**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, 2007





o TRANSITION
      REPORT
      PURSUANT TO SECTION 13 OR 15(d)


OF
      THE
      SECURITIES EXCHANGE ACT OF 1934


For
      the
      Transition Period from   to


__________





Commission
      File Number 0-22710





**INTERPHARM
      HOLDINGS, INC** .


______________________________________


(Exact
      name of registrant as specified in its charter)




Delaware
              
              13-3673965State
                  or other jurisdiction of
              
              (I.R.S.
                  Employercorporation
                  or organization)
              
              Identification
                  Number)
  75
                    Adams Avenue, Hauppauge, New York
                
                11788(Address
                    of principal executive offices)
                
                (Zip
                    Code)


Issuer's
      telephone number, including area code (631) 952-0214





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





YES x     
      NO o





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





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





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




YES o  NO x





As
      of the
      close of business on February 11, 2008, there were 66,738,422 shares of the
      Registrant's $0.01 par value per share Common Stock outstanding.













INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





TABLE
      OF
      CONTENTS




PART
                  I
              Financial
                  Information
              PageItem
                  1.
              Financial
                  Statements & Notes
              1-38Item
                  2.
              Managements
                  Discussion & Analysis of
                Financial
                  Condition and Results of Operations
              39-55Item
                  3.
              Quantitative
                  and Qualitative Disclosures about Market Risk
              55Item
                  4.
              Controls
                  and Procedures
              56PART
                  II
              Other
                  Information Required in ReportItem
                  1.
              Legal
                  Proceedings
              57Item6.
                  Exhibits
              
              59Signatures
                  Page
              
              60Exhibits/Certifications
              
              61-64







INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(In
      thousands)





ASSETS


December
                31,
            
            June
                30,2007
            
            2007CURRENT
                ASSETS
            
            
            (Unaudited)Cash
            
            $
            41
            
            $
            72Accounts
                receivable, net
            
            
            13,718
            
            
            12,945Inventories,
                net
            
            
            12,256
            
            
            17,295Prepaid
                expenses and other current assets
            
            
            1,361
            
            
            1,794Deferred
                tax assets
            
            
            --
            
            
            21Total
                Current Assets
            
            
            27,376
            
            
            32,127Land,
                building and equipment, net
            
            
            35,099
            
            
            34,498Deferred
                tax assets
            
            
            --
            
            
            5,954Investment
                in APR, LLC
            
            
            1,023
            
            
            1,023Other
                assets
            
            
            837
            
            
            772TOTAL
                ASSETS
            
            $
            64,335
            
            $
            74,374




*See
        Notes To Condensed Consolidated Financial Statements.*





1







INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED BALANCE SHEETS


(In
      thousands)





LIABILITIES
      AND STOCKHOLDERS’ (DEFICIT) EQUITY





December
                31,
            
            June
                30,2007
            
            2007(Unaudited)CURRENT
                LIABILITIESCurrent
                maturities of long-term debt
            
            $
            30,681
            
            $
            12,057Accounts
                payable, accrued expenses and other liabilities
            
            
            13,330
            
            
            18,542Total
                Current Liabilities
            
            
            44,011
            
            
            30,599OTHER
                LIABILITIESLong-term
                debt, less current maturities
            
            
            7,790
            
            
            14,488Contract
                termination liability
            
            
            903
            
            
            1,356Other
                liabilities
            
            
            417
            
            
            5Total
                Other Liabilities
            
            
            9,110
            
            
            15,849TOTAL
                LIABILITIES
            
            
            53,121
            
            
            46,448COMMITMENTS
                AND CONTINGENCIESSeries
                B-1 Redeemable Convertible Preferred Stock:
              15
                shares authorized; issued and outstanding - 10 at December 31,
                2007
              and
                June 30, 2007; liquidation preference of $10,000
            
            
            8,155
            
            
            8,155Series
                C-1 Redeemable Convertible Preferred Stock:
              10
                shares authorized; issued and outstanding - 10 at
              December
                31, 2007 and June 30, 2007; liquidation preference of
                $10,000
            
            
            8,352
            
            
            8,352STOCKHOLDERS’
                (DEFICIT) EQUITYPreferred
                stocks, 10,000 shares authorized; issued and
              outstanding
                - 5,132 at December 31, 2007 and June 30, 2007;
              aggregate
                liquidation preference of $3,588 at December 31, 2007
              and
                June 30, 2007.
            
            
            51
            
            
            51Common
                stock, $0.01 par value, 150,000 shares authorized; shares issued
                -
              66,738
                and 65,886 respectively.
            
            
            667
            
            
            659Additional
                paid-in capital
            
            
            34,339
            
            
            29,530Accumulated
                other comprehensive (loss) income
            
            
            (380
            )
            
            10Accumulated
                deficit
            
            
            (39,970
            )
            
            (18,831
            )TOTAL
                STOCKHOLDERS’ (DEFICIT) EQUITY
            
            
            (5,293
            )
            
            11,419TOTAL
                LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
            
            $
            64,335
            
            $
            74,374




*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
                31,2007
            
            2006
            
            2007
            
            2006SALES,
                Net
            
            $
            16,214
            
            $
            17,479
            
            $
            33,929
            
            $
            40,305COST
                OF SALES(including related party rent expense of $165 and $330 for the three
                and
                six months ended December 31, 2007 and $140 and $242 for the three
                and six
                months ended December 31, 2006, respectively)
            
            
            13,945
            
            
            13,443
            
            
            30,584
            
            
            27,292GROSS
                PROFIT
            
            
            2,269
            
            
            4,036
            
            
            3,345
            
            
            13,013OPERATING
                EXPENSESSelling,
                general and administrative
            
            
            3,303
            
            
            3,156
            
            
            7,075
            
            
            5,794Related
                party rent
            
            
            --
            
            
            25
            
            
            --
            
            
            43Research
                and development
            
            
            2,903
            
            
            4,871
            
            
            6,361
            
            
            8,289TOTAL
                OPERATING EXPENSES
            
            
            6,206
            
            
            8,052
            
            
            13,436
            
            
            14,126OPERATING
                LOSS
            
            
            (3,937
            )
            
            (4,016
            )
            
            (10,091
            )
            
            (1,113
            )OTHER
                EXPENSESContract
                termination expense
            
            
            --
            
            
            1,655
            
            
            --
            
            
            1,655Interest
                expense, net
            
            
            984
            
            
            240
            
            
            1,727
            
            
            527Other
            
            
            --
            
            
            121
            
            
            --
            
            
            121TOTAL
                OTHER EXPENSE
            
            
            984
            
            
            2,016
            
            
            1,727
            
            
            2,303LOSS
                BEFORE INCOME TAXES
            
            
            (4,921
            )
            
            (6,032
            )
            
            (11,818
            )
            
            (3,416
            )PROVISION
                FOR (BENEFIT FROM) INCOME TAXES
            
            
            5,976
            
            
            (1,908
            )
            
            5,976
            
            
            (922
            )NET
                LOSS
            
            
            (10,897
            )
            
            (4,124
            )
            
            (17,794
            )
            
            (2,494
            )Preferred
                stock beneficial conversion feature
            
            
            --
            
            
            --
            
            
            --
            
            
            1,094Deemed
                dividend upon modification of warrants exercise price and preferred
                stock
                exchange
            
            
            3,345
            
            
            --
            
            
            3,345
            
            
            --Preferred
                stock dividends
            
            
            41
            
            
            453
            
            
            82
            
            
            742NET
                LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
            
            $
            (14,283
            )
            $
            (4,577
            )
            $
            (21,221
            )
            $
            (4,330
            )LOSS
                PER SHARE ATTRIBUTABLE TO COMMONSTOCKHOLDERSBasic
                and diluted loss per share
            
            $
            (0.21
            )
            $
            (0.07
            )
            $
            (0.32
            )
            $
            (0.07
            )Basic
                and diluted weighted average shares and equivalent shares
              outstanding
            
            
            66,738
            
            
            65,063
            
            
            66,467
            
            
            64,892




See
      Notes To Condensed Consolidated Financial
      Statements.





3




INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES





CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)


(UNAUDITED)


(In
      thousands)




Preferred
                Stock
            
            Common
                Stock
            
            Additional
                Paid-In
              Capital
            
            Accumulated
                Other
              Compre-hensive
                (Loss) Income
            
            Accumulated
                Deficit
            
            Total
              Stock-
              Holders
                Equity (DeficitShares
            
            Amount
            
            Shares
            
            AmountBALANCE
                - June 30, 2007
            
            
            5,132
            
            $
            51
            
            
            65,886
            
            $
            659
            
            $
            29,530
            
            $
            10
            
            $
            (18,831
            )
            $
            11,419Shares
                issued for options and warrants exercised
            
            
            
            
            
            
            
            
            556
            
            
            6
            
            
            (1
            )
            
            
            
            
            
            
            
            5Series
                B-1 dividends paid with common stock
            
            
            
            
            
            
            
            
            148
            
            
            1
            
            
            205
            
            
            
            
            
            
            
            
            206Series
                C-1 dividends paid with common stock
            
            
            
            
            
            
            
            
            148
            
            
            1
            
            
            205
            
            
            
            
            
            
            
            
            206Stock
                based compensation and modification expense
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            575
            
            
            
            
            
            
            
            
            575Warrants
                to be issued in connection with STAR convertible debt
                issuance
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            480
            
            
            
            
            
            
            
            
            480Deemed
                dividend from Series B-1 warrants exercise price
                modification
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            158
            
            
            
            
            
            (158
            )
            
            --Deemed
                dividend from Series C-1 warrants exercise price
                modification
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            157
            
            
            
            
            
            (157
            )
            
            --Deemed
                dividend on Series B-1 exchange for Series D-1
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,515
            
            
            
            
            
            (1,515
            )
            
            --Deemed
                dividend on Series C-1 exchange for Series D-1
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,515
            
            
            
            
            
            (1,515
            )
            
            --Change
                in fair value of interest rate swap
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (390
            )
            
            
            
            
            (390
            )Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (17,794
            )
            
            (17,794
            )BALANCE
                - December 31, 2007
            
            
            5,132
            
            $
            51
            
            
            66,738
            
            $
            667
            
            $
            34,339
            
            
            ($380
            )
            
            ($39,970
            )
            
            ($5,293
            )




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
                31,2007
            
            2006
            
            2007
            
            2006NET
                LOSS
            
            $
            (10,897
            )
            $
            (4,124
            )
            $
            (17,794
            )
            $
            (2,494
            )OTHER
                COMPREHENSIVE LOSSChange
                in fair value of interest rate swap
            
            
            (172
            )
            
            (29
            )
            
            (390
            )
            
            (15
            )TOTAL
                COMPREHENSIVE LOSS
            
            $
            (11,069
            )
            $
            (4,153
            )
            $
            (18,184
            )
            $
            (2,509
            )





See
      Notes To Condensed Consolidated Financial
      Statements.


5


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(In
      thousands)




Six
                Months EndedDecember
                31,2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss from operations
            
            $
            (17,794
            )
            $
            (2,494
            )Adjustments
                to reconcile net loss to net cash (used in) provided by operating
                activities:Bad
                debt expense
            
            
            --
            
            
            55Accreted
                non-cash interest expense
            
            
            94
            
            
            21Depreciation
                and amortization
            
            
            1,818
            
            
            1,029Contract
                termination expense
            
            
            --
            
            
            1,655Amortization
                of deferred financing fees
            
            
            79
            
            
            69Stock
                based compensation expense
            
            
            575
            
            
            586Deferred
                tax expense (benefit)
            
            
            5,976
            
            
            (922
            )Excess
                tax benefit from exercise of stock options
            
            
            --
            
            
            (31
            )Write-down
                of inventory
            
            
            1,205
            
            
            --Other
            
            
            --
            
            
            121Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (773
            )
            
            2,812Inventories
            
            
            3,834
            
            
            (1,101
            )Prepaid
                expenses and other current assets
            
            
            433
            
            
            (360
            )Accounts
                payable, accrued expenses and other liabilities
            
            
            (5,282
            )
            
            (236
            )Deferred
                revenue
            
            
            --
            
            
            (3,399
            )Total
                adjustments
            
            
            7,959
            
            
            299NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (9,835
            )
            
            (2,195
            )CASH
                FLOWS FROM INVESTING ACTIVITIESPurchases
                of machinery and equipment, net
            
            
            (2,058
            )
            
            (2,200
            )Deposits
                and other long-term assets
            
            
            (22
            )
            
            (120
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (2,080
            )
            
            (2,320
            )CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from sale of Series C-1 preferred stock and warrants, net
            
            
            --
            
            
            9,993Expenditures
                relating to sale of Series B-1 preferred stock and
                warrants
            
            
            --
            
            
            (70
            )Proceeds
                from options exercised
            
            
            5
            
            
            258Proceeds
                from long-term debt
            
            
            8,000
            
            
            690Payment
                of Series A-1 dividends
            
            
            --
            
            
            (124
            )Excess
                tax benefit from exercise of stock options
            
            
            --
            
            
            31Collections
                on stock subscription receivable
            
            
            --
            
            
            56Proceeds
                from line of credit, net
            
            
            5,277
            
            
            --Repayments
                of long-term debt
            
            
            (1,115
            )
            
            (878
            )Payment
                of deferred financing and other costs
            
            
            (283
            )
            
            --NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            11,884
            
            
            9,956NET
                (DECREASE) INCREASE IN CASH
            
            
            (31
            )
            
            5,441CASH-
                Beginning
            
            
            72
            
            
            1,438CASH-
                Ending
            
            $
            41
            
            $
            6,879


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 EndedDecember
                31,2007
            
            2006SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid during the periods for:Interest
            
            $
            1,464
            
            $
            636Non-Cash
                Investing or Financing Transactions:Tax
                Benefit in connection with exercise of stock options
            
            $
            --
            
            $
            31Acquisition
                of machinery and equipment in exchange for capital lease
              payable
            
            $
            212
            
            $
            156Reclassification
                of equipment deposits to building and equipment
            
            $
            150
            
            $
            389Series
                B-1 dividends paid with common stock
            
            $
            206
            
            $
            284Series
                C-1 dividends paid with common stock
            
            $
            206
            
            $
            41Accrual
                of Series B-1 dividends
            
            $
            --
            
            $
            206Accrual
                of Series C-1 dividends
            
            $
            --
            
            $
            206Change
                in fair value of interest rate swap
            
            $
            (390
            )
            $
            15




See
      Notes To Condensed Consolidated Financial
      Statements.




7


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


(In
      thousands, except for share data)


**NOTE
      1 -** **Basis
      of Presentation**





The
      accompanying unaudited interim 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, 2007 are not necessarily indicative of the results
      that may be expected for the fiscal year ending June 30, 2008. The condensed
      consolidated financial statements should be read in conjunction with the audited
      consolidated financial statements and notes thereto included in the Company’s
      Annual Report on Form 10-K for the year ended June 30, 2007.





