10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

____________________

FORM 10-K

____________________

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended June 30, 2007

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

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-22710

INTERPHARM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware	13-3673965
(State or other jurisdiction of corporation or organization)	(IRS. Employer 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

Securities registered pursuant to Section 12(b) of the Act:Common Stock $.01 par value

Securities registered pursuant to Section 12(g) of the Act: Series A Preferred Stock $.01 par value

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 requirement for the past 90 days.

YES x NO o

Indicate by check mark if disclosure of delinquent filer pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

YES oNO x

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

YES oNO x

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

YES oNO x

i

On December 31, 2006, the aggregate market value of the voting common equity of Interpharm Holdings, Inc., held by non-affiliates of the Registrant was $31,287 based on the closing price of $2.09 for such common stock on said date as reported by the American Stock Exchange.

On November 12, 2007, we had 66,190 shares of common stock outstanding.

ii

INTERPHARM HOLDINGS, INC.

Form 10-K

Fiscal Year Ended June 30, 2007

Table of Contents

PART I		Page
Item 1	Business	1
Item 1A	Risk Factors	14
Item 1 B	Unresolved Staff Comments	25
Item 2.	Properties	26
Item 3.	Legal Proceedings	26
Item 4.	Submission of Matters to a Vote of
	Security Holders	28
PART II
Item 5.	Market for Common Stock
	and Related Stockholder Matters	28
Item 6.	Selected Financial Data	34
Item 7.	Management's Discussion and Analysis of
	Financial Condition and Results of Operations	35
Item 7A.	Quantitative and Qualitative Disclosure
	About Market Risk	64
Item 8.	Financial Statements and Supplementary Data	65
Item 9.	Changes in and Disagreements with
	Accountants on Accounting and
	Financial Disclosures	65
Item 9A.	Controls and Procedures	65
Item 9B	Other Information	65
PART III
Item 10.	Directors and Executive Officers
	of the Registrant.	66
Item 11.	Executive Compensation	71
Item 12.	Security Ownership of Certain Beneficial
	Owners and Management and Related
	Stockholder Matters	86
Item 13.	Certain Relationships and Related
	Transactions	90
Item 14.	Principal Accounting Fees and Services	91
Item 15.	Exhibits, Financial Statement Schedules
	and Reports on Form 8-K	92
Signatures		94
Financial Statements		F-1

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK

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

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

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

PART I

ITEM 1. - BUSINESS

Company History

Interpharm Holdings, Inc., (the "Company" or "Interpharm"), through its operating wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and collectively with Interpharm, "we" or "us") has been engaged in the business of developing, manufacturing and marketing generic prescription strength and over-the-counter pharmaceuticals since 1984.

We currently sell our products under (i) our own label to the major retailers, wholesalers, managed care organizations and national distributors, and (ii) under private label to wholesalers, distributors, repackagers, and other manufacturers. As of June 30, 2007, we manufactured and marketed thirty six generic pharmaceutical products, which represent various oral dosage strengths for eleven unique products and different dosage strengths for twenty-five of these products.

Our Business and Expansion Plan

In our current phase of expansion, we are continuing the process of transforming the Company into a full service generic pharmaceuticals provider and increasing our line of products, revenues and gross margins. During the fiscal year ended June 30, 2007, we increased our revenues by $12,200 over the prior year. During the fiscal year ended June 30, 2007, our gross margins were 28.7%, as compared to 27.5% during the prior year.

The most critical component of our expansion plan is the investment in research and development to continue to add new products to our product portfolio. Over the past two fiscal years, we have spent a total of $29,600 on research and development.

Another critical component of our plan is an emphasis on sales. During fiscal 2007, our sales strategy has been successful and we are now selling products to the major chains, wholesalers, distributors, managed care entities and government agencies. We are now well positioned to launch new products in these sales channels which should result in increasing sales.

During fiscal 2007, we produced a total of approximately 4.3 billion tablets. We are making further improvements to our efficiencies in manufacturing, and have completed the build out of our Yaphank, New York facility.

Recent Developments

As set forth in detail below in Management’s Discussion and Analysis under the heading “Liquidity and Capital Resources,” as of June 30, 2007, we defaulted under the terms of our credit facility with Wells Fargo Business Credit (“WFBC”) due to a lack of adequate working capital resulting from increased expenses and losses during the fiscal year ended June 30, 2007. Although these defaults gave WFBC the right to liquidate our assets and business, WFBC instead waived the defaults and amended our covenants upon our raising an additional $8,000 of debt financing (the “Financing”). The details of the Financing are also described below.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

During our negotiations with WFBC and with the lenders for the $8,000 in financing, we were delayed in filing this Annual Report on Form 10-K, which, as disclosed in our Current Report on Form 8-K filed on October 17, 2007, caused the American Stock Exchange to halt trading in our common stock from October 17, 2007 until November 15, 2007.

In connection with prior financings in 2006, we sold shares of our Series B-1 and C-1 convertible Preferred Stock to Tullis-Dickerson Capital Focus III, L.P. (“TD III”) and Aisling Capital II, L.P. (“Aisling”) from which a waiver is required to issue any securities if no registration statement is effective for the sale of the common stock into which the Series B-1 and C-1 Preferred Stock is convertible. No such registration statement is yet effective, and therefore, we were required to seek the consent of TD III and Aisling in order to effect the Financing.

On November 7, 2007, we entered into a Waiver and Consent Agreement (the “Waiver”) with TD III, Aisling and the Parties to the Financing which provided us with the necessary waiver from Tullis and Aisling. In addition, the pursuant to the Waiver, Perry Sutaria, P&K Holdings I, LLC, Rametra Holdings I, LLC, RajsHoldings I, LLC and Raj Sutaria, the holders of 54% of our issued and outstanding common stock (the “Proxy Shares”) agreed to, and did give a voting proxy to a committee comprised of Perry Sutaria and a representative from each of TD III and Aisling to vote the Proxy Shares:

1. For the election of directors; and

2. With respect to any changes in the Company by-laws.

In addition, the holders of the Proxy Shares gave TD III and Aisling tag along rights on the Proxy Shares such that in the event of any sale, other than certain exempted sales, of the Proxy Shares, the holders of the Proxy Shares will have an obligation to have the buyer purchase a proportionate number of shares held by TD III and Aisling.

As consideration for the Waiver, the conversion price of the Series B-1 and C-1 Preferred Stock was reduced from $1.5338 to $0.95 and the exercise price of an aggregate of 4,563 warrants held by TD III and Aisling was reduced from $1.639 to $0.95. The decreased conversion and exercise prices could adversely impact our earnings per share and the market price of our common stock.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Research and Development

During the fiscal year ended June 30, 2007, we filed ten Abbreviated New Drug Applications ("ANDAs") and two additional ANDAs owned by the Company but in the name of Tris Pharma, Inc., with which we have the development agreements described below. In addition during fiscal 2007, we obtained FDA approval for the following twelve ANDAs for five unique products which we plan to launch in FY 2008:

40-754	Hydrocodone Bitartrate and Acetaminophen Tablets, USP 7.5 mg / 650 mg
40-757	Hydrocodone Bitartrate and Acetaminophen Tablets, USP 10 mg / 650 mg
40-729	Hydrocodone Bitartrate and Acetaminophen Tablets, USP 5 mg / 500 mg
40-736	Hydrocodone Bitartrate and Acetaminophen Tablets, USP 5 mg / 325 mg
40-746	Hydrocodone Bitartrate and Acetaminophen Tablets, USP 10 mg / 325 mg
40-748	Hydrocodone Bitartrate and Acetaminophen Tablets, USP 7.5 mg / 500 mg
40-769	Hydrocodone Bitartrate and Acetaminophen Tablets, USP 7.5 mg / 750 mg
77-824	Ranitidine Hydrochloride Tablets, USP 150 mg, 300 mg
77-289	Citalopram Hydrobromide Tablets 10 mg, 20 mg, 40 mg
40-813	Hydrocodone Bitartrate and Acetaminophen Tablets, USP 10 mg / 500 mg
78-432	Naproxen Sodium Tablets, USP 275 mg, 550 mg
78-558	Ibuprofen Tablets, USP 400 mg, 600 mg, 800 mg

New product development continues to focus on the following six areas: Female Hormone Products, Scheduled Narcotic Products, Soft Gelatin Capsule Products, Oral Liquid Products, Products Coming Off Patent and Special Release Products.

Facilities

Our primary manufacturing activities are located at our 100 square foot facility in Hauppauge, New York. In January 2007, we leased from an unrelated third party 20 square feet of office space in a building next door to our Hauppauge manufacturing facility. The renovation of our 108 square foot facility located in Yaphank, New York has been completed and we are conducting all of our research and development activities there. The specialized facilities for oral contraceptives, soft gels and high potency products, which are within the Yaphank facility, are now operational. We are now also manufacturing and packaging commercial quantities of some of our current products at the Yaphank facility.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Strategic Alliances

Tris Pharma, Inc.

On February 24, 2005, we entered into two agreements with Tris for the development and licensing of up to twenty-five immediate release liquid generic products (First Liquids Agreement”) and seven solid oral dosage generic pharmaceutical products (the "Solids Contract"). We subsequently amended the Solids Contract to include an additional solid oral dosage product and two soft gel products. In April 2006, we entered into a second amendment to the Solids Contract to add one additional special release product. On October 4, 2006, we entered into an agreement with Tris that supersedes the First Liquids Agreement (“Second Liquids Agreement”). The Second Liquids Agreement covers the development and licensing of up to fourteen immediate release liquid generic products. To date, we have filed two ANDAs for products developed under the Solids Contract and two ANDAs have been filed for products developed under the Second Liquids Agreement.

Centrix Pharmaceutical, Inc.

As previously reported, we commenced shipments in August 2005 pursuant to an agreement with Centrix whereby Centrix has had exclusive distribution rights in the United States to a female hormone product that is manufactured and supplied by Interpharm. 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 shared net profits equally, as defined in the agreement.  During fiscal 2007, we recognized $11,583 in net sales from the Centrix agreement. Effective November 1, 2007, the original Centrix agreement is again in full force and effect.

Marketing Strategy

We have made significant progress on our marketing strategy since the implementation of our expansion plan. Our current marketing strategy focuses on offering an array of products within product categories that require distinct capabilities in manufacturing, facilities, regulatory or release technology. These limitations can be characterized by high initial capital expenditures, qualified personnel or specific technological capabilities. By selecting products within these higher barrier to entry product categories, we believe we can offer a unique breadth of products to the marketplace, further penetrate the direct sales channel and reach a larger customer base.

We believe that a broader customer base will enable us to achieve more stable sales and production cycles for both our existing products and new product launches. By making more direct sales, we believe that we can maximize value and profits by eliminating intermediaries as well as offer better customer service and stronger customer relationships.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

We have started development on products in all of our five primary targeted product areas and are continuing to target and file ANDAs for products in our sixth area - products coming off patent and for which patents have expired. Each of these product areas was chosen because of the higher margins that are available and because we anticipate limited competition. We continue to focus on developing product lines in our five primary targeted product areas, which are: Female Hormone Products, Scheduled Narcotic Products, Soft Gelatin Capsule Products, Special Release Characteristic Products and Liquid Products. This should allow us to further increase gross margins and per tablet revenues.

Products:

The following is the list of generic pharmaceutical products which are marketed or are planned to be marketed by the Company as of June 30, 2007. With the exception of Reprexain(R), the names of all of the products under the caption "Brand-Name Products" are registered trademarks in which the holders of the registered trademarks are non-affiliated pharmaceutical manufacturers.

PRODUCT NAME	BRAND-NAME PRODUCTS
1. Ibuprofen, 200mg White Tablets	Advil(R)
2. Ibuprofen, 200mg Brown Tablets	Advil(R)
3. Ibuprofen, 200mg Orange Tablets	Motrin(R)
4. Ibuprofen, 200mg Brown Caplets	Advil(R)
5. Ibuprofen, 200mg Orange Caplets	Motrin(R)
6. Ibuprofen, 400mg White Tablets	Motrin(R)
7. Ibuprofen, 600mg White Tablets	Motrin(R)
8. Ibuprofen, 800mg White Tablets	Motrin(R)
9. Isometheptene Mucate, Dichloralphenazone	Midrin(R)
Acetaminophen, Red/Red Capsule,
65mg/100mg/325mg
10. Naproxen, 250mg White Tablets	Naprosyn(R)
11. Naproxen, 375mg White Tablets	Naprosyn(R)

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

12. Naproxen, 500mg White Tablets	Naprosyn(R)
13. Hydrocodone Bitartrate and	Vicoprofen(R)
Ibuprofen Tablets, 7.5 mg / 200 mg
14. Hydrocodone Bitartrate and	Reprexain(R)
Ibuprofen Tablets, 5 mg / 200 mg
15. Sulfamethoxazole & Trimethoprim	Bactrim (R)
Tablets, 400 mg / 80 mg
16. Sulfamethoxazole & Trimethoprim	Bactrim DS (R)
Tablets (Double Strength), 800 mg / 160 mg
17. Esterified Estrogens and Methyltestosterone	Estratest
Tablets, 0.625 mg / 1.25 mg
18. Esterified Estrogens and Methyltestosterone	Estratest
Tablets, 1.25 mg / 2.50 mg
19. Hydrocodone Bitartrate and Acetaminophen	Norco (R)
Tablets, USP 5 mg / 325 mg
20. Hydrocodone Bitartrate and Acetaminophen	Norco (R)
Tablets, USP 10 mg / 325 mg
21. Hydrocodone Bitartrate and Acetaminophen	Vicodin(R)
Tablets, USP 5 mg / 500 mg
22. Hydrocodone Bitartrate and Acetaminophen	Lortab (R)
Tablets, USP 7.5 mg / 500 mg
23. Hydrocodone Bitartrate and Acetaminophen	Lortab (R)
Tablets, USP 10 mg / 500 mg
24. Hydrocodone Bitartrate and Acetaminophen	Lorcet Plus(R)
Tablets, USP 7.5 mg / 650 mg
25. Hydrocodone Bitartrate and Acetaminophen	Lorcet (R)
Tablets, USP 10 mg / 650 mg

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data) 

26. Hydrocodone Bitartrate and Acetaminophen	Vicodin ES(R)
Tablets, USP 7.5 mg / 750 mg
27. Ranitidine Hydrochloride Tablets, USP 150 mg	Zantac (R)
28. Ranitidine Hydrochloride Tablets, USP 300 mg	Zantac (R)
29. Naproxen Sodium Tablets, USP 275 mg	Anaprox (R)
30. Naproxen Sodium Tablets, USP 550 mg	Anaprox (R)
31. Gabapentin Capsules 100 mg	Neurontin(R)
32. Gabapentin Capsules 300 mg	Neurontin(R)
33. Gabapentin Capsules 400 mg	Neurontin(R)
34. Metformin HCl Tablets, USP 500 mg	Glucophage(R)
35. Metformin HCl Tablets, USP 850 mg	Glucophage(R)
36. Metformin HCl Tablets, USP 1000 mg	Glucophage(R)

Competition

The generic pharmaceutical industry is intensely competitive. The primary means of competition involve manufacturing capabilities and efficiencies, innovation and development, timely FDA approval, product quality, marketing, reputation, level of service, including the maintenance of sufficient inventory levels to assure timely delivery of products, product appearance and price. Often, price is the key factor in the generic pharmaceutical business. Therefore, to compete effectively and remain profitable, a generic drug manufacturer must manufacture its products in a cost effective manner. We believe that in most instances, we maintain adequate levels of inventories to meet customer demand. In the first half of fiscal 2007, we had experienced raw material supply issues, which created backorders, which were fulfilled during the second half of the fiscal year.We believe that our expansion and modernization of our facility, hiring of experienced personnel, including logistics and operations personnel, and implementation of quality control programs have improved our competitive position during fiscal 2007.

7

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

During the past several years the number of chain drug stores and wholesaler customers have declined due to industry consolidation. In addition, the remaining chain drug stores and wholesaler customers have instituted buying programs that have caused them to buy more products from fewer suppliers. At the same time, mail-order prescription services and managed care organizations have grown in importance and they also limit the number of vendors. The reduction in the number of our customers and limitation on the number of vendors by the remaining customers has increased competition among generic drug marketers. During fiscal year ended June 2007, this has caused us to reduce pricing on some products in certain segments of the market. However, these pressures have not had a material adverse impact on our business and we believe that we have good relationships with our key customers.

As is the case with many generic pharmaceutical manufacturers, many of our competitors have longer operating histories and greater financial resources than us. Consequently, some of these competitors may have larger production capabilities, may be able to develop products at a significantly faster pace at a reduced cost, and may be able to devote far greater resources to marketing their product lines.

Certain manufacturers of brand-name drugs and/or their affiliates have been introducing generic pharmaceutical products equivalent to such brand-name drugs at relatively low prices (so-called “authorized generics”). Such pricing, with its attendant diminished profit margins, could have the effect of inhibiting us and other manufacturers of generic pharmaceutical products from developing and introducing generic pharmaceutical products comparable to certain brand-name drugs. Also, consolidation among wholesalers, distributors, and repackagers, and technological advances in the industry and pricing pressures from large buying groups, may create pricing pressure, which could reduce our profit margins on our product lines.

In addition, increased price competition among manufacturers of generic pharmaceutical products, resulting from new generic pharmaceutical products being introduced into the market and other generic pharmaceutical products being reintroduced into the market, has led to an increase in demands by customers for downward price adjustments by the manufacturers of generic pharmaceutical products. No assurance can be given that such price adjustments, which reduce gross profit margins, will not continue, or even increase, with a consequent adverse effect on our earnings.

Brand-name companies also pursue other strategies to prevent or delay generic competition. These strategies may include: seeking to establish regulatory and legal obstacles that would make it more difficult to demonstrate bioequivalence, initiating legislative efforts in various states to limit the substitution of generic versions of certain types of brand-name pharmaceuticals, instituting legal action that automatically delays approval of an ANDA and may require certifications that the brand-name drug's patents are invalid or unenforceable, or introducing "second generation" products prior to the expiration of market exclusivity for the reference product, obtaining extensions of market exclusivity by conducting trials of brand-name drugs, persuading the FDA to withdraw the approval of brand-name drugs, for which the patents are about to expire, thus allowing the brand-name company to obtain new patented products serving as substitutes for the products withdrawn, or seeking to obtain new patents on drugs for which patent protection is about to expire.

8

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

The ability of brand-name companies to successfully delay generic competition in any of our targeted new product lines may adversely affect our ability to enter into the desired product line or may impact our ability to attain our desired market share for that product.

The Food and Drug Modernization Act of 1997 includes a pediatric exclusivity provision that may provide an additional six months of market exclusivity for indications of new or currently marketed drugs if certain agreed upon pediatric studies are completed by the applicant. Brand-name companies are utilizing this provision to extend periods of market exclusivity.

Backlog

We do not have a significant backlog, as we normally deliver products purchased by our customers on a timely basis.

Patents and Trademarks

We do not own any patents. Interpharm owns the registered trademark REPRAXIN.

Industry

The Generic Drug Market and Necessary Approvals

Pharmaceutical products in the United States are generally marketed as either "brand-name" or "generic" drugs. Brand-name products are drugs generally sold by the holder of the drug's patent or through an exclusive marketing arrangement. A company that receives approval for a new drug application ("NDA") from the U.S. Food and Drug Administration ("FDA"), usually the patent holder, has the exclusive right to produce and sell the drug during the life of the patent. This market exclusivity generally provides brand-name products the opportunity to build-up physician and customer loyalties.

Once a patent on a drug expires, another manufacturer can obtain FDA approval to market a "generic" version. A generic drug is therefore usually marketed after the patent on a brand drug expires. However, a generic product may be marketed prior to the brand product’s patent expiration if that patent is shown to be invalid or not infringed by the generic product.

The FDA requires that generic drugs have the same quality, strength, purity, identity and efficacy as brand-name drugs. While comparable to brand-name drugs, generic drugs are usually far less costly than brand-name drugs, resulting in substantial savings to consumers, healthcare providers and hospitals. These cost savings have resulted in sustained growth of the generic pharmaceutical industry in the United States. According to a Congressional Budget Office study, "How Increased Competition from Generic Drugs has Affected Prices and Returns in the Pharmaceutical Industry," ¹ in 1984, 19% of prescription drugs sold in the United States were generic. According to a Federal Trade Commission Study in July, 2002, "Generic Drug Entry Prior to Patent Expiration,"² that figure reached more than 47%. Moreover, Generic Pharmaceutical Association statistics indicate that generic drug products were dispensed 56% of the time in 2005.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

(See HTTP://WWW.GPHAONLINE.ORG/CONTENT/NAVIGATIONMENU/ABOUTGENERICS/STATISTICS/STATISTICS.HTM.

⁽¹⁾ HTTP://WWW.CBO.GOV/SHOWDOC.CFM?INDEX=655&SEQUENCE=0

⁽²⁾ HTTP://WWW.FTC.GOV/OS/2002/07/GENERICDRUGSTUDY.PDF

Much of the growth of the generic pharmaceutical industry has been attributed to The Drug Price Competition and Patent Term Restoration Act of 1984 (the "Waxman-Hatch Act") which encourages generic competition. Before the Waxman-Hatch Act, generic drug manufacturers had to put their products through an approval process similar to that for the original approval for brand-name drugs. Waxman-Hatch created an accelerated approval process in which the generic manufacturer needs only to demonstrate to the FDA that, among other things, the generic product is bioequivalent to the brand-name product through the filing of an abbreviated new drug application ("ANDA"). The ANDA may rely on information from the brand-name drug's application with the FDA instead of spending its resources, time and money to collect the same information to support an FDA approval to market its generic product.

On June 12, 2003, the FDA announced new regulations and procedures to improve implementation of the Waxman-Hatch Act. The new regulations and procedures are aimed at reducing the time it takes to bring generic drugs to the market and expanding educational programs to assist health care practitioners and consumers to get accurate information about the availability of generic drugs. The FDA has estimated that the new regulations and procedures will reduce the typical time for generic drug approvals by three months or more during the three to five year period following implementation and will save consumers approximately $35,000,000 over 10 years.

Government Regulation

FDA approval is required before any generic drug can be marketed through an ANDA. While the FDA has significantly streamlined the process of obtaining ANDA approval for generic drugs, it is difficult to predict how long the process will take for any specific drug. In fact, the length of time necessary to bring a product to market can vary significantly and can depend on, among other things, availability of funding, problems relating to formulation, safety or efficacy, patent issues associated with the product or barriers to market entry from brand-name product manufacturers. Therefore, there is always the risk that the introduction of new products can be delayed.

The ANDA process requires that a company's manufacturing procedures and operations conform to FDA requirements and guidelines, generally referred to as current Good Manufacturing Practices ("cGMP"). The requirements for FDA approval encompass all aspects of the production process, including validation and record keeping, and involve changing and evolving standards. Compliance with cGMP regulations requires substantial expenditures of time, money and effort in such areas as production and quality control to ensure full technical compliance. The evolving and complex nature of these regulatory requirements, the broad authority and discretion of the FDA and the generally high level of regulatory oversight result in a continuing possibility that we may be adversely affected by regulatory actions despite our efforts to comply with regulatory requirements.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

The ANDA process also requires bioequivalence studies to show that the generic drug is bioequivalent to the approved drug. Bioequivalence studies compare the bioavailability of one drug product, e.g., the generic, with that of another formulation containing the same active ingredient, e.g., the brand. When established, bioequivalence confirms that the rate of absorption and levels of concentration in the bloodstream of a formulation of the approved drug and the generic drug are equivalent as defined by the FDA. Bioavailability indicates the rate and extent of absorption and levels of concentration of a drug product in the bloodstream needed to produce the same therapeutic effect.

We contract with outside laboratories to conduct bioequivalence studies. Historically, the vast majority of our research and development expenditures have been on these studies. While we strive to engage reputable and experienced companies to perform these studies, there can be no assurance that they will use the proper due diligence or that their work will otherwise be accurate.

Supplemental ANDAs are required for approval of various types of changes to an approved application, and these supplements may be under review for six months or more. In addition, certain types of changes may only be approved once new bioequivalency studies are conducted or other requirements are satisfied.

The scientific process of developing new products and obtaining FDA approval is complex, costly and time consuming and there can be no assurance that any products will be developed and approved despite the amount of time or money spent on research and development. Product development may be curtailed in the early or later stages of development due to the introduction of competing generic products or for other strategic or technical reasons.

Even if an ANDA is approved, brand-name companies can impose substantial barriers to market entry which may include: receiving new patents on drugs whose original patent protection is about to expire; developing patented controlled-release products or other improvements to the original product; marketing over-the-counter versions of the brand-name product that will soon face generic competition; and commencement of marketing initiatives, regulatory activities and litigation. While none of these actions have been taken against us to date, there can be no assurance that they will not be taken in the future, particularly as we significantly expand our product development efforts.

In addition to the Federal government, individual states have laws regulating the manufacture and distribution of pharmaceuticals, as well as regulations pertaining to the substitution of generic drugs for brand-name drugs. Our operations are subject to regulation, licensing requirements and inspection by the states in which we are located or conduct business.

We must also comply with federal, state and local laws of general applicability, such as laws regulating working conditions and equal opportunity employment. Additionally, we are subject, as are all manufacturers, to various federal, state and local environmental protection laws and regulations, including those governing the discharge of materials into the environment.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Historically, the costs of complying with such environmental provisions have not had a material adverse effect on our earnings, cash requirements or competitive position, and we do not expect such costs to have any such material adverse effect in the foreseeable future. However, if changes to such environmental provisions are made that require significant changes in our operations or the expenditure of significant funds, such changes could have a material adverse effect on our earnings, cash requirements or competitive position.

As a public company, we are subject to the Sarbanes-Oxley Act of 2002 (the "SOX Act"). The SOX Act contains a variety of provisions affecting public companies, including the relationship with its auditors, prohibiting loans to executive officers and requiring an evaluation of its disclosure controls and procedures and internal controls. We have retained an outside consultant to assist us with the process of becoming compliant with Section 404 of the SOX Act by the deadline for such compliance.

The federal government established the Medicaid drug reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA"). Generally, OBRA provides that a generic drug manufacturer must offer the states an 11% rebate on drugs dispensed under the Medicaid program and must enter into a formal drug rebate agreement with the Centers for Medicare and Medicaid Services (CMS). In the U.S., there have been a number of legislative and regulatory changes that impact the pricing of our products. In particular, the Deficit Reduction Act of 2005 and specific guidance issued by CMS changed the methodology as it is applied to the underlying data for Medicaid rebates of pharmaceutical products. Although not required under OBRA, we have also entered into similar agreements with various states.

Continuing studies of the proper utilization, safety and efficacy of pharmaceutical products are being conducted by the pharmaceutical industry, government agencies and others. Such studies, which increasingly employ sophisticated methods and techniques, can call into question the utilization, safety and efficacy of previously marketed products. There can be no assurances that these studies will not, in the future, result in the discontinuance of product marketing.

Raw Materials

Most of the raw materials that we use in the manufacturing of our products consist of pharmaceutical chemicals in various forms, which are available from various sources. FDA approval is required in connection with the process of selecting active ingredient suppliers. In selecting a supplier, we consider not only their status as an FDA approved supplier, but consistency of their products, timeliness of delivery, price and patent position.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Employees

As of June 30, 2007, we had approximately six hundred and seventy full time employees. We believe we have a strong relationship with our employees. None of our employees are represented by a union. Subsequent to June 30, 2007, we reduced the number of employees to approximately five hundred and seventy in conjunction with the various actions to improve profitability and cash flows generated from operations which is discussed in “Liquidity and Capital Resources”.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 1A.

Risk Factors

We operate in a highly competitive environment in which there are numerous factors which can influence our business, financial position or results of operations and which can also cause the market value of our common stock to decline. Many of these factors are beyond our control and therefore, are difficult to predict. The following section sets forth what we believe to be the principal risks that could affect us, our business or our industry, and which could result in a material adverse impact on our financial results or cause the market price of our common stock to fluctuate or decline.

Risks Related to Our Business

Our future success is dependent on our ability to develop, manufacture and commercialize new generic drug products.

Our current business and expansion plan is dependent on our ability to successfully develop, manufacture and commercialize new generic drugs. There are numerous factors which can delay or prevent us from developing, manufacturing or commercializing new products, including:

· inability to obtain requisite FDA approvals on a timely basis for new generic products;

· reliance on partners for development of certain products;

· the availability, on commercially reasonable terms, of raw materials, including active pharmaceutical ingredients and other key ingredients;

· competition from other generic drug companies offering the same or similar products;

· inadequate funding available for product marketing and sales;

· failure to obtain market acceptance for new generic products;

· failure to succeed in patent challenges;

· unforeseen costs in development;

· legal actions by brand competitors; and

· inability to demonstrate bioequivalence in clinical studies as required by the FDA.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

These, as well as other factors may lead to product approval delays or the abandonment of products in development. The failure of a product to reach successful commercialization could materially and adversely affect our business and operating results.

Our future success is dependent upon incurring significant levels of research and development expenditures which will continue to have an adverse effect on our profitability.

Our current business and expansion plan is dependent upon incurring significant levels of research and development expenditures, which continue to have an adverse effect on our profitability. This may cause the market price of our common stock to decline or fluctuate.

We face intense competition which could significantly limit our expansion and growth and materially adversely affect our business and financial results.

The generic drug market and industry is highly competitive. Most of our competitors have greater financial, research and development, marketing and other resources than we do and therefore, can develop and commercialize more products and develop and commercialize them faster and more efficiently than us. The markets in which we compete and intend to compete are undergoing, and are expected to continue to undergo, rapid and significant changes. We expect competition to intensify as technological advances are made.

We also face intense price competition in certain of our products and expect to face intense competition in some of the products we intend to develop and market. This price competition may lead to reductions in prices and gross margins which can adversely affect our business and financial results, and can cause the price of our common stock to decline or fluctuate.

We address competitive issues by seeking to develop and manufacture products where competition is limited. However, there can be no assurance that this strategy will be effective as there may be no barriers to additional competitors entering the market for these products.

We may not maintain adequate product liability insurance.

We currently maintain $10,000 in product liability insurance. While we believe this amount to be adequate, there can be no assurance that any one or series of claims may exceed our coverage or that coverage will not be denied with respect to a claim or series of claims. A lack of sufficient coverage could materially and adversely affect our business, financial results and the market value of our common stock.

We enter into various agreements in the normal course of our business which have indemnification provisions, the triggering of which could have a material adverse impact on our business and financial results.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

In the normal course of our business, we enter into manufacturing, marketing and other agreements whereby we agree to indemnify the other party or parties in the event of certain breaches of the agreement or with respect to product defects or recalls. While we maintain insurance coverage which we believe can effectively mitigate our obligations under these indemnification provisions, there can be no assurance that such coverage will be adequate to do so. Should our obligations under an indemnification provision exceed our coverage or should coverage be denied, our business, financial results and the market value of our common stock could be materially and adversely affected.

Our operating results are affected by a number of factors and may fluctuate significantly on a quarterly basis.

Our operating results may vary substantially from quarter to quarter. Revenues and other operating results for any given period may be greater or less than those in other periods. Factors that may cause quarterly results to vary include, but are not limited to, the following:

· the amount of research and development expenditures;

· competition for new and existing products;

· new product launches;

· changes in pricing for raw materials and other inputs; and

· legal actions.

Fluctuations in our operating results may cause a decline or fluctuation in the price of our common stock.

Reserves for credits and pricing adjustments may be inadequate.

For certain customers, we issue various price adjustments and credits based on market prices or sales to certain customers. For instance, when we sell certain products to prime vendors for the U.S. government, the sales to the prime vendor are at one price, but if the products are resold to the government, the prime vendor gets to chargeback a portion of the purchase price because sales to the government are at a discount.

Although we establish a reserve for these credits and chargebacks at the time of sale based on known contingencies, there can be no assurance that such reserves will be adequate. Increases in credits and chargebacks may exceed what was estimated as a result of a variety of reasons, including unanticipated increased competition or an unexpected change in one or more of its contractual relationships. Any failure to establish adequate reserves with respect to credits or chargebacks may result in a material adverse effect on our business, financial results and may cause the price of our common stock to decline or fluctuate.

We are presently dependent on a limited number of products for most of our revenues.

We currently generate most of our revenues and gross margins from the sale of a limited number of products. For the fiscal year ended June 30, 2007, the following products accounted for 95% of our total revenues: Ibuprofen, generic Bactrim, Naproxen and our female hormone products. Ibuprofen alone accounted for 41% of our revenues. Any material adverse developments, including increased competition, with respect to the sale or use of these products, or our failure to successfully introduce new products, could have a material adverse effect on our revenues and gross margins.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

We are presently dependent on a small number of major customers.

For the fiscal year ended June 30, 2007, five customers, in the aggregate, accounted for 62% of the company’s sales. While we have been able to diversify our customer base over the past two fiscal years, the loss of any one or more of these customers or the substantial reduction in orders from any one or more of such customers could have a material adverse effect on our operating results and financial condition and could cause a decline in the market price of our common stock.

Our loan agreement with Wells Fargo Business Credit imposes significant operating and financial restrictions, which may prevent us from capitalizing on business opportunities and taking certain actions.

Our loan agreement with Wells Fargo Business Credit, a copy of which is contained in our Current Report on Form 8-K filed with the SEC on February 15, 2006, imposes significant operating and financial restrictions on us. These restrictions limit our ability to, among other things, incur additional indebtedness, make investments, sell assets, incur certain liens, or merge or consolidate. There can be no assurance that these restrictions will not adversely affect our ability to finance our future operations or capital needs or to pursue available business opportunities.

As set forth below under “Management’s Discussion and Analysis,” we were unable to meet certain financial covenants with Wells Fargo Business Credit and were required to raise additional monies through the sale of debt securities. On November 14, 2007, Wells Fargo Business Credit lifted certain of the restrictions on us which enabled us to raise additional monies, waived certain defaults and agreed to amended covenants. There can be no assurance that Wells Fargo Business Credit will act similarly in the future if we breach our credit agreement again.

We may be liable to pay substantial damages, including liquidated damages, or be obligated to redeem such stock for cash if we do not timely perform certain obligations we have to holders of our Series B-1 and C-1 Preferred Stock.

In May 2006 we sold to one institutional investor for $10,000 shares of our Series B-1 Convertible Preferred Stock. In September 2006 we sold to another institutional investor shares of our Series C-1 Convertible Preferred Stock for $10,000. Under the transaction documents relating to these sales the holders have the right to redeem such shares for cash upon the occurrence of certain events, including our failure to pay dividends on such stock, our failure to timely deliver certificates for shares of our common stock if the holders elect to convert such shares, if we default on indebtedness owed to third parties and such persons accelerate the maturity of at least $3,000 of such indebtedness, or there is a change in control of our company. In addition, we are subject to penalties, up to a maximum of 18% of the aggregate purchase price (which penalties accrue on a daily basis so long as we continue to be in default of our obligations) (a) if, within 60 days after a request to do so is made by the holders of such preferred stock, we do not timely file with the Securities and Exchange Commission (the “SEC”) a registration statement covering the resale of shares of our 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 our common stock because of a failure to keep the registration statement effective or because of a suspension or delisting of our common stock from the American Stock Exchange or other principal exchange on which our common stock is traded. We are also subject to penalties if we fail 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 our business and financial condition would likely be materially adversely affected and the market price of our common stock would likely decline.

17

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

We have defaulted in certain of our agreements with the holders of the Series B-1 and C-1 Preferred Stock which have been waived per the Consent and Waiver Agreement dated November 7, 2007, as described in the “Managements Discussion and Analysis” Section below and under the heading “Recent Developments” in Item 1. Those holders have provided a waiver of those defaults in exchange for a decrease in the conversion and exercise prices of the preferred stock and warrants held by them which has a dilutive effect on our common stock. There can be no assurance that any future defaults will be similarly waived.

We are currently involved in legal disputes which could have a material adverse effect on our financial condition.

As reported in our Current Report on Form 8-K filed with the SEC on June 28, 2006, on June 1, 2006, Ray Vuono commenced an action against us in the Supreme Court of the State of New York, County of Suffolk (Index No. 13985/06). The complaint against Interpharm alleges, among other things, that Vuono is entitled to receive additional compensation as a “finder” under an agreement dated July 1, 2002 with respect to a reverse merger transaction consummated by us in May 2003. Vuono also alleges that he is entitled to additional compensation under the agreement in respect of a $41,500 credit facility from Wells Fargo Business Credit, Inc. obtained by us in February 2006 and the sale for $10,000 of shares of a new series of convertible preferred stock and warrants to purchase our common stock consummated by the Company with Tullis-Dickerson Capital Focus III, L.P. in May 2006. The total amount of damages sought by Vuono in the action was approximately $10,000.

By recent decision and order dated March 29, 2007, the Court dismissed Vuono’s claims as they pertain to any fees claimed by Vuono related to a reverse merger of Interpharm, Inc. and the Company and declined to dismiss other claims.  The dismissed claims represent approximately $7,000 of the total of $10,000 claimed by Vuono.  

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

The Court deferred its decision on Vuono’s motion to disqualify counsel, and held hearing on the matter on September 24, 2007. A final decision on the motion to disqualify is not expected until early 2008. The action, including all discovery, is stayed pending the Court’s decision.   

