**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549


_____________





FORM
      10-Q


_____________





[X]
      QUARTERLY REPORT UNDER SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934





For
      the
      Quarter Ended September 30, 2006





[ 
]
      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      Transition Period from    to


__________





Commission
      File Number 0-22710





**INTERPHARM
      HOLDINGS, INC** .


______________________________________


(Exact
      name of registrant as specified in its charter)






Delaware
            13-3673965State or other jurisdiction of
            (I.R.S. Employercorporation or organization)
            Identification Number)75
              Adams Avenue, Hauppauge, New York
            11788(Address of principal executive
              offices)
            (Zip Code)Issuer's telephone number,
              including area code (631) 952-0214




Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.





YES
      [X]  NO [  
]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
      Act).





Large
      accelerated filer [    ]  Accelerated filer
      [     ]  Non-accelerated filer
      [ X ]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Act.)





YES
      [   ]  NO
      [X]





As
      of the
      close of business on November 13, 2006, there were 65,063,819 shares of the
      Registrant's $0.01 par value per share Common Stock outstanding.














INTERPHARM
      HOLDINGS, INC.








TABLE
      OF
      CONTENTS




PART
                  I
              Financial
                  Information
              PageItem
                  1.
              Financial
                  Statements & Notes
              1-24Item
                  2.
              Managements
                  Discussion & Analysis of
                Financial
                  Condition and Results of Operations
              25-33Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              33Item
                  4.
              Controls
                  and Procedures
              34PART
                  II
              Other
                  Information Required in ReportItem
                  6
              Exhibits
              35Signatures
                  Page
              36Exhibits/Certifications
              37-40


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS





(In
      thousands)


ASSETS


September
                30
            
            June
                30,2006
            
            2006CURRENT
                ASSETS
            
            (Unaudited)Cash
            
            $
            11,503
            
            $
            1,438Accounts
                receivable, net
            
            
            14,568
            
            
            14,212Inventories
            
            
            8,348
            
            
            8,706Prepaid
                expenses and other current assets
            
            
            1,451
            
            
            1,316Deferred
                tax assets
            
            
            171
            
            
            1,321Total
                Current Assets
            
            
            36,041
            
            
            26,993Land,
                building and equipment, net
            
            
            29,998
            
            
            29,069Deferred
                tax assets
            
            
            5,042
            
            
            4,849Investment
                in APR, LLC
            
            
            1,023
            
            
            1,023Other
                assets
            
            
            570
            
            
            933TOTAL
                ASSETS
            
            $
            72,674
            
            $
            62,867





*See
        Notes To Condensed Consolidated Financial Statements.*




1








INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS





(In
      thousands)





LIABILITIES
      AND STOCKHOLDERS’ EQUITY


September
                30,
            
            June
                30,2006
            
            2006CURRENT
                LIABILITIES
            
            (Unaudited)Current
                maturities of long-term debt
            
            $
            1,733
            
            $
            1,686Accounts
                payable, accrued expenses and other liabilities
            
            
            13,889
            
            
            12,650Deferred
                revenue
            
            
            232
            
            
            3,399Total
                Current Liabilities
            
            
            15,854
            
            
            17,735OTHER
                LIABILITIESLong-term
                debt, less current maturities
            
            
            13,861
            
            
            13,952Other
                liabilities
            
            
            73
            
            
            125Total
                Other Liabilities
            
            
            13,934
            
            
            14,077TOTAL
                LIABILITIES
            
            
            29,788
            
            
            31,812COMMITMENTS
                AND CONTINGENCIESSeries
                B-1 Redeemable Convertible Preferred Stock:
              15 shares authorized; issued and outstanding - 10 at September
                30,
              and June 30, 2006; liquidation preference of $10,000
            
            
            8,155
            
            
            8,225Series
                C-1 Redeemable Convertible Preferred Stock:
              10 shares authorized; issued and outstanding - 10 at
              September 30, 2006; liquidation preference of $10,000
            
            
            8,352
            
            
            --STOCKHOLDERS’
                EQUITYPreferred
                stocks, 10,000 shares authorized; issued and
              outstanding
                - 5,132 and 5,141, respectively; aggregate
              liquidation
                preference of $3,588 and $4,291, respectively
            
            
            51
            
            
            51Common
                stock, $0.01 par value, 150,000 and 64,819 shares authorized
              and
                issued, respectively, at September 30, 2006, and 70,000 and
                64,537
              shares
                authorized and issued, respectively, at June 30, 2006.
            
            
            648
            
            
            645Additional
                paid-in capital
            
            
            27,388
            
            
            24,196Stock
                subscription receivable
            
            
            (33
            )
            
            (90
            )Accumulated
                other comprehensive income
            
            
            111
            
            
            98Accumulated
                deficit
            
            
            (1,786
            )
            
            (2,070
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            26,379
            
            
            22,830TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            72,674
            
            $
            62,867








*See
      Notes To Condensed Consolidated Financial Statements.*






2








INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





(In
        thousands, except per share data)


Three
                Months Ended
              September
                302006
            
            2005SALES,
                Net
            
            $
            22,827
            
            $
            14,547COST
                OF SALES(including related party rent expense of $102 for the three months
                ended
                September 30, 2006 and 2005, respectively)
            
            
            13,850
            
            
            10,564GROSS
                PROFIT
            
            
            8,977
            
            
            3,983OPERATING
                EXPENSESSelling,
                general and administrative
            
            
            2,637
            
            
            2,437Related
                party rent
            
            
            18
            
            
            18Research
                and development
            
            
            3,419
            
            
            2,146TOTAL
                OPERATING EXPENSES
            
            
            6,074
            
            
            4,601OPERATING
                INCOME (LOSS)
            
            
            2,903
            
            
            (618
            )OTHER
                EXPENSEInterest
                expense, net
            
            
            287
            
            
            91INCOME
                (LOSS) BEFORE INCOME TAXES
            
            
            2,616
            
            
            (709
            )PROVISION
                FOR (BENEFIT FROM) INCOME TAXES
            
            
            986
            
            
            (262
            )NET
                INCOME (LOSS)
            
            
            1,630
            
            
            (447
            )Series
                C-1 preferred stock beneficial conversion feature
            
            
            1,094
            
            
            --Preferred
                stock dividends
            
            
            293
            
            
            41NET
                INCOME (LOSS) ATTRIBUTABLE TO
              COMMON
                STOCKHOLDERS
            
            $
            243
            
            $
            (488
            )EARNINGS
                PER SHARE ATTRIBUTABLE TO
              COMMON
                STOCKHOLDERSBasic
                earnings (loss) per share
            
            $
            0.00
            
            $
            (0.01
            )Diluted
                earnings (loss) per share
            
            $
            0.00
            
            $
            (0.01
            )Basic
                weighted average shares outstanding
            
            
            64,720
            
            
            32,464Diluted
                weighted average shares and equivalent shares outstanding
            
            
            67,857
            
            
            32,464








*See
      Notes To Condensed Consolidated Financial Statements.*




3




INTERPHARM
      HOLDINGS, INC. AND
      SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(UNAUDITED)





(In
      thousands)


AccumulatedOther
            
            RetainedPreferred
                Stock
            
            Common
                Stock
            
            Paid-In
            
            Subscription
            
            Comprehensive
            
            Earnings
            
            Stockholders’Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Receivable
            
            Income
            
            (Deficit)
            
            EquityBALANCE-
                July 1, 2006
            
            
            5,141
            
            $
            51
            
            
            64,537
            
            $
            645
            
            $
            24,196
            
            $
            (90
            )
            $
            98
            
            $
            (2,070
            )
            $
            22,830Accrued
                dividends - Series B-1
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (211
            )
            
            (211
            )Accrued
                dividends - Series C-1
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (41
            )
            
            (41
            )Series
                C-1 Preferred beneficial conversion feature
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,094
            
            
            --
            
            
            --
            
            
            (1,094
            )
            
            --Dividends
                paid with common stock
            
            
            --
            
            
            --
            
            
            63
            
            
            1
            
            
            78
            
            
            --
            
            
            --
            
            
            --
            
            
            79Shares
                issued for options exercised
            
            
            --
            
            
            --
            
            
            210
            
            
            2
            
            
            140
            
            
            --
            
            
            --
            
            
            --
            
            
            142Tax
                benefit in connection
              with
                exercise of options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            28
            
            
            --
            
            
            --
            
            
            --
            
            
            28Conversion
                of Series A preferred stock
            
            
            (7
            )
            
            --
            
            
            7
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Conversion
                of Series B preferred stock
            
            
            (2
            )
            
            --
            
            
            2
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Fair
                value of warrants issued
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,641
            
            
            --
            
            
            --
            
            
            --
            
            
            1,641Amortization
                of unearned stock based compensation
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            211
            
            
            --
            
            
            --
            
            
            --
            
            
            211Collections
                on stock subscription receivable
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            57
            
            
            --
            
            
            --
            
            
            57Change
                in fair value of interest rate swap
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            13
            
            
            --
            
            
            13Net
                Income
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,630
            
            
            1,630BALANCE-
                September 30, 2006
            
            
            5,132
            
            $
            51
            
            
            64,819
            
            $
            648
            
            $
            27,388
            
            $
            (33
            )
            $
            111
            
            $
            (1,786
            )
            $
            26,379




See
      Notes To Condensed Consolidated Financial
      Statements.





4


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


(UNAUDITED)





(In
      thousands)








Three
                Months Ended
              September
                30,2006
            
            2005NET
                INCOME (LOSS)
            
            $
            1,630
            
            $
            (447
            )OTHER
                COMPREHENSIVE INCOMEChange in fair value of interest rate swap
            
            
            13
            
            
            --TOTAL
                COMPREHENSIVE INCOME (LOSS)
            
            $
            1,643
            
            $
            (447
            )





See
      Notes To Condensed Consolidated Financial
      Statements.




5


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(In
      thousands)


Three
                  Months EndedSeptember 30,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                income (loss)
            
            $
            1,630
            
            $
            (447
            )Adjustments
                to reconcile net (loss) income to netcash
                provided by operating activities:Depreciation
                and amortization
            
            
            532
            
            
            347Amortization
                of unearned compensation
            
            
            211
            
            
            216Excess
                tax benefit from exercise of stock options
            
            
            (28
            )
            
            --Deferred
                tax expense
            
            
            986
            
            
            (272
            )Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (356
            )
            
            (2,058
            )Inventories
            
            
            358
            
            
            67Prepaid
                expenses and other current assets
            
            
            (135
            )
            
            84Accounts
                payable, accrued expenses and other liabilities
            
            
            1,013
            
            
            3,423Deferred
                revenue
            
            
            (3,167
            )
            
            --TOTAL
                ADJUSTMENTS
            
            
            (586
            )
            
            1,807NET
                CASH PROVIDED BY OPERATING ACTIVITIES
            
            
            1,044
            
            
            1,360CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of building and equipment
            
            
            (930
            )
            
            (2,383
            )Deposits
                and other long-term assets
            
            
            --
            
            
            (225
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (930
            )
            
            (2,608
            )CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from sale of Series C-1 preferred stock and warrants, net
            
            
            9,993
            
            
            --Expenditures
                relating to sale of Series B-1 preferred stock and
                warrants
            
            
            (70
            )
            
            --Proceeds
                from options exercised
            
            
            142
            
            
            --Borrowings
                from new bank lines of credit
            
            
            --
            
            
            2,200Proceeds
                from long-term debt
            
            
            240
            
            
            --Collections
                on stock subscription receivable
            
            
            57
            
            
            --Excess
                tax benefit from exercise of stock options
            
            
            28
            
            
            --Repayments
                of long-term debt
            
            
            (439
            )
            
            (93
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            9,951
            
            
            2,107NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            10,065
            
            
            859CASH
                AND CASH EQUIVALENTS-
                Beginning
            
            
            1,438
            
            
            537CASH
                AND CASH EQUIVALENTS-
                Ending
            
            $
            11,503
            
            $
            1,396





See
      Notes To Condensed Consolidated Financial
      Statements.




