**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 March 31, 2007





o
      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 o





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 o Accelerated
      filer o 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
o NO
x




As
      of the
      close of business on May 11, 2007, there were 65,813,668 shares of the
      Registrant's $0.01 par value per share Common Stock outstanding.










INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES




TABLE
      OF
      CONTENTS




PagePART
                I
            Financial
                InformationItem
                1.
            Financial
                Statements & Notes
            1-26Item
                2.
            Managements
                  Discussion & Analysis ofFinancial Condition and Results of
                  Operations
            27-37Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            37Item
                4.
            Controls
                and Procedures
            38PART
              II
            Other
                Information Required in ReportItem
                1.
            Legal
                Proceedings
            39Item
                6.
            Exhibits
            40Signatures
                Page
            41Exhibits/Certifications
            42-45









INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(In
      thousands)




ASSETSMarch
                  31,
                2007
            
            June
                  30,
                2006(Unaudited)CURRENT
                ASSETSCash
            
            $
            184
            
            $
            1,438Accounts
                receivable, net
            
            
            14,109
            
            
            14,212Inventories
            
            
            12,117
            
            
            8,706Prepaid
                expenses and other current assets
            
            
            1,564
            
            
            1,316Assets
                held for sale
            
            
            538
            
            
            —Deferred
                tax assets
            
            
            83
            
            
            1,321Total
                Current Assets
            
            
            28,595
            
            
            26,993Land,
                building and equipment, net
            
            
            32,385
            
            
            29,069Deferred
                tax assets
            
            
            7,744
            
            
            4,849Investment
                in APR, LLC
            
            
            1,023
            
            
            1,023Other
                assets
            
            
            1,168
            
            
            933TOTAL
                ASSETS
            
            $
            70,915
            
            $
            62,867


*See
        Notes To Condensed Consolidated Financial
        Statements.*


1




INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(In
      thousands)




LIABILITIES
                AND STOCKHOLDERS’ EQUITYMarch
                    31,
                  2007
            
            June
                  30,
                2006(Unaudited)CURRENT
                LIABILITIESCurrent
                maturities of long-term debt
            
            $
            2,090
            
            $
            1,686Accounts
                payable, accrued expenses and other liabilities
            
            
            15,027
            
            
            12,650Liabilities
                held for sale
            
            
            377
            
            
            —Deferred
                revenue
            
            
            —
            
            
            3,399Total
                Current Liabilities
            
            
            17,494
            
            
            17,735OTHER
                LIABILITIESLong-term
                debt, less current maturities
            
            
            14,585
            
            
            13,952Contract
                termination liability
            
            
            1,330
            
            
            —Other
                liabilities
            
            
            —
            
            
            125Total
                Other Liabilities
            
            
            15,915
            
            
            14,077TOTAL
                LIABILITIES
            
            
            33,409
            
            
            31,812COMMITMENTS
                AND CONTINGENCIESSeries
                B-1 Redeemable Convertible Preferred Stock:
              15
                shares authorized; issued and outstanding - 10 at March 31, 2007and
                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 atMarch
                31, 2007; liquidation preference of $10,000
            
            
            8,352
            
            
            —STOCKHOLDERS’
                EQUITYPreferred
                stocks, 10,000 shares authorized; issued andoutstanding
                - 5,132 and 5,141 at March 31, 2007 and June 30, 2006,respectively;
                aggregate liquidation preference of $3,588 and $4,291 atMarch
                31, 2007 and June 30, 2006, respectively
            
            
            51
            
            
            51Common
                stock, $0.01 par value, 150,000 and 65,569 shares authorizedand
                issued, respectively, at March 31, 2007, and 70,000 and 64,537shares
                authorized and issued, respectively, at June 30, 2006.
            
            
            656
            
            
            645Additional
                paid-in capital
            
            
            28,885
            
            
            24,196Stock
                subscription receivable
            
            
            —
            
            
            (90
            )Accumulated
                other comprehensive income
            
            
            114
            
            
            98Accumulated
                deficit
            
            
            (8,707
            )
            
            (2,070
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            20,999
            
            
            22,830TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            70,915
            
            $
            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
                March
                  31,
              
              Nine
                  Months Ended
                March
                  31,2007
              
              2006
              
              2007
              
              2006SALES,
                  Net
              
              $
              19,910
              
              $
              16,110
              
              $
              60,215
              
              $
              46,869COST
                  OF SALES(including related-party rent expense of $204 and $446 for the
                  three and
                  nine months ended March 31, 2007 and $102 and $306 for the three
                  and nine
                  months ended March 31, 2006, respectively)
              
              
              13,535
              
              
              12,111
              
              
              40,828
              
              
              33,708GROSS
                  PROFIT
              
              
              6,375
              
              
              3,999
              
              
              19,387
              
              
              13,161OPERATING
                  EXPENSESSelling,
                  general and administrative
              
              
              3,882
              
              
              3,263
              
              
              9,675
              
              
              7,901Related
                  party rent
              
              
              36
              
              
              18
              
              
              79
              
              
              54Research
                  and development
              
              
              4,711
              
              
              2,975
              
              
              13,001
              
              
              7,006TOTAL
                  OPERATING EXPENSES
              
              
              8,629
              
              
              6,256
              
              
              22,755
              
              
              14,961OPERATING
                  LOSS
              
              
              (2,254
              )
              
              (2,257
              )
              
              (3,368
              )
              
              (1,800
              )OTHER
                  (EXPENSE) INCOMEContract
                  termination expense
              
              
              —
              
              
              —
              
              
              (1,655
              )
              
              —Interest
                  expense, net
              
              
              (289
              )
              
              (170
              )
              
              (816
              )
              
              (359
              )Asset
                  impairment
              
              
              (101
              )
              
              —
              
              
              (101
              )
              
              —Other
              
              
              46
              
              
              2
              
              
              (75
              )
              
              (5
              )TOTAL
                  OTHER EXPENSE
              
              
              (344
              )
              
              (168
              )
              
              (2,647
              )
              
              (364
              )LOSS
                  BEFORE INCOME TAXES
              
              
              (2,598
              )
              
              (2,425
              )
              
              (6,015
              )
              
              (2,164
              )BENEFIT
                  FROM INCOME TAXES
              
              
              (746
              )
              
              (926
              )
              
              (1,668
              )
              
              (828
              )NET
                  LOSS
              
              
              (1,852
              )
              
              (1,499
              )
              
              (4,347
              )
              
              (1,336
              )Series
                  C-1 preferred stock beneficial conversion feature
              
              
              —
              
              
              —
              
              
              1,094
              
              
              —Preferred
                  stock dividends
              
              
              454
              
              
              98
              
              
              1,196
              
              
              181NET
                  LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
              
              $
              (2,306
              )
              $
              (1,597
              )
              $
              (6,637
              )
              $
              (1,517
              )EARNINGS
                  (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERSBasic
                  and diluted loss per share
              
              $
              (0.04
              )
              $
              (0.05
              )
              $
              (0.10
              )
              $
              (0.05
              )Basic
                  and diluted weighted average shares and equivalent sharesoutstanding
              
              
              65,380
              
              
              32,464
              
              
              65,052
              
              
              32,423




*See
        Notes To Condensed Consolidated Financial Statements.*


3


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(UNAUDITED)


(In
        thousands)
  Preferred
                  Stock
              
              Common
                  Stock
              
              Paid-In
              
              Subscription
              
              AccumulatedOther Comprehensive
              
              Accumulated
              
              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
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (206
              )
              
              (206
              )Accrued
                  dividends - Series C-1
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (206
              )
              
              (206
              )Series
                  C-1 Preferred beneficial conversion feature
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,094
              
              
              —
              
              
              —
              
              
              (1,094
              )
              
              —Series
                  B-1 dividends paid with common stock
              
              
              —
              
              
              —
              
              
              299
              
              
              3
              
              
              488
              
              
              —
              
              
              —
              
              
              (413
              )
              
              78Series
                  C-1 dividends paid with common stock
              
              
              
              
              
              
              
              
              122
              
              
              2
              
              
              245
              
              
              —
              
              
              —
              
              
              (247
              )
              
              —Dividends
                  declared - Series A-1
              
              
              —
              
              
              —
              
              
              
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (124
              )
              
              (124
              )Shares
                  issued for options exercised
              
              
              —
              
              
              —
              
              
              602
              
              
              6
              
              
              387
              
              
              —
              
              
              —
              
              
              —
              
              
              393Conversion
                  of Series A preferred stock
              
              
              (7
              )
              
              —
              
              
              7
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Conversion
                  of Series B preferred stock
              
              
              (2
              )
              
              —
              
              
              2
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Fair
                  value of warrants issued
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,641
              
              
              —
              
              
              —
              
              
              —
              
              
              1,641Stock
                  based compensation and modification expense
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              834
              
              
              —
              
              
              —
              
              
              —
              
              
              834Collections
                  on stock subscription receivable
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              90
              
              
              —
              
              
              —
              
              
              90Change
                  in fair value of interest rate swap
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              16
              
              
              —
              
              
              16Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,347
              )
              
              (4,347
              )BALANCE-
                  March 31, 2007
              
              
              5,132
              
              $
              51
              
              
              65,569
              
              $
              656
              
              $
              28,885
              
              $
              —
              
              $
              114
              
              $
              (8,707
              )
              $
              20,999


*See
        Notes To Condensed Consolidated Financial Statements.*




4




INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


(UNAUDITED)


(In
      thousands)