Nature
      of Business





The
      Company, 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.


8




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**NOTE
      2 -Management’s Liquidity Plans and Going Concern**





The
      accompanying condensed consolidated financial statements have been prepared
      on a
      going concern basis, which contemplates continuity of operations, realization
      of
      assets, and liquidity of liabilities in the ordinary course of business.
      Realization of the Company’s assets is dependent on the continued operations of
      the Company and the future success of such operations.





The
      Company has incurred a net loss for the six months ended December 31, 2007
      of
      $17,794 and has incurred net losses for each of the last three fiscal years.
      At
      December 31, 2007, the Company had a working capital deficiency of $16,635,
      an
      accumulated deficit of $39,970 and cash flows used in operating activities
      of
      $9,835.





In
      addition, as disclosed in Note 8 - Debt, on January 10, 2008, the Company
      received notice that it had defaulted under its Forbearance Agreement with
      Wells
      Fargo Business Credit, with respect to: (i) financial covenants relating to
      required Income Before Tax for the months ending October 31, 2007 and November
      30, 2007, (ii) financial covenants relating to required Net Cash Flow for the
      months ending October 31, 2007 and November 30, 2007 and (iii) an obligation
      to
      have a designated financial advisor provide an opinion as to the Company's
      ability to meet their fiscal year 2008 projections. Subsequently, on January
      28,
      2008, Wells Fargo informed the Company that it would consider providing the
      Company with credit availability on the condition that the Company (i) develops
      and implements a new operating plan focused on increasing the amount of eligible
      collateral and reducing costs and (ii) develop an alternative financing
      arrangement. Further, on February 5, 2008, the Company and Wells Fargo entered
      into the Forbearance Agreement whereby Wells Fargo agreed to, among other
      things, (i) forbear from exercising its remedies arising from the Company’s
      default under the Credit Agreement until June 30, 2008 provided no further
      default occurs; (ii) provide a moratorium on certain principal payment; (iii)
      and advance the Company up to $3,000 under a newly granted real estate line
      of
      credit mortgage on the Company’s real estate, which amounts will be due on June
      30, 2008. The total amount outstanding with Wells Fargo at December 31, 2007
      was
      $30,590.





Under
      the
      Forbearance Agreement the Company agreed to (i) submit to Wells Fargo,
      on a weekly basis, a “rolling” 13-week budget; (ii) engage a chief restructuring
      officer to review and oversee the budget and, in conjunction with the
      Company’s management, certain financial matters; (iii) grant Wells Fargo an
      equity line of credit mortgage to secure its new equity line of credit and
      a
      collateral mortgage to secure certain obligations under the $7,000 portion
      of
      revolving line of credit that has been converted to a term loan and (iv) pay
      Wells Fargo a success fee of up to $500 in the event the balance of the
      indebtedness owed to Wells Fargo is repaid from the sale of the Company’s
      stock or substantially all of its assets prior to June 30,
      2008





In
      connection with its negotiation of the Forbearance Agreement, the Company
      completed a restructuring of its operations on January 25, 2008 and submitted
      a
      new operating plan to Wells Fargo, which the Company believes will result in
      positive cash flow and net profits, and includes the following:





·
            Identifying
                alternative financing sources for the Company’s real estate, machinery and
                equipment, and working capital finance.


·
            Reducing
                payroll and headcount by approximately
                20%


·
            Increasing
                revenue through the launch of new products, identifying new customers,
                and
                expanding relationships with existing
                customers


·
            Substantially
                reducing research and development activities


9


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**NOTE
      2 -Management’s Liquidity Plans and Going Concern,
      continued**





There
      can
      be no assurances that the Company will be able to reverse its operating losses,
      cash flow deficiencies, or meet the requirements set forth in the Forbearance
      Agreement entered into on February 5, 2008. These factors raise substantial
      doubt about the Company’s ability to continue as a going concern. The financial
      statements do not include any adjustments to the measurement and classification
      of recorded asset amounts and classification of liabilities that might be
      necessary should we be unable to continue as a going concern.





Among
      other initiatives, the Company is currently holding discussions with its key
      vendors in an effort ensure that there is a continuous supply of raw
      materials.  In addition, the Company is seeking alternative financing
      arrangements to secure additional working capital.  If the Company is not
      able to procure sufficient levels of raw materials, or if the Company is not
      able to secure additional working capital in a timely manner, then the Company
      will not be able to continue as a going concern.  The Company would then be
      forced to conduct a sale of the Company or a liquidation of assets in
      bankruptcy.





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





Revenue
      Recognition


The
      Company recognizes product sales revenue when title and risk of loss have
      transferred to the customer, when estimated provisions for chargebacks and
      other
      sales allowances including discounts, rebates, etc., are reasonably
      determinable, and when collectibility is reasonably assured. Accruals for these
      provisions are presented in the condensed consolidated financial statements
      as
      reductions to revenues. Accounts receivable are presented net of allowances
      relating to the above provisions of $4,694 and $4,865 at December 31, 2007
      and
      June 30, 2007, respectively.





In
      addition, the Company is party to manufacturing and 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 $40 and
      $594
      at December 31, 2007 and June 30, 2007, respectively, are included in “Accounts
      receivable, net” in the accompanying Condensed Consolidated Balance Sheets.





Earnings
      (Loss) Per Share


Basic
      earnings (loss) per share (“EPS”) of common stock is computed by dividing net
      income (loss) attributable to common stockholders by the weighted average number
      of shares of common stock outstanding during the period. Diluted EPS reflects
      the amount of net income (loss) for the period available to each share of common
      stock outstanding during the reporting period, giving effect to all potentially
      dilutive shares of common stock from the potential exercise of stock options
      and
      warrants and conversions of convertible preferred stocks.


10





INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)
  NOTE
        3 - 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. These estimates are often based on judgements,
      probabilities, and assumptions that management believe are reasonable, but
      that
      are not inherently uncertain and unpredictable. As a result, actual results
      could differ from those estimates. Management periodically evaluates estimates
      used in the preparation of the consolidated financial statements for continued
      reasonableness. Appropriate adjustments, if any, to the estimates used are
      made
      prospectively based on such periodic evaluations.





Stock
      Based Compensation


The
      Company accounts for stock based compensation arrangements using the fair value
      recognition provisions of Statement of Financial Accounting Standards (“SFAS”)
      No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”). The
      Company estimates fair value of employee stock options using the Black-Scholes
      Model. Key assumptions in the Black-Scholes model include stock price, expected
      volatility, risk free interest rate, expected life, and expected forfeiture
      rates. The compensation cost of these arrangements is recognized over the
      requisite service period, which in the case of employees is often the vesting
      period. As a result, the Company’s net loss before taxes for the three months
      ended December 31, 2007 and 2006 included a non cash stock based compensation
      expense of $233 and $375, respectively, and $575 and $586 for the six months
      ended December 31, 2007 and 2006, respectively.





Impairment
      of Long-Lived Assets


The
      Company reviews its long-lived assets for impairment whenever events or changes
      in circumstances indicate that the carrying amount of the assets may not be
      fully recoverable. To determine if impairment exists, the Company compares
      the
      estimated future undiscounted cash flows from the related long-lived assets
      to
      the net carrying amount of such assets. Once it has been determined that
      impairment exists, the carrying value of the asset is adjusted to fair value.
      Factors considered in the determination of fair value include current operating
      results, trends and the present value of estimated expected future cash
      flows.





Reclassifications


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


11


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





New
      Accounting Pronouncements





On
      July
      1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”)
      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”). This
      Interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise’s financial statements in accordance with SFAS No.
      109. FIN 48 prescribes a recognition threshold and measurement attribute for
      the
      financial statement recognition and measurement of an income tax position taken
      or expected to be taken in an income tax return. Adoption of the provisions
      of
      FIN 48 did not have a material impact on the Company’s condensed consolidated
      financial position, results of operations, or its cash flows for the six months
      ended December 31, 2007 (see Note 9).





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. This guidance was
      effective for the Company as of July 1, 2007.   Adoption of the provisions
      of SFAS 156 had no impact on the Company’s condensed consolidated financial
      position, results of operations, or its cash flows for the six months ended
      December 31, 2007.





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




In
      December 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2
“Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”). FSP
      00-19-2 provides guidance related to the accounting for registration payment
      arrangements and specifies that the contingent obligation to make future
      payments or otherwise transfer consideration under a registration arrangement,
      whether issued as a separate arrangement or included as a provision of a
      financial instrument or arrangement, should be separately recognized and
      measured in accordance with SFAS No. 5, “Accounting for
      Contingencies.”  FSP 00-19-2 requires that if the transfer of
      consideration under a registration payment arrangement is probable and can
      be
      reasonably estimated at inception, the contingent liability under such
      arrangement shall be included in the allocation of proceeds from the related
      financing transaction using the measurement guidance in




12


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





Statement
      No. 5. FSP 00-19-2 applies immediately to any registration payment arrangements
      entered into subsequent to the issuance of FSP 00-19-2. This guidance was
      effective for the Company as of July 1, 2007. Adoption of the provisions of
      FSP
      00-19-2 had no impact on the Company’s condensed consolidated financial
      position, results of operations, or its cash flows for the three and six months
      ended December 31, 2007.





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




In
      December 2007, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 141R, “Business
      Combinations” (“SFAS 141R”), which replaces SFAS No. 141, “Business
      Combinations.” SFAS 141R establishes principles and requirements for determining
      how an enterprise recognizes and measures the fair value of certain assets
      and
      liabilities acquired in a business combination, including noncontrolling
      interests, contingent consideration, and certain acquired contingencies. SFAS
      141R also requires acquisition-related transaction expenses and restructuring
      costs be expensed as incurred rather than capitalized as a component of the
      business combination. SFAS 141R will be applicable prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008. SFAS
      141R
      would have an impact on accounting for any businesses acquired after the
      effective date of this pronouncement. The Company does not expect the adoption
      of SFAS No. 141R to have a material impact on its consolidated financial
      statements.




In
      December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
      Consolidated Financial Statements - An Amendment of ARB No. 51” (“SFAS
      160”). SFAS 160 establishes accounting and reporting standards for the
      noncontrolling interest in a subsidiary (previously referred to as minority
      interests). SFAS 160 also requires that a retained noncontrolling interest
      upon
      the deconsolidation of a subsidiary be initially measured at its fair value.
      Upon adoption of SFAS 160, the Company would be required to report any
      noncontrolling interests as a separate component of stockholders’ equity. The
      Company would also be required to present any net income allocable to
      noncontrolling interests and net income attributable to the stockholders of
      the
      Company separately in its consolidated statements of income. SFAS 160 is
      effective for fiscal years, and interim periods within those fiscal years,
      beginning on or after




13


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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




December
      15, 2008. SFAS 160 requires retroactive adoption of the presentation and
      disclosure requirements for existing minority interests. All other requirements
      of SFAS 160 shall be applied prospectively. SFAS 160 would have an impact on
      the
      presentation and disclosure of the noncontrolling interests of any non
      wholly-owned businesses acquired in the future. The Company does not expect
      the
      adoption of SFAS No. 160 to have a material impact on its consolidated financial
      statements.




**NOTE
      4 -** **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, discounts, rebates
      and
      customer chargebacks. Allowances for doubtful accounts were approximately $30
      at
      December 31, 2007 and June 30, 2007. 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 relating to
      discounts, rebates, and customer chargebacks were $4,694 and $4,865 at December
      31, 2007 and June 30, 2007, 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 (known
      as a “chargeback”) 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. 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.


14




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**NOTE
      4 -** **Accounts
      Receivable**




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




Six
                  Months EndedDecember
                  31,2007
              
              2006Reserve
                  balance - beginning
              
              $
              4,865
              
              $
              2,315Actual
                  chargebacks, discounts and othercredits
                  taken in the current period (a)
              
              
              (11,381
              )
              
              (5,014
              )Current
                  provision related to current period sales
              
              
              11,210
              
              
              5,267Reserve
                  balance - ending
              
              $
              4,694
              
              $
              2,568





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





**NOTE
      5 -** **Inventories** ****





Inventories
      consist of the following:


December
                  31,
              
              June
                  30,2007
              
              2007(Unaudited)Finished
                  goods
              
              $
              3,074
              
              $
              3,085Work
                  in process
              
              
              4,715
              
              
              7,260Raw
                  materials
              
              
              3,896
              
              
              6,286Packaging
                  materials
              
              
              776
              
              
              664Total
              
              $
              12,461
              
              $
              17,295Less:
                  Reserve for obsolescence
              
              
              (205
              )
              
              --Total
              
              $
              12,256
              
              $
              17,295





The
      Company reduces the carrying value of inventories to a lower of cost or market
      basis for inventory whose net book value is in excess of market. Aggregate
      reductions in the carrying value with respect to inventories still on hand
      at
      December 31, 2007 and June 30, 2007 that were determined to have a carrying
      value in excess of market were $1,000 and $1,157, respectively. As a result,
      the
      Company reduced the carrying value of inventory on hand to its market value
      by
      these amounts as of December 31, 2007 and June 30, 2007,
      respectively.




The
      Company performs a quarterly review of inventory items to determine if an
      obsolescence reserve adjustment is necessary. The allowance not only considers
      specific items and expiration dates, but also takes into consideration the
      overall value of the inventory as of the balance sheet date. The inventory
      obsolescence reserve value at December 31, 2007 was $205.


15


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


(In
      thousands, except for share data)




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





Land,
      building and equipment consist of the following:




December
                  31,
              
              June
                  30,2007
              
              2007(Unaudited)Land
              
              $
              4,924
              
              $
              4,924Building
              
              
              12,460
              
              
              12,460Machinery
                  and equipment
              
              
              18,021
              
              
              16,881Computer
                  equipment
              
              
              2,700
              
              
              2,065Construction
                  in Progress
              
              
              36
              
              
              186Furniture
                  and fixtures
              
              
              1,003
              
              
              953Leasehold
                  improvements
              
              
              5,130
              
              
              4,38644,274
              
              
              41,855Less:
                  accumulated depreciation and amortization
              
              
              9,175
              
              
              7,357Land,
                  Building and Equipment, net
              
              $
              35,099
              
              $
              34,498




Depreciation
      and amortization expense for the three and six months ended December 31, 2007
      was approximately $913 and $1,818, respectively, and was approximately $541
      and
      $1,029 for the three and six months ended December 31, 2006.