In May 2007, a former employee commenced an action against us with the New York State Division of Human Rights.  The complaint alleges claims of race discrimination. The total sought by the former employee in the action is unspecified.  We believe that the claims are without merit and are vigorously defending the action.  Currently, we cannot predict with certainty the outcome of this litigation.

While we believe that these claims are without merit and are vigorously defending the action, should we be unsuccessful in our defense, our business and financial condition will be materially adversely affected and the market price of our common stock could decline.

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 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 subsequently withheld any additional payments under the Settlement until they received 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.

We rely on independent third parties for some of the research and development and testing required for the regulatory approval of our products. Any failure by any of these third parties to perform this research and development or testing properly and in a timely manner may have an adverse effect upon our ability to obtain regulatory approvals.

Our applications for the regulatory approval of products incorporate the results of research and development and testing and other information that is conducted or gathered by independent third parties (including, for example, Tris Pharma, Inc. whose agreements with us are described fully under “Business”), manufacturers of raw materials, testing laboratories, contract research organizations or independent research facilities. Our ability to obtain regulatory approval on the products being developed and tested is dependent upon the quality of the work performed by these third parties, the quality of the third parties’ facilities and the accuracy of the information provided by third parties. In some instances, we have little or no control over any of these factors. If this testing is not performed properly, our ability to obtain regulatory approvals could be restricted or delayed.

Our future success depends on our ability to attract and retain key employees and consultants.

Our future success will depend, to a substantial degree, upon the continued service of the key members of our management team. The loss of the services of key members of our management team, or their inability to perform services on our behalf, could have a material effect on our business and financial condition and could result in a decline in the market value of our common stock.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Our success, and the success of our expansion plan, also will depend, to a large extent, upon the contributions of our existing sales, marketing, operations, regulatory, compliance scientific, quality control and quality assurance staff and our ability to build their departments and hire additional qualified personnel. We compete for qualified personnel against other larger companies which may offer more favorable employment opportunities. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we could experience constraints that would adversely affect our ability to sell and market products, or to support internal research and development programs. In particular, product development programs depend on the ability to attract and retain highly skilled scientists, biochemists, and sales and marketing efforts depend on the ability to attract and retain skilled and experienced sales, marketing and quality assurance representatives. Although we believe we have been successful in attracting and retaining skilled personnel in all areas of our business, we cannot assure that we can continue to attract, train and retain such personnel. Any failure in this regard could limit our growth and expansion and new product development.

Our ability to service our debt from Wells Fargo Business Credit and make dividend payments to the holders of our Series B-1 and C-1 Preferred Stock and to meet our cash requirements depends on numerous factors, some of which are beyond our control.

Our ability to satisfy our obligations to Wells Fargo Business Credit, the holders of our Series B-1 and C-1 Preferred Stock, and the holders of our Junior Subordinated Secured 12% Promissory Note due 2010 and the holders of our Secured 12% Promissory Notes Due 2009 will depend on our future operating performance and financial results, which will be subject, in part, to factors beyond our control, including interest rates and general economic, financial and business conditions. If we are unable to generate sufficient cash flow, we may be required to: refinance all or a portion of our debt with Wells Fargo, obtain additional financing in the future for working capital, capital expenditures and general corporate or other purposes; redirect a substantial portion of our cash flow to debt service, which as a result, might not be available for our operations or other purposes; sell some of our assets or operations; reduce or delay capital expenditures; or revise or delay our operations or strategic plans. If we are required to take any of these actions, it could have a material adverse effect on our business and financial condition. In addition, there can be no assurance that we would be able to take any of these actions, that these actions would enable us to continue to satisfy our capital requirements or that these actions would be permitted under the terms of our agreement with Wells Fargo or under the terms of the Series B-1 and C-1 Preferred Stock.

20

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Risks Related to Our Industry

Litigation is common in our industry and can cause significant expense and delays.

Branded pharmaceutical companies with patented products are increasingly suing companies that produce generic forms of their patented brand name products for alleged patent infringement or other violations of intellectual property rights, which may delay or prevent the entry of such generic products into the market. Generally, a generic drug may not be marketed until the applicable patent(s) on the brand name drug expires. When an ANDA is filed with the FDA for approval of a generic drug, the filing person may either certify that the patent listed by the FDA as covering the generic product is about to expire, in which case the ANDA will not become effective until the expiration of such patent, or that any patent listed as covering the generic drug is invalid or will not be infringed by the manufacture, sale or use of the new drug for which the ANDA is filed. Under either circumstance, there is a risk that a branded pharmaceutical company may sue the filing person for alleged patent infringement or other violations of intellectual property rights. Also, other companies that compete with us by manufacturing, developing and/or selling the same generic pharmaceutical products similarly may file lawsuits against us claiming patent infringement or invalidity. Because a portion of our current business involves the marketing and development soon to be off-patent products, the threat of litigation, the outcome of which is inherently uncertain, is always present. Such litigation is often costly and time consuming, and could result in a substantial delay in, or prevent, the commercialization of our products, which could have a material adverse effect on our business and financial condition and the market for our common stock.

We are susceptible to product liability claims that may not be covered by insurance, which, if successful, could require us to pay substantial damages.

We face the risk of loss resulting from, and the adverse publicity associated with, product liability lawsuits, whether or not such claims are valid. In many instances, there is no way that such claims can be avoided. Unanticipated side effects or unfavorable publicity concerning any of our products would likely have an adverse effect on our ability to achieve acceptance by prescribing physicians, managed care providers, pharmacies and other retailers, customers and patients. Even unsuccessful product liability claims could require us to spend money on litigation, divert management’s time, damage our reputation and impair the marketability of our products. In addition, while we believe our current level of product liability insurance is sufficient, there can be no assurance that it will be enough to cover any one or series of claims. There can also be no assurance that as we expand, that we will be able to maintain adequate insurance coverage at acceptable costs. A successful product liability claim that is excluded from coverage or exceeds policy limits could require us to pay substantial sums. In addition, insurance coverage for product liability may become prohibitively expensive in the future.

We are subject to extensive governmental regulation, the non-compliance with which may result in fines and/or other sanctions, including product seizures, product recalls, injunctive actions and criminal prosecutions.

21

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

We are subject to extensive regulation by the federal government, principally the FDA and the Drug Enforcement Administration and state governments. The FFDC Act, the Controlled Substances Act, the Generic Drug Enforcement Act of 1992 (the “Generic Act”), and other federal statutes and regulations govern the testing, manufacture, safety, labeling, storage, recordkeeping, approval, advertising and promotion of our products. The Generic Act, a result of legislative hearings and investigations into the generic drug approval process, is particularly relevant to our business. Under the Generic Act, the FDA is authorized to impose debarment and other penalties on individuals and companies that commit illegal acts relating to the generic drug approval process. In some situations, the Generic Act requires the FDA not to accept or review for a period of time ANDAs from a company or an individual that has committed certain violations and provides for temporary denial of approval of applications during its investigation. Additionally, non-compliance with other applicable regulatory requirements may result in fines, perhaps significant in amount, and other sanctions imposed by courts and/or regulatory bodies, including the initiation of product seizures, product recalls, injunctive actions and criminal prosecutions. The FDA also has the authority to withdraw its approval of drugs in accordance with statutory procedures.

In addition to the new drug approval process, the FDA also regulates the facilities and operational procedures that we use to manufacture our products. We must register our facilities with the FDA. All products manufactured in those facilities must be made in a manner consistent with current good manufacturing practices (“cGMP”). Compliance with cGMP regulations requires substantial expenditures of time, money and effort in such areas as production and quality control to ensure full technical compliance. The FDA periodically inspects our manufacturing facilities for compliance. FDA approval to manufacture a drug is site-specific. Failure to comply with cGMP regulations at one of our manufacturing facilities could result in an enforcement action brought by the FDA which could include withholding the approval of ANDAs or other product applications of that facility. If the FDA were to require one of our manufacturing facilities to cease or limit production, our business could be adversely affected. Delay and cost in obtaining FDA approval to manufacture at a different facility also could have a material adverse effect on our business, financial position and results of operations and could cause the market value of our common stock to decline.

Because of the chemical ingredients of pharmaceutical products and the nature of the manufacturing process, we are subject to extensive environmental regulation and the risk of incurring liability for damages and/or the costs of remedying environmental problems. In the future, we may be required to increase expenditures in order to remedy environmental problems and/or comply with applicable regulations. Additionally, if we fail to comply with environmental regulations to use, discharge or dispose of hazardous materials appropriately or otherwise to comply with the provisions of our operating licenses, the licenses could be revoked and we could be subject to criminal sanctions and/or substantial civil liability or be required to suspend or modify our manufacturing operations.

As part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, companies are now required to file with the FTC and the Department of Justice certain types of agreements entered into between brand and generic pharmaceutical companies related to the manufacture, marketing and sale of generic versions of brand drugs. This requirement could affect the manner in which generic drug manufacturers resolve intellectual property litigation and other disputes with brand pharmaceutical companies and could result generally in an increase in private-party litigation against pharmaceutical companies or additional investigations or proceedings by the FTC or other governmental authorities. The impact of this requirement, and the potential private-party lawsuits associated with arrangements between brand name and generic drug manufacturers, is uncertain and could adversely affect the Company’s business.

22

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Our distribution operations and our customers are subject to various regulatory requirements, including from the DEA, FDA and State Boards of Pharmacy and Health, among others. These include licensing, registration, recordkeeping, security and reporting requirements. Failure by the Company to comply with these regulatory requirements could impact our ability to make and/or maintain sales of our products resulting in a materially adverse impact on the Company’s finances.

Our raw materials are purchased primarily from foreign distributors of bulk pharmaceutical chemicals. Any significant supply interruption could have a material adverse effect on our business and financial condition and could cause a decline in the market value of our common stock.

Our raw materials are purchased primarily from foreign companies. From time to time, we have experienced difficulty in obtaining certain raw materials and products, there can be no assurance that supply interruptions or delays will not occur again in the future or that we will not have to obtain substitute materials or products, which would require additional regulatory approvals. In addition, changes in its raw material suppliers could result in delays in production, higher raw material costs and loss of sales and customers because regulatory authorities must generally approve raw material sources for pharmaceutical products. Any significant supply interruption could have a material adverse effect on our business and financial condition and could cause a decline in the market value of our common stock.

We may not be able to utilize all of the deferred tax assets recorded on our balance sheet.

            In accordance with Statement of Financial Accounting Standard (SFAS) No. 109, “Accounting for Income Taxes,” we are required to establish a valuation allowance against our deferred tax assets if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. At June 30, 2007, we had a total of $5,975 in net deferred tax assets, which we believe are realizable based on the requirements of SFAS 109. However, because we have shown volatile operating results in the past and because there is no guarantee that the amount and timing of net profits, if any, will be sufficient to fully utilize our deferred tax assets, there is a risk that we will have to record an additional valuation allowance in the future. Moreover, there is a risk that unfavorable audits of, for example, tax credit or NOL carryforwards by government agencies or change of ownership limitations under Section 382 of the Internal Revenue Code of 1986 may reduce the value of our deferred tax assets. If any of these events were to occur, our financial results for one or more periods would be adversely affected.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

RISKS RELATING TO OUR COMMON STOCK

Our research and development expenditures may not lead to the commercialization of successful products.

            Our current business and expansion plan calls for, and is dependent upon, research and development expenditures in order to add new products to our product line, but also upon the projected success of new products.  There can be no assurance, however, that these research and development expenditures will result in successful or profitable products as there are many factors which affect the success of pharmaceutical products in the market such as consumer acceptance, continuing acceptance by the medical profession, litigation and product liability and competition.  In the event that our significant research and development expenditures do not result in profitable products, our business and financial condition would be materially and adversely affected and the market price of our common stock would decline.

We have never paid cash dividends on our common stock and are not likely to do so in the foreseeable future.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not expect to pay any cash dividends in the foreseeable future but will review this policy as circumstances dictate.

Six of our shareholders control us through their ownership and control of voting stock.

Four of our shareholders, one of whom is an Executive Vice President and owns approximately 27% of our common stock, along with two investors who share a proxy from three of these shareholders, own and control in the aggregate approximately 76% of our common stock. These stockholders can effectively control us and their interests may materially differ from other shareholders.

There is only a limited trading market for our common stock.

Our common stock is traded on the American Stock Exchange, but the public float available for trading is currently relatively small. Therefore, the volume and price of trading in our common stock is subject to significant fluctuations.

The Waivers obtained from the holders of our Series B-1 and C-1 Preferred Stock will be dilutive to our other shareholders.

Pursuant to the terms of the purchase of our Series B-1 and C-1 Preferred Stock, we cannot raise additional capital through the sale of securities until such time as the common stock into which the Series B-1 and C-1 Preferred Stock is convertible has been registered for re-sale, which has not yet occurred. On November 8, 2007, in exchange for a waiver permitted us to sell additional securities, we lowered the conversion price of the Series B-1 and C-1 Preferred Stock from $1.5338 to $0.95 and lowered the exercise price of an aggregate of 4,564 warrants held by them from $1.639 to $0.95. The decreased conversion and exercise prices could result in the issuance of an additional 8,013 shares by us without additional consideration which could increase our net loss per share to common stockholders and may have an adverse impact on the market price of our common stock.

24

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

The trading of our common stock has been suspended for failure to comply with rules and regulations of the American Stock Exchange relating to timely SEC filings.

As reported in our Current Reports on Form 8-K and Form 8-K/A filed with the SEC on October 12 and 15, 2007, respectively, we disclosed that as a result of negotiations with Wells Fargo Bank, National Association, acting through our Wells Fargo Business Credit operating division ("Wells Fargo"), the Company would not be able to file its Form 10-K by its due date of October 15, 2007 and that we anticipated filing upon the conclusion of negotiations with Wells Fargo. We further disclosed that on October 12, 2007, we notified the American Stock Exchange (“AMEX”) that we would not file its Form 10-K in a timely manner in conformity with Section 610(b) of the AMEX Company Guide.

On October 15, 2007, we received notice from the AMEX that trading in its common stock would be halted pending compliance with AMEX rules through the filing of financial information and on October 16, 2007, trading in its common stock was halted.

We anticipate that we will be unable to file its Quarterly Report on Form 10-Q for the three months ended September 30, 2007 by its due date. This late filing is likely to result in an additional or continued suspension of trading in the Company’s common stock on the AMEX, and could result in the delisting of the Company’s common stock from the AMEX. A continued or additional trading suspension may adversely impact the market value of our common stock in the event that trading again commences and a delisting of our common stock from the AMEX is likely to adversely impact the market value of our common stock if it can be traded over-the-counter and may result in a substantial loss of value if it cannot be so traded.

ITEM 1B. Unresolved Staff Comments

None.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 2.PROPERTIES

Description of Property

We lease an entire building in Hauppauge, New York, pursuant to a non-cancellable lease expiring in October, 2019, which houses our manufacturing, warehousing and some of our executive offices. The leased building is approximately 100 square feet and is located in an industrial/office park. The lease between the landlord and Interpharm Inc, states that upon a change in ownership of Interpharm Inc, which occurred on May 30, 2003, the landlord is entitled to increase the rents to fair market value and every three years thereafter. The current annual lease payments to the landlord, Sutaria Family Realty, LLC, are $660. Sutaria Family Realty, LLC is owned by Mona Rametra, Perry Sutaria and Raj Sutaria, who collectively own and control 37,706 shares of our common stock and 4,855 shares of our Series A-1 Preferred Stock and are the children of Dr. Maganlal K. Sutaria, the Chairman of our Board of Directors, and the niece and nephews of Bhupatlal K. Sutaria, our past President. In addition, Raj Sutaria is an Executive Vice President of Interpharm Holdings, Inc. There are no tenants in the building other than us.

In January 2007, we entered into a seven year lease for approximately 20 square feet of office space. The lease provides us 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, we are required to pay for renovations to the facility, currently estimated at approximately $300.

On June 29, 2004, pursuant to a contract entered into on November 14, 2003, we purchased a 92 square foot facility on thirty seven acres of land, located at 50 Horseblock Road in Brookhaven, New York. The purchase price for the building and land was approximately $9,400. The facility is located in Suffolk County, New York's Brookhaven Empire Zone. As part of the planned modifications to the facility, we constructed a 16 square foot research and development laboratory within the facility, which is now operational. Through June 30, 2007 we have spent an additional $8,685 in building renovations and equipment.

ITEM 3.LEGAL PROCEEDINGS

As reported in our Current Report on Form 8-K filed with the SEC on June 28, 2006, on June 1, 2006, Ray Vuono (“Vuono”) commenced an action against us in the Supreme Court of the State of New York, County of Suffolk (Index No. 13985/06). Vuono’s complaint against us alleges, among other things, that Vuono is entitled to receive additional compensation as a “finder” under an agreement dated July 1, 2002 between Vuono and the Company (then known as Atec Group, Inc.) with respect to a reverse merger transaction consummated by us in May 2003. Vuono also alleges that he is entitled to additional compensation under the agreement in respect of a $41,500 credit facility from Wells Fargo Business Credit, Inc. obtained by us in February 2006 and the sale for $10,000 of shares of a new series of convertible preferred stock and warrants to purchase our common stock consummated by us with Tullis-Dickerson Capital Focus III, L.P. in May 2006. The total amount of damages sought by Vuono in the action was $10,000.

26

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

By recent decision and order dated March 29, 2007, the Court dismissed Vuono’s claims as they pertain to any fees claimed by Vuono related to a reverse merger of Interpharm, Inc. and the Company and declined to dismiss other claims.  The dismissed claims represent approximately $7,000 of the total of $10,000 claimed by Vuono.  The Court deferred a decision on Vuono’s motion to disqualify counsel pending a hearing and further proceedings. 

The Court deferred its decision on Vuono’s motion to disqualify counsel, and held a hearing on the matter on September 24, 2007. A final decision on the motion to disqualify is not expected until early 2008. The action, including all discovery, is stayed pending the Court’s decision. 

We believe that Vuono’s claims are without merit and we are vigorously defending the action.

In November 2006, a former employee commenced an action against us in the Supreme Court of the State of New York, County of Suffolk (Index No. 06/31481).  As of October 15, 2007, the action was voluntarily dismissed with prejudice, and without costs, expenses, or fees to either party. The complaint alleged violations of the New York State Human Rights Law and other unidentified rules, regulations, statutes and ordinances. 

In May 2007, a former employee commenced an action against us with the New York State Division of Human Rights.  The complaint alleges claims of race discrimination. The total sought by the former employee in the action is unspecified.  We believe that the claims are without merit and are vigorously defending the action.  Currently, we cannot predict with certainty the outcome of this litigation.

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 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 subsequently held any additional payments under the Settlement until they received 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.

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

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fiscal quarter ended June 30, 2007.

PART II

ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK

Our common stock is traded on the American Stock Exchange under the symbol "IPA." As reported in our Current Reports on Form 8-K and Form 8-K/A filed with the SEC on October 12 and 15, 2007, respectively, we disclosed that as a result of negotiations with Wells Fargo Bank, National Association, acting through its Wells Fargo Business Credit operating division ("Wells Fargo"), the Company would not be able to file its Form 10-K by its due date of October 15, 2007 and that we anticipated filing upon the conclusion of negotiations with Wells Fargo. We further disclosed that on October 12, 2007, we notified the American Stock Exchange (“AMEX”) that we would not file its Form 10-K in a timely manner in conformity with Section 610(b) of the AMEX Company Guide.

On October 15, 2007, we received notice from the AMEX that trading in our common stock would be halted pending compliance with AMEX rules through the filing of financial information and on October 16, 2007, trading in its common stock was halted.

The following table sets forth the high and low sale prices for our common stock for the periods indicated as reported by the American Stock Exchange. Such prices reflect inter-dealer prices without retail mark-up, markdown or commissions and may not necessarily represent actual transactions.

	High		Low
2005
Quarter ended 3/31		2.58		1.50
Quarter ended 6/30		1.65		1.23
Quarter ended 9/30		1.82		1.07
Quarter ended 12/31		1.49		1.21
2006
Quarter ended 3/31		1.68		1.24
Quarter ended 6/30		1.56		1.10
Quarter ended 9/30		1.54		1.08
Quarter ended 12/31		2.51		1.25
2007
Quarter ended 3/31		2.09		1.60
Quarter ended 6/30		1.80		1.28

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

As of November 12, 2007, there were approximately one hundred and sixty seven holders of record of our common stock, two hundred and eighty eight holders of record of Series C preferred shares, and one holder of record each of our Series B-1 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock.

We do not currently pay dividends on our common stock. It is our present intention not to declare or pay dividends on our common stock, but to retain earnings for the operation and expansion of our business.

The holders of our Series A-1 preferred shares are entitled to cumulative annual dividends of $0.0341 per share when and as declared by our Board of Directors. We are required to pay quarterly dividends on our Series B-1 Preferred Stock and our Series C-1 Preferred Stock at an annual dividend rate of 8.25%, in either cash or common stock. In an effort to retain cash, we intend to pay the Series B-1 Preferred Stock and Series C-1 Preferred Stock with restricted common stock.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER

EQUITY COMPENSATION PLANS

The following table gives information about our common stock that may be issued upon the exercise of options, warrants and rights under all of our equity compensation plans as of June 30, 2007. The table includes the following plans: 1997 Stock Option Plan and 2000 Flexible Stock Plan.

Plan Category	Number of Securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrant and rights		Number of securities remaining available for future issuance under equity compensation plans(excluding securities reflected in column (a))
Equity compensation plans approved by security holders:
1997 Stock Option Plan		1,317	$	1.85		-0-
2000 Flexible Stock Plan(1)		10,613	$	0.99		9,387
Total		11,930	$	1.08		9,387

(1) Securities available for future issue increase each year by 10% of our outstanding common stock at the beginning of each year. The total amount of common stock available under the plan cannot exceed 20,000 shares.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

RECENT SALES OF UNREGISTERED SECURITIES

During the fiscal quarter ended June 30, 2007, we have made the following issuances of restricted securities:

We issued 122 shares of common stock in payment of Series B-1 dividends accrued as of March 31, 2007.

We issued 122 shares of common stock in payment of Series C-1 dividends accrued as of March 31, 2007.

We issued 72 shares of common stock as a result of an exercise of employee options to acquire our common stock. The shares were issued in reliance upon Section 4(2) of the Securities Act.

At June 30, 2007, we had accrued $206 each of Series B-1 and Series C-1 dividends, which was paid in July 2007 through the issuance of 148 shares each of our common stock.

In July 2007, we issued 8 shares of common stock as a result of the exercise of employee options to acquire our common stock, for which we received cash of approximately $5. The shares were issued in reliance upon Section 4(2) of the Securities Act.

30

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

SERIES A-1, B-1 and C-1 PREFERRED STOCK

Series A-1 Convertible Preferred Stock

The following are the principal designations, preferences and rights of our Series A-1 Convertible Preferred Stock which is held by two holders:

- Title.	$.01 par value per share Series A-1 Convertible Cumulative Preferred Stock.
- Voting.	No voting rights.
- Liquidation Preference.	$0.682 per share.
- Dividend Rights.	$0.0341 per share, per year, when and as declared by our Board of Directors.
- Redemption Provisions.	None.
- Amount Authorized.	5,000
- Amount Issued.	4,855
- Conversion.	Converts on a 1:1 basis into common stock upon:

i.  the Company reaching $150,000 in revenues;

ii. a merger, consolidation, sale of assets or similar transaction; or

iii. a “Change in Control” which occurs if (a) any person, or any two or more persons acting as a group, and all affiliates of such person or persons, shall, acquire and own, beneficially, 50% or more of the common stock outstanding, or (b) if following (i) a tender or exchange offer for voting securities of the Company, or (ii) a proxy contest for the election of directors of the Company, the persons who were directors of the Company immediately before the initiation of such event cease to constitute a majority of the Board of Directors of the Company upon the completion of such tender or exchange offer or proxy contest or within one year after such completion.

31

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Series B-1 Redeemable Convertible Preferred Stock

On May 15, 2006, Tullis-Dickerson Capital Focus III, L.P. purchased 10 shares of our newly designated Series B-1 Redeemable Convertible Preferred Stock as fully described in our Current Report on Form 8-K filed with the SEC on June 2, 2006. The following are the principal designations, preferences and rights of our Series B-1 Redeemable Convertible Preferred Stock which is held by one holder:

- Title.	$.01 par value per share Series B-1 Convertible Preferred Stock.
- Voting.	Each votes with the common and has a number of votes equal to the number of shares of common into which it is convertible on the record date for the action to be voted upon. The current aggregate number of votes for the Series B-1 Stock is 6,520.
- Liquidation Preference.	Upon certain liquidation events set forth in the Certificate of Designation, the holder of each share is entitled to a payment of $1 plus accrued but unpaid dividends.
- Dividend Rights.	8.25% per annum, payable quarterly in arrears in either cash or at our option, in restricted common stock.
- Redemption Provisions.	We are required to redeem the Series B-1 Stock upon the occurrence of specified events, including, but not limited to a change in control, a going private transaction, failure to pay dividends or a failure to allow conversion.
- Amount Authorized.	15
- Amount Issued.	10
- Conversion.	The Series B-1 Stock, as well as any accrued dividends, may be converted at any time by the holder into a number of shares of our common stock determined by dividing the dollar amount to be converted by $1.5338. Pursuant to the subsequent debt issuance discussed below (“Liquidity and Capital Resources”), the conversion was reduced to $0.95.
- Registration Rights	The holders of the Series B-1 Stock have demand registration rights pursuant to which we must file a registration statement to cover common shares into which the Series B-1 Stock is convertible within 60 days of a request to do so.
- Right to Appoint a Director	For so long as Tullis-Dickerson Capital Focus III, L.P. or any of its affiliates holds at least 25% of the Series B-1 Stock, it shall have the right to appoint one member of our Board of Directors.

32

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Series C-1 Redeemable Convertible Preferred Stock

On September 11, 2006, Aisling Capital II, LP purchased 10 shares of our newly designated Series C-1 Redeemable Convertible Preferred Stock as fully described in our Current Report on Form 8-K filed with the SEC on September 15, 2006. The following are the principal designations, preferences and rights of our Series C-1 Redeemable Convertible Preferred Stock which is held by one holder:

- Title.	$.01 par value per share Series C-1 Convertible Preferred Stock.
- Voting.	Each votes with the common and has a number of votes equal to the number of shares of common into which it is convertible on the record date for the action to be voted upon. The current aggregate number of votes for the Series C-1 Stock is 6,520.
- Liquidation Preference.	Upon certain liquidation events set forth in the Certificate of Designation, the holder of each share is entitled to a payment of $1 plus accrued but unpaid dividends.
- Dividend Rights.	8.25% per annum, payable quarterly in arrears in either cash or at our option, in restricted common stock.
- Redemption Provisions.	We are required to redeem the Series C-1 Stock upon the occurrence of specified events, including, but not limited to a change in control, a going private transaction, failure to pay dividends or a failure to allow conversion.
- Amount Authorized.	10
- Amount Issued.	10
- Conversion.	The Series C-1 Stock, as well as any accrued dividends, may be converted at any time by the holder into a number of shares of our common stock determined by dividing the dollar amount to be converted by $1.5338. Pursuant to the subsequent debt issuance discussed below (“Liquidity and Capital Resources”), the conversion was reduced to $0.95.
- Registration Rights	The holders of the Series C-1 Stock have demand registration rights pursuant to which we must file a registration statement to cover common shares into which the Series C-1 Stock is convertible within 60 days of a request to do so.
- Right to Appoint a Director	For so long as Aisling Capital II, LP or any of its affiliates holds at least 25% of the Series C-1 Stock, it shall have Board observer rights.

33

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 6.SELECTED FINANCIAL DATA

The following table presents summary financial data for the years ended June 30, 2007, 2006, 2005, 2004, and the six-months ended June 30, 2003. The following summary financial data should be read in conjunction with the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this Report (in thousands except per share data):

	Year Ended June 30, 2007			Year Ended June 30, 2006			Year Ended June 30, 2005			Year Ended June 30, 2004		Six Months Ended June 30, 2003
Net Sales	$	75,587		$	63,355		$	39,911		$	41,100	$	14,953
Net (loss) income		(14,058	)		(3,790	)		(149	)		3,123		724
(Loss) Income per common share:
Basic		(0.26	)		(0.15	)		(0.01	)		0.16		0.08
Diluted		(0.26	)		(0.15	)		(0.01	)		0.04		0.02
Balance Sheet Data
Total Assets		74,374			62,867			46,390			35,168		20,339
Long-term obligations		15,849			14,077			6,706			7,076		267
Cash dividend per common share		0			0			0			0		0

34

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 7.                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(in Thousands except per share data)

Results of Operations

Overview

Interpharm Holdings, Inc., (the "Company" or "Interpharm"), through its operating wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and collectively with Interpharm, "we" or "us") is engaged in the business of developing, manufacturing and marketing generic prescription strength and over-the-counter pharmaceutical products. As of June 30, 2007, we manufactured and marketed 36 generic pharmaceutical products, which represent various oral dosage strengths for 11 unique products for twenty-five of these products.

As more fully described below, as a result of increased expenses and losses incurred by the Company during the fiscal year ended June 30, 2007, we defaulted on our credit facility with 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 in “Liquidity and Capital Resources.”

Net sales for the fiscal year ended June 30, 2007 were $75,587 compared to $63,355 for fiscal year ended June 30, 2006, an increase of $12,232 or 19%. We successfully increased sales of existing products as we continued to expand our distribution with the top tier accounts in retail, wholesale, distributor, and managed care trade classes. However, we had also anticipated launching three new generic pharmaceutical products by June 2007, all of which were delayed. These new products are currently on schedule to be launched in fiscal year ended June 2008.

Our gross margin was 28.7% for the fiscal year ended June 30, 2007, which was somewhat improved over our 27.5% gross margin in the previous year. In the first half of fiscal 2007, we had experienced raw material supply issues, which created backorders, which were fulfilled during the second half of the fiscal year. At the same time, we encountered difficulty in forecasting new customer demand for existing product positions. In an effort to maintain satisfactory customer service levels while solving our raw material supply issues, we created an oversupply and build up of inventory levels. In addition, we lost a large purchaser of our OTC Ibuprofen product at March 31, 2007, due to the customer’s FDA regulatory problems, and the customer is no longer purchasing product from us. One result of the foregoing was a significant increase in inventory levels by June 2007.

In parallel, we continued to strengthen our employee infrastructure, particularly in areas such as regulatory affairs and cGMP compliance, and we implemented a new enterprise resource planning IT system needed to accommodate future growth. In addition, we continued spending on our generic pharmaceutical R&D programs at original planned levels. As sales were lower than anticipated, the net result was a significant operating loss for fiscal 2007 which we expect to continue through the first quarter of fiscal 2008. Coupled with the increased inventory levels, the operating losses led to a rapidly worsening cashflow situation towards the end of fiscal 2007. Subsequent to June 2007, we proceeded to identify sources of debt and equity financing which in the completion of $8,000 in subordinated debt financing transactions in November 2007 (see “Liquidity and Capital Resources” for detailed discussion).

35

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

With respect to our research and development programs, during fiscal 2007 we filed ten ANDAs and two additional ANDAs owned by the Company but in the name of Tris Pharma. In addition during fiscal 2007, we obtained FDA approval for twelve ANDAs for five unique products which we plan to launch in FY 2008. We are now manufacturing and packaging commercial quantities of some of our current products at our Yaphank facility. The specialized facilities for oral contraceptives, soft gels and high potency products are now operational. We are commencing production of batches for use in conducting bioequivalence studies and the submissions of ANDAs.

We have continued to develop products in areas that are characterized by having high barriers to entry, i.e., related to formulation, technology, patents, analytical and dedicated facilities. We have been aggressive in advancing these high barrier product areas. While the development process has taken longer than planned, we continue to make good progress in these areas.

36

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Fiscal Year Ended June 30, 2007 compared to Fiscal Year Ended June 30, 2006

	For the Fiscal Year Ended June 30, 2007			For the Fiscal Year Ended June 30, 2006
SALES, Net	$	75,587		$	63,355
COST OF SALES		53,920			45,927
GROSS PROFIT		21,667			17,428
Gross Profit Percentage		28.67	%		27.51	%
OPERATING EXPENSES
Selling, general and administrative expenses		13,340			11,449
Related party rent expense		103			72
Research and development		18,962			10,674
TOTAL OPERATING EXPENSES		32,405			22,195
OPERATING LOSS		(10,738	)		(4,767	)
OTHER INCOME (EXPENSES)
Contract termination expense		(1,655	)
Asset impairment charge		(101	)		---
Loss on Sale of Fixed Asset		(99	)		(5	)
Interest expense, net		(1,275	)		(718	)
TOTAL OTHER EXPENSES		(3,130	)		(723	)
LOSS BEFORE INCOME TAXES		(13,868	)		(5,490	)
INCOME TAX EXPENSE (BENEFIT)		190			(1,700	)
NET LOSS	$	(14,058	)	$	(3,790	)

37

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Net Sales

Net sales for the fiscal year ended June 30, 2007 were $75,587 compared to $63,355 for fiscal year ended June 30, 2006, an increase of $12,232 or 19%. Significant components contributing to our sales growth are set forth in the table below:

	Year ended June
	2007					2006
			% of					% of
	Sales		Sales			Sales		Sales
Ibuprofen	$	31,149		41.2		$	33,836		53.4
Bactrim(R)		17,471		23.1			4,220		6.7
Naproxen		12,221		16.2			9,401		14.8
Female hormone product		11,199		14.8			8,100		12.8
Hydrocodone/Ibuprofen		2,334		3.1			3,693		5.8
Hydrocodone/Acetaminophen		545		0.7			--		--
All Other Products		668		0.9			4,105		6.5
Total	$	75,587		100	%	$	63,355		100	%

§ Net sales of Ibuprofen for the year ended June 30, 2007 decreased $2,687, or 7.9%, as compared to sales for the year ended June 30, 2006. The decrease is partially due to supply chain issues incurred during our fiscal year ended June 30, 2007 and partially due to a decrease in demand for a specific strength of Ibuprofen. The decrease in demand is directly related to one of our customer’s voluntary suspension of sales of over-the-counter pharmaceuticals as a result of the FDA inspection,which was unrelated to our product. We have been working with our suppliers to obtain adequate supplies of Ibuprofen raw material. We are currently attempting to qualify an additional source of Ibuprofen, and we are making efforts to ensure that our suppliers maintain adequate levels of inventory sufficient to enable us to increase our overall production.

§ For year ended June 30, 2007 we significantly increased our market share of Sulfamethoxazole - Trimethoprim in two strengths 400mg / 80mg commonly referred to as generic Bactrim(R) and 800mg / 160mg or commonly referred to as Bactrim-DS(R) (both, “Bactrim”). Sales increased to $17,471 during the year ended June 2007 from $4,220 for the year ended June 30, 2006, primarily as a result of two significant factors: (i) our entering into sales and marketing arrangements with two major distributors which include net profit sharing arrangements; and (ii) favorable pricing conditions in the market.

§ Naproxen net sales for the year ended June 30, 2007 increased $2,820 or 30%, as compared to sales for the year ended June 2006. The increase is primarily due to our success in increasing our customer base.

38

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

§ Net sales of our female hormone products for the year ended June 30, 2007 increased $3,099 or 38.3% compared to sales for the year ended June 2006 due primarily to a higher volume of units shipped during the current fiscal year. As previously reported, as a result of market conditions, on October 27, 2006, we amended our agreement with Pharmaceuticals, Inc. (“Centrix”). Commencing November 2006, Centrix agreed to purchase over a twelve month period, 40% more bottles than the initial year of the agreement at a discounted price with a provision for profit sharing.  Under the amended agreement, the parties shared net profits as defined in the agreement. The amendment has a one year term, after which time the original Centrix agreement shall again be in full force and effect.

§ 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(R) (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 year ended June 2007, decreased $1,360 or 36.8% to $2,334 as compared to $3,693 for the year ended June 2006. The decrease is partially due to a decrease in units shipped as well as a decrease in market prices for this product during the year ended June 2007.

§ As a result of our decision to halt the manufacture and sale of Allopurinol and Atenolol under a contract manufacturing agreement, our revenues for these products declined during the fiscal year ended June 30, 2007. Both Allopurinol and Atenolol were manufactured for and shipped to one customer based on quantities ordered by that customer. Revenue from sales ofAllopurinol and Atenolol decreased by $2,287 from $2,289 for the year ended June 30, 2006 to $2 for the year ended June 30, 2007. Sales of these product are included in All Other Products in the table above. The manufacturing capacity gained from the decrease in production of these two products is being used for other products. For fiscal 2008 and beyond we anticipate little or no sales of these products.

During the fiscal year ended June 30, 2007, five customers, in the aggregate, accounted for approximately 62% of total sales. For the fiscal year ended June 30, 2006 we had four key customers which accounted for approximately 53%.

Cost of sales / Gross Profits

During year ended June 30, 2007, prices for raw materials remained relatively constant when compared to the prior year.While no assurance can be given, we anticipate this trend to continue, at least for the near future. During the fiscal year ended June 30, 2007, we have incurred increased direct labor and supervisory salaries and related benefits associated with increased production.  As part of our expansion plan, we have continued to increase our managerial and production staff.  We believe this increase is required and should ultimately support our expansion plan. Additionally, we incurred increased general overhead costs, such as product liability insurance, workers compensation insurance, medical benefits and utilities. We believe these higher costs will likely continue for the near future.