Three
                  Months Ended
                March
                  31,
              
              Nine
                  Months Ended
                March
                  31,2007
              
              2006
              
              2007
              
              2006NET
                  LOSS
              
              $
              (1,852
              )
              $
              (1,499
              )
              $
              (4,347
              )
              $
              (1,336
              )OTHER
                  COMPREHENSIVE INCOME (LOSS)Change
                  in fair value of interest rate swap
              
              
              31
              
              
              (12
              )
              
              16
              
              
              (12
              )TOTAL
                  COMPREHENSIVE LOSS
              
              $
              (1,821
              )
              $
              (1,511
              )
              $
              (4,331
              )
              $
              (1,348
              )


*See
        Notes To Condensed Consolidated Financial Statements.*
  5


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(In
      thousands)




Nine
                  Months Ended
                March
                  31,2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss from continuing operations
            
            $
            (4,347
            )
            $
            (1,336
            )Adjustments
                to reconcile net loss to net cash (used in) provided by operating
                activities:Bad
                debt expense
            
            
            55
            
            
            11Asset
                impairment
            
            
            101
            
            
            —Accreted
                non-cash interest expense
            
            
            54
            
            
            —Depreciation
                and amortization
            
            
            1,671
            
            
            1,062Stock
                based compensation expense
            
            
            834
            
            
            1,004Contract
                termination expense
            
            
            1,655
            
            
            —Deferred
                tax benefit
            
            
            (1,657
            )
            
            (800
            )Loss
                on disposal of fixed assets
            
            
            75
            
            
            5Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            49
            
            
            (2,258
            )Inventories
            
            
            (3,412
            )
            
            (346
            )Prepaid
                expenses and other current assets
            
            
            (272
            )
            
            (635
            )Accounts
                payable, accrued expenses and other liabilities
            
            
            1,743
            
            
            6,803Deferred
                revenue
            
            
            (3,399
            )
            
            2,296Total
                adjustments
            
            
            (2,503
            )
            
            7,142NET
                CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
            
            
            (6,850
            )
            
            5,806CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of building and equipment, net
            
            
            (4,992
            )
            
            (6,621
            )Proceeds
                from sale of equipment
            
            
            129
            
            
            —Deposits
                and other long-term assets
            
            
            (706
            )
            
            (604
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (5,569
            )
            
            (7,225
            )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
            
            
            393
            
            
            —Proceeds
                from long-term debt
            
            
            2,240
            
            
            8,654Payment
                of Series A-1 dividends
            
            
            (124
            )
            
            (165
            )Payment
                of deferred financing costs
            
            
            —
            
            
            (270
            )Collections
                on stock subscription receivable
            
            
            90
            
            
            21Repayment
                of bank line of credit, net
            
            
            —
            
            
            (6,728
            )Repayments
                of long-term debt
            
            
            (1,357
            )
            
            (376
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            11,165
            
            
            1,136NET
                DECREASE IN CASH
            
            
            (1,254
            )
            
            (283
            )CASH-
                Beginning
            
            
            1,438
            
            
            537CASH-
                Ending
            
            $
            184
            
            $
            254




*See
        Notes To Condensed Consolidated Financial Statements.*


6




INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


(UNAUDITED)


(In
      thousands)




Nine
                    Months Ended
                  March
                    31,2007
            
            2006SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid during the periods for:Interest
            
            $
            934
            
            $
            273Income
                taxes
            
            $
            —
            
            $
            15Non-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
            
            $
            128Reclassification
                of equipment deposits to building and equipment
            
            $
            410
            
            $
            771Series
                B-1 dividends paid with common stock
            
            $
            491
            
            $
            —Series
                C-1 dividends paid with common stock
            
            $
            247
            
            $
            —Accrual
                of Series B-1 dividends
            
            $
            206
            
            $
            —Accrual
                of Series C-1 dividends
            
            $
            206
            
            $
            —Change
                in fair value of interest rate swap
            
            $
            16
            
            $
            12Repayment
                of debt with proceeds from new credit facility
            
            $
            —
            
            $
            20,445Declaration
                of preferred dividends
            
            $
            —
            
            $
            124




See
      Notes To Condensed Consolidated Financial
      Statements.


7


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
  (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 and nine
      months ended March 31, 2007 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 $816 and $620 at March
      31, 2007 and June 30, 2006, respectively, are included in “Accounts receivable,
      net” in the accompanying Condensed Consolidated Balance Sheets.





Earnings
      (Loss) Per Share




Basic
      earnings (loss) per share (“EPS”) of common stock is computed by dividing net
      income (loss) 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 (loss) 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 converted
      into the Company’s common stock; therefore the use of the Two-Class Method is
      not required for the three and nine months ended March 31,
      2007.





8


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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




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 loss
      before taxes for the three months ended March 31, 2007 and its net income before
      taxes for the three month period ended March 31, 2006 is lower by $248 and
      $588,
      respectively, and $834 and $1,004 for the nine months ended March 31, 2007
      and
      2006, 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
      accordance with the terms and conditions of an agreement entered into during
      the
      fiscal year ended June 30, 2006, 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 required the customer to purchase a minimum quantity of the Company's
      products during a specified period of time. The incentive offered was based
      upon
      a fixed dollar amount per unit sold to the customer. The Company made an
      estimate of the ultimate amount of the incentive the customer would earn based
      upon past history with the customer and other facts and circumstances. The
      Company had the ability to estimate this volume incentive price adjustment,
      as
      there did 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 was recognized immediately using a cumulative catch-up adjustment.
      In
      accordance with EITF 01-9, the Company recorded the provision for this sales
      incentive when the related revenue is recognized. 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. The specific terms of this agreement which related to sales incentives
      expired in October 2006. For the three and nine months ended March 31, 2007,
      the
      Company recognized $0 and $3,399 sales incentive revenue related to this
      agreement.





Impairment
      of Long-Lived Assets




In
      accordance with SFAS No. 144, the Company accounted for certain long lived
      assets and related liabilities that will be disposed or that met all of the
      “held for sale” criteria, as a disposal group which has been classified as “held
      for sale” and presented separately in the Current Assets and Current Liabilities
      sections, respectively, of the accompanying Condensed Consolidated Balance
      Sheet
      as of March 31, 2007. The major classes of assets and liabilities classified
      as
“held for sale” are separately discussed in Note 17. The “held for sale”
classification required having appropriate approvals by the Company's management
      and Board of Directors, as applicable, and meeting other criteria.





9


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)




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





Reclassifications




Certain
      reclassifications have been made to the audited 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.





The
      Company reclassified certain components of 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 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
      November 2006, The Emerging Issues Task Force (“EITF”) reached a final consensus
      in EITF Issue 06-6 “Debtor’s Accounting for a Modification (or Exchange) of
      Convertible Debt Instruments” (“EITF 06-6”). EITF 06-6 addresses the
      modification of a convertible debt instrument that changes the fair value of
      an
      embedded conversion option and the subsequent recognition of interest expense
      for the associated debt instrument when the modification does not result in
      a
      debt extinguishment pursuant to EITF 96-19, “Debtor’s Accounting for a
      Modification or Exchange of Debt Instruments,”. The consensus should be applied
      to modifications or exchanges of debt instruments occurring in interim or annual
      periods beginning after November 29, 2006. The adoption of EITF 06-6 did not
      have a material effect on the Company’s consolidated financial position, results
      of operations or cash flows.





In
      November 2006, The Financial Accounting Standards Board (“FASB”) ratified EITF
      Issue No. 06-7, “Issuer’s Accounting for a Previously Bifurcated Conversion
      Option in a Convertible Debt Instrument When the Conversion Option No Longer
      Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for
      Derivative Instruments and Hedging Activities” (“EITF 06-7”). At the time of
      issuance, an embedded conversion option in a convertible debt instrument may
      be
      required to be bifurcated from the debt instrument and accounted for separately
      by the issuer as a derivative under of Financial Accounting Standards (“FAS”)
      133, based on the application of EITF 00-19. Subsequent to the issuance of
      the
      convertible debt, facts may change and cause the embedded conversion option
      to
      no longer meet the conditions for separate accounting as a derivative
      instrument, such as when the bifurcated instrument meets the conditions of
      Issue
      00-19 to be classified in stockholders’ equity. Under EITF 06-7, when an
      embedded conversion option previously accounted for as a derivative under FAS
      133 no longer meets the bifurcation criteria under that standard, an issuer
      shall disclose a description of the principal changes causing the embedded
      conversion option to no longer require bifurcation under FAS 133 and the amount
      of the liability for the conversion option reclassified to stockholders’ equity.
      EITF 06-7 should be applied to all previously bifurcated conversion options
      in
      convertible debt instruments
      that no longer meet the bifurcation criteria in FAS 133 in interim or annual
      periods beginning after December 15, 2006, regardless of whether the debt
      instrument was entered into prior or subsequent to the effective date of EITF
      06-7. Earlier application of EITF 06-7 is permitted in periods for which
      financial statements have not yet been issued. The adoption of EITF 06-7 did
      not
      have a material effect on the Company’s consolidated financial position, results
      of operations or cash flows.





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.





10


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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




Recently
        Issued Accounting Pronouncements ,
        continued
 
 New
        Accounting Pronouncements ,
        continued




In
      June
      2006, the 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 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 assessing the impact
      that the adoption of FIN 48 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 became
      effective in fiscal 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.