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





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




December
                  31,
              
              June
                  30,2007
              
              2007(Unaudited)Inventory
                  purchases
              
              $
              5,730
              
              $
              9,525Research
                  and development expenses
              
              
              1,657
              
              
              3,003Contract
                  termination liability
              
              
              902
              
              
              386Other
              
              
              5,041
              
              
              5,628Total
              
              $
              13,330
              
              $
              18,542


16


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


(In
      thousands, except for share data)





**NOTE
      8 -** **Debt**





Long-term
      Debt


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




December
                  31,
              
              June
                  30,2007
              
              2007(Unaudited)Revolving
                  credit facility
              
              $
              15,143
              
              $
              9,866Real
                  estate term loan
              
              
              10,533
              
              
              10,933Machinery
                  and equipment term loans
              
              
              4,914
              
              
              5,601STAR
                  Note Payable
              
              
              4,552
              
              
              -Sutaria
                  Note Payable
              
              
              3,000
              
              
              -Capital
                  leases
              
              
              386
              
              
              18338,528
              
              
              26,583Less:
                  amount representing interest on capital leases
              
              
              58
              
              
              38Total
                  debt
              
              
              38,470
              
              
              26,545Less:
                  current maturities
              
              
              30,680
              
              
              12,057Long-term
                  debt, less current maturities
              
              $
              7,790
              
              $
              14,488





In
      February, 2006, the Company entered into a 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 $20,445
      owed on the previous credit facility. The revolving credit facility borrowing
      base is calculated as (i) 85% of the Company’s eligible accounts receivable plus
      the lesser of 50% of cost or 85% of the net orderly liquidation value of its
      eligible inventory. The advances pertaining to inventory were initially 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 of approximately $8,800 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.





In
      connection with WFBC credit facility, the Company incurred deferred financing
      costs of $482, which are being amortized over the term of the WFBC credit
      facility and are included in Other Assets. Of this amount, $30 and $60 has
      been
      amortized for the three and six months ended December 31, 2007 and 2006,
      respectively.




17


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**NOTE
      8 -** **Debt,
      continued**





The
      WFBC
      credit facility is collateralized by substantially all of the assets of the
      Company. In addition, the Company is required to comply with certain financial
      covenants. On October 26, 2007, the Company and Wells Fargo Business Credit
      finalized a Forbearance Agreement, which was subsequently amended on November
      12, 2007, that terminated on December 31, 2007. As of June 30, 2007, the Company
      had defaulted under the Senior Credit Agreement with respect to (i) financial
      reporting obligations, including the submission of its annual audited financial
      statements for the fiscal year ending June 30, 2007, and (ii) financial
      covenants related to minimum net cash flow, maximum allowable leverage ratio,
      maximum allowable total capital expenditures and unfinanced capital expenditures
      for the fiscal year ended June 30, 2007 (collectively, the “Defaults”). In
      accordance with the Forbearance Agreement, WFBC waived the Defaults based upon
      the Borrower’s consummation and receipt of $8,000 related to the issuance of
      subordinated debt described below.





On
      November 7, 2007 and November 14, 2007, as required by the Forbearance
      Agreement, the Company received a total of $8,000 in gross proceeds from the
      issuance and sale of subordinated debt.





On
      November 7, 2007, Dr. Maganlal K. Sutaria, the Chairman of the Company’s Board
      of Directors, and Vimla M. Sutaria, his wife, loaned $3,000 to the Company
      pursuant to a Junior Subordinated Secured 12% Promissory Note due 2010 (the
      “Sutaria Note”). Interest of 12% per annum on the Sutaria Note is payable
      quarterly in arrears, and for the first 12 months of the note’s term, may be
      paid in cash, or additional notes (“PIK Notes”), at the option of the Company.
      Thereafter, the Company is required to pay at least 8% interest in cash, and
      the
      balance, at its option, in cash or PIK Notes.





Repayment
      of the Sutaria Notes is secured by liens on substantially all of the Company’s
      property and real estate. Pursuant to intercreditor agreements, the Sutaria
      Notes are subordinated to the liens held by WFBC and the holders of the STAR
      Notes described below.





On
      November 14, 2007, the Company issued and sold an aggregate of $5,000 of Secured
      12% Promissory Notes Due 2009 (the “STAR Notes”) in the following amounts to the
      following parties:




Tullis-Dickerson
                  Capital Focus III, L.P. (“Tullis”)
              
              $
              833Aisling
                  Capital II, L.P. (“Aisling”)
              
              $
              833Cameron
                  Reid (“Reid”)
              
              $
              833Sutaria
                  Family Realty, LLC (“SFR”)
              
              $
              2,500


Tullis
      is
      an investor in the Company and the holder of its Series B-1 Convertible
      Preferred Stock. Aisling is also an investor in the Company and the holder
      of
      its Series C-1 Convertible Preferred Stock. Reid is the Company’s Chief
      Executive Officer and SFR is owned by Company shareholders who control
      approximately 53% of the Company’s voting stock (the “Major Shareholders”),
      including Raj Sutaria, who is a Company Executive Vice
      President.


18





INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)
  **NOTE
        8 - Debt, continued**





Interest
      of 12% per annum on the STAR Notes is payable quarterly in arrears, and may
      be
      paid, at the option of the Company, in cash or PIK Notes. Upon the Company
      obtaining stockholder approval and ratification of the issuance of the STAR
      Note
      financing and making the necessary filings with the SEC in connection therewith
      (the “Stockholder Approval”), which was to occur no earlier than January 18,
      2008 and no later than the later of February 28, 2008 or such later date as
      may
      be necessary to address SEC comments on the Company’s Information Statement on
      Schedule 14C, which was filed on January 15, 2008, the STAR Notes shall be
      exchanged for:




·
            Secured
                Convertible 12% Promissory Notes due 2009 (the “Convertible Notes”) in the
                original principal amount equal to the principal and accrued interest
                on
                the STAR Notes through the date of exchange. The conversion price
                of the
                Convertible Notes is to be $0.95 per share and interest is to be
                payable
                quarterly, in arrears, in either cash or PIK Notes, at the option
                of the
                Company;





·
            Warrants
                to acquire an aggregate of 1,842 shares of Common Stock (the “Warrants”)
                with an exercise price of $0.95 per share.In
                accordance with EITF 00-27,*Application
                of Issue No. 98-5 to Certain Convertible Instruments (“EITF
                00-27”)*,
                a
                commitment date occurs for purposes of determining the fair value
                of the
                issuer's common stock to be used to measure the intrinsic value of
                an
                embedded conversion option when the following two characteristics
                have
                been met: i) the agreement specifies all significant terms, including
                the
                quantity to be exchanged, the fixed price, and the timing of the
                transaction, and ii) the agreement includes a disincentive for
                nonperformance that is sufficiently large to make performance probable.
                The above characteristics were met on November 14, 2007 as all significant
                terms were agreed to and performance was probable as the funds had
                been
                received and the majority shareholders had delivered a proxy approving
                the
                transaction. Accordingly,the Company recorded a discount to the debt of $480, which is being
                accreted over the life of the STAR Notes. Non-cash interest of $32
                was
                recognized during the six months ended December 31, 2007.





Each
      of
      the Convertible Notes and Warrants are to have anti-dilution protection with
      respect to issuances of Common Stock, or common stock equivalents at less than
      $0.95 per share such that their conversion or exercise price shall be reset
      to a
      price equal to 90% of the price at which shares of Common Stock or equivalents
      are deemed to have been issued.





The
      repayment of the STAR Notes (and, eventually, Convertible Notes) is
      secured by a second priority lien on substantially all of the Company’s property
      and real estate. Pursuant to intercreditor agreements, the STAR Note financing
      liens are subordinate to those of WFBC, but ahead, in priority, of the Sutaria
      Notes.





Also,
      upon the Company obtaining the Stockholder Approval, the Series B-1 and Series
      C-1 Convertible Preferred Stock held by Tullis and Aisling shall be exchangeable
      for shares of a new Series D-1 Convertible Preferred Stock, which shall be
      substantially similar to the B-1 and C-1 Convertible Preferred Stock other
      than
      the Conversion price which is to be $0.95 per share instead of $1.5338 per
      share. In
      accordance with EITF 00-27, as
      all
      significant terms were agreed to and performance was probable as the funds
      had
      been received and the majority shareholders had delivered a proxy approving
      the
      transaction ,
      the
      Company recorded a deemed dividend of approximately $3,030 related to this
      pending exchange during the quarter ended December 31, 2007.


19


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


(In
      thousands, except for share data)





**NOTE
      8 -** **Debt,
      continued**





Pursuant
      to the terms of the Securities Purchase Agreements for the Company’s Series B-1
      and C-1 Convertible Preferred Stock, the consent of Tullis and Aisling was
      required for the issuance of the Sutaria Notes and for the STAR Note financing.
      In consideration for that consent, the Company has agreed to exchange 2,282
      warrants to purchase Company Common Stock held by each of Tullis and Aisling
      with an exercise price of $1.639 per share for new warrants with an exercise
      price of $0.95 per share. In addition, the Major Shareholders have agreed to
      give Tullis and Aisling tag along rights on certain sales of Company common
      stock. As a result, the Company recorded a deemed dividend of approximately
      $315, which represented the difference in the fair value immediately before
      and
      after the reduction of the exercise price on November 14, 2007.





In
      connection with the Sutaria Notes and STAR Note Financing, the Company incurred
      deferred financing costs of $283, which are being amortized over the term of
      Notes and is included in Other Assets. Of this amount, $19 has been amortized
      for the three and six months ended December 31, 2007.





On
      January 10, 2008, the Company received notice from Wells Fargo that they had
      defaulted under the Forbearance Agreement, with respect to: (i) financial
      covenants relating to required Income Before Tax for the months ending October
      31, 2007 and November 30, 2007, (ii) financial covenants relating to required
      Net Cash Flow for the months ending October 31, 2007 and November 30, 2007
      and
      (iii) an obligation to have a designated financial advisor provide an opinion
      as
      to the Company's ability to meet their fiscal year 2008 projections. The Notice
      states that Wells Fargo is not demanding repayment of the Outstanding Amount
      at
      this time, but that Wells Fargo reserves the right to do so. In addition, Wells
      Fargo had informed the Company that it was in the process of assessing the
      Company’s eligible collateral under the Wells Fargo Credit Agreement and was
      providing limited credit availability for ongoing operations pending the outcome
      of that review. On January 28, 2008, Wells Fargo informed the Company that
      it
      would consider providing the Company with credit availability on the condition
      that the Company (i) develops and implements a new operating plan focused on
      increasing the amount of eligible collateral and reducing costs and (ii) develop
      an alternative financing arrangement.




20


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**NOTE
      8 -** **Debt,
      continued**





On
      February 5, 2008, the Company and Wells Fargo entered into the Forbearance
      Agreement whereby Wells Fargo agreed to, among other things, (i) forbear from
      exercising its remedies arising from the Company’s default under the Credit
      Agreement until June 30, 2008 provided no further default occurs; (ii) provide
      a
      moratorium on certain principal payment; (iii) and advance the Company up to
      $3,000 under a newly granted real estate line of credit mortgage on the
      Company’s real estate, which amounts will be due on June 30, 2008.





Under
      the
      Forbearance Agreement the Company agreed to (i) submit to Wells Fargo, on a
      weekly basis, a “rolling” 13-week budget; (ii) engage a chief restructuring
      officer to review and oversee the budget and, in conjunction with Company
      management, certain financial matters; (iii) grant Wells Fargo an equity line
      of
      credit mortgage to secure its new equity line of credit and a collateral
      mortgage to secure certain obligations under that portion of revolving line
      of
      credit that has been converted to a term loan and (iv) pay Wells Fargo a success
      fee of up to $500 in the event the balance of the indebtedness owed to Wells
      Fargo is repaid from the sale of the Company’s stock or substantially all of its
      assets prior to June 30, 2008.





The
      Forbearance Agreement also limits the Company’s borrowing base on which certain
      advances are made and provides for a number of events of default, including
      (i)
      a material adverse change (ii) failure of the Company to meet certain budget
      items by more that 10%; (iii) failure to receive a letter of intent for the
      sale
      of the assets of the Company for an amount in excess of the Wells Fargo
      indebtedness by March 31, 2008; (iv) failure by the Company to receive a
      commitment for the sale of the assets of the Company for an amount in excess
      of
      the Wells Fargo indebtedness by April 30, 2008; (v) failure of the Company
      to
      close a transaction for the sale of the assets of the Company for an amount
      in
      excess of the Wells Fargo indebtedness by June 30, 2008; and (vi) Wells Fargo
      indebtedness remains outstanding on June 30, 2008. Pursuant to the operating
      plan approved by Wells Fargo in connection with the Forbearance Agreement,
      the
      Company was given access to up to an additional $3,000 of capital to meet its
      ongoing working capital and operating requirements.





The
      revolving credit facility and term loans bear interest at a rate of the prime
      rate less 0.5% or, at the Company’s option, LIBOR plus 250 basis points.
      However, as a results of the default discussed above, the Company was charged
      interest at the default rate of prime plus 2.5% from September 30, 2007 through
      the forbearance period. At December 31, 2007, the interest rate on this debt
      was
      9.75%. Pursuant to the requirements of the WFBC agreement, the Company has
      put
      in place a lock-box arrangement. The Company will incur a fee of 25 basis points
      per annum on any unused amounts of this credit facility.





With
      respect to the real estate term loan 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. However, as a
      result of the default discussed above, the Company was charged interest at
      the
      default rates of 10.56% and 11.00%, respectively. The swaps 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, 2007 and June 30, 2007 was approximately ($380) and $10 and is
      included in Other Liabilities and Other Assets, respectively.





21


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)





**NOTE
      8 -** **Debt,
      continued**





Capital
      Leases





The
      Company has acquired equipment under a capital lease with annual interest at
      8.89% that expires September 2012. The asset and liability under the capital
      lease is recorded at the fair value of the asset and is depreciated over its
      estimated useful life. The remaining cost of the asset included in machinery
      and
      equipment is $133 as of December 31, 2007.





On
      September 14, 2007, the Company acquired equipment under a capital lease with
      annual interest at 9.23% that expires August 2010. The asset and liability
      under
      the capital lease is recorded at the fair value of the asset and is depreciated
      over its estimated useful life. The remaining cost of the asset included in
      computer equipment is $195 as of December 31, 2007.




**NOTE
      9-** **Income
      Taxes**





At
      December 31, 2007, the Company has remaining Federal net operating losses
      (“NOLs”) of $44,053 available through 2027. Pursuant to Section 382 of the
      Internal Revenue Code regarding substantial changes in Company ownership,
      utilization of the Federal NOLs is limited. As a result of losses incurred
      in
      fiscal years 2005, 2006, 2007, and the Company’s current financial position (see
      Note 2 - Management’s Liquidity Plans and Going Concern), which indicate
      uncertainty as to the Company’s ability to generate future taxable income, the
“more-likely-than-not” standard has not been met and therefore the Company’s
      deferred tax asset may not be realized. As such, the company carried a full
      valuation allowance against its deferred tax assets as of December 31, 2007.





In
      calculating its tax provision for the six month periods ended December 31,
      2007
      and 2006, the Company applied aggregate effective tax rates of approximately
      51%
      and 27%, respectively, thereby creating income tax expense of $5,976 and an
      income tax benefit of $922, respectively. The increase in effective tax rates
      is
      the result of the Company increasing the valuation allowance against its
      deferred tax assets during the six months ended December 31, 2007.





