**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 December 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
x
      NO o





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


Large
                  accelerated filer o
              Accelerated
                  filer o
              Non-accelerated
                  filer x





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





YES
o  NO x





As
      of the
      close of business on February 13, 2007, there were 65,569,122 shares of the
      Registrant's $0.01 par value per share Common Stock outstanding.









INTERPHARM
      HOLDINGS, INC.





TABLE
      OF
      CONTENTS




PagePART
                I
            Financial
                InformationItem
                1.
            Financial
                Statements & Notes
            1-25Item
                2.
            Managements
                Discussion & Analysis of Financial Condition and Results of
                Operations
            26-37Item
                3.
            Quantitative
                and Qualitative Disclosures about Market Risk
            37Item
                4.
            Controls
                and Procedures
            38PART
                II
            Other
                Information Required in ReportItem
                4
            Submission
                of Matters to a Vote of Security Holders
            39Item
                6
            Exhibits
            40Signatures
                Page
            41Exhibits/Certifications
            42-45








INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(In
      thousands)




December
                31,
            
            June
                30,2006
            
            2006(Unaudited)ASSETSCURRENT
                ASSETSCash
            
            $
            6,879
            
            $
            1,438Accounts
                receivable, net
            
            
            11,345
            
            
            14,212Inventories
            
            
            9,807
            
            
            8,706Prepaid
                expenses and other current assets
            
            
            1,650
            
            
            1,316Deferred
                tax assets
            
            
            56
            
            
            1,321Total
                Current Assets
            
            
            29,737
            
            
            26,993Land,
                building and equipment, net
            
            
            30,664
            
            
            29,069Deferred
                tax assets
            
            
            7,069
            
            
            4,849Investment
                in APR, LLC
            
            
            1,023
            
            
            1,023Other
                  assets
            
            
            604
            
            
            933TOTAL
                ASSETS
            
            $
            69,097
            
            $
            62,867




*See
        Notes To Condensed Consolidated Financial Statements.*
  1





INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(In
      thousands)





LIABILITIES
      AND STOCKHOLDERS’ EQUITY


December
                  31,
              
              June
                  30,2006
              
              2006(Unaudited)CURRENT
                  LIABILITIESCurrent
                  maturities of long-term debt
              
              $
              1,808
              
              $
              1,686Accounts
                  payable, accrued expenses and other liabilities
              
              
              13,235
              
              
              12,650Deferred
                  revenue
              
              
              —
              
              
              3,399Total
                  Current Liabilities
              
              
              15,043
              
              
              17,735OTHER
                  LIABILITIESLong-term
                  debt, less current maturities
              
              
              13,797
              
              
              13,952Contract
                  termination liability
              
              
              1,304
              
              
              —Other
                  liabilities
              
              
              11
              
              
              125Total
                  Other Liabilities
              
              
              15,112
              
              
              14,077TOTAL
                  LIABILITIES
              
              
              30,155
              
              
              31,812COMMITMENTS
                  AND CONTINGENCIESSeries
                  B-1 Redeemable Convertible Preferred Stock:15
                  shares authorized; issued and outstanding - 10 at December 31,
                  and June
                  30, 2006; liquidation preference of $10,000
              
              
              8,155
              
              
              8,225Series
                  C-1 Redeemable Convertible Preferred Stock:10
                  shares authorized; issued and outstanding - 10 at December 31,
                  2006;
                  liquidation preference of $10,000
              
              
              8,352
              
              
              —STOCKHOLDERS’
                  EQUITYPreferred
                  stocks, 10,000 shares authorized; issued and outstanding - 5,132
                  and
                  5,141, respectively; aggregate liquidation preference of $3,588
                  and
                  $4,291, respectively
              
              
              51
              
              
              51Common
                  stock, $0.01 par value, 150,000 and 65,148 shares authorized and
                  issued,
                  respectively, at December 31, 2006, and 70,000 and 64,537 shares
                  authorized and issued, respectively, at June 30, 2006.
              
              
              651
              
              
              645Additional
                  paid-in capital
              
              
              28,126
              
              
              24,196Stock
                  subscription receivable
              
              
              (34
              )
              
              (90
              )Accumulated
                  other comprehensive income
              
              
              83
              
              
              98Accumulated
                  deficit
              
              
              (6,442
              )
              
              (2,070
              )TOTAL
                  STOCKHOLDERS’ EQUITY
              
              
              22,435
              
              
              22,830TOTAL
                  LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              69,097
              
              $
              62,867




*See
        Notes To Condensed Consolidated Financial Statements.*
  2




INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)


(In
      thousands, except per share data)


Three
                  Months Ended
                December
                  31,
              
              Six
                  Months Ended
                December
                  31,2006
              
              2005
              
              2006
              
              2005SALES,
                  Net
              
              $
              17,479
              
              $
              16,213
              
              $
              40,305
              
              $
              30,760COST
                  OF SALES(including related-party rent expense of $140 and $242 for the
                  three and
                  six months ended December 31, 2006 and $102 and $204 for the three
                  and six
                  months ended December 31, 2005, respectively)
              
              
              13,443
              
              
              11,034
              
              
              27,292
              
              
              21,597GROSS
                  PROFIT
              
              
              4,036
              
              
              5,179
              
              
              13,013
              
              
              9,163OPERATING
                  EXPENSESSelling,
                  general and administrative
              
              
              3,156
              
              
              2,201
              
              
              5,794
              
              
              4,639Related
                  party rent
              
              
              25
              
              
              18
              
              
              43
              
              
              36Research
                  and development
              
              
              4,871
              
              
              1,885
              
              
              8,289
              
              
              4,031TOTAL
                  OPERATING EXPENSES
              
              
              8,052
              
              
              4,104
              
              
              14,126
              
              
              8,706OPERATING
                  (LOSS) INCOME
              
              
              (4,016
              )
              
              1,075
              
              
              (1,113
              )
              
              457OTHER
                  EXPENSEContract
                  termination expense
              
              
              (1,655
              )
              
              —
              
              
              (1,655
              )
              
              —Interest
                  expense, net
              
              
              (240
              )
              
              (99
              )
              
              (527
              )
              
              (190
              )Other
              
              
              (121
              )
              
              (7
              )
              
              (121
              )
              
              (7
              )TOTAL
                  OTHER EXPENSE
              
              
              (2,016
              )
              
              (106
              )
              
              (2,303
              )
              
              (197
              )(LOSS)
                  INCOME BEFORE INCOME TAXES
              
              
              (6,032
              )
              
              969
              
              
              (3,416
              )
              
              260(BENEFIT
                  FROM) PROVISION FOR INCOME TAXES
              
              
              (1,908
              )
              
              360
              
              
              (922
              )
              
              98NET
                  (LOSS) INCOME
              
              
              (4,124
              )
              
              609
              
              
              (2,494
              )
              
              162Series
                  C-1 preferred stock beneficial conversion feature
              
              
              —
              
              
              —
              
              
              1,094
              
              
              —Preferred
                  stock dividends
              
              
              453
              
              
              67
              
              
              742
              
              
              90NET
                  (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
              
              $
              (4,577
              )
              $
              542
              
              $
              (4,330
              )
              $
              72EARNINGS
                  PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERSBasic
                  (loss) earnings per share
              
              $
              (0.07
              )
              $
              0.02
              
              $
              (0.07
              )
              $
              0.00Diluted
                  (loss) earnings per share
              
              $
              (0.07
              )
              $
              0.01
              
              $
              (0.07
              )
              $
              0.00Basic
                  weighted average shares outstanding
              
              
              65,063
              
              
              32,464
              
              
              64,892
              
              
              32,464Diluted
                  weighted average shares and equivalent shares outstanding
              
              
              65,063
              
              
              67,555
              
              
              64,892
              
              
              67,401




*See
      Notes To Condensed Consolidated Financial
      Statements.*




3




INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


(UNAUDITED)


(In
      thousands)




AccumulatedOther
            
            RetainedPreferred
                Stock
            
            Common
                Stock
            
            Paid-In
            
            Subscription
            
            Comprehensive
            
            Earnings
            
            Stockholders’Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Receivable
            
            Income
            
            (Deficit)
            
            EquityBALANCE-
                July 1, 2006
            
            
            5,141
            
            $
            51
            
            
            64,537
            
            $
            645
            
            $
            24,196
            
            $
            (90
            )
            $
            98
            
            $
            (2,070
            )
            $
            22,830Accrued
                dividends - Series B-1
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (206
            )
            
            (206
            )Accrued
                dividends - Series C-1
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (206
            )
            
            (206
            )Series
                C-1 Preferred beneficial conversion feature
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,094
            
            
            —
            
            
            —
            
            
            (1,094
            )
            
            —Series
                B-1 dividends paid with common stock
            
            
            —
            
            
            —
            
            
            204
            
            
            2
            
            
            283
            
            
            —
            
            
            —
            
            
            (207
            )
            
            78Series
                C-1 dividends paid with common stock
            
            
            
            
            
            
            
            
            28
            
            
            —
            
            
            41
            
            
            —
            
            
            —
            
            
            (41
            )
            
            —Dividends
                declared - Series A-1
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (124
            )
            
            (124
            )Shares
                issued for options exercised
            
            
            —
            
            
            —
            
            
            370
            
            
            4
            
            
            254
            
            
            —
            
            
            —
            
            
            —
            
            
            258Tax
                benefit in connection with exercise of options
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            31
            
            
            —
            
            
            —
            
            
            —
            
            
            31Conversion
                of  Series A preferred stock
            
            
            (7
            )
            
            —
            
            
            7
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Conversion
                of Series B preferred stock
            
            
            (2
            )
            
            —
            
            
            2
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Fair
                value of warrants issued
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,641
            
            
            —
            
            
            —
            
            
            —
            
            
            1,641Stock
                based compensation and modification expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            586
            
            
            —
            
            
            —
            
            
            —
            
            
            586Collections
                on stock subscription receivable
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            56
            
            
            —
            
            
            —
            
            
            56Change
                in fair value of interest rate swap
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (15
            )
            
            —
            
            
            (15
            )Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (2,494
            )
            
            (2,494
            )BALANCE-
                December 31, 2006
            
            
            5,132
            
            $
            51
            
            
            65,148
            
            $
            651
            
            $
            28,126
            
            $
            (34
            )
            $
            83
            
            $
            (6,442
            )
            $
            22,435




See
      Notes To Condensed Consolidated Financial
      Statements.