39

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Gross profit for the fiscal year ended June 30, 2007 significantly increased by $4,239, or 24%, to $21,667, compared to $17,428 for the year ended June 30, 2006. In addition, our gross profit percentage remained relatively consistent, increasing 1.2 percentage points from 27.5% for the year ended June 30, 2006 to 28.7% for the year ended June 30, 2007. While direct labor and most overhead expenses have increased to accommodate higher manufacturing throughput in fiscal 2007, the improvement in gross margin is primarily a function of (i) the Company selling higher margin products during the current fiscal year and (ii) greater throughput and relatively higher inventory levels as of June 30, 2007 resulting in higher absorption of labor and overhead and thus, a positive impact on cost of goods sold. 

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

Selling and General and Administrative Expenses

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

During the fiscal year ended June 30, 2007, SG&A expenses increased $1,891, or 16.5% to $13,340, as compared to $11,449 during fiscal year end June 2006. When stated as a percentage of net sales, SG&A expenses decreased to 17.6% for the year ended June 2007 as compared to 18.1% for the year ended June 2006.

Significant factors contributing to the dollar increase in SG&A expenses include: an increase of $887 in compensation and related taxes and benefits of sales and administrative staff to support our growth; an increase in professional services of $688, of which $289 relates to costs associated with the implementation of our new ERP system and of which the remainder can be associated with management and IT consulting, an increase in depreciation of $545, primarily due to our second facility becoming operational for general and administrative purposes in July 2006; an increase in rent of $50 and utilities of $196, much of which is associated with our second facility; an increase in computer-related expenses of $202 related to the increase in the number of employees; and an increase in Board Compensation of $194 as a result of a new Board of Directors Compensation Policy. Included in SG&A expense for the fiscal year ended June 2006, was a $621 non-recurring expense related to investment banking services and a non-recurring commission expense of $460 related to a specific contract providing for commissions to one salesman during the first year of sales under a sales agreement with Centrix. The one time expenses incurred during the year ended June 2006 offset the increases noted above in SG&A expenses in the current year.

40

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Research and Development Expenses

Research and development expenses for new products currently in development in our new product pipeline consist primarily of wages, outside development organizations, bioequivalence studies, materials, legal fees, and consulting fees. Research and development expenses increased by $8,288 or 77.6% during the fiscal year ended June 30, 2007 to $18,962 as compared to $10,674 during the fiscal year ended June 2006. This represents an increase in R&D as a percentage of net sales to 25.1% for the fiscal year ended June 30, 2007 as compared to 16.8% for the fiscal year ended June 2006.

The increase was due to: higher compensation expenses of $2,324 primarily related to the expansion of analytical chemist and product formulation staff; an increase of $1,561 for legal services primarily related to patent reviews for products under development or pending launch; an increase in purchases of raw materials of $1,276 necessary for the production of trial batches of new generic pharmaceutical products; $1,128 of increased costs related to bioequivalence studies for new generic pharmaceutical products currently in development; and an increase of $749 for consulting related to new product development.

Our research and development efforts continue to focus in the areas of oral contraceptives, soft gelatin capsules and modified release products, and we are planning to commence bioequivalence studies in each of these areas by December 2007. Work is progressing well in the product area of products coming off patent. As we continue to focus in on these types of pharmaceutical products and as new products are released we anticipate a decline in our research and development costs.

As previously disclosed, during February 2005, we 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, we 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 us 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 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 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.

41

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

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

We 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.

Interest Expense

Our net interest expense increased approximately $557 to approximately $1,275 for the fiscal year ended June 30, 2007 from $718 for the fiscal year ended June 30, 2006.  In an effort to fund our plan, we increased our borrowings from our credit facility with Wells Fargo Business Credit. The additional borrowings were required primarily to fund our research and development efforts, for renovation and construction costs incurred for our second facility and new equipment. In addition to these borrowings being in place for the entire year ended June 30, 2007, we also began to draw down from our line of credit in Q4 2007 and taken additional equipment loans. Our total outstanding debt with Wells Fargo was $26,400 at June 30, 2007 compared to $15,567 at June 30, 2006.

In addition, $87 was included in interest expense for the fiscal year ended June 30, 2007 related to the accreted interest on the Watson Laboratories, Inc. (“Watson”) Termination Agreement (the “Termination Agreement”) discussed below.

In order to hedge against rising interest rates, we entered into two interest rate swap arrangements. Fair value of the interest rate swaps at June 30, 2007 and 2006 was approximately $10 and $98 and is included in Other Assets. However, it is likely that, as a result of additional borrowings we will incur increases in our interest expense in the future.

Contract Termination Expense

On October 3, 2006, we entered into a Termination and Release 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(R) (7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets, (the “Product”). As a result of entering into the Termination Agreement, we recorded contract termination expense of $1,655 for the year ended June 30, 2007.

42

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Operating Loss

Although our sales and gross margins increased, as a result of our increase in research and development efforts from which we believe we will see the benefits from in the future, along with increases in selling and general and administrative costs, we incurred an operating loss of $10,738 for the year ended June 30, 2007 compared to an operating loss of $4,767 for the year ended June 30, 2006.

Income Taxes

We account for income taxes using the liability method which requires the determination of deferred tax assets and liabilities based on the differences between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. The net deferred tax asset is adjusted by a valuation allowance, if, based on the weight of available evidence, it is more likely than not that some portion or the entire net deferred tax asset will not be realized. We assess realization of our deferred tax assets based on all available evidence in order to conclude whether it is more likely than not that the deferred tax assets will be realized. Available evidence considered includes, but is not limited to, the our historic operation results, projected future operating earnings results, reversing temporary differences and changing business circumstances. When there is a change in circumstances that causes a change in judgment about the realizability of the deferred tax assets, we may adjust all or a portion of the applicable valuation allowance in the period when such changes occur. For the year ended June 30, 2007 increased our valuation allowance by $4,670 and we recorded income tax expense of $190 as compared to the year ended June 30, 2006, which had a benefit from income tax of $1,700.

Liquidity and Capital Resources

At June 30, 2007 we had an accumulated deficit of $18,831 and operating activities used $14,105 of cash for the year then ended. In order to address our operating loss position and our lack of liquidity, (i) we have completed a series of banking and financing activities in October and November 2007, which are outlined below in “Subsequent Events - Banking and Financing Transactions”, and (ii) we are taking various actions to improve profitability and cash flows generated from operations, including:

· Reducing headcount and other operating expenses in different functional areas where possible while still carrying out our future growth plan

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

· Scaling back our research and development activities to levels where we can execute our overall business plan while managing the financial implications

While we believe that the initiatives described above will result in positive cash flows and profitability, there can be no assurance that we will achieve our cash flow and profitability goals, or that we will be able, if necessary, to raise additional capital sufficient to implement our plans. In such event, we may have to revise our plans and significantly reduce our operating expenses, which could have an adverse effect on revenue and operations in the short term.

43

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Subsequent Events - Banking and Financing Transactions

1. On October 26, 2007, the Company and Wells Fargo Business Credit finalized a Forbearance Agreement that terminates on December 31, 2007, which was subsequently amended on November 12, 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 “Existing Defaults”). WFBC has agreed to waive the Existing Defaults based upon the Borrower’s consummation and receipt of $8,000 related to the issuance of subordinated debt described below. The parties have agreed to establish financial covenants for fiscal year 2008 prior to the conclusion of the Forbearance Period.

2. 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 November 7, 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 October 1, 2009 (the “STAR Notes”) in the following amounts to the following parties:

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

TD III 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 54% of the Company’s voting stock (the “Major Shareholders”), including Raj Sutaria, who is a Company Executive Vice President.

44

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

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, 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.

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 TD III 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.

3. 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 TD III 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 TD III 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 TD III and Aisling tag along rights on certain sales of Company common stock.

Our operations and capital expenditures have been financed through cash flows from operations and the WFBC Credit Facility. For the fiscal year ended June 30, 2007, net cash used in operating activities was $14,105 as compared to cash provided by operating activities of $801 during the fiscal year ended June 30, 2006. Significant factors comprising the net cash used in operating activities for the fiscal year ended June 30, 2007 include: net loss of $14,058, increase in inventory of $9,747, and a decrease in deferred revenue of $3,399, partially offset by a decrease of $1,212 in accounts receivable and an increase in accounts payable, accrued expenses and other liabilities of $5,416. Inventory levels increased significantly due to several factors, as discussed below in “Inventory”. The increase in accounts payable, accrued expenses and other payables primarily relates to the increase in purchased inventory items and the overall increase in operating expenses, primarily related to higher research and development costs.

45

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

We also recognized several non-cash charges: depreciation and amortization of $2,554, contract termination expense of $1,655 (related to termination of the agreement with Watson Pharmaceuticals), stock-based compensation expense (in accordance with SFAS 123 (R)) amounting to $1,070, a lower of cost or market write down of inventory of $1,157 and deferred tax expense of $195.

During the fiscal year ended June 30, 2007, we used funds in investing activities of $8,296 compared to $8,142 used in investing activities during the fiscal year ended June 30, 2006. These amounts primarily related to capital expenditures of $8,003 in fiscal year ended June 30, 2007 for new machinery, equipment and building renovations as compared to $6,833 of capital expenditures in the prior year. We continue to invest in and develop our Yaphank, NY facility; $4,345 of the total $8,003 in capital expenditures was invested there primarily for purchases of machinery and equipment and building improvements. Most of our research and development activity is conducted there and, as previously reported, we commenced packaging and some manufacturing following an FDA inspection in February 2007. As previously disclosed, we elected not to move forward with the planned construction of a research and development facility in Ahmedabad, India, and on April 25, 2007, we completed the sale of our subsidiary, Interpharm Development Private Limited (“IDPL”) located in Ahmedabad, India to an entity partially owned by two officers of the Company for $161.

During the fiscal year ended June 30, 2007, net cash of $21,035 was provided by financing activities primarily related to (i) the sale of $10,000 of our Series C-1 redeemable convertible preferred stock in September 2006, which generated $9,993 of cash, and (ii) $9,866 in proceeds from drawdown of the WFBC revolving credit facility.

At June 30, 2007, we had $72 in cash and cash equivalents, compared to $1,438 at June 30, 2006.

Bank Financing

On February 9, 2006, we entered into a four-year financing arrangement with Wells Fargo Business Credit (“the WFBC Credit Facility”). This financing agreement provided a maximum credit facility of $41,500 comprised of:

·$22,500 revolving credit facility

·$12,000 real estate term loan

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

·$ 3,500 additional / future capital expenditure facility

46

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

The funds made available through this facility paid down, in its entirety, the $20,450 owed on the previous credit facility. The WFBC revolving credit facility borrowing base is calculated as (i) 85% of our eligible accounts receivable plus the lesser of 50% of cost or 85% of the net orderly liquidation value of its eligible inventory. The advances pertaining to inventory are capped at the lesser of 100% of the advance from accounts receivable or $9,000. As of June 30, 2007, our remaining availability under the revolving credit facility was $6,708. The $12,000 loan for the real estate in Yaphank, NY is payable in equal monthly installments of $67 plus interest through February 2010 at which time the remaining principal balance is due. As of June 30, 2007, the real estate loan balance outstanding was $10,933. 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. During the fiscal year ended June 30, 2007, we borrowed $2,780 under the second capital expenditure facility for the cost of new equipment, and such borrowings are being amortized over 60 months. As of June 30, 2007, the aggregate balance outstanding for both M&E term loans was $5,601, and there was approximately $150 available for additional capital expenditure borrowings.

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

The revolving credit facility and term loans bear interest at a rate of the prime rate less 0.5% or, at our option, LIBOR plus 250 basis points. At June 30, 2007, the interest rate on this debt was 7.75%. Pursuant to the requirements of the WFBC agreement, we put in place a lock-box arrangement and we incur a fee of 25 basis points per annum on any unused amounts of this credit facility. The WFBC credit facility is collateralized by substantially all of our assets.

In addition, we are required to comply with certain financial covenants. As of June 30, 2007, we were not in compliance with several covenants, as described above in “Subsequent Events -

Banking and Financing Transactions”, and we have received a waiver of these defaults from WFBC.

With respect to the real estate term loan and the $3,500 M&E loan, we entered into interest rate swap contracts (the “swaps”), whereby we pay a fixed rate of 7.56% and 8.00% per annum, respectively. The swaps contracts mature in 2010. The swaps are a cash flow hedge (i.e. a hedge against interest rates increasing). As all of the critical terms of the swaps and loans match, they are structured for short-cut accounting under SFAS No. 133, “Accounting For Derivative Instruments and Hedging Activities’” and by definition, there is no hedge ineffectiveness or a need to reassess effectiveness. Fair value of the interest rate swaps at June 30, 2007 was approximately $10 and is included in Other Assets.

47

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

As previously disclosed, we entered into agreements with Tris for the development and delivery of over thirty new Technical Packages. The combined costs of these two agreements will approximate $5,800, of which we have paid $5,425 as of June 30, 2007. 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 June 30, 2007.

Future cash flows could be aided by utilization of our available Federal net operating loss carryforwards ("NOLs"). At June 30, 2007 we have remaining Federal NOLs of approximately $32,250 available through 2027. As of June 30, 2007, as a result of changes in New York state law, the benefit of the future utilization of State NOLs has been eliminated. 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 and 2007, which indicate uncertainty as to our ability to generate future taxable income, the “more-likely-than-not” standard has not been met and therefore some amount of the Company’s deferred tax asset may not be realized. As such, a valuationallowance of $5,554 has been established decreasing the total accumulated net deferred tax asset of $11,529 to $5,975.

In addition, at June 30, 2007, we have approximately $986 of New York State investment tax credit carryforwards, expiring in various years through 2022. These carryforwards are available to reduce future New York State income tax liabilities. However, we reserved 100% of the investment tax credit carryforward, which we do not anticipate utilizing.

Watson Termination Agreement

On October 3, 2006, we 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 we manufactured and supplied and Watson distributed and sold generic Vicoprofen(R) (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. Further, Watson was required to turn over to us 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 then we in turn invoiced Watson $42 for repacking. The net affect was a reduction of $99 to our net sales during the year ended June 30, 2007.In consideration of the termination of Watson’s rights under the Supply Agreement, the 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 termination agreement. Upon entering the Termination Agreement, we 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 $1,287, respectively. The imputed interest of $345 will be amortized over the remaining life of the obligation using the effective interest rate method. At June 30, 2007, contract termination liability of $386 and $1,356 are included in Accounts payable, accrued expenses and other liabilities and Contract termination liability, respectively.

48

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Accounts Receivable

Our accounts receivable at June 30, 2007 was $12,945 as compared to $14,212 at June 30, 2006. The average annual turnover ratio of accounts receivable to net sales for the fiscal years ended June 30, 2007 and 2006 was 5.5 and 5.7 turns, respectively. 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.

Inventory

At June 30, 2007, our inventory was $17,295 as compared to $8,706 at June 30, 2006. Our turnover of inventory for the years ended June 30, 2007 and 2006 was 4.15 and 5.20, respectively. Our inventory is current; there are no reserves for obsolescence. Our inventory levels have risen in order to support our growth and overall customer demands.

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 June 30, 2007 that were determined to have a carrying value in excess of market was $1,157. As a result, the Company reduced the net book value of inventory on hand by this amount during the year ended June 30, 2007.

Accounts Payable

Our accounts payable, accrued expenses and other current liabilities increased by approximately $5,892 to $18,542 at June 30, 2007 from $12,650 at June 30, 2006, primarily as a result of a $3,791 increase in accounts payable and accrued expenses related to raw material purchases, which is partially the result of the timing of the receipt of $920 in raw materials at year-end; and an increase in accounts payable and accrued expenses of $935 pertaining to research and development costs, of which $580 of the increase related to legal fees in this area. Additionally, the increase is partially attributable to liabilities incurred in relation to fixed asset additions, specifically, the Company has approximately $516 included in accounts payable and accrued expenses at June 30, 2007 related to the acquisition of our new ERP system.

Cash

During the year ended June 30, 2007, cash decreased $1,366 from $1,438 at June 30, 2006 to $72 at June 30, 2007. For the year ended June 30, 2007 we funded our business from bank debt, operations and sale of Series C-1 redeemable convertible preferred stock.

49

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Our Obligations

As of June 30, 2007, our obligations and the periods in which they are scheduled to become due are set forth in the following table:

			Due in less		Due		Due		Due
			than 1		in 1-3		in 3-5		after 5
Obligation	Total		Year		Years		Years		Years
Real Estate and M&E Term Loans (a)	$	16,534	$	2,170	$	14,364	$	--	$	--
Capital lease		145		21		77		47		--
Line of Credit		9,866		9,866		--		--		--
Operating lease and software license		10,547		1,188		2,026		1,902		5,431
Other long-term liabilities reflected on the Registrants Balance Sheet under GAAP		2,000		500		1,000		500		--
Total cash obligations	$	39,092	$	13,745	$	17,467	$	2,449	$	5,431

In addition to the information presented in the table above, there is a balance on the Tris solids agreement, as amended, of $375 which could be paid by us if certain milestones are reached.

(a) The Real Estate Term Loan of $12,000 is for the real estate in Brookhaven, NY, is payable in equal monthly installments of $67 plus interest through February 2010 at which time the remaining principal balance is due. The M&E Term Loans are payable in equal monthly installments of $114 plus interest through February 2010 at which time the remaining principal balance is due. With respect to additional capital expenditures, we are permitted to borrow 90% of the cost of new equipment purchased to a maximum of $3,500 in borrowings amortized over 60 months. As of June 30, 2007, there is approximately $150 available for additional capital expenditure borrowings.

50

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Leases

We lease an entire building in Hauppauge, New York, pursuant to a non-cancellable lease expiring in October, 2019, which houses our manufacturing, warehousing and some executive offices. The leased building is approximately 100 square feet and is located in an industrial/office park. The current annual lease payments to the landlord, Sutaria Family Realty, LLC, are $660. Sutaria Family Realty, LLC is owned by Mona Rametra, Perry Sutaria and Raj Sutaria. Upon a change in ownership of the Company, and every three years thereafter, the annual base rent will be adjusted to fair market value, as determined by an independent appraisal. There are no tenants in the building other than us.In January 2007 the Company entered into a seven year lease for approximately 20 square feet of office space. The lease provides us 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.

51

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Fiscal Year Ended June 30, 2006 compared to Fiscal Year Ended June 30, 2005

	For the Fiscal Year Ended June 30, 2006			For the Fiscal Year Ended June 30, 2005
SALES, Net	$	63,355		$	39,911
COST OF SALES		45,927			30,839
GROSS PROFIT		17,428			9,072
Gross Profit Percentage		27.51	%		22.73	%
OPERATING EXPENSES
Selling, general and administrative expenses		11,449			5,092
Related party rent expense		72			72
Research and development		10,674			4,003
TOTAL OPERATING EXPENSES		22,195			9,167
OPERATING LOSS		(4,767	)		(95	)
OTHER INCOME (EXPENSES)
Gain on sale of marketable securities		---			9
Loss on sale of fixed asset		(5	)		--
Interest expense, net		(718	)		(136	)
TOTAL OTHER EXPENSES		(723	)		(127	)
LOSS BEFORE INCOME TAXES		(5,490	)		(222	)
BENEFIT FROM INCOME TAXES		(1,700	)		(73	)
NET LOSS	$	(3,790	)	$	(149	)

52

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Net Sales

Net sales for the fiscal year ended June 30, 2006 were $63,355 compared to $39,911 for fiscal year ended June 30, 2005, an increase of $23,444 or 58.7%. Significant components contributing to our growth of existing products were those set forth in the table below:

Product	Year over year increase in net sales
Ibuprofen	$	5,866
Naproxen		7,721
Hydrocodone / Ibuprofen		1,166
Total	$	14,753

§ The increase in net sales of Ibuprofen was primarily the result of an expanded customer base and improvements in manufacturing and packaging which enabled us to increase output and modest cost of materials reductions.

§ An expanded customer base, as well as obtaining a U.S. Government contract to supply Naproxen to various governmental agencies valued at approximately $3,900 for the twelve month period beginning September 2005 were key factors contributing to the $7,721 increase in sales of Naproxen. The contract includes four one-year option periods.

§ On a fiscal year over year basis, we had an increase of more than $1,166 from sales of Hydrocodone 7.5 mg/Ibuprofen 200 mg, our generic version of Vicoprofen(R), which was launched during the three month period ended December 31, 2004, and Reprexain(R) (Hydrocodone 5.0 mg/Ibuprofen 200 mg). The results for the periods reported include additional revenue derived from a profit sharing arrangement for these products.

During the fiscal year ended June 30, 2006, we began to see the positive effects of our expansion plan which commenced in 2005. Two new products were launched which contributed greatly to our revenue growth. As we continue our planned product line expansion we anticipate that fiscal year 2007 should witness the launching of new products as well; however there can be no assurance we will be successful in achieving our plan. The two new products for fiscal 2006 were:

§ As reported in our Current Report on Form 8-K filed with the SEC on July 18, 2005, we entered into an agreement with Centrix Pharmaceutical, Inc. (“Centrix”) for the sale of a female hormone product, which is distributed in two strengths. This product generates a higher gross margin compared to our other products. The agreement commenced upon the first shipment of the product to Centrix in August, 2005. Centrix was required to purchase a minimum $11,500 of the product during the first twelve month period with the option to purchase an additional $2,000 of product. For the twelve month period ended June 30, 2006, we shipped approximately $8,100 of the female hormone product to Centrix. We will ship approximately $5,400 of product by September 30, 2006. We have renegotiated the agreement with Centrix for the up coming year and we anticipated sales during fiscal 2007 of the product to exceed fiscal year 2006 totals. In the event that the agreement is terminated at any time, or for any reason, we maintain the right to market the product alone or with a third party.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

§ In September, 2005, we launched Sulfamethoxazole and Trimethoprim (“SMT”) single and double strength tablets, which are sold by the innovator under the brand-name Bactrim(R). SMT is a widely used antibiotic used to treat infections such as urinary tract infections, bronchitis, ear infections (otitis), traveler's diarrhea, and Pneumocystis carinii pneumonia. Sales during fiscal 2006 of these products approximated $4,200.

As a result of our decision to greatly reduce and ultimately halt the manufacture and sale of Allopurinol and Atenolol under a contract manufacturing agreement, our revenues for these products declined during the fiscal year ended June 30, 2006. Both Allopurinol and Atenolol were manufactured for and shipped to one customer based on quantities ordered by that customer. Revenue from sales ofAllopurinol and Atenolol decreased by approximately $4,700 from $7,100 for the year ended June 30, 2005 to $2,400 for the year ended June 30, 2006. The manufacturing capacity gained from the decrease in production of these two products is being used for other products.

The fluctuations in revenue by product were generally not attributable to any changes in our pricing which, for our entire product line, remained relatively stable.

During the fiscal year ended June 30, 2006, four key customers, in the aggregate, accounted for approximately 53% of total sales. For the fiscal year ended June 30, 2005 we had three key customers which accounted for approximately 56%

Cost of sales / Gross Profits

During the year ended June 30, 2006, prices for our raw materials remained relatively constant. While no assurance could be given, we anticipated this trend to continue, at least for the near future. During the fiscal year ended June 30, 2006, prices for packaging components increased. It is uncertain as to whether or not these costs will continue to rise. We have incurred increased direct labor and supervisory salaries and related benefits associated with increased production. As part of our expansion plan, we have increased managerial and production staff. We believed this increase is required and should ultimately support our expansion plan. Additionally, incurred increased general overhead costs, such as product liability insurance, workers compensation insurance, medical benefits and utilities.

Gross profit for the fiscal year ended June 30, 2006 significantly increased $8,356, or 92%, to $17,428, compared to $9,072 for the year ended June 30, 2005. In addition, our gross profit percentage increased 4.8 percentage points from 22.7% for the year ended June 30, 2005 to 27.5% for the year ended June 30, 2006. This increase is primarily due to sales of our new products: Bactrim(R) and our female hormone therapy products which both generate higher gross margins compared to our remaining products. Gross margins for the remaining products were generally consistent with the prior year.

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

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Selling and General and Administrative Expenses

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

During the fiscal year ended June 30, 2006, selling, general and administrative expenses increased approximately $6,357 to approximately $11,449, or 18.1% of net sales from approximately $5,092 or 12.8% of net sales, during fiscal year end June 30, 2005.

Significant factors contributing to this increase include: necessary increases in the staffing of administrative and sales areas to support our growth of $1,954; related payroll taxes and benefits of $496; increased commission expenses and freight expenses of $314 and $234, respectively, both of which are attributable to our higher sales; $600 for investment banking services; increased accounting and legal costs of $284, primarily related to the refinancing of our bank debt and sale of our Series B-1 preferred stock; an increase in general insurance of $229; increased rent, utilities and taxes of $200; an increase in depreciation of non-manufacturing assets of $105; and the recognition of a non cash charge of $1,195` as a result of our adoption of the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS 123(R)”). Included in the $1,195 was a non-cash charge related to the modification of an option grant as a result the death of an executive officer. Adoption of SFAS 123(R) requires us to report a non-cash expense for the ratable portion of the fair value of employee stock option awards of unvested stock options over the remaining vesting period. Previously we elected to follow the intrinsic value method in accounting for our stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including Financial Accounting Standards Board Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation”.

Research and Development Expenses

Research and development expenses for new products currently in development in our new product pipeline consist primarily of wages, outside development organizations, bioequivalence studies, materials, legal fees, and consulting fees. During the fiscal year ended June 30, 2006 we incurred $10,674 in research and development expenses, which is $6,671 greater than the prior year amount of $4,003. We believe that research and development expenses, as a percentage of our net sales, will be substantially higher in the future as we seek to expand our product lines. While we believed increased spending for research and development efforts will allow us to add obtain approvals for new products, there can be no assurance we will be successful in the commercialization.

A significant component of our expansion plan includes two agreements with Tris Pharma, Inc. (“Tris”). One of the agreements is for the development and licensing of twenty-five liquid generic products (“Liquids Agreement”). In the event that Tris delivers twenty-five successful technical packages, of which there can be no assurance, we will be required to pay Tris $3,000.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

In accordance with the terms of this agreement, we make payments as various milestones are achieved. In addition, Tris is to receive a royalty of between 10% and 12% of net profits resulting from the sales of each product. We are entitled to offset the royalty payable to Tris each year, at an agreed upon rate, to recoup the development fees paid to Tris under the Liquids Agreement.

The second agreement, as amended, pertains to the solid dosage products (“solids”), pursuant to which 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 softgel products. Further, the terms of this amendment require us pay to Tris $750 based upon various Tris milestone achievements. Some 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 agreement for solids also provides for an equal sharing of net profits for each product, except for one product, if it is successfully sold and marketed, after the deduction and reimbursement of all litigation-related and certain other costs. The excluded product provides for a profit split of 60% for the Company and 40% for Tris. Further, this agreement provides us with a perpetual royalty-free license to use all technology necessary for the solid products in the United States, its territories and possessions.

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

For the fiscal year ended June 30, 2006, we recorded as a research and development expense approximately $2,110 in connection with these agreements. Further, since inception, we have incurred approximately $3,510 of research and development costs associated with the Tris agreements. The combined costs of these agreements could aggregate up to $7,800. The balance on the liquid agreement of $2,750 could be paid within three years if all milestones are reached. The balance on the solids agreement, as amended, of $1,675 could be paid within two years if all milestones are reached.

During the fiscal year ended June 30, 2006, we filed seventeen ANDAs.

Interest Expense

Our interest expense, net increased approximately $583 to approximately $718 for the fiscal year ended June 30, 2006 from $136 for the fiscal year ended June 30, 2005. In an effort to fund our plan, in February, 2006, we increased our borrowing capabilities through a new credit facility entered into with Wells Fargo Business Credit. The additional borrowings were required primarily to fund our research and development efforts, for renovation and construction costs incurred for our second facility and new equipment. In order to hedge against rising interest rates, we entered into two interest rate swap arrangements. As of June 30, 2006, we have saved approximately $98 as a result of these swaps agreements.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Operating Loss

Although our sales and gross margins increased, as a result of our increase in research and development efforts from which we believe we will see the benefits from in the future, along with increases in selling and general and administrative costs, we incurred an operating loss of $5,490 for the year ended June 30, 2006 compared to an operating loss of $222 for the year ended June 30, 2005.

Income Taxes

For the year ended June 30, 2006 we recorded an income tax benefit of $1,700, an increase in the benefit of $1,627 compared to the year ended June 30, 2005 which had a benefit from income tax of $73.

We account for income taxes using the liability method which requires the determination of deferred tax assets and liabilities based on the differences between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. The net deferred tax asset is adjusted by a valuation allowance, if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. Our net deferred tax asset at June 30, 2006 was $6,170 and $4,413 at June 30, 2005.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

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 ongoing 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 its financial statements and the uncertainties that could impact results of operations, financial condition and cash flows.

Revenue Recognition

We recognize 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 consolidated financial statements as reductions to revenues.

We purchased raw materials from one supplier for the year ended June 30, 2007 and two suppliers for the years ended June 30, 2006 and 2005, which are manufactured into finished goods and sold back to this supplier 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,” the Company recorded sales to, and purchases from, this supplier 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 developed 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. For the year ended June 30, 2007, we purchased raw materials from this supplier totaling approximately $10,714, and sold finished goods to this supplier totaling approximately $1,054. For the years ended June 30, 2006 and 2005, we purchased raw materials from two suppliers, which were manufactured into finished goods and sold back to these suppliers totaling approximately $10,608 and $9,251, respectively, and sold finished goods to such suppliers totaling approximately $6,110, and $17,414, respectively. These purchase and sales transactions are recorded at fair value in accordance with EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty”.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

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 its 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. The additional revenue component of these agreement’s are recognized by us at the time our customers record their sales and is based on pre-defined formulas contained in the agreements. Receivables related to this revenue of $594 and $620 and at June 30, 2007 and 2006, respectively, are included in “Accounts receivable, net” in the accompanying Consolidated Balance Sheets.

Sales Returns and Allowances

At the time of sale, we simultaneously record estimates for various costs, which reduce product sales. These costs include estimates of chargebacks and other sales allowances. In addition, we record an allowance for rebates, including Medicaid rebates and shelf-stock adjustments when the conditions are appropriate. Estimates for sales allowances such as chargebacks are based on a variety of factors including actual return experience of that product or similar products, rebate arrangements for each product, and estimated sales by our wholesale customers to other third parties who have contracts with us. Actual experience associated with any of these items may be different than our estimates. We regularly review the factors that influence our estimates and, if necessary, make adjustments when we believe that actual product returns, credits and other allowances may differ from established reserves.

Sales Incentives

In accordance with the terms and conditions of an agreement entered into during the fiscal year ended June 30, 2006, we have offered a sales incentive to one of our customers in the form of an incentive volume price adjustment. We account for sales incentives in accordance with EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of Vendor's Products)" (“EITF 01-9”). The terms of this volume based sales incentive required the customer to purchase a minimum quantity of our products during a specified period of time. The incentive offered was based upon a fixed dollar amount per unit sold to the customer. We made an estimate of the ultimate amount of the incentive the customer would earn based upon past history with the customer and other facts and circumstances. We had the ability to estimate this volume incentive price adjustment, as there did not exist a relatively long period of time for the particular adjustment to be earned. Any change in the estimated amount of the volume incentive was recognized immediately using a cumulative catch-up adjustment. In accordance with EITF 01-9, we recorded the provision for this sales incentive when the related revenue is recognized. Our sales incentive liability may prove to be inaccurate, in which case we may have understated or overstated the provision required for these arrangements. Therefore, although we make our best estimate of our sales incentive liability, many factors, including significant unanticipated changes in the purchasing volume of our customer, could have significant impact on the our liability for sales incentives and our reported operating results. The specific terms of this agreement which related to sales incentives expired in October 2006. For the year ended June 30, 2007, we recognized sales incentive revenue of $3,399 related to this agreement.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Inventory

Inventories are valued at the lower of cost (first-in, first-out basis) or market value. Losses from the write-down of damaged, nonusable, or otherwise nonsalable inventories are recorded in the period in which they occur.

Income Taxes

We account for income taxes using the liability method which requires the determination of deferred tax assets and liabilities based on the differences between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. The net deferred tax asset is adjusted by a valuation allowance, if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized. Our net deferred tax asset at June 30, 2007 was $5,975 and $6,170 at June 30, 2006.

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.

Stock Based Compensation

Effective July 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”), using the modified-prospective-transition method. As a result, our net income before taxes for the years ended June 30, 2007 and 2006 are $1,070 and $1,195 lower than if it had continued to account for share-based compensation under Accounting Principles Board (“APB”) opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).

Accounts Receivable / Chargebacks

Accounts receivable are comprised of amounts owed to us through the sales of our 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 and $101 at June 30, 2007 and 2006, respectively. The allowance for doubtful accounts is based on a review of specifically identified accounts, in addition to an overall aging analysis. Judgments are made with respect to the collectibility of accounts receivable based on historical experience and current economic trends. Actual losses could differ from those estimates. Allowances relating to discounts, rebates, and customer chargebacks were $4,865 and $2,315 at June 30, 2007 and June 30, 2006, respectively. We sell some of our products indirectly to various government agencies referred to below as “indirect customers.” We enter into agreements with our 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. We will provide credit to the selected wholesaler for the difference between the agreed-upon price with the indirect customer and the wholesaler’s invoice price if the price sold to the indirect customer is lower than the direct price to the wholesaler. This credit is called a chargeback. The provision for chargebacks is based on expected sell-through levels by our 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. We continually monitor the reserve for chargebacks and make adjustments to the reserve as deemed necessary. Actual chargebacks may differ from estimated reserves.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Recently Issued Accounting Pronouncements

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

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

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

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

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

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

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

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

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

quantifying a current year misstatement. SAB 108 became effective in fiscal 2007. Adoption of SAB 108 did not have a material impact on our consolidated financial position, results of operations or cash flows.

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

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. We do not expect the adoption of SFAS No. 159 to have a material impact on our consolidated financial statements.

In June 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 07-3, Accounting for Advance Payments for Goods or Services to be Received for Use in Future Research and Development Activities. EITF 07-3 provides clarification surrounding the accounting for nonrefundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed. EITF 07-3 is effective for annual periods beginning after December 15, 2007. We record these advance payments in accordance with EITF 07-3 and therefore does not have any impact on our consolidated financial statements.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Issue 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 7A.QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

At June 30, 2007, total obligations to our bank pertaining to the credit facility described above were: (i) $9,866 related to the WFBC line of credit; (ii) approximately $10,933 real property term loan; and (ii) $5,601 owing on the machinery and equipment lines.

With respect to the real estate term loan and the $3,500 M&E loan, we entered into interest rate swap contract (the “swaps”), whereby the Company pays a fixed rate of 7.56% and 8.00% per annum, respectively. The swaps contracts mature in 2010. The swaps are a cash flow hedge (i.e. a hedge against interest rates increasing). As all of the critical terms of the swaps and loans match, they are structured for short-cut accounting under SFAS No. 133, “Accounting For Derivative Instruments and Hedging Activities” and by definition, there is no hedge ineffectiveness or a need to reassess effectiveness. Fair value of the interest rate swaps at June 30, 2007 was approximately $10 and is included in Other Assets

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements, including the notes thereto, together with the report from our independent registered public accounting firm are presented beginning at page F-1.

ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None

ITEM 9A.CONTROLS AND PROCEDURES

Evaluation 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 period ended June 30, 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.

ITEM 9B. - OTHER INFORMATION

None

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

PART III

ITEM 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Directors

The following table sets forth as of October 27, 2007 the names and ages of all directors of the Company along with their current positions, offices and term:

Name of Nominee	Age	Position with the Company	Director Since
Dr. Maganlal K. Sutaria	71	Chairman	May 2003
David Reback (1)(2)(3)(4)	65	Director	November 1997
Stewart Benjamin (1)(4)	42	Director	May 2001
Kennith Johnson (1)(2)(3)(4)	54	Director	November 2004
Richard J. Miller	48	Director	May 2006
Joan P. Neuscheler	48	Director	August 2006

(1)Member of the audit committee

(2)Member of the compensation committee

(3)Member of the nominating committee

(4) Member of corporate governance committee

The Board of Directors has determined that David Reback, Stewart Benjamin, Kennith Johnson, and Joan P. Neuscheler are independent (as independence is defined in Section 121A of the listing standards of the American Stock Exchange).

The following information with respect to the principal occupation or employment of the nominees, the name and principal business of the corporation or other organization in which such occupation or employment is carried on and other affiliations and business experience during the past five years has been furnished to us by the respective nominees:

DR. MAGANLAL K. SUTARIA is a cardiovascular surgeon who received his medical degree from the Medical College, Ahmedabad, Gujarat University in 1961 and since 1991 served as the Chairman of Interpharm, Inc. Dr. Sutaria has been a Director and Chairman of our Board of Directors since May 29, 2003.