The
      Company has adopted the provisions of Financial Accounting Standards Board
      ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
      - an
      interpretation of FASB Statement No. 109"("FIN 48"), on January 1, 2007. 
FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in an
      enterprise's financial statements in accordance with SFAS No. 109, "Accounting
      for Income Taxes," and prescribes a recognition threshold and measurement
      process for financial statement recognition and measurement of a tax position
      taken or expected to be taken in a tax return.  FIN 48 also provides
      guidance on derecognition, classification, interest and penalties, accounting
      in
      interim period, disclosure and transition.





Based
      on
      the company's evaluation, it has been concluded that there are no significant
      uncertain tax positions requiring recognition in the Company's financial
      statements.  The Company's evaluation was performed for its significant
      jurisdictions, United States Federal and New York State Corporate income tax
      returns for tax years ended June 30, 2004 through June 30, 2007, the only
      periods subject to examination. The Company believes that its income tax
      positions and deductions would be sustained on audit and does not anticipate
      any
      adjustments that would result in a material change to its financial
      position.  In addition, the company did not record a cumulative effect
      adjustment related to the adoption of FIN 48.




22


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**NOTE
      9-** **Income
      Taxes, continued**





The
      Company's policy for recording interest and penalties associated with audits
      is
      to record such items as a component of income taxes. There were no amounts
      accrued for penalties or interest as of or during the six months ended December
      31, 2007.  The Company does not expect its unrecognized tax benefit
      position to change during the next twelve months.  Management is currently
      unaware of any issues under review that could result in significant payments,
      accruals or material deviations from its position.





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





The
      calculations of basic and diluted EPS are as follows:




Three
                  Months Ended
              
              Six
                  Months EndedDecember
                  31,
              
              December
                  31,2007
              
              2006
              
              2007
              
              2006Numerator:Net (loss) income
              
              $
              (10,897
              )
              $
              (4,124
              )
              $
              (17,794
              )
              $
              (2,494
              )Less:Series A-1 Preferred stock dividends
              
              
              (41
              )
              
              (41
              )
              
              (82
              )
              
              (82
              )Series B-1 Preferred stock dividends
              
              
              --
              
              
              (206
              )
              
              --
              
              
              (413
              )Series C-1 Preferred stock dividends
              
              
              --
              
              
              (206
              )
              
              --
              
              
              (247
              )Deemed dividend from Series B-1
                warrants exercise price modification
              
              
              (158
              )
              
              --
              
              
              (158
              )
              
              --Deemed dividend from Series C-1
                warrants exercise price modification
              
              
              (157
              )
              
              --
              
              
              (157
              )
              
              --Deemed dividend on Series B-1
                exchange for Series D-1
              
              
              (1,515
              )
              
              --
              
              
              (1,515
              )
              
              --Deemed dividend on Series C-1
                exchange for Series D-1
              
              
              (1,515
              )
              
              --
              
              
              (1,515
              )
              
              (1,094
              )Net
                  income (loss) attributable to common stockholders
              
              $
              (14,283
              )
              $
              (4,577
              )
              $
              (21,221
              )
              $
              (4,330
              )Denominator:Denominator
                    for basic and diluted EPS
                  weighted
                    average shares outstanding
              
              
              66,738
              
              
              65,063
              
              
              66,467
              
              
              64,892Basic
                  and Diluted EPS:
              
              $
              (0.21
              )
              $
              (0.07
              )
              $
              (0.32
              )
              $
              (0.07
              )





Stock
      options, warrants and convertible preferred stock, equivalent to 37,989 and
      29,330 shares of the Company’s common stock, were not included in the
      computation of diluted earnings per share for the six months ended December
      31,
      2007 and 2006, respectively, as their inclusion would be
      antidilutive.





As
      of
      December 31, 2007, the total number of common shares outstanding and the number
      of common shares potentially issuable upon exercise of all outstanding stock
      options and conversion of preferred stocks (including contingent conversions)
      is
      as follows:





23





INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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




Common
                  stock outstanding
              
              
              66,738Stock
                  options outstanding
              
              
              10,525Warrants
                  outstanding
              
              
              6,406Common
                  stock issuable upon converstion of preferred stocks:Series C
              
              
              6Series A-1 (maximum contingent conversion) (a)
              
              
              4,855Series B-1 (c)
              
              
              10,526Series C-1 (c)
              
              
              10,526Total (b)
              
              
              109,582





(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 July 24,
                2017
                (the end of the current vesting and conversion
                periods).


(c)
            Upon
                the Company obtaining Stockholder Approval, which is reasonably assured
                as
                the major shareholders have provided a proxy approving the transactions,
                the Series B-1 and Series C-1 Convertible Preferred Stock held by
                Tullis
                and Aisling shall be exchangeable for shares of a new Series D-1
                Convertible Preferred Stock, which shall be substantially similar
                to the
                B-1 and C-1 Convertible Preferred Stock other than the Conversion
                price
                which is to be $0.95 per share instead of $1.5338 per
                share.





**NOTE
      11 -** **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 initial exercise price of $1.639 per share. The warrants
      have a five year term. The Series B-1 Stock and warrants sold to Tullis were
      initially convertible and/or exercisable into a total of 8,802 shares of common
      stock. The B-1 shares were initially 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, at a price per preferred share to be calculated
      on
      the day immediately preceding the date of a triggering event. A triggering
      event
      shall be deemed to have occurred at such time as any of the following events:
      (i) failure to cure a conversion failure by delivery of the required number
      of
      shares of common stock within ten trading days; (ii) failure to pay any
      dividends, redemption price, change of control redemption price, or any other
      amounts when due; (iii) any event of default with respect to any indebtedness,
      including borrowings under the WFBC Credit and Security Agreement, under which
      the oblige of such indebtedness are entitled to and do accelerate the maturity
      of at least an aggregate of $3,000 in outstanding indebtedness; and (iv) breach
      of any representation, warranty, covenant or other term or condition in the
      Series B-1 Transaction Document.


24





INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)
  **NOTE
        11 - Series
        B-1 Redeemable Convertible Preferred Stock,
        continued**





For
      the
      six months ended December 31, 2007, the Company issued 148 shares of common
      stock as payment of $206 of previously accrued dividends. In connection with
      the
      Consent and Waiver Agreement (discussed in Note 8 - Debt), Tullis waived their
      rights to receive dividends for the quarters ended September 30, 2007 and
      December 31, 2007.





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. On January 10, 2008, the Company
      received notice from WFBC that the Company was in default under its Senior
      Credit Agreement and Initial Forbearance Agreement dated October 26, 2007.
      On
      February 5, 2008, the Company entered into a Forbearance Agreement with Wells
      Fargo, which provides the Company with additional credit and provides for a
      forbearance by Wells Fargo from exercising its remedies based on previous
      defaults with respect to the Company’s credit agreement with Wells Fargo. As a
      result of the January 10, 2008 default notice and the terms of the February
      5,
      2008 Forbearance Agreement, in February 2008, the Company could no longer
      conclude that it is not probable that the Series B-1 preferred stock will become
      redeemable. Therefore, the Company will adjust the preferred stock to its
      $10,000 redemption value in the Company’s fiscal quarter ended March 31, 2008.





In
      addition, in May 2006, in connection with the sale of the B-1 shares the Company
      entered into a Registration Rights Agreement, as amended, with Tullis. Under
      the
      terms of this Registration Rights Agreement the Company is subject to penalties
      (a) if, within 60 days after a request to do so is made by the holders of such
      preferred stock, the Company does not timely file with the Securities
      and Exchange Commission a registration statement covering the resale of shares
      of its common stock issuable to such holders upon conversion of the preferred
      stock, (b) if a registration statement is filed, such registration statement
      is
      not declared effective within 180 days after the request is made or (c) if
      after
      such a registration is declared effective, after certain grace periods the
      holders are unable to make sales of its common stock because of a failure to
      keep the registration statement effective or because of a suspension or
      delisting of its common stock from the American Stock Exchange or other
      principal exchange on which its common stock is traded. The penalties will
      accrue on a daily basis so long as the Company is in default of the Registration
      Rights Agreement. The maximum amount of a registration delay penalty as defined
      in the Registration Rights Agreement is 18% of the aggregate purchase price
      of
      Tullis’ registrable securities included in the related registration statement.
      Unpaid registration delay penalties shall accrue interest at the rate of 1.5%


25


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





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, 2007:




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


Upon
      the
      Company obtaining Stockholder Approval, the Series B-1 Convertible Preferred
      Stock held by Tullis shall be exchangeable for shares of a new Series D-1
      Convertible Preferred Stock, which shall be substantially similar to the B-1
      Convertible Preferred Stock other than the Conversion price which is to be
      $0.95
      per share instead of $1.5338 per share. The
      change in conversion price effectively changed the number of shares of common
      stock into which the Series B-1 preferred shares may be converted from 6,520
      to
      10,526 for the Series D-1 preferred shares. In
      accordance with EITF 00-27, as all significant terms were agreed to and
      performance was probable as the funds had been received and the majority
      shareholders had delivered a proxy approving the transaction, the Company
      recorded a deemed dividend of approximately $1,515 during the quarter ended
      December 31, 2007.





Pursuant
      to the terms of the Securities Purchase Agreements for the Company’s Series B-1
      Convertible Preferred Stock, the consent of Tullis was required for the issuance
      of the Sutaria Notes and for the STAR Note financing. In consideration for
      that
      consent, the Company has agreed to exchange 2,282 warrants to purchase Company
      Common Stock held by Tullis with an exercise price of $1.639 per share for
      new
      warrants with an exercise price of $0.95 per share. In addition, the Major
      Shareholders have agreed to give Tullis tag along rights on certain sales of
      Company common stock. In accordance with EITF 00-27, as all significant terms
      were agreed to and performance was probable as the funds had been received
      and
      the majority shareholders had delivered a proxy approving the
      transaction *,* the
      Company recorded a deemed dividend of approximately $158.


26


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


(In
      thousands, except for share data)





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





On
      September 11, 2006, the Company entered into a Securities Purchase Agreement
      (the “C-1 Agreement”) with Aisling Capital, L.P. (the “Buyer”). Under the C-1
      Agreement, the Company agreed to issue and sell to the Buyer, and the Buyer
      agreed to purchase from the Company, for a purchase price of $10,000 (net
      proceeds of $9,993) an aggregate of 10 shares of a newly designated series
      of
      the Company’s preferred stock (“C-1”), together with 2,282 warrants to purchase
      shares of common stock of the Company with an initial 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 were initially convertible and/or exercisable into a total
      of
      8,802 shares of common stock. The C-1 shares were initially 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. A triggering event shall be deemed to have occurred at such time as
      any
      of the following events: (i) failure to cure a conversion failure by delivery
      of
      the required number of shares of common stock within ten trading days; (ii)
      failure to pay any dividends, redemption price, change of control redemption
      price, or any other amounts when due; (iii) any event of default with respect
      to
      any indebtedness, including borrowings under the WFBC Credit and Security
      Agreement, under which the oblige of such indebtedness are entitled to and
      do
      accelerate the maturity of at least an aggregate of $3,000 in outstanding
      indebtedness; and (iv) breach of any representation, warranty, covenant or
      other
      term or condition in the Series C-1 Transaction Document.





For
      the
      six months ended December 31, 2007, the Company issued 148 shares of common
      stock as payment of $206 of previously accrued dividends. In connection with
      the
      Consent and Waiver Agreement (discussed in Note 8 - Debt and Note 18 -
      Subsequent Events), Aisling waived their rights to receive dividends for the
      quarters ended September 30, 2007 and December 31, 2007.





With
      respect to the Company’s accounting for the preferred stock, EITF Topic D-98,
      paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities
      with redemption features that are not solely within the control of the issuer
      to
      be recorded outside of permanent equity. As described above, the terms of the
      Preferred Stock include certain redemption features that may be triggered
      by events that are not solely within the control of the Company, such as a
      potential default with respect to any indebtedness, including borrowings under
      the WFBC financing arrangement. Accordingly, the Company has classified the
      C-1
      shares as temporary equity and the value ascribed to the C-1 shares upon initial
      issuance in September 2006 was the amount received in the transaction less
      the
      relative fair value ascribed to the warrants and direct costs associated with
      the transaction. The Company allocated $1,641of the gross proceeds of the sale
      of C-1 shares to the warrants based on estimated fair value. In accordance
      with
      EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible
      Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,094
      to
      Accumulated deficit during the quarter ended September 30, 2006. The non-cash
      charge measures the difference between the relative fair value of the C-1 shares
      and the fair market value of the Company's common stock issuable pursuant to
      the
      conversion terms on the date of issuance. On January 10, 2008, the Company
      received notice from WFBC that the Company was in default under its Senior
      Credit Agreement and Initial Forbearance Agreement dated October 26, 2007.
      On
      February 5, 2008, the Company entered into a Forbearance Agreement with Wells
      Fargo, which provides the Company with additional credit and provides for a
      forbearance by Wells Fargo from exercising its remedies based on previous
      defaults with respect to the Company’s credit agreement with Wells Fargo. As a
      result of the January 10, 2008 default


27


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





notice
      and the terms of the February 5, 2008 Forbearance Agreement, in February 2008,
      the Company could no longer conclude that it is not probable that the Series
      B-1
      preferred stock will become redeemable. Therefore, the Company will adjust
      the
      preferred stock to its $10,000 redemption value in the Company’s fiscal quarter
      ended March 31, 2008.





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





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


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


28


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





Upon
      the
      Company obtaining Stockholder Approval, the Series C-1 Convertible Preferred
      Stock held by Aisling shall be exchangeable for shares of a new Series D-1
      Convertible Preferred Stock, which shall be substantially similar to the C-1
      Convertible Preferred Stock other than the Conversion price which is to be
      $0.95
      per share instead of $1.5338 per share. The change in conversion price
      effectively changed the number of shares of common stock into which the Series
      C-1 preferred shares may be converted from 6,520 to 10,526 for the Series D-1
      preferred shares. In accordance with EITF 00-27, as all significant terms were
      agreed to and performance was probable as the funds had been received and the
      majority shareholders had delivered a proxy approving the transaction, the
      Company recorded a deemed dividend of approximately $1,515 during the quarter
      ended December 31, 2007 .





Pursuant
      to the terms of the Securities Purchase Agreements for the Company’s Series C-1
      Convertible Preferred Stock, the consent of Aisling was required for the
      issuance of the Sutaria Notes and for the STAR Note financing. In consideration
      for that consent, the Company has agreed to exchange 2,282 warrants to purchase
      Company Common Stock held by Aisling with an exercise price of $1.639 per share
      for new warrants with an exercise price of $0.95 per share. In addition, the
      Major Shareholders have agreed to give Aisling tag along rights on certain
      sales
      of Company common stock. In accordance with EITF 00-27, as all significant
      terms
      were agreed to and performance was probable as the funds had been received
      and
      the majority shareholders had delivered a proxy approving the
      transaction *,* the
      Company recorded a deemed dividend of approximately $157.