4


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME


(UNAUDITED)


(In
      thousands)




Three
                Months Ended
              December
                31,
            
            Six
                Months Ended
              December
                31,2006
            
            2005
            
            2006
            
            2005NET
                (LOSS) INCOME
            
            $
            (4,124
            )
            $
            609
            
            $
            (2,494
            )
            $
            162OTHER
                COMPREHENSIVE INCOMEChange
                in fair value of interest rate swap
            
            
            (29
            )
            
            —
            
            
            (15
            )
            
            —TOTAL
                COMPREHENSIVEINCOME (LOSS)
            
            $
            (4,153
            )
            $
            609
            
            $
            (2,509
            )
            $
            162




See
      Notes To Condensed Consolidated Financial
      Statements.


5


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(In
      thousands)





Six
                  Months Ended
                  December
                    31,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                (loss) income
            
            $
            (2,494
            )
            $
            162Adjustments
                to reconcile net (loss) income to netcash
                (used in) provided by operating activities:Bad
                debt expense
            
            
            55
            
            
            11Accreted
                non-cash interest expense
            
            
            21
            
            
            —Depreciation
                and amortization
            
            
            1,098
            
            
            685Vested
                options expense
            
            
            586
            
            
            416Contract
                termination expense
            
            
            1,655
            
            
            —Excess
                tax benefit from exercise of stock options
            
            
            (31
            )
            
            —Deferred
                tax expense
            
            
            (922
            )
            
            98Other
            
            
            121
            
            
            7Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            2,812
            
            
            608Inventories
            
            
            (1,101
            )
            
            (403
            )Prepaid
                expenses and other current assets
            
            
            (360
            )
            
            (323
            )Accounts
                payable, accrued expenses and other liabilities
            
            
            (236
            )
            
            4,373Deferred
                revenue
            
            
            (3,399
            )
            
            1,637TOTAL
                ADJUSTMENTS
            
            
            299
            
            
            7,109NET
                CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
            
            
            (2,195
            )
            
            7,271CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of building and equipment
            
            
            (2,200
            )
            
            (4,589
            )Deposits
                and other long-term assets
            
            
            (120
            )
            
            (111
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (2,320
            )
            
            (4,700
            )CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from sale of Series C-1 preferred stock and warrants, net
            
            
            9,993
            
            
            —Expenditures
                relating to sale of Series B-1 preferred stock and
                warrants
            
            
            (70
            )
            
            —Proceeds
                from options exercised
            
            
            258
            
            
            —Proceeds
                from long-term debt
            
            
            690
            
            
            3,630Payment
                of Series A-1 dividends
            
            
            (124
            )
            
            (165
            )Collections
                on stock subscription receivable
            
            
            56
            
            
            21Excess
                tax benefit from exercise of stock options
            
            
            31
            
            
            —Repayments
                of long-term debt
            
            
            (878
            )
            
            (200
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            9,956
            
            
            3,286NET
                INCREASE IN CASH
            
            
            5,441
            
            
            5,857CASH-
                Beginning
            
            
            1,438
            
            
            537CASH-
                Ending
            
            $
            6,879
            
            $
            6,394




See
      Notes To Condensed Consolidated Financial
      Statements.


6


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


(UNAUDITED)


(In
      thousands)





Six
                  Months Ended
                December
                  31,2006
            
            2005SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid during the periods for:Interest
            
            $
            636
            
            $
            160Income
                taxes
            
            $
            —
            
            $
            —Non-Cash
                Investing or Financing Transactions:Tax
                benefit in connection with exercise of stock options
            
            $
            31
            
            $
            —Issuance
                of common stock in exchange for subscription receivable
            
            $
            —
            
            $
            133Acquisition
                of machinery and equipment in exchange for capital lease
                payable
            
            $
            156
            
            $
            128Reclassification
                of equipment deposits to building and equipment
            
            $
            389
            
            $
            735Series
                B-1 dividends paid with common stock
            
            $
            284
            
            $
            —Series
                C-1 dividends paid with common stock
            
            $
            41
            
            $
            —Accrual
                of Series B-1 dividends
            
            $
            206
            
            $
            —Accrual
                of Series C-1 dividends
            
            $
            206
            
            $
            —Change
                in fair value of interest rate swap
            
            $
            15
            
            $
            —Declaration
                of preferred dividends
            
            $
            —
            
            $
            124





7




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


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





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





These
      financial statements have been prepared in accordance with accounting principles
      generally accepted in the United States of America for interim financial
      information and with the instructions to Form 10-Q. Accordingly, they do not
      include all of the information and footnotes required by accounting principles
      generally accepted in the United States of America for complete financial
      statements. In the opinion of management, such interim statements reflect all
      adjustments (consisting of normal recurring accruals) necessary to present
      fairly the financial position and the results of operations and cash flows
      for
      the interim periods presented. The operating results for the three and six
      months ended December 31, 2006 are not necessarily indicative of the results
      that may be expected for the fiscal year ending June 30, 2007. For further
      information, refer to the consolidated financial statements and footnotes
      thereto included in the Company’s Form 10-K for the year ended June 30,
      2006.




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





Nature
      of Business




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





Revenue
      Recognition





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





In
      addition, the Company is party to supply agreements with certain pharmaceutical
      companies under which, in addition to the selling price of the product, the
      Company receives payments based on sales or profits associated with these
      products realized by its customer. The Company recognizes revenue related to
      the
      initial selling price upon shipment of the products as the selling price is
      fixed and determinable and no right of return exists. The additional revenue
      component of these agreements is recognized by the Company at the time its
      customers record their sales and is based on pre-defined formulas contained
      in
      the agreements. Receivables related to this revenue of $958 and $620 at December
      31, 2006 and June 30, 2006, respectively, are included in “Accounts receivable,
      net” in the accompanying Condensed Consolidated Balance Sheets.





Earnings
      Per Share




Basic
      earnings per share (“EPS”) of common stock is computed by dividing net income
      attributable to common stockholders by the weighted average number of shares
      of
      common stock outstanding during the period. Diluted EPS reflects the amount
      of
      net income for the period available to each share of common stock outstanding
      during the reporting period, giving effect to all potentially dilutive shares
      of
      common stock from the potential exercise of stock options and warrants and
      conversions of convertible preferred stocks. In accordance with Emerging Issues
      Task Force (“EITF”) Issue No. 03-6, “Participating Securities and the Two-Class
      Method Under FASB Statement No. 128, Earnings Per Share,” during the fiscal year
      ended June 30, 2006, in periods when there was net income and Series K preferred
      stock was outstanding, the Company used the Two-Class Method to calculate the
      effect of the participating Series K on the calculation of basic EPS and the
      if-converted method was used to calculate the effect of the participating Series
      K on diluted EPS. In periods when there was a net loss, the effect of the
      participating Series K was excluded from both basic and diluted EPS.
      Additionally, in May 2006, the Series K preferred stock was converted
      into the Company’s common stock; therefore the use of the Two-Class Method is
      not required for the three and six months ended December 31,
      2006.





8




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


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





Use
      of
      Estimates in the Financial Statements




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





Stock
      Based Compensation




Effective
      July 1, 2005, the Company adopted the fair value recognition provisions of
      Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised
      2004), “Share-Based Payment,” (“SFAS No. 123(R)”), using the
      modified-prospective-transition method. As a result, the Company’s net loss
      before taxes for the three months ended December 31, 2006 and its net income
      before taxes for the three month period ended December 31, 2005 is lower by
      $375
      and $200, respectively, and $586 and $416 for the six months ended December
      31,
      2006 and 2005, respectively, than if it had continued to account for share-based
      compensation under Accounting Principles Board (“APB”) opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB No. 25”).





Sales
      Incentives




In
      accordance with the terms and conditions of an agreement entered into during
      the
      prior fiscal 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
      required the customer to purchase a minimum quantity of the Company's products
      during a specified period of time. The incentive offered was based upon a fixed
      dollar amount per unit sold to the customer. The Company made an estimate of
      the
      ultimate amount of the incentive the customer would earn based upon past history
      with the customer and other facts and circumstances. The Company had the ability
      to estimate this volume incentive price adjustment, as there did not exist
      a
      relatively long period of time for the particular adjustment to be earned.
      Any
      change in the estimated amount of the volume incentive was recognized
      immediately using a cumulative catch-up adjustment. In accordance with EITF
      01-9, the Company recorded the provision for this sales incentive when the
      related revenue is recognized. The Company's sales incentive liability may
      prove
      to be inaccurate, in which case the Company may have understated or overstated
      the provision required for these arrangements. Therefore, although the Company
      makes its best estimate of its sales incentive liability, many factors,
      including significant unanticipated changes in the purchasing volume of its
      customer, could have significant impact on the Company's liability for sales
      incentives and the Company's reported operating results. The specific terms
      of
      this agreement which related to sales incentives expired in October 2006. For
      the three and six months ended December 31, 2006, the Company recognized $232
      and $3,399 sales incentive revenue related to this agreement.





Reclassifications




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





The
      Company reclassified certain components of stockholders’ equity section to
      reflect the elimination of deferred compensation arising from unvested
      share-based compensation pursuant to the requirements of Staff Accounting
      Bulletin No. 107, regarding Statement of Financial Accounting Standards No.
      123(R), “Share-Based Payment.” This deferred compensation was previously
      recorded as an increase to additional paid-in capital with a corresponding
      reduction to stockholders’ equity for such deferred compensation. This
      reclassification has no effect on net income or total stockholders’ equity as
      previously reported. The Company will record an increase to additional paid-in
      capital as the share-based payments vest.