In
      December 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2
“Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”) which
      specifies that the contingent obligation to make future payments or otherwise
      transfer consideration under a registration payment arrangement should be
      separately recognized and measured in accordance with SFAS No. 5,
“Accounting for Contingencies.” Adoption of FSP EITF 00-19-02 is required for
      fiscal years beginning after December 15, 2006. The Company does not expect
      the adoption of FSP EITF 00-19-2 to have a material impact on its consolidated
      financial position, results of operations or cash flows.




11


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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





Recently
      Issued Accounting Pronouncements ,
      continued





New
      Accounting Pronouncements ,
      continued




In
      February 2007, the FASB issued Statement (“SFAS”) No. 159, “The Fair Value
      Option for Financial Assets and Financial Liabilities - including an amendment
      of FASB Statement No. 115 *”* (“SFAS
      159”). This Statement permits entities to choose to measure many financial
      instruments and certain other items at fair value. The objective is to improve
      financial reporting by providing entities with the opportunity to mitigate
      volatility in reported earnings caused by measuring related assets and
      liabilities differently without having to apply complex hedge accounting
      provisions. The fair value option established by this Statement permits all
      entities to choose to measure eligible items at fair value at specified election
      dates. A business entity shall report unrealized gains and losses on items
      for
      which the fair value option has been elected in earnings (or another performance
      indicator if the business entity does not report earnings) at each subsequent
      reporting date. Most of the provisions of this Statement apply only to entities
      that elect the fair value option. However, the amendment to FASB Statement
      No.
      115, Accounting for Certain Investments in Debt and Equity Securities, applies
      to all entities with available-for-sale and trading securities. Some
      requirements apply differently to entities that do not report net income. This
      Statement is effective as of the beginning of an entity’s first fiscal year that
      begins after November 15, 2007. The Company does not expect the adoption of
      SFAS
      No. 159 to have a material impact on its consolidated financial
      statements.




**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 $53 at March 31, 2007 and
      $101 at 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 $3,310 and $2,315 at March 31, 2007 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.





12


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


**NOTE
      3 -** **Accounts
      Receivable** ,
      continued




The
        changes in the allowance for customer chargebacks, discounts and other credits
        that reduced gross revenue for nine months ended March 31, 2007 and 2006
        is as
        follows:




Nine
                  Months EndedMarch
                31,2007
            
            2006Reserve
                balance - beginning
            
            $
            2,315
            
            $
            425Actual
                chargebacks, discounts and other credits taken in the current period
                (a)
            
            
            (8,359
            )
            
            (3,620
            )Current
                provision related to current period sales
            
            
            9,354
            
            
            5,105Reserve
                balance - ending
            
            $
            3,310
            
            $
            1,910





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




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





Inventories
      consist of the following:




March
                    31,
                  2007
            
            June
                    30,
                  2006(Unaudited)Finished
                goods
            
            $
            2,124
            
            $
            1,781Work
                in process
            
            
            5,618
            
            
            3,685Raw
                materials
            
            
            3,952
            
            
            2,928Packaging
                materials
            
            
            423
            
            
            312Total
            
            $
            12,117
            
            $
            8,706




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





Land,
      building and equipment consist of the following:




March
                    31,2007
              
              June
                    30,2006
              
              Estimated
                  UsefulLives(Unaudited)Land
              
              $
              4,924
              
              $
              4,924
              
              
              —Building
              
              
              12,460
              
              
              12,460
              
              
              39
                  YearsMachinery
                  and equipment
              
              
              15,560
              
              
              12,657
              
              
              5-7
                  YearsComputer
                  equipment
              
              
              1,228
              
              
              151
              
              
              5
                  YearsConstruction
                  in Progress
              
              
              243
              
              
              587
              
              
              —Furniture
                  and fixtures
              
              
              765
              
              
              660
              
              
              5
                  YearsLeasehold
                  improvements
              
              
              3,913
              
              
              3,206
              
              
              5-15
                  Years39,093
              
              
              34,645Less:
                  accumulated depreciation and amortization
              
              
              6,708
              
              
              5,576Land,
                  Building and Equipment, net
              
              $
              32,385
              
              $
              29,069




13


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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





Depreciation
      and amortization expense for the three and nine months ended March 31, 2007,
      was
      approximately $542 and $1,571, respectively, and for the three and nine months
      ended March 31, 2006, was approximately $370 and $1,062,
      respectively **.**




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





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




March
                    31,
                  2007
            
            June
                  30,
                2006(Unaudited)Inventory
                purchases
            
            $
            7,141
            
            $
            5,734Research
                and development expenses
            
            
            1,978
            
            
            2,068Other
            
            
            5,908
            
            
            4,848Total
            
            $
            15,027
            
            $
            12,650




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





Long-term
      Debt


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


March
                31,
              2007
            
            June
                30,
              2006(Unaudited)Revolving
                credit facility
            
            $
            —
            
            $
            —Real
                estate term loan
            
            
            11,133
            
            
            11,734Machinery
                and equipment term loans
            
            
            5,386
            
            
            3,833Capital
                leases
            
            
            197
            
            
            7216,716
            
            
            15,639Less:
                amount representing interest on capital leases
            
            
            41
            
            
            1Total
                long-term debt
            
            
            16,675
            
            
            15,638Less:
                current maturities
            
            
            2,090
            
            
            1,686Long-term
                debt, less current maturities
            
            $
            14,585
            
            $
            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 an
      original 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




14


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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





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 March 31, 2007, there was approximately $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 limited personal
      guarantees were reduced by $3,670. The sale of the $10,000 Series C-1 redeemable
      convertible preferred stock in September 2006, resulted in elimination of the
      balance of the personal pledges of marketable securities of $3,830.





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 March 31, 2007, 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 the Company’s assets.
      In addition, the Company is required to comply with certain financial covenants
      and as of March 31, 2007, was not in compliance with one of these financial
      covenants which required that unfinanced capital expenditures not exceed $2,500.
      Such expenditures were approximately $3,500 for the nine month period ended
      March 31, 2007. The Company received a waiver from WFBC of the financial
      covenant non-compliance and entered into an amendment to the WFBC loan documents
      to accommodate the Company’s unfinanced capital expenditures.





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 March 31, 2007, was
      approximately $114  and
      is
      included in Other assets.





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





At
      March
      31, 2007 the Company has remaining Federal net operating losses (“NOLs”) of
      $23,676 and State NOLs of $22,789 available through 2027. Pursuant to Section
      382 of the Internal Revenue Code regarding substantial changes in Company
      ownership, utilization of these NOLs is limited. As of March 31, 2007, the
      Company has determined that it is more likely than not, that the Company will
      utilize all of the Federal NOLs in the future. Additionally,
      as of March 31, 2007, as a result of changes in New York State tax law, the
      benefit of the future utilization of State NOLs has been reduced.




15


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)




**NOTE
      8-** **Income
      Taxes** ,
      continued





In
      calculating its tax provision for the nine month periods ended March 31, 2007
      and 2006, the Company applied aggregate effective tax rates of approximately
      28%
      and 38%, respectively, thereby creating a $1,668  and
      $828
      income tax benefit, respectively, and adjusted its deferred tax assets by like
      amounts. The decrease in effective tax rates is the result of permanent tax
      differences relating to Incentive Stock Options and changes in New York State
      tax law.




**NOTE
      9-** **Earnings
      (Loss) Per Share**





The
      calculations of basic and diluted EPS are as follows:




Three
                Months Ended
              March
                31,
            
            Nine
                Months Ended
              March
                31,2007
            
            2006
            
            2007
            
            2006Numerator:Net
                loss
            
            $
            (1,852
            )
            $
            (1,499
            )
            $
            (4,347
            )
            $
            (1,336
            )Less:
                Preferred stock dividendsSeries
                A-1
            
            
            (42
            )
            
            (98
            )
            
            (124
            )
            
            (181
            )Series
                B-1
            
            
            (206
            )
            
            —
            
            
            (619
            )
            
            —Series
                C-1
            
            
            (206
            )
            
            —
            
            
            (453
            )
            
            —Less:
                Series C-1 beneficial conversionfeature
            
            
            —
            
            
            —
            
            
            (1,094
            )
            
            —Net
                loss attributableto
                common stockstockholders
            
            $
            (2,306
            )
            $
            (1,597
            )
            $
            (6,637
            )
            $
            (1,517
            )


Denominator:Denominator
                for basic and diluted EPSweighted
                average shares outstanding
            
            
            65,380
            
            
            32,464
            
            
            65,052
            
            
            32,423Basic
                and diluted loss per share:
            
            $
            (0.04
            )
            $
            (0.05
            )
            $
            (0.10
            )
            $
            (0.05
            )





Stock
      options, warrants and convertible preferred stock, equivalent to 30,245 and
      12,813 shares of the Company’s common stock, were not included in the
      computation of diluted earnings per share for the three and nine months ended
      March 31, 2007 and 2006, respectively, as their inclusion would be
      antidilutive.





As
      of
      March 31, 2007, 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
            
            
            65,569Stock
                options outstanding
            
            
            12,636Warrants
                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)
            
            
            100,670


(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.


16


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


**NOTE
      9-** **Earnings
      (Loss) Per Share** ,
      continued




(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 November
                  16, 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 into a total of 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. Through March 31, 2007, the Company issued
      299
      shares of common stock as payment of $491 of previously accrued dividends.
      At
      March 31, 2007, the Company had accrued $206 of Series B-1 dividends, which
      was
      paid in April 2007 through the issuance of 122 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, and
      the
      Company made an assessment that it is not probable that it will 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 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 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.