**NOTE
      13 -** **Equity
      Securities**





Preferred
      Stocks


During
      the six months ended December 31, 2007, the Company issued 148 shares of the
      Company’s common stock to each of the Series B-1 and C-1 stockholders,
      respectively, for dividends earned for the quarter ended June 30, 2007 of $206
      for each of the Series B-1 and Series C-1 stockholders,
      respectively.





Common
      Stock


During
      the six months ended December 31, 2007, 148 shares of the Company’s common stock
      were issued to Series B-1 and C-1 preferred stock shareholders, respectively,
      in
      settlement of dividends for the quarter ended June 30, 2007.





Stock
      Options and Appreciation Rights


During
      the six months ended December 31, 2007:





·  the
      Company recognized approximately $39 as income 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, 2007, the total
      liability related to the SARs is $7;





·  total
      unrecognized compensation cost related to stock options granted was $1,281.
      The
      unrecognized stock option compensation cost is expected to be recognized over
      a
      weighted-average period of approximately 2.90 years;


29


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


(In
      thousands, except for share data)





**NOTE
      13 -** **Equity
      Securities, continued**





·  total
      options outstanding and total options exercisable to purchase the Company’s
      common stock as of September 30, 2007, amounted to 10,525  and
      9,195, respectively; These options had a weighted average exercise price of
      $1.14 and $1.09, respectively. At December 31, 2007 these options had no
      intrinsic value.





·  80
      options to purchase the Company’s common stock were issued to certain employees
      at the market price on the date of the grant and had vesting periods ranging
      from 2.44 to 4.93 years from the date of issuance, and having a weighted average
      exercise price of $0.98 on the date of grant. There was no intrinsic value
      in
      these options at December 31, 2007.





·  in
      connection with separation agreements involving three employees, the Company
      accelerated the vesting of 388 options, which were exercisable until December
      10, 2007. As a result of these transactions, the Company recognized $0 and
      $246
      expense during the three and six months ended December 31, 2007.





·  the
      Company issued 556 shares (548 resulting from a cashless exercise of 1,100
      options), resulting in $5 proceeds in connection with exercises of options
      to
      purchase the Company’s stock.





**NOTE
      14 -** **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 $103 and $195 for the three and six month period ended December
      31, 2007, respectively.


30




INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


(In
      thousands, except for share data)





**NOTE
      15 -** **Economic
      Dependency**





Major
      Customers


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




Three
                  Months Ended
              
              Six
                  Months EndedDecember
                  31,
              
              December
                  31,2007
              
              2006
              
              2007
              
              2006Customer
                  "A"
              
              
              13
              %
              
              12
              %
              
              13
              %
              
              10
              %Customer
                  "B"
              
              
              *
              
              
              16
              %
              
              *
              
              
              15
              %Customer
                  "C"
              
              
              *
              
              
              13
              %
              
              *
              
              
              14
              %Customer
                  "D"
              
              
              *
              
              
              10
              %
              
              *
              
              
              17
              %Customer
                  "E"
              
              
              *
              
              
              *
              
              
              11
              %
              
              *Customer
                  "F"
              
              
              *
              
              
              18
              %
              
              *
              
              
              17
              %*
                Sales to customer were less than 10%




Accounts
                  ReceivableDecember
                  31,2007Customer
                  "A"
              
              $
              7,736Customer
                  "B"
              
              
              68Customer
                  "C"
              
              
              525Customer
                  "D"
              
              
              564Customer
                  "E"
              
              
              617Customer
                  "F"
              
              
              103





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 “A” above.





Major
      Suppliers


For
      the
      three and six months ended December 31, 2007, the Company purchased materials
      from three suppliers totaling approximately 74% and 68%, respectively. 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. At December 31, 2007 and 2006, aggregate amounts due to these
      suppliers included in accounts payable, were approximately $3,944 and $5,357,
      respectively.


31


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**NOTE
      16 -** **Related
      Party Transactions**





**Rents**


The
      Company leases one of its business premises located in Hauppauge, New York,
      (“Premises”) from an entity owned by three stockholders (“Landlord”), under a
      noncancelable lease expiring in October 2019.





Under
      the
      terms of the lease for the Premises, upon a transfer of a majority of the issued
      and outstanding voting stock of Interpharm, Inc., which occurred on May 30,
      2003, and every three years thereafter, the annual rent may be adjusted to
      fair
      market value, as determined by an independent appraiser. Effective May 1, 2006,
      the Company is paying the Landlord a base rent of $660 annually. For the three
      and six months ended December 31, 2007, the rents paid in accordance with this
      lease were $165 and $330, respectively. For the three and six months ended
      December 31, 2006, the rents paid in accordance with this lease were $165 and
      $285, 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**


In
      the
      prior year, 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. Supply of this
      raw material is being coordinated with the Company’s requirement projections for
      the fiscal year ended June 30, 2008. As of December 31, 2007, the Company has
      advanced $80 to APR in connection with this order.


32




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





**Separation
      Agreements**


As
      of
      September 10, 2007, the Company entered into separation agreements in connection
      with the termination of employment of Bhupatlal K. Sutaria, the brother of
      the
      Chairman of the Company’s Board of Directors and the Company’s former President,
      Vimla Sutaria, the wife of the Chairman of the Company’s Board of Directors, and
      Jyoti Sutaria, the wife of Bhupatlal K. Sutaria. In connection with his
      separation agreement, Bhupatlal K. Sutaria received six months of salary
      aggregating $138, accelerated vesting of 200 stock options and a “cashless” or
“net” exercise feature with respect to all of his 700 vested options.
      Accordingly, on September 21, 2007, Mr. Sutaria exercised all of his available
      options under this agreement.





In
      connection with her separation agreement, Jyoti Sutaria received accelerated
      vesting of 100 stock options and a “cashless” exercise feature with respect to
      all of her 400 vested options. Accordingly, on September 21, 2007, Mrs. Sutaria
      exercised all of her available options under this agreement.





In
      connection with her separation agreement, Vimla Sutaria received accelerated
      vesting of 88 stock options and a “cashless” exercise feature with respect to
      all of her 350 vested options which expired on December 10, 2007.





**NOTE
      17 -** **Commitments
      and Contingencies**





**Litigation**


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





By
      motion
      dated July 26, 2006, the Company moved to dismiss Vuono’s complaint in its
      entirety.  Vuono cross-moved to disqualify the Company's counsel due to an
      alleged conflict of interest.  By decision and order dated March 29, 2007,
      the Court dismissed Vuono’s claims as they pertain to any fees claimed by Vuono
      related to a reverse merger of Interpharm, Inc. and the Company and declined
      to
      dismiss other claims.  The dismissed claims represent approximately $7
      million of the total of $10 million claimed by Vuono.  The Court deferred
      its decision on Vuono’s motion to disqualify counsel, and held a hearing on the
      matter on September 24, 2007.  By decision and order dated December 17,
      2007, the Court denied Vuono’s motion to disqualify counsel.





Vuono
      has
      filed notices of appeal in connection with both the partial dismissal of his
      claims and the motion to disqualify. The Company’s time to file and serve
      answering briefs has been extended to April 1, 2008. It is also anticipated
      that the trial court will shortly order the parties to engage in expedited
      discovery, including the exchange of documents and depositions of Vuono, the
      Company, and third-parties. The Company will continue to vigorously defend
      the
      action and cannot predict with certainty the outcome of this
      litigation.





33











INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





In
      May
      2007, a former employee commenced an action against the Company with the
      New York State Division of Human Rights.  The complaint against the Company
      alleges claims of race discrimination. The total sought by the former employee
      in the action is unspecified.  A hearing has been scheduled for late March
      2008. The Company believes that the claims are without merit and the Company
      is
      vigorously defending the action.





On
      October 8, 2007, Leiner Health Products LLC and the Company entered into a
      Settlement Agreement and Release (“Settlement”) in connection with an October
      2005 manufacturing and supply agreement for ibuprofen tablets. As part of the
      Settlement, Leiner executed a Promissory Note for $477 for the amount it owed
      the Company. On October 12, 2007, the Company notified Leiner that one lot
      of
      this product was subject to a voluntary recall. Leiner has subsequently
      threatened to hold any additional payments under the Settlement until they
      receive reasonable assurances from the Company that the additional lots in
      their
      possession would not be subject to the recall as well. If all lots were
      recalled, Leiner would be entitled to a reimbursement by the Company of
      approximately $256. However, the Company does not believe any further lots
      will
      be recalled.





On
      November 8, 2007, Leiner failed to make its initial principal payment under
      the
      Promissory Note, and indicated that it did not intend to make future payments
      under the Note.  In response, the Company declared Leiner in default under
      the Promissory Note and accelerated the unpaid principal obligations.  On
      November 26, 2007, the Company commenced litigation, via a motion for summary
      judgment in lieu of complaint, in New York Supreme Court, Suffolk County
      entitled *Interpharm
      Holdings, Inc. v. Leiner Health Products LLC.* ,
      36642/2007, seeking to recover the full principal amount of the promissory
      note
      plus costs and interest.  Leiner has opposed the Company’s motion, the
      company expects a decision by early spring. In addition, Leiner has commenced
      an
      action against the Company in California state court for a declaratory judgment
      that it is entitled to a set-off against the Promissory Note based on the
      recall. *Leiner
      Health Products LLC v. Interpharm Holdings, Inc.* ,
      Superior Court of California, Los Angeles, No. BC381396. The Company’s response
      to Leiner’s California complaint is due in mid-February. The Company will
      continue to vigorously defend the action.





On
      November 2, 2007, the Company commenced an action against Watson in the U.S.
      District Court, Eastern District of New York (Index No. 02-4600). The Company
      is
      seeking rescission and a declaratory judgment relieving the Company of its
      obligations under the Termination Agreement. Watson’s answer in this action
      contains counterclaims seeking damages in the amount of $500 (representing
      the
      initial installment due from the Company under the Termination Agreement),
      a
      declaratory judgment that the Company must pay the balance due under the
      Termination Agreement, and damages for breach of the underlying Supply
      Agreement. Discovery in this action is expected to commence in mid-February
      2008.





On
      November 16, 2007, Crane Partners LLC (“Crane”) commenced an action against the
      Company in the Superior Court of NJ-Law Div., Bergen County (Index No.
      L8474-07). Crane alleges the Company breached certain obligations under a Term
      Sheet that Crane and the Company entered into on October 22, 2007. Crane is
      seeking $60 plus interest and costs. A scheduling conference is set for February
      20, 2008. The Company will continue to vigorously defend the action.





34
 
  INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
 (In
          thousands, except for share data)




On
      December 17, 2007, Generic Pharmaceutical Services Inc. (“GPSI”) commenced an
      action against the Company in the NY Supreme Court-Suffolk County (Index No.
      07-39101). GPSI claims breach of contract and breach of implied warranty of
      merchantability in connection with product supplied to it by the Company. GPSI
      alleges damages of not less than $1,500. The Company believes that the claims
      are without merit and the Company is vigorously defending the action.





On
      January 25, 2008, Forest Laboratories, Inc. et al. (“Forest”) commenced an
      action against the Company in the U.S. District Court, District of Delaware
      (Index No. 08-52) in connection with the Company’s filing of its memantine
      tablets ANDA containing a paragraph IV certification challenging Forest’s patent
      on the branded product known as Namenda® .
      Forest’s complaint alleges infringement of U.S. Patent No. 5,061,703. Forest is
      seeking, inter alia, a judgment that the company has infringed U.S. Patent
      No.
      5,061,703; that the Company’s ANDA shall not be approved prior to the expiration
      date of U.S. Patent No. 5,061,703 and an award of attorney fees, costs and
      expenses.





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





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





**Operating
      Leases**


Property
      Lease


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


35


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


(In
      thousands, except for share data)





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





**Significant
      Contracts**


Tris
      Pharmaceuticals, Inc.


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 the 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 $4,800 to Tris, whether or not regulatory approval is
      obtained for any of the solids products. The Solids Agreement also provides
      for
      an equal sharing of net profits for each product, except for one product, that
      is successfully sold and marketed, after the deduction and reimbursement of
      all
      litigation-related and certain other costs. The excluded product provides for
      a
      profit split of 60% for the Company and 40% for Tris. Further, this agreement
      provides the Company with a perpetual royalty-free license to use all technology
      necessary for the solid products in the United States, its territories and
      possessions.





In
      April
      2006, the Company and Tris further amended the Solids Agreement. This second
      amendment required Tris to deliver a Technical Package for one additional solid
      dosage product.





Further,
      terms of this second amendment required the Company to pay to Tris an additional
      $300 associated with the original agreement.





During
      October 2006, the Company entered into a new agreement (“New Liquids Agreement”)
      with Tris Pharma, Inc. (“Tris”), which terminated the agreement entered into in
      February 2005, which was for the development and licensing of up to twenty-five
      liquid generic products (“Liquids Agreement”). According to the terms of the New
      Liquids Agreement, Tris will, among other things, be required to develop and
      deliver the properties, specifications and formulations (“Product Details”) for
      fourteen generic liquid pharmaceutical products (“Liquid Products”). The Company
      will then utilize this information to obtain all necessary approvals. Further,
      under the terms of the New Liquids Agreement Tris will manufacture, package
      and
      label each product for a fee. The Company was required to pay Tris $1,000,
      whether or not regulatory approval is obtained for any of the liquid products.
      The Company has paid in full the $1,000; $250 having been paid during the term
      of the initial Liquids Agreement; $500 paid upon the execution of the New
      Liquids Agreement, and the balance of $250 paid December 15, 2006. In addition,
      Tris is to receive 40% of the net profits, as defined, in accordance with the
      terms in the New Liquids Agreement.





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.





Since
      inception, we have incurred approximately $5,425 of research and development
      costs associated with the Tris agreements of which the Company has paid the
      full
      amount due as of December 31, 2007. The combined costs of these agreements
      could
      aggregate up to $5,800. The balance on the solids agreement, as amended, of
      $375
      could be paid within two years if all milestones are reached. There is no
      outstanding balance to be paid related to the liquid agreement as of December
      31, 2007.


36




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





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 six months
      ended December 31, 2007.  In
      consideration of the termination of Watson’s rights under the Supply Agreement,
      the Company is to pay Watson $2,000 payable at the rate of $500 per year over
      four years from the first anniversary of the effective date of the termination
      agreement. The Company determined the net present value of the obligation and
      accordingly increased Accounts payable, accrued expenses and other liabilities
      and Contract termination liability by $367 and $1,288, respectively. At December
      31, 2007, contract termination liability of $902 and $903 are included in
      Accounts payable, accrued expenses and other liabilities and Contract
      termination liability, respectively. The imputed interest of $345 will be
      amortized over the remaining life of the obligation using the effective interest
      rate method. Non-cash interest of $28 and $62 was recognized during the three
      and six months ended December 31, 2007.