DAVID C. REBACK has served as a director since November 1997. Since 1969, Mr. Reback has been a partner with Reback & Potash, LLP, a law firm specializing in litigation, appellate matters and real estate. Mr. Reback received a B.A. from Syracuse University, and in 1965 he received a Juris Doctor's degree from Syracuse University College of Law.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

STEWART BENJAMIN has served as a Director since May 2001. Mr. Benjamin is a certified public accountant in the State of New York. From January 1996 to the present, Mr. Benjamin has been self-employed as a sole practitioner under the name of Stewart H. Benjamin, CPA, P.C. From 1985 through December 1995, Mr. Benjamin was employed as a staff accountant in both private industry and local public accounting firms. Mr. Benjamin received a Bachelor of Business Administration degree from Pace University in 1985.

KENNITH JOHNSON has served as a Director since November 18, 2004. He currently serves as the Chairman of our Audit and Compensation Committees. He is a CPA with more than 30 years of financial/accounting experience and presently Vice President of Finance & Administration with the operations of Fairfax Financial Holdings Ltd. a financial and insurance holding company. Prior to joining Fairfax, he had been a consultant and the Senior Vice President and Chief Financial Officer for the Movado Group, Inc., a manufacturer and distributor of Swiss watches and jewelry. Prior thereto, he was Vice President, Chief Financial Officer for Wenger-The Swiss Army Knife Company, a distributor and importer of Swiss made products. He has held financial positions with C.R. Bard, Inc., Becton Dickinson Company and Pfizer Corporation.

RICHARD J. MILLER has served as a director since May 30, 2006. Mr. Miller is the managing member of Shippan Point Advisors, LLC, a private equity advisory firm.  As part of his private equity work, Mr. Miller was a member of Tullis-Dickerson Capital Focus III, LP’s general partner from April 2002 to June 2006, serving as the Chairman and CEO of SupplyPro, Inc. from January 2004 to June 2006, as well as consulting with other private equity firms.  Previously he served as Senior Vice President of GE Equity, a division of GE Capital, where he led successful strategic investments in healthcare and technology companies and as a partner of RFE Investment Partners, a venture capital firm.

JOAN P. NEUSCHELER has served as a director since August 23, 2006. Ms. Neuscheler has 17 years of experience in private equity investing as an officer of Tullis-Dickerson & Co., Inc.  (“TD”), a health care-focused venture capital firm. Since July 1998, Ms. Neuscheler has been the President of TD.  Ms. Neuscheler’s previous experience includes three years in public accounting with Arthur Andersen and five years experience as a senior officer in a reinsurance firm. Ms. Neuscheler is a Director of Adams Respiratory Therapeutics, Inc. (NasdaqGS: ARXT), a specialty pharmaceutical company, and a number of privately held companies. She received her B.B.A. and her M.B.A. from Pace University.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Executive Officers

The following table sets forth as of October 27, 2007 the names and ages of all of our officers along with their positions. Officers are appointed to serve until the meeting of the board of directors following the next annual meeting of stockholders and until their successors have been duly elected and qualified.

Name	Age	Position
Cameron Reid	53	Chief Executive Officer
Peter Giallorenzo	49	Chief Operating Officer, Chief Financial Officer and Executive Vice President
Kenneth Cappel	41	Executive Vice President and General Counsel
Raj Sutaria	36	Executive Vice President
Jeffrey Weiss	40	Executive Vice President - Sales and Marketing
Jonathan Berlent	38	Senior Vice President - Business Development

CAMERON REID has served as the CEO of the Company since January 24, 2005. From 1992 through March 2004, Mr. Reid was the President of Dr. Reddy’s Laboratories, Inc. Prior to joining Dr. Reddy’s, Mr. Reid was an Executive Vice President of, and headed Roussel Corp., a division of Roussel UCLAF, a pharmaceutical company based in Montvale, New Jersey. Mr. Reid holds a Bachelor of Science degree in chemistry and geology from the University of Calgary. He is also a graduate of the executive management program at INSEAD in France.

PETER GIALLORENZO became one of our Executive Vice Presidents in January 2007, our Chief Financial Officer in February 2007 and our Chief Operating Officer in July 2007. Mr. Giallorenzo is a Certified Public Accountant with over twenty-five years of management and financial experience for both public and private companies. Prior to joining us, Mr. Giallorenzo served for six years as Senior Vice President Finance and CFO of Nice-Pak Products, Inc., a consumer and healthcare products manufacturer. Mr. Giallorenzo also has experience in the generic pharmaceutical business having served as CFO initially, and then Senior Vice President and Chief Operating Officer of Taro Pharmaceutical Industries, Ltd., a generic pharmaceutical product manufacturer. Mr. Giallorenzo earned a B.B.A. in Accounting from Iona College in 1980.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

KENNETH CAPPEL joined us in February 2005 and became our General Counsel on March 30, 2006. Mr. Cappel brings to us over 15 years of experience in pharmacy, pharmaceutical development and intellectual property law. After holding positions as a pharmacist in retail and hospital pharmacies, Mr. Cappel worked as a pharmaceutical scientist in the Schering-Plough Research Institute from October 1992 to September 2000. He then worked from September 2000 to March 2003 as an associate in the law firm of Budd Larner where his practice focused on ANDA litigation, patent opinions and Hatch-Waxman/FDA regulatory issues. Mr. Cappel was next employed at Dr. Reddy’s Laboratories, Inc. where from March 2003 to February 2005 he advised several key business units. Mr. Cappel graduated Rutgers College of Pharmacy in 1989 and Seton Hall School of Law in 2000. He is a registered pharmacist and a member of the New Jersey bar.

JEFFREY WEISS became our Executive Vice President of Sales and Marketing in April 2005. Mr. Weiss brings with him over 17 years of experience in the pharmaceutical industry, having served in many senior level management positions in sales and marketing. Prior to joining us, Mr. Weiss served as CEO of Glenmark Pharmaceuticals Inc. from 2003 until joining us in April, 2005. Prior, Mr. Weiss served as Vice President of Sales for Dr. Reddy’s Laboratories, Inc. from 2001 to 2003. Mr. Weiss holds a Bachelors degree from William Paterson College in Business Management.

JONATHAN BERLENT became our Vice President of Business Development in August 2004. He was promoted to Senior Vice President on July 1, 2006. Mr. Berlent brings with him over eleven years of experience from the capital markets division of FleetBoston as a manager and equities trader where he ran FleetBoston's Long Island desk from March 2000 to August 2001. Mr. Berlent earned a Masters of Business Administration from New York University's Stern School of Business in May 2001 where he double-majored in Finance and Management and he graduated in May 1991 from the University of Michigan with a Bachelor of Arts in Economics.

RAJ SUTARIA has been an Executive Vice President of our company since July 2007. From November 2004 to July 2007 he served as our Chief Operating Officer. Between 1997 and 2004, Mr. Sutaria served as Production Manager, Director of Manufacturing, Vice President and Chief Operating Officer of Interpharm, Inc. Mr. Sutaria earned a B.B.A. in Marketing from the University of Colorado at Boulder in 1997 and is the son of Maganlal K. Sutaria and the nephew of Bhupatlal K. Sutaria.

Family Relationships

The following family relationships exist for directors and officers: Raj Sutaria, an officer of Interpharm, Inc., is the son of Maganlal K. Sutaria and the nephew of Bhupatlal K. Sutaria, our former President. Maganlal K. Sutaria and Bhupatlal K. Sutaria are brothers.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

To our knowledge, based solely on a review of such materials as are required by the Securities and Exchange Commission, none of our officers, directors or beneficial holders of more than ten percent of our issued and outstanding shares of Common Stock has failed to timely file with the Securities and Exchange Commission any form or report required to be so filed pursuant to Section 16(a) of the Securities Exchange Act of 1934 during the fiscal year ended June 30, 2007.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Code of Ethics

The Board of Directors has adopted a Code of Ethics that applies to all of our employees, officers and directors. The Code of Ethics is available at the Company’s website, www.interpharminc.com.

Audit Committee and Audit Committee Financial Experts

The Board of Directors created an audit committee in 1994. The audit committee is comprised of three directors: Kennith Johnson, Stewart Benjamin and David Reback. The audit committee is responsible for reviewing reports of financial results, audits, internal controls, and adherence to its Business Conduct Guidelines in compliance with federal procurement laws and regulations. The committee also recommends to the Board of Directors the selection of our outside auditors and reviews their procedures for ensuring their independence with respect to the services performed for us.

We believe that Kennith Johnson and Stewart Benjamin qualify as “audit committee financial experts” as defined in Rule 407(d)(5)(ii) of Regulation S-K.

70

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 11.COMPENSATION DISCUSSION AND ANALYSIS

Introduction and Corporate Governance

Our Compensation Committee (which is referred to herein as the “Committee” or as the “Compensation Committee”) oversees and administers our executive compensation programs. The Committee’s complete roles and responsibilities are set forth in the written charter adopted by the Board of Directors, which can be found at www.interpharminc.com under “Corporate Governance.” The Board of Directors selected the following four individuals to serve on the Committee in November, 2006: Richard J. Miller (Chair), Kennith Johnson, David Reback and Joan Neuscheler. All of these individuals, with the exception of Richard J. Miller, qualify as an independent director under the rules of the American Stock Exchange.

The Committee meets at regularly scheduled times during the year and on an ad hoc basis as business needs necessitate. During the fiscal year ended June 30, 2007, the Committee met for three regularly scheduled meetings and held two ad hoc meeting. As part of his duties as the Committee Chair, Mr. Miller reports on Committee actions and recommendations to the Board of Directors.

The Committee has retained Frederic W. Cook and Associates (“FW Cook”) as outside advisors to the Committee. FW Cook reports directly to the Committee and provides guidance on matters including trends in executive and non-employee director compensation, the development of specific executive compensation programs and other matters as directed by the Committee. FW Cook does not provide any other services to the Company.

Executive Compensation Philosophy and Objectives

Our compensation program for the individuals named in the Summary Compensation Table (the “named executive officers”) is designed and implemented based on our pay-for-performance compensation philosophy. Our compensation committee’s current intent is to perform an annual strategic review of our executive officers’ compensation to determine whether they provide adequate incentives and motivation and whether they adequately compensate our executive officers relative to comparable officers in other companies with which we compete for executives. We strive to adhere to this philosophy by significantly differentiating the pay and rewards of our executive officers based on their demonstrated performance and potential to contribute to the long-term success of the Company. Competing for talent in the rapidly changing and increasingly competitive pharmaceutical industry is both challenging and critical to our success. The quality of the Company’s talent is a key driver of long-term stockholder value. Establishing and maintaining executives’ long-term commitment to us is critical to the development of our product pipeline, as development of new products often takes three years or more, and time to market is critical to our business success.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

We have established a total rewards framework that supports our compensation philosophy through the following objectives:

•  to afford our executives a competitive total rewards opportunity relative to organizations with which we compete for executive talent,

•  to allow us to attract and retain superior, experienced people who can perform and succeed in our fast-paced, dynamic and challenging environment,

•  to support our meritocracy by ensuring that our top performers receive rewards that are substantially greater than those received by average performers at the same position level, and

•  to deliver pay in a cost efficient manner that aligns employees’ rewards with stockholders’ long-term interests.

What is our compensation program designed to reward?

The compensation program is designed to reward superior financial, strategic and operational performance that is achieved in a manner consistent with the Company’s values. Results and how the results are attained are both critically important. Our executive officers are assessed on the basis of demonstrated results relative to pre-established goals, ability to address market changes in a timely and efficient manner, as well as demonstrated competencies and behavioral attributes.

Compensation Program Elements and Pay Level Determination

What factors are considered in determining the amounts of compensation?

The Committee has formalized a review process for the determination of base salaries, annual incentive targets and payments, and long-term incentive targets and awards for all executive officers. For the year ended June 30, 2007, there were no changes in the base salary or any annual cash incentive and long-term incentive award determinations for the Chief Executive Officer.

As part of this review process, the CEO presents to the Committee individual assessments of each executive officer’s performance over the prior year, as well as recommended compensation actions for each executive officer. The performance assessments for executive officers include performance relative to established goals, overall leadership effectiveness, impact across the organization and performance and impact relative to other executive officers.

Formal goal setting is critical to ensuring that our compensation program rewards each executive based on his or her success relative to the specific objectives for his or her role. All Company senior managers are subject to annual goal setting, as well as annual performance reviews. The key metrics we use to measure performance differ by individual, but can be grouped into the following categories:

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

•  Financial — we evaluate measures of Company financial performance, including revenue growth, gross margins, operating margins and other measures such as expense management.

•  Strategic — we monitor the success of our executive team in furthering the strategic success of the Company, including the development of the Company’s product pipeline.

•  Operational — we include operational measures in our determination of success, including our production capacity and capability, the timeliness and effectiveness of new product launches, the execution of important internal Company initiatives and customer growth and retention.

The Committee considers the totality of the information presented (including external competitiveness, the performance review, Company performance, progress towards strategic objectives and internal equity) and applies its knowledge and discretion to determine the compensation for each executive officer.

During the fiscal year ended June 30, 2007, the Company targeted its compensation at the median of its market peers, which are defined in the next section. The actual compensation level for each executive officer may be above or below median depending on factors such as Company performance, individual performance, skills/capabilities, overall impact/contribution, experience in position, “premiums” initially required to attract the executive and internal equity.

What external market peer group is used for comparison, and how is it established?

The Company’s peer group is comprised of: (1) a named set of companies for which executive compensation data from public filings is compiled and analyzed; and (2) a somewhat broader set of companies participating in benchmark compensation surveys from which executive compensation data is compiled and analyzed by our compensation advisor.

The named peer group is reviewed annually by the Committee for appropriateness, considering such factors as size (e.g., revenue and market capitalization), complexity (e.g., multiple marketed products), geographic scope of operations (e.g., domestic-only presence), etc. The named peer group for the fiscal year ended June 30, 2007 includes:

Arqule	Hi Tech Phamacal	Quigley	Caraco
Bentley Pharmaceuticals	Inspire Pharmaceutical	Saviant	Theragenics
Bradley Pharmaceuticals	Lannett	Supergen

The compensation surveys used in analyzing our external competitiveness include data from a broader set of biotechnology and pharmaceutical companies. We believe that this broader set of companies is representative of our competitive market for executive officers. These compensation surveys provide reliable data to complement the data collected from executive compensation disclosures of our named peer group.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

What is each element of compensation and why is it paid?

The Company’s executive compensation program is designed with three elements (discussed in detail below), each of which serves an important role in supporting Interpharm’s pay-for-performance philosophy and in realizing our compensation program objectives:

Element	Role and Purpose
Base Salary	• Provide a stable source of income that facilitates the attraction and recognition of the acquired skills and contributions of executives in the day-to-day management of our business.
Long-term Incentives	• Align executive interests with those of stockholders.
	• Promote long-term retention and stock ownership, and hold executives accountable for enhancing stockholder value.
	• Enable the delivery of competitive compensation opportunities in a manner that balances cost efficiency with perceived value.
Benefits & Perquisites	• Provide programs that promote health, wellness and financial security.
	• Provide executive benefits and perquisites at or below market competitive levels.

While the general mix of the elements is considered in the design of our total compensation program, the Committee does not target a specific mix of pay in either its program design or in its compensation determinations. By design, our executive officers have more variability than non-executives in their compensation, to more closely tie their compensation to the Company’s overall performance.

Base Salary

We pay our executive officers base salaries to provide a baseline level of compensation that is both competitive with the external market and commensurate with each employee’s past performance, experience, responsibilities and skills. The Company generally targets base salaries around the median of our external market peers. In making its base salary determinations, the Committee takes into account the internal and external factors described above. Base salary increases from the fiscal year ended June 30, 2006 to the fiscal year ended June 30, 2007 for our named executive officers averaged 2% and ranged from 0% to 5%. The Company’s CEO received a 0% increase in the fiscal year ended June 30, 2007.

Long-term Incentives

A long-term incentive (“LTI”) opportunity has been designed for managers to foster a culture of ownership, align compensation with stockholder interests and promote long-term retention and affiliation with the organization. The Committee has determined the types of awards to be used for delivering long-term incentives. In doing so, the Committee considered the ability of each type of award to achieve key compensation objectives (such as employee retention, motivation and attraction), the needs of the business, competitive market practices, dilution and expense constraints, as well as tax and accounting implications.

74

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

For the fiscal year ended June 30, 2007, the Committee evaluated various program designs and approved a program awarding stock options for our executive officers. Stock options promote stockholder alignment and accountability and are qualified as performance-based pay under Internal Revenue Code Section 162(m). Our 2007 stock option grants vest over four years.

Tax-deductibility of Compensation

Section 162(m) of the Internal Revenue Code of 1986, as amended, limits to $1 million the amount a company may deduct for compensation paid to its CEO or any of its other four named executive officers. This limitation does not, however, apply to compensation meeting the definition of “qualifying performance-based” compensation.

Management works with the Committee to assess alternatives to preserve the deductibility under Section 162(m) of compensation payments to the extent reasonably practicable, consistent with our compensation policies and as determined to be in the best interests of the Company and its stockholders. For the fiscal year ended June 30, 2007, the Company believes that the Compensation payments will meet the requirements of Section 162(m) of the Internal Revenue Code of 1986, as amended.

Perquisites and Personal Benefits

In addition to participating in the benefit programs provided to all other employees (for example, medical, dental, vision, life and disability insurance, employee stock purchase plan), we provide certain perquisites and additional benefits to executives. These supplemental benefits and perquisites include:

·Auto Allowances The Company provided annual car allowance benefits to executive officers and certain management personnel. Such reimbursement is considered taxable income to the recipients.

·Mobile Telephone Allowance: The Company provided monthly mobile telephone allowance benefits to executive officers and certain management personnel. Such reimbursement is considered taxable income to the recipients.

Retirement Plans

We maintain 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, including executive management, 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.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Summary Compensation Table

The following table shows the compensation paid to or earned by the named executive officers during the fiscal year ended June 30, 2007.

Name and 'Principal Position	Year		Salary ($)		Bonus ($)		Stock Awards ($) (1)		Option Awards ($) (2)		Non-Equity Incentive Plan Compensation ($) (3)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) (4)		All Other Compensation ($) (5)		Total ($)
(a)	(b)		(c)		(d)		(e)		(f)		(g)		(h)		(i)		(j)
Cameron Reid		2007	$	300	$	-	$	-	$	-	$	-	$	-	$	13	$	313
Chief Executive Officer		2006	$	297	$	-	$	-	$	-	$	-	$	-	$	-	$	297
		2005	$	76	$	-	$	-	$	-	$	-	$	-	$	-	$	76
Bhupatlal Sutaria		2007	$	275	$	-	$	-	$	-	$	-	$	-	$	13	$	288
President		2006	$	271	$	-	$	-	$	-	$	-	$	-	$	22	$	293
		2005	$	198	$	15	$	-	$	-	$	-	$	-	$	21	$	234
Peter Giallarenzo		2007	$	110	$	-	$	-	$	117	$	-	$	-	$	5	$	232
Chief Financial Officer		2006	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
		2005	$	-	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Jeffrey Weiss		2007	$	236	$	-	$	-	$	15	$	-	$	-	$	12	$	263
Executive Vice President		2006	$	225	$	460	$	-	$	-	$	-	$	-	$	25	$	710
		2005	$	78	$	-	$	-	$	244	$	-	$	-	$	-	$	322
Ken Cappel		2007	$	250	$	-	$	-	$	13	$	-	$	-	$	12	$	275
General Counsel		2006	$	232	$	-	$	-	$	-	$	-	$	-	$	25	$	257
		2005	$	118	$	-	$	-	$	330	$	-	$	-	$	10	$	458
George Aronson		2007	$	236	$	-	$	-	$	-	$	-	$	-	$	13	$	249
Chief Financial Officer		2006	$	221	$	-	$	-	$	-	$	-	$	-	$	21	$	242
		2005	$	148	$	15	$	-	$	136	$	-	$	-	$	9	$	308
Munish Rametra		2007	$	250	$	-	$	-	$	-	$	-	$	-	$	12	$	262
General Counsel		2006	$	252	$	-	$	-	$	-	$	-	$	-	$	19	$	271
		2005	$	165	$	15	$	-	$	-	$	-	$	-	$	30	$	210

Notes to Summary Compensation Table

(1) The amounts in column (e) reflect the dollar amounts recognized for financial statement reporting purposes in accordance with SFAS 123(R) for unvested restricted stock held by each executive officer.

(2) The amounts in column (f) reflect the dollar amounts recognized for financial statement reporting purposes in accordance with SFAS 123(R) for unvested stock options held by each executive officer. Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vesting conditions.

(3) The amounts in column (g) reflect actual cash incentives awarded to each executive officer.

(4) The amounts in column (h) represent earnings in the Company’s 401(k) that were contributed by the Company. We do not maintain a pension plan or a defined benefit plan.

(5) The amounts in column (i) reflect the amount for auto allowances.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

2007 Grants of Plan-Based Awards

The following table shows additional information regarding all grants of plan-based awards made to our named executive officers for the year ended June 30, 2007.

GRANTS OF PLAN-BASED AWARDS
									All Other		All Other
									Stock		Option				Exercise		Grant Date
									Awards:		Awards:				or Base		Fair
	Estimated Future Payouts Under								Number of		Number of				Price of		Value of
	Equity Incentive Plan Awards								Shares of		Securities				Option		Stock
	Grant		Threshold		Target		Maximum		Stocks or		Underlying				Awards		and Option
Name	Date		(#)		(#)		(#)		Units (#)		Options (#) (1)				($/Sh) (2)		Awards ($)(3)
Cameron Reid		-		-		-		-		-		-			$	-	$	-
Bob Sutaria		-		-		-		-		-		-			$	-	$	-
Peter Giallarenzo		03/20/07		-		-		-		-		100	(4	)	$	1.62	$	117
Jeff Weiss		03/20/07		-		-		-		-		17	(5	)	$	1.62	$	15
Ken Cappel		03/20/07		-		-		-		-		14	(5	)	$	1.62	$	13
George Aronson		-		-		-		-		-		-			$	-	$	-

Notes to 2007 Grants of Plan-Based Awards Table

(1)	Grant of non performance-based stock options.
(2)	Fair Market Value of stock on the date of grant
(3)	Amounts represent the full grant date fair value as determined under SFAS 123(R). The value of stock options granted is based on the
	grant date present value as calculated using a Black-Scholes option pricing model.
(4)	Options have a ten-year term and are scheduled to vest 20% each on January 8, 2008, 2009, 2010, 2011 and 2012.
(5)	Options have an approximate five-year term and are scheduled to vest 25% each on June 30, 2007, 2008, 2009 and 2010.

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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Outstanding Equity Awards At 2007 Fiscal Year-End

The following table summarizes the equity awards we have made to each of the named executive officers that were outstanding as of June 30, 2007.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
	OPTION AWARDS										STOCK AWARDS
Name	Number of Securities Underlying Unexercised Options (#) Exercisable			Number of Securities Underlying Unexercised Options (#) Unexercisable			Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration Date		Number of Shares of Units of Stock That Have Not Vested (#)		Market Value of Shares of Units of Stock That Have Not Vested ($)		Equity Incentive Plan Awards: Number of Unearned Shares, Units of Other Rights That Have Not Vested (#)		Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested (#)
Cameron Reid		3,000	1		-			-	$	1.23		06/30/10		-		-		-		-
Jeffrey Weiss		60	2		90	3		-	$	1.23		06/30/10		-		-		-		-
		47	2		47	3		-	$	1.23		06/30/11
		4	2		12	3		-	$	1.62		06/30/12
Bhupatlal K. Sutaria		500	4		200	4		-	$	0.68		05/30/13		-		-		-		-
Peter Giallarenzo		-			100	5		-	$	1.62		03/20/17		-		-		-		-
Kenneth Cappel		84	6		66	7		-	$	1.23		06/30/10		-		-		-		-
		38	6		38	7		-	$	1.23		06/30/11
		3	6		10	7		-	$	1.62		06/30/12
George Aronson		-			-									-		-
Estate of Munish Rametra		450	8		-			-	$	0.68		03/31/09		-		-		-		-

Notes to Outstanding Equity Awards at 2007 Fiscal Year-End Table

(1) Represents fully vested options that: (i) are exercisable at $1.23 per share through June 30, 2010 and (ii) were repriced as follows:

options to purchase 2,000 shares of common stock originally granted at $2.24 per share were repriced to $1.23 per share and options to purchase 1,000 shares of common stock originally granted at $3.97 per share were repriced to $1.23 per share at June 30, 2005.

(2) Represents 60 options that are exercisable at $1.23 per share through June 30, 2015, 47 options that are exercisable at $1.23 per share through June 30, 2011, and 4 options that are exercisable at $1.62 through June 30, 2012.

(3) Represents 90 options exercisable at $1.23 per share that have various vesting dates through June 30, 2010 and are exercisable through June 30, 2015, 47 options exercisable at $1.23 per share through June 30, 2011 and 12 options exercisable at $1.62 that have various vesting dates through June 30, 2012.

(4) Represents options that are exercisable at $0.682 per share. These options have the following vesting provisions: 25% of the options vested on January 1, 2005, December 31, 2005, and December 31, 2006, respectively and an additional 25% will vest on December 31, 2007.

(5) Represents options that are exercisable at $1.46 per share. The shares have various vesting dates through January 8, 2012 and are exercisable through March 20, 2017.

(6) Represents 84,000 fully vested repriced options that are exercisable at $1.23 per share through June 30, 2010, 38,250 options exercisable at $1.23 per share through June 30, 2011 and 3,375 options that are exercisable at $1.62 through June 30, 2012. The June 30, 2005 repriced options were originally granted at $1.94 per share.

(7) Represents (a) 104 options that are exercisable at $1.23 per share and vest 41 on June 30, 2008 and June 30, 2009, respectively, and 22 options that vest on June 30, 2010 and (b) 10 options that are exercisable at $1.62 per share and vest 3 on June 30, 2008, June 30, 2009 and 4 on June 30, 2010.

(8) Represents 450 fully vested options that are exercisable at $0.68 per share through March 31, 2009.

78

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

2007 Options Exercised and Stock Vested

The following table summarizes the options exercised and stock vested by our named executive officers during the year ended June 30, 2007.

OPTION EXERCISES AND STOCK VESTED
	OPTION AWARDS								STOCK AWARDS
Name	Number of Shares Aquired On Exercise (#)				Value Realized on Exercise ($)				Number of Shares Aquired On Vesting (#)		Value Realized on Vesting ($)
Cameron Reid		-				-				-		-
Jeffrey Weiss		-				-				-		-
Bhupatlal K. Sutaria		-				-				-		-
Peter Giallarenzo		-				-				-		-
Kenneth Cappel		-				-				-		-
George Aronson		72	(1	)	$	120	(1	)		-		-
Estate of Munish Rametra		-				-				-		-

Notes to 2007 Options Exercised and Stock Vested Table

(1) Represents cashless exercises of 302 options to purchase our common stock. Of the total amount exercised, 108 options were

Incentive Stock Options resulting in the acquisition of 28 shares having a value of $47, and 194 options were Nonqualified Options

resulting in the acquisition of 44 shares and having a value of $73.

2007 Pension Benefits

There were no pension benefits granted to named executive officer during the year ended June 30, 2007.

79

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Nonqualified Deferred Compensation Plans

There were no contributions to any nonqualified defined contribution or other nonqualified deferred compensation plans for any named executive officers during the year ended June 30, 2007.

Employment Agreements

Cameron Reid Agreement. On June 24, 2005, the Company entered into an employment agreement with Cameron Reid for three years, under which his annual base salary is presently $300. Under the terms of the agreement, the executive received an initial annual base salary of $200 together with reimbursement of certain expenses. He will be eligible to receive an annual incentive bonus based on achievement of performance goals set by the Board of Directors or Compensation Committee each year and the incentive bonus for fiscal 2007. Mr. Reid has received fully vested options to purchase 3,000 shares of common stock at $1.23. If Mr. Reid’s employment is terminated for the remaining contract term by us without cause or he resigns for good reason (as defined in the employment agreement), he will receive an amount equal to 3 months base salary (currently totaling $75) and the continuation of health benefits for a period of 3 months.

Bhupatlal Sutaria Agreement. The Company entered into an employment agreement on May 23, 2003 with Bhupatlal Sutaria for the period expiring on December 31, 2007. The Agreement as amended provides for a base salary of $275 salary, auto allowance of $13, reimbursement for cellular telephone and reimbursement for reasonable expenses that conform with Interpharm’s policies and procedures. In July 2007, Mr. Sutaria resigned his position as President of the Company. See Item 13 for details of Mr. Sutaria’s separation agreement.

Peter Giallorenzo Agreement. The Company entered into an agreement with Peter Giallorenzo on January 8, 2007 for a three year term beginning January 15, 2007 to become the Company’s Chief Financial Officer. Mr. Giallorenzo agreement provides for a base salary of $237 and a sign-on bonus of $35. His agreement includes a target annual incentive opportunity of not less than 50% of the Salary (the “Target Annual Bonus”). The amount actually paid shall be determined on the basis of objective performance measures. The agreement also provided for the awarding of options to purchase 100 shares of common stock at $1.62. In July 2007, Mr. Giallorenzo was elected as the Chief Operating Officer and his compensation was increased to $275.

Jeffrey Weiss Agreement. The Company entered into an agreement with Jeffrey Weiss on January 17, 2005 for a three year term beginning April 1, 2005 to become the Company’s Vice President of Sales and Marketing. In 2006, Mr. Weiss was promoted to Executive Vice President. Mr. Weiss’ agreement provides for a base salary of $236, auto reimbursement of $12 per annum, and reimbursement of all necessary business expenses that conform with Interpharm’s policies and procedures.

Ken Cappel Agreement. The Company entered into an agreement with Ken Cappel on February 11, 2005 for a five year term beginning February 28, 2005 to become the Company’s Vice President of Intellectual Property. In 2006, Mr. Cappel was promoted to Vice President - General Counsel. Mr. Cappel’s agreement originally provided for a base salary of $237 (which was subsequently increased to $250), auto reimbursement of $12 per annum, mobile telephone reimbursement, reimbursement of certain home office equipment, and reimbursement of all necessary business expenses that conform with Interpharm’s policies and procedures.

80

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

George Aronson Agreement. The Company entered into an agreement with George Aronson on December 4, 2003 to serve as the Company’s Chief Financial Officer. During the fiscal year ended June 30, 2007, Mr. Aronson was paid a salary of $20 per month and auto reimbursement of $1 per month until his termination in March 2007. In April 2007, the Company entered into a formal separation agreement with Mr, Aronson that provided for a severance of six months.

Surinder Rametra Agreement. The Company entered into an agreement with Surinder Rametra on May 30, 2003 to be an executive providing strategic planning, investor relations, negotiations of strategic alliances and agreements and duties and responsibilities as are from time to time assigned to him by the Chief Executive Officer and/or the Board of Directors. During 2007, Mr. Rametra provided no services to the Company. Mr. Rametra’s agreement provides for a base salary of $150, mobile telephone reimbursement, health care insurance reimbursement of $7, and a automobile allowance of $12 per year. Mr. Rametra’s agreement may not be terminated by the Company without cause and expires December 31, 2007.

Potential Payments Upon Termination or Change in Control

Executive Severance Policy

Our named executive officers all have employment agreements (“Employment Agreements”). The Employment Agreements include executive severance arrangements payable upon a termination of employment other than “for cause” (as defined in their Employment Agreement), retirement, death or disability.

Potential Post-Termination Payments

The following table summarizes the potential payments to each named executive officer under various termination events. The table assumes that the event occurred on June 30, 2007 and the calculations use the closing price of our common stock on June 30, 2007 (the last trading day of 2007) as reported by AMEX, which was $1.29 per share.

81

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Name and Payment Element	Voluntary Termination for Good Reason Unrelated to Corporate Transaction or Change in Control		Retirement		Involuntary Termination Not for Cause and Not Following a Corporate Transaction or Change in Control		Involuntary Termination Following a Corporate Transaction or Change in Control
(a)	(b)		(c)		(d)		(e)
Cameron Reid
Cash Compensation	$	-	$	-	$	-	$	-
Severance	$	75	$	-	$	75	$	75
Equity Awards	$	-	$	-	$	-	$	-
Options	$	180	$	-	$	180	$	180
Benefits and Perequisites	$	-	$	-	$	-	$	-
Bhupatlal Sutaria
Cash Compensation	$	-	$	-	$	-	$	-
Severance	$	-	$	-	$	-	$	-
Equity Awards	$	-	$	-	$	-	$	-
Options	$	305	$	-	$	305	$	305
Benefits and Perequisites	$	-	$	-	$	-	$	-
Peter Giallarenzo
Cash Compensation	$	-	$	-	$	-	$	-
Severance	$	594	$	-	$	594	$	594
Equity Awards	$	-	$	-	$	-	$	-
Options	$	6	$	-	$	6	$	6
Benefits and Perequisites	$	-	$	-	$	-	$	-
Jeffrey Weiss
Cash Compensation	$	-	$	-	$	-	$	-
Severance	$	29	$	-	$	59	$	59
Equity Awards	$	-	$	-	$	-	$	-
Options	$	16	$	-	$	16	$	16
Benefits and Perequisites	$	-	$	-	$	-	$	-
Ken Cappel
Cash Compensation	$	-	$	-	$	-	$	-
Severance	$	62	$	-	$	62	$	62
Equity Awards	$	-	$	-	$	-	$	-
Options	$	14	$	-	$	14	$	14
Benefits and Perequisites	$	-	$	-	$	-	$	-

82

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Notes to Post-Termination Payments Table

(1) The Company does not have a formal severance plan. Under the Employment Agreements of the specified executives, severance rights range from three months to two years salary.

Director Compensation

Dr. Sutaria, the only employee member of the Board of Directors, received no extra compensation for his service on the Board of Directors. Effective November 2006, a standard compensation package was adopted for all non-employee members of our Board of Directors based upon a review of similar sized companies in the pharmaceutical industry as follows:

·15 fully vested stock options as of the date of appointment to the Board;

·10 options as of the first day of a year served;

·An annual retainer of $10;

·$1.5 for each meeting day of the Board of Directors attended (in person);

·A fee of not greater than $0.5 for each meeting day of the Board of Directors attended (by telephone) and determined by the Compensation Committee Chairperson;

·$0.75 for each committee meeting attended (in person or by telephone);

In addition to the fees described above: (i) the chairs of our Audit Committee, Compensation Committee, receive an additional annual retainer of $5 respectively; (ii) the members of our Audit Committee (other than the chair) receive an additional annual retainer of $1; (iii)   David Reback and Stewart Benjamin granted 16 fully vested options and $10 for all past Board service provided; and (iv) Kennith Johnson granted 40 fully vested options for past Board service provided.

83

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Director Compensation

The following Director Compensation Table sets forth summary information concerning the compensation paid to our non-employee directors in fiscal 2007 for services to our company.

DIRECTOR COMPENSATION
Name	Fees Earned or Paid in Cash ($) (1)		Stock Awards ($)		Option Awards ($) (2)		Non-Equity Incentive Plan Compensation ($)		Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)		All Other Compensation ($)				Total ($)
Stewart Benjamin	$	34	$	-	$	25	$	-	$	-	$	-			$	59
Kennith Johnson	$	48	$	-	$	49	$	-	$	-	$	-			$	97
David Reback	$	38	$	-	$	25	$	-	$	-	$	-			$	63
Richard Miller	$	30	$	-	$	24	$	-	$	-	$	112	(3	)	$	166
Joan Neuscheler	$	23	$	-	$	24	$	-	$	-	$	-			$	47

Notes to 2007 Options Exercised and Stock Vested Table

(1)	Amounts represent fees paid for Board Meetings and sub-committee meetings, as well as fees for Board membership and membership in certain sub-committees.
(2)	Amounts represent the full grant date fair value as determined under SFAS 123(R). The value of stock options granted is based on grant date present value as calculated using a Black-Scholes option pricing model.
(3)	Amount represents monies paid to a consulting firm of which Mr. Miller is a principal.

Compensation Committee Interlocks and Insider Participation

None of the Compensation Committee members is, or was ever, an officer or employee of the Company or any of its subsidiaries, nor did any of the Compensation Committee members have any relationship requiring disclosure by the Company under any subsection of Item 404 of Regulation S-K promulgated by the SEC. During the last fiscal year, none of the executive officers of the Company served on the board of directors or on the compensation committee of any other entity, any of whose executive officers served on the Board.

Compensation Committee Report

The Compensation Committee, comprised of independent directors with the exception of Richard J. Miller, reviewed and discussed the Compensation Discussion and Analysis set forth above with the Company’s management. Based on such review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2007 and in the proxy statement.

84

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

COMPENSATION COMMITTEE:

Richard J. Miller (Chairman)

Kennith Johnson

Joan Neuscheler

David Reback

85

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth as of November 12, 2007, certain information with respect to the beneficial ownership of our voting securities by (i) any person known by us to be the beneficial owner of more than 5% of our voting securities, (ii) each director, (iii) each executive officer named in the Summary Compensation table appearing in Item 11. “Executive Compensation” and (iv) all directors and executive officers as a group.

