                                                                                                                           |   |   | ---        |   |   | ---        |   |   | 42,329         |   |   | ---            |   |   | 42,329        |         |
|                                                                                                                                                                                                     |   |   |       |   |   |       |   |   |           |   |   |           |   |   |          |    |
|                     Additional fees associated with issuance                      of common stock in May 2006                                                                   |   |   | ---        |   |   | ---        |   |   | (12,569        | )      |   | ---            |   |   | (12,569       | )            |
|                                                                                                                                                                                                     |   |   |       |   |   |       |   |   |           |   |   |           |   |   |          |         |
|                     Net loss for three months ended                        September 30, 2006                                                                                   |   |   | ---        |   |   | ---        |   |   | ---            |   |   | (567,860       | )      |   | (567,860      | )            |
| **Balance                  September 30, 2006**                                                                                                                                                          |   | **$**  | **96,510** |   | **$**  | **91,131** |   | **$**  | **11,854,584** |   | **$**  | **(6,655,579** | **)**  | **$**  | **5,386,646** |         |
|                                                                                                                                                                                                     |   |   |       |   |   |       |   |   |           |   |   |           |   |   |          |         |
| The                  accompanying notes to condensed consolidated financial statements                  are an                  integral part of these                  statements.                      |

----

| **AFP                  Imaging Corporation and Subsidiaries****Condensed                  Consolidated Statements of Cash                  Flows**(Unaudited)                       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                |   |   |   |
|                                                                                                                                                                                |   | Three                  months endedSeptember                  30, |   |
|                                                                                                                                                                                |   | 2006 |   | 2005 |   |
|                                                                                                                                                                                |   |   |   |   |   |
| Cash                  flows from operating activities:                                                                                                                              |   |   |   |   |   |
|                    Net loss                                                                                                                                                    |   |   | ($567,860 | ) |   | ($109,896 | ) |
|                    Adjustments to reconcile net income to net cash provided by operating                  activities-                                                          |   |   |   |   |   |   |   |
|                      Depreciation and amortization                                                                                                                   |   |   | 58,133 |   |   | 57,382 |   |
|                      Non-cash compensation expense                                                                                                                   |   |   | 42,329 |   |   | 17,644 |   |
|                      Write-off of deferred financing costs                                                                                                           |   |   | 50,000 |   |   | --- |   |
|                      Change in assets and liabilities:                                                                                                               |   |   |   |   |   |   |   |
|                        Decrease in accounts receivable                                                                                                     |   |   | 358,552 |   |   | 309,175 |   |
|                        (Increase) in inventories                                                                                                           |   |   | (131,774 | ) |   | (55,366 | ) |
|                        (Increase) in prepaid expenses and other assets                                                                                     |   |   | (125,603 | ) |   | (12,799 | ) |
|                        (Decrease) in accounts payable                                                                                                      |   |   | (587,703 | ) |   | (243,612 | ) |
|                        Increase/(decrease) in accrued expenses                                                                                             |   |   | 32,741 |   |   | (286,667 | ) |
|                        (Decrease) in deferred rent                                                                                                         |   |   | (5,085 | ) |   | (11,055 | ) |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
|                        Total adjustments                                                                                                                   |   |   | (308,410 | ) |   | (225,298 | ) |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| **                       Net cash used by operating activities**                                                                                           |   |   | (876,270 | ) |   | (335,194 | ) |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| Cash                  flows from investing activities:                                                                                                                              |   |   |   |   |   |   |   |
|                        Purchases of property and equipment                                                                                                 |   |   | (38,468 | ) |   | (105,440 | ) |
|                        Costs related to a proposed acquisition                                                                                             |   |   | (115,047 | ) |   | --- |   |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| **                       Net cash used in investing activities**                                                                                           |   |   | (153,515 | ) |   | (105,540 | ) |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| Cash                  flow from financing activities:                                                                                                                               |   |   |   |   |   |   |   |
|                        Borrowing of debt                                                                                                                   |   |   | 1,062,545 |   |   | 439,199 |   |
|                        Repayment of debt                                                                                                                   |   |   | --- |   |   | (66,666 | ) |
|                        Proceeds from exercise of common stock options                                                                                      |   |   | --- |   |   | 83,238 |   |
|                        Payment of fees associated with issuance of common stock in May                  2006                                               |   |   | (12,569 | ) |   | --- |   |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| **                       Net cash provided by financing activities**                                                                                       |   |   | 1,049,976 |   |   | 455,771 |   |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
|                        Net increase in cash and cash equivalents                                                                                           |   |   | 20,191 |   |   | 15,137 |   |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| Cash                  and cash equivalents, at beginning of period                                                                                                                  |   |   | 5,213,289 |   |   | 331,009 |   |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| Cash                  and cash equivalents, at end of period                                                                                                                        |   | $ | 5,233,480 |   | $ | 346,146 |   |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| **Supplemental                  cash flow disclosures:**                                                                                                                            |   |   |   |   |   |   |   |
|   Cash                paid during the periods for-                                                                                                                        |   |   |   |   |   |   |   |
|                        Interest                                                                                                                            |   | $ | 17,153 |   | $ | 25,559 |   |
|                        Income taxes, net of refunds                                                                                                        |   | $ | 1,727 |   |   | ($1,537 | ) |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| **Supplemental                  Schedule of Non Cash Activity:**                                                                                                                    |   |   |   |   |   |   |   |
|                        Cashless exercise of common stock warrants                                                                                          |   | $ | 19,800 |   |   | --- |   |
|                                                                                                                                                                                |   |   |   |   |   |   |   |
| The                  accompanying notes to condensed consolidated financial statements                  are an                  integral part of these                  statements. |