9




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




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




Recently
      Issued Accounting Pronouncements





New
      Accounting Pronouncements




In
      June
      2006, The Financial Accounting Standards Board (“FASB”) issued Interpretation
      No. 48, “Accounting for Uncertainty in Income Taxes”, (“FIN 48”). This
      interpretation clarified the accounting for uncertainty in income taxes
      recognized in accordance with Statement of Financial Accounting Standards
      (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No.109”). Specifically,
      FIN 48 clarifies the application of SFAS No. 109 by defining a criterion that
      an
      individual tax position must meet for any part of the benefit of that position
      to be recognized in an enterprise’s financial statements. Additionally, FIN 48
      provides guidance on measurement, derecognition, classification, interest and
      penalties, accounting in interim periods of income taxes, as well as the
      required disclosure and transition. This interpretation is effective for fiscal
      years beginning after December 15, 2006. The Company is currently assessing
      the
      impact that the adoption of FIN 48 will have on its financial position and
      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 155 clarifies certain issues relating to embedded derivatives
      and
      beneficial interests in securitized financial assets. The provisions of SFAS
      155
      are effective for all financial instruments acquired or issued after fiscal
      years beginning after September 15, 2006. The Company is currently assessing
      the
      impact that the adoption of SFAS 155 will have on its financial position
      and results of operations.





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





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




10





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





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





Recently
      Issued Accounting Pronouncements ,
      continued





New
      Accounting Pronouncements ,
      continued




In
      September 2006, the staff of the Securities and Exchange Commission issued
      Staff
      Accounting Bulletin No. 108 ("SAB 108") which provides interpretive guidance
      on
      how the effects of the carryover or reversal of prior year misstatements should
      be considered in quantifying a current year misstatement. SAB 108 became
      effective in fiscal 2007.
      Adoption of SAB 108 is not expected to have a material impact on the Company's
      consolidated financial position, results of operations or cash
      flows.





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





Accounts
      receivable are comprised of amounts owed to the Company through the sales of
      its
      products throughout the United States. These accounts receivable are presented
      net of allowances for doubtful accounts, sales returns and customer chargebacks.
      Allowances for doubtful accounts were approximately $62 at December 31, 2006
      and
      $101 at June 30, 2006. The allowance for doubtful accounts is based on a
      review of specifically identified accounts in addition to an overall aging
      analysis. Judgments are made with respect to the collectibility of accounts
      receivable based on historical experience and current economic trends. Actual
      losses could differ from those estimates. Allowances for customer chargebacks
      were $2,568 and $2,315 at December 31, 2006 and June 30, 2006, respectively.
      The Company
      sells some of its products indirectly to various government agencies referred
      to
      below as “indirect customers.” The Company enters into agreements with its
      indirect customers to establish pricing for certain products. The indirect
      customers then independently select a wholesaler from which to actually purchase
      the products at these agreed-upon prices. The Company will provide credit to
      the
      selected wholesaler for the difference between the agreed-upon price with the
      indirect customer and the wholesaler’s invoice price if the price sold to the
      indirect customer is lower than the direct price to the wholesaler. This credit
      is called a chargeback. The provision for chargebacks is based on expected
      sell-through levels by the Company’s wholesale customers to the indirect
      customers, and estimated wholesaler inventory levels. As sales to the large
      wholesale customers increase, the reserve for chargebacks will also generally
      increase. However, the size of the increase depends on the product mix. The
      Company continually monitors the reserve for chargebacks and makes adjustments
      to the reserve as deemed necessary. Actual chargebacks may differ from estimated
      reserves.





The
      changes in the allowance for customer chargebacks, discounts and other credits
      that reduced gross revenue for six months ended December 31, 2006 and 2005
      is as
      follows:





Six
                Months EndedDecember
                31,2006
            
            2005Reserve
                balance - beginning
            
            $
            2,315
            
            $
            425Actual
                chargebacks, discounts and other credits taken in the current period
                (a)
            
            
            (5,014
            )
            
            (1,695
            )Current
                provision related to current period sales
            
            
            5,267
            
            
            3,177Reserve
                balance - ending
            
            $
            2,568
            
            $
            1,907





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





11




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





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





Inventories
      consist of the following:




December
                31,
            
            June
                30,2006
            
            2006(Unaudited)Finished
                goods
            
            $
            1,010
            
            $
            1,781Work
                in process
            
            
            4,268
            
            
            3,685Raw
                materials
            
            
            4,233
            
            
            2,928Packaging
                materials
            
            
            296
            
            
            312Total
            
            $
            9,807
            
            $
            8,706




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





Land,
      building and equipment consist of the following:


December
                  31,
              
              June
                  30,
              
              Estimated
                Useful2006
              
              2006
              
              Lives(Unaudited)Land
              
              $
              4,924
              
              $
              4,924
              
              
              —Building
              
              
              12,460
              
              
              12,460
              
              
              39
                  YearsMachinery
                  and equipment
              
              
              14,242
              
              
              12,657
              
              
              5-7
                  YearsComputer
                  equipment
              
              
              891
              
              
              151
              
              
              5
                  YearsConstruction
                  in Progress
              
              
              560
              
              
              587
              
              
              —Furniture
                  and fixtures
              
              
              686
              
              
              660
              
              
              5
                  YearsLeasehold
                  improvements
              
              
              3,506
              
              
              3,206
              
              
              5-15
                  Years37,269
              
              
              34,645Less:
                  accumulated depreciation and amortization
              
              
              6,605
              
              
              5,576Land,
                  Building and Equipment, net
              
              $
              30,664
              
              $
              29,069




Depreciation
      and amortization expense for the three and six months ended December 31, 2006
      was approximately $541 and $1,029, respectively, and for the three and six
      months ended December 31, 2005, was approximately $346 and $692,
      respectively **.**




12





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




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





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




December
                31,
            
            June
                30,2006
            
            2006(Unaudited)Inventory
                purchases
            
            $
            7,265
            
            $
            5,734Research
                and development expenses
            
            
            1,500
            
            
            2,068Other
            
            
            4,470
            
            
            4,848Total
            
            $
            13,235
            
            $
            12,650




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





Long-term
      Debt




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


December
                31,
              2006
            
            June
                30,
              2006Revolving
                credit facility
            
            $
            —
            
            $
            —Real
                estate term loan
            
            
            11,333
            
            
            11,734Machinery
                and equipment term loans
            
            
            4,086
            
            
            3,833Capital
                leases
            
            
            232
            
            
            7215,651
            
            
            15,639Less:
                amount representing interest on capital leases
            
            
            46
            
            
            1Total
                long-term debt
            
            
            15,605
            
            
            15,638Less:
                current maturities
            
            
            1,808
            
            
            1,686Long-term
                debt, less current maturities
            
            $
            13,797
            
            $
            13,952




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





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


·
            $12,000
                real estate term loan


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


·
            $
                3,500 additional / future capital expenditure
                facility





The
      funds
      made available through this facility paid down, in its entirety, the $20.45
      million owed on the previous credit facility. The new revolving credit facility
      borrowing base is calculated as (i) 85% of the Company’s eligible accounts
      receivable plus the lesser of 50% of cost or 85% of the net orderly liquidation
      value of its eligible inventory. The advances pertaining to inventory are capped
      at the lesser of 100% of the advance from accounts receivable or $9,000. The
      $12,000 loan for the real estate in Yaphank, NY is payable in equal monthly
      installments of $67 plus interest through February 2010 at which time the
      remaining principal balance is due. The $3,500 M&E loan is payable in equal
      monthly installments of $58 plus interest through February 2010 at which time
      the remaining principal balance is due. With respect to additional capital
      expenditures, the Company is permitted to borrow 90% of the cost of new
      equipment purchased to a maximum of $3,500 in borrowings amortized over 60
      months. As of December 31, 2006, there was approximately $2,240 available for
      additional capital expenditure borrowings.




13




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


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





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





The
      revolving credit facility and term loans will bear interest at a rate of the
      prime rate less 0.5% or, at the Company’s option, LIBOR plus 250 basis points.
      At December 31, 2006, the interest rate on this debt was 7.75%. Pursuant to
      the
      requirements of the WFBC agreement, the Company put in place a lock-box
      arrangement, which will incur a fee of 25 basis points per annum on any unused
      amounts of this credit facility.





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





With
      respect to the real estate term loan and the $3,500 M&E loan, the Company
      entered into interest rate swap contracts (the “swaps”), whereby the Company
      pays a fixed rate of 7.56% and 8.00% per annum, respectively. The swaps
      contracts mature in 2010. The swaps are a cash flow hedge (i.e. a hedge against
      interest rates increasing). As all of the critical terms of the swaps and loans
      match, they are structured for short-cut accounting under SFAS No. 133,
“Accounting For Derivative Instruments and Hedging Activities” and by
      definition, there is no hedge ineffectiveness or a need to reassess
      effectiveness. Fair value of the interest rate swaps at December 31, 2006,
      was
      approximately $83 and is included in other assets.





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





During
      the three and six month periods ended December 31, 2006, non-qualified stock
      options were exercised which generated approximately $9 and $83 of income tax
      deductions, respectively, resulting in tax benefits of approximately $3 and
      $31,
      respectively, which were credited to additional paid-in capital.





At
      December 31, 2006 the Company has remaining Federal NOLs of $20,847 and State
      NOLs of $20,257 available through 2026. Pursuant to Section 382 of the Internal
      Revenue Code regarding substantial changes in Company ownership, utilization
      of
      these NOLs is limited. As of December 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 of approximately
      17% of the State NOLs which the Company does not anticipate utilizing due to
      State limitations.





In
      calculating its tax provision for the six month periods ended December 31,
      2006
      and 2005, the Company applied aggregate effective tax rates of approximately
      27%
      and 38%, respectively, thereby creating a $922 income tax benefit
      and an income tax expense of $98, respectively, and adjusted its deferred tax
      asset by like amounts. The decrease in effective tax rates is the result of
      permanent tax differences relating to Incentive Stock Options.




