**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, 2006





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
xNO
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 oAccelerated 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 12, 2006, there were 32,463,607 shares of the
      Registrant's $0.01 par value per share Common Stock
      outstanding.








INTERPHARM
      HOLDINGS, INC.





TABLE
      OF
      CONTENTS





PART
                I
            
            Financial
                Information
            PageItem
                1.
            
            Financial
                Statements & Notes
            1-20Item
                2.
            
            Managements
                Discussion & Analysis of Financial Condition and Results of
                Operations
            21-29Item
                3.
            
            Quantitative
                and Qualitative Disclosures about Market Risk
            29Item
                4.
            
            Controls
                and Procedures
            30PART
              II
            
            Other
              Information Required in ReportItem
                6
            
            Exhibits
            31Forward
                Looking Statements and Associated Risks
            32Signatures
                Page
            33Exhibits/Certifications
            34-37





INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(In
      thousands, except share data)


ASSETS





March
                31,
              2006
            
            June
                30,
              2005CURRENT
                ASSETS
            
            **(Unaudited)**Cash
                and cash equivalents
            
            $
            254
            
            $
            537Accounts
                receivable, net
            
            
            9,910
            
            
            7,664Inventories
            
            
            9,287
            
            
            8,941Prepaid
                expenses and other current assets
            
            
            1,791
            
            
            1,156Deferred
                tax assets
            
            
            87
            
            
            87Total
                Current Assets
            
            
            21,329
            
            
            18,385Land,
                building and equipment, net
            
            
            28,289
            
            
            21,872Deferred
                tax assets
            
            
            5,126
            
            
            4,326Investment
                in APR, LLC
            
            
            1,022
            
            
            1,022Deposits
            
            
            650
            
            
            785Deferred
                financing costs
            
            
            274
            
            
            --TOTAL
                ASSETS
            
            $
            56,690
            
            $
            46,390LIABILITIES
                AND STOCKHOLDERS’ EQUITYCURRENT
                LIABILITIESCurrent
                maturities of long-term debt
            
            $
            4,826
            
            $
            10,340Accounts
                payable, accrued expenses and other liabilities
            
            
            12,822
            
            
            6,233Deferred
                revenue
            
            
            2,296
            
            
            --Total
                Current Liabilities
            
            
            19,944
            
            
            16,573OTHER
                LIABILITIESLong-term
                debt, less current maturities
            
            
            13,883
            
            
            6,691Other
                liabilities
            
            
            199
            
            
            15TOTAL
                LIABILITIES
            
            
            34,026
            
            
            23,279COMMITMENTS
                AND CONTINGENCIESSTOCKHOLDERS’
                EQUITYPreferred
                stock, 10,000,000 shares authorized; issued and
              outstanding
                - 6,607,561 and 6,608,233 at March 31, 2006 and
              June
                30, 2005, respectively; aggregate liquidation preference of
              $4,365,591
                and $4,366,263 at March 31, 2006 and June 30,
              2005,
                respectively
            
            
            343
            
            
            343Common
                stock, $0.01 par value, 70,000,000 shares authorized;
              shares
                issued - 32,463,607 at March 31, 2006 and 32,338,607
              at
                June 30, 2005
            
            
            325
            
            
            324Additional
                paid-in capital
            
            
            22,500
            
            
            19,104Stock
                subscription receivable
            
            
            (112
            )
            
            --Accumulated
                other comprehensive loss
            
            
            (12
            )
            
            --Unearned
                stock based compensation
            
            
            (2,260
            )
            
            --Retained
                earnings
            
            
            1,880
            
            
            3,340TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            22,664
            
            
            23,111TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            56,690
            
            $
            46,390





*See
      Notes To Condensed Consolidated Financial Statements.*


1





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,**
            ********
            ****
            **2006**
            ****
            **2005**
            ****
            **2006**
            ****
            **2005**SALES,
                Net
            
            $
            16,110
            
            $
            10,670
            
            $
            46,869
            
            $
            28,561COST
                OF SALES(including related party rent expense of $102 and $306 for the three
                and
                nine months ended March 31, 2006 and 2005, respectively)
            
            
            12,111
            
            
            8,398
            
            
            33,708
            
            
            21,755GROSS
                PROFIT
            
            
            3,999
            
            
            2,272
            
            
            13,161
            
            
            6,806OPERATING
                EXPENSESSelling,
                general and administrative
            
            
            3,263
            
            
            1,580
            
            
            7,901
            
            
            3,893Related
                party rent
            
            
            18
            
            
            18
            
            
            54
            
            
            54Research
                and development
            
            
            2,975
            
            
            1,659
            
            
            7,006
            
            
            2,198TOTAL
                OPERATING EXPENSES
            
            
            6,256
            
            
            3,257
            
            
            14,961
            
            
            6,145OPERATING
                (LOSS) INCOME
            
            
            (2,257
            )
            
            (985
            )
            
            (1,800
            )
            
            661OTHER
                (EXPENSE) INCOMEInterest
                expense, net
            
            
            (170
            )
            
            (22
            )
            
            (359
            )
            
            (25
            )Gain (loss)
              on
              disposal of fixed assets
            
            
            2
            
            
            --
            
            
            (5
            )
            
            --Gain
                on sale of marketable securities
            
            
            --
            
            
            --
            
            
            --
            
            
            9TOTAL
                OTHER EXPENSE
            
            
            (168
            )
            
            (22
            )
            
            (364
            )
            
            (16
            )(LOSS)
                INCOME BEFORE INCOME TAXES
            
            
            (2,425
            )
            
            (1,007
            )
            
            (2,164
            )
            
            645(BENEFIT
                FROM) PROVISION FOR INCOME TAXES
            
            
            (926
            )
            
            (373
            )
            
            (828
            )
            
            240NET
                (LOSS) INCOME
            
            
            (1,499
            )
            
            (634
            )
            
            (1,336
            )
            
            405INCOME
                ATTRIBUTABLE TO PREFERRED STOCKHOLDERS
            
            
            98
            
            
            41
            
            
            181
            
            
            143NET
                (LOSS) INCOME ATTRIBUTABLE TO
              COMMON
                STOCKHOLDERS
            
            $
            (1,597
            )
            $
            (675
            )
            $
            (1,517
            )
            $
            262EARNINGS
                PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERSBasic
                (loss) earnings per share
            
            $
            (0.05
            )
            $
            (0.03
            )
            $
            (0.05
            )
            $
            0.01Diluted
                (loss) earnings per share
            
            $
            (0.05
            )
            $
            (0.03
            )
            $
            (0.05
            )
            $
            0.00Basic
                weighted average shares outstanding
            
            
            32,464
            
            
            24,967
            
            
            32,423
            
            
            24,967Diluted
                weighted average shares and equivalent sharesoutstanding
            
            
            32,464
            
            
            24,967
            
            
            32,423
            
            
            67,702





*See
        Notes To Condensed Consolidated Financial
        Statements.*


2





INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(UNAUDITED)


(In
      thousands)




**Additional**
                **Paid-In**
                **Capital**
              
              **Stock**
                **Subscription**
                **Receivable**
              
              **Accumulated
                  Other**
                **Comprehensive**
                **Loss**
              
              **Unearned**
                **Stock
                  Based**
                **Compensation**
              
              **Retained**
                **Earnings**
              
              **Total**
                **Stockholders’**
                **Equity****Preferred
                  Stock**
              
              **Common
                  Stock****Shares**
              
              **Amount**
              
              **Shares**
              
              **Amount**BALANCE-
                  July 1, 2005
              
              
              6,608
              
              $
              343
              
              
              32,339
              
              $
              324
              
              $
              19,104
              
              $
              --
              
              $
              --
              
              $
              --
              
              $
              3,340
              
              $
              23,111Dividends
                  Declared - Series A-1
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (124
              )
              
              (124
              )Fair
                  value of unvested stock options upon adoption of FAS 123
                  (R)
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              2,739
              
              
              --
              
              
              --
              
              
              (2,739
              )
              
              --
              
              
              --Fair
                  value of stock options issued during the nine month period ended
                  March 31,
                  2006
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              323
              
              
              --
              
              
              --
              
              
              (323
              )
              
              --
              
              
              --Modification
                  of previouslyissued
                  stock option award
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              202
              
              
              --
              
              
              --
              
              
              (202
              )
              
              --
              
              
              --Amortization
                  of unearned stock based compensation
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              1,004
              
              
              --
              
              
              1,004Common
                  stocksubscribed
              
              
              --
              
              
              --
              
              
              125
              
              
              1
              
              
              132
              
              
              (133
              )
              
              --
              
              
              --
              
              
              --
              
              
              --Collections
                  on stocksubscription
                  receivable
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              21
              
              
              --
              
              
              --
              
              
              --
              
              
              21Change
                  in fair value of interest rate swap
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (12
              )
              
              --
              
              
              --
              
              
              (12
              )Net
                  loss
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              (1,336
              )
              
              (1,336
              )BALANCE-
                  March 31, 2006
              
              
              6,608
              
              $
              343
              
              
              32,464
              
              $
              325
              
              $
              22,500
              
              $
              (112
              )
              $
              (12
              )
              $
              (2,260
              )
              $
              1,880
              
              $
              22,664







*See
      Notes To Condensed Consolidated Financial Statements.*


3





INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


(UNAUDITED)


(In
      thousands)




**Three
                  Months Ended**
                **March
                  31,**
              ****
              **Nine
                  Months Ended**
                **March
                  31,**
              ********
              ****
              **2006**
              ****
              **2005**
              ****
              **2006**
              ****
              **2005**NET
                  (LOSS) INCOME
              
              $
              (1,499
              )
              $
              (634
              )
              $
              (1,336
              )
              $
              405OTHER
                  COMPREHENSIVE LOSSChange
                  in fair value of interest rate swap
              
              
              (12
              )
              
              --
              
              
              (12
              )
              
              --TOTAL
                  COMPREHENSIVE (LOSS) INCOME
              
              $
              (1,511
              )
              $
              (634
              )
              $
              (1,348
              )
              $
              405




See
      Notes To Condensed Consolidated Financial
      Statements.