6





INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


(UNAUDITED)





(In
      thousands)




Three
                  Months EndedSeptember 30,2006
              
              2005SUPPLEMENTAL
                  DISCLOSURES OF CASH FLOW INFORMATIONCash
                  paid during the periods for:Interest
              
              $
              314
              
              $
              76Income
                  taxes
              
              $
              --
              
              $
              --Non-Cash
                  Investing or Financing Transactions:Issuance
                  of common stock in exchange for subscription receivable
              
              $
              --
              
              $
              133Acquisition
                  of machinery and equipment in exchange for capital lease
                  payable
              
              $
              156
              
              $
              --Tax
                  benefit in connection with exercise of stock options
              
              $
              28
              
              $
              --Series
                  B-1 dividends paid with common stock
              
              $
              79
              
              $
              --Accrual
                  of Series B-1 dividends
              
              $
              211
              
              $
              --Accrual
                  of Series C-1 dividends
              
              $
              41
              
              $
              --Change
                  in fair value of interest rate swap
              
              $
              13
              
              $
              --








See
      Notes To Condensed Consolidated Financial
      Statements.





7
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)


**NOTE
      1 -** **Condensed
      Consolidated Financial Statements**




The
        accompanying interim unaudited condensed consolidated financial statements
        include the accounts of Interpharm Holdings, Inc. and its subsidiaries that
        are
        hereafter referred to as (the “Company”). All intercompany accounts and
        transactions have been eliminated in consolidation.





These
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America for interim financial
      information and with the instructions to Form 10-Q. Accordingly, they do not
      include all of the information and footnotes required by accounting principles
      generally accepted in the United States of America for complete financial
      statements. In the opinion of management, such interim statements reflect all
      adjustments (consisting of normal recurring accruals) necessary to present
      fairly the financial position and the results of operations and cash flows
      for
      the interim periods presented. The operating results for the three months ended
      September 30, 2006 are not necessarily indicative of the results that may be
      expected for the fiscal year ending June 30, 2007. For further information,
      refer to the consolidated financial statements and footnotes thereto included
      in
      the Company’s Form 10-K for the year ended June 30, 2006.








**NOTE
      2 -** Summary
      of Significant Accounting Policies





Nature
      of Business


Interpharm
      Holdings, Inc., through its wholly-owned subsidiary, Interpharm, Inc.
      (“Interpharm, Inc.”), is in the business of developing, manufacturing and
      marketing generic prescription strength and over-the-counter pharmaceutical
      products for wholesale distribution throughout the United States.





Revenue
      Recognition





The
      Company recognizes product sales revenue upon the shipment of product, when
      estimated provisions for chargebacks and other sales allowances are reasonably
      determinable, and when collectibility is reasonably assured. Accruals for these
      provisions are presented in the consolidated financial statements as reductions
      to revenues.





In
      addition, the Company is party to supply agreements with certain pharmaceutical
      companies under which, in addition to the selling price of the product, the
      Company receives payments based on sales or profits associated with these
      products realized by its customer. The Company recognizes revenue related to
      the
      initial selling price upon shipment of the products as the selling price is
      fixed and determinable and no right of return exists. The additional revenue
      component of these agreements is recognized by the Company at the time its
      customers record their sales and is based on pre-defined formulas contained
      in
      the agreements. Receivables related to this revenue of $1,901 and $620 at
      September 30, 2006 and June 30, 2006, respectively, are included in “Accounts
      receivable, net” in the accompanying Condensed Consolidated Balance Sheets.





Earnings
      Per Share


Basic
      earnings per share (“EPS”) of common stock is computed by dividing net income
      attributable to common stockholders by the weighted average number of shares
      of
      common stock outstanding during the period. Diluted EPS reflects the amount
      of
      net income for the period available to each share of common stock outstanding
      during the reporting period, giving effect to all potentially dilutive shares
      of
      common stock from the potential exercise of stock options and warrants and
      conversions of convertible preferred stocks. In accordance with Emerging Issues
      Task Force (“EITF”) Issue No. 03-6, “Participating Securities and the Two-Class
      Method Under FASB Statement No. 128, Earnings Per Share,” during the fiscal year
      ended June 30, 2006, in periods when there was net income and Series K preferred
      stock was outstanding, the Company used the Two-Class Method to calculate the
      effect of the participating Series K on the calculation of basic EPS and the
      if-converted method was used to calculate the effect of the participating Series
      K on diluted EPS. In periods when there was a net loss, the effect of the
      participating Series K was excluded from both basic and diluted EPS.
      Additionally, in May 2006, the Series K preferred stock was






8
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





**NOTE
      2 -** Summary
      of Significant Accounting Policies ,
      continued





Earnings
      Per Share ,
      continued


converted
      into the Company’s common stock; therefore the use of the Two-Class Method is
      not required at September 30, 2006.





Use
      of
      Estimates in the Financial Statements


The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenue and expenses during
      the reporting period. Actual results could differ from those estimates.
      Significant estimates include deferred tax asset valuations, reserve for
      chargebacks, deferred revenue, fair values of stock based compensation awards
      and inventory overhead costing estimates.





Stock
      Based Compensation


Effective
      July 1, 2005, the Company adopted the fair value recognition provisions of
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised
      2004), “Share-Based Payment,” (“SFAS No. 123(R)”), using the
      modified-prospective-transition method. As a result, the Company’s net income
      before taxes for the three months ended September 30, 2006 and 2005 is lower
      by
      $211 and $216, respectively, than if it had continued to account for share-based
      compensation under Accounting Principles Board (“APB”) opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”).





Sales
      Incentives


In
      the
      current year the Company has offered a sales incentive to one of its customers
      in the form of an incentive volume price adjustment. The Company accounts for
      sales incentives in accordance with EITF 01-9, "Accounting for Consideration
      Given by a Vendor to a Customer (Including a Reseller of Vendor's Products)"
      (“EITF 01-9”). The terms of this volume based sales incentive require the
      customer to purchase a minimum quantity of the Company's products during a
      specified period of time. The incentive offered is based upon a fixed dollar
      amount per unit sold to the customer. The Company makes an estimate of the
      ultimate amount of the incentive the customer will earn based upon past history
      with the customer and other facts and circumstances. The Company has the ability
      to estimate this volume incentive price adjustment, as there does not exist
      a
      relatively long period of time for the particular adjustment to be earned.
      Any
      change in the estimated amount of the volume incentive is recognized immediately
      using a cumulative catch-up adjustment. In accordance with EITF 01- 9, the
      Company records the provision for this sales incentive when the related revenue
      is recognized. The accrual for sales incentives at September 30, 2006 was
      approximately $232 and reported as deferred revenue on the Company’s balance
      sheet. The Company's sales incentive liability may prove to be inaccurate,
      in
      which case the Company may have understated or overstated the provision required
      for these arrangements. Therefore, although the Company makes its best estimate
      of its sales incentive liability, many factors, including significant
      unanticipated changes in the purchasing volume of its customer, could have
      significant impact on the Company's liability for sales incentives and the
      Company's reported operating results.





Reclassifications


Certain
      reclassifications have been made to the unaudited condensed consolidated
      financial statements for the prior period in order to have them conform to
      the
      current period’s classifications. These reclassifications have no effect on
      previously reported net income.





In
      the
      current quarter we have reclassified certain components of our stockholders’
equity section to reflect the elimination of deferred compensation arising
      from
      unvested share-based compensation pursuant to the requirements of Staff
      Accounting Bulletin No. 107, regarding Statement of Financial Accounting
      Standards No. 123(R), “Share-Based Payment.” This deferred compensation was
      previously recorded as an increase to additional paid-in capital with a
      corresponding reduction to stockholders’ equity for such deferred compensation.
      This reclassification has no






9
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)




**NOTE
      2 -** Summary
      of Significant Accounting Policies ,
      continued





Reclassifications ,
      continued


effect
      on
      net income or total stockholders’ equity as previously reported. The Company
      will record an increase to additional paid-in capital as the share-based
      payments vest.





Recently
      Issued Accounting Pronouncements





New
      Accounting Pronouncements


In
      June
      2006, The Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes”, (“FIN 48”). This
      interpretation clarified the accounting for uncertainty in income taxes
      recognized in accordance with Statement of Financial Accounting Standards
      (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No.109”). Specifically,
      FIN 48 clarifies the application of SFAS No. 109 by defining a criterion that
      an
      individual tax position must meet for any part of the benefit of that position
      to be recognized in an enterprise’s financial statements. Additionally, FIN 48
      provides guidance on measurement, derecognition, classification, interest and
      penalties, accounting in interim periods of income taxes, as well as the
      required disclosure and transition. This interpretation is effective for fiscal
      years beginning after December 15, 2006. The Company is currently evaluating
      the
      requirements of FIN 48 and has not yet determined if the adoption of FIN 48
      will
      have a significant impact on its consolidated financial statements.





In
      February 2006, the FASB issued SFAS No. 155 ''Accounting for Certain Hybrid
      Financial Instruments, an amendment of FASB Statements No. 133 and 140'' (''SFAS
      155''). SFAS 155 clarifies certain issues relating to embedded derivatives
      and
      beneficial interests in securitized financial assets. The provisions of SFAS
      155
      are effective for all financial instruments acquired or issued after fiscal
      years beginning after September 15, 2006. The Company is currently assessing
      the
      impact that the adoption of SFAS 155 will have on its financial position
      and results of operations.





In
      March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
      Financial Assets” (“ SFAS
      156 ”),
      which
      amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and
      Extinguishments of Liabilities”, with respect to the accounting for separately
      recognized servicing assets and servicing liabilities. SFAS
      156 permits the choice of the amortization method or the fair value measurement
      method, with changes in fair value
      recorded in income, for the subsequent measurement for each class of separately
      recognized servicing assets and servicing liabilities. The statement is
      effective for years beginning after September 15, 2006, with earlier
      adoption permitted. The Company is currently evaluating the
      effect that adopting this statement will have on
      the Company's financial position and results of operations.





In
      September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
      157"). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in generally accepted accounting principles, and expands disclosures
      about
      fair value measurements. It codifies the definitions of fair value included
      in
      other authoritative literature; clarifies and, in some cases, expands on the
      guidance for implementing fair value measurements; and increases the level
      of
      disclosure required for fair value measurements. Although SFAS 157 applies
      to
      (and amends) the provisions of existing authoritative literature, it does not,
      of itself, require any new fair value measurements, nor does it establish
      valuation standards. SFAS 157 is effective for financial statements issued
      for
      fiscal years beginning after November 15, 2007, and interim periods within
      those
      fiscal years. This statement will be effective for the Company's fiscal year
      beginning July 2008. The Company will evaluate the impact of adopting SFAS
      157
      but does not expect that it will have a material impact on the Company's
      consolidated financial position, results of operations or cash
      flows.





In
      September 2006, the staff of the Securities and Exchange Commission issued
      Staff
      Accounting Bulletin No. 108 ("SAB 108") which provides interpretive guidance
      on
      how the effects of the carryover or reversal of prior year misstatements should
      be considered in quantifying a current year misstatement. SAB 108 becomes
      effective in fiscal






10
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)


**NOTE
      2 -** Summary
      of Significant Accounting Policies ,
      continued





Recently
      Issued Accounting Pronouncements ,
      continued





New
      Accounting Pronouncements ,
      continued


2007.
      Adoption of SAB 108 is not expected to have a material impact on the Company's
      consolidated financial position, results of operations or cash
      flows.