17


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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




The
      Company’s Series B-1 redeemable convertible preferred stock is summarized as
      follows at March 31, 2007:





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 “C-1 Agreement”) with Aisling Capital, L.P. (the “Buyer”). Under the C-1
      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 into a total of 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.
      Through March 31, 2007, the Company issued 122 shares of common stock as payment
      of $247 of previously accrued dividends. At March 31, 2007, the Company had
      accrued $206 of Series C-1 dividends, which was paid in April 2007 through
      the
      issuance of 122 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
      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 Accumulated deficit during the quarter ended
      September 30, 2006. 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, and the Company made an assessment that it is not
      probable that it will 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.




18


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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




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 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.





The
      Company’s Series C-1 redeemable convertible preferred stock is summarized as
      follows at March 31, 2007:





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


19


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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





Preferred
      Stocks




On
      July
      18, 2006, the Company filed an amendment to its Articles 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 preferred stock (“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 convertible
      preferred stock (“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 and by the holder of all of the
      outstanding Series B shares.





During
      the quarter ended September 30, 2006, 64 shares of the Company’s common stock
      were issued in payment of Series B-1 dividends of $78 earned through June 30,
      2006.





During
      the quarter ended December 31, 2006, the Company issued 141 and 28 shares of
      the
      Company’s common stock to the Series B-1 and C-1 holders, respectively, for
      dividends earned for the quarter ended September 30, 2006 of $206 and $41 of
      Series B-1 dividends and Series C-1 dividends, respectively.





During
      the quarter ended December 31, 2006, the Company paid to the holders of Series
      A-1 preferred stock $124 of declared dividends which covered the period January
      1, 2006 through September 30, 2006. As of March 31, 2007, the Company’s Board of
      Directors had not declared any dividend on the Series A-1 shares for the period
      October 1, 2006 through March 31, 2007. Such undeclared dividends amounted
      to
      $82.





During
      the quarter ended March 31, 2007, the Company issued 94 shares of the Company’s
      common stock to each of the Series B-1 and C-1 stockholders, respectively,
      for
      dividends earned for the quarter ended December 31, 2006 of $206 for each of
      the
      Series B-1 and Series C-1 stockholders, respectively.





At
      March
      31, 2007, the Company had accrued approximately $206 and $206 of Series B-1
      and
      Series C-1 dividends, respectively, which were paid in April 2007 through the
      issuance of 122 shares of the Company’s common stock to each of the Series B-1
      and C-1 stockholders, respectively.





Common
      Stock




During
      the nine months ended March 31, 2007, the Company issued shares of its common
      stock as follows:





·
            602
                shares, resulting in $393 proceeds, in connection with exercises
                of
                options to purchase the Company’s common
                stock;





·
            299
                and 122 shares were issued to Series B-1 and C-1 preferred stock
                shareholders, respectively, in settlement of dividends earned through
                December 31, 2006;





·
            7
                and 2 shares were issued to Series A and B shareholders, respectively,
                in
                connection with the conversion of Series A and B resulting from the
                July
                18, 2006, amendment to the Company’s Article of
                Incorporation.




20





INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)




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





Stock
      Options and Appreciation Rights




As
      of
      March 31, 2007 and during the nine month period ended March 31, 2007:





·
            the
                Company recognized approximately $24 as an 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.
                As of March 31, 2007, the total liability related to the SARs is
                $83;





·
            total
                unrecognized compensation cost related to stock options granted was
                $2,083. The unrecognized stock option compensation cost is expected
                to be
                recognized over a weighted-average period of approximately 2.56
                years;





·
            total
                options outstanding and total vested options outstanding to purchase
                the
                Company’s common stock as of March 31, 2007, amounted to
                12,636and
                9,516, respectively;





·
            162
                options to purchase the Company’s common stock were issued to members of
                the Company’s Board of Directors at the market price on the date of the
                grant and had vesting periods ranging from immediate to one year
                from the
                date of issuance;





·
            in
                connection with separation agreements involving two employees, the
                Company
                extended the exercise period of 155 options, 10 of which were exercised
                prior to December 31, 2006; 90 were forfeited as of December 31,
                2006, the
                balance of 55 has been extended to September 20, 2008. As a result
                of
                these transactions, the Company recognized $12 expense during the
                quarter
                ended December 31, 2006.





·
            1,243
                options to purchase the Company’s common stock were issued to employees of
                the Company at the market price on the date of the grant and vest
                over
                3.28 years from the date of issuance. Of this amount, 445 were
                performanced based options.





The
      Company disclosed in its 10-Q for the quarter ended September 30, 2006, that
      on
      October 26, 2006, it granted 1,474 stock options to certain employees. After
      conferring with independent counsel, it was determined that these stock option
      grants were not finalized and effectuated under the terms of the Company’s stock
      option plan pursuant to which the options were to be granted. Therefore, the
      Company determined that these stock options were not actually granted. Other
      than a subsequent event disclosure, there had been no accounting recognition
      given to the options at September 30, 2006. As a result, no adjustments to
      the
      Company’s financial statements are required.




**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 $89 and $225 for the three and nine month periods ended March
      31,
      2007, respectively.




21


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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





Major
      Customers




The
      Company had the following customer concentrations for the three and nine month
      periods ended March 31, 2007 and 2006:




Sales
        - Percent of Revenue


Three
                Months Ended
              March
                31,
            
            Nine
                Months Ended
              March
                31,2007
            
            2006
            
            2007
            
            2006Customer
                “A”
            
            
            22
            %
            
            *
            
            
            17
            %
            
            *Customer
                “B”
            
            
            13
            %
            
            10
            %
            
            16
            %
            
            12
            %Customer
                “C”
            
            
            *
            
            
            24
            %
            
            11
            %
            
            14
            %Customer
                “D”
            
            
            *
            
            
            15
            %
            
            *
            
            
            14
            %Customer
                “E”
            
            
            *
            
            
            *
            
            
            *
            
            
            10
            %





*
            Sales
                to customer were less than 10%





Accounts
      Receivable





March
                31,
              2007Customer
                “A”
            
            $
            3,113Customer
                “B”
            
            $
            2,118Customer
                “C”
            
            $
            488Customer
                “D”
            
            $
            1,257Customer
                “E”
            
            $
            1,372





The
      Company has supply agreements 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 “D” above.





Major
      Suppliers




For
      the
      three and nine months ended March 31, 2007, the Company purchased materials
      from
      three suppliers totaling approximately 60% and 55% of purchases, respectively.
      For the three and nine months ended March 31, 2006, the Company purchased
      materials from three suppliers totaling approximately 67% and 71% of purchases,
      respectively. At March 31, 2007 and 2006, aggregate amounts due to these
      suppliers included in accounts payable, were approximately $4,200 and $4,400,
      respectively.




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





**Rents**


The
        Company leases one of its business premises located in Hauppauge, New York,
        (“Premises”) from an entity owned by three stockholders (“Landlord”), one of
        whom is Raj Sutaria, an officer of the Company, under a noncancelable lease
        expiring in October 2019.
 
 Under
        the
        terms of the lease for the Premises, 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 thereafter, the annual rent may be adjusted to
        fair
        market value, as determined by an independent appraiser. Effective October
        1,
        2006, the Company and its Landlord agreed to adjust the base rent for the
        premises based upon two independent appraisals. Accordingly the Company incurred
        base rent expense of $240 and $525 for the three and nine months ended March
        31,
        2007, respectively. For the three and nine months ended March 31, 2006, the
        rents paid in accordance with this lease were $120 and $360, respectively.
        However, the appraisals obtained were not tied to market price in May, 2006,
        the
        time period during which the rent was to be adjusted to market value. As
        a
        result, at a meeting of the Company’s Board of Directors on March 20, 2007, the
        Board resolved, with the Chairman abstaining, that the Audit Committee would
        obtain an appraisal of the lease price for the Premises as of May 30,
        2006.
 
 In
        a
        letter dated April 20, 2007, the Landlord’s counsel advised that the Company was
        obligated to pay rent to the Landlord at the rate contained in an appraisal
        obtained in November 2006 and based on rental prices at that time, which
        were
        higher than those in May 2006. The Landlord’s counsel also advised that the
        Landlord is asserting a claim against the Company for $236 in back rent and
        to
        set the current rent at $821 per annum.
 
 As
        of May
        14, 2007, no action has been commenced against the Company, however, the
        Company
        believes that a claim by the Landlord based on the April 20, 2007 letter
        from
        the Landlord's counsel would be without merit.  In accordance with SFAS No
        5, “Accounting for Contingencies”, no amounts have been accrued at March 31,
        2007 related to this matter.


22




INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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





**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.





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.





**Purchase
      from APR, LLC**




During
      the nine months ended March 31, 2007, the Company placed an order valued at
      $160
      for a certain raw material from APR. The Company currently purchases the same
      raw material from an overseas supplier at a price 37% greater than the price
      APR
      is currently willing to offer. The Company believes sourcing the raw material
      from APR would not only resolve intermittent delays in obtaining this material
      from overseas but would also improve gross margins on products using the raw
      material. Upon receipt of the raw material, the Company will analyze them and
      determine whether the materials from APR will be suitable for use. Accordingly,
      the Company is unable at this time to predict whether the raw material
      associated with this purchase order will be usable. As of March 31, 2007, the
      Company has advanced $80 to APR in connection with this order.