4


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(In
      thousands)




**Nine
                Months Ended**
              **March
                31,**
            ********
            **2006**
            ****
            **2005**CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                (loss) income
            
            $
            (1,336
            )
            $
            405Adjustments
                to reconcile net (loss) income to netcash
                provided by operating activities:Gain
                on sale of marketable securities
            
            
            --
            
            
            (9
            )Loss
                on disposal of fixed asset
            
            
            5
            
            
            --Bad
                debt expense
            
            
            11Depreciation
                and amortization
            
            
            1,062
            
            
            908Amortization
                of unearned compensation
            
            
            1,004
            
            
            --Deferred
                tax expense
            
            
            (800
            )
            
            210Changes
                in operating assets and liabilitiesAccounts
                receivable
            
            
            (2,258
            )
            
            337Inventories
            
            
            (346
            )
            
            (3,064
            )Prepaid
                expenses and other current assets
            
            
            (635
            )
            
            (85
            )Accounts
                payable, accrued expenses and other liabilities
            
            
            6,803
            
            
            2,634Deferred
                revenue
            
            
            2,296
            
            
            --TOTAL
                ADJUSTMENTS
            
            
            7,142
            
            
            931NET
                CASH PROVIDED BY OPERATING ACTIVITIES
            
            
            5,806
            
            
            1,336CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of building and equipment
            
            
            (6,621
            )
            
            (5,844
            )Investment
                in APR, LLC
            
            
            --
            
            
            (773
            )Deposits
                and other long-term assets
            
            
            (604
            )
            
            (96
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (7,225
            )
            
            (6,713
            )CASH
                FLOWS FROM FINANCING ACTIVITIESRepayments
                of bank line of credit, net
            
            
            (6,728
            )
            
            (425
            )Proceeds
                from long-term debt
            
            
            8,654
            
            
            5,970Payment
                of Series A-1 preferred stock dividends
            
            
            (165
            )
            
            (179
            )Collections
                on stock subscription receivable
            
            
            21
            
            
            --Payment
                of deferred financing costs
            
            
            (270
            )
            
            --Repayments
                of long-term debt
            
            
            (376
            )
            
            (246
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            1,136
            
            
            5,120NET
                DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (283
            )
            
            (257
            )CASH
                AND CASH EQUIVALENTS-
                Beginning
            
            
            537
            
            
            2,885CASH
                AND CASH EQUIVALENTS-
                Ending
            
            $
            254
            
            $
            2,628




*See
      Notes To Condensed Consolidated Financial Statements.*


5





INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


(UNAUDITED)


(In
      thousands)




**Nine
                Months Ended**
              **March
                31,**
            ********
            ****
            **2006**
            ****
            **2005**SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid during the periods for:Interest
            
            $
            273
            
            $
            201Income
                taxes
            
            $
            15
            
            $
            31Non-Cash
                Investing or Financing Transactions:Conversion
                of Series C preferred stock to common stock
            
            $
            --
            
            $
            2Issuance
                of common stock in exchange for subscription receivable
            
            $
            133
            
            $
            --Acquisition
                of machinery and equipment in exchange for capital lease
              payable
            
            $
            128
            
            $
            --Reclassification
                of equipment deposits to building and equipment
            
            $
            771
            
            $
            --Declaration
                of Series A-1 preferred dividends
            
            $
            124
            
            $
            --Repayment
                of debt with proceeds from new credit facility
            
            $
            20,445
            
            $
            --Retirement
                of Treasury Stock
            
            $
            --
            
            $
            798Change
                in fair value of interest rate swap
            
            $
            12
            
            $
            --





See
      Notes To Condensed Consolidated Financial
      Statements.





6


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





**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, 2006 are not necessarily indicative of the results that
      may be expected for the fiscal year ending June 30, 2006. 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,
      2005.








**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. The majority
      of the Company’s sales have been derived from sales of Ibuprofen tablets in both
      over-the-counter and prescription strength.





Earnings
      Per Share


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





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, fair values of
      stock based compensation awards and inventory overhead costing
      estimates.





Capitalization
      of Interest and Other Costs


The
      Company capitalizes interest on borrowings and certain other direct costs during
      the active construction period of major capital projects. Capitalized costs
      are
      added to the cost of the underlying assets and will be depreciated over the
      useful lives of the assets.





The
      Company capitalized interest approximating $517,000 during the nine month period
      ended March 31, 2006 in connection with its capital improvements to the
      Brookhaven, NY facility.


7


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





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





Stock
      Based Compensation


Effective
      July 1, 2005, the Company adopted the fair value recognition provisions of
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised
      2004), “Share-Based Payment,” (“SFAS No. 123(R)”), using the
      modified-prospective-transition method. As a result, the Company’s net income
      before taxes for the nine months ended March 31, 2006 is $1,004,000 lower 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”).





Prior
      to
      July 1, 2005, the Company’s stock-based employee compensation plans were
      accounted for under the recognition and measurement provisions of APB
      No. 25, and related Interpretations, as permitted by Financial Accounting
      Standards Board (“FASB”) Statement No. 123, “Accounting for Stock-Based
      Compensation,” (“SFAS No. 123”). The Company did not recognize stock-based
      compensation cost in its statement of operations for periods prior to
      July 1, 2005 as all options granted had an exercise price equal to the
      market value of the underlying common stock on the date of grant. However,
      compensation expense was recognized under APB No. 25 for certain options granted
      to non employees of the Company based upon the intrinsic value (the difference
      between the exercise price at the date of grant and the deemed fair value of
      the
      common stock).





Three
      and nine months ended March 31, 2005


As
      was
      permitted under SFAS No. 148, “Accounting for Stock-Based Compensation -
      Transition and Disclosure,” which amended SFAS No. 123, the Company elected to
      continue to follow the intrinsic value method in accounting for its stock-based
      employee compensation arrangements as defined by APB No. 25, and related
      interpretations including FASB Interpretation No. 44, “Accounting for Certain
      Transactions Involving Stock Compensation, an interpretation of APB No. 25.” No
      stock-based employee compensation cost is reflected in operations, as all
      options granted under those plans had an exercise price equal to the market
      value of the underlying common stock on the date of grant. The following table
      illustrates the effect on net income and net income per share as if the Company
      had applied the fair value recognition provisions of SFAS No. 123 to stock-based
      employee compensation: (in thousands, except for per share data)





**Three
                Months Ended**
              **March
                31,**
            ****
            **Nine
                Months Ended**
              **March
                31,**
            ********
            ****
            **2005**
            ****
            **2005**Net
                (loss) income, as reported
            
            $
            (634
            )
            $
            405Less:
                Stock-based employee
              compensation
                expense
              determined
                under fair value-based
              method
                for all awards, net of income tax
            
            
            9,270
            
            
            10,583Pro
                forma net loss
            
            $
            (9,904
            )
            $
            (10,178
            )Basic
                net (loss) income per shareAs
                reported
            
            $
            (0.03
            )
            $
            0.01Pro
                forma
            
            $
            (0.40
            )
            $
            (0.40
            )Diluted
                net (loss) income per shareAs
                reported
            
            $
            (0.03
            )
            $
            0.00Pro
                forma
            
            $
            (0.40
            )
            $
            (0.40
            )




8





INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





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





For
      the
      three and nine months ended March 31, 2005, the fair values of Company common
      stock options granted to employees were estimated on the date of grant using
      the
      Black-Scholes option-pricing model with the following assumptions: (1) expected
      volatility ranging from 106% to 131% (2) risk-free interest rate ranging from
      4.25% to 5.58% and (3) expected average lives of 10 years.





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 $26,000 and $66,000 at March 31, 2006
      and
      June 30, 2005, respectively. Allowances for sales returns were $86,000 and
      $0 at March 31, 2006 and June 30, 2005, respectively. The allowance for
      doubtful accounts is based on a review of specifically identified accounts
      in
      addition to an overall aging analysis. Judgments are made with respect to the
      collectibility of accounts receivable based on historical experience and current
      economic trends. Actual losses could differ from those estimates. Allowances
      for
      customer chargebacks were $1,910,000 and $425,000 at March 31, 2006 and June
      30,
      2005, 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.





Sales
      Incentives





In
      the
      current year the Company has offered a sales incentive to one of its customers
      in the form of an incentive volume price adjustment. The Company accounts for
      sales incentives in accordance with EITF 01-9, "Accounting for Consideration
      Given by a Vendor to a Customer (Including a Reseller of Vendor's Products)"
      (“EITF 01-9”). The terms of this volume based sales incentive require the
      customer to purchase a minimum quantity of the Company's products during a
      specified period of time. The incentive offered is based upon a fixed dollar
      amount per unit sold to the customer. The Company makes an estimate of the
      ultimate amount of the incentive the customer will earn based upon past history
      with the customer and other facts and circumstances. The Company has the ability
      to estimate this volume incentive price adjustment, as there does not exist
      a
      relatively long period of time for the particular adjustment to be earned.
      Any
      change in the estimated amount of the volume incentive is recognized immediately
      using a cumulative catch-up adjustment. In accordance with EITF 01- 9, the
      Company records the provision for this sales incentive when the related revenue
      is recognized. The accrual for sales incentives at March 31, 2006 was
      approximately $2.3 million and reported as deferred revenue on the Company’s
      balance sheet. The Company's sales incentive liability may prove to be
      inaccurate, in which case the Company may have understated or overstated the
      provision required for these arrangements. Therefore, although the Company
      makes
      its best estimate of its sales incentive liability, many factors, including
      significant unanticipated changes in the purchasing volume of its customer,
      could have significant impact on the Company's liability for sales incentives
      and the Company's reported operating results.