----

**AFP      Imaging Corporation and Subsidiaries**

**Notes      to Consolidated Financial Statements**

**September      30, 2006**

**(1)      **
**Genera**
**l:**

**(2)      **
**Stock      Option Plans:**

*Share      Based Payment*
*Accounting      for Stock Issued to Employees*

----

|                                          |   | Three                months ended September 30 |
|-----------------------------------------------|--------|------------------------------------------------|
|                                          |   | 2006                                           |   | 2005 |   |
| Expected                volatility            |   | 151%                                           |   | 92% |   |
| Expected                lives from grant date |   |                                           | 10                years |   |   | 10                years |   |
| Expected                dividend yield        |   |                                           | 0% |   |   | 0% |   |
| Risk-free                interest rate        |   |                                           | 4.79%                - 5.13% |   |   | 4.19% |   |

| Three                months ended September 30,                              | 2006        | 2005                 |
|------------------------------------------------------------------------------|-------------|----------------------|
|                                                                         | Options     | Weightedaverageprice | Options | Weightedaverageprice |
| Outstanding,                beginning of fiscal year                         | 827,900     | $.87                 | 948,400 | $.76 |
| Exercised                                                                    | 0           | 0                    | (160,500) | .52 |
| Granted                                                                      | 20,000      | 2.15                 | 10,000 | 2.00 |
| Forfeited                                                                    | (1,000)     | 1.15                 | 0 | 0 |
| Expired                                                                      | 0           | 0                    | 0 | 0 |
| Outstanding,                end of period                                    | 846,900     | $.90                 | 797,900 | $.82 |
| Exercisable                at September 30,                                  | 846,900     |                 | 797,900 |   |
| Weighted                average fair value of options                granted |  $2.12 |                 |   |  $1.55 |

|                                            |   |  Options                  Outstanding                                      |    | Options                  Exercisable                                                 |   |
|-------------------------------------------------|--------|---------------------------------------------------------------------------------|---------|--------------------------------------------------------------------------------------|--------|
|  Range                  of Exercise Prices |   |  Number                  Exercisableat                  September 30, 2006 |    | Weighted-averageRemaining                  Contractual                  Life (Years) |   |  Weighted-average                  Exercise                  Price |   |  Number                  Exercisable September                  30, 2006 |   |  Weighted-average                  Exercise                  Price |   |
| $.11                  - $.50                    |   |                                                                            | 396,000 |                                                                                 |   | 3.42 |   | $ | .30 |   |   | 396,000 |   | $ | .30 |   |
| $.53                  - $.81                    |   |                                                                            | 25,500  |                                                                                 |   | 3.69 |   |   | .61 |   |   | 25,500 |   |   | .61 |   |
| $1.06                  - $1.75                  |   |                                                                            | 347,400 |                                                                                 |   | 7.99 |   |   | 1.33 |   |   | 347,400 |   |   | 1.33 |   |
| $1.90                  - $2.44                  |   |                                                                            | 78,000  |                                                                                 |   | 7.66 |   |   | 2.15 |   |   | 78,000 |   |   | 2.15 |   |
|                                            |   |                                                                            | 846,900 |                                                                                 |   | 5.82 |   | $ | .90 |   |   | 846,900 |   | $ | .90 |   |