Name and			Amount and
Address of	Title of		Nature of Beneficial			Percent of
Beneficial Owner	Class		Ownership			Class (1)
Maganlal K. Sutaria		Common Stock		1,243 (2	)		1.86	%
75 Adams Avenue
Hauppauge, NY 11788
Rajs Holdings I, LLC(3)		Common Stock		15,526 (3	)		23.46	%
75 Adams Avenue
Hauppauge, NY 11788
Bhupatlal K. Sutaria		Common Stock		804 (4	)		1.20	%
75 Adams Avenue
Hauppauge, NY 11788
Rametra Holdings I, LLC		Common Stock		8,015 (5	)		12.11	%
75 Adams Avenue
Hauppauge, NY 11788
David Reback		Common Stock		61 (6	)		*
75 Adams Avenue
Hauppauge, NY 11788
Stewart Benjamin		Common Stock		46 (7	)		*
75 Adams Avenue
Hauppauge, NY 11788
Ravis Holdings I, LLC		Common Stock		10,519 (8	)		15.89	%
75 Adams Avenue
Hauppauge, NY 11788
Perry Sutaria		Common Stock		44,094 (9	)		66.62	%
75 Adams Avenue
Hauppauge, NY 11788
Kennith C. Johnson		Common Stock		50 (10	)		*
75 Adams Avenue
Hauppauge, NY 11788

86

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

Cameron Reid	Common Stock	3,175 (11	)	4.59	%
75 Adams Avenue
Hauppauge, NY 11788
P&K Holdings, LLC	Common Stock	8,015 (12	)	12.11	%
75 Adams Avenue
Hauppauge, NY 11788
Richard J. Miller	Common Stock	25 (13	)	*
75 Adams Avenue
Hauppauge, NY 11788
Joan P. Neuscheler	Common Stock	9,310 (14	)	12.40%	%
c/o Tullis Dickerson Co., Inc.
Two Greenwich Plaza
Greenwich, Connecticut 06830
Tullis Dickerson Capital Focus III, L.P.	Common Stock	9,285 (15	)	12.37	%
Two Greenwich Plaza
Greenwich, Connecticut 06830
Aisling Capital II, L.P.	Common Stock	9,046 (16	)	12.02	%
888 Seventh Avenue, 30th Floor
New York, New York 10106
George Aronson	Common Stock	72		*
75 Adams Avenue
Hauppauge, NY 11788
Peter Giallorenzo	Common Stock	20 (17	)	*
75 Adams Avenue
Hauppauge, NY 11788
Kenneth Cappel	Common Stock	126 (18	)	*
75 Adams Avenue
Hauppauge, NY 11788
Jeffrey Weiss	Common Stock	236 (19	)	*
75 Adams Avenue
Hauppauge, NY 11788
All Directors and	Common Stock	17,784 (20	)	22.05	%
Officers as a
Group (13 persons)

* Less than 1%

87

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

(1) Computed based upon a total of 66,190 shares of common stock outstanding as of November 12, 2007.

(2) The foregoing figure reflects the ownership of 543 shares of common stock and vested options to acquire 700 shares. It does not include 350 options held by his spouse and 1,874 shares of Series A-1 Preferred Stock held by an annuity he controls.

(3) Raj Sutaria is the sole member of Rajs Holdings I, LLC, which holds 15,526 shares of common stock. The sole manager of Rajs Holdings I, LLC is Perry Sutaria.

(4) The foregoing figure includes vested options to acquire 700 shares, 104 shares of common stock held directly by Mr. Sutaria, but does not include 400 options held by his spouse.

(5) Mona Rametra is the sole member of Rametra Holdings I, LLC, which holds 8,015 shares of common stock. The sole manager of Rametra Holdings I, LLC is Perry Sutaria.

(6) The foregoing figure comprises vested options to acquire 61 shares of common stock.

(7) The foregoing figure comprises 46 shares of common stock which may be acquired upon exercise of currently exercisable options.

(8) Ravi Sutaria is the sole member of Ravis Holdings I, LLC, which holds 10,519 shares of common stock. The sole manager of Ravis Holdings I, LLC is Perry Sutaria.

(9) Includes an aggregate of 42,075 shares of common stock owned directly by the following New York limited liability companies of which Perry Sutaria is the sole manager: P&K Holdings, LLC; Rajs Holdings I, LLC; Ravis Holdings I, LLC; and Rametra Holdings I, LLC. Does not include his beneficial interest in Series A-1 Preferred Stock held by a trust of which he is a beneficiary. The balance of 2,019 shares are shares held directly by Perry Sutaria.

(10) The foregoing figure comprises vested options to acquire 50 shares of common stock.

(11) The foregoing figure includes vested options to purchase 3,000 shares of common stock

and 175 shares held directly Mr. Reid.

(12) Perry Sutaria is the sole member and manager of P&K Holdings, LLC, which holds 8,015 shares of common stock.

(13) The foregoing figure comprises vested options to acquire 25 shares of common stock.

(14) Includes all 9,285 shares beneficially owned by Tullis-Dickerson Capital Focus III, L.P. (“TD III”) as set forth in the table. Ms. Neuscheler is a principal of TD III and shares voting and dispositive power with respect to such shares, but disclaims beneficial ownership of such shares. Also includes vested options to acquire 25 shares of common stock.

88

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

(15) Includes an aggregate of 6,520 shares of common stock issuable upon conversion of Series B-1 Stock held TD III and 2,282 shares of common stock issuable upon exercise of warrants held by TD III, and 483 shares held as payment for dividends earned. Ms. Neuscheler is a principal of TD III. Ms. Neuscheler disclaims beneficial ownership of such shares within the meaning of SEC Rule 13d-3.

(16) Includes an aggregate of 6,520 shares of common stock issuable upon conversion of Series B-1 Stock and 2,282 shares of common stock issuable upon exercise of warrants and 244 shares held as payments for dividends earned.

(17) The foregoing figure includes vested options to acquire 20 shares of common stock, but does not include options to acquire 80 shares of common stock which are not exercisable within 60 days after November 12, 2007.

(18) The foregoing figure includes vested options to acquire 126 shares of common stock, but does not include options to acquire an aggregate of 114 shares of common stock which are not exercisable within 60 days after November 12, 2007

(19) The foregoing figure comprises vested options to acquire 111 shares of common stock and 125 shares acquired through a subscription agreement, but does not include options to acquire an aggregate of 149 shares of common stock which are not exercisable within 60 days after November 12, 2007.

(20) The foregoing figure includes vested options to acquire an aggregate of 5,673 shares. The foregoing also includes the shares referred to in footnote (14).

89

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Lease

Our 100 square foot facility at 75 Adams Avenue in Hauppauge, New York is owned by Sutaria Family Realty, LLC which is owned by Perry Sutaria, Raj Sutaria and Mona Rametra. Interpharm, Inc. is obligated to pay minimum annual rent of $660, plus property taxes, insurance, maintenance and other expenses related to the leased facility.

Investment in APR, LLC.

In February and April 2005, we purchased 5.0 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 us, 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 us 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. 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 our major customers and suppliers. As a result, we currently own 10 Interests out of the 100 Interests now outstanding.

In accordance with the terms of the Purchase Agreements, we have granted to Reid and Lomans each a proxy to vote 5 of the Interests owned by us on all matters on which the holders of Interests may vote. Our 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 deliberations on this matter. We are accounting for our investment in APR pursuant to the cost method of accounting.

Purchase from APR, LLC

During the year ended June 30, 2007, the Company placed an order valued at $160 for a certain raw material from APR. The Company currently purchases the same raw material from an overseas supplier at a price 37% greater than the price APR is currently willing to offer. The Company believes sourcing the raw material from APR would not only resolve intermittent delays in obtaining this material from overseas but would also improve gross margins on products using the raw material. 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 June 30, 2007, the Company has advanced $80 to APR in connection with this order.

90

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

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” exercise feature with respect to all of his 700 vested options which will expire on December 10, 2007.

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 which will expire on December 10, 2007.

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 will expire on December 10, 2007.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES.

The following table sets forth the fees billed to us for the fiscal years ended June 30, 2007 and June 30, 2006 by Marcum & Kliegman, LLP:

	Fiscal Year		Fiscal Year
	Ended		Ended
	June 30, 2007		June 30, 2006
Audit Fees	$	184	$	233
Audit Related Fees (1)		40		40
Tax Fees (2)		27		26
Other (3)		2		0

(1) Consists of fees for services relating to review of proposed accounting treatments and documents filed with the SEC.

(2) Consists of tax filing and tax related compliance and other advisory services.

(3) Consists of attendance at Board of Directors meetings.

91

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)            (1)           FINANCIAL STATEMENTS

The following financial statements of Interpharm Holdings, Inc., are included herein:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of June 30, 2007 and June 30, 2006

Consolidated Statements of Operations for the years ended June 30, 2007, 2006 and 2005

Consolidated Statement of Stockholders’ Equity for the years ended June 30, 2007, 2006 and 2005

Consolidated Statements of Comprehensive (Loss) Income for the years ended June 30, 2007, 2006 and 2005.

Consolidated Statements of Cash Flows for the years ended June 30, 2007, 2006 and 2005

(3) EXHIBITS

(b) EXHIBITS required by Item 601 of Regulation S-K

Number	Description
3.1	Certificate of Incorporation of the Company; (1)
3.2	Certificate of Amendment of Certificate of Incorporation, filed October 21, 1992; (1)
3.3	By-laws of the Company; (1)
3.4	Certificate of Amendment of Certificate of Incorpo ration, filed December 22, 1992; (1)
3.5	Certificate of Powers, Designations, Preferences and Rights of the
	Series A-1 Convertible Preferred Stock; (1)
3.6	Certificate of Powers, Designations, Preferences and Rights of the Series B-1 Convertible Preferred Stock; (6)
3.7	Certificate of Powers, Designations, Preferences and Rights of the
4.1	Series C-1 Convertible Preferred Stock; (7) Form of Common Stock Certificate; (1)
4.2	Form of Interpharm Holdings Inc. and Interpharm, Inc. Junior
	Subordinated Secured 12% Note Due 2010
4.3	Form of Interpharm Holdings, Inc. and Interpharm, Inc. Secured 12% Note Due 2009
10.3	Form of Employment Agreements for Interpharm Holdings, Inc. employees (3);
10.6	Supply Agreement between Interpharm Holdings, Inc. and Tris Pharma, Inc. for Development of Liquid Products (5);
10.7	February 24, 2005 Agreement between Interpharm Holdings, Inc. and Tris Pharma, Inc. for development of Solid Products (5);

92

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

 

10.8	July 6, 2005 amendment to February 24, 2005 Agreement between Interpharm Holdings, Inc. and Tris Pharma, Inc. for development of Solid Products (5);
10.9	Supply Agreement between Interpharm Holdings, Inc. and Centrix Pharmaceutical, Inc. (4)
10.10	Security Agreement, dated November 7, 2007, by and among Interpharm Holdings, Inc., Interpharm Inc., and Sutaria Family Realty, LLC
10.11	Consent and Waiver Agreement, dated November 7, 2007, by and among Interpharm Holdings, Inc., Tullis-Dickerson Capital Focus III, L.P., Aisling Capital II, L.P., P&K P&K Holdings I, LLC, RAMETRA HOLDINGS I, LLC (“Rametra Holdings”), a New York Limited Liability Company, Rametra Holdings I, LLC, Perry Sutaria, Raj Sutaria and Cameron Reid
10.12	Security Agreement, dated November 14, 2007, by and among Interpharm
	Holdings Inc., Interpharm, Inc. and Tullis-Dickerson Capital Focus III, L.P.,
10.13	Security Purchase Agreement, dated November 14, 2007, by and among Interpharm Holdings Inc., Interpharm, Inc. and the Purchasers set forth on the signature page annexed thereto.
21.1	List of Subsidiaries;
23.1	Consent of Marcum & Kliegman, LLP;
31.1	Certification of Cameron Reid pursuant to Exchange Act Rules 13a-15(d) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;
31.2	Certification of Peter Giallorenzo pursuant to Exchange Act Rules 13a-15(d) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002;

Footnotes:

1. Incorporated by reference from Registration Statement on Form SB-2 registration no. 33-54356 filed by the Company with the Securities and Exchange Commission on November 9, 1992.

2. Annexed to our Current Report on Form 8-K filed on November 26, 2002 and incorporated herein by reference;

3. Annexed to our Transition Report on Form 10-K filed on September 29, 2003 and incorporated herein by reference.

4. Annexed to our Current Report on Form 8-K filed on July 18, 2005 and incorporated herein by reference.

5. Annexed to our Annual Report on Form 10-K filed on September 28, 2005 and incorporated herein by reference.

6. Annexed to our Current Report on Form 8-K filed on June 2, 2006 and incorporated herein by reference.

7. Annexed to our Annual Report on Form 10-K filed on September 28, 2006 and incorporated herein by reference.

93

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

(In thousands, except per share data)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.
	By:	/s/ Cameron Reid
		Cameron Reid, Chief Executive Officer
Dated: November 15, 2007

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ Peter Giallorenzo	November 15, 2007
Peter Giallorenzo, Chief Financial Officer

/s/ Dr. Maganlal K. Sutaria	November 15, 2007
Dr Maganlal K. Sutaria, Chairman of the Board of Directors

/s/Stewart Benjamin	November 15, 2007
Stewart Benjamin, Director

/s/David Reback	November 15, 2007
David Reback, Director

/s/ Kennith C Johnson	November 15, 2007
Kennith C Johnson, Director

/s/ Rick Miller	November 15, 2007
Rick Miller, Director

/s/ Joan Neuscheler	November 15, 2007
Joan Neuscheler

94

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

CONTENTS

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets	F-2
Consolidated Statements of Operations	F-4
Consolidated Statements of Stockholders’ Equity	F-5
Consolidated Statements of Comprehensive (Loss) Income	F-6
Consolidated Statements of Cash Flows	F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-10

REPORT OF INDEPENDENT REGISTERED PUBLIC

ACCOUNTING FIRM

To the Audit Committee of

Interpharm Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Interpharm Holdings, Inc. and Subsidiaries (the “Company”) as of June 30, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, comprehensive (loss) income and cash flows for each of the three years in the period ended June 30, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Interpharm Holdings, Inc. and Subsidiaries at June 30, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three years in the period ended June 30, 2007, in conformity with accounting principles generally accepted in the United States of America.

 /s/ Marcum & Kliegman LLP

Melville, New York

November 14, 2007

F - 1

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

ASSETS

	June 30,
	2007		2006
CURRENT ASSETS
Cash	$	72	$	1,438
Accounts receivable, net		12,945		14,212
Inventories		17,295		8,706
Prepaid expenses and other current assets		1,794		1,316
Deferred tax assets		21		1,321
Total Current Assets		32,127		26,993
Land, building and equipment, net		34,498		29,069
Deferred tax assets		5,954		4,849
Investment in APR, LLC		1,023		1,023
Other assets		772		933
TOTAL ASSETS	$	74,374	$	62,867

The accompanying notes are an integral part of these consolidated financial statements.

F - 2

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

LIABILITIES AND STOCKHOLDERS’ EQUITY

	June 30,
	2007			2006
CURRENT LIABILITIES
Current maturities of long-term debt	$	12,057		$	1,686
Accounts payable, accrued expenses and other liabilities		18,542			12,650
Deferred revenue		-			3,399
Total Current Liabilities		30,599			17,735
OTHER LIABILITIES
Long-term debt, less current maturities		14,488			13,952
Contract termination liability		1,361			-
Other liabilities		-			125
Total Other Liabilities		15,849			14,077
TOTAL LIABILITIES		46,448			31,812
COMMITMENTS AND CONTINGENCIES
Series B-1 Redeemable Convertible Preferred Stock: 15 shares authorized; issued and outstanding - 10 at June 30, 2007; liquidation preference of $10,000		8,155			8,225
Series C-1 Redeemable Convertible Preferred Stock: 10 shares authorized; issued and outstanding - 10 at June 30, 2007; liquidation preference of $10,000		8,352			-
STOCKHOLDERS’ EQUITY
Preferred stocks, 10,000 shares authorized; issued and outstanding – 5,132 and 5,141, respectively; aggregate liquidation preference of $3,588 and $4,291, respectively		51			51
Common stock, $0.01 par value,150,000 shares authorized; shares issued – 65,886 and 64,537 respectively.		659			645
Additional paid-in capital		29,530			24,196
Stock subscription receivable		-			(90	)
Accumulated other comprehensive income		10			98
Accumulated Deficit		(18,831	)		(2,070	)
TOTAL STOCKHOLDERS’ EQUITY		11,419			22,830
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	74,374		$	62,867

The accompanying notes are an integral part of these consolidated financial statements.

F - 3

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Year Ended June 30,
	2007			2006			2005
SALES, Net	$	75,587		$	63,355		$	39,911
COST OF SALES (including related party rent expense of $587, $408, and $408 for the fiscal years ended June 30, 2007, 2006, and 2005 respectively)		53,920			45,927			30,839
GROSS PROFIT		21,667			17,428			9,072
OPERATING EXPENSES
Selling, general and administrative		13,340			11,449			5,092
Related party rent		103			72			72
Research and development		18,962			10,674			4,003
TOTAL OPERATING EXPENSES		32,405			22,195			9,167
OPERATING LOSS		(10,738	)		(4,767	)		(95	)
OTHER (EXPENSES) INCOME
Contract termination expense		(1,655	)		—			—
Gain on sale of marketable securities		—			—			9
Loss on sale of fixed asset		(99	)		(5	)		—
Interest expense, net		(1,275	)		(718	)		(136	)
Asset impairment charge		(101	)		—			—
TOTAL OTHER EXPENSE		(3,130	)		(723	)		(127	)
LOSS BEFORE INCOME TAXES		(13,868	)		(5,490	)		(222	)
INCOME TAX EXPENSE (BENEFIT)		190			(1,700	)		(73	)
NET LOSS		(14,058	)		(3,790	)		(149	)
Preferred stock beneficial conversion feature		1,094			1,418			—
Preferred stock dividends		1,651			312			166
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS	$	(16,803	)	$	(5,520	)	$	(315	)
LOSS PER SHARE ATTRIBUTABLE TO COMMONSTOCKHOLDERS
Basic and Diluted loss per share	$	(0.26	)	$	(0.15	)	$	(0.01	)
Basic and Diluted weighted average shares and equivalent shares outstanding		65,242			36,521			25,684

The accompanying notes are an integral part of these consolidated financial statements.

F - 4

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

													Additional			Stock			Accumulated Other			Retained Earnings									Total
	Preferred Stock						Common Stock						Paid-In			Subscription			Comprehensive			Accumulated									Stockholders
	Shares			Amount			Shares			Amount			Capital			Receivable			Income (Loss)			(Deficit)			Shares			Amount			Equity
BALANCE – June 30, 2004		6,903			69			25,591			256			19,463			—			—			3,792			624			(798	)		22,782
Shares issued for options exercised		—			—			1,097			11			617			—			—			—			—			—			628
Tax benefit in connection with exercise of stock options		—			—			—			—			153						—			—			—			—			153
Conversion of Series C preferred stock		(2	)		—			—			—			—			—			—			—			—			—			—
Conversion of Series K preferred stock		(293	)		(3	)		6,275			62			(59	)		—			—			—			—			—			—
Retirement of treasury stock		—			—			(624	)		(6	)		(792	)		—			—			—			(624	)		798			—
Dividends declared – Series A-1		—			—			—			—			—			—			—			(303	)		—			—			(303	)
Net loss		—			—			—			—			—			—			—			(149	)		-			—			(149	)
BALANCE – June 30, 2005		6,608			66			32,339			323			19,382			—			—			3,340			-			-			23,111
Redemption of Series A preferred stock		(1	)		—			—			—			—			—			—			—			—			—			—
Conversion of Series C preferred stock		(1	)		—			—			—			—			—			—			—			—			—			—
Conversion of Series K preferred stock		(1,465	)		(15	)		31,373			314			(299	)		—			—			—			—			—			—
Common stock subscribed		—			—			125			1			132			(133	)		—			—			—			—			—
Collections on common stock subscribed		—			—			—			—			—			43			—			—			—			—			43
Dividends declared – Series A-1		—			—			—			—			—			—			—			(124	)		—			—			(124	)
Series B-1 Preferred beneficial conversion feature		—			—			—			—			1,418			—			—			(1,418	)		—			—			—
Accrued dividends – Series B-1		—			—			—			—			—			—			—			(78	)		—			—			(78	)
Fair value of warrants issued		—			—			—			—			1,704			—			—			—			—			—			1,704
Amortization of unearned stock based compensation		—			—			—			—			1,195			—			—			—			—			—			1,195
Shares issued for options exercised		—			—			700			7			470			—			—			—			—			—			477
Tax benefit in connection with exercise of options		—			—			—			—			79			—			—			—			—			—			79
Stock options issued in settlement of contractual  obligations		—			—			—			—			115			—			—			—			—			—			115
Change in fair value of interest rate swap		—			—			—			—			—			—			98			—			—			—			98
Net loss		—			—			—			—			—			—			—			(3,790	)		—			—			(3,790	)
BALANCE – June 30, 2006		5,141			51			64,537			645			24,196			(90	)		98			(2,070	)		—			—		$	22,830
Accrued dividends – Series B-1		—			—			—			—			—			—			—			(206	)		—			—			(206	)
Accrued dividends – Series C-1		—			—			—			—			—			—			—			(206	)		—			—			(206	)
Series C-1 Preferred beneficial conversion feature		—			—			—			—			1,094			—			—			(1,094	)		—			—			—
Series B-1 dividends paid with common stock		—			—			420			4			692			—			—			(619	)		—			—			77
Series C-1 dividends paid with common stock								245			3			451			—			—			(454	)		—			—			—
Dividends declared – Series A-1		—			—			—			—			—			—			—			(124	)		—			—			(124	)
Shares issued for options exercised		—			—			675			7			386			—			—			—			—			—			393
Conversion of Series A preferred stock		(7	)		—			7			—			—			—			—			—			—			—			—
Conversion of Series B preferred stock		(2	)		—			2			—			—			—			—			—			—			—			—
Fair value of warrants issued		—			—			—			—			1,641			—			—			—			—			—			1,641
Stock based compensation and modification expense		—			—			—			—			1,070			—			—			—			—			—			1,070
Collections on stock subscription receivable		—			—			—			—			—			90			—			—			—			—			90
Change in fair value of interest rate swap		—			—			—			—			—			—			(88	)		—			—			—			(88	)
Net loss		—			—			—			—			—			—			—			(14,058	)		—			—			(14,058	)
BALANCE– June 30, 2007		5,132		$	51			65,886		$	659		$	29,530		$	—		$	10		$	(18,831	)		—		$	—		$	11,419

The accompanying notes are an integral part of these consolidated financial statements.

F - 5

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

	Year Ended June 30,
	2007			2006			2005
NET LOSS	$	(14,058	)	$	(3,790	)	$	(149	)
OTHER COMPREHENSIVE (LOSS) INCOME
Change in fair value of interest rate swap		(88	)		98			—
TOTAL COMPREHENSIVE LOSS	$	(14,146	)	$	(3,692	)	$	(149	)

The accompanying notes are an integral part of these consolidated financial statements.

F - 6

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Year Ended June 30,
	2007			2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(14,058	)	$	(3,790	)	$	(149	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Loss on sale of marketable securities		—			—			(9	)
Bad debt expense		55			46			—
Accreted non-cash interest expense		87			—			—
Asset impairment charge		101			—			—
Depreciation and amortization		2,554			1,534			1,248
Deferred tax expense (benefit)		195			(1,678	)		(78	)
Contract termination expense		1,655
Stock based compensation expense		1,070			1,195			—
Excess tax benefit from exercise of stock options		—			(79	)		—
Loss on disposal of fixed assets		99			5			—
Write-down of inventory		1,157			—			—
Changes in operating assets and liabilities:
Accounts receivable		1,212			(5,974	)		(814	)
Inventories		(9,747	)		235			(3,411	)
Prepaid expenses and other current assets		(502	)		(780	)		(703	)
Deferred revenue		(3,399	)		3,399			—
Accounts payable, accrued expenses and other liabilities		5,416			6,688			1,563
TOTAL ADJUSTMENTS		(47	)		4,591			(2,204	)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES		(14,105	)		801			(2,353	)
CASH FLOWS FROMINVESTING ACTIVITIES
Purchases of land, building and equipment		(8,003	)		(6,833	)		(8,112	)
Deposits and other long term assets		(442	)		(1,309	)		(561	)
Sale of fixed assets		149			—			—
Investment in APR, LLC		—			—			(1,023	)
Proceeds from sale of marketable securities		—			—			46
NET CASH USED IN INVESTING ACTIVITIES	$	(8,296	)	$	(8,142	)	$	(9,650	)

The accompanying notes are an integral part of these consolidated financial statements.

F - 7

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued 

(In thousands)

	Year Ended June 30,
	2007			2006			2005
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds (Repayments) of bank line of credit, net	$	9,866		$	(1,315	)	$	(425	)
Proceeds from long-term debt		2,780			570			9,970
Repayments of long-term debt		(1,893	)		(776	)		(339	)
Proceeds from sale of Series B-1 preferred stock and warrants, net		—			9,928			—
Expenditures relating to sale of Series B-1 preferred stock and warrants		(70	)		—			—
Proceeds from sale of Series C-1 preferred stock and warrants, net		9,993			—			—
Payment of Series A-1 preferred stock dividends		(124	)		(248	)		(179	)
Collections on stock subscription receivable		90			43			—
Payment of financing costs		—			(515	)		—
Proceeds from options exercised		393			477			627
Excess tax benefit from exercise of stock options		—			79			—
NET CASH PROVIDED BY FINANCING ACTIVITIES		21,035			8,243			9,654
NET (DECREASE) INCREASE IN CASH		(1,366	)		902			(2,349	)
CASH – Beginning		1,438			536			2,885
CASH – Ending	$	72		$	1,438		$	536

The accompanying notes are an integral part of these consolidated financial statements.

F - 8

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued

(in thousands)

	Year Ended June 30,
	2007			2006		2005
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest	$	1,303		$	657	$	99
Income Taxes	$	—		$	15	$	61
Non-Cash Investing and Financing Activities:
Tax benefit in connection with exercise of stock options	$	—		$	79	$	153
Series B-1 dividends paid with common stock	$	696		$	—	$	—
Series C-1 dividends paid with common stock	$	454		$	—	$	—
Issuance of common stock in exchange for subscription receivable	$	—		$	133	$	—
Reclassification of equipment deposits to building and equipment	$	410		$	—	$	—
Acquisition of machinery and equipment in exchange for capital lease payable	$	156		$	128	$	—
Declaration of Series A-1 preferred dividends:	$	—		$	124	$	303
Accrual of Series B-1 preferred dividends	$	206		$	78	$	—
Accrual of Series C-1 preferred dividends	$	206		$	—	$	—
Repayment of debt with proceeds from new credit facility	$	—		$	20,445	$	—
Change in fair value of interest rate swap	$	(88	)	$	98	$	—
Conversion of preferred stock to common stock:
Series C	$	—		$	—	$	2
Series K	$	—		$	15	$	3

The accompanying notes are an integral part of these consolidated financial statements.

F - 9

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies

Nature of Business

Interpharm Holdings, Inc. and Subsidiaries (the “Company”), through one of its wholly-owned subsidiaries, 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.

Principles of Consolidation

The consolidated financial statements include the accounts of Interpharm Holdings, Inc. and its wholly-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the United States. All intercompany transactions and balances are eliminated in consolidation.

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 consolidated financial statements as reductions to revenues. Accounts receivable are presented net of allowances relating to the above provisions of $4,865 and $2,315 at June 30, 2007 and 2006, respectively.

The Company purchased raw materials from one supplier for the year ended June 30, 2007 and two suppliers for the years ended June 30, 2006 and 2005, which are manufactured into finished goods and sold back to this supplier as well as to other customers. The Company can, and does, 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,” the Company recorded sales to, and purchases from, this supplier on a gross basis. Sales and purchases were recorded on a gross basis since the Company (i) has a risk of loss associated with the raw materials purchased, (ii) converts the raw material into a finished product based upon Company developed specifications, (iii) has other sources of supply of the raw material, and (iv) has credit risk related to the sale of such product to the suppliers. For the year ended June 30, 2007, the Company purchased raw materials from this supplier totaling approximately $10,714, and sold finished goods to this supplier totaling approximately $1,054. For the years ended June 30, 2006 and 2005, the Company purchased raw materials from two suppliers, which were manufactured into finished goods and sold back to these suppliers totaling approximately $10,608 and $9,251, respectively, and sold finished goods to such suppliers totaling approximately $6,110, and $17,414, respectively. These purchase and sales transactions are recorded at fair value in accordance with EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with the Same Counterparty”.

In addition, the Company is party to supply agreements with certain pharmaceutical companies under which, in addition to the selling price of the product, the Company receives payments based on sales or profits associated with these products realized by its customer. The Company recognizes revenue related to the initial selling price upon shipment of the products as the selling price is fixed and determinable and no right of return exists. The additional revenue component of these agreements are 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 $594 and $620 at June 30, 2007 and 2006, respectively, are included in “Accounts receivable, net” in the accompanying Consolidated Balance Sheets.

F - 10

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies, continued

Sales Returns and Allowances

At the time of sale, the Company simultaneously records estimates for various costs, which reduce product sales. These costs include estimates of chargebacks and other sales allowances. In addition, the Company records allowances for rebates, including Medicaid rebates and shelf-stock adjustments when the conditions are appropriate. Estimates for sales allowances such as chargebacks are based on a variety of factors including actual return experience of that product or similar products, rebate arrangements for each product, and estimated sales by our wholesale customers to other third parties who have contracts with the Company. Actual experience associated with any of these items may be different than the Company’s estimates. The Company regularly reviews the factors that influence its estimates and, if necessary, makes adjustments when it believes that actual product returns, credits and other allowances may differ from established reserves.

Sales Incentives

In accordance with the terms and conditions of an agreement entered into during the fiscal year ended June 30, 2006, the Company has offered a sales incentive to one of its customers in the form of an incentive volume price adjustment. The Company accounts for sales incentives in accordance with EITF 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of Vendor's Products)" (“EITF 01-9”). The terms of this volume based sales incentive required the customer to purchase a minimum quantity of the Company's products during a specified period of time. The incentive offered was based upon a fixed dollar amount per unit sold to the customer. The Company made an estimate of the ultimate amount of the incentive the customer would earn based upon past history with the customer and other facts and circumstances. The Company had the ability to estimate this volume incentive price adjustment, as there did not exist a relatively long period of time for the particular adjustment to be earned. Any change in the estimated amount of the volume incentive was recognized immediately using a cumulative catch-up adjustment. In accordance with EITF 01-9, the Company recorded the provision for this sales incentive when the related revenue is recognized. The Company's sales incentive liability may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for these arrangements. Therefore, although the Company makes its best estimate of its sales incentive liability, many factors, including significant unanticipated changes in the purchasing volume of its customer, could have significant impact on the Company's liability for sales incentives and the Company's reported operating results. The specific terms of this agreement which related to sales incentives expired in October 2006. For the year ended June 30, 2007, the Company recognized previously deferred sales incentive revenue of $3,399 related to this agreement.

F - 11

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies, continued

Earnings Per Share

Basic earnings (loss) per share (“EPS”) of common stock is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the amount of net income (loss) for the period available to each share of common stock outstanding during the reporting period, giving effect to all potentially dilutive shares of common stock from the potential exercise of stock options and warrants and conversions of convertible preferred stocks. In accordance with Emerging Issues Task Force (“EITF”) Issue No. 03-6, “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share,” during the fiscal year ended June 30, 2006, in periods when there was net income and Series K preferred stock was outstanding, the Company used the Two-Class Method to calculate the effect of the participating Series K on the calculation of basic EPS and the if-converted method was used to calculate the effect of the participating Series K on diluted EPS. In periods when there was a net loss, the effect of the participating Series K was excluded from both basic and diluted EPS. Additionally, in May 2006, the Series K preferred stock was converted into the Company’s common stock; therefore the use of the Two-Class Method is not required for the year ended June 30, 2007.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all short-term investments with original maturities of three months or less to be cash equivalents. From time to time the Company maintains cash balances in excess of the FDIC insurance limit.

Allowance for Doubtful Accounts

The allowance for doubtful accounts reflects management’s best estimate of probable losses inherent in the account receivable balance. Management determines the allowance based on known troubled accounts, historical experience and other currently available evidence.

Inventories

Inventories are valued at the lower of cost (first-in, first-out basis) or market value. Losses from the write-down of damaged, nonusable, or otherwise nonsalable inventories are recorded in the period in which they occur.

Land, Building and Equipment

Land, building and equipment is recorded at cost. Maintenance and repairs are charged to expense as incurred, costs of major additions and betterments are capitalized. When equipment is sold or otherwise disposed of, the cost and related accumulated depreciation is eliminated from the accounts and any resulting gain or loss is reflected in operations.

F - 12

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies, continued

Depreciation and Amortization

Depreciation is recorded on a straight-line basis over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the shorter of their useful lives or the terms of the respective leases.

Capitalization of Interest and Other Costs

The Company capitalizes interest on borrowings and certain other direct costs during the active construction period of major capital projects. Capitalized costs are added to the cost of the underlying assets and will be depreciated over the useful lives of the assets. In connection with its capital improvements to the Brookhaven, NY facility, the Company capitalized approximately $907, including interest approximating $517, during the fiscal year ended June 30, 2006. The Company did not incur any interest on borrowings related major capital projects for the year ended June 30, 2007.

Comprehensive (Loss) Income

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130, “Reporting Comprehensive Income,” the Company reports comprehensive (loss) income in addition to net (loss) income. Comprehensive (loss) income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net (loss) income.

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.

Derivative Instruments

The Company uses derivative instruments on a limited basis, principally to manage its exposure to changes in interest rates. Derivative instruments are recorded at their fair value on the balance sheet, while changes in the fair value of the instrument are included in other comprehensive income (loss).

F - 13

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies, continued

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.

Income Taxes

The Company accounts for income taxes using the liability method which requires the determination of deferred tax assets and liabilities based on the differences between the financial and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. The Company and its subsidiaries file a consolidated income tax return. The Company’s management assesses realization of its deferred tax assets based on all available evidence in order to conclude whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. Available evidence considered by the Company includes, but is not limited to, the Company’s historic operation results, projected future operating earnings results, reversing temporary differences and changing business circumstances. When there is a change in circumstances that cause a change in judgement about the realizability of the deferred tax assets, the Company may adjust all or a portion of the applicable valuation allowance in the period when such change occurs. Management evaluates the realizability of the deferred tax assets and the need for additional valuation allowances quarterly.

Shipping Costs

The Company’s shipping and handling costs are included in selling, general and administrative expenses. For the years ended June 30, 2007, 2006 and 2005, shipping and handling costs approximated $827, $668, and $434, respectively.

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.

F - 14

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies, continued

Concentrations and Fair Value of Financial Instruments

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash investments and accounts receivable. Concentrations of credit risk with respect to accounts receivable are disclosed in Note 15. The Company performs ongoing credit evaluations of its customers’ financial conditions and, generally, requires no collateral from its customers. Unless otherwise disclosed, the fair values of financial instruments approximate their recorded value.

Reclassification

Certain reclassifications have been made to the 2006 financial statements to conform to the 2007 presentation. These reclassifications have no effect on previously reported operations.

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

Stock Based Compensation

Effective July 1, 2005, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”), using the modified-prospective-transition method. As a result, the Company’s net income before taxes for the years ended June 30, 2007 and 2006 were $1,070 and $1,195 lower than if it had continued to account for share-based compensation under Accounting Principles Board (“APB”) opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).

Recently Issued Accounting Pronouncements

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

F - 15

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies, continued

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

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

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

F - 16

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies, continued

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

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

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

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

F - 17

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except per share data)

NOTE 1 - Summary of Significant Accounting Policies, continued

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

In June 2007, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 07-3, Accounting for Advance Payments for Goods or Services to be Received for Use in Future Research and Development Activities. EITF 07-3 provides clarification surrounding the accounting for nonrefundable research and development advance payments, whereby such payments should be recorded as an asset when the advance payment is made and recognized as an expense when the research and development activities are performed. EITF 07-3 is effective for annual periods beginning after December 15, 2007. The Company records these advance payments in accordance with EITF 07-3 and therefore does not have any impact on its consolidated financial statements.

F - 18

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In thousands, except per share data)

NOTE 2 - Management’s Liquidity Plan

At June 30, 2007 the Company had an accumulated deficit of $18,831 and operating activities used $14,105 of cash for the year then ended. In an effort to meet the Company’s cash requirements and generate positive cash flows from operations management has taken various actions and steps to revise its operating and financial requirements, including:

· Seeking additional financing from our existing shareholders and other strategic investors, including $8,000 raised in November 2007 (see Note 18 - Subsequent Events)

· Reducing headcount to an efficient level while still carrying out the Company’s future growth plan

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

· Scaling back the Company’s research and development activities to the extent necessary to be able to fund operations and continue to execute the Company’s overall business plan

Management believes that the plans and initiatives described above will result in sufficient liquidity to meet cash requirements at least through June 30, 2008. However, there can be no assurance that the Company will achieve its cash flow and profitability goals, or that it will be able to raise additional capital sufficient to meet operating expenses or implement its plans. In such event, the Company may have to revise its plans and significantly reduce its operating expenses, which could have an adverse effect on revenue and operations in the short term.