**NOTE
      3 -** **Accounts
      Receivable**





Accounts
      receivable are comprised of amounts owed to the Company through the sales of
      its
      products throughout the United States. These accounts receivable are presented
      net of allowances for doubtful accounts, sales returns and customer chargebacks.
      Allowances for doubtful accounts were approximately $101 at September 30, 2006
      and June 30, 2006. The allowance for doubtful accounts is based on a review
      of specifically identified accounts in addition to an overall aging analysis.
      Judgments are made with respect to the collectibility of accounts receivable
      based on historical experience and current economic trends. Actual losses could
      differ from those estimates. Allowances for customer chargebacks were $1,940
      and
      $2,315 at September 30, 2006 and June 30, 2006, respectively. The Company
      sells some of its products indirectly to various government agencies referred
      to
      below as “indirect customers.” The Company enters into agreements with its
      indirect customers to establish pricing for certain products. The indirect
      customers then independently select a wholesaler from which to actually purchase
      the products at these agreed-upon prices. The Company will provide credit to
      the
      selected wholesaler for the difference between the agreed-upon price with the
      indirect customer and the wholesaler’s invoice price if the price sold to the
      indirect customer is lower than the direct price to the wholesaler. This credit
      is called a chargeback. The provision for chargebacks is based on expected
      sell-through levels by the Company’s wholesale customers to the indirect
      customers, and estimated wholesaler inventory levels. As sales to the large
      wholesale customers increase, the reserve for chargebacks will also generally
      increase. However, the size of the increase depends on the product mix. The
      Company continually monitors the reserve for chargebacks and makes adjustments
      to the reserve as deemed necessary. Actual chargebacks may differ from estimated
      reserves.





The
      changes in the allowance for customer chargebacks, discounts and other credits
      that reduced gross revenue for three months ended September 30, 2006 and 2005
      is
      as follows:





Three
                Months EndedSeptember
                30,2006
            
            2005Reserve
                balance - beginning
            
            $
            2,315
            
            $
            425Actual
                chargebacks, discounts and other credits taken in the current period
                (a)
            
            
            (2,732
            )
            
            (670
            )Current
                provision related to current period sales
            
            
            2,357
            
            
            945Reserve
                balance - ending
            
            $
            1,940
            
            $
            700





(a)
      Actual chargebacks discounts and other credits are determined based upon the
      customer’s application of amounts taken against the accounts receivable
      balance.








11





INTERPHARM
        HOLDINGS, INC
 (In
        thousands, except per share data)





**NOTE
      4 -** **Inventories** ****





Inventories
      consist of the following: (in thousands)


September
                30,
            
            June
                30,2006
            
            2006(Unaudited)Finished
                goods
            
            $
            624
            
            $
            1,781Work
                in process
            
            
            5,015
            
            
            3,685Raw
                materials
            
            
            2,373
            
            
            2,928Packaging
                materials
            
            
            336
            
            
            312Total
            
            $
            8,348
            
            $
            8,706








**NOTE
      5 -** **Land,
      Building and Equipment**





Land,
      building and equipment consist of the following: (in thousands)





September
                30,
            
            June
                30,
            
            Estimated
              Useful2006
            
            2006
            
            Lives(Unaudited)Land
            
            $
            4,924
            
            $
            4,924Building
            
            
            12,460
            
            
            12,460
            
            
            39
                YearsMachinery
                and equipment
            
            
            13,477
            
            
            12,643
            
            
            5-7
                YearsComputer
                equipment
            
            
            579
            
            
            151
            
            
            5
                YearsConstruction
                in Progress
            
            
            613
            
            
            587
            
            
            --Furniture
                and fixtures
            
            
            660
            
            
            660
            
            
            5
                YearsLeasehold
                improvements
            
            
            3,335
            
            
            3,206
            
            
            5-15
                Years36,048
            
            
            34,631Less:
                accumulated depreciation and amortization
            
            
            6,050
            
            
            5,562Land,
                Building and Equipment, net
            
            $
            29,998
            
            $
            29,069


Depreciation
      and amortization expense for the three months ended September 30, 2006 and
      2005
      was approximately $488 and $347, respectively **.**








**NOTE
      6 -** **Accounts
      Payable, Accrued Expenses and Other Current
      Liabilities**





Accounts
      payable, accrued expenses and other current liabilities consist of the
      following:


September
                30,
            
            June
                30,2006
            
            2006(Unaudited)Accrued
                inventory purchases
            
            $
            8,691
            
            $
            5,734Accrued
                research and development expenses
            
            
            1,280
            
            
            2,068Other
            
            
            3,918
            
            
            4,848Total
            
            $
            13,889
            
            $
            12,650






12




INTERPHARM
        HOLDINGS, INC
 (In
        thousands, except per share data)




**NOTE
      7 -** **Debt**





Long-term
      Debt




A
      summary
      of the outstanding long-term debt is as follows:


September
                30, 2006
            
            June
                30,
              2006Revolving
                credit facility
            
            $
            --
            
            $
            --Real
                estate term loan
            
            
            11,533
            
            
            11,734Machinery
                and equipment term loans
            
            
            3,860
            
            
            3,833Capital
                leases
            
            
            247
            
            
            7215,640
            
            
            15,639Less:
                amount representing interest on capital lease
            
            
            46
            
            
            1Total
                long-term debt
            
            
            15,594
            
            
            15,638Less:
                current maturities
            
            
            1,733
            
            
            1,686Long-term
                debt, less current maturities
            
            $
            13,861
            
            $
            13,952




During
      February, 2006, the Company entered into a new four-year financing arrangement
      with Wells Fargo Business Credit (“WFBC”). This financing agreement provided a
      maximum credit facility of $41,500 comprised of:





·  $22,500
      revolving credit facility (the “facility”)


·  $12,000
      real estate term loan


·  $
      3,500
      machinery and equipment (“M&E”) term loan


·  $
      3,500
      additional / future capital expenditure facility





The
      funds
      made available through this facility paid down, in its entirety, the $20.45
      million owed on the previous credit facility. The new revolving credit facility
      borrowing base is calculated as (i) 85% of the Company’s eligible accounts
      receivable plus the lesser of 50% of cost or 85% of the net orderly liquidation
      value of its eligible inventory. The advances pertaining to inventory are capped
      at the lesser of 100% of the advance from accounts receivable or $9,000. The
      $12,000 loan for the real estate in Yaphank, NY is payable in equal monthly
      installments of $67 plus interest through February 2010 at which time the
      remaining principal balance is due. The $3,500 M&E loan is payable in equal
      monthly installments of $58 plus interest through February 2010 at which time
      the remaining principal balance is due. With respect to additional capital
      expenditures, the Company is permitted to borrow 90% of the
      cost
      of new equipment purchased to a maximum of $3,500 in borrowings amortized over
      60 months. As of September 30, 2006, there was approximately $2,690
      available for additional capital expenditure borrowings.





Under
      the
      terms of the WFBC agreement, three stockholders, all related to the Company’s
      Chairman of the Board of Directors, one of whom is our Chief Operating Officer,
      were required to provide limited personal guarantees, as well as pledge
      securities with a minimum aggregate value of $7,500 as security for a portion
      of
      the $22,500 credit facility. The Company was required to raise a minimum of
      $7,000 through the sale of equity or subordinated debt by June 30, 2006. The
      shareholder’s pledges of marketable securities would be reduced by WFBC either
      upon the Company raising capital, net of expenses in excess of $5,000 or
      achieving certain milestones. As a result of the sale of $10,000 of Series
      B-1
      redeemable convertible preferred stock in May 2006, the credit facility and
      the
      limited personal guarantees were reduced by $4,250 and $3,670, respectively.
      The
      sale of the $10,000 Series C-1 redeemable convertible preferred stock in
      September 2006, resulted in reducing the credit facility by $3,250 and
      eliminated the balance of the personal pledges of marketable securities of
      $3,830. As a result of the Company raising $20,000, the






13





INTERPHARM
        HOLDINGS, INC
 (In
        thousands, except per share data)





**NOTE
      7 -** **Debt** ,
      continued





maximum
      availability of the revolving credit facility is now $15,000, and the three
      stockholders pledges have been eliminated.





The
      revolving credit facility and term loans will bear interest at a rate of the
      prime rate less 0.5% or, at the Company’s option, LIBOR plus 250 basis points.
      At September 30, 2006, the interest rate on this debt was 7.75%. Pursuant to
      the
      requirements of the WFBC agreement, the Company put in place a lock-box
      arrangement, which will incur a fee of 25 basis points per annum on any unused
      amounts of this credit facility.





The
      WFBC
      credit facility is collateralized by substantially all of our assets. In
      addition, the Company is required to comply with certain financial covenants.





With
      respect to the real estate term loan and the $3,500 M&E loan, the Company
      entered into interest rate swap contracts (the “swaps”), whereby the Company
      pays a fixed rate of 7.56% and 8.00% per annum, respectively. The swaps
      contracts mature in 2010. The swaps are a cash flow hedge (i.e. a hedge against
      interest rates increasing). As all of the critical terms of the swaps and loans
      match, they are structured for short-cut accounting under SFAS No. 133,
“Accounting For Derivative Instruments and Hedging Activities” and by
      definition, there is no hedge ineffectiveness or a need to reassess
      effectiveness. Fair value of the interest rate swaps at September 30, 2006,
      was
      approximately $111 and is included in other assets.





**NOTE
      8-** **Income
      Taxes**





During
      the three month period ended September 30, 2006, non-qualified stock options
      were exercised which generated approximately $74 of income tax deductions,
      resulting in tax benefits of approximately $27, which were credited to
      additional paid-in capital.





At
      September 30, 2006 the Company has remaining Federal NOLs of $14,727 and State
      NOLs of $14,137 available through 2026. Pursuant to Section 382 of the Internal
      Revenue Code regarding substantial changes in Company ownership, utilization
      of
      these NOLs is limited. As of September 30, 2006, the Company has determined
      that
      it is more likely than not, that the Company will utilize all of the Federal
      NOLs in the future. The Company recorded a valuation allowance of approximately
      24% of the State NOLs which the Company does not anticipate utilizing due to
      State limitations.





In
      calculating its tax provision for the three month periods ended September 30,
      2006 and 2005, the Company applied an aggregate effective tax rate of
      approximately 38% and 37%, respectively, thereby creating approximate $986
      income tax expense and income tax benefit of $262, respectively, and decreased
      and increased its deferred tax asset by like amounts.







14





INTERPHARM
        HOLDINGS, INC
 (In
        thousands, except per share data)





**NOTE
      9-** **Earnings
      Per Share**





The
      calculations of basic and diluted EPS are as follows: (in thousands, except
      per
      share data)





Three
                Months Ended
              September
                30,2006
            
            2005Numerator:Net
                income (loss)
            
            $
            1,630
            
            $
            (447
            )Less:
                Preferred stock dividendsSeries
                A-1
            
            
            (41
            )
            
            (41
            )Series
                B-1
            
            
            (211
            )
            
            --Series
                C-1
            
            
            (41
            )
            
            --Less:
                Series C-1 beneficial conversion feature
            
            
            (1,094
            )
            
            --Numerator
                for basic and dilutive EPS
            
            $
            243
            
            $
            (488
            )





Denominator:Denominator
                for basic EPS weighted average
              shares
                outstanding
            
            
            64,720
            
            
            32,464Effect
                of dilutive securities:Stock
                options
            
            
            3,137
            
            
            -Denominator
                for diluted EPS
            
            
            67,857
            
            
            32,464Basic
                EPS
            
            $
            0.00
            
            $
            (0.01
            )Diluted
                EPS
            
            $
            0.00
            
            $
            (0.01
            )





Stock
      options, warrants and convertible preferred stock, equivalent to 31,201shares
      of
      the Company’s common stock, were not included in the computation of diluted
      earnings per share as their inclusion would be antidilutive.





As
      of
      September 30, 2006, the total number of common shares outstanding and the number
      of common shares potentially issuable upon exercise of all outstanding stock
      options and conversion of preferred stocks (including contingent conversions)
      is
      as follows:





Common
                stock outstanding
            
            
            64,819Stock
                options outstanding
            
            
            11,873Warrants
                outstanding
            
            
            4,564Common
                stock issuable upon conversion of preferred stocks:Series
                C
            
            
            6Series
                A-1 (maximum contingent conversion) (a)
            
            
            4,855Series
                B-1
            
            
            6,520Series
                C-1
            
            
            6,520Total
                (b)
            
            
            99,157







15
 
  INTERPHARM
            HOLDINGS, INC
 (In
            thousands, except per share data)





**NOTE
      9-** **Earnings
      Per Share** ,
      continued





**(a)**
            The
                Series A-1 shares are convertible only if the Company reaches $150
                million
                in annual sales or upon a merger, consolidation, sale of assets or
                similar
                transaction.