On
      November 2, 2007, the Company commenced an action against Watson in the U.S.
      District Court, Eastern District of New York (Index No. 02-4600). The Company
      is
      seeking rescission of the Termination Agreement based on Watson’s fraud in the
      inducement and a declaratory judgment relieving the Company of its obligations
      under the Termination Agreement. Watson’s answer in this action contains
      counterclaims seeking damages in the amount of $500 (representing the initial
      installment due from the Company under the Termination Agreement, which the
      Company withheld due to Watson’s fraud), a declaratory judgment that the Company
      must pay the balance due under the Termination Agreement, and damages for breach
      of the underlying Supply Agreement. Discovery in this action is expected to
      commence in mid-February 2008.





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




37




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





Centrix
      Pharmaceutical, Inc.


On
      October 27, 2006, the Company amended its agreement with Centrix
      Pharmaceuticals, Inc., (“Centrix”) wherein Centrix has agreed to purchase over a
      twelve month period, 40% more bottles of the Company’s female hormone therapy
      products than the initial year of the agreement, commencing November 2006. 
The parties will share net profits, as defined in the agreement, with the
      Company’s share being paid within 45 days of the end of each calendar month.
 The amendment has a one year term, after which time the original Centrix
      agreement shall again be in full force and effect. On February 13, 2008, the
      Company notified Centrix that it is in material breach of their original
      agreement and the October 27, 2006 amendment. As a result, the Company has
      terminated the agreement.





Applied
      Pharma, LLC


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.




38




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


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





**FORWARD-LOOKING
      STATEMENTS AND ASSOCIATED RISK**





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





Investing
      in our securities involves substantial risks and uncertainties. Therefore,
      we
      encourage you to review the “Risk Factors” contained in Item 1A of our Form 10-K
      filed with the SEC on November 15, 2007.


39




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**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.





As
      previously reported, as a result of increased expenses and losses we incurred
      during the fiscal year ended June 30, 2007, we defaulted on our credit facility
      with Wells Fargo Business Credit (“WFBC”) and, in November 2007, had to raise an
      additional $8,000 in debt financing.  A complete description of the debt
      financing and a Forbearance Agreement with WFBC may be found below under the
      heading “Liquidity and Capital Resources.”





On
      January 10, 2008, we received notice from WFBC that we had defaulted under
      the
      Forbearance Agreement. On February 5, 2008, we entered into a new Forbearance
      Agreement with WFBC. In conjunction with these activities, we have restructured
      our business in an effort to achieve positive cash flow and profitability. 
On January 29, 2008, we reduced payroll by approximately 20% on an annualized
      basis, and the Company’s research and development programs have been
      substantially curtailed.





Net
      sales
      for the three and six months ended December 31, 2007 were $16,214 and $33,929,
      respectively, which represented a 7.2% and 15.8% decrease from sales of $17,479
      and $40,305 for the three and six months ended December 31, 2006.  Lower
      sales in the three months ended December 31, 2007 was due to our inability
      to
      obtain adequate levels of raw materials, which was the result of raw material
      supply being interrupted by the Company’s liquidity difficulties during the
      quarter ended December 31, 2007. The Company’s inefficient production and
      planning processes also contributed to not being able to completely satisfy
      open
      sales orders.  As a result, we had backorders of approximately $3,000 at
      December 31, 2007.





Subsequent
      to December 31, 2007, we have taken steps to improve the production planning
      process which should improve our sales performance going forward.  We are
      currently holding discussions with the Company’s key vendors in an effort ensure
      that there is a continuous supply of raw materials.  In addition, we are
      seeking alternative financing arrangements to secure additional working
      capital.  If we are not able to procure sufficient levels of raw materials,
      or if we are not able to secure additional working capital in a timely manner,
      then the Company will not be able to continue as a going concern. We would
      then be forced to conduct a sale of the Company or a liquidation of assets
      in
      bankruptcy.




40


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**Results
      of Operations --**


**Summary**





As
      indicated in the tables below, our net sales decreased $1,265, or 7.2%, when
      comparing the three month periods ended December 31, 2007 and 2006. In addition,
      our net sales decreased $6,376 or 15.8% when comparing the six month periods
      ended December 31, 2007 and 2006.




Three
                Month Periods Ended December 31,2007
            
            2006%
                of
            
            
            
            %
                ofSales
            
            Sales
            
            Sales
            
            SalesIbuprofen
            
            $
            6,615
            
            
            41
            %
            $
            8,551
            
            
            49
            %Bactrim®
            
            
            3,562
            
            
            22
            
            
            4,556
            
            
            26Naproxen
            
            
            2,893
            
            
            18
            
            
            2,422
            
            
            14Hydrocodone/Acetaminophen
            
            
            1,040
            
            
            6
            
            
            --
            
            
            0Isometheptene/Dichloral
            
            
            1,492
            
            
            9
            
            
            --
            
            
            0Hydrocodone/Ibuprofen
            
            
            541
            
            
            3
            
            
            104
            
            
            1Female
                hormone product
            
            
            --
            
            
            0
            
            
            1,766
            
            
            10All
                Other Products
            
            
            71
            
            
            1
            
            
            80
            
            
            0Total
            
            $
            16,214
            
            
            100
            %
            $
            17,479
            
            
            100
            %





Six
                Month Periods Ended December 31,2007
            
            2006%
                of
            
            
            
            %
                ofSales
            
            Sales
            
            Sales
            
            SalesIbuprofen
            
            $
            15,981
            
            
            47
            %
            $
            17,173
            
            
            43
            %Bactrim®
            
            
            7,022
            
            
            20
            
            
            9,304
            
            
            23Naproxen
            
            
            5,008
            
            
            15
            
            
            5,520
            
            
            14Hydrocodone/Acetaminophen
            
            
            1,715
            
            
            5
            
            
            --
            
            
            0Isometheptene/Dichloral
            
            
            1,492
            
            
            4
            
            
            447
            
            
            1Female
                hormone product
            
            
            1,275
            
            
            4
            
            
            6,791
            
            
            17Hydrocodone/Ibuprofen
            
            
            1,213
            
            
            4
            
            
            1,030
            
            
            2All
                Other Products
            
            
            223
            
            
            1
            
            
            40
            
            
            0Total
            
            $
            33,929
            
            
            100
            %
            $
            40,305
            
            
            100
            %








41




INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
 (In
          thousands, except for share data)
 ·
              Net sales of Ibuprofen for the three and six month
                periods ended December 31, 2007 decreased by $1,936, or 22.6% and
                $1,192
                or 6.9%, as compared to sales for the three and six months ended
                December
                31, 2006, respectively. The sales decreases resulted primarily from
                our
                inability to obtain sufficient quantities of raw materials in the
                three
                months ended December 31, 2007, which blocked us from producing sufficient
                quantities of finished product to satisfy open
                orders.


·
            Net
                sales of our Bactrim products for the three and six months ended
                December
                31, 2007 decreased $994, or 21.8% and $2,282 or 24.5%, as compared
                to
                sales for the three and six month periods ended December 31, 2006,
                respectively. (We market our Sulfamethoxazole - Trimethoprim products
                in
                two strengths: 400mg / 80mg, commonly referred to as generic Bactrim®, and
                800mg / 160mg, commonly referred to as Bactrim-DS® (both, “Bactrim”)). The
                sales decrease resulted from our inability to obtain sufficient quantities
                of raw materials in the three months ended December 31, 2007, which
                blocked us from producing sufficient quantities of finished product
                to
                satisfy open orders. In addition, the decrease in sales primarily
                relates
                to lower selling prices in the December 2007 quarter as compared
                to the
                prior year.




·
            Net
                sales of our Naproxen products for the three month period ended December
                31, 2007 increased $471, or 19.4%, as compared to sales for the three
                month period ended December 31, 2006. However, sales for the six
                month
                period ended December 31, 2007 decreased $512, or 9.3%, as compared
                to
                sales for the six month period ended December 31, 2006 due to increased
                competitive pressure and due to losing private label distributor
                business
                to a large wholesaler and retailer in July
                2007.




·
            Net
                sales of our female hormone products for the three months ended December
                31, 2007 were zero, and sales for the six month period ended December
                31,
                2007 decreased $5,516, or 81.2%, as compared to sales for the six
                month
                period ended December 31, 2006. During the past six months, two additional
                competitors entered the market for these products, resulting in decreased
                selling prices, lower volume sold and lower margins. On February
                13, 2008
                we terminated the agreement with Centrix under which we marketed
                this
                product. See Note 17 to the condensed consolidated financial statements
                contained herein for additional
                discussion.




·
            We
                re-entered the market with distribution of our
                Isometheptene/Dichloral/Acetominophen capsules product in October
                2007
                (equivalent to branded product Midrin®). Our sales of this product through
                major wholesaler and retailer channels of distribution have steadily
                increased as we increase our sources of raw material
                supply.




·
            On
                October 3, 2006, we entered into a termination and release agreement
                (the
                “Termination Agreement”) with Watson terminating the Manufacturing and
                Supply Agreement dated as of October 14, 2003 pursuant to which we
                manufactured and supplied and Watson distributed and sold generic
                Vicoprofen® (7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets.As
                a result of the Termination Agreement we obtained all rights to market
                this product. Net sales of this product for the three and six month
                periods ended December 31, 2007 increased by $437 or 420.2% and $183
                or
                17.8%, respectively as compared to sales for the six month period
                ended
                December 31, 2006.





·
            During
                the six months ended December 31, 2007, we re-launched seven strengths
                of
                our hydrocodone bitartrate/acetaminophen tablet products though retail
                and
                wholesale channels of distribution.





For
      the
      three and six months ended December 31, 2007, we purchased materials from three
      suppliers totaling approximately 74% and 68%, respectively. For the three and
      six months ended December 31, 2006, we purchased materials from four suppliers
      totaling approximately 67% and 65% of purchases, respectively. At December
      31,
      2007 aggregate amounts due to these suppliers included in accounts payable,
      were
      approximately $3,944.


42


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**Cost
      of sales / Gross Margins**





Our
      gross
      profit percentage for the three and six month periods ended December 31, 2007
      was 14.0% and 9.9%, respectively, a decrease of 9.1  and
      22.4
      percentage points as compared to 23.1% and 32.3% for the three and six months
      ended December 31, 2006, respectively.  Due to the liquidity issues that
      have confronted us in the past several months, we were not able to maintain
      a
      continuous source of supply for many of major raw materials.  This created
      inefficiencies in the manufacturing and planning processes and resulted in
      not
      being able to produce sufficient finished products to satisfy open orders in
      a
      timely manner. Subsequent to the November 2007 financing transactions,
      while we were able to begin to obtain increased materials, inventory levels
      at
      December 31, 2007 were lower than required and we were behind in terms of the
      rate at which raw materials had been converted to finished goods.





During
      the six months ended December 31, 2007, inventory levels were reduced as
      discussed above.  In addition, we recognized adjustments of $1,000 to
      reduce the carrying value of certain inventory items on hand at December 31,
      2007 to their market value and a reserve for obsolescence of $205. The
      combination of the significant decrease in inventory from June 30, 2007 to
      December 31, 2007, the $1,205 in inventory adjustments, and the relatively
      low
      level of net sales resulted in higher cost of sales as a percentage of sales
      being reflected in the three and six months ended December 31,
      2007.





**Selling
      and General and Administrative Expenses**





Selling,
      general and administrative (“SG&A”) expenses increased $147 or 4.7% to
      $3,303 for the three months ended December 31, 2007, as compared to $3,156
      for
      the three months ended December 31, 2006.  When stated as a percentage of
      net sales, SG&A expenses increased to 20.4% for the three months ended
      December 31, 2007 as compared to 18.1% for the three months ended December
      31,
      2006.





The
      increase in SG&A expenses during the three months ended December 31, 2007 as
      compared to the three months ended December 31, 2006 is primarily attributable
      to a $225 increase in freight expense. This increase is due to a higher
      proportion of distribution through major retail channels as opposed to warehouse
      and distribution centers, combined with an increase in the number of shipments
      between our two production facilities as we are now using warehouse space in
      the
      Yaphank facility for storage of our raw materials and as we have started
      production out of the Yaphank facility for products which can only be shipped
      from our Hauppauge location due to FDA restrictions. In addition, there was
      an
      increase of $88 in bank fees resulting from waiver fees following defaults
      under
      our Forbearance Agreement with WFBC, an increase of $77 for professional and
      consulting fees as a result of an increase in management advisory services,
      and
      an increase of $62 in compensation and related taxes and benefits for sales
      and
      administrative staff.





There
      were significant offsets to the increases in SG&A described above. We
      currently have outstanding SARs, which are recorded at fair value and are marked
      to market each reporting period with changes in fair value being recorded to
      SG&A. The adjustments in the fair value resulted in a decline of $94 in
      SG&A expense during the three months ended December 31, 2007 as compared to
      the three months ended December 31, 2006. Board of Directors fees declined
      by
      $139 as a result of a nonrecurring cost incurred during the quarter ended
      December 31, 2006 resulting from the finalization of a new board compensation
      package. In addition, legal and accounting costs declined by $79 which was
      primarily attributable to the settlement of a legal matter during the quarter
      ended December 31, 2006 in the amount of $66.




43


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


SG&A
      expenses increased $1,281 or 22.1% to $7,075 for the six months ended December
      31, 2007, as compared to $5,794 for the six months ended December 31,
      2006.  When stated as a percentage of net sales, SG&A expenses
      increased to 20.9% for the six months ended December 31, 2007 as compared to
      14.4% for the same period in the prior year.





The
      increase in SG&A expense for the six months ended December 31, 2007 as
      compared to the six months ended December 31, 2006 is primarily attributable
      to
      an increase of $316 in compensation and related taxes and benefits for sales
      and
      administrative staff, an increase in freight expense of $297 consistent with
      the
      discussion above, an increase of $262 in professional services and consulting
      fees consisting of non-capitalizable costs associated with the ERP system
      implementation and additional management advisory services, an increase of
      $89
      in bank fees resulting from waiver fees following defaults under our Forbearance
      Agreement with WFBC, and an increase of $71 in rent expense. These expenses
      were
      partially offset by a decrease in the fair value of our outstanding SARs of
      $105.





SFAS
      123®
requires us to report a non-cash expense for the ratable portion of the fair
      value of employee stock option awards of unvested stock options over the
      remaining vesting period.  We reported non-cash expenses of $233 and $375
      during the three month periods ended December 31, 2007 and December 31, 2006,
      respectively.  We reported non-cash expenses of $575 and $586 during the
      six month periods ended December 31, 2007 and December 31, 2006,
      respectively.