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





**Litigation**




An
      action
      was commenced on June 1, 2006, by Ray Vuono (“Vuono”) in the Supreme Court of
      the State of New York, County of Suffolk (Index No. 13985/06). The action
      alleged that plaintiff was owed an amount exceeding $10 million in unpaid
“finder’s fees” under an advisory agreement between plaintiff and Atec Group,
      Inc.





By
      motion
      dated July 26, 2006, the Company moved to dismiss Vuono’s complaint in its
      entirety. Vuono cross-moved to disqualify the Company's counsel due to an
      alleged conflict of interest. By recent decision and order dated March 29,
      2007,
      the Court dismissed Vuono’s claims as they pertain to any fees claimed by Vuono
      related to a reverse merger of Interpharm, Inc. and the Company and declined
      to
      dismiss other claims. The dismissed claims represent approximately $7 million
      of
      the total of $10 million claimed by Vuono. The Court deferred a decision on
      Vuono’s motion to disqualify counsel pending a hearing and further proceedings.





The
      Company will continue to vigorously defend the action.





In
      November 2006, a former employee commenced an action against the Company in
      the Supreme Court of the State of New York, County of Suffolk (Index No.
      06/31481). The complaint against the Company alleges violations
      of the New York State Human Rights Law and other unidentified rules,
      regulations, statutes and ordinances. Specifically, the former employee alleges
      claims of sex discrimination and gender retaliation. The total sought by the
      former employee in the action is unspecified. The Company believes that the
      claims are without merit and the Company is vigorously defending the action.
      Currently, the Company cannot predict with certainty the outcome of this
      litigation.




23


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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




The
      testing, manufacturing and marketing of pharmaceutical products subject the
      Company 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.





**Operating
      Leases**




Property
      Lease




In
      January 2007 the Company entered into a seven year lease for approximately
      20
      square feet of office space. The lease provides the Company an option to extend
      the lease for a period of three years. According to the terms of the lease
      the
      base annual rental for the first year will be $261 and will increase by 3%
      annually thereafter. Further, the Company is required to pay for renovations
      to
      the facility, currently estimated at approximately $300.





**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 was required to pay Tris $1,000,
      whether or not regulatory approval is obtained for any of the liquid products.
      The Company has paid in full the $1,000; $250 having been paid during the term
      of the initial Liquids Agreement; $500 paid upon the execution of the New
      Liquids Agreement, and the balance of $250 paid December 15, 2006. In addition,
      Tris is to receive 40% of the net profits, as defined, in accordance with the
      terms in the New Liquids Agreement.





During
      February 2005, the Company entered into an 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, 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.





24


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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





**Significant
      Contracts** ,
      continued




Tris
      Pharmaceuticals, Inc. ,
      continued




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 and nine month periods ended March 31, 2007, the Company recorded as
      research and development expense approximately $233 and $1,715, respectively,
      in
      connection with these agreements. Further, since their inception, the Company
      has incurred approximately $5,225 of research and development costs associated
      with the Tris
      agreements of which the Company has paid $5,125 as of March 31, 2007. The
      balance on the solids agreement, as amended, is approximately $675. The combined
      costs of these agreements aggregate to $5,800.





Watson
      Pharmaceuticals, Inc .




On
      October 3, 2006, the Company entered into a termination and release agreement
      (the “Termination Agreement”) with Watson Laboratories, Inc. (“Watson”)
      terminating the Manufacturing and Supply Agreement dated 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, (the “Product”). Watson
      was required to return all rights and agreements to the Company thereby enabling
      it to market the Product. Further, Watson was 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 is to
      solicit sales for this product from its twenty largest customers. In
      accordance with the Termination Agreement, Watson returned approximately $141
      of
      the Product and the Company in turn invoiced Watson $42 for
      repacking.  The
      net
      affect was a reduction of $99 to the Company’s net sales during the nine months
      ended March 31, 2007.  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 first anniversary of the effective date of the termination
      agreement. The Company determined the net present value of the obligation and
      accordingly increased Accounts payable, accrued expenses and other liabilities
      and Contract termination liability by $372 and $1,304, respectively. The imputed
      interest of $324 will be amortized over the remaining life of the obligation
      using the effective interest rate method. At March 31, 2007, contract
      termination liability of $379 and $1,330 are included in Accounts payable,
      accrued expenses and other liabilities and Contract termination liability,
      respectively.





In
      February 2007 the Company entered into a termination and release agreement
      with
      Watson terminating the Manufacturing and Supply Agreement dated as of July
      1, 2003 pursuant to which the Company manufactured and supplied and Watson
      distributed and sold Reprexain® (5.0 mg hydrocodone bitartrate/200 mg ibuprofen)
      tablets. Further,
      in February 2007 the Company entered into an intellectual property purchase
      agreement with Watson whereby the Company acquired the
      registered trademark, domain name, and website content relating to the
      pharmaceutical product Reprexain® (5.0 mg hydrocodone bitartrate/200 mg
      ibuprofen) tablets as described in the agreement. As consideration the
      Company shall pay Watson, on a quarterly basis, 1.5% of net sales derived
      from sales of 5.0 mg hydrocodone bitartrate/200 mg ibuprofen tablets
      sold under the Reprexain® trademark.





25


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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





**Significant
      Contracts** ,
      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, 40% more bottles of the Company’s female hormone therapy
      products than the initial year of the agreement, commencing November 2006.
      The
      parties will share net profits, as defined in the agreement, 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.





Applied
      Pharma, LLC




In
      October 2006 the Compan y
      entered
      into a consulting agreement with Applied Pharma, LLC in which the consultant
      agreed to provide the Company with, among other things, analytical method
      development services relating to the Company’s oral contraceptive products. The
      Agreement is for thirty six months and may be terminated by either party with
      90
      days written notice. The agreement calls for monthly payments of $25, which
      aggregate to a maximum of $900 along with a $75 payment which was issued upon
      the execution of the agreement. The principal of Applied Pharma, LLC holds
      a
      minority interest in APR, LLC.




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





On
      April
      25, 2007 the Company completed the sale of its subsidiary, Interpharm
      Development Private Limited (“IDPL”) located in Ahmedabad, India to an entity
      partially owned by two officers of the Company for $161. As previously disclosed
      the Company elected not to move forward with the construction of a research
      and
      development facility in Ahmedabad, India. During the quarter ended March 31,
      2007 management committed to a plan to dispose of its interest in the entity
      which was incorporated specifically for the construction project in Ahmedabad.
      I n
      accordance with SFAS No. 144, as of March 31, 2007 the assets and
      liabilities of IDPL were classified as “held for sale”. As a result, in
      accordance with SFAS 144 the Company recorded an impairment charge of $101
      in
      the quarter ended March 31, 2007. In addition, in advance of the closing of
      the
      IDPL sale the acquiring entity advanced IDPL cash of $172 which is included
      in
      the caption Due to related party below.





Assets
      and liabilities of the discontinued operation classified as “held for sale” in
      our consolidated balance sheet as of March 31, 2007 were as
      follows:




Cash
            
            $
            233Land
            
            
            305Assets
                held for sale
            
            $
            538Accrued
                expenses
            
            $
            205Due
                to related party
            
            
            172Liabilities
                held for sale
            
            $
            377




26




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
  (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 Form 10-Q
      filed with the SEC on February 14, 2007 and 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.





Following
      an FDA inspection in February 2007, we are packaging and have commenced some
      manufacturing at our Yaphank facility. We plan to file almost all new product
      ANDAs from the Yaphank facility. We have now commissioned our oral
      contraceptives facility and will now start the manufacture of clinical supplies
      for the purpose of filing the related ANDAs. As previously described in our
      Annual Report on Form 10-K, part of our business plan is to focus on development
      of products which present high barriers to entry for other market participants.
      In furtherance of our plan, we have commissioned a specialized facility for
      the
      manufacture of high potency products (i.e., products which exhibit medicinal
      or
      toxic effects at low doses) and anticipate the commencement of manufacturing
      for
      clinical supplies shortly.





For
      the
      quarter ended March 2007, our net sales were $19,910 as compared to $16,110
      in
      the same quarter last year, for a year-over-year increase of 23.6%. The
      increased sales are primarily due to (i) capturing distribution with a majority
      of the top tier accounts in retail, wholesale, distributor, and managed care
      trade classes, and (ii) an increase in production capacity year over year,
      enabling us to better service our markets. Our Company’s gross profit percentage
      for the three month period ended March 2007, improved to 32.0% as compared
      to
      24.8% for the quarter ended March 2006. We continue to take the necessary
      corrective measures to minimize disruption from inadequate supplies of raw
      materials in the future by qualifying additional sources and building up our
      inventories. We made progress in the March 2007 quarter in obtaining adequate
      supplies of raw materials for several finished products, which enabled
      throughput to increase  from
      the
      December 2006 quarter. We anticipate that we will be back to normal production
      levels by the end of June 2007.




27




INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


For
      the
      quarter ended March 2007, we incurred a net loss of approximately $1,852 as
      compared to a net loss of $1,499 for the three month period ended March 2006.
      The net loss in the March 2007 quarter resulted from higher selling, general
      and
      administrative expenses, related to expansion of our infrastructure, and
      increased research and development expenses.





Our
      research and development efforts have progressed in the areas of oral
      contraceptives, soft gelatin capsules and high potency products, and we are
      planning to manufacture clinical supplies to commence bioequivalence studies
      in
      each of these areas by June 2007. We believe that we are also progressing well
      in the product areas of special release, controlled substances, and products
      coming off patent.