14




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





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





The
      calculations of basic and diluted EPS are as follows:


Three
                  Months Ended
                December
                  31,
              
              Six
                  Months Ended
                December
                  31,2006
              
              2005
              
              2006
              
              2005Numerator:Net
                  (loss) income
              
              $
              (4,124
              )
              $
              609
              
              $
              (2,494
              )
              $
              162Less:
                  Preferred stock dividendsSeries
                  A-1
              
              
              (41
              )
              
              (41
              )
              
              (82
              )
              
              (83
              )Series
                  B-1
              
              
              (206
              )
              
              —
              
              
              (413
              )
              
              —Series
                  C-1
              
              
              (206
              )
              
              —
              
              
              (247
              )
              
              —Less:
                  Series C-1 beneficial conversionfeature
              
              
              —
              
              
              —
              
              
              (1,094
              )
              
              —Less:
                  Net income attributable toSeries
                  K preferred stockholders
              
              
              —
              
              
              (26
              )
              
              —
              
              
              (7
              )Numerator
                  for basic EPS
              
              
              (4,577
              )
              
              542
              
              
              (4,330
              )
              
              72Effect
                  of dilutive securities:Net
                  income attributable to Series Kpreferred
                  stockholders
              
              
              —
              
              
              26
              
              
              —
              
              
              7Numerator
                  for diluted EPS
              
              $
              (4,577
              )
              $
              568
              
              $
              (4,330
              )
              $
              79
 Denominator:Denominator
                  for basic EPS weightedaverage
                  shares outstanding
              
              
              65,063
              
              
              32,464
              
              
              64,892
              
              
              32,464Effect
                  of dilutive securities:Convertible
                  Series K preferred stock
              
              
              —
              
              
              31,374
              
              
              —
              
              
              31,374Convertible
                  Series A, B, C, and Jpreferred
                  stocks
              
              
              —
              
              
              7
              
              
              —
              
              
              7Stock
                  options
              
              
              —
              
              
              3,710
              
              
              —
              
              
              3,556Denominator
                  for diluted EPS
              
              
              65,063
              
              
              67,555
              
              
              64,892
              
              
              67,401Basic
                  EPS
              
              $
              (0.07
              )
              $
              0.02
              
              $
              (0.07
              )
              $
              0.00Diluted
                  EPS
              
              $
              (0.07
              )
              $
              0.01
              
              $
              (0.07
              )
              $
              0.00




Stock
      options, warrants and convertible preferred stock, equivalent to 29,330 and
      5,294 shares of the Company’s common stock, were not included in the computation
      of diluted earnings per share for the three and six months ended December 31,
      2006 and 2005, respectively, as their inclusion would be
      antidilutive.




15




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


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





As
      of
      December 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
            
            
            65,148Stock
                options outstanding
            
            
            11,720Warrants
                outstanding
            
            
            4,564Common
                stock issuable upon conversion of preferred stocks:Series
                C
            
            
            6Series
                A-1 (maximum contingent conversion) (a)
            
            
            4,855Series
                B-1
            
            
            6,520Series
                C-1
            
            
            6,520Total
                (b)
            
            
            99,333





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





(b)
            Assuming
                no further issuance of equity instruments, or changes to the equity
                structure of the Company, this total represents the maximum number
                of
                shares of common stock that could be outstanding through November
                16, 2016
                (the end of the current vesting and conversion
                periods).




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





In
      May
      2006, the Company entered into a Securities Purchase Agreement (the “Agreement”)
      with Tullis-Dickerson Capital Focus III, L.P. ( “Tullis”). Under the Agreement,
      the Company agreed to issue and sell to Tullis, and Tullis agreed to purchase
      from the Company, for a purchase price of $10,000 (net proceeds of $9,858)
      an
      aggregate of 10 shares of a newly designated series of the Company’s preferred
      stock (“B-1”), together with 2,282 warrants to purchase shares of common stock
      of the Company with an exercise price of $1.639 per share. The warrants have
      a
      five year term. The Series B-1 Stock and warrants sold to Tullis are convertible
      and/or exercisable into a total of  8,802 shares of common stock. The
      B-1 shares are convertible into common shares at a conversion price of $1.5338,
      and have an annual dividend rate of 8.25%, payable quarterly, which can be
      paid,
      at the Company’s option, in cash or the Company’s common stock. In addition, the
      B-1 shareholders have the right to require the Company to redeem all or a
      portion of the B-1 shares upon the occurrence of certain triggering events,
      as
      defined, at a price per preferred share to be calculated on the day immediately
      preceding the date of a triggering event. Through December 31, 2006, the Company
      issued 204 shares of common stock as payment of $285 of previously accrued
      dividends. At December 31 2006, the Company had accrued $206 of Series B-1
      dividends, which was paid in February 2007 through the issuance of 94 shares
      of
      the Company’s common stock.




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




16




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


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




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





The
      Company’s Series B-1 redeemable convertible preferred stock is summarized as
      follows at December 31, 2006:





Shares
                IssuedAnd
            
            Par
                Value
            
            LiquidationShares
                  Authorized
            
            Outstanding
            
            Per
                Share
            
            Preference15
            
            
            10
            
            $
            100
            
            $
            10,000





17





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




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





On
      September 11, 2006, the Company entered into a Securities Purchase Agreement
      (the “Agreement”) with Aisling Capital, L.P. (the “Buyer”). Under the Agreement,
      the Company agreed to issue and sell to the Buyer, and the Buyer agreed to
      purchase from the Company, for a purchase price of $10,000 (net proceeds of
      $9,993) an aggregate of 10 shares of a newly designated series of the Company’s
      preferred stock (“C-1”), together with 2,282 warrants to purchase shares of
      common stock of the Company with an exercise price of $1.639 per share. The
      warrants have a five year term. The Series C-1 Stock and warrants sold to the
      Buyer are convertible and/or exercisable into a total of 8,802 shares of common
      stock. The C-1 shares are convertible into common shares at a conversion price
      of $1.5338, and have an annual dividend rate of 8.25%, payable quarterly, which
      can be paid, at the Company’s option, in cash or the Company’s common stock. In
      addition, the C-1 shareholders have the right to require the Company to redeem
      all or a portion of the C-1 shares upon the occurrence of certain triggering
      events, as defined, at a price per preferred share to be calculated on the
      day
      immediately preceding the date of a triggering event. Through December 31,
      2006,
      the Company issued 28 shares of common stock as payment of $41 of previously
      accrued dividends. At December 31 2006, the Company had accrued $206 of Series
      C-1 dividends, which was paid in February 2007 through the issuance of 94 shares
      of the Company’s common stock.




With
      respect to the Company’s accounting for the preferred stock, EITF Topic D-98,
      paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities
      with redemption features that are not solely within the control of the issuer
      to
      be recorded outside of permanent equity. As described above, the terms of the
      Preferred Stock include certain redemption features that may be triggered
      by events that are not solely within the control of the Company, such as a
      potential default with respect to any indebtedness, including borrowings under
      the WFBC financing arrangement. Accordingly, the Company has classified the
      C-1
      shares as temporary equity and the value ascribed to the C-1 shares upon initial
      issuance in September 2006 was the amount received in the transaction less
      the
      relative fair value ascribed to the warrants and direct costs associated with
      the transaction. The Company allocated $1,641of the gross proceeds of the sale
      of C-1 shares to the warrants based on estimated fair value. In accordance
      with
      EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible
      Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,094
      to
      retained deficit during the quarter ended September 30, 2006. The non-cash
      charge measures the difference between the relative fair value of the C-1 shares
      and the fair market value of the Company's common stock issuable pursuant to
      the
      conversion terms on the date of issuance. The Company is not currently, and
      the
      Company made an assessment that it is not probable that it will be, in default
      on its WFBC credit facility (the only redemption feature outside of its control)
      nor does it plan to redeem the Series C-1 preferred stock. As such the Company
      believes it is not probable that the Series C-1 preferred stock will become
      redeemable.





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





18


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




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


The
      Company’s Series C-1 redeemable convertible preferred stock is summarized as
      follows at December 31, 2006:





Shares
                IssuedAnd
            
            Par
                Value
            
            LiquidationSharesAuthorized
            
            Outstanding
            
            Per
                Share
            
            Preference10
            
            
            10
            
            $
            100
            
            $
            10,000




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





Preferred
      Stocks




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





During
      the quarter ended September 30, 2006, 63 shares of the Company’s common stock
      were issued in payment of Series B-1 dividends of $ 78 earned through June
      30,
      2006.





During
      the quarter ended December 31, 2006, the Company issued 141 and 28 shares of
      the
      Company’s common stock to the Series B-1 and C-1 holders, respectively, for
      dividends earned for the quarter ended September 30, 2006 of $211 and $41 of
      Series B-1 dividends and Series C-1 dividends, respectively.





At
      December 31, 2006, the Company had accrued approximately $206 and $206 of Series
      B-1 dividends and Series C-1 dividends, respectively, which was paid in February
      2007 through the issuance of 94 shares each of the Company’s common stock to the
      Series B-1 and C-1 holders, respectively.





During
      the quarter ended December 31, 2006, the Company paid to the holders of Series
      A-1 preferred stock $124 of declared dividends which covered the period January
      1, 2006 through September 30, 2006. As of December 31, 2006, the Company’s Board
      of Directors had not declared any dividend on the Series A-1 shares for the
      period October 1, 2006 through December 31, 2006. Such undeclared dividends
      amounted to $41.




19


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




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





Common
      Stock




During
      the six months ended December 31, 2006, the Company issued shares of its common
      stock as follows:





·  370
      shares, resulting in $258 proceeds, in connection with exercises of options
      to
      purchase the Company’s common stock;





·  204
      and
      28 shares were issued to Series B-1 and C-1 preferred stock shareholders,
      respectively, in settlement of dividends earned through September 30,
      2006;





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





Additionally,
      subsequent to December 31, 2006, the Company issued 232 shares of its common
      stock in connection with an option exercise.





Stock
      Options and Appreciation Rights




As
      of
      December 31, 2006 and during the six month period ended December 31, 2006:





·  the
      Company recognized approximately $66 as expense in connection with 100
      previously issued stock appreciation rights (“SARs”). The SARs must be exercised
      between July 1, 2008 and December 31, 2008. The SARs are recorded at fair value
      and are marked to market at each reporting period. As of December 31, 2006,
      the
      total liability related to the SARs is $125;





·  total
      unrecognized compensation cost related to stock options granted was $1,431.
      The
      unrecognized stock option compensation cost is expected to be recognized over
      a
      weighted-average period of approximately 2.15 years;





·  total
      options outstanding and total vested options outstanding to purchase the
      Company’s common stock as of December 31, 2006, amounted to 11,720 and 9,843,
      respectively;





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





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





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





20





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





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




In
      2006,
      the Company initiated a pre-tax savings plan covering substantially all
      employees, which qualifies under Section 401(k) of the Internal Revenue
      Code. Under the plan, eligible employees may contribute a portion of their
      pre-tax salary, subject to certain limitations. The Company contributes and
      matches 100% of the employee pre-tax contributions, up to 3% of the employee’s
      compensation plus 50% of pre-tax contributions that exceed 3% of compensation,
      but not to exceed 5% of compensation. The Company may also make profit-sharing
      contributions in its discretion which would be allocated among all eligible
      employees, whether or not they make contributions. Company contributions were
      approximately $68 and $136 for the three and six month periods ended December
      31, 2006, respectively.