F - 19

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 3 - Accounts Receivable

Accounts receivable are comprised of amounts owed to the Company through the sales of its products throughout the United States. These accounts receivable are presented net of allowances for doubtful accounts, sales returns, discounts, rebates and customer chargebacks. Allowances for doubtful accounts were approximately $30 and $101 at June 30, 2007 and 2006, respectively. The allowance for doubtful accounts is based on a review of specifically identified accounts, in addition to an overall aging analysis. Judgments are made with respect to the collectibility of accounts receivable based on historical experience and current economic trends. Actual losses could differ from those estimates. Allowances relating to discounts, rebates, and customer chargebacks were $4,865 and $2,315 at June 30, 2007 and June 30, 2006, respectively. The Company sells some of its products indirectly to various government agencies referred to below as “indirect customers.” The Company enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to actually purchase the products at these agreed-upon prices. The Company will provide credit to the selected wholesaler for the difference between the agreed-upon price with the indirect customer and the wholesaler’s invoice price if the price sold to the indirect customer is lower than the direct price to the wholesaler. This credit is called a chargeback. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers, and estimated wholesaler inventory levels. As sales to the large wholesale customers increase, the reserve for chargebacks will also generally increase. However, the size of the increase depends on the product mix. The Company continually monitors the reserve for chargebacks and makes adjustments to the reserve as deemed necessary. Actual chargebacks may differ from estimated reserves.

The changes in the allowance for doubtful accounts are summarized as follows:

	Year Ended June 30,
	2007			2006
Beginning balance	$	101		$	66
Provision for doubtful accounts		55			46
Charge-offs		(126	)		(11	)
Ending balance	$	30		$	101

F - 20

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 3 - Accounts Receivable, continued

The changes in the allowance for customer chargebacks, discounts and other credits that reduced gross revenue for each of the fiscal years ended June 30, 2007 and 2006:

	Year Ended
	June 30,
	2007			2006
Reserve balance - beginning	$	2,315		$	425
Actual chargebacks, discounts and other credits taken in the current period (a)		(11,934	)		(5,277	)
Current provision related to current period sales		14,484			7,167
Reserve balance – ending	$	4,865		$	2,315

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

NOTE 4 - Inventories

Inventories consist of the following:

	June 30,
		2007		2006
Finished goods	$	3,085	$	1,781
Work in process		7,260		3,685
Raw materials		6,286		2,928
Packaging materials		664		312
Total	$	17,295	$	8,706

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 June 30, 2007 that were determined to have a carrying value in excess of market was $1,157. As a result, the Company reduced the carrying value of inventory on hand to its market value by this amount as of June 30, 2007.

F - 21

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 5 - Land, Building and Equipment

Land, building and equipment consists of the following:

	June 30,				Estimated Useful
	2007		2006		Lives
Land	$	4,924	$	4,924		N/A
Building		12,460		12,460		39 Years
Machinery and equipment		16,881		12,643		5-7 Years
Computer equipment		2,065		151		5 Years
Construction in Progress		186		587		N/A
Furniture and fixtures		953		660		5 Years
Leasehold improvements		4,386		3,206		5-15 Years
		41,855		34,631
Less: accumulated depreciation and amortization		7,357		5,562
Land, Building and Equipment, net (a)	$	34,498	$	29,069

(a) Includes assets not yet placed in service of approximately $2,305 and $4,123 for June 30, 2007 and 2006, respectively. 

Depreciation and amortization expense for the years ended June 30, 2007, 2006 and 2005 was approximately $2,423, $1,534 and $1,248, respectively.

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

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

	June 30,
	2007		2006
Inventory purchases	$	9,525	$	5,734
Research and development expenses		3,003		2,068
Other		6,014		4,848
Total	$	18,542	$	12,650

F - 22

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 7 - Debt

Long-term Debt

	June 30, 2007		June 30, 2006
Revolving credit facility	$	9,866	$	—
Real estate term loan		10,933		11,734
Machinery and equipment term loans		5,601		3,833
Capital lease		183		72
		26,583		15,639
Less: amount representing interest on capital lease		38		1
Total debt		26,545		15,638
Less: current maturities		12,057		1,686
Long-term debt, less current maturities	$	14,488	$	13,952

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

On February 9, 2006, the Company entered into a four-year financing arrangement with Wells Fargo Business Credit (“WFBC”). This financing agreement provided a maximum credit facility of $41,500 comprised of:

·$22,500 revolving credit facility

·$12,000 real estate term loan

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

·$ 3,500 additional / future capital expenditure facility

The funds made available through this facility paid down, in its entirety, the $20,445 owed on the previous credit facility. The WFBC revolving credit facility borrowing base is calculated as (i) 85% of the Company’s eligible accounts receivable plus the lesser of 50% of cost or 85% of the net orderly liquidation value of its eligible inventory. The advances pertaining to inventory are capped at the lesser of 100% of the advance from accounts receivable or $9,000. As of June 30, 2007, the remaining availability under the revolving credit facility was $6,708. The $12,000 loan for the real estate in Brookhaven, NY is payable in equal monthly installments of $67 plus interest through February 2010 at which time the remaining principal balance is due. The $3,500 M&E loan is payable in equal monthly installments of $58 plus interest through February 2010 at which time the remaining principal balance is due. With respect to additional capital expenditures, the Company is permitted to borrow 90% of the cost of new equipment purchased to a maximum of $3,500 in borrowings amortized over 60 months. As of June 30, 2007, there is approximately $150 available for additional capital expenditure borrowings.

F - 23

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 7 - Debt, continued

Under the terms of the WFBC agreement, three stockholders, all related to the Company’s Chairman of the Board of Directors, one of whom is an Executive Vice President, were required to provide limited personal guarantees, as well as pledge securities with a minimum aggregate value of $7,500 as security for a portion of the $22,500 credit facility. The Company was required to raise a minimum of $7,000 through the sale of equity or subordinated debt by June 30, 2006. The shareholders’ pledges of marketable securities would be reduced by WFBC either upon the Company raising capital, net of expenses in excess of $5,000 or achieving certain milestones. As a result of the Company completing the sale of $10,000 of Series B-1 convertible preferred stock in May 2006 (See Note 10), the limited personal guarantees were reduced by $3,670. In September 2006, the Company consummated a $10,000 sale of Series C-1 Convertible preferred stock (see Note 16), which eliminated the balance of the personal pledges of marketable securities of $3,830.

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. At June 30, 2007, the interest rate on this debt was 7.75%. 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.

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. 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 “Existing Defaults”). WFBC has agreed to waive the Existing Defaults based upon the Company’s consummation and receipt of $8,000 related to the issuance of subordinated debt described in Note 18 - Subsequent Events.

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, $131 and $50 have been recognized as amortization expense for the years ended June 30, 2007 and 2006, respectively.

With respect to the real estate term loan and the $3,500 M&E loan, the Company entered into interest rate swap contracts (the “swaps”), whereby the Company pays a fixed rate of 7.56% and 8.00% per annum, respectively. The swaps contracts mature in 2010. The swaps are a cash flow hedge (i.e. a hedge against interest rates increasing). As all of the critical terms of the swaps and loans match, they are structured for short-cut accounting under SFAS No. 133, “Accounting For Derivative Instruments and Hedging Activities’” and by definition, there is no hedge ineffectiveness or a need to reassess effectiveness. Fair value of the interest rate swaps at June 30, 2007 and 2006 was approximately $10 and $98 and is included in Other Assets.

F - 24

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 8 - 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. For the years ended June 30, 2007 and 2006, the rent paid in accordance with this lease was $690 and $480.

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.

In June 2007, the Company executed a Settlement Agreement with the Landlord, whereas, effective May 1, 2006, the Company would pay the Landlord a base rent of $660 annually. The Company recorded an additional $30 to properly account for the increase in base rent through June 30, 2007.

Future annual minimum rental payments under this operating lease are as follows:

For the Year Ending June 30,		Amount
2008	$	660
2009		660
2010		660
2011		660
2012		660
Thereafter		4,840
Total	$	8,140

The lease does not grant the Company the option to purchase the Premises at any time during the lease term nor at its termination, nor will the Company share in any proceeds that may result from sale or disposition of the Premises.

F - 25

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 8 - Related Party Transactions, continued

Sale of Subsidiary

On April 25, 2007 the Company completed the sale of its subsidiary, Interpharm Development Private Limited (“IDPL”) located in Ahmedabad, India to an entity partially owned by two officers of the Company for $161. As previously disclosed the Company elected not to move forward with the construction of a research and development facility in Ahmedabad, India. During the quarter ended March 31, 2007 management committed to a plan to dispose of its interest in the entity which was incorporated specifically for the construction project in Ahmedabad. As a result, in accordance with SFAS 144 the Company recorded an impairment charge of $101 in the quarter ended March 31, 2007 to write down the carrying value of the net asset to the selling price. Therefore, no gain or loss on disposal was recorded in the three months ended June 30, 2007.

Assets and liabilities of IDPL at the time of sale consisted of the following:

Cash	$	233
Land		305
Assets		538
Accrued expenses		205
Due to related party		172
Net book value		161
Selling price		(161	)
Gain (loss) on sale of asset	$	—

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.

NOTE 8 - Related Party Transactions, continued

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.

F - 26

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

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

Purchase from APR, LLC

During the year ended June 30, 2007, the Company placed an order valued at $160 for a certain raw material from APR. The Company currently purchases the same raw material from an overseas supplier at a price 37% greater than the price APR is currently willing to offer. The Company believes sourcing the raw material from APR would not only resolve intermittent delays in obtaining this material from overseas but would also improve gross margins on products using the raw material. Supply of this raw material is being coordinated with the Company’s requirement projections for the fiscal year ended June 30, 2008. As of June 30, 2007, the Company has advanced $80 to APR in connection with this order.

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” exercise feature with respect to all of his 700 vested options which will expire on December 10, 2007.

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 which will expire on December 10, 2007.

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 will expire on December 10, 2007.

F - 27

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 9 - Income Taxes

At June 30, 2007 the Company has remaining Federal net operating losses (“NOLs”) of $32,250 available through 2027. As of June 30, 2007, as a result of changes in New York State tax law, the benefit of the future utilization of State NOLs has been eliminated resulting in deferred state tax expense of $195 in fiscal 2007. Pursuant to Section 382 of the Internal Revenue Code regarding substantial changes in Company ownership, utilization of the Federal NOLs is limited. $31,382 of these NOLs are available in fiscal 2008, and utilization of $868 of these NOLs is limited and becomes available after fiscal 2008. The limitations lapse at the rate of $2,690 per year, through fiscal 2009. As a result of losses incurred in fiscal years 2005, 2006 and 2007, 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 some amount of the Company’s deferred tax asset may not be realized. As such, a valuationallowance of $5,554 decreased the total accumulated net deferred tax asset of $11,529 to $5,975 at June 30, 2007. In addition, at June 30, 2007, the Company has approximately $986 of New York State investment tax credit carry forwards, expiring in various years through 2022. These carry forwards are available to reduce future New York State income tax liabilities. However, the Company has reserved 100% of the investment tax credit carry forward, which the Company does not anticipate utilizing.

In calculating its tax provision for the year ended June 30, 2007 and 2006, the Company applied aggregate effective tax rates of approximately 1.4% and (31%), respectively, thereby creating income tax expense of $190and an income tax benefit of $1,700, respectively, and adjusted its deferred tax assets accordingly.

F - 28

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 9 - Income Taxes, continued

The income tax (benefit) expense is comprised of the following:

	Year Ended June 30,
	2007			2006			2005
Current
Federal	$	—		$	—		$	—
State		(5	)		(22	)		5
Total Current		(5	)		(22	)		5
Deferred
Federal		—			(1,739	)		(71	)
State		195			61			(7	)
Total Deferred		195			(1,678	)		(78	)
Total Income Tax Expense (Benefit)	$	190		$	(1,700	)	$	(73	)

The Company’s effective income tax rate differs from the statutory U.S. Federal income tax rate as a result of the following:

	Year Ended June 30,
	2007			2006			2005
Statutory U.S. federal tax rate	(34.0		)%	(34.0		)%	(34.0		)%
Increase in valuation allowance	33.0			—			—
State taxes		0.0			0.7			(3.0	)
Stock based compensation		0.8			1.9			—
Permanent differences		0.0			0.2			4.0
Change in New York State tax law		1.4
Other		0.2			0.2			0.3
Effective income tax rate		1.4	%		(31.0	)%		(32.7	)%

F - 29

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 9 - Income Taxes, continued

The components of deferred tax assets and liabilities consist of the following:

	June 30,
	2007			2006
Deferred Tax Assets, Current Portion
Capitalized inventory	$	114		$	31
Receivable allowance and reserves		10			36
Other		39			50
Deferred revenue		0			1,204
Deferred Tax Assets, current		163			1,321
Less: Valuation Allowance		(142	)		—
Net Deferred Tax Assets, current	$	21		$	1,321

Deferred Tax Assets, Non-Current Portion
Other	$	44		$	45
Stock based compensation		550			314
Investment tax credits		986			835
Net operating loss carry forwards (“NOLs”)		10,886			5,068
Deferred Tax Assets, non-current		12,466			6,262
Less: Valuation Allowance		(5,412	)		(884	)
Net Deferred Tax Assets, Non-Current		7,054			5,378
Deferred Tax Liabilities, Non-Current Portion
Depreciation and amortization		(1,004	)		(529	)
Other		(96	)		—
Deferred Tax Assets, non-current, net	$	5,954		$	4,849

During the years ended June 30, 2007 and 2006, stock options were exercised which generated approximately $191 and $216 of income tax deductions, respectively, resulting in tax benefits of approximately $65 and $79. The benefits with respect to the June 30, 2006 stock option exercises were credited to additional paid in capital. For the June 30, 2007 stock option exercises, a valuation allowance has been established against the NOL attributable to stock option expense, in accordance with the Company’s adoption of the alternative method of calculating the additional paid in capital pool as defined in SFAS No. 123 (R). When these NOLs are utilized, the valuation allowance will be reversed and additional paid in capital will be credited for the benefit. The Company will receive a benefit when taxes payable is reduced in the future.

F - 30

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 9 - Income Taxes, continued

The change in the valuation allowance for deferred tax assets are summarized as follows:

	Years Ended June 30
		2007		2006
Beginning Balance	$	884	$	702
Change in Allowance		4,670		182
Ending Balance	$	5,554	$	884

NOTE 10 - Earnings Per Share

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

	Year Ended June 30,
	2007			2006			2005
Numerator:
Net loss	$	(14,058	)	$	(3,790	)	$	(149	)
Less: Preferred stock dividends
Series A		—			68			—
Series A-1		166			166			166
Series B-1		825			78			—
Series C-1		660			—			—
Less: Series B-1 beneficial conversion feature		—			1,418			—
Less: Series C-1 beneficial conversion feature		1,094			—			—
Numerator for basic EPS		(16,803	)		(5,520	)		(315	)
Effect of dilutive securities:
Net income attributable to Series K preferred stockholders		—			—			166
Numerator for diluted EPS	$	(16,803	)	$	(5,520	)	$	(149	)

Denominator:
Denominator for basic EPS weighted average shares outstanding		65,242			36,521			25,684
Effect of dilutive securities:
Convertible Series K preferred stock		—			—			—
Convertible Series A, B, B-1, C and J preferred stocks		—			—			—
Stock options		—			—			—
Basic and Diluted EPS	$	(0.26	)	$	(0.15	)	$	(0.01	)

F - 31

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 10 - Earnings Per Share, continued

Stock options, warrants and convertible preferred stock, equivalent to 29,540, 20,906 and 44,035 shares of the Company’s common stock, were not included in the computation of diluted earnings per share for the years ended June 30, 2007, 2006 and 2005, respectively, as their inclusion would be antidilutive.

As of June 30, 2007, the total number of common shares outstanding and the number of common shares potentially issuable upon exercise of all outstanding stock options and conversion of preferred stocks (including contingent conversions) is as follows:

Common stock outstanding	65,886
Stock options outstanding (see Note 13)	11,930
Warrants outstanding (see Notes 11 and 12)	4,564
Common stock issuable upon conversion of preferred stocks:
Series A	—
Series A-1 (maximum contingent conversion) (a)	4,855
Series B	—
Series B-1	6,520
Series C	6
Series C-1	6,520
Total (b)	100,281

(a) As described in Note 12, the Series A-1 shares are convertible only if the Company reaches $150,000 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 April 30, 2017 (the end of the current vesting and conversion periods).

F - 32

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

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 exercise price of $1.639 per share. The warrants have a five year term. The Series B-1 Stock and warrants sold to Tullis are convertible and/or exercisable into a total of 8,802 shares of common stock. The B-1 shares are convertible into common shares at a conversion price of $1.5338, and have an annual dividend rate of 8.25%, payable quarterly, which can be paid, at the Company’s option, in cash or the Company’s common stock. In addition, the B-1 shareholders have the right to require the Company to redeem all or a portion of the B-1 shares upon the occurrence of certain triggering events, 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.

Through June 30, 2007, the Company issued 420 shares of common stock as payment of $697 of previously accrued dividends. At June 30, 2007, the Company had accrued $206 of Series B-1 dividends, which was paid in July 2007 through the issuance of 148 shares of the Company’s common stock.

With respect to the Company’s accounting for the preferred stock, EITF Topic D-98, paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities with redemption features that are not solely within the control of the issuer to be recorded outside of permanent equity. As described above, the terms of the Preferred Stock include certain redemption features that may be triggered by events that are not solely within the control of the Company, such as a potential default with respect to any indebtedness, including borrowings under the WFBC financing arrangement. Accordingly, the Company has classified the B-1 shares as temporary equity and the value ascribed to the B-1 shares upon initial issuance in May 2006 was the amount received in the transaction less the relative fair value ascribed to the warrants and direct costs associated with the transaction. The Company allocated $1,704 of the gross proceeds of the sale of B-1 shares to the warrants based on estimated fair value. In accordance with EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,418 to accumulated deficit during the quarter ended June 30, 2006. The non-cash charge measures the difference between the relative fair value of the B-1 shares and the fair market value of the Company's common stock issuable pursuant to the conversion terms on the date of issuance. As of June 30, 2007, the Company had defaulted under the Senior Credit Agreement with respect to the Existing Defaults, as described in Note 7 - Debt, and WFBC has agreed to waive the Existing Defaults. The Company does not expect to be in default in the future under its credit facility (the only redemption feature outside of its control), nor does it plan to redeem the Series B-1 preferred stock. As such the Company believes it is not probable that the Series B-1 preferred stock will become redeemable.

F - 33

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

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

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

F - 34

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

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

The Company’s Series B-1 redeemable convertible preferred stock is summarized as follows at June 30, 2007:

	Shares Issued
Shares	And		Par Value		Liquidation
Authorized	Outstanding		Per Share		Preference
15		10	$	100	$	10,000

As of June 30, 2007, the Company was in default under the Securities Purchase Agreement due to (A) the failure of the Company to timely file with the Securities and Exchange Commission (and deliver to Tullis) its Annual Report on Form 10-K for the year ended June 30, 2007; and (B) the failure of the Company to prevent the suspension of trading of its Common Stock on the American Stock Exchange as a result of (A). Tullis provided the Company with a waiver of these defaults based upon the Company’s consummation and receipt of $8,000 related to the issuance of subordinated debt described in Note 18 - Subsequent Events.

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 exercise price of $1.639 per share. The warrants have a five year term. The Series C-1 Stock and warrants sold to the Buyer are convertible and/or exercisable into a total of 8,802 shares of common stock. The C-1 shares are convertible into common shares at a conversion price of $1.5338, and have an annual dividend rate of 8.25%, payable quarterly, which can be paid, at the Company’s option, in cash or the Company’s common stock. In addition, the C-1 shareholders have the right to require the Company to redeem all or a portion of the C-1 shares upon the occurrence of certain triggering events, as defined, at a price per preferred share to be calculated on the day immediately preceding the date of a triggering event. 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.

F - 35

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

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

Through June 30, 2007, the Company issued 245 shares of common stock as payment of $454 of previously accrued dividends. At June 30, 2007, the Company had accrued $206 of Series C-1 dividends, which was paid in July 2007 through the issuance of 148 shares of the Company’s common stock.

With respect to the Company’s accounting for the preferred stock, EITF Topic D-98, paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities with redemption features that are not solely within the control of the issuer to be recorded outside of permanent equity. As described above, the terms of the Preferred Stock include certain redemption features that may be triggered by events that are not solely within the control of the Company, such as a potential default with respect to any indebtedness, including borrowings under the WFBC financing arrangement. Accordingly, the Company has classified the C-1 shares as temporary equity and the value ascribed to the C-1 shares upon initial issuance in September 2006 was the amount received in the transaction less the relative fair value ascribed to the warrants and direct costs associated with the transaction. The Company allocated $1,641of the gross proceeds of the sale of C-1 shares to the warrants based on estimated fair value. In accordance with EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,094 to Accumulated deficit during the quarter ended September 30, 2006. The non-cash charge measures the difference between the relative fair value of the C-1 shares and the fair market value of the Company's common stock issuable pursuant to the conversion terms on the date of issuance. As of June 30, 2007, the Company had defaulted under the C-1 Agreement with respect to the Existing Defaults, as described in Note 6 - Debt, and WFBC has agreed to waive the Existing Defaults. The Company does not expect to be in default in the future under its credit facility (the only redemption feature outside of its control), nor does it plan to redeem the Series C-1 preferred stock. As such the Company believes it is not probable that the Series C-1 preferred stock will become redeemable.

In addition, on September 11, 2006, in connection with the sale of the C-1 shares the Company entered into a Registration Rights Agreement, as amended, with the Buyer. Under the terms of this Registration Rights Agreement the Company is subject to penalties (a) if, within 60 days after a request to do so is made by the holders of such preferred stock, the Company does not timely file with the Securities and Exchange Commission a registration statement covering the resale of shares of its common stock issuable to such holders upon conversion of the preferred stock, (b) if a registration statement is filed, such registration statement is not declared effective within 180 days after the request is made or (c) if after such a registration is declared effective, after certain grace periods the holders are unable to make sales of its common stock because of a failure to keep the registration statement effective or because of a suspension or delisting of its common stock from the American Stock Exchange or other principal exchange on which its common stock is traded. The penalties will accrue on a daily basis so long as the Company is in default of the Registration Rights Agreement. The maximum amount of a registration delay penalty as defined in the Registration Rights Agreement is 18% of the aggregate purchase price of the Buyers registrable securities included in the related registration statement. Unpaid registration delay penalties shall accrue interest at the rate of 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.

F - 36

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

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

The Company’s Series C-1 redeemable convertible preferred stock is summarized as follows at June 30, 2007:

	Shares Issued
Shares	And		Par Value		Liquidation
Authorized	Outstanding		Per Share		Preference
10		10	$	100	$	10,000

As of June 30, 2007, the Company was in default under the C-1 Agreement due to (A) the failure of the Company to timely file with the Securities and Exchange Commission (and deliver to the Buyer) its Annual Report on Form 10-K for the year ended June 30, 2007; and (B) the failure of the Company to prevent the suspension of trading of its Common Stock on the American Stock Exchange as a result of (A). The Buyer provided the Company with a waiver of these defaults based upon the Company’s consummation and receipt of $8,000 related to the issuance of subordinated debt described in Note 18 - Subsequent Events.

F - 37

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 13 - Equity Securities

Preferred Stocks

The Company’s preferred stocks consist of the following at June 30, 2007:

			Shares Issued
	Shares		and				Liquidation
June 30, 2007:	Authorized		Outstanding		Par Value		Preference
Preferred Stocks:
*Series C convertible		350		277		3		277
Series A-1 cumulative convertible		5,000		4,855		48		3,311
Total preferred stocks issued and outstanding		5,350		5,132	$	51	$	3,588

* Classes of preferred stock assumed in the ATEC reverse merger

One condition of the Agreement was to convert all outstanding shares of Series A Cumulative Convertible Preferred Stock (the “Series A”) and Series B Convertible Stock (the Series B”) into the Company’s common stock. As such, in June, 2006, the Company filed an Information Statement pursuant to Section 14 (c) of the Securities and Exchange Act of 1934, as amended, (the “Information Statement”). The Information Statement informs stockholders of actions to approve the amendments to the Certificate of Incorporation of the Company of actions taken and approved in May, 2006, by the holders of (a) voting stock of the Company holding shares entitling such holders to cast more than a majority of the votes entitled to be cast with respect to such actions, (b) a majority of the outstanding shares of Series A and (c) more than two-thirds of the outstanding shares of Series B, to make all of the Series A and Series B convertible into the Company’s common stock. Another condition of the Agreement required the Company to increase its authorized common shares from 70,000 shares to 150,000 shares.

Originally, each share of Series A was convertible at the option of the holder into shares of common stock at the conversion rate in effect at the time the holder elects to convert. The conversion rate was subject to adjustment upon the occurrence of certain events, including, among other things, subdivisions or combinations of the Company’s common stock, the payment by the Company of stock dividends on the common stock, and the issuance of shares of common stock for a consideration below an amount calculated under a formula.

F - 38

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 13 - Equity Securities, continued

On July 18, 2006, the Company filed an amendment to its Article of Incorporation which had the effect of (i) automatically converting each outstanding share of the Company’s Series A into two shares of common stock or an aggregate of 8 common shares. A Series A shareholder elected to have his 3 shares canceled. Accordingly, no shares of the Company’s common stock were issued to him as part of this conversion; (ii) eliminating the Series A from the Articles of Incorporation; (iii) automatically converting each of the 2 outstanding shares of the Company’s Series B into one share of common stock, thus issuing 2 common shares; and (iv) eliminating the Series B from the Articles of Incorporation.  These amendments were approved by written consent of a majority of the Company’s outstanding common stock and Series A Cumulative Convertible Preferred Stock and by the holder of all of the outstanding Series B Convertible Preferred shares.

In 2003 the Company authorized the satisfaction of loans due to the Company’s then Chief Executive Officer and one of its stockholders, by issuing 5 shares of a Series A-1 cumulative convertible preferred (the Series A-1”). The A-1 shares convert on a 1:1 basis into Company common stock subject to the definitive terms in the list of designations upon (i) the Company reaching $150,000 in sales or (ii) a merger, consolidation, sale of assets or similar transaction. The holders of shares shall not be entitled to any voting rights and have dissolution rights upon liquidation of $0.682 per share. The Series A-1 shares have a cumulative annual dividend of $0.0341 per share. In November 2006, the Company paid $124 of declared dividends for the period January 2006 through September 2006. As of June 30, 2007 the Company’s Board of Directors had not declared any dividend on the Series A-1 shares for the period October 1, 2006 through June 30, 2007. Such undeclared dividends amounted to $124.

On June 4, 2004, the Company was deemed by AMEX to be in compliance with applicable listing standards, and as a result, a “Triggering Event” occurred. Upon the occurrence of the Triggering Event, the holders of the Series K Convertible preferred shares (the “K shares”) (entities owned by certain relatives of the Company’s Chairman of the Board of Directors), in accordance with a defined formula and through May 2006, converted all of the K shares into 43,923 restricted shares of the Company’s common stock The holders of the K shares had demand registration rights with respect to the common stock to be issued upon conversion. As of June 30, 2007 the former Series K stockholders own or control approximately 50,179 shares or 76% of the total shares outstanding of the Company.

F - 39

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 13 - Equity Securities, continued

Common Stock

During the year ended June 30, 2007, the Company issued shares of its common stock as follows:

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

· 63 shares were issued to Series B-1 preferred stock shareholders in settlement of dividends earned for the quarter ended June 30, 2006;

· 357 and 245 shares were issued to Series B-1 and C-1 preferred stock shareholders, respectively, in settlement of dividends earned through the nine months ended March 31, 2007;

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

· In July 2007, 148 shares were issued to both Series B-1 and C-1 preferred stock shareholders in settlement on dividends earned for the quarter ended June 30, 2007.

Stock Options and Appreciation Rights

In 2003, Interpharm, Inc., as a part of the ATEC reverse merger transaction, assumed options to acquire ATEC’s common stock which were granted previously by ATEC pursuant to two Stock Option Plans. The two option plans are the 1997 Stock Option Plan (“1997 Plan”) and the 2000 Flexible Stock Option Plan (“2000 Plan”). Both plans provide for the issuance of qualified and non-qualified options as those terms are defined by the Internal Revenue Code.

The 1997 Plan provides for the issuance of 6,000 shares of common stock. All options issued, pursuant to the 1997 Plan, cannot have a term greater than ten years. Options granted under this plan vest over periods established in option agreements. As of June 30, 2007, 1,317 options are outstanding under this plan. No additional shares can be granted under this plan.

The 2000 Plan provides for the issuance of 10,000 shares of common stock plus an annual increase, effective on the first day of each calendar year, equal to 10% of the number of outstanding shares of common stock as of the first day of such calendar year, but in no event, more than 20,000 shares in the aggregate. All options issued, pursuant to the 2000 Plan, cannot have a term greater than ten years. Options granted under the 2000 Plan vest over periods established in option agreements. As of June 30, 2007, the 2000 Plan provides for the issuance of 20,000 shares of common stock. As of that date, 10,613 options are outstanding under this plan.

The Company recognized approximately $13 in 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 June 30, 2007, the total liability related to the SARs is $46;

F - 40

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 13 - Equity Securities, continued

During the fiscal year ended June 30, 2007, 1,685 options were granted, as follows:

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

· in connection with separation agreements involving two employees, the Company extended the exercise period of 155 options, 10 of which were exercised prior to December 31, 2006; 90 were forfeited as of December 31, 2006, the balance of 55 has been extended to September 20, 2008. As a result of the modification of these options, the Company recognized an additional $12 expense for the year ended June 30, 2007.

· 1,243 options to purchase the Company’s common stock were issued to employees of the Company at the market price on the date of the grant and vest over 3.28 years from the date of issuance. Of this amount, 445 were performance-based options, which were not earned as of June 30, 2007 and therefore, were forfeited. The performance based criteria were related to the Company achieving specific sales, gross profit, and ANDA filing requirements for the year ended June 30, 2007.

· 100 options to purchase the Company’s common stock were issued to an officer of the Company at the market price on the date of the grant and vest over 4.81 years from the date of issuance.

· 25 options to purchase the Company’s common stock were issued to an employee of the Company at the market price on the date of the grant and vest over 5.17 years from the date of issuance.

F - 41

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 13 - Equity Securities, continued

The following table summarizes the options activity for the period July 1, 2004 to June 30, 2007.

	Number of Options			Weighted Average Exercise Price		Aggregate Intrinsic Value
		10,489		$	1.62
Options outstanding at July 01, 2004
Granted (a)		8,116		$	1.53
Exercised		(1,097	)	$	0.57
Forfeited (a)		(4,854	)	$	3.29
Outstanding at June 30, 2005		12,654		$	1.01
Granted		430		$	1.16
Exercised		(700	)	$	0.68
Forfeited		(301	)	$	1.44
Outstanding at June 30, 2006		12,083		$	1.02
Granted		1,685		$	1.55
Exercised		(904	)	$	0.84
Expired		(240	)	$	1.87
Forfeited		(694	)	$	1.36
Outstanding at June 30, 2007		11,930		$	1.08	$	3,699
Exercisable at June 30, 2007		9,545		$	1.07	$	3,011

(a) Includes 4,854 options repriced at June 30, 2005

For all of the Company’s stock-based compensation plans, the fair value of each grant was estimated at the date of grant using the Black-Scholes option-pricing model. Black-Scholes utilizes assumptions related to volatility, the risk-free interest rate, the dividend yield (which is assumed to be zero, as the Company has not paid any cash dividends) and employee exercise behavior. Expected volatilities utilized in the model are based mainly on the historical volatility of the Company’s stock price and other factors. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect in the period of grant. The model incorporates exercise assumptions based on an analysis of historical data. The Company does not have a reasonable basis for estimating stock option forfeitures, so it assumes zero forfeitures in estimating the financial impact of granting options to purchase its common stock. The expected life of the fiscal 2007 grants is derived from historical and other factors. As a policy, the Company issues shares for exercised options upon receipt of the required funds, as stated in the Stock Option Agreement, and a properly executed intent-to-exercise form.

F - 42

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 13 - Equity Securities, continued

The following table summarizes information concerning outstanding and exercisable stock options as of June 30, 2007:

	Options Outstanding						Options Exercisable
			Weighted
	Number		Average		Weighted		Number		Weighted
	Outstanding		Remaining		Average		Exercisable		Average
Range of	At		Contractual		Exercise		at		Exercise
Exercise Prices	June 30, 2007		Life		Price		June 30, 2007		Price
$0.45 - $0.68		5,220		5.05	$	0.64		4,135	$	0.63
$1.21 - $1.99		6,558		3.62	$	1.33		5,258	$	1.29
$3.13 - $6.80		152		1.30	$	5.76		152	$	5.76
		11,930		4.22				9,545

For the year ended June 30, 2007, the fair values of Company common stock options granted to employees were estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility ranging from 65% to 85% (2) risk-free interest rate ranging from 4.21% to 4.85% (3) Weighted-average volatility of 79% and (4) expected average lives ranging from 1.2 to 7.6 years.

The total unearned compensation cost of $1,767 for the total nonvested options as of June 30, 2007 of 2,401 will be recognized over a weighted average period of 2.88 years.

NOTE 14 - 401K Plan

In January 2006, the Company initiated a pre-tax savings plan covering substantially all employees, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, eligible employees may contribute a portion of their pre-tax salary, subject to certain limitations. The Company contributes and matches 100% of the employee pre-tax contributions, up to 3% of the employee’s compensation plus 50% of pre-tax contributions that exceed 3% of compensation, but not to exceed 5% of compensation. The Company may also make profit-sharing contributions in its discretion which would be allocated among all eligible employees, whether or not they make contributions. Company contributions were approximately $317 for the year ended June 30, 2007.

F - 43

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 15 - Commitments and Contingencies

Legal Proceedings

An action was commenced on June 1, 2006, by Ray Vuono (“Vuono”) in the Supreme Court of the State of New York, County of Suffolk (Index No. 13985/06).  The action alleged that plaintiff was owed an amount exceeding $10,000 in unpaid “finder’s fees” under an advisory agreement between plaintiff and Atec Group, Inc.

By motion dated July 26, 2006, the Company moved to dismiss Vuono’s complaint in its entirety.  Vuono cross-moved to disqualify the Company's counsel due to an alleged conflict of interest.  By recent decision and order dated March 29, 2007, the Court dismissed Vuono’s claims as they pertain to any fees claimed by Vuono related to a reverse merger of Interpharm, Inc. and the Company and declined to dismiss other claims.  The dismissed claims represent approximately $7,000 of the total of $10,000 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. A final decision on the motion to disqualify is not expected until early 2008. The action, including all discovery, is stayed pending the Court’s decision. 

The Company will continue to vigorously defend the action.

In November 2006, a former employee commenced an action against us in the Supreme Court of the State of New York, County of Suffolk (Index No. 06/31481).  As of October 15, 2007, the action was voluntarily dismissed with prejudice, and without costs, expenses, or fees to either party. The complaint alleged violations of the New York State Human Rights Law and other unidentified rules, regulations, statutes and ordinances.

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.  The Company believes that the claims are without merit and the Company is vigorously defending the action.  Currently, the Company cannot predict with certainty the outcome of this litigation.

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 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.

F - 44

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 15 - Commitments and Contingencies, continued

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

From time to time, the Company is a party to litigation arising in the normal course of its business operations. In the opinion of management, it is not anticipated that the settlement or resolution of any

such matters will have a material adverse impact on the Company’s financial condition, liquidity or results of operations.

Operating Lease

Property Lease

In January 2007 the Company entered into a seven year non-cancellable operating 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.

Rent is recorded on a straight line basis over the life of the lease. Deferred rent relating this lease at June 30, 2007 was $5. Future non-cancellable payments under this operating lease are as follows:

For the Year Ending June 30,	Amount
2008	$412
2009	270
2010	278
2011		287
2012		295
Thereafter		591
Total	$	2,133

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.

F - 45

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 15 - Commitments and Contingencies, continued

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.

For the years ended June 30, 2007, 2006 and 2005, the Company recorded as research and development expense approximately $1,915, $2,110, and $1,400, respectively, in connection with these agreements. Further, 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 June 30, 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 June 30, 2007.

F - 46

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 15 - 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 year ended June 30, 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. Upon entering 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 $1,287, respectively. The imputed interest of $345 will be amortized over the remaining life of the obligation using the effective interest rate method. At June 30, 2007, contract termination liability of $386 and $1,356 are included in Accounts payable, accrued expenses and other liabilities and Contract termination liability, respectively.

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

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.

F - 47

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 15 - Commitments and Contingencies, continued

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.

Software license

During 2005, the Company entered into a four year software license agreement which will require the Company to make quarterly payments of $29 plus applicable sales taxes through December 31, 2008.

On December 28, 2006, the Company extended the terms as set forth above to extend the subscription term through year five which will require quarterly payments of $25 through December 31, 2009.