(b)
            Assuming
                no further issuance of equity instruments, or changes to the equity
                structure of the Company, this total represents the maximum number
                of
                shares of common stock that could be outstanding through June 15,
                2016
                (the end of the current vesting and conversion
                periods).








**NOTE
      10 -** **Series
      B-1 Redeemable Convertible Preferred Stock**





In
      May
      2006, the Company entered into a Securities Purchase Agreement (the “Agreement”)
      with Tullis-Dickerson Capital Focus III, L.P. ( “Tullis”). Under the Agreement,
      the Company agreed to issue and sell to Tullis, and Tullis agreed to purchase
      from the Company, for a purchase price of $10,000 (net proceeds of $9,858)
      an
      aggregate of 10 shares of a newly designated series of the Company’s preferred
      stock (“B-1”), together with 2,282 warrants to purchase shares of common stock
      of the Company with an exercise price of $1.639 per share. The warrants have
      a
      five year term. The Series B-1 Stock and warrants sold to Tullis are convertible
      and/or exercisable for 8,802 shares of common stock. The B-1 shares are
      convertible into common shares at a conversion price of $1.5338, and have an
      annual dividend rate of 8.25%, payable quarterly, which can be paid, at the
      Company’s option, in cash or the Company’s common stock. In addition, the B-1
      shareholders have the right to require the Company to redeem all or a portion
      of
      the B-1 shares upon the occurrence of certain triggering events, as defined,
      at
      a price per preferred share to be calculated on the day immediately preceding
      the date of a triggering event. In July 2006, the Company issued 63 shares
      of
      common stock as payment of $77 of previously accrued dividends. At September
      30,
      2006, the Company had accrued approximately $211 of Series B-1 dividends, which
      was paid in October 2006 through the issuance of approximately 141 shares of
      the
      Company’s common stock.







With
      respect to the Company’s accounting for the preferred stock, EITF Topic D-98,
      paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities
      with redemption features that are not solely within the control of the issuer
      to
      be recorded outside of permanent equity. As described above, the terms of the
      Preferred Stock include certain redemption features that may be triggered
      by events that are not solely within the control of the Company, such as a
      potential default with respect to any indebtedness, including borrowings under
      the WFBC financing arrangement. Accordingly, the Company has classified the
      B-1
      shares as temporary equity and the value ascribed to the B-1 shares upon initial
      issuance in May 2006 was the amount received in the transaction less the
      relative fair value ascribed to the warrants and direct costs associated with
      the transaction. The Company allocated $1,704 of the gross proceeds of the
      sale
      of B-1 shares to the warrants based on estimated fair value. In accordance
      with
      EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible
      Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,418
      to
      accumulated deficit during the quarter ended June 30, 2006. The non-cash charge
      measures the difference between the relative fair value of the B-1 shares and
      the fair market value of the Company's common stock issuable pursuant to the
      conversion terms on the date of issuance. The Company is not currently, nor
      expects in the future to be, in default on its WFBC credit facility (the only
      redemption feature outside of its control) nor does it plan to redeem the Series
      B-1 preferred stock. As such the Company believes it is not probable that
      the Series B-1 preferred stock will become redeemable





In
      addition, in May 2006, in connection with the sale of the B-1 shares the Company
      entered into a Registration Rights Agreement, as amended, with Tullis. Under
      the
      terms of this Registration Rights Agreement the Company is subject to penalties
      (a) if, within 60 days after a request to do so is made by the holders of such
      preferred stock, the Company does not timely file with the Securities and
      Exchange Commission a registration statement covering the resale of shares
      of
      its common stock issuable to such holders upon conversion of the preferred
      stock, (b) if a registration statement is filed, such registration statement
      is
      not declared effective within 180 days after the request






16
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





**NOTE
      10 -** **Series
      B-1 Redeemable Convertible Preferred Stock** ,
      continued





is
      made or (c) if after such a registration is declared effective, after certain
      grace periods the holders are unable to make sales of its common stock because
      of a failure to keep the registration statement effective or because of a
      suspension or delisting of its common stock from the American Stock Exchange
      or
      other principal exchange on which its common stock is traded. The penalties
      will
      accrue on a daily basis so long as the Company is in default of the Registration
      Rights Agreement. The maximum amount of a registration delay penalty as defined
      in the Registration Rights Agreement is 18% of the aggregate purchase price
      of
      Tullis’ registrable securities included in the related registration statement.
      Unpaid registration delay penalties shall accrue interest at the rate of one
      and
      one-half percent (1.5%) per month until paid in full. If the Company fails
      to
      get a registration statement effective penalties shall accrue at an amount
      equal
      to 1.67% per month of the aggregate purchase price of Tullis’ registrable
      securities included in the related registration statement. If the effectiveness
      failure continues for more than 180 days the penalty rate shall increase to
      3.33%. In addition, if the Company fails to maintain the effectiveness of a
      registration statement, penalties shall accrue at a rate of 3.33% per month
      of
      the aggregate purchase price of the registrable securities included in the
      related registration. The Company is also subject to penalties if there is
      a
      failure to timely deliver to a holder (or credit the holder’s balance with
      Depository Trust Company if the common stock is to be held in street name)
      a
      certificate for shares of our common stock if the holder elects to convert
      its
      preferred stock into common stock. Therefore, upon the occurrence of one or
      more
      of the foregoing events the Company’s business and financial condition could be
      materially adversely affected and the market price of its common stock would
      likely decline.





The
      Company’s Series B-1 redeemable convertible preferred stock is summarized as
      follows at September 30, 2006:


Shares
                  IssuedShares
              
              And
              
              Par
                  Value
              
              LiquidationAuthorized
              
              Outstanding
              
              Per
                  Share
              
              Preference15
              
              
              10
              
              $
              100
              
              $
              10,000





**NOTE
      11 -** **Series
      C-1 Redeemable Convertible Preferred Stock**





On
      September 11, 2006, the Company entered into a Securities Purchase Agreement
      (the “Agreement”) with Aisling Capital, L.P. (the “Buyer”). Under the Agreement,
      the Company agreed to issue and sell to the Buyer, and the Buyer agreed to
      purchase from the Company, for a purchase price of $10,000 (net proceeds of
      $9,993) an aggregate of 10 shares of a newly designated series of the Company’s
      preferred stock (“C-1”), together with 2,282 warrants to purchase shares of
      common stock of the Company with an exercise price of $1.639 per share. The
      warrants have a five year term. The Series C-1 Stock and warrants sold to the
      Buyer are convertible and/or exercisable for 8,802 shares of common stock.
      The
      C-1 shares are convertible into common shares at a conversion price of $1.5338,
      and have an annual dividend rate of 8.25%, payable quarterly, which can be
      paid,
      at the Company’s option, in cash or the Company’s common stock. In addition, the
      C-1 shareholders have the right to require the Company to redeem all or a
      portion of the C-1 shares upon the occurrence of certain triggering events,
      as
      defined, at a price per preferred share to be calculated on the day immediately
      preceding the date of a triggering event. At September 30, 2006, the Company
      had
      accrued approximately $41 of Series C-1 dividends, which was paid in October
      2006 through the issuance of approximately 28 shares of the Company’s common
      stock.







17


INTERPHARM
        HOLDINGS, INC
 (In
        thousands, except per share data)




**NOTE
      11 -** **Series
      C-1 Redeemable Convertible Preferred Stock** ,
      continued




With
      respect to the Company’s accounting for the preferred stock, EITF Topic D-98,
      paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities
      with redemption features that are not solely within the control of the issuer
      to
      be recorded outside of permanent equity. As described above, the terms of the
      Preferred Stock include certain redemption features that may be triggered
      by events that are not solely within the control of the Company, such as a
      potential default with respect to any indebtedness, including borrowings under
      the WFBC financing arrangement. Accordingly, the Company has classified the
      C-1
      shares as temporary equity and the value ascribed to the C-1 shares upon initial
      issuance in September 2006 was the amount received in the transaction less
      the
      relative fair value ascribed to the warrants and direct costs associated with
      the transaction. The Company allocated $1,641of the gross proceeds of the sale
      of C-1 shares to the warrants based on estimated fair value. In accordance
      with
      EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible
      Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,094
      to
      retained deficit. The non-cash charge measures the difference between the
      relative fair value of the C-1 shares and the fair market value of the Company's
      common stock issuable pursuant to the conversion terms on the date of issuance.
      The Company is not currently, nor expects in the future to be, in default on
      its
      WFBC credit facility (the only redemption feature outside of its control) nor
      does it plan to redeem the Series C-1 preferred stock. As such the Company
      believes it is not probable that the Series C-1 preferred stock will become
      redeemable.





In
      addition, on September 11, 2006, in connection with the sale of the C-1 shares
      the Company entered into a Registration Rights Agreement, as amended, with
      the
      Buyer. Under the terms of this Registration Rights Agreement the Company is
      subject to penalties (a) if, within 60 days after a request to do so is made
      by
      the holders of such preferred stock, the Company does not timely file with
      the
      Securities and Exchange Commission a registration statement covering the resale
      of shares of its common stock issuable to such holders upon conversion of the
      preferred stock, (b) if a registration statement is filed, such registration
      statement is not declared effective within 180 days after the request is made
      or
      (c) if after such a registration is declared effective, after certain grace
      periods the holders are unable to make sales of its common stock because of
      a
      failure to keep the registration statement effective or because of a suspension
      or delisting of its common stock from the American Stock Exchange or other
      principal exchange on which its common stock is traded. The penalties will
      accrue on a daily basis so long as the Company is in default of the Registration
      Rights Agreement. The maximum amount of a registration delay penalty as defined
      in the Registration Rights Agreement is 18% of the aggregate purchase price
      of
      the Buyers registrable securities included in the related registration
      statement. Unpaid registration delay penalties shall accrue interest at the
      rate
      of one and one-half percent (1.5%) per month until paid in full. If the Company
      fails to get a registration statement effective penalties shall accrue at an
      amount equal to 1.67% per month of the aggregate purchase price of the Buyers
      registrable securities included in the related registration statement. If the
      effectiveness failure continues for more than 180 days the penalty rate shall
      increase to 3.33%. In addition, if the Company fails to maintain the
      effectiveness of a registration statement, penalties shall accrue at a rate
      of
      3.33% per month of the aggregate purchase price of the registrable securities
      included in the related registration. The Company is also subject to penalties
      if there is a failure to timely deliver to a holder (or credit the holder’s
      balance with Depository Trust Company if the common stock is to be held in
      street name) a certificate for shares of our common stock if the holder elects
      to convert its preferred stock into common stock. Therefore, upon the occurrence
      of one or more of the foregoing events the Company’s business and financial
      condition could be materially adversely affected and the market price of its
      common stock would likely decline.






18
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)







**NOTE
      11 -** **Series
      C-1 Redeemable Convertible Preferred Stock** ,
      continued





The
      Company’s Series C-1 redeemable convertible preferred stock is summarized as
      follows at September 30, 2006:





Shares
                IssuedShares
            
            And
            
            Par
                Value
            
            LiquidationAuthorized
            
            Outstanding
            
            Per
                Share
            
            Preference10
            
            
            10
            
            $
            100
            
            $
            10,000








**NOTE
      12 -** **Equity
      Securities**




Preferred
      Stocks


On
      July
      18, 2006, the Company filed an amendment to its Article of Incorporation which
      had the effect of (i) increasing the Company’s authorized common stock to
      150,000; (ii) automatically converting all outstanding shares of the Company’s
      Series A into two shares of common stock or an aggregate of 7 common shares.
      A
      Series A shareholder elected to have his 3 shares canceled. Accordingly, no
      shares of the Company’s common stock were issued to him as part of this
      conversion; (iii) eliminating the Series A from the Articles of Incorporation;
      (iv) automatically converting each of the outstanding shares of the Company’s
      Series B into one share of common stock, thus issuing 2 common shares; and
      (v)
      eliminating the Series B from the Articles of Incorporation.  These
      amendments were approved by written consent of a majority of the Company’s
      outstanding common stock and Series A Cumulative Convertible Preferred Stock
      and
      by the holder of all of the outstanding Series B Convertible Preferred shares.