In
      the
      sales and marketing area, we launched the seven controlled substance products
      during the March 2007 quarter. As a result of ongoing sales and marketing
      efforts, we have captured distribution to a majority of the top tier accounts,
      and by the September 2007 quarter, we believe gross margins for our existing
      business and on anticipated product launches may begin to increase.




**Results
      of Operations —** **Summary**





As
      indicated in the tables below, our net sales increased $3,800, or 23.6%, when
      comparing the three month periods ended March 2007 and 2006. Overall, the growth
      in sales related to a combination of factors. We were able to work with our
      key
      suppliers and obtain increased amounts of raw materials in the March 2007
      quarter, particularly for our female hormone product and Bactrim®. Production
      throughput was therefore increased, and as a result, we were able to satisfy
      most of our backorders for these products. In addition, as a result of its
      ongoing sales and marketing efforts, we continue to gain distribution to a
      majority of the top tier accounts. Net sales increased $13,346, or 28.5%, when
      comparing the nine month periods ended March 2007 and 2006.




Three
                Month Periods Ended March2007
            
            2006Sales
            
            %
                    of
                  Sales
            
            Sales
            
            %
                    of
                  SalesIbuprofen
            
            $
            7,014
            
            
            35.2
            
            $
            8,888
            
            
            55.2Bactrim®
            
            
            5,595
            
            
            28.1
            
            
            1,496
            
            
            9.3Naproxen
            
            
            3,422
            
            
            17.2
            
            
            2,354
            
            
            14.6Female
                hormone product
            
            
            2,584
            
            
            13.0
            
            
            1,569
            
            
            9.7Hydrocodone/Ibuprofen
            
            
            769
            
            
            3.9
            
            
            1,277
            
            
            7.9Hydrocodone/Acetaminophen
            
            
            369
            
            
            1.8
            
            
            0
            
            
            0.0All
                Other Products
            
            
            157
            
            
            0.8
            
            
            526
            
            
            3.3Total
            
            $
            19,910
            
            
            100.0
            %
            $
            16,110
            
            
            100.0
            %





28





INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)




Nine
                Month Periods Ended March2007
            
            2006Sales
            
            %
                    of
                  Sales
            
            Sales
            
            %
                    of
                  SalesIbuprofen
            
            $
            24,187
            
            
            40.2
            
            $
            25,566
            
            
            54.5Bactrim®
            
            
            14,899
            
            
            24.7
            
            
            3,412
            
            
            7.3Female
                hormone product
            
            
            9,374
            
            
            15.5
            
            
            5,471
            
            
            11.7Naproxen
            
            
            8,943
            
            
            14.9
            
            
            5,751
            
            
            12.2Hydrocodone/Ibuprofen
            
            
            1,799
            
            
            3.0
            
            
            2,941
            
            
            6.3Hydrocodone/Acetaminophen
            
            
            369
            
            
            0.6
            
            
            0
            
            
            0.0All
                Other Products
            
            
            644
            
            
            1.1
            
            
            3,728
            
            
            8.0Total
            
            $
            60,215
            
            
            100
            %
            $
            46,869
            
            
            100
            %





·
            Net
                sales of Ibuprofen for the three month period ended March 2007 decreased
                $1,874, or 21.1%, as compared to sales for the three months ended
                March
                2006. We have been working with our suppliers to obtain adequate
                supplies
                of Ibuprofen raw material. We are currently attempting to qualify
                an
                additional source of Ibuprofen, and we are making efforts to ensure
                that
                our suppliers maintain adequate levels of inventory sufficient to
                enable
                us to increase our overall production. We believe sales of Ibuprofen
                should increase for the balance of this fiscal year, however, there
                can be
                no assurance that this will occur. Net sales of Ibuprofen products
                for the
                nine month period ended March 2007 decreased by $1,379, or 5.4%,
                when
                compared to the nine month period ended March 2006, due largely to
                the
                material supply issues described
                above.




·
            As
                a result of our success in increasing the number of major accounts,
                sales
                of Naproxen continued to increase. Net sales for the three month
                period
                ended March 2007 increased $1,068, or 45.4%, as compared to sales
                for the
                three month period ended March 2006. During the nine month period
                ended
                March 2007, Naproxen net sales increased $3,192, or 55.5%, as compared
                to
                sales for the same nine month period of the prior fiscal year.




**·**
            Net
                sales of our female hormone products in the three months ended March
                2007
                increased $1,015, or 64.7%, as compared to sales for the three month
                period ended March 2006. The supply chain issues that delayed certain
                of
                our product shipments in the three months ended December 2006 were
                corrected in the three months ended March 2007, which enabled the
                Company
                to satisfy the majority of our open orders in the March 2007 quarter.
                Also, as previously reported and as a result of market conditions,
                on
                October 27, 2006, we amended our agreement with Centrix Pharmaceuticals,
                Inc. (“Centrix”). Commencing November 2006, Centrix agreed to purchase
                over a twelve month period, 40% more bottles than the initial year
                of the
                agreement at a discounted price with a provision for profit sharing.
                Under
                the amended agreement, the parties will share net profits as defined
                in
                the agreement. The amendment has a one year term, after which time
                the original Centrix agreement shall again be in full force and effect.
                Net sales of these products in the nine month period ended March
                2007
                increased $3,903, or 71.3%, as compared to sales for the nine month
                period
                ended March 2006, due primarily to a higher volume of units shipped
                during
                the current fiscal year to date period. As a result of the amended
                agreement, we believe that net sales for the fiscal year ending June
                2007
                should exceed sales recorded during the fiscal year ended June 2006;
                however, there can be no assurance that this will occur.





·
            For
                both the three month period and nine month period ended March 2007,
                we
                significantly increased our market share of Sulfamethoxazole -
                Trimethoprim in two strengths 400mg / 80mg commonly referred to as
                generic
                Bactrim® and 800mg / 160mg or commonly referred to as Bactrim-DS® (both,
                “Bactrim”). Sales increased to $5,595 during the three month period ended
                March 2007 from $1,496 in the three months ended March 2006, primarily
                as
                a result of two significant factors: (i) our entering into sales
                and
                marketing arrangements with two major distributors which include
                net
                profit sharing arrangements; and (ii) favorable pricing conditions
                in the
                market. Net sales of Bactrim for the nine month period ended March
                2007
                increased to $14,899, as compared to $3,412 for the nine month period
                ended March 2006. The difficulties experienced in obtaining quantities
                of
                a key ingredient for these products during the three months ended
                December
                2006 have been addressed and corrected, and this facilitated the
                higher
                level of sales in the March 2007 quarter.




29


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


·
            On
                October 3, 2006, we entered into a termination and release agreement
                (the
                “Termination Agreement”) with Watson terminating the Manufacturing and
                Supply Agreement dated as of October 14, 2003 pursuant to which we
                manufactured and supplied and Watson distributed and sold generic
                Vicoprofen® (7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets. As a
                result of the Termination Agreement we obtained all rights to market
                this
                product. Net sales of this product for the three month period ended
                March
                2007, decreased 39.8% to $769 as compared to $1,277 for the same
                period in
                2006. Net sales of this product for the nine month period ended March
                2007
                were $1,799, as compared to $2,941 during the nine month period ended
                March 2006. While not a material factor affecting our overall net
                sales
                recognized during the current quarter, market prices for this product
                have
                significantly decreased, which will likely affect our net sales and
                gross
                margins at least until the end of our fiscal year or when market
                conditions may change.





For
      the
      three month period ended March 2007, two significant customers accounted for
      34.5% of total Company sales, compared to three significant customers accounting
      for 48.8% of total Company sales for the three month period ended March 2006.
      For the nine month period ended March 2007, three significant customers
      accounted for 43.3% of total Company sales, compared to four significant
      customers accounting for 50.4% of total Company sales for the nine month period
      ended March 2006.





**Cost
      of sales / Gross Margins**





Our
      gross
      profit percentage for the three months ended March 2007 was 32.0%, an increase
      of 7.2  percentage
      points as compared to 24.8% for the three months ended March 2006. During the
      three and nine month periods ended March 2007, prices for raw materials remained
      relatively constant when compared to the prior year. In the three months ended
      March 2007, we were able to achieve increased manufacturing throughput which
      enabled us to satisfy backorders, generate higher sales and improve
      manufacturing efficiencies resulting in lower cost of goods sold as a percentage
      of sales for the period. In addition, gross margin in the March 2007 quarter
      was
      positively impacted by a favorable product sales mix, i.e., sales of Bactrim
      and
      the female hormone product were higher than in the prior year period and these
      products have somewhat higher margins than the our other products. We did not
      experience any significant reduction in selling prices during the March 2007
      quarter.





For
      the
      nine month period ended March 2007, the gross profit percentage of 32.2% was
      4.1
      percentage points higher than the gross profit percentage of 28.1% for the
      nine
      month period ended March 2006. While direct labor and most overhead expenses
      have increased to accommodate higher manufacturing throughput in fiscal 2007,
      the improvement in gross margin is primarily a function of (i) the Company
      selling higher margin products during the current fiscal year and (ii) greater
      throughput and relatively higher inventory levels as of March 2007 resulting
      in
      higher absorption of labor and overhead and thus, a positive impact on cost
      of
      goods sold.





As
      sales
      volumes may fluctuate for our higher margin products over the remainder of
      the
      year, we may experience a similar fluctuation in margins. Overall, we still
      believe that our overall gross margin as a percentage of net sales for the
      fiscal year ended June 2007, can exceed the overall gross margin as a percentage
      of net sales reported for the fiscal year ended June 2006. However, there can
      be
      no assurances that market conditions or other factors might not negatively
      impact our forecast.