9





INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





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





Reclassifications





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





Recently
      Issued Accounting Pronouncements





New
      Accounting Pronouncements




In
      November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an
      amendment of ARB No. 43, Chapter 4.” SFAS No. 151 clarifies that
      abnormal inventory costs such as costs of idle facilities, excess freight and
      handling costs, and wasted materials (spoilage) are required to be
      recognized as current period costs. The provisions of SFAS No. 151 are effective
      for the Company’s fiscal year 2006. The adoption of SFAS No. 151 has had no
      material impact on the Company’s condensed consolidated financial position,
      results of operations, or cash flows.




In
      December 2004, the FASB issued SFAS No. 123 (R) amending SFAS No. 123,
      which, for the Company, became effective beginning the first quarter of fiscal
      2006. SFAS No. 123 (R) requires the Company to expense stock options based
      on
      grant date fair value in its financial statements. Further, the adoption of
      SFAS
      No. 123 (R) requires additional accounting related to the income tax effects
      and
      additional disclosure regarding the cash flow effects resulting from share-based
      payment arrangements. The adoption of SFAS No. 123 (R) has had no effect on
      the
      Company’s condensed consolidated cash flows, but impacts its results of
      operations.




In
      March
      2005, the FASB issued *FASB
      Interpretation No. 47, “Accounting for Conditional Asset Retirement
      Obligations”* (“FIN 47”),
      which is effective no later than the end of fiscal years ending after December
      15, 2005, with early adoption encouraged. FIN 47 clarifies that the phrase
“conditional asset retirement obligation,” as used in FASB Statement
      No. 143, *“Accounting
      for Asset Retirement Obligations”* (SFAS No.
      143), refers to a legal obligation to perform an asset retirement activity
      for
      which the timing and/or method of settlement are conditional on a future event
      that may or may not be within the control of the Company. The obligation to
      perform the asset retirement activity is unconditional even though uncertainty
      exists about the timing and/or method of settlement. Uncertainty about the
      timing and/or method of settlement of a conditional asset retirement obligation
      should be factored into the measurement of the liability when sufficient
      information exists. SFAS No. 143 acknowledges that in some cases,
      sufficient information may not be available to reasonably estimate the fair
      value of an asset retirement obligation. FIN 47 also clarifies when an
      entity would have sufficient information to reasonably estimate the fair value
      of an asset retirement obligation. The adoption of FIN 47 did not have an effect
      on the Company’s condensed consolidated financial position or results of
      operations.





In
      May
      2005, the FASB issued SFAS No. 154, “ *Accounting
      Changes and Error Corrections”* (“SFAS
      No. 154”). SFAS 154 requires retrospective application to prior periods’
financial statements of changes in accounting principle. It also requires that
      the new accounting principle be applied to the balances of assets and
      liabilities as of the beginning of the earliest period for which retrospective
      application is practicable and that a corresponding adjustment be made to the
      opening balance of retained earnings for that period rather than being reported
      in an income statement. The statement will be effective for accounting changes
      and corrections of errors made in fiscal years beginning after December 15,
      2005. The Company does not expect the adoption of SFAS No. 154 will have a
      material effect on its condensed consolidated financial position or results
      of
      operations.





In
      June
      2005, the EITF reached consensus on Issue No. 05-6, “Determining the
      Amortization Period for Leasehold Improvements” ("EITF 05-6"). EITF 05-6
      provides guidance on determining the amortization period for leasehold
      improvements acquired in a business combination or acquired subsequent to lease
      inception. The guidance in EITF 05-6 will be applied prospectively and is
      effective for reporting periods beginning after June 29, 2005. The adoption
      of EITF 05-6 did not have a material impact on the Company's condensed
      consolidated financial position or results of operations.





10


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





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





In
      September 2005, the FASB ratified the EITF’s Issue No. 05-7, “Accounting for
      Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues” (EITF 05-7”), which addresses whether a modification to a conversion
      option that changes its fair value effects the recognition of interest expense
      for the associated debt instrument after the modification, and whether a
      borrower should recognize a beneficial conversion feature, not a debt
      extinguishment, if a debt modification increases the intrinsic value of the
      debt
      (for example, the modification reduces the conversion price of the debt). The
      statement will be effective for accounting modifications of debt instruments
      beginning in the first interim or annual reporting period beginning after
      December 15, 2005. The adoption of EITF 05-7 did not have a material impact
      on
      the Company's condensed consolidated financial position or results of
      operations.





In
      June
      2005, the Emerging Issues Task Force ("EITF") issued EITF 05-2, "The Meaning
      of
      Conventional Convertible Debt Instrument in Issue No. 00-19." EITF 05-2 retained
      the definition of a conventional convertible debt instrument as set forth in
      EITF 00-19, and which is used in determining certain exemptions to the
      accounting treatments prescribed under SFAS 133, "Accounting for Derivative
      Instruments and Hedging Activities." EITF 05-2 also clarified that certain
      contingencies related to the exercise of a conversion option would not be
      outside the definition of "conventional" and determined that convertible
      preferred stock with a mandatory redemption date would also qualify for similar
      exemptions if the economic characteristics of the preferred stock are more
      akin
      to debt than equity. EITF 05-2 is effective for new instruments entered into
      and
      instruments modified in periods beginning after June 29, 2005 The Company
      adopted the provisions of EITF 05-2 on July 1, 2005, which did not have a
      material effect on the Company's condensed consolidated financial position
      or
      results of operations.





In
      September 2005, the FASB ratified the EITF’s Issue No. 05-8, “Income Tax
      Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature”
(“EITF 05-8”), which discusses whether the issuance of convertible debt with a
      beneficial conversion feature results in a basis difference arising from the
      intrinsic value of the beneficial conversion feature on the commitment date
      (which is recorded in the stockholder’s equity for book purposes, but as a
      liability for income tax purposes) and, if so, whether that basis difference
      is
      a temporary difference under FASB Statement No. 109, “Accounting for Income
      Taxes.” The statement will be effective for financial statements beginning in
      the first interim or annual reporting period beginning after December 15, 2005.
      The adoption of EITF 05-8 did not have a material impact on the Company's
      condensed consolidated financial position or results of operations.





In
      November 2005, the FASB issued Staff Position No. FAS 123(R)-3,
“Transition Election Related to Accounting for the Tax Effects of Share-Based
      Payment Awards.” FAS 123(R)-3 provides that companies may elect to use a
      specified alternative method to calculate the historical pool of excess tax
      benefits available to absorb tax deficiencies recognized upon adoption of SFAS
      No. 123 (R). The option to use the alternative method is available regardless
      of
      whether SFAS No. 123 (R) was adopted using the modified prospective or modified
      retrospective application transition method, and whether it is has the ability
      to calculate its pool of excess tax benefits in accordance with the guidance
      in
      paragraph 81 of SFAS No. 123 (R). This method only applies to awards that are
      fully vested and outstanding upon adoption of SFAS No. 123 (R). FAS 123(R)-3
      became effective after November 10, 2005. The adoption of FAS 123(R)-3 did
      not have a material impact on the Company’s condensed consolidated financial
      position or results of operations.





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 No. 155 clarifies certain issues relating to embedded derivatives
      and beneficial interests in securitized financial assets. The provisions of
      SFAS
      No. 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 No. 155 will have on its
      condensed consolidated results of operations and financial
      position.


11


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





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




In
      March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
      Financial Assets” (“SFAS No. 156”), which amends SFAS No. 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 No. 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 condensed consolidated financial position and results of
      operations.





**NOTE
      3 -** **Inventories** ****





Inventories
      consist of the following: (in thousands)





**March
                31,**
              **2006**
            
            **June
                30,**
              **2005****(Unaudited)**Finished
                goods
            
            $
            912
            
            $
            721Work
                in process
            
            
            4,952
            
            
            5,539Raw
                materials
            
            
            3,050
            
            
            2,117Packaging
                materials
            
            
            373
            
            
            564Total
            
            $
            9,287
            
            $
            8,941





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





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





**March
                31,**
              **2006**
            ****
            **June
                30,**
              **2005**
            ****
            **Estimated**
              **Useful**
              **Lives**
            ********
            ****
            **(Unaudited)**
            ****
            ****
            ****Land
            
            $
            4,924
            
            $
            4,924Building,
                equipment and construction in progress (a)
            
            
            15,635
            
            
            9,314
            
            
            7-20
                YearsMachinery
                and equipment
            
            
            8,907
            
            
            8,289
            
            
            5-7
                YearsFurniture
                and fixtures
            
            
            772
            
            
            435
            
            
            5
                YearsLeasehold
                improvements
            
            
            3,142
            
            
            2,950
            
            
            5-15
                Years33,380
            
            
            25,912Less:
                accumulated depreciation and amortization
            
            
            5,091
            
            
            4,040Land,
                Building and Equipment, net
            
            $
            28,289
            
            $
            21,872





(a)  Not
      yet
      been placed into service and no depreciation expense has yet been
      recorded


12


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





**NOTE
      5 -** **Debt**





A
      summary
      of the outstanding long-term debt is as follows: (in thousands)





**March
                31,**
              **2006**
            
            **June
                30,**
              **2005****(Unaudited)**Advised
                credit facility
            
            $
            --
            
            $
            9,970Revolving
                credit facility
            
            
            3,241
            
            
            --Real
                estate term loan
            
            
            11,933
            
            
            7,061Machinery
                and equipment term loan
            
            
            3,442
            
            
            --Capital
                lease
            
            
            95
            
            
            --18,711
            
            
            17,031Less:
                amount representing interest on capital lease
            
            
            2
            
            
            --Total
                long-term debt
            
            
            18,709
            
            
            17,031Less:
                current maturities
            
            
            4,826
            
            
            10,340Long-term
                debt, less current maturities
            
            $
            13,883
            
            $
            6,691





Bank
      Debt


In
      March,
      2004, the Company obtained a $21 million credit facility consisting of (i)
      a
      $7.4 million mortgage loan for the purchase of the Company's second
      manufacturing plant in Brookhaven, NY; (ii) $8.6 million of credit lines
      primarily to acquire new equipment and for renovations, and (iii) a $5 million
      general line of credit. During
      fiscal 2005, the Company and the Bank informally agreed to consolidate the
      credit lines into one advised credit line totaling $13.6 million. As a result,
      the $13.6 million of advances was not allocated to each individual credit line.
      Because the Company and the Bank did not determine the amount of loans that
      were
      available to be converted into 60 month term loans, the $13.6 million of
      advances were classified as current.