During
      the quarter ended September 30, 2006, 63 shares of the Company’s common stock
      were issued in payment of Series B-1 dividends earned through June 30,
      2006.





At
      September 30, 2006, the Company had accrued approximately $211 and $41 of Series
      B-1 dividends and Series C-1 dividends, respectively, which was paid in October
      2006 through the issuance of approximately 141 and 28 shares of the Company’s
      common stock to the Series B-1 and C-1 holders, respectively.





Common
      Stock


During
      the quarter ended September 30, 2006, the Company issued 210 shares of its
      common stock in connection with an exercise of options to purchase the Company’s
      common stock.





Subsequent
      to September 30, 2006 the Company had the following stock
      issuances:





·  Approximately
      169 shares were issued to Series B-1 and C-1 preferred stock shareholders in
      settlement of dividends earned and accrued through September 30,
      2006;





·  75
      shares
      were issued in connection with an exercise of options to purchase the Company’s
      common stock.





Stock
      Options


As
      of
      September 30, 2006 and during the quarter ended September 30, 2006:





·  the
      Company recognized approximately $8 as expense in connection with 100 previously
      issued stock appreciation rights (“SARs”). The SARs must be exercised between
      July 1, 2008 and December 31, 2008. The SARs are recorded at fair value and
      are
      marked to market at each reporting period;





19
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)


**NOTE
      12 -** **Equity
      Securities** ,
      continued ****





·  total
      unrecognized compensation cost related to stock options granted was $1,697.
      The
      unrecognized stock option compensation cost is expected to be recognized over
      a
      period of approximately 5 years;





·  total
      options outstanding and total vested options outstanding to purchase the
      Company’s common stock as of September 30, 2006, amounted to 11,873 and 8,658,
      respectively.





On
      October 26, 2006, the Company granted 1,474 options to purchase its common
      stock
      to certain employees with an exercise price being
      set
      as the closing price of the Company’s common stock on October 26, 2006. Approximately
      60% of the o ptions
      were granted
      outright, with the balance, approximately 40%, being subject to the Company
      achieving certain milestones.





**NOTE
      13 -** **401k
      Plan**




In
      2006, the Company initiated a pre-tax savings plan covering substantially all
      employees, which qualifies under Section 401(k) of the Internal Revenue
      Code. Under the plan, eligible employees may contribute a portion of their
      pre-tax salary, subject to certain limitations. The Company contributes and
      matches 100% of the employee pre-tax contributions, up to 3% of the employee’s
      compensation plus 50% of pre-tax contributions that exceed 3 % of compensation,
      but not to exceed 5% of compensation. The Company may also make profit-sharing
      contributions in its discretion which would be allocated among all eligible
      employees, whether or not they make contributions. Company contributions, were
      approximately $68 for the three months ended September 30, 2006.





**NOTE
      14 -** **Economic
      Dependency**





Major
      Customers


The
      Company had the following customer concentrations for the three month periods
      ended September 30, 2006 and 2005:




Sales
      -
      Percent of Revenue





Three
                Months Ended
              September
                30,2006
            2005Customer
                “A”
            22%
            13%Customer
                “B”
            14
            *Customer
                “C”
            16
            *Customer
                “D”
            11
            12Customer
                “E”
            *
            15Customer
                “F”
            *
            12Customer
                “G”
            *
            14


*  Sales
      to
      customer were less than 10%




20




INTERPHARM
        HOLDINGS, INC
 (In
        thousands, except per share data)





**NOTE
      14 -** **Economic
      Dependency** ,
      continued





Accounts
      Receivable (in thousands)





September
                30, 2006Customer
                “A”
            
            $
            2,468Customer
                “B”
            
            
            2,274Customer
                “C”
            
            
            2,057Customer
                “D”
            
            
            1,465





The
      Company complies with its supply agreement to sell various strengths of
      Ibuprofen, and commencing October 2005, various strengths of Naproxen, to the
      Department of Veteran Affairs through two intermediary wholesale prime vendors
      whose data are combined and reflected in Customer “G” above.





Major
      Suppliers





For
      the
      three months ended September 30, 2006 and 2005, the Company purchased materials
      from two suppliers totaling approximately 50% and 71% of purchases,
      respectively. At September 30, 2006 and 2005, aggregate amounts due to these
      suppliers included in accounts payable, were approximately $4,300 and $3,200,
      respectively.





**NOTE
      15 -** **Related
      Party Transactions**





**Rents**


The
      Company leases one of its business premises which is located in Hauppauge,
      New
      York, (“Premises”) from an entity owned by three stockholders, one of which is
      an officer of the Company, under a noncancelable lease expiring in October
      2019.
      According to the terms of the lease, upon a transfer of a majority of the issued
      and outstanding voting stock of Interpharm, Inc., which occurred on May 30,
      2003, and every three years hereafter the annual rent may be adjusted to fair
      market value, as determined by an independent appraiser. The Company believes
      that the aggregate lease costs for the premises are less than those for
      comparable facilities in the area. The Company incurred base rent expense of
      $120 for the three months ended September 30, 2006 and 2005,
      respectively.





**Investment
      in APR, LLC.**


In
      February and April 2005, the Company purchased 5 Class A membership interests
      (“Interests”) from each of Cameron Reid (“Reid”), the Company’s Chief Executive
      Officer, and John Lomans (“Lomans”), who has no affiliation with the Company,
      for an aggregate purchase price of $1,023 (including costs of $23) of APR,
      LLC,
      a Delaware limited liability company primarily engaged in the development of
      complex bulk pharmaceutical products (“APR”). The purchases were made pursuant
      to separate Class A Membership Interest Purchase Agreements dated February
      16,
      2005 between the Company and Reid and Lomans (the “Purchase Agreements”). At the
      time of the purchases, Reid and Lomans owned all of the outstanding Class A
      membership interests of APR, which had, outstanding, 100 Class A membership
      interests and 100 Class B membership interests. As a result, the Company owns
      10
      of the 100 Class A membership Interests outstanding. The two classes of
      membership interests have different economic and voting rights, and the Class
      A
      members have the right to make most operational decisions. The Class B interests
      are held by one of the Company’s major customers and suppliers.




In
      accordance with the terms of the Purchase Agreements, the Company has granted
      to
      Reid and Lomans each a proxy to vote 5 of the Interests owned by the Company
      on
      all matters on which the holders of Interests may vote.





21
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





**NOTE
      15 -** **Related
      Party Transactions** ,
      continued





**Investment
      in APR, LLC.** ,
      continued





The
      Board
      of Directors approved the purchases of Interests at a meeting held on February
      15, 2005, based on an analysis and advice from an independent investment banking
      firm. Reid did not participate during the Company’s deliberations on this
      matter. The Company is accounting for its investment in APR pursuant to the
      cost
      method of accounting.





**NOTE
      16 -** **Commitments
      and Contingencies**





**Litigation**


In
      June
      2006, Ray Vuono (“Vuono”) commenced an action against the Company in the Supreme
      Court of the State of New York, County of Suffolk (Index No. 13985/06). Vuono’s
      complaint against the Company alleges, among other things, that Vuono is
      entitled to receive additional compensation as a “finder” under an agreement
      dated July 1, 2002 between Vuono and the Company (then known as Atec Group,
      Inc.) with respect to a reverse merger transaction consummated by the Company
      in
      May 2003. Vuono also alleges that he is entitled to additional compensation
      under the agreement in respect of a $41,500 credit facility from Wells Fargo
      Business Credit, Inc. obtained by the Company in February 2006 and the sale
      for
      $10,000 of shares of a new series of convertible preferred stock and warrants
      to
      purchase common stock of the Company consummated by the Company with
      Tullis-Dickerson Capital Focus III, L.P. in May 2006. The total amount of
      damages sought by Vuono in the action is approximately $10,000.





The
      Company believes that Vuono’s claims are without merit and the Company is
      vigorously defending the action.





The
      testing, manufacturing and marketing of pharmaceutical products subject us
      to
      the risk of product liability claims. The Company believes that it maintains
      an
      adequate amount of product liability insurance, but no assurance


can
      be
      given that such insurance will cover all existing and future claims or that
      it
      will be able to maintain existing coverage or obtain additional coverage at
      reasonable rates.





From
      time
      to time, the Company is a party to litigation arising in the normal course
      of
      its business operations. In the opinion of management, it is not anticipated
      that the settlement or resolution of any such matters will have a material
      adverse impact on the Company’s financial condition, liquidity or results of
      operations.





**Significant
      Contracts**


Tris
      Pharmaceuticals, Inc


During
      October 2006, the Company entered into a new agreement (“New Liquids Agreement”)
      with Tris Pharma, Inc. (“Tris”), which terminated the agreement entered into In
      February 2005, which was for the development and licensing of up to twenty-five
      liquid generic products (“Liquids Agreement”). According to the terms of the New
      Liquids Agreement, Tris will, among other things, be required to develop and
      deliver the properties, specifications and formulations (“Product Details”) for
      fourteen generic liquid pharmaceutical products (“Liquid Products”). The Company
      will then utilize this information to obtain all necessary approvals. Further,
      under the terms of the New Liquids Agreement Tris will manufacture, package
      and
      label each product for a fee. The Company is required to pay Tris $1,000,
      whether or not regulatory approval is obtained for any of the liquid products.
      The Company has paid $750; $250 having been paid during the term of the Liquids
      Agreement and $500 paid upon the execution of the New Liquids Agreement. The
      balance of $250 is due and payable December 15, 2006. In addition, Tris is
      to
      receive forty percent of the net profits, as defined, in accordance with the
      terms in the New Liquids Agreement.





During
      February 2005, the Company entered into a second agreement (“Solids Agreement”),
      for solid dosage products (“solids”) with Tris. In July 2005, the Solids
      Agreement was amended. According to the terms of the






22
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





**NOTE
      16 -** **Commitments
      and Contingencies** ,
      continued





**Significant
      Contracts** ,
      continued


Tris
      Pharmaceuticals, Inc ,
      continued


Solids
      Agreement, as amended, the Company will collaborate with Tris on the
      development, manufacture and marketing of eight solid oral dosage generic
      products. The amendment to this agreement requires Tris to deliver Technical
      Packages for two soft-gel products and one additional solid dosage product.
      Some
      of products included in this agreement, as amended, may require the Company
      to
      challenge the patents for the equivalent branded products. This agreement,
      as
      amended, provides for payments of an aggregate of $4,500 to Tris, whether or
      not
      regulatory approval is obtained for any of the solids products. The Solids
      Agreement also provides for an equal sharing of net profits for each product,
      except for one product, that is successfully sold and marketed, after the
      deduction and reimbursement of all litigation-related and certain other costs.
      The excluded product provides for a profit split of 60% for the Company and
      40%
      for Tris. Further, this agreement provides the Company with a perpetual
      royalty-free license to use all technology necessary for the solid products
      in
      the United States, its territories and possessions.





In
      April,
      2006, the Company and Tris further amended the Solids Agreement. This second
      amendment requires Tris to deliver a Technical Package for one additional solid
      dosage product. Further, terms of this second amendment will require the Company
      to pay to Tris an additional $300 after it has paid the initial aggregate
      amounts associated with the original agreement.





The
      Company further amended the Solids Agreement in October 2006, modifying the
      manner in which certain costs will be shared as well as clarifying the parties’
respective audit rights.





For
      the
      three month period ended September 30, 2006 and 2005, the Company recorded
      as
      research and development expense approximately $400 and 660, respectively,
      in
      connection with these agreements. Further, since their inception, the Company
      has incurred approximately $3,910 of research and development costs associated
      with the Tris agreements of which the Company has paid $3,775 as of September
      30, 2006. The balance on the solids agreement, as amended, is $1,275. The
      combined costs prior to the marketing of any product associated with either
      of
      these agreements aggregate up to $5,800.





**NOTE
      17 -** **Subsequent
      Events**





Watson
      Pharmaceuticals, Inc.