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





Major
      Customers




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




Sales
      -
      Percent of Revenue





Three
                Months Ended
              December
                31,
            
            Six
                Months Ended
              December
                31,2006
            
            2005
            
            2006
            
            2005Customer
                “A”
            
            
            10
            %
            
            13
            %
            
            17
            %
            
            13
            %Customer
                “B”
            
            
            16
            %
            
            17
            %
            
            15
            %
            
            *Customer
                “C”
            
            
            13
            %
            
            *
            
            
            14
            %
            
            *Customer
                “D”
            
            
            12
            %
            
            10
            %
            
            10
            %
            
            10
            %Customer
                “E”
            
            
            *
            
            
            15
            %
            
            *
            
            
            14
            %




*  Sales
      to
      customer were less than 10%





Accounts
      Receivable





December
                31,
              2006Customer
                “A”
            
            $
            1,406Customer
                “B”
            
            $
            1,697Customer
                “C”
            
            $
            2,035Customer
                “D”
            
            $
            574Customer
                “E”
            
            $
            1,172





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





Major
      Suppliers




For
      the
      three and six months ended December 31, 2006, the Company purchased materials
      from four suppliers totaling approximately 67% and 65% of purchases,
      respectively. For the three and six months ended December 31, 2005, the Company
      purchased materials from three suppliers totaling approximately 74% and 73%
      of
      purchases, respectively. At December 31, 2006 and 2005, aggregate amounts due
      to
      these suppliers included in accounts payable, were approximately $5.4 million
      and $4.4 million, respectively.





21




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


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





**Rents**




The
      Company leases one of its business premises located in Hauppauge, New York,
      (“Premises”) from an entity owned by three stockholders, one of which is an
      officer of the Company, under a noncancelable lease expiring in October 2019.
      According to the terms of the lease, upon a transfer of a majority of the issued
      and outstanding voting stock of Interpharm, Inc., which occurred on May 30,
      2003, and every three years hereafter the annual rent may be adjusted to fair
      market value, as determined by an independent appraiser. Effective October
      1,
      2006, the Company and its landlord agreed to adjust the base rent for the
      premises based upon two independent appraisals. Accordingly, the Company
      incurred base rent expense of $165 and $285 for the three and six months ended
      December 31, 2006, respectively. For the three and six months ended December
      31,
      2005, the rents paid in accordance with this lease were $120 and $242,
      respectively.





**Investment
      in APR, LLC.**




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




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





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





**Purchase
      from APR, LLC**




During
      the three months ended December 31, 2006, the Company placed an order valued
      at
      $160 for a certain raw material from APR. The Company currently purchases the
      same raw material from an overseas supplier at a price 37% greater than the
      price APR is currently willing to offer. The Company believes sourcing the
      raw
      material from APR would not only resolve intermittent delays in obtaining this
      material from overseas but would also improve gross margins on products using
      the raw material. Upon receipt of the raw material, the Company will analyze
      and
      determine whether the materials from APR will be suitable for use. Accordingly,
      the Company is unable at this time to predict whether the raw material
      associated with this purchase order will be usable.





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





**Litigation**




In
      June
      2006, Ray Vuono (“Vuono”) commenced an action against the Company in the Supreme
      Court of the State of New York, County of Suffolk (Index No. 13985/06). Vuono’s
      complaint against the Company alleges, among other things, that Vuono is
      entitled to receive additional compensation as a “finder” under an agreement
      dated July 1,
      2002
      between Vuono and the Company (then known as Atec Group, Inc.) with respect
      to a
      reverse merger transaction consummated by the Company in May 2003. Vuono also
      alleges that he is entitled to additional compensation under the agreement
      in
      respect of a $41,500 credit facility from Wells Fargo Business Credit, Inc.
      obtained by the Company in February 2006 and the sale for $10,000 of shares
      of a
      new series of convertible preferred stock and warrants to purchase common stock
      of the Company consummated by the Company with Tullis-Dickerson Capital Focus
      III, L.P. in May 2006. The total amount of damages sought by Vuono in the action
      is approximately $10,000. The Company believes that Vuono’s claims are without
      merit and the Company is vigorously defending the action. Currently, the Company
      cannot predict with certainty the outcome of this
      litigation.





22





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





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




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





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





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





**Significant
      Contracts**




Tris
      Pharmaceuticals, Inc




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





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




23




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





**Significant
      Contracts** ,
      continued




Tris
      Pharmaceuticals, Inc ,
      continued





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





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





For
      the
      three and six month periods ended December 31, 2006, the Company recorded as
      research and development expense approximately $1,082 and $1,482, respectively,
      in connection with these agreements. Further, since their inception, the Company
      has incurred approximately $4,992 of research and development costs associated
      with the Tris agreements of which the Company has paid $4,925 as of December
      31,
      2006. The balance on the solids agreement, as amended, is approximately $875.
      The combined costs of these agreements aggregate to $5,800.





Watson
      Pharmaceuticals, Inc .




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





Centrix
      Pharmaceutical, Inc.




On
      October 27, 2006, the Company amended its agreement with Centrix
      Pharmaceuticals, Inc., (“Centrix”) wherein Centrix has agreed to purchase over a
      twelve month period, 40% more bottles of the Company’s female hormone therapy
      products than the initial year of the agreement, commencing November,
      2006.  The parties will equally share net profits, as defined in the
      agreement, with the Company’s share being paid within 45 days of the end of each
      calendar month.  The amendment has a one year term, after which time the
      original Centrix agreement shall again be in full force and effect.





24


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




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





**Significant
      Contracts** ,
      continued




Applied
      Pharma, LLC ,
      continued




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




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





Property
      Lease




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





Watson
      Pharmaceuticals, Inc .





In
      February 2007 the Company entered into a termination and release agreement
      with
      Watson terminating the Manufacturing and Supply Agreement dated as of July
      1, 2003 pursuant to which the Company manufactured and supplied and Watson
      distributed and sold Reprexain® (5.0 mg hydrocodone bitartrate/200 mg ibuprofen)
      tablets.




Further,
      in February 2007 the Company entered into an intellectual property purchase
      agreement with Watson whereby the Company acquired the
      registered trademark, domain name, and website content relating to the
      pharmaceutical product Reprexain® (5.0 mg hydrocodone bitartrate/200 mg
      ibuprofen) tablets as described in the agreement.  As consideration
      the Company shall pay Watson, on a quarterly basis, one and one half percent
      of
      net sales derived from sales of 5.0 mg hydrocodone bitartrate/200 mg
      ibuprofen tablets sold under the Reprexain® trademark.




25


INTERPHARM
      HOLDINGS, INC


(In
      thousands, except per share data)


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





**FORWARD-LOOKING
      STATEMENTS AND ASSOCIATED RISK**





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





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





**Overview**





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





On
      February 2, 2007, the FDA completed its inspection of our Yaphank facility
      and
      issued a “no action indicated” notice in which no deviations from current good
      manufacturing practices (cGMP) were noted. We can now commence full commercial
      operations at the facility, allowing for future launches of scheduled narcotic
      products, oral contraceptives, soft gelatin capsules, products coming off patent
      and products with special release characteristics. In order to increase
      commercial manufacturing capacity for specific products, we are in the process
      of evaluating a separate stand-alone facility for female hormone products which
      require specialized handling and containment.





For
      the
      quarter ended December 31, 2006 our net sales were $17,479 compared to $16,213
      in the same quarter last year, for a year-over-year increase of 7.8%. There
      was,
      however, a significant decrease in gross profit percentage for the three month
      period ended December 31, 2006, to 23.1% as compared to 31.9% for the quarter
      ended December 31, 2005. This was the result of difficulties in obtaining raw
      materials for several finished products,
      as well
      as decreased selling prices to certain customerswhich are detailed
      below. We are taking the necessary corrective measures to ensure that we will
      have adequate supplies of raw materials in the future by qualifying additional
      sources and building up our inventories. As a result, we believe that by
      June
      30, 2007, we will be able to satisfy both our current backlog of orders
      which resulted from supply chain issues, as well as previously targeted sales.
      Sales orders for existing products continue to increase from both new and
      existing customers. In addition, during the quarter, we were successful in
      obtaining sales at top tier accounts in retail, wholesale, distributor, and
      managed care trade classes.




26


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


For
      the
      quarter ended December 31, 2006, we incurred a net loss of approximately $4,124
      compared to a net profit of $609 reported in the three month period ended
      December 31, 2005. The net loss resulted primarily from the supply issues and
      downward pricing pressure on certain productsas well as a charge of
      approximately $1,655 in costs associated with the termination of an agreement
      with Watson Laboratories,
      Inc. (“Watson”), and research and development expenditures of
      $4,871.





Our
      research and development spending continues to increase and we believe the
      developments in each of our six targeted areas are progressing well. However,
      due to complexities in the development of oral contraceptive products, soft
      gelatin capsules and products with special release characteristics, there have
      been delays in development as well as increased costs. As a result, we will
      file
      fewer than the previously announced 37 ANDA filings for the 24 month period
      ending June 30, 2007, but will exceed our originally announced commitment for
      25
      ANDAs over this period. Overall, we are confident in our prospects for the
      future and look forward to focusing our continuing efforts towards enhancing
      shareholder value.





During
      the quarter ending March 31, 2007, we plan to launch eight (8) new products.
      Seven (7) of these products are controlled substances. We believe that our
      acquisition from Watson of the rights to generic Vicoprofen® along with its
      established customer base and existing sales channel has positioned us for
      successful launches of the seven other controlled substance products.