This
      credit facility was collateralized by substantially all assets of the Company.
      At the option of the Company, interest was calculated at (i) LIBOR plus 1.5%
      for
      3 to 36 month periods, or at (ii) the Bank's then fixed prime rate.





On
      February 9, 2006, the Company entered into a new four-year financing arrangement
      with Wells Fargo Business Credit (“WFBC”). This financing agreement provides for
      a total credit facility of $41.5 million comprised of:


·  $22.5
      million revolving credit facility


·  $12.0
      million real estate term loan


·  $
      3.5
      million machinery and equipment (“M&E”) term loan


·  $
      3.5
      million additional / future capital expenditure facility





The
      funds
      made available through this facility paid down, in its entirety, the $20.45
      million owed on the previous credit facility.





The
      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 $9.0 million. The $12.0 million loan for the real estate
      in Brookhaven, NY is payable in equal monthly installments of $66,667 plus
      interest through February 2010 at which time the remaining principal balance
      is
      due. The $3.5 million M&E loan is payable in equal monthly installments of
      $58,333 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 $3.5 million in borrowings amortized over 60 months.


13


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





**NOTE
      5 -** **Debt** ,
      continued





The
      WFBC
      credit facility is collateralized by substantially all of the assets of the
      Company. In addition, the Company will be required to comply with certain
      financial covenants, and as of March 31, 2006, the Company was in default
      of one covenant. Subsequent to March 31, 2006, this default has been cured
      by a modification to the covenant by an amendment to the WFBC credit
      facility. 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, 2006, the interest rate on this debt was 7.25%. Pursuant to the
      requirements of the WFBC agreement, the Company has put in place a lock-box
      arrangement. The Company will incur a fee of 25 basis points per annum on any
      unused amounts of this credit facility.





With
      respect to the real estate term loan, the Company entered into an interest
      rate
      swap contract, whereby the Company pays a fixed rate of 7.56% per annum and
      while the original term is the prime rate less 0.5%. The swap matures in 2010.
      The swap is a Cash Flow hedge (i.e. a hedge against interest rates increasing).
      As all of the critical terms of the swap and loan match, it is 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 swap at March
      31, 2006 was approximately $12,000.





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,
      have provided limited personal guarantees, and have pledged securities with
      a
      minimum aggregate value of $7.5 million as security for the credit facility.
      Further, the Company is required to raise a minimum of $7.0 million through
      the
      sale of equity or subordinated debt by June 30, 2006. The shareholders pledges
      of marketable securities will be released by WFBC upon the Company achieving
      certain milestones.





Capital
      Lease


The
      Company has acquired equipment under a capital lease with annual interest at
      3.26% that expires in April 2007. The asset and liability under the capital
      lease is recorded at the fair value of the asset. The cost of the asset included
      in machinery and equipment is $0.13 million for the nine month period ended
      March 31, 2006. The asset is depreciated over its estimated useful
      life.








**NOTE
      6-** **Income
      Taxes**





At
      March
      31, 2006, the Company has remaining Federal net operating loss carryforwards
      (“NOLs”) of approximately $14.2 million and State NOLs of approximately $13.6
      million both expiring at various times through 2025. Pursuant to Section 382
      of
      the Internal Revenue Code regarding substantial changes in Company ownership,
      future utilization of these NOLs will be limited. As of March 31, 2006, the
      Company has determined that it is more likely than not, that the Company will
      utilize all of the Federal NOLs in the future. The Company recorded a valuation
      allowance for approximately 30% of the State NOLs which the Company does not
      anticipate utilizing due to State limitations.





In
      calculating its tax provision for the nine month period ended March 31, 2006,
      the Company applied an aggregate effective tax rate of approximately 38% thereby
      creating an approximate $0.80 million income tax benefit and increased its
      deferred tax asset by a like amount.


14


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





**NOTE
      7-** **Earnings
      Per Share**





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




**Three
                  Months Ended**
                **March
                  31,**
              ****
              **Nine
                  Months Ended**
                **March
                  31,**
              ********
              ****
              **2006**
              ****
              **2005**
              ****
              **2006**
              ****
              **2005**Numerator:Net
                  (loss) income
              
              $
              (1,499
              )
              $
              (634
              )
              $
              (1,336
              )
              $
              405Less:
                  Preferred stock dividends
              
              
              98
              
              
              41
              
              
              181
              
              
              124Less:
                  Net income attributable to Series K preferred stockholders
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              19Numerator
                  for basic EPS
              
              
              (1,597
              )
              
              (675
              )
              
              (1,517
              )
              
              262Effect
                  of dilutive securities:Net
                  income attributable to Series K preferred stockholders
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              18Numerator
                  for diluted EPS
              
              $
              (1,597
              )
              $
              (675
              )
              $
              (1,517
              )
              $
              280Denominator:Denominator
                  for basic EPS weighted average
                shares
                  outstanding
              
              
              32,464
              
              
              24,967
              
              
              32,423
              
              
              24,967Effect
                  of dilutive securities:Convertible
                  Series K preferred stock
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              37,649Convertible
                  Series A, B, C and J preferred stocks
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              7Stock
                  options
              
              
              N/A
              
              
              N/A
              
              
              N/A
              
              
              5,079Denominator
                  for diluted EPS
              
              
              32,464
              
              
              24,967
              
              
              32,423
              
              
              67,702Basic
                  EPS
              
              $
              (0.05
              )
              $
              (0.03
              )
              $
              (0.05
              )
              $
              0.01Diluted
                  EPS
              
              $
              (0.05
              )
              $
              (0.03
              )
              $
              (0.05
              )
              $
              0.00





As
      of
      March 31, 2006, the total number of common shares outstanding and the number
      of
      common shares potentially issuable upon exercise of all outstanding stock
      options and conversion of preferred stocks (including contingent conversions)
      is
      as follows:





Common
                stock outstanding - March 31, 2006
            
            
            32,463,607Stock
                options and warrants outstanding
            
            
            12,791,870Common
                stock issuable upon conversion of preferred stocks:Series
                A
            
            
            15,222Series
                A-1 (maximum contingent conversion) - (a)
            
            
            4,855,389Series
                B
            
            
            292Series
                C
            
            
            5,571Series
                K - (b)
            
            
            31,373,875Total
                - (c)
            
            
            81,505,826





(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.


15


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





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





(b)
            On
                June 4, 2006 and on each anniversary date thereon, through June 4,
                2010,
                292,913 Series K shares will automatically convert into 6,274,775
                shares
                of the Company’s common stock.




(c)
            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 February
                10, 2016
                (the end of the current vesting and conversion
                periods).





The
      Company has received proxy statements from a majority of its
      shareholders to amend the Certificate of Incorporation of the
      Company and increase the number of authorized shares to an amount to be
      determined by the Company’s Chief Executive Officer.  The number of
      authorized shares will be increased to an amount of at least the
      number of common shares that would be outstanding upon exercise of all
      outstanding stock options, warrants and conversion of all preferred
      stocks.





**NOTE
        8 -** **Equity
        Securities**
 
 Common
        Stock, Stock Options and Stock Appreciation Rights
 
 On
        July
        1, 2005, the Company entered into a common stock subscription agreement to
        sell
        125,000 shares of the Company’s common stock to an employee at a purchase price
        of $1.07 per share of common stock.
 
 During
        the nine months ended March 31, 2006, the Company granted 332,500 options
        to
        purchase the Company’s common stock as follows:
 
 ·
              100,000
                  performance-based options to employees having exercise prices ranging
                  from
                  $1.24 to $1.26 and which vest 25% June 30, 2006 and each subsequent
                  June
                  30ththrough June 30, 2009;
 ·
              225,000
                  non performance-based options to employees having an exercise prices
                  ranging from $1.24 to $1.40 and which vest ratably over periods
                  ranging
                  from three to five years from December 31, 2005 to June 30, 2010;
 ·
              7,500
                  fully-vested options to a former Director of the Company, having
                  an
                  exercise price of $1.64.
 
 For
        the
        nine months ended March 31, 2006, the fair values of Company common stock
        options granted to employees were estimated on the date of grant using the
        Black-Scholes option-pricing model with the following assumptions: (1) expected
        volatility ranging from 73.42% to 74.51% (2) risk-free interest rate ranging
        from 4.34% to 4.77% and (3) expected average lives ranging from 1.5 years
        to 7.5
        years.
 
 Additionally,
        during the nine months ended March 31, 2006, the Company issued the following
        Stock Appreciation Rights (“SARs”) and modified a previous option to purchase
        the Company’s common stock as follows:
 
 ·
              As
                  consideration for past services provided by a executive officer
                  of the
                  Company who suddenly and tragically passed away, the Company’s board of
                  directors modified a previous grant of 450,000 options, first by
                  immediately vesting the unvested portion and secondly to extend
                  the date
                  upon which they can be exercised to March, 2009. As a result of
                  this
                  transaction, the Company recognized as expense approximately $316,000.
                  The
                  Company also granted 100,000 SARs exercisable at $1.55 and having
                  a
                  maximum cash value of $250,000 payable to the executive officers’ estate.
                  The SARs are recorded at fair value and are marked to market at
                  each
                  reporting period. At March 31, 2006, the Company recognized $75,000
                  as
                  expense. The SARs must be exercised between July 1, 2008 and December
                  31,
                  2008.
  
 INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
 **NOTE
        8 -** **Equity
        Securities** ,
        continued ****
 
 Subsequent
        to March 31, 2006, the Company issued 150,000 options to purchase the Company’s
        common stock to a consultant in settlement of certain accrued expenses. The
        fully vested options have an exercise price of $0.68 and must be
        exercised no later than April 7, 2007.
  Preferred
        Stock
 
 In
        August
        and December 2005, the Board of Directors, declared dividends of $41,381
        and
        $82,762, respectively, in accordance with the terms set forth in the Series
        A-1
        Cumulative Convertible Preferred Stock (“A-1 shares”). The A-1 shares have a
        cumulative annual dividend of $0.0341 per share. The declared dividends were
        cumulative through December 31, 2005. Cumulative declared and unpaid dividends
        through June 30, 2005 totaling $165,558 were paid in
 December,
        2005. As of March 31, 2006 the Company’s Board of Directors had not declared any
        dividend on the A-1 shares for the period January 1, 2006 through March 31,
        2006. Such undeclared dividends amounted to $41,381.
 
 In
        February 2006, the Company redeemed 672 shares of its Series C Convertible
        Preferred Stock (“Series C”) for a nominal amount. The Series C converts into
        common stock at 50 shares of Series C for one share of the Company’s common
        stock. The Company settled the transaction with cash in lieu of issuance
        of
        common stock.
 
 The
        Company’s previous filings with the Securities and Exchange Commission stated
        that the dividend rate on the Company’s Series A Cumulative Convertible
        Preferred Stock (the “Series A”) were $0.10 per share per year.  Subsequent
        to the end of the quarter, the Company performed an analysis of its outstanding
        preferred stock and discovered that the dividend rate on the Series A is
        actually $10.00 per share per year.  There are currently 7,611 shares of
        Series A outstanding with accumulated dividends of approximately $837,000
        which can only be paid when and if declared by the Company’s Board of
        Directors.  There is no present intention to declare or pay these
        dividends.
 
 Subsequent
        to the date of this report, the Company expects it will conclude
        negotiations with the holder of a majority of the outstanding shares of Series
        A
        in order to make all Series A automatically convert into the Company’s common
        stock at the present conversion rate as determined under the Series A
        Certificate of Designations, Preferences and Rights.  The Company does not
        believe that the conversion of the Series A will be materially dilutive to
        the
        Company’s existing stockholders.


**NOTE
      9-** **401k
      Plan**




In
      January 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 $59,000 for the nine months ended March 31,
      2006.




**NOTE
      10 -** **Economic
      Dependency**





Major
      Customers


The
      Company had the following customer concentrations for the three and nine month
      periods ended March 31, 2006 and 2005:


Sales
      -
      Percent of Revenue





**Three
                Months Ended**
              **March
                31,**
            ****
            **Nine
                Months Ended**
              **March
                31,**
            ********
            ****
            **2006**
            ****
            **2005**
            ****
            **2006**
            ****
            **2005**Customer
                “A”
            
            
            24
            %
            
            *
            
            
            14
            %
            
            *Customer
                “B”
            
            
            15
            %
            
            *
            
            
            14
            %
            
            *Customer
                “C”
            
            
            10
            %
            
            *
            
            
            12
            %
            
            *Customer
                “D”
            
            
            *
            
            
            28
            %
            
            10
            %
            
            23
            %Customer
                “E”
            
            
            *
            
            
            18
            %
            
            *
            
            
            24
            %Customer
                “F”
            
            
            *
            
            
            11
            %
            
            *
            
            
            14
            %





*  Sales
      to
      customer were less than 10%


17


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





**NOTE
      10 -** **Economic
      Dependency** ,
      continued





Accounts
      Receivable (in thousands)





**March
                31, 2006**Customer
                “A”
            
            $
            2,242Customer
                “B”
            
            
            1,434Customer
                “C”
            
            
            2,228Customer
                “D”
            
            
            2,561





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





Major
      Suppliers





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.
      For the three and nine months ended March 31, 2005, the Company purchased
      materials from three suppliers totaling approximately 75% and 73% of purchases,
      respectively. At March 31, 2006 and 2005, aggregate amounts due to these
      suppliers included in accounts payable, were approximately $4.4 million and
      $3.8
      million, respectively.




**NOTE
      11 -** **Related
      Party Transactions**





**Rents**


The
      Company leases its business premises located in Hauppauge, New York,
      (“Premises”) from an entity owned by three stockholders, one of which is an
      officer of the Company, under a noncancelable lease expiring in October 2019,
      and is obligated to pay minimum annual rent of $480,000, plus property taxes,
      insurance, maintenance and other expenses related to the Premises. The Company
      believes that the aggregate lease costs for the premises are less than those
      for
      comparable facilities in the area.





Upon
      a
      change in control of the Company, as defined, and every three years thereafter,
      the annual rent will be adjusted to fair market value, as determined by an
      independent third party.





**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 $1,022,500 (including costs of $22,500)
      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.


18


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





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





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




**NOTE
      12 -** **Contingencies**





**Litigation**





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.





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





**Significant
      Contracts**




Tris
      Pharmaceuticals, Inc


The
      Company entered into two agreements with Tris Pharma, Inc. (“Tris”). One of the
      agreements is for the development and licensing of twenty-five liquid generic
      products (“Liquids Agreement”). According to the terms of the Liquids Agreement,
      Tris is to develop and deliver the properties, specifications and formulations
      (“Technical Packages”) necessary to effectuate a technology transfer to the
      Company for the twenty-five generic liquid pharmaceutical products. The Company
      will then utilize this information to obtain all necessary approvals and
      manufacture and market the products. Further, the Liquids Agreement provides
      the
      Company with a perpetual license of all technology and components of the
      Technical Packages necessary to produce the liquid products that are the subject
      of the agreement. It also allows the Company the use of the technology for
      other
      products in exchange for an additional fee. In the event that Tris delivers
      twenty-five successful Technical Packages, of which there can be no assurance,
      the Company will pay Tris approximately $3,000,000. In accordance with the
      terms
      of this agreement, the Company will make payments as various milestones are
      achieved. In addition, Tris is to receive


a
      royalty
      of between 10% and 12% of net profits resulting from the sales of each product.
      The Company is entitled to offset the royalty payable to Tris each year, at
      an
      agreed upon rate, to recoup the development fees paid to Tris under the Liquids
      Agreement.





According
      to the terms of the second agreement, as amended, for the solid dosage products
      (“solids”), 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
      softgel products. Further, the terms of this amendment will require the Company
      to pay to Tris $750,000, based upon various Tris milestone achievements. 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 $4,500,000 to Tris, whether
      or
      not regulatory approval is obtained for any of the solids products. The
      agreement for solids 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.


19


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





**NOTE
      12 -** **Contingencies** ,
      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 $300,000 after it has paid the initial aggregate
      amounts associated with the original agreement.





For
      the
      three and nine month periods ended March 31, 2006, the Company recorded as
      a
      research and development expense approximately $0.40 and $1.59 million,
      respectively, in connection with these agreements. Further, since inception,
      we
      have incurred approximately $2.99 million of research and development costs
      associated with the Tris agreements of which the Company has paid $2.85 million
      as of March 31, 2006.





The
      combined costs of these agreements could aggregate up to $7.8 million. The
      balance on the liquid agreement of $2.75 million could be paid within three
      years if all milestones are reached. The balance on the solids agreement, as
      amended, of $2.2 million could be paid within two years if all milestones are
      reached.


20





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





**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.





We
      currently manufacture and market 23 generic drug products, which represent
      various oral dosage strengths for 18 unique products. Of these, we hold 8
      approved Abbreviated New Drug Applications ("ANDA") for 16 of these products.
      The remaining products are manufactured under an over-the-counter monograph
      or
      are drugs which do not otherwise require ANDAs.





We
      are
      continuing our expansion plan with the goal of transforming the Company into
      a
      full service generic drug products provider. During the nine months ended March
      31, 2006, we executed our product development initiatives through increased
      research and development spending. We now have new products under development,
      for which we plan to file, or have already filed, an ANDA, in each of our
      targeted product areas: female hormone products, scheduled narcotics, products
      requiring special release characteristics, liquid products, softgel products
      and
      products coming off patent. We plan to file ANDAs for products in each of these
      areas.





As
      part
      of our expansion plan, we implemented a marketing strategy focused on broadening
      our customer base and increasing direct sales versus selling to wholesalers
      or
      distributors. Pursuant to our marketing strategy, during the quarter ended
      December 31, 2005, we launched Sulfamethoxazole
      and Trimethoprim (which is known as Bactrim) in two strengths which resulted
      in
      approximately $3.0 million in net sales through March 31, 2006.




On
      February 9, 2006, in order to support our expansion plan and attendant research
      and development spending, we closed on a secured credit facility of up to $41.5
      million with Wells Fargo Business Credit. We used approximately $20.4 million
      of
      the proceeds received from Wells Fargo to pay off our previous credit facility
      with HSBC. As part of the transaction, three stockholders, each of whom is
      related to our Chairman of the Board of Directors, and one of whom is our Chief
      Operating Officer, have provided limited personal guarantees, and have pledged
      securities with a minimum aggregate value of $7.5 million as collateral. One
      of
      the requirements of the credit line is that we raise a minimum of $7.0 million
      through an offering of our equity by June 30, 2006. We are currently involved
      in
      active negotiations for a private offering of our equity to meet this
      requirement, as well as our needs under our expansion plan.