Subsequent
      to September 30, 2006 the Company entered into a termination and release
      agreement (the “Termination Agreement”) with Watson Pharmaceuticals, Inc.
      (“Watson”) terminating the Manufacturing and Supply Agreement dated as of
      October 14, 2003 (the “Supply Agreement”) pursuant to which the Company
      manufactured and supplied and Watson distributed and sold generic Vicoprofen®
(7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets. Watson
      is required to return all rights and agreements to the Company thereby enabling
      it to market Hydrocodone Bitartate - 7.5 / Ibuprofen 200 mg tablets. Further,
      Watson shall be required to turn over to the Company its current customer list
      for this product and agreed that, for a period of six months from closing,
      neither Watson nor any of its affiliates shall solicit sales for this product
      from its twenty largest customers. In
      consideration of the termination of Watson’s rights under the Supply Agreement,
      the Company is to pay Watson $2,000 payable at the rate of $500 per year over
      four years from the effective date of the agreement.




23
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)




**NOTE
      17 -** **Subsequent
      Events** ,
      continued





Centrix
      Pharmaceutical, Inc





On
      October 27, 2006, the Company amended its agreement with Centrix
      Pharmaceuticals, Inc., (“Centrix”) wherein Centrix has agreed to purchase over a
      twelve month period 700 bottles of the Company's female hormone
      therapy product commencing November, 2006.  The parties will share net
      profits, as defined in the agreement, equally with the Company’s share being
      paid within 45 days of the end of each calendar month.  The amendment has a
      one year term, after which time the original Centrix agreement shall again
      be in
      full force and effect.








24
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)




**ITEM
      2.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS**





**FORWARD-LOOKING
      STATEMENTS AND ASSOCIATED RISK**





Certain
      statements in this document may constitute “forward-looking statements” within
      the meaning of the Private Securities Litigation Reform Act of 1995, including
      those concerning Management’s expectations with respect to future financial
      performance, trends and future events, particularly relating to sales of current
      products and the introduction of new products. Such statements involve known
      and
      unknown risks, uncertainties and contingencies, many of which are beyond the
      control of the Company, which could cause actual results and outcomes to differ
      materially from those expressed herein. These statements are often, but not
      always, made typically by use of words or phrases such as “estimate,” “plans,”
“projects,” “anticipates,” “continuing,” “ongoing,” “expects,” “intends,”
“believes,” or similar words and phrases. Factors that might affect such
      forward-looking statements set forth in this document include (i) increased
      competition from new and existing competitors, and pricing practices from such
      competitors, (ii) pricing pressures, (iii) the amount of funds available for
      research and development, (iv) research and development project delays or delays
      and unanticipated costs in obtaining regulatory approvals, (v) the continued
      ability of distributed product suppliers to meet future demand, (vi) the costs,
      delays involved in and outcome of any threatened or pending litigations, (vii)
      and general industry and economic conditions. Any forward-looking statements
      included in this document are made as of the date hereof only, based on
      information available to us as of the date hereof, and, subject to applicable
      law to the contrary, we assume no obligation to update any forward-looking
      statements.





Investing
      in our securities involves substantial risks and uncertainties. Therefore,
      we
      encourage you to review the “Risk Factors” contained in Item 1A of our Annual
      Report on Form 10-K filed with the SEC on September 28, 2006.





**Overview**





Interpharm
      Holdings, Inc., (the "Company" or "Interpharm"), through its operating
      wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and collectively
      with Interpharm, "we" or "us") is engaged in the business of developing,
      manufacturing and marketing generic prescription strength and over-the-counter
      pharmaceutical products.





Investment
      in research and development of generic products and in our sales and marketing
      force are critical to our expansion plan and our success. During the quarter
      ended September 30, 2006, our continuing investment in these and other areas
      resulted in net sales of $22,827, the highest quarterly net sales since our
      reverse merger in May 2003, wherein we generated $1,630 in net income after
      provision for income taxes.





We
      are
      continuing to build our sales department. During the quarter ended September
      30,
      2006, we added two national sales managers to support our anticipated new
      product launches.





Research
      and development continues to be a high priority as evidenced by our having
      spent
      $3,419 during our first fiscal quarter of 2007 and anticipate incurring this
      or
      higher levels of research and development expenses during the remainder of
      fiscal 2007. Our product line currently consists of 23 **** generic
      products. As of this filing we obtained eight new approvals since July 1,
      2006.





On
      October 3, 2006 we entered into a termination and release agreement (the
“Termination Agreement”) with Watson Pharmaceuticals, Inc. (“Watson”)
      terminating the Manufacturing and Supply Agreement dated as of October 14,
      2003
      (the “Supply Agreement”) pursuant to which the Company manufactured and supplied
      and Watson distributed and sold generic Vicoprofen® (7.5 mg hydrocodone
      bitartrate/200 mg ibuprofen) tablets. Watson
      is required to return all rights and agreements to us thereby enabling us to
      market Hydrocodone Bitartate - 7.5 / Ibuprofen 200 mg tablets. In
      connection with Watson’s merger with Andrx Corporation, Watson agreed to divest
      itself of generic Vicoprofen® product. On November 3, 2006, the Termination
      Agreement became effective. Accordingly, we will now manufacture, market and
      sell the product and retain all sales proceeds. We believe that the transfer
      of
      this product to us provides us with penetration into the scheduled narcotic
      products market and lays a foundation for future launches in this targeted
      product line. Among our new approvals during the quarter were the following
      seven controlled substances:






25
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)




·
            hydrocodone
                bitartrate and acetaminophen tablets USP, 5 mg / 500 mg; 
 ·
            hydrocodone
                bitartrate and acetaminophen tablets USP, 5 mg / 325 mg; 
 ·
            hydrocodone
                bitartrate and acetaminophen tablets USP, 10 mg / 325 mg; 
 ·
            hydrocodone
                bitartrate and acetaminophen tablets USP, 7.5 mg/ 500 mg; 
 ·
            hydrocodone
                bitartrate and acetaminophen tablets USP, 7.5 mg / 650 mg; 
 ·
            hydrocodone
                bitartrate and acetaminophen tablets USP, 7.5 mg / 750 mg, and 
 ·
            hydrocodone
                bitartrate and acetaminophen tablets USP, 10 mg / 650 mg.


We
      are
      continuing to target higher margin products, such as those products announced
      above, as well as other scheduled narcotic products, oral contraceptive
      products, soft gelatin capsule products, liquid products, products coming off
      patent and special release products. We are already seeing the benefits of
      this
      strategy, which complements and supplements our base business, with an increase
      of 12 percentage points in gross profit for this quarter over the same period
      last year. We believe we will continue to report higher gross profits than
      in
      prior periods.




As
      previously reported, we obtained an additional $10,000 in financing on September
      11, 2006 through the sale of our Series C-1 Convertible Preferred Stock. As
      a
      result, over the next twelve months, we have sufficient capital available to
      continue increasing our research and development expenditures as well as to
      finance additional projects which may become available to us.


**Results
      of Operations --**


**Summary**





Our
      record net sales of $22,827 for the three month period ended September 30,
      2006
      are detailed in the table below. In addition, the following explanations detail
      our results for the three month period ended September 30, 2006 compared to
      the
      three month period ended September 30, 2005:




26
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





Three
                Months Ended September 30,2006
            
            2005%
                of
            
            
            
            %
                ofSales
            
            Sales
            
            Sales
            
            SalesIbuprofen
            
            $
            8,688
            
            
            38
            
            $
            7,770
            
            
            54Allopurinol
                & Atenolol
            
            
            2
            
            
            --
            
            
            1,702
            
            
            12Naproxen
            
            
            3,099
            
            
            14
            
            
            1,809
            
            
            12Female
                hormone product
            
            
            5,025
            
            
            22
            
            
            1,783
            
            
            12Bactrim
            
            
            4,748
            
            
            21
            
            
            -
                0 -
            
            
            -
                0 -All
                Other Products
            
            
            1,265
            
            
            5
            
            
            1,483
            
            
            10Total
            
            $
            22,827
            
            
            100
            
            $
            14,547
            
            
            100





As
      indicated in the tables above, our net sales increased $8,280 when compared
      with
      the three month periods ended September 30, 2006 and September 30, 2005.
      Significant first quarter sales components include:




·  Net
      sales
      of Ibuprofen increased $918 or 11.8% over the three month period ended September
      30, 2005, due in part to an expanded customer base, as well as improvements
      in
      production and packaging. We believe sales of Ibuprofen should remain at
      approximately the current level for the balance of this fiscal year, however,
      there can be no assurance that this will occur.




·  As
      a
      result of our expanded marketing efforts which are focused on increasing the
      number of major accounts, sales of Naproxen increased $1,290 or 71.3% from
      $1,809 reported during the three month period ended September 30, 2005 to $3,099
      recognized during this quarter. We believe sales of Naproxen should continue
      at
      these levels assuming constant market conditions, but there can be no assurance
      that this will occur.




·  Net
      sales
      of our female hormone products were $5,025, of which $3,167 was the result
      of
      recognizing deferred revenue. The balance of our deferred revenue of
      approximately $232 will be recognized in our next fiscal quarter. Subsequent
      to
      September 30, 2006, we entered into a new agreement with our female hormone
      products customer. As a result of the new agreement we believe that sales for
      the fiscal year ending June 30, 2007 are likely to exceed sales recorded during
      the fiscal year ended June 30, 2006, however, there can be no assurance that
      this will occur.




·  The
      most
      significant factor affecting our sales and gross profit was our ability to
      expand our market share of Sulfamethoxazole - Trimethoprim in two strengths
      400mg / 80mg commonly referred to as Bactrim® and 800mg / 160mg or commonly
      referred to as Bactrim-DS®, (“Bactrim”). The increase occurred primarily as a
      result of our entering into sales and marketing arrangements with two major
      wholesalers. This product was initially launched in October, 2005. We believe
      the higher levels of sales and gross profit should continue at least through
      early calendar 2007, but there can be no assurance this will occur.




·  We
      no
      longer manufacture Allopurinol & Atenolol




Other
      than as described above any fluctuations in our sales by product were generally
      not attributable to any changes in our pricing which, for our entire product
      line, remained stable.




During
      the three month period ended September 30, 2006, four key customers, in the
      aggregate, accounted for approximately 63% of total sales. For the three month
      period ended September 30, 2005 five key customers which accounted for
      approximately 66% of total sales.





**Cost
      of sales / Gross Margins**





During
      the three month period ended September 30, 2006, prices for raw materials
      remained relatively constant when compared to the prior year. However,
      indications are that we may see modest increases in certain key raw material
      costs as well as packaging components during the next several months. The
      remaining components of our cost of sales, primarily direct labor and overhead
      have, as a percentage of net sales, increased over the same three month period
      last year. When compared to the prior year, we have incurred increased costs
      associated with increased production and supervisory salaries, as well as hiring
      and training staff for additional work shifts, and in connection with our second
      facility. Additionally, we had increases in general overhead costs such as
      product liability insurance and utilities. We believe these higher costs will
      likely continue for the near future.






27
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





Our
      total
      gross profit percentage for the three months ended September 31, 2006 was 39.3%,
      an increase of 12.0 percentage points compared to 27.3% for the three months
      ended September 30, 2005. This increase is primarily the result of significant
      increases in our sales of our female hormone products and Bactrim®, both of
      which generate higher gross profits than our traditional product line. As
      volumes may fluctuate for these higher margin products, so also may our margin
      increases for these products throughout the year. We anticipate that our overall
      gross margin for the fiscal year ended June 30, 2007, should exceed the gross
      margin reported during the fiscal year ended June 30, 2006. However, there
      are
      no assurances that this will occur.





**Selling
      and General and Administrative Expenses**





Selling,
      general and administrative expenses include salaries and related costs,
      commissions, travel, administrative facilities, communications costs and
      promotional expenses for our direct sales and marketing staff, administrative
      and executive salaries and related benefits, legal, accounting and other
      professional fees as well as general corporate overhead.





During
      the three month period ended September 30, 2006, selling, general and
      administrative expenses increased approximately $200 to approximately $2,637,
      from approximately $2,437, during three month period ended September 30, 2005.
      However when stated as a percentage of net sales it decreased significantly
      to
      11.6% of sales, from 16.8%, or 5.2 percentage points.