**Results
      of Operations –** **Summary**





As
      indicated in the tables below, our net sales increased $1,266 when comparing
      the
      three month periods ended December 31, 2006 and 2005. However, during the three
      month period ended December 31, 2006, we had difficulties obtaining raw
      materials for the production of our female hormone product, generic Bactrim
      and
      ibuprofen which slowed production, adversely affected net sales and resulted
      in
      an order backlog. As set forth below, we believe that we have adequately
      addressed these supply issues and they are therefore not as likely to affect
      us
      in the future. For our existing female hormone products, there is currently
      only
      one supplier of one of the raw materials. The supplier was unable to meet our
      orders during the quarter. We are working closely with our supplier to ensure
      adequate raw material supplies, however
      we
      anticipate some additional shortage in supplies which may affect our fiscal
      fourth quarter production.




With
      respect to Ibuprofen, there was a shortage of materials available from our
      principal supplier and raw material acquired from one of our alternative sources
      did not meet our specifications. As a result, we are working with that supplier
      with respect to the specifications and have increased our inventories to assure
      that adequate supplies are on hand.




With
      respect to Bactrim, a large shipment of a key raw material was delayed in
      transit shipment and FDA clearance times for replacement shipments were longer
      than anticipated. As a result, we have increased our inventories of this raw
      material.




27


INTERPHARM
        HOLDINGS, INC


(In
        thousands, except per share data)




Three
                Month Periods Ended December
                31,2006
            
            
            2005%
                of
            
            
            
            
            
            %
                ofSales
            
            
            Sales
            
            
            Sales
            
            
            SalesIbuprofen
            
            $
            8,551
            
            
            48.9
            
            $
            8,906
            
            
            54.9Allopurinol
                & Atenolol
            
            
            0
            
            
            0
            
            
            555
            
            
            3.4Naproxen
            
            
            2,422
            
            
            13.9
            
            
            1,588
            
            
            9.8Female
                hormone product
            
            
            1,766
            
            
            10.1
            
            
            2,119
            
            
            13.1Bactrim®
            
            
            4,556
            
            
            26.1
            
            
            1,480
            
            
            9.1Hydrocodone/Ibuprofen
            
            
            104
            
            
            0.6
            
            
            1,079
            
            
            6.7All
                Other Products
            
            
            80
            
            
            0.4
            
            
            486
            
            
            3.0Total
            
            $
            17,479
            
            
            100.
            %
            $
            16,213
            
            
            100.
            %








Six
                Month Periods Ended December 31,2006
            
            2005%
                of
            
            
            
            %
                ofSales
            
            Sales
            
            Sales
            
            SalesIbuprofen
            
            $
            17,173
            
            
            42.6
            
            $
            16,678
            
            
            54.2Allopurinol
                & Atenolol
            
            
            2
            
            
            0
            
            
            2,257
            
            
            7.4Naproxen
            
            
            5,520
            
            
            13.7
            
            
            3,396
            
            
            11.0Female
                hormone product
            
            
            6,791
            
            
            16.8
            
            
            3,902
            
            
            12.7Bactrim®
            
            
            9,304
            
            
            23.1
            
            
            1,915
            
            
            6.2Hydrocodone/Ibuprofen
            
            
            1,031
            
            
            2.6
            
            
            1,664
            
            
            5.4All
                Other Products
            
            
            484
            
            
            1.2
            
            
            948
            
            
            3.1Total
            
            $
            40,305
            
            
            100
            %
            $
            30,760
            
            
            100
            %








·
            Net
                sales of Ibuprofen decreased $355 or 4.0% from the three month period
                ended December 31, 2005, due in part to supply chain issues which
                arose
                during the quarter. We believe the factors that caused the reductions
                in
                Ibuprofen have been addressed and corrected. Among other actions
                taken, we
                are currently attempting to secure an additional source of Ibuprofen,
                as
                well as ensure that our suppliers maintain adequate levels of inventory
                sufficient to enable us to increase our overall production. We believe
                sales of Ibuprofen should increase for the balance of this fiscal
                year,
                however, there can be no assurance that this will occur. However,
                net
                sales for the six month period ended December 31, 2006 increased
                by $495
                or 3% when compared to the six month period ended December 31, 2005,
                due
                largely in part to an expanded customer base.




·
            As
                a result of our expanded marketing efforts which are focused on increasing
                the number of major accounts, sales of Naproxen continued to increase.
                Net
                sales increased $834 or 52.5% when comparing the three month period
                ended
                December 31, 2006 amount of $2,422 to that of the three month period
                ended
                December 31, 2005 total of $1,588. During the six month period ended
                December 31, 2006, net sales of Naproxen increased $2,124 or 63%
                over the
                same six month period of the prior fiscal year. We believe we will
                be able
                to maintain our current net sales volume for the remainder of the
                current
                fiscal year assuming static market conditions, but there can be no
                assurance that this will occur.




28


INTERPHARM
        HOLDINGS, INC


(In
        thousands, except per share data)


**·**
            Net
                sales of our female hormone products were $1,766, a decrease of $353
                when
                compared to net sales of $2,119 for the three month period ended
                December
                31, 2005. This decrease is due in part to two primary factors: (i)
                supply
                chain issues delayed certain of our product shipments until January,
                2007
                that should have been shipped in December, 2006; (ii) as a result
                of
                market conditions, on October 27, 2006, we amended our agreement
                with
                Centrix Pharmaceuticals, Inc., (“Centrix”). Commencing November 2006
                Centrix has agreed to purchase over a twelve month period, 40% more
                bottles than the initial year of our agreement at a discounted price
                with
                a provision for profit sharing.  Under the amended agreement, we will
                share net profits with Centrix as defined in the agreement,
                equally. The amendment has a one year term, after which time the
                original Centrix agreement shall again be in full force and effect.
                Net
                sales recognized of $6,791 during the six month period ended December
                31,
                2006 for these products is $2,889 or 74% greater than the $3,902
                which we
                recognized during the six month period ended December 31, 2005. The
                most
                significant factor contributing to this increase is that the number
                of
                units shipped during the current fiscal year to date period is greater
                than that of the prior year. As a result of the amended agreement,
                we
                believe that net sales for the fiscal year ending June 30, 2007 are
                likely
                to exceed sales recorded during the fiscal year ended June 30, 2006,
                however, there can be no assurance that this will occur.





·
            Affecting
                our sales and gross profit in the six months ended December 31, 2006,
                was
                our ability to increase our market share over the prior year of
                Sulfamethoxazole - Trimethoprim in two strengths 400mg / 80mg commonly
                referred to as generic Bactrim® and 800mg / 160mg or commonly referred to
                as Bactrim-DS®, (both,“Bactrim”). Sales increased $3,076 from $1,480
                during the three month period ended December 31, 2005 to $4,556 recognized
                during the three month period ended December 31, 2006 primarily as
                a
                result of two significant factors: (i) our entering into sales and
                marketing arrangements with two major wholesalers which include net
                profit
                sharing arrangements; and (ii) favorable pricing conditions in the
                market.
                Net sales reported during the six month period ended December 31,
                2006 for
                these products is $9,304, compared to $1,915 reported during the
                six month
                period ended December 31, 2005, resulting in an increase of $7,389
                or
                386%. We initially launched this product in October, 2005, and, therefore,
                part of the year to date increase is attributable to the fact that
                we did
                not begin selling Bactrim at the beginning of the year. We had
                difficulties during the quarter ended December 31, 2006 in obtaining
                quantities of a key ingredient for these products, from our foreign
                supplier which limited our ability to further increase net sales
                of this
                product. We believe we have addressed and corrected our supply chain
                issues for this raw material.




·
            On
                October 3, 2006, we entered into a termination and release agreement
                (the
                “Termination Agreement”) with Watson terminating the Manufacturing and
                Supply Agreement dated as of October 14, 2003 pursuant to which we
                manufactured and supplied and Watson distributed and sold generic
                Vicoprofen® (7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets.As
                a result of the Termination Agreement we obtained all rights to market
                this product. We recorded net sales of only $104 for the three month
                period ended December 31, 2006 compared to $1,079 for the same period
                in
                2005. Net sales of this product for the six month period ended December
                31, 2006 of $1,031 is down from $1,664 which we recognized during
                the six
                month period ended December 31, 2005. While not a material factor
                affecting our net sales recognized during the current quarter, market
                prices for these products has significantly decreased, which will
                likely
                affect our net sales and gross margins at least until the end of
                our
                fiscal year or when market conditions may
                change.




·
            We
                no longer manufacture Allopurinol and Atenolol.




During
      the three month period ended December 31, 2006, four key customers in the
      aggregate accounted for approximately 51% of total sales. For the three month
      period ended December 31, 2005 four key customers accounted for approximately
      56% of total sales.




29


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


**Cost
      of sales / Gross Margins**





During
      the three and six month periods ended December 31, 2006, prices for raw
      materials remained relatively constant when compared to the prior year. However,
      as described above we encountered supply chain problems during the current
      fiscal quarter which we believe we have resolved and should not have
      as
      great aneffect
      onfuture periods. The supply chain issues,
      along
      withdecreased
      selling prices to certain customers resulted in decreased gross
      margins during the three month period ended December 31, 2006. Management
      believes that there may be modest increases in certain key raw material costs,
      as well as the cost of packaging components during the next several months.
      The
      remaining components of our cost of sales - primarily direct labor and overhead
      - have, as a percentage of net sales, increased during the current fiscal year,
      both during the current fiscal quarter as well as the six month period ended
      December 31, 2006, when compared to the same three and six month periods in
      the
      prior fiscal year. When compared to the prior year, we have incurred increased
      costs associated with increased production and supervisory salaries.
      Additionally, we had increases in general overhead costs such as product
      liability insurance and lab and factory supplies. We believe these higher costs
      will likely continue for the near future, and may negatively affect our gross
      margins.





Our
      total
      gross profit percentage for the three months ended December 31, 2006 was 23.1%,
      a decrease of 8.8 percentage points compared to 31.9% for the three months
      ended
      December 31, 2005. This decrease, as described above, is primarily the result
      of
      supply chain issues, which caused a reduction in our production throughput
      and
      created manufacturing inefficiencies, and
      downward pricing pressure on certain products. Additionally, as a result
      of the Centrix amendment, our gross margin as a percentage of net sales for
      our
      female hormone therapy products has decreased during the three month period
      ended December 31, 2006, when compared to prior periods. The lower gross margin
      for these products will continue for the remainder of the amendment period.
      However, we anticipate increases in our net sales and gross margin dollars
      for
      these products for the fiscal year ending June 30, 2007, compared to the fiscal
      year ended June 30, 2006. Overall gross profit percentage for the six month
      period ended December 31, 2006 of 32.3% was 2.5 percentage points higher than
      reported for the six month period ended December 31, 2005. This is primarily
      attributable to new higher margin products shipped during the current fiscal
      year.