Future minimum annual payments for the software license are as follows:

For the Year Ended June 30,		Amount
2008		116
2009		108
2010		50
Total	$	274

Employment Agreements

The Company has entered into employment arrangements with certain key employees as follows:

In June 2005, the Company entered into a three year employment agreement with its CEO, under which his annual base salary is presently $300. The CEO received an initial annual base salary of $200 together with reimbursement of certain expenses. He will be eligible to receive an annual incentive bonus based on achievement of performance goals set by the Board of Directors or Compensation Committee each year and the incentive bonus for fiscal 2007. He has received fully vested options to purchase 3,000 shares of common stock at $1.23. If his employment is terminated for the remaining contract term by the Company without cause or he resigns for good reason (as defined in the employment agreement), he will receive an amount equal to 3 months base salary (currently totaling $75) and the continuation of health benefits for a period of 3 months.

In January 2007, the Company entered into a three year employment agreement with its CFO. The agreement provides for a base salary of $237, a sign-on bonus of $35 and reimbursement of certain expenses. The agreement includes a target annual incentive opportunity of not less than 50% of the salary (the “Target Annual Bonus”). The amount actually paid shall be determined on the basis of objective performance measures. In addition he was awarded an option for 100 shares of common stock exercisable at $1.62 per share which vest over 5 years. In July 2007, the CFO was also elected as the Chief Operating Officer and his compensation was increased to $275.

In January 2005, the Company entered into a three year employment agreement beginning April 2005 with its Vice President of Sales and Marketing. In 2006, this individual was promoted to Executive Vice President. The agreement provides for a base salary of $236 and reimbursement of certain expenses.

In February 2005, the Company entered into a five year employment agreement with its Vice President of Intellectual Property. In 2006, this individual was promoted to Vice President - General Counsel. The agreement originally provided for a base salary of $237 (which was subsequently increased to $250), and reimbursement of certain expenses.

F - 48

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 16 - Economic Dependency

Major Customers

The Company had the following customer revenue concentrations for the years ended June 30, 2007, 2006 and 2005:

	Year Ended June 30,
	2007			2006			2005
Customer A		15	%		13	%		*
Customer B		15	%		*			*
Customer C		12	%		13	%		*
Customer D		10	%		10	%		11	%
Customer E		10	%		17	%		*
Customer F		*			*			22	%
Customer G		*			*			23	%

*Sales to customers were less than 10%

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

	Accounts Receivable
	June 30,
	2007		2006
Customer A	$	3,161	$	5,959
Customer B		1,202		—
Customer C		1,536		906
Customer D		1,480		3,521
Customer E		610		2,374
Customer F		131		494
Customer G		91		—

F - 49

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 16 - Economic Dependency, continued

The table below sets forth sales for those products or classes of products that accounted for 10% or more of our total product sales for the years ended June 30, 2007, 2006 and 2005:

	Year Ended June 30,
	2007		2006		2005
Ibuprofen	$	31,149	$	33,836	$	27,970
Bactrim		17,471		*		*
Naproxen		12,221		9,401		*
Esterified Estrogen		11,199		8,100		*
Atenolol		*		*		4,819

* Sales of products were less than 10%

Major Suppliers

The Company purchased materials from four suppliers during the year ended June 30, 2007 totaling approximately 67%, two suppliers during the year ended June 30, 2006 totaling approximately 59%, and three suppliers during the year ended June 30, 2005 totaling approximately 70%. At June 30, 2007 and 2006, amounts due to these suppliers included in accounts payable were approximately $6,348 and $3,900, respectively.

F - 50

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 17 - Quarterly Financial Data (Unaudited)

Summarized quarterly financial information consists of the following:

	Sept. 30, 2006			Dec. 31, 2006			March 31, 2007			June 30, 2007
Sales, net	$	22,827		$	17,479		$	19,910		$	15,371
Gross profit		8,977			4,036			6,375			2,279
Net income (loss)		1,630			(4,124	)		(1,852	)		(9,712	)
Basic EPS	$	(0.00	)	$	(0.07	)	$	(0.04	)	$	(0.15	)
Diluted EPS	$	(0.00	)	$	(0.07	)	$	(0.04	)	$	(0.15	)

	Sept. 30, 2005			Dec. 31, 2005		March 31, 2006			June 30, 2006
Sales, net	$	14,547		$	16,213	$	16,110		$	16,485
Gross profit		3,983			5,179		3,999			4,267
Net income (loss)		(447	)		609		(1,499	)		(2,453	)
Basic EPS	$	(0.01	)	$	0.02	$	(0.05	)	$	(0.08	)
Diluted EPS	$	(0.01	)	$	0.01	$	(0.05	)	$	(0.08	)

During the fourth quarter of 2007, the Company reduced the carrying value of inventory on hand by $1,157 that was determined to have a carrying value in excess of market.

The unaudited interim financial information reflects all adjustments, which in the opinion of management, are necessary to fairly present the results of the interim periods presented. All adjustments are of a normal recurring nature. The sum of the quarterly EPS amounts may not equal the full year amounts due to rounding.

NOTE 18 - Subsequent Events

On October 26, 2007, the Company and Wells Fargo Business Credit finalized a Forbearance Agreement that terminates on December 31, 2007, which was subsequently amended on November 12, 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 “Existing Defaults”). In accordance with the Forbearance Agreement, WFBC has agreed to waive the Existing Defaults based upon the Borrower’s consummation and receipt of $8,000 related to the issuance of subordinated debt described below. The parties have agreed to establish financial covenants for fiscal year 2008 prior to the conclusion of the Forbearance Period.

F - 51

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 18 - Subsequent Events, continued

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

The $5,000 proceeds were deposited in escrow on November 14, 2007 and will be released from escrow upon the Company receiving the waiver of the Existing Defaults from WFBC in writing in accordance with the terms of the Forbearance Agreement.

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 54% of the Company’s voting stock (the “Major Shareholders”), including Raj Sutaria, who is a Company Executive Vice President.

F - 52

INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 

(In thousands, except per share data)

NOTE 18 - Subsequent Events, 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 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, 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.

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.

F-53

EX-4.2

Exhibit 4.2

THIS INSTRUMENT IS SUBJECT TO THE TERMS OF A SUBORDINATION AGREEMENT BY MAGANLAL SUTARIA AND VIMLA SUTARIA IN FAVOR OF WELLS FARGO BANK, NATIONAL ASSOCIATION, ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT OPERATING DIVISION, DATED NOVEMBER 7, 2007.

No. 1	$3,000,000
Date: November 7, 2007

INTERPHARM HOLDINGS INC.

AND

INTERPHARM, INC.

JUNIOR SUBORDINATED SECURED 12% NOTE DUE 2010

THIS NOTE is a duly authorized and issued promissory note of INTERPHARM HOLDINGS INC., a Delaware corporation (the “Company”), and INTERPHARM, INC., a New York corporation (“Interpharm” and together with the Company, the “Borrowers”) designated as their Junior Subordinated Secured 12% Notes due 2010, in the original aggregate principal amount of $3,000,000 (the “Note”).

FOR VALUE RECEIVED, the Borrowers, jointly and severally, promise to pay to the order of MAGANLAL AND VIMLA SUTARIA, as joint tenants with right of survivorship, or their registered assigns (the “Holder”), the principal sum of three million ($3,000,000) dollars, on the Maturity Date (as defined below), or such earlier date as the Notes are required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the then outstanding principal amount of this Note in accordance with the provisions hereof. Notwithstanding anything to the contrary contained herein, this Note shall bear interest on the due and unpaid interest and outstanding principal amount hereof from and after the occurrence and during the continuance of an Event of Default at the rate (the “Default Rate”) equal to eighteen percent (18%).

Interest payable under this Note shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which interest is payable.

Payments of principal and interest shall be made in lawful money of the United States of America to the Holder at its address as provided in Section 12 or by wire transfer to such account specified from time to time by the Holder hereof for such purpose as provided in Section 12.

1.Definitions. In addition to those terms defined above and elsewhere in this Note, for the purposes of this Note, the following terms shall have the meanings here set forth:

“Bankruptcy Event” means any of the following events: (a) any Borrower commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to such Borrower; (b) there is commenced against any Borrower any such case or proceeding that is not dismissed within 60 days after commencement; (c) any Borrower is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) any Borrower suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) any Borrower makes a general assignment for the benefit of creditors; (f) any Borrower fails to pay, or states that it is unable to pay or is unable to pay, its debts generally as they become due; (g) any Borrower calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (h) any Borrower, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.

“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to remain closed.

“Change of Control” will be deemed to exist if (i) there occurs any consolidation, merger or other business combination of any Borrower with or into any other corporation or other entity or person (whether or not such Borrower is the surviving corporation), or any other corporate reorganization or transaction or series of related transactions in which in any of such events the voting stockholders of such Borrower prior to such event cease to own fifty percent (50%) or more of the voting power, or corresponding voting equity interests, of the surviving corporation after such event (including without limitation: (x) any “going private” transaction under Rule 13e-3 promulgated pursuant to the Exchange Act or (y) any tender offer by the Company under Rule 13e-4 promulgated pursuant to the Exchange Act for twenty percent (20%) or more of the Company's Common Stock), (ii) any person (as defined in Section 13(d) of the Exchange Act), other than the Sutaria Parties (as defined below), together with their affiliates and associates (as such terms are defined in Rule 405 under the Securities Act), beneficially owns or is deemed to beneficially own (as described in Rule 13d-3 under the Exchange Act without regard to the 60-day exercise period) in excess of fifty percent (50%) of the Company’s voting power, (iii) there is a replacement of more than one-half of the members of the Company’s Board of Directors which is not approved by those individuals who are members of the Company’s Board of Directors on the date thereof, (iv) in one or a series of related transactions, there is a sale or transfer of all or substantially all of the assets of the Company, determined on a consolidated basis, or (v) any Borrower enters into any agreement providing for an event set forth in (i), (ii), (iii) or (iv) above.

“Collateral Agent” means Sutaria Family Realty, LLC, a New York limited liability company, and its successors and assigns.

“Common Stock” means the common stock, par value $0.01 per share, of the Company.

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“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Lien” means any lien, charge, claim, security interest, encumbrance, right of first refusal or other restriction.

“Maturity Date”means November 7, 2010.

“Original Issue Date” means the date of the first issuance of the Note, regardless of the number of transfers of the Note.

“Securities Act” means the Securities Act of 1933, as amended.

“Security Agreement” means the Security Agreement, dated as of the date hereof, made by each of the Borrowers in favor of the Collateral Agent, as amended or supplemented from time to time in accordance with its terms.

“Security Documents” means the Security Agreement, and all other security agreements, pledge agreements, collateral assignments, mortgages, collateral agency agreements, control agreements, deeds of trusts or other grants or transfers for security executed by any Borrower creating (or purporting to create) a Lien upon property in favor of the Collateral Agent, in each case, as amended, modified, renewed, restated or replaced, in whole or in part, from time to time, in accordance with its terms.

“Senior Credit Agreement” means the Credit and Security Agreement, dated as of February 9, 2006, by and between Interpharm, Inc. and Wells Fargo Bank, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreement may be amended, restated, supplemented, refinanced, replaced, refunded or otherwise modified from time to time, whether by the same lender or any other lender or group of lenders.

“Subsidiary” means any Person in which the Company or Interpharm, directly or indirectly, owns capital stock or holds an equity or similar interest.

“Sutaria Parties” means P&K Holdings I, LLC, a New York limited liability company, Rajs Holdings I, LLC, a New York limited liability company, Rametra Holdings I, LLC, a New York limited liability company, Maganlal K. Sutaria, Vilma Sutaria, Perry Sutaria, Raj Sutaria and Mona Rametra.

“Trading Day” means (a) any day on which the Common Stock is listed or quoted and traded on its primary Trading Market, (b) if the Common Stock is not then listed or quoted and traded on any Eligible Market, then any day on which trading occurs on the NASDAQ Global Market (or any successor thereto), or (c) if trading ceases to occur on the NASDAQ Global Market (or any successor thereto), any Business Day.

“Trading Market” means the American Stock Exchange or any other Eligible Market, or any other national securities exchange, market or trading or quotation facility on which the Common Stock is then listed or quoted.

3

“Transaction Documents” means this Note, the Security Documents and any other agreement, document or instrument entered into or delivered, now or in the future, by any of the Borrowers in connection with this Note or any of the other Transaction Documents.

“Triggering Event” means any of the following events: (a) any of the Borrowers defaults in the timely performance of any other obligation under the Transaction Documents and such default continues uncured for a period of 10 calendar days after the date on which notice of such default is first given to such Borrower by the Holder (it being understood that no prior notice need be given in the case of a default that cannot reasonably be cured within such 10 days); or (b) the Company has not received an additional $5,000,000 investment by November 30, 2007.

2.Payment of Principal and Interest.

(a)Interest. The Company shall pay interest to the Holder on the aggregate then outstanding principal amount of this Note at a rate equal to 12% per annum, payable quarterly in arrears on each March 31, June 30, September 30 and December 31, except if such date is not a Trading Day, in which case such interest shall be payable on the next succeeding Trading Day (each, an “Interest Payment Date”). The first Interest Payment Date shall be December 31, 2007.

(b)Principal Payment at Maturity. The Company shall pay the outstanding principal balance of this Note to the Holder on the Maturity Date, together with any accrued and unpaid interest.

(c)Post-Maturity Interest. In the event the Company can not pay the outstanding principal of this Note due and owing to the Holder on the Maturity Date, the Company shall continue to pay interest to the Holder on the aggregate then outstanding principal amount of this Note pursuant to the terms of Section 2(a) herein until such time as the aggregate principal amount has been paid to the Holders.

(d)Cash or PIK Notes.

(i)Subject to the conditions and limitations set forth below, from the Original Issue Date to a date twelve (12) months therefrom, the Company may pay interest on this Note, at its option, (x) in cash or (y) by the Borrowers issuing an additional Note with a principal amount equal to the interest then due and payable (a “PIK Note”).

(ii)Subject to the conditions and limitations set forth below, from the date twelve (12) months from the Original Issue Date through the Maturity Date, unless the Holder otherwise consents, eight (8%) percent of the interest payment due shall be paid in cash, with the remaining four (4%) percent of the interest payment due paid in (x) PIK Notes and/or (y) in cash, at the Company’s option.

4

(e)Prepayment. Upon at least thirty (30) days prior written notice to the Holder (which notice shall indicate the date on which the prepayment will be made and the amount of such prepayment), the Borrowers shall have the right to prepay, in whole or in part, the Note, plus, in each case all accrued and unpaid interest (which for such purpose shall be payable in cash only), if any, thereon to the date of such prepayment, and plus, all other amounts, costs, expenses and liquidated damages due hereunder (the “Prepayment Price”).

3.Ranking and Covenants.

(a)Except pursuant to the Senior Credit Agreement and except additional indebtedness of $5,000,000 in initial principal amount to be funded by November 30, 2007 (the “Existing Indebtedness”) and all indebtedness of the Company, now or in the future, which by their terms rank senior to this Note, no indebtedness of any of the Borrowers is senior to this Note in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise. Other than the Existing Indebtedness and any renewal, refinancing or replacement thereof that does not exceed the aggregate amount of the borrowing availability under the Senior Credit Agreement as it exists on the date hereof, the Borrowers will not, and will not permit any Subsidiary to, directly or indirectly, enter into, create, incur, assume or suffer to exist any indebtedness of any kind, that is senior in any respect to the Borrowers’ obligations under the Notes, and the Borrowers will not, and will not permit any Subsidiary to, directly or indirectly, incur any Lien on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom.

4.Registration of Notes. The Borrowers shall register the Notes upon records to be maintained by the Borrowers for that purpose (the “Note Register”) in the name of each record holder thereof from time to time. The Borrowers may deem and treat the registered Holder of this Note as the absolute owner hereof for the purpose of any conversion hereof or any payment of interest or principal hereon, and for all other purposes, absent actual notice to the contrary.

5.Registration of Transfers and Exchanges. The Borrowers shall register the transfer of any portion of this Note in the Note Register upon surrender of this Note to the Borrowers at their address for notice set forth herein. Upon any such registration or transfer, a new Note, in substantially the form of this Note (any such new Note, a “New Note”), evidencing the portion of this Note so transferred shall be issued to the transferee and a New Note evidencing the remaining portion of this Note not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Note by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Note. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge or other fee will be imposed in connection with any such registration of transfer or exchange.

6.Intentionally Omitted.

7.Intentionally Omitted.

5

8.Events of Default.

(a)“Event of Default” means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body), which remains uncured, to the extent curable, for a period of ten (10) days following receipt by the Borrowers of written notice from Perry Sutaria:

(i)any default in the payment of principal, interest or liquidated damages in respect of the Note, as and when the same becomes due and payable (whether on a date specified for the payment of interest or the date on which the obligations under the Note mature or by acceleration, redemption, prepayment or otherwise);

(ii)any of the Borrowers or any Subsidiary defaults in any of its obligations under any other note or any mortgage, credit agreement (including the Senior Credit Agreement) or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of any Borrower or any Subsidiary and such default results in an acceleration of indebtedness in an amount exceeding $1,000,000, whether such indebtedness now exists or is hereafter created, and such default results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;

(iii)a material breach by any Borrower of its covenants, representations or warranties hereunder, in any Transaction Document;

(iv)any material provision hereof or any Transaction Document shall for any reason cease to be valid, binding and enforceable with respect to any party hereto or thereto (other than the Holder) in accordance with its terms, or any such party challenges the enforceability hereof or thereof, or shall assert in writing, or take any action or fail to take any action based on the assertion that any provision hereof or any Transaction Document has ceased to be or is otherwise not valid, binding or enforceable in accordance with its terms, or any security interest provided for therein shall cease to be a valid and perfected security interest in any of the collateral purported to be subject thereto; or

(v)any Borrower revokes or terminates or purports to revoke or terminate or fails to perform any of the terms, covenants, conditions provisions of any guarantee, endorsement or other agreement of such party in favor of Collateral Agent or the Holder;

(vi)the occurrence of a Bankruptcy Event; and

(vii)the occurrence of a Triggering Event.

(b)At any time or times following the occurrence of an Event of Default, in addition to any other remedy available to the Holder hereunder or available under any applicable law, the Holder shall have the option to elect, by notice to the Borrowers (an “Event Notice”), to require the Borrowers to repurchase all or any portion of the outstanding principal amount of this Note, at a repurchase price equal to 115% of such outstanding principal amount, plus all accrued but unpaid interest thereon through the date of payment. The aggregate amount payable pursuant to the preceding sentence is referred to as the “Event Price.” The Borrowers shall pay the Event Price to the Holder no later than the third Trading Day following the date of delivery of the Event Notice, and upon receipt thereof the Holder shall deliver this Note so repurchased to the Borrowers.

6

(c)Upon the occurrence of any Bankruptcy Event, all amounts pursuant to Section 8(b) shall immediately become due and payable in full in cash, without any further action by the Holder.

(d)In connection with any Event of Default, the Holder need not provide and the Borrowers hereby waive any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Any such declaration may be rescinded and annulled by the Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereto. The remedies under this Note or available under applicable law shall be cumulative.

9.Intentionally Omitted.

10.Intentionally Omitted.

11.Intentionally Omitted.

12.Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 12 prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 12 on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to any of the Borrowers, at 75 Adams Avenue, Hauppauge, New York 11788, or (ii) if to the Holder, to the address or facsimile number appearing on the Company’s Holders records or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 12.

13.Miscellaneous.

(a)This Note shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Borrowers shall not be permitted to assign this Note.

(b)Subject to Section 13(a), nothing in this Note shall be construed to give to any person or corporation other than the Borrowers and the Holder any legal or equitable right, remedy or cause under this Note.

7

(c)Governing Law; Venue; Waiver Of Jury Trial. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE BORROWERS HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

(d)The headings herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

(e)In case any one or more of the provisions of this Note shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Note shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Note.

(f)No provision of this Note may be waived or amended except in a written instrument signed, in the case of an amendment, by the Borrowers and the Holder or, or, in the case of a waiver, by the Holder. No waiver of any default with respect to any provision, condition or requirement of this Note shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOLLOWS]

8

IN WITNESS WHEREOF, the Borrowers have caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.

INTERPHARM HOLDINGS INC.
By
	Name:
	Title:

INTERPHARM, INC.
By
	Name:
	Title:

9

EX-4.3

Exhibit 4.3

FORM OF STAR NOTE

THIS INSTRUMENT IS SUBJECT TO THE TERMS OF THE SUBORDINATION AGREEMENT BY AND AMONG TULLIS-DICKERSON CAPITAL FOCUS III, L.P., AISLING CAPITAL II, L.P., CAMERON REID, SUTARIA FAMILY REALTY, LLC AND WELLS FARGO BANK, NATIONAL ASSOCIATION, ACTING THROUGH ITS WELLS FARGO BUSINESS CREDIT OPERATING DIVISION, DATED NOVEMBER __, 2007.

No. [               ]	$[                ]
Date: [_________ __], 2007

INTERPHARM HOLDINGS INC.

AND

INTERPHARM, INC.

SECURED 12% NOTE DUE 2009

THIS NOTE is one of a series of duly authorized and issued promissory notes of INTERPHARM HOLDINGS INC., a Delaware corporation (the “Company”), and INTERPHARM, INC., a New York corporation (“Interpharm” and together with the Company, the “Borrowers”) designated as their Secured 12% Notes due 2009, in the original aggregate principal amount of $5,000,000 (each a “Note” and collectively, the “Notes”). Notwithstanding anything to the contrary herein, any rights or remedies of the Holder under this Note and the Holders under all other Notes may be exercised or waived, and this Note may be amended or modified, only by the holders of a majority in principal amount of Notes outstanding held by Tullis-Dickerson Capital Focus III, L.P., Aisling Capital II, L.P. and Cameron Reid or any of their successors in interest or transferees (such majority, the “Required Holders”), and any right so exercised or waived, and any such amendment or modification, shall apply to all Notes; provided that if such modification, amendment or waiver would adversely affect a Holder in a manner different than any other Holder, then such modification, amendment or waiver will require the consent of such Holder adversely affected. Holder acknowledges that by the operation of this paragraph, the Required Holders will have the right and power to diminish or eliminate rights of such Holder under this Note.

FOR VALUE RECEIVED, the Borrowers, jointly and severally, promise to pay to the order of [Holder] or its registered assigns (the “Holder”), the principal sum of [__________] $(__________), on the Maturity Date (as defined below), or such earlier date as the Notes are required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the then outstanding principal amount of this Note in accordance with the provisions hereof. Notwithstanding anything to the contrary contained herein, this Note shall bear interest on the due and unpaid interest and outstanding principal amount hereof from and after the occurrence and during the continuance of an Event of Default at the rate (the “Default Rate”) equal to the lower of eighteen percent (18%) or the highest rate permitted by law.

Interest payable under this Note shall be computed on the basis of a year of 360 days and actual days elapsed (including the first day but excluding the last day) occurring in the period for which interest is payable.

Payments of principal and interest shall be made in lawful money of the United States of America to the Holder at its address as provided in Section 7 or by wire transfer to such account specified from time to time by the Holder hereof for such purpose as provided in Section 7.

1.Definitions. In addition to the terms defined above and elsewhere in this Note, (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Securities Purchase Agreement, dated as of November __, 2007, among the Borrowers and the Purchasers identified therein (the “Purchase Agreement”), and (b) for the purposes of this Note, the following terms shall have the meanings indicated:

“Bankruptcy Event” means any of the following events: (a) any of the Borrowers commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to such Borrower; (b) there is commenced against any of the Borrowers any such case or proceeding that is not dismissed within 60 days after commencement; (c) any of the Borrowers is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) any of the Borrowers suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) any of the Borrowers makes a general assignment for the benefit of creditors; (f) any of the Borrowers fails to pay, or states that it is unable to pay or is unable to pay, its debts generally as they become due; (g) any of the Borrowers calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (h) any of the Borrowers, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.

“Change of Control” will be deemed to exist if (i) there occurs any consolidation, merger or other business combination of a Borrower with or into any other corporation or other entity or person (whether or not such Borrower is the surviving corporation), or any other corporate reorganization or transaction or series of related transactions in which in any of such events the voting stockholders of such Borrower prior to such event cease to own fifty percent (50%) or more of the voting power, or corresponding voting equity interests, of the surviving corporation after such event (including without limitation: (x) any “going private” transaction under Rule 13e-3 promulgated pursuant to the 1934 Act or (y) any tender offer by the Company under Rule 13e-4 promulgated pursuant to the 1934 Act for twenty percent (20%) or more of the Company's Common Stock), (ii) any person (as defined in Section 13(d) of the 1934 Act), other than the Sutaria Parties, together with their affiliates and associates (as such terms are defined in Rule 405 under the 1933 Act), beneficially owns or is deemed to beneficially own (as described in Rule 13d-3 under the 1934 Act without regard to the 60-day exercise period) in excess of fifty percent (50%) of the Company’s voting power, (iii) there is a replacement of more than one-half of the members of the Company’s Board of Directors which is not approved by those individuals who are members of the Company’s Board of Directors on the date thereof, (iv) in one or a series of related transactions, there is a sale or transfer of all or substantially all of the assets of the Company, determined on a consolidated basis, or (v) any Borrower enters into any agreement providing for an event set forth in (i), (ii), (iii) or (iv) above

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“Convertible Securities” means any convertible securities, warrants, options or other rights to subscribe for or to purchase or exchange for, shares of Common Stock.

“Maturity Date”means October 1, 2009; provided, in the event the Senior Credit Agreement is amended, refinanced or extended such that the maturity date thereunder is later than February 1, 2011, the Maturity Date hereunder shall be automatically extended to October 1, 2010.

“Options” shall mean any rights, warrants or options to subscribe for or purchase common stock or Convertible Securities of the Company.

“Original Issue Date” means the date of the first issuance of any Notes, regardless of the number of transfers of any particular Note.

“Trading Day” means (a) any day on which the Common Stock is listed or quoted and traded on its primary Trading Market, (b) if the Common Stock is not then listed or quoted and traded on any Eligible Market, then any day on which trading occurs on the NASDAQ Global Market (or any successor thereto), or (c) if trading ceases to occur on the NASDAQ Global Market (or any successor thereto), any Business Day.

“Triggering Event” means any of the following events: (a) at any time after November 30, 2007, the Common Stock is not listed or quoted, or is suspended from trading, on an Eligible Market for a period of five or more Trading Days (which need not be consecutive Trading Days); (b) the Company fails to obtain the Shareholder Approval contemplated by the Purchase Agreement on or prior to the date required therein; (c) any of the Borrowers fails to make any cash payment required under the Transaction Documents and such failure is not cured within five Trading Days after notice of such default is first given to such Borrower by a Purchaser; or (d) any of the Borrowers defaults in the timely performance of any other obligation under the Transaction Documents and such default continues uncured for a period of 10 calendar days after the date on which notice of such default is first given to such Borrower by a Purchaser (it being understood that no prior notice need be given in the case of a default that cannot reasonably be cured within such 10 days).

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2.Payment of Principal and Interest.

(a)Interest. The Company shall pay interest to the Holder on the aggregate and then outstanding principal amount of this Note at a rate equal to 12% per annum, payable quarterly in arrears on each March 31, June 30, September 30 and December 31, except if such date is not a Trading Day, in which case such interest shall be payable on the next succeeding Trading Day (each, an “Interest Payment Date”). The first Interest Payment Date shall be December 31, 2007.

(b)Principal Payment at Maturity. The Company shall pay the outstanding principal balance of this Note to the Holder on the Maturity Date, together with any accrued and unpaid interest.

(c)Cash, PIK Notes or Accrual. Subject to the conditions and limitations set forth below, the Company may pay interest on this Note (i) in cash, or (ii) by the Borrowers issuing an additional Note with a principal amount equal to the interest then due and payable (a “PIK Note”), or (iii) in lieu of a PIK Note, any unpaid interest may accrue and be added to the principal amount of this Note.

(d)Prepayment. This Note may not be prepaid.

3.Ranking and Covenants.

(a)Except pursuant to the Senior Credit Agreement, (the “Existing Indebtedness”), no indebtedness of any of the Borrowers is senior to this Note in right of payment, whether with respect to interest, damages or upon liquidation or dissolution or otherwise. Other than the Existing Indebtedness and any renewal, refinancing or replacement thereof that does not exceed the aggregate amount of the borrowing availability under the Senior Credit Agreement as it exists on the date hereof, the Borrowers will not, and will not permit any Subsidiary to, directly or indirectly, enter into, create, incur, assume or suffer to exist any indebtedness of any kind, that is senior in any respect to the Borrowers’ obligations under the Notes, and the Borrowers will not, and will not permit any Subsidiary to, directly or indirectly, incur any Lien on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom.

(b)So long as any Notes are outstanding, none of the Borrowers nor any Subsidiary shall, directly or indirectly, (i) redeem, purchase or otherwise acquire any of the Company’s capital stock or set aside any monies for such a redemption, purchase or other acquisition or (ii) issue any Options or Convertible Securities with an exercise price or a conversion price or a number of underlying shares that floats or resets or otherwise varies or is subject to adjustment based (directly or indirectly) on market prices of the Common Stock.

4.Registration of Notes. The Borrowers shall register the Notes upon records to be maintained by the Borrowers for that purpose (the “Note Register”) in the name of each record holder thereof from time to time. The Borrowers may deem and treat the registered Holder of this Note as the absolute owner hereof for the purpose of any conversion hereof or any payment of interest or principal hereon, and for all other purposes, absent actual notice to the contrary.

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5.Registration of Transfers and Exchanges. The Borrowers shall register the transfer of any portion of this Note in the Note Register upon surrender of this Note to the Borrowers at their address for notice set forth herein. Upon any such registration or transfer, a new Note, in substantially the form of this Note (any such new Note, a “New Note”), evidencing the portion of this Note so transferred shall be issued to the transferee and a New Note evidencing the remaining portion of this Note not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Note by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Note. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge or other fee will be imposed in connection with any such registration of transfer or exchange.

6.Events of Default.

(a)“Event of Default” means any one of the following events (whatever the reason and whether it shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):

(i)any default in the payment of principal, interest or liquidated damages in respect of any Notes, as and when the same becomes due and payable (whether on a date specified for the payment of interest or the date on which the obligations under the Note mature or by acceleration, redemption, prepayment or otherwise) and such default continues for a period of five (5) Trading Days;

(ii)any of the Borrowers or any Subsidiary defaults in any of its obligations under any other note or any mortgage, credit agreement (including the Senior Credit Agreement) or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement of any Borrower or any Subsidiary in an amount exceeding $1,000,000, whether such indebtedness now exists or is hereafter created, and such default (after any applicable notice and passage of time) results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;

(iii)a material breach by any of the Borrowers of its covenants, representations or warranties hereunder or in any other Transaction Document that remains uncured for a period of ten (10) days following receipt by the Borrowers of written notice of such breach;

(iv)any material provision hereof or any other Transaction Document shall for any reason cease to be valid, binding and enforceable with respect to any party hereto or thereto (other than the Holder) in accordance with its terms (and to the extent curable, is not cured within ten (10) Trading Days), or any such party challenges the enforceability hereof or thereof, or shall assert in writing, or take any action or fail to take any action based on the assertion that any provision hereof or any other Transaction Document has ceased to be or is otherwise not valid, binding or enforceable in accordance with its terms, or any security interest provided for therein shall cease to be a valid and perfected security interest in any of the collateral purported to be subject thereto;

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(v)the occurrence of a Triggering Event, which is not cured within 15 calendar days;

(vi)any Borrower revokes or terminates or purports to revoke or terminate or fails to perform any of the terms, covenants, conditions provisions of any guarantee, endorsement or other agreement of such party in favor of Collateral Agent or the Holders;

(vii)any Borrower which is a partnership, limited liability company, limited partnership or a corporation, dissolves, suspends or discontinues doing business; or

(viii)the occurrence of a Bankruptcy Event.

(b)At any time or times following the occurrence of an Event of Default, in addition to any other remedy available to the Required Holders under the Notes or under any other Transaction Document or available under any applicable law, the Required Holders shall have the option to elect, by notice to the Borrowers (an “Event Notice”), to require the Borrowers to repurchase all or any portion of the outstanding principal amount of this Note and all other Notes, at a repurchase price equal to 115% of such outstanding principal amount, plus all accrued but unpaid interest thereon through the date of payment. The aggregate amount payable pursuant to the preceding sentence is referred to as the “Event Price.” The Borrowers shall pay the Event Price to the Holder no later than the third Trading Day following the date of delivery of the Event Notice, and upon receipt thereof the Holder shall deliver this Note to the Borrowers.

(c)Upon the occurrence of any Bankruptcy Event, all amounts pursuant to Section 6(b) shall immediately become due and payable in full in cash, without any further action by the Holder or the Required Holders.

(d)In connection with any Event of Default, the Holder and Required Holders need not provide and the Borrowers hereby waive any presentment, demand, protest or other notice of any kind, and the Required Holders may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to Holder under applicable law. Any such declaration may be rescinded and annulled by the Required Holders or Holder at any time prior to payment hereunder. No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereto. The remedies under this Note and any other Transaction Document or available under applicable law shall be cumulative.

7.Notices. Any and all notices or other communications or deliveries hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 7 prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section 7 on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The addresses for such communications shall be: (i) if to any of the Borrowers, as set forth in the Purchase Agreement, or (ii) if to the Holder, to the address or facsimile number appearing on the Company’s Holders records or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 7, with a copy to the Required Holders.

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8.Miscellaneous.

(a)This Note shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Borrowers shall not be permitted to assign this Note.

(b)Subject to Section 8(a), and subject to the right of the Required Holders to act for and on behalf of Holder with respect to remedies hereunder, nothing in this Note shall be construed to give to any person or corporation other than the Borrowers and the Holder any legal or equitable right, remedy or cause under this Note.

(c)Governing Law; Venue; Waiver Of Jury Trial. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE BORROWERS HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

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(d)The headings herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.

(e)In case any one or more of the provisions of this Note shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Note shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Note.

(f)No provision of this Note may be waived or amended except in a written instrument signed, in the case of an amendment, by the Borrowers and the Required Holders or, in the case of a waiver, by the Holder or the Required Holders. No waiver of any default with respect to any provision, condition or requirement of this Note shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

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SIGNATURE PAGE FOLLOWS]

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IN WITNESS WHEREOF, the Borrowers have caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.

INTERPHARM HOLDINGS INC.
By
	Name:
	Title:

INTERPHARM, INC.
By
	Name:
	Title:

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EX-10.10

Exhibit 10.10

SECURITY AGREEMENT

SECURITY AGREEMENT (this “Security Agreement”) dated as of the 7th day of November, 2007, by and among INTERPHARM HOLDINGS INC. (the “Company”) and INTERPHARM, INC. (the “Subsidiary” and together with the Company, the “Debtors”), and SUTARIA FAMILY REALTY, LLC, in its capacity as the collateral agent (together with any successors thereto in such capacity, the “Collateral Agent”) for the benefit of the holders (the “Holders”) of the Note (as defined below) (the Collateral Agent and the Holders are hereinafter referred to as the “Secured Parties”).

Recitals

A.Debtors have agreed to issue to the Holders, the Debtors’ Junior Subordinated Secured 12% Note due 2010 in the principal amount of $3,000,000 (the “Note”); and

C.As a condition to each of the Holders’ obligation to purchase the Note, the Secured Parties have required, and the Debtors have agreed, to execute and deliver certain agreements to provide collateral security for the obligations of the Debtors under the Note, this Security Agreement and any other agreements entered into, now or in the future by the Debtors in connection with the Note (hereinafter collectively referred to as the “Sutaria Documents”);

Agreement

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Defined Terms. Terms not otherwise defined in this Security Agreement (including Annex A hereto), unless the context indicates otherwise, have the meanings set forth in the Note, or if not defined in the Note, then as provided for by the Code to the extent the same are used or defined therein.

2.Grant Of Lien.

(a)To secure the prompt and complete payment, performance and observance when due (whether at stated maturity, by acceleration or otherwise) of all of the Secured Obligations, the Debtors hereby grant, assign, convey, mortgage, pledge, hypothecate and transfer to the Collateral Agent, for itself and the benefit of the Secured Parties, security interests in all of their right, title and interest in, to and under all personal property and other assets described below, whether now owned by or owing to, or hereafter acquired by or arising in favor of the Debtors, and whether owned or consigned by or to, or leased from or to, the Debtors, and regardless of where located (all of which being hereinafter collectively referred to as the “Collateral”): (i) all Accounts; (ii) all General Intangibles; (iii) all goods, including, without limitation, Inventory and Equipment; (iv) all real property and fixtures; (v) all Chattel Paper; (vi) all Instruments (including all promissory notes); (vii) all documents; (viii) all Deposit Accounts, including all deposits therein; (ix) all money, cash or cash equivalents of the Debtor; (x) all books and records pertaining to the Collateral; (xi) all investment property (including securities, whether certificated or uncertificated, securities accounts, security entitlements, commodity contracts or commodity accounts); (xii) to the extent not otherwise included, all Proceeds, tort claims, insurance claims and other rights to payments not otherwise included in the foregoing and products of the foregoing and all accessions to, substitutions and replacements for, and rents and profits of, each of the foregoing.