Significant
      factors contributing to the dollar increase include: necessary increases in
      the
      staffing of administrative and sales areas to support our growth of $185;
      related payroll taxes and benefits of $129; increased rent, utilities and taxes
      of $63; an increase in depreciation of non-manufacturing assets of $82;
      Freight-out increased $30 due to higher net sales and an increase in investor
      relations costs of $33. These increases were offset by a decrease in commission
      expenses of $124 and legal and accounting of $106 and a reduction in
      professional fees and expenses of $91. Adoption of SFAS 123(R) requires us
      to
      report a non-cash expense for the ratable portion of the fair value of employee
      stock option awards of unvested stock options over the remaining vesting period.
      Therefore, in accordance with SFAS 123 (R), we reported non-cash expenses of
      $211 and $216 during the three month periods ended September 30, 2006 and
      September 30, 2005, respectively. We believe that our general and administrative
      costs and selling expenses should remain at current levels, however, there
      can
      be no assurance that events could occur which may alter our plan.





**Research
      and Development Expenses**





During
      the three month period ended September 30, 2006, we continued to take
      significant steps to expand of our product line. We incurred research and
      development expenses of approximately $3,419 (15% of net sales) compared to
      approximately $2,146 (14.8% of net sales) for the same period in the prior
      fiscal year, an increase of $1,273 or an increase of 59%.





Research
      and development expenses were primarily for wages and bioequivalence studies
      for
      new products currently in development and for materials and legal fees
      associated with our planned new product pipeline. We believe that research
      and
      development expenses, as a percentage of our net sales, may likely increase
      as a
      percentage of net sales in the future as we seek to expand our product line.





During
      October 2006, we entered into a new agreement (“New Liquids Agreement”) with
      Tris Pharma, Inc. (“Tris”), which terminated the agreement entered into In
      February 2005, which was for the development and licensing of up to twenty-five
      liquid generic products (“Liquids Agreement”). According to the terms of the New
      Liquids Agreement, Tris will, among other things, be required to develop and
      deliver the properties, specifications and formulations (“Product Details”) for
      fourteen generic liquid pharmaceutical products (“Liquid Products”). We will
      then utilize this information to obtain all necessary approvals. Tris will
      manufacture, package and label each product for a fee. We are required to pay
      Tris $1,000, whether or not regulatory approval is obtained for any of the
      liquid products. We have already paid $750; $250 having been paid during the
      term of the Liquids Agreement and $500 paid upon the execution of the New
      Liquids Agreement. The balance of $250 is due and payable December 15, 2006.
      In
      addition, Tris is to receive forty percent of the net profits, as defined,
      in
      accordance with the terms in the New Liquids Agreement.






28
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





During
      February 2005, we entered into a second agreement (“Solids Agreement”), for
      solid dosage products (“solids”) with Tris. In July 2005, the Solids Agreement
      was amended. According to the terms of the Solids Agreement, as amended, we
      are
      to collaborate with Tris on the development, manufacture and marketing of eight
      solid oral dosage generic products. The amendment to this agreement requires
      Tris to deliver Technical Packages for two soft-gel products and one additional
      solid dosage product. Some of products included in this agreement, as amended,
      may require us to challenge the patents for the equivalent branded products.
      This agreement, as amended, provides for payments of an aggregate of $4,500
      to
      Tris, whether or not regulatory approval is obtained for any of the solids
      products. The Solids Agreement also provides for an equal sharing of net profits
      for each product, except for one product, that is successfully sold and
      marketed, after the deduction and reimbursement of all litigation-related and
      certain other costs. The excluded product provides for a profit split of 60%
      for
      the Company and 40% for Tris. Further, this agreement provides us with a
      perpetual royalty-free license to use all technology necessary for the solid
      products in the United States, its territories and possessions.





In
      April,
      2006, we further amended the Solids Agreement. This second amendment requires
      Tris to deliver a Technical Package for one additional solid dosage product.
      Further, terms of this second amendment will require us to pay to Tris an
      additional $300 after it has paid the initial aggregate amounts associated
      with
      the original agreement.





We
      further amended the Solids Agreement in October 2006, modifying the manner
      in
      which certain costs will be shared as well as clarifying respective audit
      rights.





**Interest
      Expense, net**





Our
      interest expense increased approximately $196 when comparing the three months
      ended September 30, 2006 with the three months ended September 30, 2005,
      primarily as a result of increased borrowings to fund the Yaphank location
      renovations, increased research and development activities as well as additional
      purchases of new equipment. It is likely that, as a result of additional
      borrowings and higher interest rates, we will incur increases in our interest
      expense.





**Income
      Taxes**





In
      calculating our tax provision for the three month period ended September 30,
      2006, we applied an aggregate effective tax rate of approximately 38% thereby
      creating an approximate $986 income tax expense and increased its deferred
      tax
      asset by a like amount. In calculating our tax provision for the three month
      period ended September 30, 2005, we applied an effective tax rate of 37% which
      resulted in an income tax benefit of approximately $262.





During
      the three month period ended September 30, 2006, stock options were exercised
      which generated approximately $74 of income tax deductions, resulting in tax
      benefits of approximately $27, which were credited to additional paid-in
      capital. At
      September 30, 2006 we had remaining Federal NOLs of $14,727 and State NOLs
      of
      $14,137 expiring through 2026. Pursuant to Section 382 of the Internal Revenue
      Code regarding substantial changes our ownership; utilization of these NOLs
      is
      limited. As of September 30, 2006, we determined that it is more likely than
      not, that we will utilize all of the Federal NOLs in the future. We recorded
      a
      valuation allowance of approximately 24% of the State NOLs which we do not
      anticipate utilizing due to State limitations.






29
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





**Liquidity
      and Capital Resources**





We
      currently finance our operations and capital expenditures through cash flows
      from operations and bank loans. Net cash provided by operating activities for
      the three month period ended September 30, 2006, was $1,044 compared to $1,360
      for the three month period ended September 30, 2005. Significant factors
      comprising the cash provided by operating activities for the three month period
      ended September 30, 2006 include: net income of $1,630 and a net decrease to
      operating assets and liabilities of $2,287. This net change is due, in part,
      to
      our reduction of deferred revenue of $3,167. At September 30, 2006, we had
      $11,503 in cash, compared to $1,438 at June 30, 2006. Additionally, we reported
      depreciation and amortization of $532. We also recognized a non cash charge
      of
      $211 as a result of adoption of SFAS 123 (R). Other items affecting our net
      cash
      provided by operating activities aggregated net increases of $958.





Funds
      used in investing activities of $930 during the three month period ended
      September 30, 2006 were for new machinery, equipment and building renovations.





The
      most
      significant component to our net cash provided by financing activities of $9,951
      was the sale of $10,000 of our Series C-1 redeemable convertible preferred
      stock
      in September 2006. In addition we received $142 from the exercise of employee
      stock options. Net funds used pertaining to long-term debt was
      $199.




It
      should
      be noted that as part of our business plan, during the three month period ended
      September 30, 2006, we incurred more than $3,400 of research and development
      costs. We believe that, according to our business plan, our research and
      development costs will likely exceed this current rate for the foreseeable
      future.





Bank
      Financing





During
      February, 2006, the Company entered into a new four-year financing arrangement
      with Wells Fargo Business Credit (“WFBC”). This financing agreement provided a
      maximum credit facility of $41,500 comprised of:





·  $22,500
      revolving credit facility


·  $12,000
      real estate term loan


·  $
      3,500
      machinery and equipment (“M&E”) term loan


·  $
      3,500
      additional / future capital expenditure facility





The
      funds
      made available through this facility paid down, in its entirety, the $20.45
      million owed on the previous credit facility. The new revolving credit facility
      borrowing base is calculated as (i) 85% of our eligible accounts receivable
      plus
      the lesser of 50% of cost or 85% of the net orderly liquidation value of its
      eligible inventory. The advances pertaining to inventory are capped at the
      lesser of 100% of the advance from accounts receivable or $9,000. The $12,000
      loan for the real estate in Yaphank, NY is payable in equal monthly installments
      of $67 plus interest through February 2010 at which time the remaining principal
      balance is due. The $3,500 M&E loan is payable in equal monthly installments
      of $58 plus interest through February 2010 at which time the remaining principal
      balance is due. With respect to additional capital expenditures, we are
      permitted to borrow 90% of the cost of new equipment purchased to a maximum
      of
      $3,500 in borrowings amortized over 60 months. As of September 30, 2006, there
      is approximately $2,690 available for additional capital expenditure
      borrowings.





Under
      the
      terms of the WFBC agreement, three stockholders, all related to our Chairman
      of
      the Board of Directors, one of whom is our Chief Operating Officer, were
      required to provide limited personal guarantees, as well as pledge securities
      with a minimum aggregate value of $7,500 as security for a portion of the
      $22,500 credit facility. We were required to raise a minimum of $7,000 through
      the sale of equity or subordinated debt by June 30, 2006. The shareholder’s
      pledges of marketable securities would be reduced by WFBC either upon our
      raising capital, net of expenses in excess of $5,000 or achieving certain
      milestones. As a result of our sale of $10,000 of Series B-1 redeemable
      convertible preferred stock in May 2006, the credit facility and the limited
      personal guarantees were reduced by $4,250 and $3,670, respectively. The sale
      of
      the $10,000 Series C-1 redeemable convertible preferred stock in September
      2006,
      resulted in reducing the credtit facility by $3,250 and eliminated the balance
      of the personal pledges of marketable securities of $3,830. As a result the
      Company raising $20,000, the maximum availability of the revolving credit
      facility is now $15,000, and the three stockholders pledges have been
      eliminated.






30
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





The
      revolving credit facility and term loans will bear interest at a rate of the
      prime rate less 0.5% or, at our option, LIBOR plus 250 basis points. At
      September 30, 2006, the interest rate on this debt was 7.75%. Pursuant to the
      requirements of the WFBC agreement, we put in place a lock-box arrangement.
      We
      will incur a fee of 25 basis points per annum on any unused amounts of this
      credit facility.





The
      WFBC
      credit facility is collateralized by substantially all of our assets. In
      addition, we are required to comply with certain financial covenants.





With
      respect to the real estate term loan and the $3,500 M&E loan, we entered
      into interest rate swap contracts (the “swaps”), whereby we pay a fixed rate of
      7.56% and 8.00% per annum, respectively. The swaps contracts mature in 2010.
      The
      swaps are a cash flow hedge (i.e. a hedge against interest rates increasing).
      As
      all of the critical terms of the swaps and loans match, they are structured
      for
      short-cut accounting under SFAS No. 133, “Accounting For Derivative Instruments
      and Hedging Activities’” and by definition there is no hedge ineffectiveness or
      a need to reassess effectiveness. Fair value of the interest rate swaps at
      September 30, 2006, was approximately $111 and is included in other
      assets.





Watson
      Termination Agreement


Subsequent
      to September 30, 2006 we entered into a Termination Agreement with Watson as
      set
      forth above. In consideration of the termination of Watson’s rights under the
      Supply Agreement, we are to pay to Watson $2,000 payable at the rate of $500
      per
      year over four years from the effective date of the agreement.





Our
      expansion plan calls for continued spending on research and development and
      capital improvements. We believe that we have adequate cash on hand and that
      our
      credit facility with Wells Fargo Business Credit will be sufficient for the
      next
      twelve months of our operations.





**Accounts
      Receivable**





Although
      our net sales increased by approximately $6,342 when compared to $16,485
      reported during the three month period ended June 30, 2006, our accounts
      receivable at September 30, 2006, was $14,568, up $356 when compared to $14,212
      at June 30, 2006. As of September 30, 2006, 7% of our receivables had aged
      greater than 90 days. We believe the quality of our accounts receivable is
      good,
      and as such we do not believe we have more than minimal exposure to bad debt
      expense.





**Inventories**





At
      September 30, 2006, the value of our inventory was $8,348, a slight decrease
      of
      $358 from $8,706 at June 30, 2006.  The
      decrease is primarily the result of our net sales during the quarter slightly
      exceeding our plan and in difficulties, which have now been resolved, in
      obtaining certain raw materials from one supplier. We strive to maintain
      adequate inventory levels as well as maintain our relationships with our key
      vendors. We believe that the modest decrease in our inventory is within
      acceptable limits of our current operating plan.