During
      the first six months of our fiscal year ending June 30, 2005, (July 1, 2004
      through December 31, 2004), we spent approximately $0.5 million for research
      and
      development. In January 2005 we launched our current plan. During the first
      six
      month period in which the plan was in effect, (January 2005 through June 30,
      2005), we spent approximately $3.5 million on research and development. During
      the nine-month period ended March 31, 2006, we spent over $7.0 million on
      research and development. We will continue to expand our capabilities and
      capacities in research and development to meet the requirements of our expansion
      plan. As such, we will spend additional funds on research and development at
      an
      increased rate than we have over the past few quarters.





During
      the nine months ended March 31, 2006, we filed 10 ANDAs. We believe our
      increased research and development spending, will enable us to file ANDAs at
      an
      increasing rate and anticipate exceeding our previous projection of 25 ANDAs
      for
      the period July 1, 2005 through June 30, 2007 though there is no assurance
      we
      will be able to do so.


21





**Results
      of Operations —**


**Summary**





Net
      sales
      of $16.1 million for the three month period ended March 31, 2006 fell just
      short
      of our record quarter of $16.2 million set last quarter. Net sales for the
      nine
      month period of $46.9 million surpassed net sales during the same nine month
      period last year by $18.3 million. During this fiscal year we began shipments
      of
      two new products: our female hormone therapy product which, for the year to
      date, has accounted for approximately $5.5 million of net sales, yielding nearly
      four times our historical average in gross profit percentage, and
      Sulfamethoxazole and Trimethoprim (which is known as Bactrim) in two strengths,
      400mg / 80mg and 800mg / 160mg (“Bactrim”), which together, accounted for net
      sales of approximately $3.0 million.





As
      a
      result of our growth, our total operating expenses during the three and nine
      months ended March 31, 2006, increased $3.0 million and $8.8 million,
      respectively, compared to the same periods in the prior year.





**Net
      sales by product:** ( in
      thousands)




Three
                Months Ended March 31,**2006**
                  **Sales**
            
            **%
                    of**
                  **Sales**
            
            **2005**
                      **Sales**
            
            **%
                    of**
                  **Sales**Ibuprofen
            $
            8,888
            
            
            55
            
            $
            6,188
            
            
            58Allopurinol
                & Atenolol
            
            31
            
            
            -0-
            
            
            2,388
            
            
            22Naproxen
            
            2,354
            
            
            15
            
            
            517
            
            
            5Female
                hormone product
            
            1,569
            
            
            10
            
            
            -0-
            
            
            -0-Bactrim
            
            1,496
            
            
            9
            
            
            -0-
            
            
            -0-All
                Other Products
            
            1,772
            
            
            11
            
            
            1,577
            
            
            15Total
            $
            16,110
            
            
            
            
            $
            10,670







**Nine
                Months Ended March 31,****2006**
                    **Sales**
            ****
            **%
                      of**
                    **Sales**
            ****
            **2005**
                    **Sales**
            ****
            **%
                      of**
                    **Sales**Ibuprofen
            $
            25,564
            
            
            55
            
            $
            17,891
            
            
            62Allopurinol
                & Atenolol
            
            2,288
            
            
            5
            
            
            5,589
            
            
            20Naproxen
            
            5,751
            
            
            12
            
            
            1,320
            
            
            5Female
                hormone product
            
            5,471
            
            
            12
            
            
            -0-
            
            
            -0-Bactrim
            
            2,976
            
            
            6
            
            
            -0-
            
            
            -0-All
                Other Products
            
            4,819
            
            
            10
            
            
            3,761
            
            
            13Total
            $
            46,869
            
            
            
            
            $
            28,561




As
      indicated in the tables above, our net sales increased $5.4 and $18.3 million
      when comparing the three and nine month periods ended March 31, 2006 to the
      same
      periods in the prior year. Significant components include:




·
            For
                the three and nine month periods ended March 31, 2006, net sales
                of
                Ibuprofen increased $2.7 million and $7.67 million, respectively,
                or 43.6%
                and 42.9%, respectively, due, in part to an expanded customer base,
                as
                well as improvements in production and packaging. We believe sales
                of
                Ibuprofen should remain at approximately the current level for the
                balance
                of this fiscal year, however, there can be no assurance that this
                will
                occur.




22




·
            Both
                Allopurinol and Atenolol are manufactured for and shipped to one customer
                based on quantities ordered by that customer. When comparing net
                sales for
                three and nine month periods ended March 31, 2006 and 2005 there
                was a
                decrease of $2.36 million and $3.30 million, respectively. A component
                of
                our plan was to significantly reduce our dependency on sales from
                contract
                manufacturing arrangements. We anticipate that revenue derived from
                sales
                of these two products will continue to decrease during the remainder
                of
                the current fiscal year. The manufacturing capacity gained from the
                decrease in production of these two products is being used for other
                products. Additionally, with respect to our agreements with United
                Research Laboratories, Inc. and Mutual Pharmaceutical Company, Inc.,
                we
                manufacture two other products which have nominal
                sales.




·
            As
                a result of our marketing initiatives, we have been successful in
                obtaining new customers for our products. As discussed in previous
                filings, we were awarded a U.S. Government contract to supply Naproxen
                to
                various governmental agencies. The contract is for approximately
                $3.9
                million for the twelve month period beginning September 22, 2005.
                As a
                result, our sales for Naproxen increased by $1.84 million in the
                current
                quarter compared to same quarter of the prior year and $4.43 million
                when
                comparing the nine months ended March 31, 2006, to the same period
                in the
                last fiscal year. We believe that future net sales of Naproxen should
                remain at current sales level for the balance of the fiscal year,
                however
                there can be no assurance that this will
                occur.




·
            As
                stated above, we began shipping a female hormone therapy product
                during
                this current fiscal year in accordance with the terms of a multi-year
                agreement. Revenue from this product, which is sold in two strengths
                to
                one customer, aggregated $1.57 million and $5.47 million during the
                three
                and nine month period ended March 31, 2006, respectively. This product
                generates a higher gross margin compared to our other products.




·
            We
                made our initial shipments of Bactrim during the three month period
                ended
                December 31, 2005. This quarter we recognized $1.5 million and since
                inception, $3.0 million. There is no assurance this level of sales
                will
                continue.




·
            A
                significant component of “all other products” is Hydrocodone-7.5
                mg/Ibuprofen-200 mg, our generic version of Vicoprofen®. We launched this
                product during the three month period ended December 31, 2004. As
                this
                product, and Reprexain® (Hydrocodone - 5.0 mg/Ibuprofen-200 mg), are sold
                to and marketed by, Watson Pharmaceuticals, Inc., it is difficult
                to
                project future sales. The results for the periods reported include
                additional revenue derived from a profit sharing arrangement for
                these
                products.




**Cost
      of Sales / Gross Profit**





During
      the three and nine month periods ended March 31, 2006, prices of our raw
      materials, referred to as “active pharmaceutical ingredients,” (“API”) in
      general remained relatively constant when compared to the prior year. While
      no
      assurance can be given, we believe that our API costs should continue at the
      present rates for the next several months. However, costs associated with
      packaging components have increased and are likely to continue at their present
      level or possibly increase further in the foreseeable future. The remaining
      components of our cost of sales, primarily direct labor and overhead have,
      as a
      percentage of net sales, decreased slightly during the three and nine months
      ended March 31, 2006. However, we have incurred increased costs associated
      with
      increased production and supervisory salaries, as well as hiring and training
      staff for our second facility, which we anticipate will be operational sometime
      in 2006. Additionally, we experienced increases in general overhead costs such
      as product liability insurance, workers compensation insurance, medical benefits
      and utilities. We believe these higher costs will likely continue for the near
      future.





Our
      total
      gross profit percentage for the three months ended March 31, 2006 was 24.8%,
      an
      increase of 3.5 percentage points compared to 21.3% for the three months ended
      March 31, 2005. Our total gross profit percentage for the nine months ended
      March 31, 2006 was 28.1%, an increase of 4.3 percentage points compared to
      23.8%
      for the nine months ended March 31, 2005. This increase is primarily the result
      of sales of our female hormone product and Bactrim, both of which generate
      higher gross profits than our traditional product line, offset slightly by
      higher costs of goods sold.


23





Gross
      margin percentage can fluctuate as a result of many factors, such as changes
      in
      our selling price or the cost of our API, as well as increases in cost of labor
      and general overhead. Fluctuations in our sales volume and product mix affect
      gross margin dollars. As part of our expansion plan, we are seeking to add
      new
      products with higher margins, however, there can be no assurance that sales
      will
      increase or cost of sales will not increase disproportionately.




**Research
      and Development Expenses**





As
      described above, as part of our plan, during the three and nine month periods
      ended March 31, 2006, we continued to take significant steps to expand of our
      product line. For the three and nine month periods ended March 31, 2006, we
      incurred research and development expenses of approximately $2.98 million and
      $7.01 million, respectively, as compared to approximately $1.66 million and
      $2.2
      million, respectively for the same periods in the prior fiscal year.





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





The
      Company entered into two agreements with Tris Pharma, Inc. (“Tris”). One of the
      agreements is for the development and licensing of twenty-five liquid generic
      products (“Liquids Agreement”). According to the terms of the Liquids Agreement,
      Tris is to develop and deliver the properties, specifications and formulations
      (“Technical Packages”) necessary to effectuate a technology transfer to the
      Company for the twenty-five generic liquid pharmaceutical products. The Company
      will then utilize this information to obtain all necessary approvals and
      manufacture and market the products. Further, the Liquids Agreement provides
      the
      Company with a perpetual license of all technology and components of the
      Technical Packages necessary to produce the liquid products that are the subject
      of the agreement. It also allows the Company the use of the technology for
      other
      products in exchange for an additional fee. In the event that Tris delivers
      twenty-five successful Technical Packages, of which there can be no assurance,
      the Company will pay Tris approximately $3,000,000. In accordance with the
      terms
      of this agreement, the Company will make payments as various milestones are
      achieved. In addition, Tris is to receive a royalty of between 10% and 12%
      of
      net profits resulting from the sales of each product. The Company is entitled
      to
      offset the royalty payable to Tris each year, at an agreed upon rate, to recoup
      the development fees paid to Tris under the Liquids Agreement.