**Research
      and Development Expenses**





We
      incurred Research and Development (“R&D”) expenses of $2,903 during the
      three month period ended December 31, 2007, which represented a decrease of
      $1,968, or 40.4 %, below $4,871 incurred in the three month period ended
      December 31, 2006.





The
      decline in R&D expenses is primarily the result of a $1,082 decrease in
      costs associated with our agreements with Tris Pharma, Inc. (“Tris”) as
      described below, a $357 decline in legal and consultation costs, a $280 decline
      in materials used in the bio-study and product development processes, a $413
      reduction in costs associated with bioequivalence studies for new generic
      pharmaceutical products currently in development, and a $244 decrease in outside
      service costs. These decreases were offset by an increase of $319 in overhead
      costs such as rent, depreciation and utilities, due to growth in the amount
      of
      space allocated for R&D work as compared to the comparative period in the
      prior year.





R&D
      costs for the six month period ended December 31, 2007 decreased $1,928, or
      23.3% to $6,361 from $8,289 for the six month period ended December 31, 2006.


44


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


The
      decline in R&D expenses is primarily the result of a $1,447 decrease in
      costs associated with our agreements with Tris as described below, and a $1,219
      reduction in costs associated with bioequivalence studies for new generic
      pharmaceutical products currently in development. In addition, there was also
      a
      $446 decrease in legal and consultation costs, and a $164 decrease in outside
      service costs. These decreases were offset by an increase of $623 in
      compensation and related taxes and benefits for R&D employees, and an
      increase of $584 in overhead costs such as rent, depreciation and utilities,
      due
      to growth in the amount of space allocated for R&D work as compared to the
      comparative period in the prior year.





As
      previously reported, during October 2006, we entered into a new agreement (“New
      Liquids Agreement”) with Tris Pharma, Inc. (“Tris”), which terminated the
      agreement entered into February 2005, which in turn was for the development
      and
      licensing of up to twenty-five liquid generic products (“Liquids Agreement”).
      According to the terms of the New Liquids Agreement, Tris will, among other
      things, be required to develop and deliver the properties, specifications and
      formulations (“Product Details”) for fourteen generic liquid pharmaceutical
      products (“Liquid Products”). We will then utilize this information to obtain
      all necessary approvals. Tris will manufacture, package and label each product
      for a fee. In conjunction with this new liquids agreement we were required
      to
      pay Tris $1,000, whether or not regulatory approval is obtained for any of
      the
      liquid products. As of December 31, 2007, all payments associated to this
      agreement were made. In addition, Tris is to receive forty percent of the net
      profits, as defined, in accordance with the terms in the New Liquids
      Agreement.





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





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





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


45


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)





**Interest
      Expense, net**





Our
      net
      interest expense increased approximately $744 and $1,200 when comparing the
      three and six months ended December 31, 2007 with the three and six month period
      ended December 31, 2006. The increases are primarily a result of an increase
      in
      borrowings from our line of credit and the default rate of interest being
      charged as a result of the defaults discussed below in Liquidity and Capital
      Resources. As of December 31, 2006, we had not drawn from our line of credit
      as
      compared to $15,143 outstanding against the line of credit as of December 31,
      2007. In addition to these borrowings being in place, we also borrowed
      additional funds for new equipment.





In
      order
      to hedge against rising interest rates, we entered into two interest rate swap
      arrangements. Fair value of the interest rate swaps at December 31, 2007 and
      2006 was approximately ($380) and $83 and is included in Other Liabilities
      and
      Other Assets, respectively. However, it is likely that, as a result of
      additional borrowings we will incur increases in our interest expense in the
      future.





**Income
      Taxes**





At
      December 31, 2007, we have remaining Federal net operating losses (“NOLs”) of
      $44,053 available through 2027. Pursuant to Section 382 of the Internal Revenue
      Code regarding substantial changes in our ownership, utilization of the Federal
      NOLs is limited. As a result of losses incurred in fiscal years 2005, 2006,
      2007, and the our current financial position (see Note 2 - Management’s
      Liquidity Plans and Going Concern of the accompanying condensed consolidated
      financial statements), which indicate uncertainty as to our ability to generate
      future taxable income, the “more-likely-than-not” standard has not been met and
      therefore our deferred tax asset may not be realized. As such, we carried a
      full
      valuation allowance against our deferred tax assets as of December 31, 2007.





In
      calculating its tax provision for the six month periods ended December 31,
      2007
      and 2006, we applied aggregate effective tax rates of approximately 51% and
      27%,
      respectively, thereby creating income tax expense of $5,976 and a benefit of
      $922, respectively. The increase in effective tax rates is the result of
      increasing our valuation allowance against its deferred tax assets during the
      three months ended December 31, 2007.


46




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**Liquidity
      and Capital Resources**





As
      previously reported, on October 26, 2007, we finalized a Forbearance Agreement
      with WFBC that terminated on December 31, 2007, which was subsequently amended
      on November 12, 2007. As of June 30, 2007, we had defaulted under the Senior
      Credit Agreement with respect to (i) financial reporting obligations, including
      the submission of its annual audited financial statements for the fiscal year
      ending June 30, 2007, and (ii) financial covenants related to minimum net cash
      flow, maximum allowable leverage ratio, maximum allowable total capital
      expenditures and unfinanced capital expenditures for the fiscal year ended
      June
      30, 2007 (collectively, the “Defaults”). WFBC waived the Defaults based upon our
      consummation and receipt of $8,000 related to the issuance of subordinated
      debt
      described below.





On
      January 10, 2008, we received notice (the “Notice”) from Wells Fargo that we had
      defaulted under the Forbearance Agreement with respect to: (i) financial
      covenants relating to required Income Before Tax for the months ending October
      31, 2007 and November 30, 2007, (ii) financial covenants relating to required
      Net Cash Flow for the months ending October 31, 2007 and November 30, 2007
      and
      (iii) an obligation to have a designated financial advisor provide an opinion
      as
      our ability to meet their fiscal year 2008 projections. The Notice stated that
      Wells Fargo is not demanding repayment of the Outstanding Amount at this time,
      but that Wells Fargo reserves the right to do so.





On
      February 5, 2008, we entered into a Forbearance Agreement with Wells Fargo
      Bank,
      National Association (“Wells Fargo”) which, as more fully set forth below,
      provides us with additional credit and provides for a forbearance by Wells
      Fargo
      from exercising its remedies based on previous defaults with respect to
      ourcredit agreement with Wells Fargo.





In
      connection with our negotiation of the Forbearance Agreement, we completed
      a
      restructuring of its operations on January 25, 2008 and submitted a new
      operating plan to Wells Fargo which we believe will result in positive cash
      flow
      and net profits. Pursuant to the new operating plan, we have substantially
      reduced research and development activities, reduced payroll by approximately
      20% and began a process to identify alternative financing sources for our real
      estate, machinery and equipment, and working capital finance.





As
      reported in Holdings’ Current Report on Form 8-K filed with the Securities and
      Exchange Commission on January 29, 2008, on January 28, 2008, Wells Fargo
      informed us that it would consider providing us with credit availability on
      the
      condition that we (i) develop and implement a new operating plan focused on
      increasing the amount of eligible collateral and reducing costs and (ii) develop
      an alternative financing arrangement.


47


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


On
      February 5, 2008, we entered into the Forbearance Agreement with Wells Fargo
      whereby Wells Fargo agreed to, among other things, (i) forbear from exercising
      its remedies arising from our default under the Wells Fargo Credit Agreement
      until June 30, 2008 provided no further default occurs; (ii) provide a
      moratorium on certain principal payment; (iii) and advance us up to $3,000
      under
      a newly granted real estate line of credit mortgage on our real estate, which
      amounts will be due on June 30, 2008.





Under
      the
      Forbearance Agreement we agreed to (i) submit to Wells Fargo, on a weekly basis,
      a “rolling” 13-week budget; (ii) engage a chief restructuring officer to review
      and oversee the budget and, in conjunction with our management, certain
      financial matters; (iii) grant Wells Fargo an equity line of credit mortgage
      to
      secure its new equity line of credit and a collateral mortgage to secure certain
      obligations under the $7,000 portion of revolving line of credit that has been
      converted to a term loan and (iv) pay Wells Fargo a success fee of up to $500
      in
      the event the balance of the indebtedness owed to Wells Fargo is repaid from
      the
      sale of our stock or substantially all of our assets prior to June 30, 2008.





The
      Forbearance Agreement also limits our borrowing base on which certain advances
      are made and provides for a number of events of default, including (i) a
      material adverse change (ii) failure by us to meet certain budget items by
      more
      that 10%; (iii) failure to receive a letter of intent for the sale of the assets
      of the Company for an amount in excess of the Wells Fargo indebtedness by March
      31, 2008; (iv) failure by the Company to receive a commitment for the sale
      of
      the assets of the Company for an amount in excess of the Wells Fargo
      indebtedness by April 30, 2008; (v) failure of the Company to close a
      transaction for the sale of the assets of the Company for an amount in excess
      of
      the Wells Fargo indebtedness by June 30, 2008; and (vi) Wells Fargo indebtedness
      remains outstanding on June 30, 2008.





Pursuant
      to the operating plan approved by Wells Fargo in connection with the Forbearance
      Agreement, the Company will have access to up to an additional $3,000 of capital
      to meet its ongoing working capital and operating requirements.





At
      December 31, 2007, we had a working capital deficiency of $16,635, an
      accumulated deficit of $39,970 and cash flows used in operating activities
      of
      $9,835. In order to address our operating loss position and our lack of
      liquidity, we have taken various actions to improve profitability and cash
      flows
      generated from operations, including:





o
            Headcount
                was reduced on January 29, 2008 resulting in a 20% decrease in
                compensation costs on an annualized
                basis.


o
            Research
                & development (R&D) initiatives have been suspended, resulting in
                a substantial reduction in R&D expense commencing February 1, 2008.





As
      previously reported, we completed a series of banking and financing activities
      in October and November 2007, which are outlined below.




On
      November 7, 2007 and November 14, 2007, as required by the Forbearance
      Agreement, we received a total of $8,000 in gross proceeds from the issuance
      and
      sale of subordinated debt.


48


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


On
      November 7, 2007, Dr. Maganlal K. Sutaria, the Chairman of the Company’s Board
      of Directors, and Vimla M. Sutaria, his wife, loaned $3,000 to the Company
      pursuant to a Junior Subordinated Secured 12% Promissory Note due 2010 (the
      “Sutaria Note”). Interest of 12% per annum on the Sutaria Note is payable
      quarterly in arrears, and for the first 12 months of the note’s term, may be
      paid in cash, or additional notes (“PIK Notes”), at the option of the Company.
      Thereafter, we are required to pay at least 8% interest in cash, and the
      balance, at its option, in cash or PIK Notes.





Repayment
      of the Sutaria Notes is secured by liens on substantially all of our property
      and real estate. Pursuant to intercreditor agreements, the Sutaria Notes are
      subordinated to the liens held by WFBC and the holders of the STAR Notes
      described below.





On
      November 14, 2007, we issued and sold an aggregate of $5,000 of Secured 12%
      Promissory Notes Due 2009 (the “STAR Notes”) in the following amounts to the
      following parties:




Tullis-Dickerson
                  Capital Focus III, L.P. (“Tullis”)
              
              $
              833Aisling
                  Capital II, L.P. (“Aisling”)
              
              $
              833Cameron
                  Reid (“Reid”)
              
              $
              833Sutaria
                  Family Realty, LLC (“SFR”)
              
              $
              2,500





Tullis
      is
      an investor in the Company and the holder of its Series B-1 Convertible
      Preferred Stock. Aisling is also an investor in the Company and the holder
      of
      its Series C-1 Convertible Preferred Stock. Reid is the Company’s Chief
      Executive Officer and SFR is owned by Company shareholders who control
      approximately 53% of the Company’s voting stock (the “Major Shareholders”),
      including Raj Sutaria, who is a Company Executive Vice President.





Interest
      of 12% per annum on the STAR Notes is payable quarterly in arrears, and may
      be
      paid, at the option of the Company, in cash or PIK Notes. Upon the Company
      obtaining stockholder approval and ratification of the issuance of the STAR
      Note
      financing and making the necessary filings with the SEC in connection therewith
      (the “Stockholder Approval”), which is to occur no earlier than January 18, 2008
      and no later than the later of February 28, 2008 or such later date as may
      be
      necessary to address SEC comments on the Company’s Information Statement on
      Schedule 14C, which was filed on January 15, 2008, the STAR Notes shall be
      exchanged for:




·
            Secured
                Convertible 12% Promissory Notes due 2009 (the “Convertible Notes”) in the
                original principal amount equal to the principal and accrued interest
                on
                the STAR Notes through the date of exchange. The conversion price
                of the
                Convertible Notes is to be $0.95 per share and interest is to be
                payable
                quarterly, in arrears, in either cash or PIK Notes, at the option
                of the
                Company;


49


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


·
            Warrants
                to acquire an aggregate of 1,842 shares of Common Stock (the “Warrants”)
                with an exercise price of $0.95 per share.





Each
      of
      the Convertible Notes and Warrants are to have anti-dilution protection with
      respect to issuances of Common Stock, or common stock equivalents at less than
      $0.95 per share such that their conversion or exercise price shall be reset
      to a
      price equal to 90% of the price at which shares of Common Stock or equivalents
      are deemed to have been issued.





The
      repayment of the STAR and Convertible Notes is secured by a second priority
      lien
      on substantially all of the Company’s property and real estate. Pursuant to
      intercreditor agreements, the STAR Note financing liens are subordinate to
      those
      of WFBC, but ahead, in priority, of the Sutaria Notes.





Also,
      upon the Company obtaining the Stockholder Approval, the Series B-1 and Series
      C-1 Convertible Preferred Stock held by Tullis and Aisling shall be exchangeable
      for shares of a new Series D-1 Convertible Preferred Stock, which shall be
      substantially similar to the B-1 and C-1 Convertible Preferred Stock other
      than
      the Conversion price which is to be $0.95 per share instead of $1.5338 per
      share.





Pursuant
      to the terms of the Securities Purchase Agreements for the Company’s Series B-1
      and C-1 Convertible Preferred Stock, the consent of Tullis and Aisling was
      required for the issuance of the Sutaria Notes and for the STAR Note financing.
      In consideration for that consent, the Company has agreed to exchange 2,282
      warrants to purchase Company Common Stock held by each of Tullis and Aisling
      with an exercise price of $1.639 per share for new warrants with an exercise
      price of $0.95 per share. In addition, the Major Shareholders have agreed to
      give Tullis and Aisling tag along rights on certain sales of Company common
      stock.