31
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





**Accounts
      Payable, Accrued Expenses and Other Liabilities**





Our
      accounts payable, accrued expenses and other current liabilities increased
      by
      approximately $1,239 from June 30, 2006 to September 30, 2006. The increase
      is
      primarily attributable to increases in purchases of raw materials due to greater
      sales volume as well as increased research and development costs. Further,
      the
      fluctuation in accounts payable and accrued expenses payable was partially
      the
      result of controls over cash outflows. We do not believe our cash outflow
      controls will have any material affect on our vendor relationships.





**Cash**


Cash
      increased during the three month period ended September 30, 2006, by
      approximately $10,065 to $11,503 at September 30, 2006 from $1,438 at June
      30,
      2006, primarily as a result of the sale of $10,000 of our Series C-1 redeemable
      convertible preferred stock.





**Critical
      Accounting Policies**





Management's
      discussion and analysis of financial condition and results of operations
      discusses our financial statements, which have been prepared in accordance
      with
      accounting principles generally accepted in the United States of America. The
      preparation of these financial statements requires that we make estimates and
      assumptions that affect the reported amounts of assets and liabilities, the
      disclosure of contingent assets and liabilities at the date of the financial
      statements, and the reported amounts of revenues and expenses during the
      reporting period. On an on-going basis, we evaluate judgments and estimates
      made, including those related to revenue recognition, inventories, income taxes
      and contingencies including litigation. We base our judgments and estimates
      on
      historical experience and on various other factors that it believes to be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying value of assets and liabilities that are
      not
      readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions.





We
      consider the following accounting policies to be most critical in understanding
      the more complex judgments that are involved in preparing our financial
      statements and the uncertainties that could impact results of operations,
      financial condition and cash flows.





**Revenue
      Recognition**





We
      recognize product sales revenue upon the shipment of product, when estimated
      provisions for chargebacks and other sales allowances are reasonably
      determinable, and when collectibility is reasonably assured. Accruals for these
      provisions are presented in the consolidated financial statements as reductions
      to revenues. Accounts receivable are presented net of allowances relating to
      the
      above provisions.





We
      purchase raw materials from two suppliers, which are manufactured into finished
      goods and sold back to such suppliers as well as to other customers. We can
      and
      do purchase raw materials from other suppliers. Pursuant to Emerging Issues
      Task
      Force, (“EITF”) No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as
      an Agent,” we recorded sales to, and purchases from, these suppliers on a gross
      basis. Sales and purchases were recorded on a gross basis since we (i) have
      a
      risk of loss associated with the raw materials purchased, (ii) convert the
      raw
      material into a finished product based upon our specifications, (iii) have
      other
      sources of supply of the raw material, and (iv) have credit risk related to
      the
      sale of such product to the suppliers. These factors among others, qualify
      us as
      the principal under the indicators set forth in EITF 99-19, “Reporting Revenue
      Gross as a Principal vs. Net as an Agent.” If the terms and substance of the
      arrangement change, such that we no longer qualify to report these transactions
      on a gross reporting basis, our net income and cash flows would not be affected.
      However, our sales and cost of sales would both be reduced by a similar amount.
      These purchase and sales transactions are recorded at fair value in accordance
      with EITF Issue 04-13 “Accounting For Purchase and Sales of Inventory with the
      Same Counterparty”.






32
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





**Sales
      Incentives**


In
      the
      current year we offered a sales incentive to one of our customers in the form
      of
      an incentive volume price adjustment. We account for sales incentives in
      accordance with EITF 01-9, "Accounting for Consideration Given by a Vendor
      to a
      Customer (Including a Reseller of Vendor's Products)" (“EITF 01-9”). The terms
      of this volume based sales incentive require the customer to purchase a minimum
      quantity of our products during a specified period of time. The incentive
      offered is based upon a fixed dollar amount per unit sold to the customer.
      We
      made an estimate of the ultimate amount of the incentive the customer will
      earn
      based upon past history with the customer and other facts and circumstances.
      We
      have the ability to estimate this volume incentive price adjustment, as there
      does not exist a relatively long period of time for the particular adjustment
      to
      be earned. Any change in the estimated amount of the volume incentive is
      recognized immediately using a cumulative catch-up adjustment. In accordance
      with EITF 01- 9, we record the provision for this sales incentive when the
      related revenue is recognized. The accrual for sales incentives at September
      30,
      2006 was approximately $232 and reported as deferred revenue on our balance
      sheet. Our sales incentive liability may prove to be inaccurate, in which case
      we may have understated or overstated the provision required for these
      arrangements. Therefore, although we make a best estimate of its sales incentive
      liability, many factors, including significant unanticipated changes in the
      purchasing volume of its customer, could have significant impact on our
      liability for sales incentives and our reported operating results.





**Inventories**





Our
      inventories are valued at the lower of cost or market determined on a first-in,
      first-out basis, and includes the cost of raw materials, labor and manufacturing
      overhead. We continually evaluate the carrying value of our inventories and
      when
      factors such as expiration dates and spoilage indicate that impairment has
      occurred, either a reserve is established against the inventories' carrying
      value or the inventories are disposed of and completely written off in the
      period incurred.





**Research
      and Development**





Pursuant
      to SFAS No. 2 “Accounting for Research and Development Costs,” research and
      development costs are expensed as incurred or at the date payment of
      non-refundable amounts become due, whichever occurs first. Research and
      development costs, which consist of salaries and related costs of research
      and
      development personnel, fees paid to consultants and outside service providers,
      raw materials used specifically in the development of its new products and
      bioequivalence studies. Pre-approved milestone payments due under contract
      research and development arrangements are expensed when the milestone is
      achieved.





**Issues
      And Uncertainties**


**Risk
      of Product Liability Claims**





The
      testing, manufacturing and marketing of pharmaceutical products subject us
      to
      the risk of product liability claims. We believe that we maintain an adequate
      amount of product liability insurance, but no assurance can be given that such
      insurance will cover all existing and future claims or that we will be able
      to
      maintain existing coverage or obtain additional coverage at reasonable rates.








**ITEM
      3 - Quantitative and Qualitative Disclosures About Market
      Risk**


As
      of
      this filing, our principal financial instrument is a $34,000 credit facility,
      consisting of a real estate term loan of $12,000, two machinery and equipment
      lines aggregating $7,000 and a revolving credit line of a maximum of $15,000,
      subject to a certain asset levels. The original amount of the credit facility
      and the revolving credit facility was $41,500. Under the terms of the WFBC
      agreement, three stockholders, all related to our Chairman of the Board of
      Directors, one of whom is the our Chief Operating Officer, were required to
      provide limited personal guarantees, as well as pledge securities with a minimum
      aggregate value of $7,500 as security for a portion of the $22,500 credit
      facility. We were required to raise a minimum of $7,000 through the sale of
      equity or subordinated debt by June 30, 2006. The shareholder’s pledges of
      marketable securities would be reduced by WFBC either upon raising capital,
      net
      of expenses in excess of $5,000 or achieving certain milestones. As a result
      of
      the sale of $10,000 of Series B-1 convertible preferred stock in May 2006,
      the
      credit facility and the limited personal guarantees were reduced by $4,250
      and
      $3,670, respectively. In September, 2006 we consummated a $10,000 sale of a
      Series C-1 Convertible preferred stock, which further reduced the credit
      facility by $3,250 and eliminate the balance of the personal pledges of
      marketable securities of $3,830. After the reductions described above, the
      maximum availability of the revolving credit facility will be $15,000.






33
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





At
      September 30, 2006, total obligations to our bank pertaining to the credit
      facility described above were: (i) approximately $11,533 real estate term loan;
      and (ii) $3,860 owing on the machinery and equipment lines.





With
      respect to the real estate term loan and the machinery and equipment loans,
      we
      entered into interest rate swap contracts (the “swaps”), whereby the Company
      pays a fixed rate of 7.56% and 8.00% per annum, respectively. The swaps
      contracts mature in 2010. The swaps are a cash flow hedge (i.e. a hedge against
      interest rates increasing). As all of the critical terms of the swaps and loans
      match, they are structured for short-cut accounting under SFAS No. 133,
“Accounting For Derivative Instruments and Hedging Activities’” and by
      definition, there is no hedge ineffectiveness or a need to reassess
      effectiveness. Fair value of the interest rate swaps at September 30, 2006
      was
      approximately $111.





If
      our
      combined variable rate borrowings remained at the same amount as of September
      30, 2006, for the remainder of our fiscal year, for every one percent change,
      upward or downward in our borrowing rate, we would incur or save approximately
      $2 per quarter. The remaining borrowing capacity within the credit facility
      with
      WFBC will likely be used for such things as future research and development
      costs as well as the purchase of new equipment for our facilities. Any
      additional borrowings could effectively increase our exposure to interest rate
      market risk. In addition, we are required to comply with certain financial
      covenants.





**ITEM
      4 - CONTROLS AND PROCEDURES**





**E** **valuation** **** **of
      Controls and Procedures** ****





We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our Exchange Act reports is recorded,
      processed, summarized and reported within the time periods specified in the
      Securities and Exchange Commission’s (“SEC”) rules and forms, and that such
      information is accumulated and communicated to our management to allow timely
      decisions regarding required disclosure. Management necessarily applied its
      judgment in assessing the costs and benefits of such controls and procedures,
      which, by their nature, can provide only reasonable assurance regarding
      management's control objectives.





At
      the
      conclusion of the three month period ended September 30, 2006, we carried out
      an
      evaluation, under the supervision and with the participation of our management,
      including our Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures. Based upon that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective in alerting them in a timely manner to information relating to the
      Company required to be disclosed in this report.





A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control systems are met.
      Because of the inherent limitations in all control systems no evaluation of
      controls can provide absolute assurance that all control issues, if any, within
      a company have been detected. Such limitations include the fact that human
      judgment in decision-making can be faulty and that breakdowns in internal
      control can occur because of human failures, such as simple errors or mistakes
      or intentional circumvention of the established process.






34
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)





**PART
      II - OTHER INFORMATION**




**Item
                  6.**
              **Exhibits**Exhibits10.1
              Agreement
                  between Interpharm, Inc. and Tris Pharma, Inc. dated October 4,
                  2006.21.1
              List
                  of Subsidiaries.31.1
              Certification
                  of Chief Executive Officer pursuant to Rules 13a-14(a) as adopted,
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.31.2
              Certification
                  of the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted,
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1
              Certifications
                  of the Chief Executive Officer and the Chief Financial Officer
                  pursuant to
                  18 U.S.C. Section 1350 as adopted, pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.







35
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)


Signatures





Pursuant
      to the requirements of the Securities Exchange Act of 1934, the Registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.




INTERPHARM
                HOLDINGS, INC.
              (Registrant)Date: November
              14, 2006
            By:
            /s/ George
              AronsonGeorge
                Aronson,
              Chief
                Financial Officer
              (Duly
                authorized to sign on behalf of
                registrant)







36
 
  INTERPHARM
          HOLDINGS, INC
 (In
          thousands, except per share data)


**Exhibits**


**Number**  **Description**




21.1  List
      of
      Subsidiaries





Name
                of  Subsidiary
            Jurisdiction
            Ownership
                PercentageInterpharm,
                Inc.
            New
                York
            100%Micro
                Computer Store, Inc.
            New
                York
            100%Innovative
                Business Micros, Inc.
            New
                York
            100%Logix
                Solutions, Inc.
            Colorado
            90%Saturn
                Chemical, LLC
            New
                York
            100%Interpharm
                Realty, LLC
            New
                York
            100%Interpharm
                Development Private, LTD
            India
            100%




31.1  Certification
        of
        Cameron Reid pursuant to Exchange Act Rules 13(a)-14(a) and 15d-14(a), as
        adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;
  31.2  Certification
        of
        George Aronson pursuant to Exchange Act Rules 13(a)-14(a) and 15d-14(a),
        as
        adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;
  32.1 Certification
        pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
        the
        Sarbanes-Oxley Act of 2002;
   37