As
      sales
      volumes may fluctuate for our higher margin products over the remainder of
      the
      year, we may experience a similar fluctuation in margins. Overall, we still
      believe that our overall gross margin as a percentage of net sales for the
      fiscal year ended June 30, 2007, can exceed the overall gross margin as a
      percentage of net sales reported for the fiscal year ended June 30, 2006.
      However, there can be no assurances market conditions or other factors may
      negatively impact our forecast.





**Selling
      and General and Administrative Expenses**





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





During
      the three month period ended December 31, 2006 selling, general and
      administrative expenses increased approximately $955 to approximately $3,156,
      from approximately $2,201 during three month period ended December 31, 2005.
      When stated as a percentage of net sales it increased 4.5 percentage points
      to
      18.1% compared to 13.6%.




Factors
      contributing to the increase when comparing the three month periods ended
      December 31, 2006 and 2005 include: necessary increases in the staffing and
      related taxes and benefits of administrative and sales staff of $221 to support
      our growth; increased rent, utilities and taxes (much of which is associated
      with our second facility) of $74; an increase in depreciation of $162, primarily
      due to our second facility becoming operational for general and administrative
      purposes July 1, 2006; board of directors fees increased $144; professional
      /
      consulting fees consisting of management advisory services and software
      consulting increased $94; bank /financing fees increased $99 primarily the
      result of the banking facility; during the three month period ended December
      31,
      2006, computer and data processing costs increased by approximately $35 and
      we
      settled a legal matter for $66. These increases were offset by decreases in
      commission expenses of $246 which is primarily the result of the conclusion
      of a
      commission arrangement as well as a reduction in other miscellaneous taxes
      of
      $25.




30


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


During
      the three month period ended March 31, 2006, we granted 100 Stock Appreciation
      Rights (“SARs”), having a maximum cash value of $250. The expense related to the
      SARs are recorded at fair value and is marked to market each reporting period
      with changes recorded as income or expense in the period will be marked to
      market. Accordingly we reported as expense $58 during the three month period
      ended December 31, 2006.





SFAS
      123(R) requires us to report a non-cash expense for the ratable portion of
      the
      fair value of employee stock option awards of unvested stock options over the
      remaining vesting period. Therefore, in accordance with SFAS 123 (R), we
      reported non-cash expenses of $375 and $200 during the three month periods
      ended
      December 31, 2006 and December 31, 2005, respectively.





During
      the six month period ended December 31, 2006 selling, general and administrative
      expenses were $5,794, an increase of $1,155 or 25% when compared to $4,639
      during the six month period ended December 31, 2005. When stated as a percentage
      of net sales, selling, general and administrative expenses decreased
      approximately 0.7 percentage points to 14.4% compared to 15.1%. The significant
      components of this increase are: increased staffing, and associated payroll
      taxes and benefits which we believe necessary in order to support our growth,
      of
      $534; depreciation increased $246 primarily the result of our second facility
      becoming operational for general and administrative purposes; we incurred
      increases in rents and utilities aggregating $139 again primarily due to the
      second facility; board of director fees increased $78; a non-cash expense of
      $42
      recorded in accordance with the provisions of SFAS 123 (R) and banking fees
      incurred with a bank financing which went into effect in March 2006.
      Additionally, we granted a SAR described above which contributed $66 to the
      increase. These were offset by a decrease in commissions of $369. We were paying
      a commission to one salesperson for sales to one customer. This arrangement
      ended during the current quarter.




**Research
      and Development Expenses**





During
      the three month period ended December 31, 2006, we continued to take significant
      steps to expand our product line. We incurred research and development expenses
      of approximately $4,871 (27.9% of net sales) compared to approximately $1,885
      (11.6% of net sales) for the same period in the prior fiscal year, an increase
      of $2,986 or 158.4%. During the six month period ended December 31, 2006 our
      research and development expenses were $8,289 an increase of $4,258 or nearly
      106% higher than the $4,031 reported during the same six month period in the
      prior fiscal year.





Research
      and development expenses were primarily for wages, 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 will increase as a percentage of net sales in the future as we seek
      to
      expand our product line. Included in the increase for the three months ended
      December 31, 2006 when compared to the three months ended December 31, 2005
      is
      $605 related to payroll, payroll taxes and employee benefits. This increased
      staffing is necessary in order for us to implement our plan. Additionally we
      incurred $150 expense as a result of entering into a new consulting agreement.
      The new consultant will assist us in the development of our oral contraceptive
      products.





Our
      research and development costs incurred for the six month period ended December
      31, 2006 of $8,289 is $4,258 or 106% greater than $4,031 which we incurred
      during the six month period in the prior fiscal year. As noted above we continue
      to expand our staff and have therefore witnessed an increase of $965 in salaries
      and related payroll taxes and employee benefits. At December 31, 2006 we had
      47
      employees in our research and development area compared to 20 on December 31,
      2005. External legal costs incurred in association with our product development
      increased to $1,017 during the six month period ended December 31, 2006, an
      increase of $632 over the same period in the prior fiscal year. The remaining
      portion of the increase consists primarily of increases in materials,
      bio-equivalency studies and other general costs.




31


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


During
      October 2006, we entered into a new agreement (“New Liquids Agreement”) with
      Tris Pharma, Inc. (“Tris”), which terminated the agreement entered into February
      2005, which was for the development and licensing of up to twenty-five liquid
      generic products (“Liquids Agreement”). According to the terms of the New
      Liquids Agreement, Tris will, among other things, be required to develop and
      deliver the properties, specifications and formulations (“Product Details”) for
      fourteen generic liquid pharmaceutical products (“Liquid Products”). We will
      then utilize this information to obtain all necessary approvals. Tris will
      manufacture, package and label each product for a fee. In conjunction with
      this
      new liquids agreement we were required to pay Tris $1,000, whether or not
      regulatory approval is obtained for any of the liquid products. As of December
      31, 2006, all payments associated to this agreement were made. In addition,
      Tris
      is to receive forty percent of the net profits, as defined, in accordance with
      the terms in the New Liquids Agreement.





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





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





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





**Interest
      Expense, net**





Our
      net
      interest expense increased approximately $141 and $337 when comparing the three
      and six months ended December 31, 2006 with the three and six month periods
      ended December 31, 2005, respectively primarily as a result of increased
      borrowings to fund the Yaphank facility, renovations, additional purchases
      of
      new equipment and increased research and development activities. It is likely
      that our net interest expense will increase when compared to prior periods
      as a
      result of additional borrowings and higher interest rates.





**Income
      Taxes**





In
      calculating our tax provision for the three and six month periods ended December
      31, 2006 we applied aggregate effective tax rates of approximately 32% and
      27%
      respectively. For the three and six month periods ended December 31, 2005 we
      applied aggregate effective tax rates of approximately 37% and 38%,
      respectively, thereby creating $1,908 and $922 income tax benefits for the
      three
      and six month periods ended December 31, 2006 and $360 and $98 income tax
      expense for the three and six month periods ended December 31, 2005, and
      adjusted its deferred tax asset by like amounts.




32


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


During
      the three and six month period ended December 31, 2006, stock options were
      exercised which generated approximately $9 and $83 of income tax deductions,
      resulting in tax benefits of approximately $3 and $31, which were credited
      to
      additional paid-in capital.





At
      December 31, 2006 we had remaining Federal NOLs of $20,847 and State NOLs of
      $20,257 expiring through 2026. Pursuant to Section 382 of the Internal Revenue
      Code regarding substantial changes of ownership; utilization of these NOLs
      is
      limited. As of December 31, 2006, we determined that it is more likely than
      not,
      that we will utilize all of the Federal NOLs in the future. We recorded a
      valuation allowance of approximately 17% of the State NOLs which we do not
      anticipate utilizing due to State limitations.





**Liquidity
      and Capital Resources**





We
      currently finance our operations and capital expenditures through cash flows
      from operations and bank loans. Net cash used by operating activities for the
      six month period ended December 31, 2006, was $2,195 compared to net cash being
      provided by operating activities of $7,271 for the six month period ended
      December 31, 2005. Significant factors comprising the cash used by operating
      activities for the six month period ended December 31, 2006 include: a net
      loss
      of $2,494 and a net decrease to operating assets and liabilities of $2,284.
      This
      net change in operating assets is due, in part, to a reduction of deferred
      revenue of $3,399, recognized during the period. Additionally, we reported
      depreciation and amortization of $1,098. We also recognized a non cash
      compensation charge of $586 in accordance with the provisions of SFAS 123 (R).
      During the quarter ended December 31, 2006, we recognized a non-cash charge
      of
      $1,655 as a result of a termination agreement with Watson Pharmaceuticals,
      Inc.
      Other items affecting our net cash used in operating activities aggregated
      net
      decreases of $756.





Funds
      used in investing activities of $2,320 during the six month period ended
      December 31, 2006 were for new machinery, equipment and building renovations,
      compared to $4,700 used in investing activities during the six months ended
      December 31, 2005





The
      most
      significant component to our net cash provided by financing activities of $9,956
      was the sale of $10,000 of our Series C-1 redeemable convertible preferred
      stock
      in September 2006, which generated $9,993 of cash. In addition we received
      $258
      from the exercise of employee stock options. Net funds used pertaining to
      long-term debt was $188.





At
      December 31, 2006, we had $6,879 in cash, compared to $1,438 at June 30,
      2006.





It
      should
      be noted that as part of our business plan, during the three and six month
      periods ended December 31, 2006, we incurred $4,871 and $8,289, respectively
      of
      research and development costs. We believe that our research and development
      costs will likely exceed this current rate for the foreseeable
      future.