**Selling
      and General and Administrative Expenses**





Selling,
      general and administrative (“SG&A”) 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.




30


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


SG&A
      expenses were $3,882 for the three month period ended March 2007, which
      represented an increase of $619, or 19.0%, above $3,263 incurred in the three
      month period ended March 2006. When stated as a percentage of net sales,
      SG&A expenses decreased to 19.5% in the March 2007 quarter as compared to
      20.3% in the March 2006 quarter.





The
      dollar increase in SG&A expenses during the three months ended March 2007
      was attributable to the following: increase of $218 in compensation and related
      taxes and benefits of sales and administrative staff to support our growth;
      increased rent and utilities (much of which is associated with our second
      facility) of $131; an increase in depreciation of $161, primarily due to our
      second facility becoming operational for general and administrative purposes
      July 1, 2006; professional and consulting fees consisting of management advisory
      services and information technology consulting increased $345; and
      computer-related expenses increased $82 related to the increase in the number
      of
      employees.





During
      the three month period ended March 2006 we granted 100 Stock Appreciation Rights
      (“SARs”), having a maximum cash value of $250. The expense related to the SARs
      are recorded at fair value and is marked to market each reporting period with
      changes recorded as income or expense in the period will be marked to market.
      Accordingly we reported income of $42 during the three month period ended March
      2007 as a result of a decrease in the price of our stock as of March 31, 2007
      when compared to December 31, 2006.





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. We reported non-cash expenses of $233 and $588 during
      the three month periods ended March 2007 and March 2006, respectively. In the
      March 2006 quarter, a non-recurring option expense of $316 was recorded related
      to a compensation agreement with a former officer of the Company.





During
      the nine month period ended March 2007 SG&A expenses were $9,675, an
      increase of $1,774,  or
      22.5%,
      above $7,901 for the nine month period ended March 2006. When stated as a
      percentage of net sales, SG&A expenses decreased to 16.1% in the March 2007
      quarter from 16.9% in the March 2006 quarter. The significant components the
      dollar increase are: $753 increase in compensation and related employee benefit
      expenses of sales and administrative staff to support our growth; $407 in
      depreciation primarily the result of our second facility becoming operational
      for general and administrative purposes in July 2006; $399 in professional
      and
      consulting fees; $270 in rents and utilities, primarily due to the second
      facility; $73 in computer related expenses; $164 in board of director fees;
      and
      $139 in bank fees. Non-cash expense recorded in accordance with the provisions
      of SFAS 123(R) decreased $313 as a result of the one-time charge recorded in
      the
      March 2006 quarter, as described above. Commissions paid that related to a
      commission arrangement with a salesperson decreased $468; the arrangement ended
      in the December 2006 quarter.





**Research
      and Development Expenses**





We
      incurred research and development expenses of $4,711 during the three month
      period ended March 2007, which represented an increase of $1,736, or 58.4%,
      above $2,975 incurred in the three month period ended March 2006. The increase
      was due to: higher compensation expenses of $690 primarily related to the
      expansion of analytical chemist and product formulation staff, and $1,046 of
      increased costs related to bioequivalence studies for new generic pharmaceutical
      products currently in development, materials and legal fees.





During
      the nine month period ended March 2007, research and development expenses were
      $13,001, which represented an increase of $5,995, or 85.6%, above $7,006
      reported during the same period in the prior fiscal year. When stated as a
      percentage of net sales, research and development expenses increased to 21.6%
      in
      the March 2007 quarter as compared to 14.9% in the March 2006 quarter. The
      $5,995 increase was due to: higher compensation expenses of $1,655 primarily
      related to the expansion of analytical chemist and product formulation staff,
      and $4,340 of increased costs related to bioequivalence studies for new generic
      drug products currently in development, materials and legal fees. Our research
      and development efforts continue to focus in the areas of oral contraceptives,
      soft gelatin capsules and high potency products, and we are planning to commence
      bioequivalence studies in each of these areas by June 2007. Work is progressing
      well in the product areas of special release, controlled substances, and
      products coming off patent.





31


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


As
      previously reported, during October 2006, we entered into a new agreement (“New
      Liquids Agreement”) with Tris Pharma, Inc. (“Tris”), which terminated the
      agreement entered into February 2005, which in turn 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. In conjunction with this new liquids agreement we were required
      to
      pay Tris $1,000, whether or not regulatory approval is obtained for any of
      the
      liquid products. As of March 2007, all payments associated to this agreement
      were made. 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, 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 the 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 we have 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
      net
      interest expense increased approximately $119 and $457 when comparing the three
      and nine months ended March 2007 with the three and nine month periods ended
      March 2006, respectively, primarily as a result of increased borrowings to
      fund
      the Yaphank facility, renovations, additional purchases of new equipment and
      increased research and development activities. It is likely that our net
      interest expense will continue to increase when compared to prior periods as
      a
      result of anticipated additional borrowings.





**Income
      Taxes**





In
      calculating our tax provision for the three and nine month periods ended March
      2007 we applied aggregate effective tax rates of approximately 29% and 28%
      respectively, thereby creating $746 and $1,668 income tax benefits. For the
      three and nine month periods ended March 2006 we applied aggregate effective
      tax
      rates of approximately 38%, thereby creating $926 and $828 income tax benefits.
      We adjusted our deferred tax assets by like amounts. The decrease in effective
      tax rates is the result of permanent tax differences relating to Incentive
      Stock
      Options and changes in New York State tax law.





32


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


At
      March
      31, 2007 we had remaining Federal NOLs of $23,676 and State NOLs of $22,789
      expiring through 2027. Pursuant to Section 382 of the Internal Revenue Code
      regarding substantial changes of ownership; utilization of these NOLs is
      limited. As of March 31, 2007, we determined that it is more likely than not,
      that we will utilize all of the Federal NOLs in the future *.* Additionally,
      as of March 31, 2007, as a result of changes in New York State tax law, the
      benefit of the future utilization of NOLs has been reduced.





**Liquidity
      and Capital Resources**





We
      currently finance our operations and capital expenditures through cash flows
      from operations and bank loans. Net cash used in operating activities for the
      nine month period ended March 2007, was $6,850 compared to net cash being
      provided by operating activities of $5,806 for the nine month period ended
      March
      2006. Significant factors comprising the net cash used by operating activities
      for the nine month period ended March 2007 include: a net loss of $4,347 and
      a
      net decrease to operating assets and liabilities of $5,291. The net change
      in
      operating assets is due, in part, to a reduction of deferred revenue of $3,399,
      and an increase in inventory of $3,412 which was partially offset by an increase
      in accounts payable, accrued expenses and other liabilities of $1,743.
      Additionally, we reported depreciation and amortization of $1,671, an asset
      impairment of $101 and a benefit from income taxes of $1,657. We also recognized
      a non cash compensation charge of $834 in accordance with the provisions of
      SFAS
      123 (R). During the nine months ended March 2007, we recognized a non-cash
      charge of $1,655 as a result of a termination agreement with Watson
      Pharmaceuticals, Inc. Other items affecting our net cash used in continuing
      operations aggregated a net increase of $184.





Funds
      used in investing activities of $5,569 during the nine month period ended March
      2007 were for new machinery, equipment and building renovations, compared to
      $7,225 used in investing activities during the nine months ended March
      2006.





The
      most
      significant component to our net cash provided by financing activities of
      $11,165 was the sale of $10,000 of our Series C-1 redeemable convertible
      preferred stock in September 2006, which generated $9,993 of cash. In addition
      we received $393 from the exercise of employee stock options. Net proceeds
      from
      long-term debt for the nine months ended March 2007 was $883. Other items
      affecting our net cash provided by financing activities aggregated a net
      decrease of $104.





At
      March
      31, 2007, we had $184 in cash, compared to $1,438 at June 30, 2006.





It
      should
      be noted that as part of our business plan, during the three and nine month
      periods ended March 2007 we incurred $4,711 and $13,001, respectively of
      research and development expenses. We believe that our research and development
      costs may exceed this current rate for the foreseeable future.





Our
      expansion plan calls for continued spending on research and development and
      capital improvements. We believe that our credit facility with Wells Fargo
      Business Credit will be sufficient to support our working capital and capital
      expenditure requirements for the next twelve months of our operations, however
      there can be no assurance that events may occur which could require us to seek
      additional funds either from additional borrowings or through possible sales
      of
      equity or other securities.





Bank
      Financing





During
      February 2006 we entered into a new four-year financing arrangement with Wells
      Fargo Business Credit (“WFBC”). This financing agreement provided an original
      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




33




INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


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 March 31, 2007, there
      is
      approximately $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 us 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 limited personal guarantees were reduced by $3,670.
      The
      sale of the $10,000 Series C-1 redeemable convertible preferred stock in
      September 2006, resulted in elimination of the balance of the personal pledges
      of marketable securities of $3,830.




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 March
      31, 2007, the interest rate on this debt was 7.75%. We will incur a fee of
      25
      basis points per annum on any unused amounts of this credit facility. Pursuant
      to the requirements of the WFBC agreement, we put in place a lock-box
      arrangement. At March 31, 2007, there was no balance outstanding on the
      revolving 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 and as
      of
      March 31, 2007, we were not in compliance with one of these financial covenants
      which required that unfinanced capital expenditures not exceed $2,500. Such
      expenditures were approximately $3,500 for the nine month period ended March
      31,
      2007. We received a waiver from WFBC of the financial covenant non-compliance
      and entered into an amendment to the WFBC loan documents to accommodate our
      unfinanced capital expenditures.