According
      to the terms of the second agreement, as amended, for the solid dosage products
      (“solids”), 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
      softgel products. Further, the terms of this amendment will require the Company
      to pay to Tris $750,000, based upon various Tris milestone achievements. 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 $4,500,000 to Tris, whether
      or
      not regulatory approval is obtained for any of the solids products. The
      agreement for solids also provides for an equal sharing of net profits for
      each
      product, except for one product, that is successfully sold and marketed, after
      the deduction and reimbursement of all litigation-related and certain other
      costs. The excluded product provides for a profit split of 60% for the Company
      and 40% for Tris. Further, this agreement provides the Company with a perpetual
      royalty-free license to use all technology necessary for the solid products
      in
      the United States, its territories and possessions.





In
      April,
      2006, the Company and Tris further amended the solids agreement. This second
      amendment requires Tris to deliver a Technical Package for one additional solid
      dosage product. Further, terms of this second amendment will require the Company
      to pay to Tris an additional $300,000 after it has paid the initial aggregate
      amounts associated to the original agreement.





For
      the
      three and nine month periods ended March 31, 2006, the Company recorded as
      a
      research and development expense approximately $0.40 and $1.59 million,
      respectively, in connection with these agreements. Further, since inception,
      we
      have incurred approximately $2.99 million of research and development costs
      associated with the Tris agreements.


24





During
      the nine months ended March 31, 2006, we filed 10 ANDAs. We believe that with
      our increased research and development spending, we will be able to file ANDAs
      at an increasing rate and anticipate exceeding our previous projection of twenty
      five ANDAs for the period July 1, 2005 through June 30, 2007.





**Selling,
      General and Administrative Expenses**





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





During
      the three months ended March 31, 2006, selling, general and administrative
      expenses increased approximately $1.68 million to approximately $3.26 million,
      or 20.3% of net sales from approximately $1.58 million or 14.8% of net sales,
      during the same period in 2005. As consideration for past services provided
      by a
      deceased officer who had a central role in preparation and execution of our
      expansion plan, the Company’s board of directors modified a previous grant of
      450,000 options by accelerating their vesting and by extending the date until
      which they can be exercised to March, 2009. The modification to the 450,000
      stock option grant resulted in the one time recognition, during the quarter
      ended March 31, 2006, of a non-cash charge of approximately $0.32 million.
      We
      also granted 100,000 Stock Appreciation Rights (“SARs”) to the deceased
      officer’s estate, having a maximum cash value of $0.25 million. The expense
      related to the SARs are recorded at fair value and will be marked to market
      each
      reporting period with changes recorded as income or expense in the period will
      be marked to market. We recognized $0.08 million of expenses associated to
      the
      SARs during the quarter ended March 31, 2006. Additionally, we accrued $0.44
      million for compensation associated with our obligation pursuant to the
      officer’s employment agreement. As a result of the foregoing, we recognized an
      aggregate of approximately $0.83 million of compensation expense during the
      three months ended March 31, 2006. Excluding the non-cash charge of $0.32
      million discussed above, our adoption of the fair value recognition provisions
      of Statement of Financial Accounting Standards (“SFAS”) No. 123(Revised
      2004), “Share-Based Payment,” (“SFAS 123(R)”) resulted in recognizing a non-cash
      charge of $0.27 million. Adoption of SFAS 123(R) requires us to report a
      non-cash expense for the ratable portion of the fair value of employee stock
      option awards of unvested stock options over the remaining vesting period.
      Previously we elected to follow the intrinsic value method in accounting for
      our
      stock-based employee compensation arrangements as defined by Accounting
      Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to
      Employees,” and related interpretations including Financial Accounting. Another
      component of the increase in selling, general and administrative expenses was
      increased wages resulting from staffing requirements associated with our plan
      along with associated payroll taxes and benefits aggregating approximately
      $0.85
      million. Other key items include: commissions and freight out as a result of
      higher sales, real estate taxes associated to the second facility and general
      insurance. We believe this level of selling, general and administrative expenses
      will remain throughout the fiscal year.





During
      the nine month period ended March 31, 2006 our selling, general and
      administrative expenses increased approximately $4.01 million to approximately
      $7.90 million, or 16.9% of net sales from approximately $3.89 million or 13.6%
      of net sales incurred during the nine month period ended March 31, 2005. Taking
      into consideration the information described above detailing the increases
      of
      $0.83 million which were recognized during for the three month period ended
      March 31, 2006, other significant components of this increase are: salaries,
      including payroll taxes and benefits of $1.83 million; commissions of $0.25
      million and non-cash expenses of $0.69 million.





**Income
      Taxes**





For
      the
      three and nine month periods ended March 31, 2006 and 2005 we applied an
      effective tax rate of approximately 38%.


25





**Liquidity
      and Capital Resources**





We
      currently finance our operations and capital expenditures through cash flows
      from operations and bank loans. Net cash provided by operating activities for
      the nine months ended March 31, 2006, was $5.81 million, compared to $1.34
      million for the nine months ended March 31, 2005. Significant factors comprising
      the cash provided in operating activities include: net loss of $1.34 million,
      increases in accounts payable and accrued expenses payable of $6.80 million,
      an
      increase in deferred revenue of $2.30 million, offset by decreases of $2.26
      million in accounts receivable, $0.35 million in inventory and prepaid expenses
      and other current assets of $0.64 million. The increase in accounts payable
      accrued expenses and other payables are primarily attributable to increases
      in
      purchases due to greater sales volume as well as increased research and
      development costs. At March 31, 2006, we had $0.25 million in cash and cash
      equivalents, compared to $0.54 million at June 30, 2005. Additionally, we
      reported depreciation and amortization of $1.06 million. We also recognized
      a
      non cash charge of $1.00 million as a result of adoption of SFAS 123 (R). Other
      items affecting our net cash provided by operating activities aggregated
      decreases of $0.78 million.





Net
      cash
      provided by financing activities of $1.11 million for the nine months ended
      March 31, 2006, was a result of proceeds from a new credit facility offset
      by
      the payoff of the old credit facility, the pay down of long term debt of $0.38
      million and the deferral of financing costs of $0.27 million. A component of
      our
      current plan is the completion of renovations to our second facility along
      with
      the installation of additional equipment for manufacturing, packaging and
      research and development. Accordingly, during the nine month period ended March
      31, 2006, our net cash used in investing activities of $7.23 million, net,
      was
      for new equipment and improvements.





It
      should
      be noted that as part of our business plan, during the three and nine month
      periods ended March 31, 2006, we incurred $2.98 million and $7.01 million of
      research and development costs. We believe that, according to our business
      plan,
      our research and development costs will likely exceed this current rate, for
      the
      forseeable future.





Although
      we entered into a purchase agreement for land in Ahmedabad, India on which
      we
      planned to build a facility for research, development and manufacturing, we
      decided to focus our efforts in the United States at this time and are not
      currently pursuing our previous plan to build the Indian facility.  We are
      continuing development and capital investment in our new Brookhaven, NY facility
      which already houses some of our expanded research and development department
      and will also be used for manufacturing.  We believe the Brookhaven
      facility will be fully operational by the end of calendar 2006.





Bank
      Financing





On
      February 9, 2006, we entered into a new four-year financing arrangement with
      Wells Fargo Business Credit (“WFBC”). This new $41.5 million credt facility
      consists of:


·  $22.5
      million revolving credit facility;


·  $12.0
      million real estate term loan;


·  $
      3.5
      million machinery and equipment (M&E) term loan; and


·  $
      3.5
      million additional / future capital expenditure facility.





The
      funds
      made available through this facility paid down, in its entirety, the $20.45
      million owed on the previous credit facility.





The
      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 $9.0 million. The $12.0 million loan for the real estate in
      Brookhaven, NY is payable in equal monthly installments of $66,667 plus interest
      through February 2010 at which time the remaining principal balance is due.
      The
      $3.5 million M&E loan is payable in equal monthly installments of $58,333
      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
      $3.5 million in borrowings amortized over 60 months.


26





The
      WFBC
      credit facility is collateralized by substantially all of our assets. In
      addition, we are required to comply with certain financial covenants. The term
      of the credit facility is four years. The revolving credit facility and term
      loans will be repaid applying an interest factor of the prime rate less 0.5%
      or,
      at our option, LIBOR plus 250 basis points. We have elected to fix the rate
      of
      the real estate term loan at 7.56% per annum by purchasing an interest rate
      swap
      contract. Pursuant to the agreement, we have a lock-box arrangement.
      Additionally, we will incur a fee of 25 basis points per annum on any unused
      amounts of the credit facility.





Three
      of
      our shareholders, each of whom is related to the Chairman of our Board of
      Directors, and one of whom is our Chief Operating Officer, were required to
      pledge marketable securities aggregating $7.5 million. Further, we are required
      to raise a minimum of $7.0 million through the sale of equity or subordinated
      debt by June 30, 2006. The pledges of marketable securities will be released
      by
      WFBC upon us achieving certain milestones.





As
      set
      forth above, we entered into agreements with Tris for the development and
      delivery of over thirty new Technical Packages. The combined costs of these
      agreements could aggregate to $7.8 million of which we have paid $2.85 million
      as of March 31, 2006. The balance on the liquid agreement of $2.75 million
      could
      be paid within three years if all milestones are reached. The solids agreement,
      as amended, of $2.20 million could be paid within two years if all milestones
      are reached.