Bank
      Financing





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





·
            $22,500
                revolving credit facility




·
            $12,000
                real estate term loan




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




·
            $
                3,500 additional / future capital expenditure
                facility




33


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


The
      funds
      made available through this facility paid down, in its entirety, the $20.45
      million owed on the previous credit facility. The new revolving credit facility
      borrowing base is calculated as (i) 85% of our eligible accounts receivable
      plus
      the lesser of 50% of cost or 85% of the net orderly liquidation value of its
      eligible inventory. The advances pertaining to inventory are capped at the
      lesser of 100% of the advance from accounts receivable or $9,000. The $12,000
      loan for the real estate in Yaphank, NY is payable in equal monthly installments
      of $67 plus interest through February 2010 at which time the remaining principal
      balance is due. The $3,500 M&E loan is payable in equal monthly installments
      of $58 plus interest through February 2010 at which time the remaining principal
      balance is due. With respect to additional capital expenditures, we are
      permitted to borrow 90% of the cost of new equipment purchased to a maximum
      of
      $3,500 in borrowings amortized over 60 months. As of December 31, 2006, there
      is
      approximately $2,240 available for additional capital expenditure
      borrowings.





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




The
      revolving credit facility and term loans will bear interest at a rate of the
      prime rate less 0.5% or, at our option, LIBOR plus 250 basis points. At December
      31, 2006, the interest rate on this debt was 7.75%. We have not drawn any funds
      from this revolving credit facility. We will incur a fee of 25 basis points
      per
      annum on any unused amounts of this credit facility. Pursuant to the
      requirements of the WFBC agreement, we put in place a lock-box
      arrangement.





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





With
      respect to the real estate term loan and the $3,500 M&E loan, we entered
      into interest rate swap contracts (the “swaps”), whereby we pay a fixed rate of
      7.56% and 8.00% per annum, respectively. The swaps contracts mature in 2010.
      The
      swaps are a cash flow hedge (i.e. a hedge against interest rates increasing).
      As
      all of the critical terms of the swaps and loans match, they are structured
      for
      short-cut accounting under SFAS No. 133, “Accounting For Derivative Instruments
      and Hedging Activities” and by definition there is no hedge ineffectiveness or a
      need to reassess effectiveness. Fair value of the interest rate swaps at
      December 31, 2006, was approximately $83 and is included in other
      assets.





Watson
      Termination Agreement





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




34


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


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





**Accounts
      Receivable**





As
      of
      December 31, 2006, less than 1% of our receivables had aged greater than 90
      days. We believe the quality of our accounts receivable is good, as such we
      believe our allowance for doubtful accounts is adequate. Further, based upon
      current information available to us we believe there is minimal exposure to
      bad
      debt expense; however we can not be assured that future conditions may alter
      our
      exposure.





**Inventories**





At
      December 31, 2006, the value of our inventory was $9,807, an increase of $1,459
      from $8,348 at September 30, 2006 and an increase of $1,101 from June 30, 2006.  These
      increases are partially due to a planned buildup of finished goods, which we
      believe should enable us to provide improved sales order turn-around as well
      as
      an increase in raw material safety-stock levels. During the three month period
      ended December 31, 2006, we encountered numerous supply chain issues which
      caused manufacturing inefficiencies as well as delays in shipping. As such,
      we
      believe the increase in our inventory levels was necessary. The overall impact
      in the buildup of inventory should not adversely effect our plan, but may
      negatively affect our cash.




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





Accounts
      payable, accrued expenses and other current liabilities increased by
      approximately $585 from June 30, 2006 to December 31, 2006. The increase is
      primarily attributable to increases in purchases of raw materials due to greater
      sales volume as well as increased research and development costs.




**Cash**





Cash
      increased during the six month period ended December 31, 2006, by approximately
      $5,441 to $6,879 at December 31, 2006 from $1,438 at June 30, 2006, primarily
      as
      a result of the sale of $10,000 of our Series C-1 redeemable convertible
      preferred stock. Please see Liquidity and Capital Resources above for further
      analysis.





**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.




35


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


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





**Revenue
      Recognition**





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





In
      addition, we are party to supply agreements with certain pharmaceutical
      companies under which, in addition to the selling price of the product, we
      receive payments based on sales or profits associated with these products
      realized by our customer. We recognize revenue related to the initial selling
      price upon shipment of the products as the selling price is fixed and
      determinable and no right of return exists. We recognize the additional revenue
      component of these agreements at the time our customers record their sales
      and
      is based on pre-defined formulas contained in the agreements.





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





**Sales
      Incentives**





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




36


INTERPHARM
        HOLDINGS, INC


(In
        thousands, except per share data)


**Inventories**





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





**Research
      and Development**





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





**Issues
      And Uncertainties**




**Risk
      of Product Liability Claims**





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




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




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


At
      December 31, 2006, total obligations to our bank pertaining to the credit
      facility described above were: (i) approximately $11,333 real estate term loan;
      and (ii) $4,086 owing on the machinery and equipment lines. With
      respect to the real estate term loan and the machinery and equipment loans,
      we
      entered into interest rate swap contracts (the “swaps”), whereby the Company
      pays a fixed rate of 7.56% and 8.00% per annum, respectively. The swaps
      contracts mature in 2010. The swaps are a cash flow hedge (i.e. a hedge against
      interest rates increasing). As all of the critical terms of the swaps and loans
      match, they are structured for short-cut accounting under SFAS No. 133,
“Accounting For Derivative Instruments and Hedging Activities’” and by
      definition, there is no hedge ineffectiveness or a need to reassess
      effectiveness. Fair value of the interest rate swaps at December 31, 2006 was
      approximately $83.




37


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


If
      our
      combined variable rate borrowings of approximately $1,169 remained at the same
      amount as of December 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 $3 per quarter.





The
      remaining borrowing capacity within the credit facility with WFBC will likely
      be
      used for such things as future research and development costs as well as the
      purchase of new equipment for our facilities. Any additional borrowings could
      effectively increase our exposure to interest rate market risk. In addition,
      we
      are required to comply with certain financial covenants.





**ITEM
      4 - CONTROLS AND PROCEDURES**





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





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





At
      the
      conclusion of the six month period ended December 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
      not
      effective in alerting them in a timely manner to information relating to the
      Company required to be disclosed in this report. As set forth in Note 12 to
      our
      unaudited condensed consolidated financial statements for the six months ended
      December 31, 2006, in our Form 10-Q for the three months ended September 30,
      2006, we incorrectly disclosed that we granted 1,474 stock options to certain
      employees on October 26, 2006. As a result, management has commenced a review
      to
      improve the applicable disclosure controls and option grant
      procedures.





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




38





INTERPHARM
      HOLDINGS, INC





**PART
      II - OTHER INFORMATION**




**Item
              1.a**
            **Risk
                factors**




We
      operate in a highly competitive environment in which there are numerous factors
      which can influence our business, financial position or results of operations
      and which can also cause the market value of our common stock to decline. Many
      of these factors are beyond our control and therefore, are difficult to predict.
      The following section sets forth risk factors in addition to those contained
      in
      our Annual Report on Form 10-K for the fiscal year ended June 30, 2006 and
      should be read in conjunction with those risk factors.





*Some
      of our raw materials are not readily available and may only be available from
      a
      single source and therefore, a supply interruption could have a material adverse
      effect on our business and financial condition and could cause a decline in
      the
      market value of our common stock.*





Many
      of
      our raw materials are not readily available from multiple suppliers and, in
      some
      cases, are available from only a single source. We have experienced supply
      issues from single source suppliers and there can be no assurance that supply
      interruptions or delays will not occur in the future without the ability to
      obtain substitute materials leading to delays in production and/or loss of
      sales
      or customers. Any significant supply interruption from a single source supplier
      could have a material adverse effect on our business and financial condition
      and
      could cause a decline in the market value of our common stock.




**Item
              4.**
            **Submission
                of Matters to a Vote of Security
                Holders**





The
      Company held its annual meeting of stockholders on November 16, 2006 at the
      Hilton Hotel 598 Broadhollow Road, Melville, New York. At the annual meeting,
      two proposals were voted on by the Company’s stockholders: the election of
      directors and the ratification of the selection of the Company’s auditors for
      the fiscal year ending June 30, 2007. The specific proposals and results of
      the
      voting at the annual meeting are set forth below.





1.  The
      stockholders of the Company voted to elect six members to the Board of Directors
      to serve until their respective successors are elected. The results of the
      vote
      are:





For
            
            Against
            
            AbstainDr.
                Maganlal K. Sutaria
            
            61,192,551
            
            128,406
            
            0David
                Reback
            
            61,257,082
            
            63,955
            
            0Stewart
                H. Benjamin
            
            61,259,173
            
            61,864
            
            0Richard
                Miller
            
            61,259,387
            
            61,650
            
            0Kennith
                Johnson
            
            61,289,433
            
            31,604
            
            0Joan
                Neuscheler
            
            61,250,344
            
            70,693
            
            0




2.  The
      stockholders also voted to ratify and approve Marcum & Kliegman, LLP, as our
      independent public accountants, to audit our financial statements for the fiscal
      year ending June 30, 2007. The result of the vote was:





For
            
            Against
            
            Abstain61,091,928
            
            229,108
            
            0




39


INTERPHARM
      HOLDINGS, INC




**Item
                  6.**
              
              **Exhibits**Exhibits10.1
              
              Termination
                  Agreement between Interpharm, Inc. and Watson Laboratories,
                  Inc.21.1
              
              List
                  of Subsidiaries.31.1
              
              Certification
                  of Chief Executive Officer pursuant to Rules 13a-14(a) as adopted,
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  200231.2
              
              Certification
                  of the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted,
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1
              
              Certifications
                  of the Chief Executive Officer and the Chief Financial Officer
                  pursuant to
                  18 U.S.C. Section 1350 as adopted, pursuant to Section 906 of the
                  Sabanes-Oxley Act of 2002.




40


**** INTERPHARM
      HOLDINGS, INC





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:
                February 14, 2007
            By:
            /s/
              George AronsonGeorge
                Aronson,
              Chief
                Financial Officer
              (Duly
                authorized to sign on behalf of
                registrant)


41




INTERPHARM
      HOLDINGS, INC




**Exhibits****Number**
              
              **Description****21.1**
              
              **List
                  of Subsidiaries**


42