Our
      operations and capital expenditures have been financed through the WFBC Credit
      Facility. For the six months ended December 31, 2007, net cash used in operating
      activities was $9,835 as compared to cash used in operating activities of $2,195
      for the six months ended December 31, 2006. Significant factors comprising
      the
      net cash used in operating activities for the six months ended December 31,
      2007
      include: net loss of $17,794, increase in inventory and prepaid expenses and
      other current assets of $3,834 and $433, respectively, partially offset by
      a
      decrease in accounts payable, accrued expenses and other liabilities of $5,282.
      Accounts payable, accrued expenses and other payables decreased primarily due
      to
      the receipt of $8,000 in conjunction with the completion of the banking and
      financing activities discussed below. We also recognized several non-cash
      charges: depreciation and amortization of $1,818, stock-based compensation
      expense (in accordance with SFAS 123 ®) amounting to $575, a lower of cost or
      market write down of inventory of $1,000 and an inventory obsolescence reserve
      of $205.





For
      the
      six months ended December 31, 2007, we used funds in investing activities of
      $2,080 compared to $2,320 used in investing activities during the six months
      ended December 31, 2006. These amounts primarily related to capital expenditures
      for new machinery, equipment and building renovations.





Our
      financing activities provided cash of $11,884 for the six months ended December
      31, 2007 compared to $9,956 of cash provided by financing activities for the
      same period in the prior year. For the six months ended December 31, 2007,
      we
      increased borrowings by $5,277 under the WFBC revolving credit facility. For
      the
      quarter ended December 31, 2006, net cash of $9,993 was provided by the sale
      of
      $10,000 of our Series C-1 redeemable convertible preferred stock, which
      generated $9,993 of cash. For the quarter ended December 31, 2007, net cash
      of
      $8,000 was provided by the issuance of subordinated debt.





50




INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
 (In
          thousands, except for share data)


At
      December 31, 2007, we had $41 in cash and cash equivalents, compared to $72
      at
      June 30, 2007.





Realization
      of our assets is dependent on the continued operations of the Company and the
      future success of such operations. There can be no assurances that we will
      be
      able to reverse our operating losses, cash flow deficiencies, or meet the
      requirements set forth in the Forbearance Agreement entered into on February
      5,
      2008. These factors raise substantial doubt about our ability to continue as
      a
      going concern. Among other initiatives, we are currently holding discussions
      with its key vendors in an effort ensure that there is a continuous supply
      of
      raw materials.  In addition, we are seeking alternative financing
      arrangements to secure additional working capital.  If we are not able to
      procure sufficient levels of raw materials, or if we are not able to secure
      additional working capital in a timely manner, then we will not be able to
      continue as a going concern.  We would then be forced to conduct a sale of
      the Company or a liquidation of assets in bankruptcy.





Bank
      Financing





During
      February, 2006, we entered into a 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





Complete
      details regarding the WFBC credit facility may be found in Note 8 of the
      accompanying condensed consolidated financial statements for the quarter ended
      December 31, 2007 and in our Form 10-K filed with the SEC on November 15,
      2007.





**Watson
      Termination Agreement**





On
      October 3, 2006, we entered into a termination and release agreement (the
“Termination Agreement”) with Watson terminating the Manufacturing and Supply
      Agreement dated October 14, 2003 (the “Supply Agreement”) pursuant to which we
      manufactured and supplied and Watson distributed and sold generic Vicoprofen®
(7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets, (the “Product”). Watson
      was required to return all rights and agreements to us thereby enabling us
      to
      market the Product ourselves. Further, Watson was required to turn over to
      us
      its then current customer list for this product and agreed that, for a period
      of six
      months from closing, neither Watson nor any of its affiliates is to solicit
      sales for this Product from its twenty largest customers. In accordance with
      the
      Termination Agreement, Watson returned approximately $141 of the Product and
      we
      in turn invoiced Watson $42 for repacking. The net effect was a reduction of
      $99
      to our net sales during the three month ended December 2006. In consideration
      of
      the termination of Watson’s rights under the Supply Agreement, we are to pay
      Watson $2,000 payable at the rate of $500 per year over four years from the
      first anniversary of the effective date of the agreement. We determined the
      net
      present value of the obligation and accordingly included in Accounts payable,
      accrued expenses and other liabilities and Contract termination liability $367
      and $1,288, respectively. The imputed interest of $324 will be amortized over
      the four year life of the obligation using the effective interest rate method.
      At December 31, 2007, contract termination liability of $902 and $903 are
      included in Accounts payable, accrued expenses and other liabilities and
      Contract termination liability, respectively. The imputed interest of $345
      will
      be amortized over the remaining life of the obligation using the effective
      interest rate method. Non-cash interest of $28 and $62 was recognized during
      the
      three and six months ended December 31, 2007.




51


INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
 (In
          thousands, except for share data)


**Accounts
      Receivable**





Our
      accounts receivable at December 31, 2007 was $13,718 as compared to $12,945
      at
      June 30, 2007. The average annual turnover ratio of accounts receivable to
      net
      sales for the six months ended December 31, 2007 was 5.09. Our turns are
      calculated on an annual average. Our accounts receivable continue to have
      minimal risk with respect to bad debts; however this trend cannot be
      assured.





**Inventories**





At
      December 31, 2007, our inventory was $12,256 as compared to $17,295 at June
      30,
      2007. Our turnover of inventory for the six months ended December 31, 2007
      was
      4.14.





We
      reduce
      the carrying value of inventories to a lower of cost or market basis for
      inventory whose net book value is in excess of market. Aggregate reductions
      in
      the carrying value with respect to inventories still on hand at December 31,
      2007 that were determined to have a carrying value in excess of market was
      $1,000.





In
      addition, we perform a quarterly review of inventory items to determine if
      an
      obsolescence reserve adjustment is necessary. The allowance not only considers
      specific items and expiration dates, but also takes into consideration the
      overall value of the inventory as of the balance sheet date. The inventory
      obsolescence reserve value at December 31, 2007 was $205.





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





Accounts
      payable, accrued expenses and other current liabilities decreased $5,214 from
      June 30, 2007 to December 31, 2007 primarily due to the receipt and use of
      $8,000 in conjunction with the completion of the banking and financing
      activities outlined above.





**Cash**





Cash
      decreased approximately $31 to $41 at December 31, 2007 from $72 at June 30,
      2007 as more fully described in Liquidity and Capital Resources
      above.





**Critical
      Accounting Policies**





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





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





52








INTERPHARM
          HOLDINGS, INC. AND SUBSIDIARIES
 (In
          thousands, except for share data)


**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
      are 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”.





**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.




53


INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**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.


54




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**Issues
      And Uncertainties**


**Risk
      of Product Liability Claims**





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





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




At
      December 31, 2007, total obligations to our bank pertaining to the credit
      facility described above were: (i) $15,143 related to the WFBC line of credit;
      (ii) approximately $10,533 real property term loan; and (ii) $4,914 owing on
      the
      machinery and equipment lines (see Note 8 of the accompanying condensed
      consolidated financial statements).





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. However, as a result of the default
      discussed above, the Company was charged interest at the default rates of 10.56%
      and 11.00%, respectively. The swaps 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,
      2007 and June 30, 2007 was approximately ($380) and $10 and is included in
      Other
      Liabilities and Other Assets, respectively.





55




INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES
 (In
        thousands, except for share data)


**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
      SEC's 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, 2007, we carried out
      an
      evaluation, under the supervision and with the participation of our management,
      including our Chief Executive Officer and Chief Financial Officer, of the
      effectiveness of the design and operation of our disclosure controls and
      procedures. Based upon that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that our disclosure controls and procedures were
      effective in alerting them in a timely manner to information relating to the
      Company, required to be disclosed in this report.





In
      July
      2007, the Company implemented an enterprise resource planning (“ERP”) system.
      The implementation involves enhancements in business processes and significant
      improvements to the Company’s internal controls over financial reporting. In
      addition to expanding and improving access to information, we believe the new
      ERP system will provide a standard scalable information platform to accommodate
      our current business growth plan.


56


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES


(In
      thousands, except for share data)


**PART
      II - OTHER INFORMATION**




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




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





By
      motion
      dated July 26, 2006, the Company moved to dismiss Vuono’s complaint in its
      entirety.  Vuono cross-moved to disqualify the Company's counsel due to an
      alleged conflict of interest.  By decision and order dated March 29, 2007,
      the Court dismissed Vuono’s claims as they pertain to any fees claimed by Vuono
      related to a reverse merger of Interpharm, Inc. and the Company and declined
      to
      dismiss other claims.  The dismissed claims represent approximately $7
      million of the total of $10 million claimed by Vuono.  The Court deferred
      its decision on Vuono’s motion to disqualify counsel, and held a hearing on the
      matter on September 24, 2007.  By decision and order dated December 17,
      2007, the Court denied Vuono’s motion to disqualify counsel.





Vuono
      has
      filed notices of appeal in connection with both the partial dismissal of his
      claims and the motion to disqualify. The Company’s time to file and serve
      answering briefs has been extended to April 1, 2008. It is also anticipated
      that the trial court will shortly order the parties to engage in expedited
      discovery, including the exchange of documents and depositions of Vuono, the
      Company, and third-parties. The Company will continue to vigorously defend
      the
      action and cannot predict with certainty the outcome of this
      litigation.





In
      May
      2007, a former employee commenced an action against the Company with the
      New York State Division of Human Rights.  The complaint against the Company
      alleges claims of race discrimination. The total sought by the former employee
      in the action is unspecified.  A hearing has been scheduled for late March
      2008. The Company believes that the claims are without merit and the Company
      is
      vigorously defending the action.





On
      October 8, 2007, Leiner Health Products LLC and the Company entered into a
      Settlement Agreement and Release (“Settlement”) in connection with an October
      2005 manufacturing and supply agreement for ibuprofen tablets. As part of the
      Settlement, Leiner executed a Promissory Note for $477 for the amount it owed
      the Company. On October 12, 2007, the Company notified Leiner that one lot
      of
      this product was subject to a voluntary recall. Leiner has subsequently
      threatened to hold any additional payments under the Settlement until they
      receive reasonable assurances from the Company that the additional lots in
      their
      possession would not be subject to the recall as well. If all lots were
      recalled, Leiner would be entitled to a reimbursement by the Company of
      approximately $256. However, the Company does not believe any further lots
      will
      be recalled.





57











INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES


On
      November 8, 2007, Leiner failed to make its initial principal payment under
      the
      Promissory Note, and indicated that it did not intend to make future payments
      under the Note.  In response, the Company declared Leiner in default under
      the Promissory Note and accelerated the unpaid principal obligations.  On
      November 26, 2007, the Company commenced litigation, via a motion for summary
      judgment in lieu of complaint, in New York Supreme Court, Suffolk County
      entitled *Interpharm
      Holdings, Inc. v. Leiner Health Products LLC.* ,
      36642/2007, seeking to recover the full principal amount of the promissory
      note
      plus costs and interest.  Leiner has opposed the Company’s motion, the
      company expects a decision by early spring. In addition, Leiner has commenced
      an
      action against the Company in California state court for a declaratory judgment
      that it is entitled to a set-off against the Promissory Note based on the
      recall. *Leiner
      Health Products LLC v. Interpharm Holdings, Inc.* ,
      Superior Court of California, Los Angeles, No. BC381396. The Company’s response
      to Leiner’s California complaint is due in mid-February. The Company will
      continue to vigorously defend the action.





On
      November 2, 2007, the Company commenced an action against Watson in the U.S.
      District Court, Eastern District of New York (Index No. 02-4600). The Company
      is
      seeking rescission and a declaratory judgment relieving the Company of its
      obligations under the Termination Agreement. Watson’s answer in this action
      contains counterclaims seeking damages in the amount of $500 (representing
      the
      initial installment due from the Company under the Termination Agreement),
      a
      declaratory judgment that the Company must pay the balance due under the
      Termination Agreement, and damages for breach of the underlying Supply
      Agreement. Discovery in this action is expected to commence in mid-February
      2008.





On
      November 16, 2007, Crane Partners LLC (“Crane”) commenced an action against the
      Company in the Superior Court of NJ-Law Div., Bergen County (Index No.
      L8474-07). Crane alleges the Company breached certain obligations under a Term
      Sheet that Crane and the Company entered into on October 22, 2007. Crane is
      seeking $60 plus interest and costs. A scheduling conference is set for February
      20, 2008. The Company will continue to vigorously defend the action.





On
      December 17, 2007, Generic Pharmaceutical Services Inc. (“GPSI”) commenced an
      action against the Company in the NY Supreme Court-Suffolk County (Index No.
      07-39101). GPSI claims breach of contract and breach of implied warranty of
      merchantability in connection with product supplied to it by the Company. GPSI
      alleges damages of not less than $1,500. The Company believes that the claims
      are without merit and the Company is vigorously defending the action.





On
      January 25, 2008, Forest Laboratories, Inc. et al. (“Forest”) commenced an
      action against the Company in the U.S. District Court, District of Delaware
      (Index No. 08-52) in connection with the Company’s filing of its memantine
      tablets ANDA containing a paragraph IV certification challenging Forest’s patent
      on the branded product known as Namenda ® .
      Forest’s complaint alleges infringement of U.S. Patent No. 5,061,703. Forest is
      seeking, inter alia, a judgment that the company has infringed U.S. Patent
      No.
      5,061,703; that the Company’s ANDA shall not be approved prior to the expiration
      date of U.S. Patent No. 5,061,703 and an award of attorney fees, costs and
      expenses.




We
      are
      unaware of any other material pending or threatened legal action or proceeding
      against us.





58





INTERPHARM
        HOLDINGS, INC. AND SUBSIDIARIES




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


Exhibits21.1
              List
                  of Subsidiaries.31.1
              Certification
                  of Chief Executive Officer pursuant to Rules 13a-14(a) as adopted,
                  pursuant to Section
                  302 of the Sarbanes-Oxley Act of 2002.31.2
              Certification
                  of the Chief Financial Officer pursuant to Rules 13a-14(a) as adopted,
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  2002.32.1
              Certifications
                  of the Chief Executive Officer and the Chief Financial Officer
                  pursuant to
                  18 U.S.C. Section 1350 as adopted, pursuant to Section 906 of the
                  Sarbanes-Oxley Act of
                  2002.


59


INTERPHARM
      HOLDINGS, INC. AND SUBSIDIARIES




Signatures




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


INTERPHARM
              HOLDINGS, INC.(Registrant)Date: February 15, 2008
            By:
            /s/ Peter GiallorenzoPeter
              Giallorenzo,Chief Financial Officer(Duly authorized to sign on behalf of
              registrant)


60






INTERPHARM
      HOLDINGS, INC. AND
      SUBSIDIARIES




**Exhibits****Number**
            **Description****21.1**
            **List
                of
                Subsidiaries**Name
                of Subsidiary
            Jurisdiction
            Ownership
              PercentageInterpharm,
                Inc.
            New
                York
            100%Micro
                Computer Store, Inc.
            New
                York
            100%Innovative
                Business Micros, Inc.
            New
                York
            100%Logix
                Solutions, Inc.
            Colorado
            90%Saturn
                Chemical, LLC
            New
                York
            100%Interpharm
                Realty, LLC
            New
                York
            100%




61