**(**
**3)      Per Share Data**
**:**

----

|                                                   |   | Three                months ended September 30, |       |
|--------------------------------------------------------|--------|-------------------------------------------------|------------|
|                                                   |   | 2006                                            |       | 2005 |   |
|                    Basic Shares         |   |                                            | 12,374,607 |   |   | 9,539,375 |   |
|                    Dilutive:            |   |                                            |       |   |   |   |   |
|                      Options  |   |                                            | ---        |   |   | --- |   |
|                      Warrants |   |                                            | ---        |   |   | --- |   |
|                    Diluted Shares       |   |                                            | 12,374,607 |   |   | 9,539,375 |   |

|                                                        |   | Three                months ended September 30, |    |
|-------------------------------------------------------------|--------|-------------------------------------------------|---------|
|                                                        |   | 2006                                            |    | 2005 |   |
|                      Stock Options |   |                                            | 846,900 |   |   | 797,900 |   |
|                      Warrants      |   |                                            | 50,000  |   |   | 100,000 |   |
|                    Diluted Shares            |   |                                            | 896,900 |   |   | 897,900 |   |

**(4)      Short Term Debt**
**:**

**(5)      **
**Inventory**
**:**

----

|                                                 |   | September                30, 2006 |      | June                30, 2006 |   |
|------------------------------------------------------|--------|-----------------------------------|-----------|------------------------------|--------|
|                                                 |   | (Unaudited)                       |      |                         |   |
| Raw                materials and sub-component parts |   | $                                 | 2,016,492 |                         | $      | 1,984,979 |   |
| Work-in-process                and finished goods    |   |                              | 2,949,792 |                         |   | 2,849,531 |   |
|                                                 |   | $                                 | 4,966,284 |                         | $      | 4,834,510 |   |

**(6)      **
**Income      Taxes**
**:**

**(7)**
**Commitments      and Contingencies:**

**(8)**
** **
**New      Accounting Standards:**

*Fair      Value Measurements *

----

*Employers’      Accounting for Defined Benefit Pension and Other Postretirement Plans-an      Amendment of FASB Statements No. 87, 88, 106 and 132R *

----

**Item      2: Management's Discussion and Analysis of Financial Condition      and Results of Operation**

**Capital      Resources and Liquidity**

----

**Results      of Operations - Three Months Fiscal 2007 Versus Three Months Fiscal      2006**

----

**Critical      Accounting Policies and Estimates**

----

**Item      3: Quantitative and Qualitative Disclosures About Market      Risk**

**Item      4: Controls and Procedures.**

----

----

**Part      II Other Information**

**Item      1: Legal Proceedings****.**

**Item      6:  ****Exhibits****.**

|   | 31.1                - Certification of Co-Principal Executive Officer pursuant to Exchange                Act                Rule 13a - 14 (a).                             |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 31.2              - Certification of Co-Principal Executive Officer pursuant to Exchange              Act              Rule 13a - 14 (a).                                   |
|   | 31.3              - Certification of Chief Financial Officer pursuant to Exchange Act              Rule              13a - 14 (a).                                          |
|   |                                                                                                                                                                        |
|   | 32.1                - Certification of Co-Principal Executive Officer pursuant to 18                U.S.C.                Section 1350 of the Sarbanes - Oxley Act of 2002. |
|   | 32.2              - Certification of Co-Principal Executive Officer pursuant to 18 U.S.C.              Section 1350 of the Sarbanes - Oxley Act of 2002.                    |
|   | 32.3              - Certification of Chief Financial Officer pursuant to 18 U.S.C. Section              1350 of the Sarbanes - Oxley Act of 2002.                           |

----

** **
**Signatures**

|   | **AFP                  IMAGING CORPORATION****(Registrant****)**                                                                                                                                       |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                   |
|   | /s/                  David                  Vozick                                                                                                                                                     |
|   | **David                  Vozick**Chairman                  of the Board,(Co-Principal                  Executive Officer)Secretary,                  TreasurerDate:                  November 14, 2006 |
|   |                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                   |
|   | /s/                  Donald                  Rabinovitch                                                                                                                                               |
|   | **Donald                  Rabinovitch**President                  (Co-Principal                  Executive Officer)Date:                  November 14, 2006                                            |
|   |                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                   |
|   | /s/                  Elise                  Nissen                                                                                                                                                     |
|   | **Elise                  Nissen**Chief                  Financial Officer(Principal                  Financial and Accounting Officer)Date:                  November 14, 2006                         |
|   |                                                                                                                                                                                                   |