We
      will
      have to spend a significant amount of money on research and development to
      continue our business plan. To obtain a portion of the necessary funds, as
      described above we completed the new $41.5 million credit facility. While we
      will continue to utilize this new facility the timing of our expansion plan
      will
      be dependent on our ability to raise additional capital through either new
      or
      additional debt financing or through an equity investment. As such, we have
      engaged an investment banking firm to assist us and are actively negotiating
      to
      complete an equity investment. There can be no assurance that we will be
      able to complete such a transaction. If we are unable to obtain sufficient
      funds, we will have to either delay or scale back on our expansion plan and
      may
      be in default under our credit line.





**Accounts
      Receivable**





Our
      accounts receivable at March 31, 2006, was $9.91 million compared to $7.66
      million at June 30, 2005.  While
      our
      net sales increased by approximately $4.76 million when compared to the three
      month periods ended March 31, 2006 and June 30, 2005. The increase in our
      receivables is primarily due to the increase in our sales volume, change in
      our
      customer base and the difference in the timing of our sales during each quarter.
      As of March 31, 2006 only 1% of our receivables had aged greater than 90 days.
      We believe the quality of our accounts receivable is excellent, and as such
      we
      do not believe we have more than minimal exposure to bad debt
      expense.





**Inventories**





At
      March
      31, 2006, the value of our inventory was $9.29 million, an increase of $0.35
      million from $8.94 million at June 30, 2005.  The
      increase is primarily the result of a deliberate build-up of inventory in
      certain key products. We believe that the modest increase in our inventory
      is
      within acceptable limits of our current operating plan.





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





Our
      accounts payable, accrued expenses and other current liabilities increased
      by
      approximately $6.60 million from June 30, 2005 to March 31, 2006. The increase
      is primarily attributable to increases in purchases of API due to greater sales
      volume as well as increased research and development costs. Additionally, the
      increase from June 2005 to March 2006 is partially due to liabilities incurred
      in relation to fixed asset additions and construction in progress. Further,
      the
      fluctuation in accounts payable and accrued expenses payable was partially
      the
      result of controls over cash outflows. We do not believe our cash outflow
      controls will have any material affect on our vendor
      relationships.


27





**Cash
      and Cash Equivalents**





Cash
      and
      cash equivalents decreased during the nine months ended March 31, 2006, by
      approximately $0.29 million from $0.54 million at June 30, 2005, to $0.25
      million at March 31, 2006. To date we funded our business from debt (net $1.55
      million) and operations (net $5.81 million). These cash inflows were offset
      by
      cash expenditures of $7.22 million to acquire and make deposits on property
      and
      equipment, plus $0.43 million in financing activities.




**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**





Revenue
      from the sale of our products is recognized upon shipment of the product.
      Revenue is recorded net of provisions for rebates, charge-backs, discounts
      and
      returns, which are established at the time of sale. Estimates for rebates,
      charge-backs, and discounts are calculated based on actual experience and also
      cover chargebacks on sales to intermediary wholesale prime vendors for the
      supply of Ibuprofen and Naproxen to the Department of Veterans
      Affairs.





With
      respect to certain products, we purchase raw materials from suppliers, which
      is
      then used in the manufacturing of completed goods and sold back to the suppliers
      or by direct drop shipment to the supplier's customers. Some raw materials
      may
      be used in the manufacturing of products for other customers. We also (i) have
      the general inventory risk by taking title to all of the raw material purchased,
      (ii) establish the selling price for the finished product and, (iii)
      significantly change the raw materials into the finished product under our
      specifications and formulas. 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.





In
      accordance with the terms of a multi-year agreement to sell our female hormone
      therapy product, we recognized revenue of approximately $1.6 and $5.5 million
      during the three and nine month periods ended March 31, 2006.  Our customer
      has committed to purchase a minimum of $11.5 million during the first twelve
      months of the agreement, which began in August, 2005. This agreement contains
      a
      sales volume discount when purchases exceed the guaranteed minimum
      quantity.  As such, in accordance with EITF 01-09, “Accounting for
      Consideration Given by a Vendor to a Customer (Including a Reseller of the
      Vendor’s Products)”, we recognize revenue based upon the average sales price as
      calculated based upon the total number of units forecasted from the customer
      to
      be purchased under the agreement, multiplied by the number of units
      shipped.  In periods where the contract allows us to invoice the customer
      for amounts in excess of the average sales price, the excess dollar amount
      is
      recorded as deferred revenue.  Likewise, in periods when the contract
      defines our invoice price to be below the average sales price, we reduce
      deferred revenue and recognize income for the difference.  In addition,
      deferred revenue under this agreement may also be reversed into income in a
      period when it becomes evident that the customer will not purchase the required
      quantity of product necessary to take advantage of the estimated
      incentive.




28





**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.





**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**





At
      March
      31, 2006, our principal financial instrument was a $41.5 million credit facility
      with Wells Fargo Business Credit (“WFBC”), consisting of:





·  $22.5
      million revolving credit facility


·  $12.0
      million real estate term loan


·  $3.5
      million machinery and equipment term loan


·  $3.5
      million additional / future capital expenditure facility





Each
      component of this credit facility bears interest at either (i) a rate of 0.5%
      below WFBC’s prime rate or, at our option, (ii) a rate of 2.5% above LIBOR. To
      limit our exposure to fluctuating interest rates, we entered into an interest
      rate swap agreement with WFBC to lock in the interest rate for the real estate
      term loan at 7.56%. At March 31, 2006, the interest rates on the revolving
      credit facility and the equipment term loan was 7.25% per annum.





If
      our
      combined borrowings remained at the same amount as of March 31, 2006, for the
      remainder of our fiscal year, for every one percent change, upward or downward
      in our borrowing rate, we would incur or save approximately $17,000 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.





Other
      than the rate swap agreement with WFBC described above, as of March 31, 2006
      we
      did not use any other derivative financial instruments to hedge our exposure
      to
      adverse fluctuations in interest rates, fluctuations in commodity prices or
      other market risks, nor do we invest in speculative financial instruments.


29





**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 nine month period ended March 31, 2006, we carried out an
      evaluation, under the supervision and with the participation of our management,
      including our Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures. Based upon that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective in alerting them in a timely manner to information relating to the
      Company required to be disclosed in this report.





Our
      independent registered accounting firm Marcum & Kliegman, LLP (“MK”),
      informed us and our Audit Committee of the Board of Directors that in connection
      with their audit of our financial results for the fiscal year ended June 30,
      2005, MK had discovered conditions which they deemed to be significant
      deficiencies, (as defined by standards established by the Public Company
      Accounting Oversight Board) in our financial statement closing process. The
      significant deficiencies related to the performance of processes and procedures
      for the period end closing process and its review by internal accounting
      personnel. Management has informed MK and the Audit Committee of the Board
      of
      Directors that it will add additional personnel and modify its controls over
      the
      financial statement closing process to prevent reoccurrences of this deficiency
      and will continue to monitor the effectiveness of these actions and will make
      any other changes or take such additional actions as management determines
      to be
      appropriate.





Management
      does not believe that the above significant deficiencies materially affected
      the
      results of the fiscal quarter ended June 30, 2005, or any prior period, nor
      any
      period included in the current nine month period ended March 31,
      2006.





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.




30




**PART
      II – OTHER
      INFORMATION**


**Item
        6.      Exhibits**


Exhibits





21.1
            List
                of Subsidiaries.




31.1
            Certification
                of Chief Executive Officer pursuant to Rules 13a-14(a) as adopted,
                pursuant to Section
                302 of theSarbanes-Oxley
                Act of 2002.




31.2
            Certification
                of the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted,
                pursuant to Section
                302 of theSarbanes-Oxley
                Act of 2002.




32.2
            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 Sabanes-Oxley Act
                of
                2002.


31


**FORWARD-LOOKING
      STATEMENTS AND ASSOCIATED RISK**





Certain
      statements in this Report, and the documents incorporated by reference herein,
      constitute "forward-looking statements" within the meaning of Section 27A of
      the
      Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934
      and
      the Private Securities Litigation Reform Act of 1995. Such forward-looking
      statements involve known and unknown risks, uncertainties and other factors
      which may cause deviations in actual results, performance or achievements to
      be
      materially different from any future results, performance or achievements
      expressed or implied. Such factors include but are not limited to: the
      difficulty in predicting the timing and outcome of legal proceedings, the
      difficulty of predicting the timing of FDA approvals; court and FDA decisions
      on
      exclusivity periods; competitor's ability to extend exclusivity periods past
      initial patent terms; market and customer acceptance and demand for our
      pharmaceutical products; our ability to market our products; the successful
      integration of acquired businesses and products into our operations; the use
      of
      estimates in the preparation of our financial statements; the impact of
      competitive products and pricing; the ability to develop and launch new products
      on a timely basis; the regulatory environment; fluctuations in operating
      results, including spending for research and development and sales and marketing
      activities; and, other risks detailed from time-to-time in our filings with
      the
      SEC.





The
      words
      "believe, expect, anticipate, intend and plan" and similar expressions identify
      forward-looking statements. These statements are subject to risks and
      uncertainties that cannot be predicted or quantified and, consequently, actual
      results may differ materially from those expressed or implied by such
      forward-looking statements. Readers are cautioned not to place undue reliance
      on
      these forward-looking statements, which speak only as of the date the statement
      was made.




32




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,
              2006
            By:
            /s/ George
              AronsonGeorge Aronson,
              Chief Financial Officer
              (Duly authorized to sign on behalf of
                registrant)




33


**Exhibits**




**Number**  **Description**




21.1            
List of subsidiaries





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







31.1
            Certification
                of Cameron Reid pursuant to Exchange Act Rules 13(a)-14(a) and 15d-14(a),
                as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
                2002;




31.2
            Certification
                of George Aronson pursuant to Exchange Act Rules 13(a)-14(a) and
                15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
                Act of
                2002;





32.1
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002;




34