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 March
      31, 2007, was approximately $114 and is included in other assets.





Watson
      Termination Agreement





On
      October 3, 2006, we entered into a termination and release agreement (the
“Termination Agreement”) with Watson terminating the Manufacturing and Supply
      Agreement dated October 14, 2003 (the “Supply Agreement”) pursuant to which we
      manufactured and supplied and Watson distributed and sold generic Vicoprofen®
(7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets, (the “Product”). Watson
      was required to return all rights and agreements to us thereby enabling us
      to
      market the Product ourselves. Further, Watson was required to turn over to
      us
      its then current customer list for this product and agreed that, for a period
      of six
      months from closing, neither Watson nor any of its affiliates is to solicit
      sales for this Product from its twenty largest customers. In accordance with
      the
      Termination Agreement, Watson returned approximately $141 of the Product and
      we
      in turn invoiced Watson $42 for repacking. The net effect was a reduction of
      $99
      to our net sales during the three month ended December 2006. In consideration
      of
      the termination of Watson’s rights under the Supply Agreement, we are to pay
      Watson $2,000 payable at the rate of $500 per year over four years from the
      first anniversary of the effective date of the agreement. We determined the
      net
      present value of the obligation and accordingly included in Accounts payable,
      accrued expenses and other liabilities and Contract termination liability $372
      and $1,304, respectively. The imputed interest of $324 will be amortized over
      the four year life of the obligation using the effective interest rate method.
      At March 31, 2007, contract termination liability of $379 and $1,330 are
      included in Accounts payable, accrued expensse and other liabilities and
      Contract termination liability, respectively.





34


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


**Accounts
      Receivable**





As
      of
      March 31, 2007, less than 1% of our receivables had aged greater than 90 days.
      We believe the quality of our accounts receivable is good, as such we believe
      our allowance for doubtful accounts is adequate. Further, based upon current
      information available to us we believe there is minimal exposure to bad debt
      expense; however we can not be assured that future conditions may alter our
      exposure.





**Inventories**





At
      March
      31, 2007, the value of our inventory was $12,117, an increase of $2,310 from
      $9,807 at December 31, 2006 and an increase of $3,411 from $8,706 at June 30,
      2006. These increases are primarily due to a planned buildup in safety-stock
      levels of raw materials and finished goods, which we believe should enable
      us to
      provide improved customer service and facilitate the Company’s ability to
      increase its market share. During the three month period ended December 2006
      we
      encountered numerous supply chain issues which caused manufacturing
      inefficiencies as well as delays in shipping. As such, we believe the increase
      in our inventory levels was necessary. The overall impact in the buildup of
      inventory should not adversely affect our plan, but may negatively affect our
      cash position.




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





Accounts
      payable, accrued expenses and other current liabilities increased $2,377 from
      June 30, 2006 to March 31, 2007. The increase is primarily attributable to
      higher inventory levels, as discussed above, and increased SG&A and research
      and development expenses.





**Assets
      held for sale / Liabilities held for sale**





On
      April
      25, 2007, we completed the sale of our subsidiary, Interpharm Development
      Private Limited (“IDPL”) located in Ahmedabad, India to an entity partially
      owned by two officers of the Company for $161. As previously disclosed, we
      elected not to move forward with the construction of a research and development
      facility in Ahmedabad, India. During the quarter ended March 2007, management
      committed to a plan to dispose of its interest in the entity which was
      incorporated specifically for the construction project in Ahmedabad.
      A s
      of
      March 31, 2007, the assets and liabilities of IDPL were classified as “held for
      sale”. As a result, the Company recorded an impairment charge of $101 in the
      quarter ended March 2007. In addition, in advance of the closing of the IDPL
      sale the acquiring entity advanced IDPL cash of $172 which is included in the
      caption “Due to related party” below. Assets
      and liabilities of the discontinued operation classified as “held for sale” in
      our consolidated balance sheet as of March 31, 2007 were as
      follows:





Cash
            
            $
            233Land
            
            
            305Assets
                held for sale
            
            $
            538Accrued
                expenses
            
            $
            205Due
                to related party
            
            
            172Liabilities
                held for sale
            
            $
            377




35


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


**Cash**





Cash
      decreased approximately $1,254 to $184 at March 31, 2007 from $1,438 at June
      30,
      2006 as more fully described in Liquidity and Capital Resources
      above.





**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.





In
      addition, we are party to supply agreements with certain pharmaceutical
      companies under which, in addition to the selling price of the product, we
      receive payments based on sales or profits associated with these products
      realized by our customer. We recognize 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. We recognize the additional revenue
      component of these agreements at the time our customers record their sales
      and
      is based on pre-defined formulas contained in the agreements.





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”.





36


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


**Sales
      Incentives**




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”). Generally, the terms of a volume based sales incentive
      we offer require the customer to purchase a minimum quantity of a product or
      products during a specified period of time. The incentive offered would then
      be
      based upon a fixed dollar amount per unit sold to the customer. We make an
      estimate of the ultimate amount of the incentive the customer would earn based
      upon past history with the customer and other facts and circumstances.
      Generally, 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 would be 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 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 our sales incentive liability, many factors, including
      significant unanticipated changes in the purchasing volume of a customer, could
      have significant impact on our liability for sales incentives and our reported
      operating results. The terms of our agreement with our customer with such sales
      incentives expired in October 2006.





**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 maximum $41,500 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
      $22,500, subject to certain asset levels. 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 $3,670. The sale of the Series
      C-1
      Convertible preferred stock in September 2006, resulted in elimination of the
      balance of the personal pledges of marketable securities of $3,830.





37


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
  (IN
          THOUSANDS, EXCEPT PER SHARE
          DATA)


At
      March
      31, 2007, total obligations to our bank pertaining to the credit facility
      described above were: (i) approximately $11,133 real estate term loan; and
      (ii)
      $5,386 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 March 31, 2007 was
      approximately $114.





If
      our
      combined variable rate borrowings of approximately $2,645 remained at the same
      amount as of March 31, 2007, 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 $7 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 March 2007 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.





38


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES




**PART
      II - OTHER INFORMATION**




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





An
      action
      was commenced on June 1, 2006, by Ray Vuono (“Vuono”) in the Supreme Court of
      the State of New York, County of Suffolk (Index No. 13985/06). The action
      alleged that plaintiff was owed an amount exceeding $10 million in unpaid
“finder’s fees” under an advisory agreement between plaintiff and Atec Group,
      Inc.





By
      motion
      dated July 26, 2006, the Company moved to dismiss Vuono’s complaint in its
      entirety. Vuono cross-moved to disqualify the Company's counsel due to an
      alleged conflict of interest. By recent decision and order dated March 29,
      2007,
      the Court dismissed Vuono’s claims as they pertain to any fees claimed by Vuono
      related to a reverse merger of Interpharm, Inc. and the Company and declined
      to
      dismiss other claims. The dismissed claims represent approximately $7 million
      of
      the total of $10 million claimed by Vuono. The Court deferred a decision on
      Vuono’s motion to disqualify counsel pending a hearing and further proceedings.





The
      Company will continue to vigorously defend the action.




The
        Company leases one of its business premises located in Hauppauge, New York,
        (“Premises”) from an entity owned by three stockholders (“Landlord”), one of
        whom is Raj Sutaria, an officer of the Company, under a noncancelable lease
        expiring in October 2019.
 
 Under
        the
        terms of the lease for the Premises, 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 thereafter, the annual rent may be adjusted to
        fair
        market value, as determined by an independent appraiser. Effective October
        1,
        2006, the Company and its Landlord agreed to adjust the base rent for the
        premises based upon two independent appraisals. However, the appraisals obtained
        were not tied to market price in May, 2006, the time period during which
        the
        rent was to be adjusted to market value. As a result, at a meeting of the
        Company’s Board of Directors on March 20, 2007, the Board resolved, with the
        Chairman abstaining, that the Audit Committee would obtain an appraisal of
        the
        lease price for the Premises as of May 30, 2006.
 
 In
        a
        letter dated April 20, 2007, the Landlord’s counsel advised that the Company was
        obligated to pay rent to the Landlord at the rate contained in an appraisal
        obtained in November 2006 and based on rental prices at that time, which
        were
        higher than those in May 2006. The Landlord’s counsel also advised that the
        Landlord is asserting a claim against the Company for $236 in back rent and
        to
        set the current rent at $821 per annum.
 
 As
        of May
        14, 2007, no action has been commenced against the Company, however, the
        Company
        believes that a claim by the Landlord based on the April 20, 2007 letter
        from
        the Landlord's counsel would be without merit.  In accordance with SFAS No.
        5, “Accounting for Contingencies”, no amounts have been accrued at March 31,
        2007 related to this matter.




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




Exhibits21.1
              List
                  of Subsidiaries.31.1
              Certification of Chief
                Executive
                Officer pursuant to Rules 13a-14(a) as adopted, pursuant toSection
                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
                toSection
                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.




39


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES


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:
                May 15, 2007By:
            /s/
              Peter
              GiallorenzoPeter
                Giallorenzo,
              Chief
                  Financial Officer
                (Duly
                    authorized to sign on behalf of
                    registrant)





40


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES


**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 Peter Giallorenzo 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;




41