(b)In addition, to secure the prompt and complete payment, performance and observance of the Secured Obligations and in order to induce the Secured Parties as aforesaid, the Debtors hereby grant to the Collateral Agent, for the benefit of the Secured Parties, a right of setoff against the property of the Debtor held by the Secured Parties, consisting of property described above in Section 2(a) now or hereafter in the possession or custody of or in transit to the Secured Parties, for any purpose, including safekeeping, collection or pledge, for the account of the Debtors, or as to which the Debtors may have any right or power.

3.Representations and Warranties. The Debtors represent and warrant that:

(a)The Debtors are corporations duly organized and in good standing under the laws of the jurisdiction of its incorporation. The execution and delivery, and performance of this Security Agreement, the Note to which it is a party and the transactions contemplated hereunder and thereunder (i) are all within the Debtors’ corporate powers, (ii) have been duly authorized, (iii) are not in contravention of law or the terms of the Debtors’ certificates of incorporation or by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which the Debtors are a party or by which their property is bound and (iv) will not result in the creation or imposition of, or require or give rise to any obligation to grant, any lien, security interest, charge or other encumbrance upon any property of the Debtors other than in favor of the Secured Parties. This Security Agreement and the Note to which the Debtors are a party constitute legal, valid and binding obligations of the Debtors enforceable in accordance with their respective terms.

(b)As of the date hereof and after the creation of the Secured Obligations and the security interest of the Secured Parties, the Debtors (i) own assets and property whose fair saleable value is greater than the amount that is likely to be required to pay all of their liabilities (including contingent liabilities as and when they become due); (ii) are able to pay all of its liabilities as such liabilities mature; (iii) have capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage; and (iv) are not “insolvent” within the meaning of Section 101(32) of the Bankruptcy Code.

(c)The Debtors have rights in and the power to transfer, and are the sole beneficial owners of, each item of the Collateral upon which it purport to grant a Lien hereunder free and clear of any and all Liens.

(d)No effective security agreement, financing statement, equivalent security or Lien instrument or continuation statement covering all or any part of the Collateral is on file or of record in any public office, except pursuant to the Senior Credit Agreement.

(e)This Security Agreement is effective to create a valid and continuing Lien on and, upon the filing of appropriate financing statements with the governmental offices listed on Schedule I hereto, a perfected Lien in favor of the Collateral Agent, for the benefit of the Secured Parties, on the Collateral with respect to which a Lien may be perfected by filing pursuant to Article 9 of the Code. As of the Initial Closing, such Lien will be prior to all other Liens (other than Liens in favor of the lender under the Senior Credit Agreement and those in favor of the Purchaser), and is enforceable as such as against any and all creditors of and purchasers from the Debtors.

(f)The Debtors’ names as they appears in official filings in the jurisdiction of its incorporation or other organization, the type of entity of each Debtor (including corporation, partnership, limited partnership or limited liability company), organizational identification number issued by the Debtors’ jurisdictions of incorporation or organization or a statement that no such number has been issued, the Debtors’ jurisdictions of organization or incorporation, the location of the Debtors’ chief executive offices, principal places of business, offices and premises where Collateral is stored or located, and the locations of their books and records concerning the Collateral are set forth on Schedule II hereto. Each of the Debtors has only one state of incorporation or organization. The Debtors have not, during the five years prior to the date of this Security Agreement, been known by or used any other corporate or fictitious name or been party to any merger or consolidation, or acquired all or substantially all of the assets of any Person, or acquired any of its property or assets out of the ordinary course of business, except as set forth on Schedule II hereto. The Debtors have not (i) within the period of four months prior to the date hereof, changed their locations (as defined in Section 9-307 of the Code), (ii) except as specified on Schedule II hereto, heretofore changed their names, or (iii) except as specified on Schedule II hereto, heretofore became “new debtor” (as defined in Section 9-102(a)(56) of the Code) with respect to a currently effective security agreement previously entered into by any other Person.

(g)The Debtors do not own or license any Trademarks, Patents or Copyrights or other Intellectual Property, except as set forth on Schedule III hereto.

4.Covenants. The Debtors covenant and agree with the Collateral Agent, for the benefit of the Secured Parties, that from and after the date of this Security Agreement and until the Termination Date:

(a)Further Assurances.

(i)At any time and from time to time (including upon any written request of the Collateral Agent), at the sole expense of the Debtors, the Debtors shall promptly and duly execute and deliver any and all such further instruments and documents and take such further actions as may be necessary or desirable or reasonably requested by the Collateral Agent to obtain the full benefits of this Security Agreement and of the rights and powers herein granted, including (A) using all reasonable efforts to secure all consents and approvals necessary or appropriate to enforce the security interests granted hereunder; and (B) filing any financing statements, mortgages, continuation statements, assignments and amendments with respect to the Liens granted hereunder as to those jurisdictions that are not Uniform Commercial Code jurisdictions.

(ii)The Debtors hereby irrevocably and unconditionally authorize the Collateral Agent at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements, continuation statements, assignments and amendments thereto that (a) indicate the Collateral, and (b) contain any other information required by Article 9 of the Code for the sufficiency or filing office acceptance of any financing statement or amendment. The Debtors agree to furnish any such information to the Collateral Agent promptly upon request. The Debtors also ratify their authorization for the Collateral Agent to have filed in any Uniform Commercial Code jurisdiction any initial financing statements or amendments thereto if filed prior to the date hereof and ratifies and confirms the authorization of the Collateral Agent to file such financing statements (and amendments, if any). The Debtors hereby authorize the Collateral Agent to adopt on behalf of the Debtors any symbol required for authenticating any electronic filing. In the event that the description of the collateral in any financing statement naming the Collateral Agent or its designee as the secured party and the Debtors as debtors includes assets and properties of the Debtors that do not at any time constitute Collateral, whether hereunder, under any of the other Documents or otherwise, the filing of such financing statement shall nonetheless be deemed authorized by the Debtors to the extent of the Collateral included in such description and it shall not render the financing statement ineffective as to any of the Collateral or otherwise affect the financing statement as it applies to any of the Collateral. In no event shall the Debtors at any time file, or permit or cause to be filed, any correction statement or termination statement with respect to any financing statement (or amendment or continuation with respect thereto) naming the Collateral Agent or its designee as secured party and the Debtors as debtors.

(iii)The Debtors shall take all steps necessary to grant the Collateral Agent control of and a perfected Lien on all Chattel Paper, Instruments, Deposit Accounts, Investment Property, investment accounts, security accounts, commodity accounts, letters of credit or banker’s acceptance constituting Collateral (including, without limitation, the delivery to the Collateral Agent of all such Collateral, accompanied by such instruments of transfer or assignment duly executed in black, the delivery of a deposit or investment property control agreement executed by the Debtors and any applicable financial institution).

(iv)The Debtors shall, upon the occurrence and during the continuance of any Event of Default, upon request of the Collateral Agent, promptly notify (and the Debtors hereby authorize the Collateral Agent so to notify) each Account Debtor in respect of any Accounts of the Debtors that such Collateral has been assigned to the Collateral Agent hereunder, and that any payments due or to become due in respect thereof are to be made directly to the Collateral Agent.

(b)Maintenance of Records. The Debtors shall keep and maintain, at its own cost and expense, satisfactory and complete records of the Collateral, including a record of any and all payments received and any and all credits granted with respect to the Collateral in the same manner such records are presently kept and maintained.

(c)Limitation on Liens on Collateral. The Debtors will not create, permit or suffer to exist, and the Debtors will defend the Collateral against, and take such other action as is necessary to remove, any Lien on the Collateral, and will defend the right, title and interest of the Secured Parties in and to any of the Debtors’ rights under the Collateral against the claims and demands of all Persons whomsoever, other than Liens pursuant to the Senior Credit Agreement.

(d)Limitations on Disposition. The Debtors will not sell, license, lease, transfer or otherwise dispose of any of the Collateral (other than Inventory in the ordinary course of business), or attempt or contract to do so.

(e)Further Identification of Collateral. The Debtors will, if so requested by the Collateral Agent, furnish to the Collateral Agent, as often as the Collateral Agent reasonably requests, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in such detail as the Collateral Agent may reasonably specify.

(f)Notices. The Debtors will advise the Collateral Agent promptly, in reasonable detail, (i) of any Lien or written claim made or asserted against any of the Collateral, and (ii) of the occurrence of any other event which could have a material adverse effect on the value of the Collateral or on the Liens created hereunder.

(g)No Reincorporation; No Name Change. The Debtors shall not reincorporate or reorganize itself under the laws of any jurisdiction other than the jurisdictions in which they are incorporated or organized as of the date hereof without the prior written consent of the Collateral Agent. The Debtors shall not change their legal names without first giving 30 days prior written notice of its intent to do so to the Collateral Agent.

5.Collateral Agent’s Appointment As Attorney-in-fact. On the Original Issue Date, the Debtors shall execute and deliver to the Collateral Agent a power of attorney (the “Power of Attorney”) substantially in the form attached hereto as Exhibit A. The power of attorney granted pursuant to the Power of Attorney is a power coupled with an interest and shall be irrevocable until the Termination Date. The powers conferred on the Collateral Agent, for the benefit of the Secured Parties, under the Power of Attorney are solely to protect the Collateral Agent’s interests (for the benefit of the Secured Parties) in the Collateral and shall not impose any duty upon the Secured Parties to exercise any such powers. The Collateral Agent agrees that (a) except for the powers granted in clause (h) of the Power of Attorney, it shall not exercise any power or authority granted under the Power of Attorney unless an Event of Default has occurred and is continuing, and (b) the Collateral Agent shall account for any moneys received by the Collateral Agent in respect of any foreclosure on or disposition of Collateral pursuant to the Power of Attorney provided that the Secured Parties shall not have any duty as to any Collateral, and the Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers. NONE OF THE SECURED PARTIES OR THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO THE DEBTORS FOR ANY ACT OR FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION.

6.Remedies: Rights Upon Default.

(a)In addition to all other rights and remedies granted to it under this Security Agreement, the Note and under any other instrument or agreement securing, evidencing or relating to any of the Secured Obligations, if any Event of Default shall have occurred and be continuing, the Secured Parties may exercise all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Debtors expressly agree that in any such event the Secured Parties, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Debtors or any other Person (all and each of which demands, advertisements and notices are hereby expressly waived to the maximum extent permitted by the Code and other applicable law), may forthwith enter upon the premises of the Debtors where any Collateral is located through self-help, without judicial process, without first obtaining a final judgment or giving the Debtors or any other Person notice and opportunity for a hearing on the Secured Parties’ claim or action and may collect, receive, assemble, process, appropriate and realize upon the Collateral, or any part thereof, and may forthwith sell, lease, license, assign, give an option or options to purchase, or sell or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at a public or private sale or sales, at any exchange at such prices as it may deem acceptable, for cash or on credit or for future delivery without assumption of any credit risk. The Secured Parties shall have the right upon any such public sale or sales and, to the extent permitted by law, upon any such private sale or sales, to purchase for the benefit of the Secured Parties, the whole or any part of said Collateral so sold, free of any right or equity of redemption, which equity of redemption the Debtors hereby release. Such sales may be adjourned and continued from time to time with or without notice. The Secured Parties shall have the right to conduct such sales on the Debtors’ premises or elsewhere and shall have the right to use the Debtors’ premises without charge for such time or times as the Secured Parties deems necessary or advisable.

If any Event of Default shall have occurred and be continuing, the Debtors further agree, at the Collateral Agent’s request, to assemble the Collateral and make it available to the Collateral Agent at a place or places designated by the Collateral Agent which are reasonably convenient to the Collateral Agent and the Debtors, whether at the Debtors’ premises or elsewhere. Until the Secured Parties are able to affect a sale, lease, or other disposition of Collateral, the Secured Parties shall have the right to hold or use Collateral, or any part thereof, to the extent that it deems appropriate for the purpose of preserving Collateral or its value or for any other purpose deemed appropriate by the Secured Parties. The Secured Parties shall have no obligation to the Debtors to maintain or preserve the rights of the Debtors as against third parties with respect to Collateral while Collateral is in the possession of the Secured Parties. The Secured Parties may, if they so elect, seek the appointment of a receiver or keeper to take possession of Collateral and to enforce any of the Secured Parties’ remedies, with respect to such appointment without prior notice or hearing as to such appointment. The Secured Parties shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale to the Secured Obligations, and only after so paying over such net proceeds, and after the payment by the Secured Parties of any other amount required by any provision of law, need the Secured Parties account for the surplus, if any, to the Debtors. To the maximum extent permitted by applicable law, the Debtors hereby waive all claims, damages, and demands against the Secured Parties arising out of the repossession, retention or sale of the Collateral except such as arise solely out of the gross negligence or willful misconduct of such Secured Party as finally determined by a court of competent jurisdiction. The Debtors agree that ten (10) days prior notice by the Secured Parties of the time and place of any public sale or of the time after which a private sale may take place is reasonable notification of such matters. The Debtors shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all Secured Obligations, including any attorneys’ fees and other expenses incurred by the Secured Parties to collect such deficiency.

(b)Except as otherwise specifically provided herein, the Debtors hereby waive presentment, demand, protest or any notice (to the maximum extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral.

(c)To the extent that applicable law imposes duties on Secured Parties to exercise remedies in a commercially reasonable manner, the Debtors acknowledge and agree that it is not commercially unreasonable for the Secured Parties (i) to fail to incur expenses reasonably deemed significant by the Secured Parties to prepare Collateral for disposition or otherwise to complete raw material or work in process into finished goods or other finished products for disposition, (ii) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (iii) to fail to exercise collection remedies against Account Debtors or other Persons obligated on Collateral or to remove Liens on or any adverse claims against Collateral, (iv) to exercise collection remedies against Account Debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (v) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (vi) to contact other Persons, whether or not in the same business as the Debtors, for expressions of interest in acquiring all or any portion of such Collateral, (vii) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the Collateral is of a specialized nature, (viii) to dispose of Collateral by utilizing internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capacity of doing so, or that match buyers and sellers of assets, (ix) to dispose of assets in wholesale rather than retail markets, (x) to disclaim disposition warranties, such as title, possession or quiet enjoyment, (xi) to purchase insurance or credit enhancements to insure the Secured Parties against risks of loss, collection or disposition of Collateral or to provide to the Secured Parties a guaranteed return from the collection or disposition of Collateral, or (xii) to the extent deemed appropriate by the Secured Parties, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Secured Parties in the collection or disposition of any of the Collateral. The Debtors acknowledge that the purpose of this Section 6(c) is to provide non-exhaustive indications of what actions or omissions by the Secured Parties would not be commercially unreasonable in the Secured Parties’ exercise of remedies against the Collateral and that other actions or omissions by the Secured Parties shall not be deemed commercially unreasonable solely on account of not being indicated in this Section 6(c). Without limitation upon the foregoing, nothing contained in this Section 6(c) shall be construed to grant any rights to the Debtors or to impose any duties on the Secured Parties that would not have been granted or imposed by this Security Agreement or by applicable law in the absence of this Section 6(c).

(d)The Secured Parties shall not be required to make any demand upon, or pursue or exhaust any of their rights or remedies against, the Debtors, any other obligor, guarantor, pledgor or any other Person with respect to the payment of the Secured Obligations or to pursue or exhaust any of their rights or remedies with respect to any Collateral therefor or any direct or indirect guarantee thereof. The Secured Parties shall not be required to marshal the Collateral or any guarantee of the Secured Obligations or to resort to the Collateral or any such guarantee in any particular order, and all of its and their rights hereunder or under any other Document shall be cumulative. To the extent it may lawfully do so, the Debtors absolutely and irrevocably waive and relinquish the benefit and advantage of, and covenant not to assert against the Secured Parties, any valuation, stay, appraisement, extension, redemption or similar laws and any and all rights or defenses it may have as sureties now or hereafter existing which, but for this provision, might be applicable to the sale of any Collateral made under the judgment, order or decree of any court, or privately under the power of sale conferred by this Security Agreement, or otherwise.

7.Grant Of Licenses To Use Intellectual Property Collateral. For the purpose of enabling the Secured Parties to exercise rights and remedies under Section 6 hereof (including, without limiting the terms of Section 6 hereof, in order to take possession of, hold, preserve, process, assemble, prepare for sale, market for sale, sell or otherwise dispose of Collateral) at such time as the Secured Parties shall be lawfully entitled to exercise such rights and remedies, the Debtors hereby grant to the Secured Parties, irrevocable, nonexclusive licenses (exercisable without payment of royalty or other compensation to the Debtors) to use, license or sublicense any Intellectual Property now owned or hereafter acquired by the Debtors, and wherever the same may be located, and including in such licenses access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.

8.Indemnity; Expenses; Limitation On Secured Parties’ Duty In Respect Of Collateral.

(a)Whether or not the transactions contemplated hereby are consummated, the Debtors shall indemnify and hold the Secured Parties, their respective Affiliates, and each of their directors, officers, agents and employees (collectively, the “Indemnified Persons”) harmless from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable attorneys fees and expenses) of any kind or nature whatsoever which may at any time (including at any time following the termination of the Secured Obligations and the termination, resignation or replacement of the Collateral Agent or any assignment by a Secured Party) be imposed on, incurred by or asserted against any such Indemnified Person in any way relating to or arising out of or in connection with the execution, delivery, enforcement, performance or administration of this Security Agreement, the Note or any other agreement, letter or instrument delivered in connection with the transactions contemplated hereby or the consummation of the transactions contemplated hereby or any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnified Person is a party thereto (all the foregoing, collectively, the “Indemnified Liabilities”), in all cases, whether or not caused by or arising, in whole or in part, out of the negligence of any Indemnified Person; provided that such indemnity shall not, as to any Indemnified Person, be available to the extent that such Indemnified Liabilities are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnified Person. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 8 applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Debtors, their directors, shareholders or creditors or an Indemnified Party or any other Person, whether or not an Indemnified Person is otherwise a party thereto and whether or not any of the transactions contemplated hereunder or under any of the other Sutaria Documents are consummated. All amounts due under this Section 8 shall be payable within five Business Days after demand therefor. The agreements in this Section 8 shall survive the resignation of the Collateral Agent, the assignment by a Secured Party and the repayment, satisfaction or discharge of all the other Secured Obligations. In the event that any investigation, litigation or proceeding is asserted or threatened in writing or instituted against any Indemnified Person, or any remedial, removal or response action which is requested of it or any other Indemnified Person, for which such Indemnified Person may desire indemnity or defense hereunder, such Indemnified Person shall notify the Debtors in writing of such event; provided that failure to so notify the Debtors shall not affect the right of any Indemnified Person to seek indemnification under this Section 8.

(b)The Debtors will upon demand pay to the Collateral Agent the amount of any and all reasonable expenses, including, without limitation, the fees and expenses of its counsel and of any experts and agents, that the Collateral Agent may incur in connection with (i) the administration of this Security Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from or other realization upon, any of the Collateral of the Debtors, (iii) the exercise or enforcement of any of the rights of the Secured Parties hereunder or (iv) the failure by the Debtors to perform or observe any of the provisions hereof.

(c)The Secured Parties shall use reasonable care with respect to the Collateral in their possession or under their control. The Secured Parties shall not have any other duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of the Secured Parties, or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto.

9.Collateral Agent.

(a)Collateral Agent Has No Duty. The powers conferred on the Collateral Agent hereunder are solely to protect its interest (on behalf of the Secured Parties) in the Collateral and shall not impose any duty on it to exercise any such powers.

(b)Reasonable Care. The Collateral Agent is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, that the Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral if it takes such action for that purpose as any owner thereof reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Collateral Agent, to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care.

(c)Other Provisions Relating to the Collateral Agent.

(i)The Collateral Agent has such powers, rights and obligations as are expressly delegated to the Collateral Agent by the terms of this Security Agreement. Subject to Section 9(c)(iv), the Collateral Agent may, from time to time, appoint another Person to act as Collateral Agent. The Collateral Agent, acting in its capacity as such, shall have only such duties with respect to the Collateral as are set forth herein.

(ii)Except during the continuance of an Event of Default, the Collateral Agent need perform only those duties that are specifically set forth in this Security Agreement and no others, and no implied covenants or obligations will be read into this Security Agreement against the Collateral Agent. In case an Event of Default has occurred and is continuing, the Collateral Agent shall exercise those rights and powers vested in it by this Security Agreement, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.

(iii)As to any matters not expressly provided for by this Security Agreement, the Collateral Agent shall not be required to take any action or exercise any discretion, but shall be required to act or to refrain from acting upon the instructions of the Holders and shall in all such cases be fully protected in acting, or in refraining from acting, in accordance with such instructions of the Holders, and any action taken or failure to act pursuant thereto shall be binding on the Holders. Notwithstanding any other provisions herein, the Collateral Agent shall not be required to advance or expend any funds or otherwise incur any financial liability in the performance of its duties or the exercise of its powers or rights hereunder at the request of the Holders unless the Debtors or the Holders have provided to the Collateral Agent security or indemnity, which the Collateral Agent, in its reasonable discretion, deems sufficient against any and all liability or expense which may be incurred by it by reason of taking or continuing to take such action.

(iv)Subject to the appointment and acceptance of a successor Collateral Agent, the Collateral Agent may resign at any time by giving not less than thirty (30) days’ notice thereof to the Holders and the Debtors. Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent, (A) such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations hereunder, and (B) the retiring Collateral Agent shall promptly transfer all Collateral within its possession or control to the possession or control of the successor Collateral Agent and shall execute and deliver such notices, instructions and assignments as may be necessary or desirable to transfer the rights of the Collateral Agent in respect of the Collateral to the successor Collateral Agent. After any retiring Collateral Agent’s resignation or replacement hereunder as Collateral Agent, the provisions of this Section shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Collateral Agent. Upon any such resignation or removal, the former Collateral Agent shall take all steps necessary to assign the Collateral to the successor Collateral Agent.

10.Reinstatement. This Security Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against the Debtors for liquidation or reorganization, should the Debtors become insolvent or make an assignment for the benefit of any creditor or creditors or should a receiver or trustee be appointed for all or any significant part of the Debtors’ assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a “voidable preference,” “fraudulent conveyance,” or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.

11.Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address specified in this Section prior to 5:00 p.m. (New York City time) on a Business Day, (b) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Security Agreement later than 5:00 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (c) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

If to the Debtors:	Interpharm Holdings Inc. 75 Adams Avenue Hauppauge, NY 11788 Attention: Chief Executive Officer Fax: 631-952-9587
If to Collateral Agent:	Sutaria Family Realty, LLC 75 Adams Avenue Hauppauge, New York 11788 Attention: Raj Sutaria Fax: 631-656-7551

12.Severability. Whenever possible, each provision of this Security Agreement shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. This Security Agreement is to be read, construed and applied together with the Note, which, taken together, set forth the complete understanding and agreement of the Collateral Agent, the Holders and the Debtors with respect to the matters referred to herein and therein.

13.No Waiver; Cumulative Remedies. The Secured Parties shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by the Collateral Agent and then only to the extent therein set forth. A waiver by the Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of the Secured Parties, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms or provisions of this Security Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by the Collateral Agent and the Debtor.

14.Limitation By Law. All rights, remedies and powers provided in this Security Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Security Agreement are intended to be subject to all applicable mandatory provisions of law that may be controlling and to be limited to the extent necessary so that they shall not render this Security Agreement invalid, or unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law.

15.Termination Of This Security Agreement. Subject to Section 10 hereof, this Security Agreement shall terminate upon the Termination Date.

16.Successors And Assigns. This Security Agreement and all obligations of the Debtors hereunder shall be binding upon the successors and assigns of the Debtors (including any debtor-in-possession on behalf of the Debtors) and shall, together with the rights and remedies of the Collateral Agent, for the benefit of the Secured Parties, hereunder, inure to the benefit of the Secured Parties and all future holders of any instrument evidencing any of the Secured Obligations and their respective successors and assigns. No sales of participations, other sales, assignments, transfers or other dispositions of any agreement governing or instrument evidencing the Secured Obligations or any portion thereof or interest therein shall in any manner impair the Lien granted to the Collateral Agent, for the benefit of the Secured Parties, hereunder. The Debtors may not assign, sell, hypothecate or otherwise transfer any interest in or obligation under this Security Agreement.

17.Counterparts. This Security Agreement may be authenticated in any number of separate counterparts, each of which shall collectively and separately constitute one agreement. This Security Agreement may be authenticated by manual signature, facsimile or, if approved in writing by the Collateral Agent, electronic means, all of which shall be equally valid.

18.Governing Law. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS SECURITY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. NOTHING IN THIS SECURITY AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE SECURED PARTIES FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE SECURED OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE SECURED PARTIES. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS SECURITY AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE COMPANY HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

19.Waiver Of Jury Trial. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY, THE PARTIES DESIRE THAT DISPUTES ARISING HEREUNDER OR RELATING HERETO BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, AMONG THE SECURED PARTIES AND THE DEBTOR ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED IN CONNECTION WITH, THIS SECURITY AGREEMENT OR ANY OF THE OTHER NOTES DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO.

20.Expenses. The Debtors agree to reimburse the Secured Parties for all costs and expenses incurred by them (including, without limitation, the fees and expenses of legal counsel) in connection with (i) any Default or Event of Default and any enforcement or collection proceeding resulting therefrom, including, without limitation, all manner of participation in or other involvement with (w) performance by the Collateral Agent of any obligations of the Debtors in respect of the Collateral that the Debtors have failed or refused to perform, (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Collateral Agent in respect thereof, by litigation or otherwise, including expenses of insurance, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 20, and all such costs and expenses shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Section 2.

21.Section Titles. The Section titles contained in this Security Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement among the parties hereto.

22.No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Security Agreement. In the event an ambiguity or question of intent or interpretation arises, this Security Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Security Agreement.

23.Benefit Of Secured Party. All Liens granted or contemplated hereby shall be for the benefit of the Secured Parties, and all proceeds or payments realized from Collateral in accordance herewith shall be applied to the Secured Obligations in the manner determined by the Collateral Agent in its sole discretion.

[Signature Page Follows]

IN WITNESS WHEREOF, each of the parties hereto has caused this Security Agreement to be executed and delivered by its duly authorized officer as of the date first set forth above.

The Debtors: INTERPHARM HOLDINGS INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

INTERPHARM, INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

The Collateral Agent: SUTARIA FAMILY REALTY, LLC
By:	/s/ Maganlal Sutaria
	Name: Maganlal Sutaria Title: Managing Member

ANNEX A

to

SECURITY AGREEMENT

DEFINITIONS

Capitalized terms used in the Security Agreement shall have the following respective meanings, and all references to Sections, Exhibits, Schedules or Annexes in the following definitions shall refer to Sections, Exhibits, Schedules or Annexes of or to the Security Agreement:

“Account Debtor” means any Person who may become obligated to a Debtor under, with respect to, or on account of, an Account.

“Accounts” means all “accounts,” as such term is defined in the Code, now owned or hereafter acquired by a Debtor, including (as the context may reasonably permit) (a) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, or Instruments), (including any such obligations that may be characterized as an account or contract right under the Code), (b) all of a Debtor’s rights in, to and under all purchase orders or receipts for goods or services, (c) all of a Debtor’s rights to any goods represented by any of the foregoing (including unpaid sellers’ rights of rescission, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), (d) all rights to payment due to a Debtor for property sold, leased, licensed, assigned or otherwise disposed of, for a policy of insurance issued or to be issued, for a secondary obligation incurred or to be incurred, for energy provided or to be provided, for the use or hire of a vessel under a charter or other contract, arising out of the use of a credit card or charge card, or for services rendered or to be rendered by a Debtor or in connection with any other transaction (whether or not yet earned by performance on the part of a Debtor), (e) all health care insurance receivables and (f) all collateral security of any kind, given by any Account Debtor or any other Person with respect to any of the foregoing.

“Bankruptcy Code” means the provisions of Title 11 of the United States Code, 11 U.S.C. §§ 101 etseq.

“Business Day” means any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the City of New York.

“Chattel Paper” means any “chattel paper,” as such term is defined in the Code, including electronic chattel paper, now owned or hereafter acquired by a Debtor.

“Code” means the Uniform Commercial Code as the same may, from time to time, be enacted and in effect in the State of New York; provided, that to the extent that the Code is used to define any term herein and such term is defined differently in different Articles of the Code, the definition of such term contained in Article 9 of the Code shall govern; providedfurther, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, the Lien on any Collateral under the Security Agreement is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of New York, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions.

“Collateral” has the meaning ascribed to it in Section 2(a).

“Copyright License” means any and all rights now owned or hereafter acquired by a Debtor under any written agreement granting any right to use any Copyright or Copyright registration.

“Copyrights” means all of the following now owned or hereafter adopted or acquired by the Debtor: (a) all copyrights, all General Intangibles of like nature (whether registered or unregistered), all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Copyright Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof, (b) all reissues, extensions or renewals thereof, (c) the right to recover for all past, present and future infringements thereof and (d) all other rights of any kind whatsoever accruing thereunder as pertaining thereto.

“Default” means any condition or event which is, or, with notice or lapse of time or both, would become, an Event of Default.

“Deposit Accounts” means all “deposit accounts” as such term is defined in the Code, now or hereafter held in the names of a Debtor.

“Event of Default” means any event of default under, or any failure by the Parties to perform, keep, or observe any covenant or agreement contained in this Security Agreement and the Note.

“General Intangibles” means all “general intangibles,” as such term is defined in the Code, now owned or hereafter acquired by a Debtor, including (as the context may reasonably permit) all right, title and interest that a Debtor may now or hereafter have in or under any Contract, all payment intangibles, customer lists, Licenses, Copyrights, Trademarks, Patents, and all applications therefor and reissues, extensions or renewals thereof, rights in Intellectual Property, interests in partnerships, joint ventures and other business associations, licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, goodwill (including the goodwill associated with any Trademark or Trademark License), all rights and claims in or under insurance policies (including insurance for fire, damage, loss and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life, key man and business interruption insurance, and all unearned premiums), choses in action, rights to receive tax refunds and other payments, rights to receive dividends, distributions, cash, Instruments and other property in respect of or in exchange for any pledged Investment Property, rights of indemnification, all books and records, correspondence, credit files, invoices and other papers, including without limitation all tapes, cards, computer runs and other papers and documents in the possession or under the control of a Debtor or any computer bureau or service company from time to time acting for a Debtor.

“Instruments” means all “instruments,” as such term is defined in the Code, now owned or hereafter acquired by a Debtor, wherever located, and, in any event, including all certificates of deposit, and all promissory notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper.

“Intellectual Property” means collectively, all Copyrights, all Patents and all Trademarks, together with (a) all inventions, processes, production methods, proprietary information, know-how and trade secrets; (b) all Copyright Licenses, Patent Licenses and Trademark Licenses; (c) all information, customer lists, identification of suppliers, data, plans, blueprints, specifications, designs, drawings, recorded knowledge, surveys, engineering reports, test reports, manuals, materials standards, processing standards, performance standards, catalogs, computer and automatic machinery software and programs; (d) all field repair data, sales data and other information relating to sales or service of products now or hereafter manufactured; (e) all accounting information and all media in which or on which any information or knowledge or data or records may be recorded or stored and all computer programs used for the compilation or printout of such information, knowledge, records or data; (f) all licenses, consents, permits, variances, certifications and approvals of governmental agencies now or hereafter held by a Debtors and (g) all clauses of action, claims, and warranties now or hereafter owned or acquired by a Debtor in respect of any of the items listed above.

“Inventory” means all “inventory,” as such term is defined in the Code, now owned or hereafter acquired by a Debtor, wherever located, and in any event including (as the context may reasonably permit) inventory, merchandise, goods and other personal property that are held by or on behalf of a Debtor for sale or lease or are furnished or are to be furnished under a contract of service, or that constitute raw materials, work in process, finished goods, returned goods, or materials or supplies of any kind, nature or description used or consumed or to be used or consumed in a Debtor’s business or in the processing, production, packaging, promotion, delivery or shipping of the same, including all supplies and embedded software.

“Investment Property” means all “investment property” as such term is defined in the Code now owned or hereafter acquired by a Debtor, wherever located, including (as the context may reasonably permit) (i) all securities, whether certificated or uncertificated, including stocks, bonds, interests in limited liability companies, partnership interests, treasuries, certificates of deposit, and mutual fund shares; (ii) all securities entitlements of a Debtor, including the rights of a Debtor to any securities account and the financial assets held by a securities intermediary in such securities account and any free credit balance or other money owing by any securities intermediary with respect to that account; (iii) all securities accounts of a Debtor; (iv) all commodity contracts of a Debtor; and (v) all commodity accounts held by a Debtor.

“License” means any Copyright License, Patent License, Trademark License or other license of rights or interests now held or hereafter acquired by a Debtor.

“Lien” means any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction).

“Patent License” means rights under any written agreement now owned or hereafter acquired by a Debtor granting any right with respect to any invention on which a Patent is in existence.

“Patents” means all of the following in which a Debtor now hold or hereafter acquire any interest: (a) all letters patent of the United States or of any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or of any other country, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State, or any other country, (b) all reissues, continuations, continuations-in-part or extensions thereof, (c) all income, royalties, damages and payments now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past or future infringements thereof, (d) the right to sue for past, present and future infringements thereof, and (e) all rights corresponding thereto throughout the world.

“Person” means a corporation, an association, a partnership, an organization, a business, an individual, a government or political subdivision thereof or governmental authority.

“Proceeds” means “proceeds,” as such term is defined in the Code, including (as the context may reasonably permit) (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to a Debtor from time to time with respect to any of the Collateral, (b) any and all payments (in any form whatsoever) made or due and payable to a Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any Person acting under color of governmental authority), (c) any claim of a Debtor against third parties (i) for past, present or future infringement of any Patent or Patent License, or (ii) for past, present or future infringement or dilution of any Copyright, Copyright License, Trademark or Trademark License, or for injury to the goodwill associated with any Trademark or Trademark License, (d) any recoveries by a Debtor against third parties with respect to any litigation or dispute concerning any of the Collateral including claims arising out of the loss or nonconformity of, interference with the use of, defects in, or infringement of rights in, or damage to, Collateral, (e) all amounts collected on, or distributed on account of, other Collateral, including dividends, interest, distributions and Instruments with respect to Investment Property, and (f) any and all other amounts, rights to payment or other property acquired upon the sale, lease, license, exchange or other disposition of Collateral and all rights arising out of Collateral.

“Secured Obligations” means any and all obligations, liabilities and indebtedness of every kind, nature and description owing by a Debtor or any obligor to the Secured Parties under the Note, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, a debtor or otherwise, whether arising under this Agreement or the Note, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and whether arising directly or howsoever acquired by a Secured Party.

“Security Agreement” means this Security Agreement, as the same may be amended, supplemented, restated or otherwise modified from time to time.

“Termination Date” means the date on which all obligations of a Debtor to the Secured Parties or their assigns under the Note, and the obligations of a Debtor under this Security Agreement and the Note to which it is a party, have been indefeasibly satisfied.

“Trademark License” means rights under any written agreement now owned or hereafter acquired by a Debtor granting any right to use any Trademark.

“Trademarks” means all of the following now owned or hereafter existing or adopted or acquired by a Debtor: (a) all trademarks, trade names, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and General Intangibles of like nature (whether registered or unregistered), all registrations and recordings thereof, and all applications in connection therewith, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof, (b) all reissues, extensions or renewals thereof, (c) all rights corresponding thereto throughout the world (d) the right to recover for all past, present and future infringements thereof and (e) all other rights of any kind whatsoever accruing thereunder or pertaining thereto, together, in each case, with the product lines and goodwill of the business connected with the use of, and symbolized by, any of the foregoing.

The words “herein,” “hereof” and “hereunder” and other words of similar import refer to the Security Agreement as a whole, including all Annexes, Exhibits and Schedules, as the same may from time to time be amended, restated, modified or supplemented, and not to any particular section, subsection or clause contained in the Security Agreement or any such Annex, Exhibit or Schedule.

Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter genders. The words “including”, “includes” and “include” shall be deemed to be followed by the words “without limitation”; the word “or” is not exclusive; references to Persons include their respective successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of the same and any successor statutes and regulations. Whenever any provision in this Security Agreement refers to the knowledge (or an analogous phrase) of the Debtor, such words are intended to signify that the Debtor has actual knowledge or awareness of a particular fact or circumstance or a Debtor, if it had exercised reasonable diligence, would have known or been aware of such fact or circumstance.

SCHEDULE I

to

SECURITY AGREEMENT

FILING JURISDICTIONS

Debtors	Jurisdiction
Interpharm Holdings Inc.	Secretary of State of Delaware
Interpharm, Inc.	Secretary of State of New York

SCHEDULE II

to

SECURITY AGREEMENT

SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL

AND RECORDS CONCERNING DEBTORS’ COLLATERAL

I. The Debtors’ official names:

II. Types of entity (e.g. corporation, partnership, business trust, limited partnership, limited liability company):

Corporation

III. Organizational identification number issued by the Debtors’ jurisdiction of incorporation or organization or a statement that no such number has been issued:

IV. Jurisdictions of Incorporation or Organization of the Debtors:

V. Chief Executive Offices and principal places of business of the Debtors:

VI. Other Premises at which Collateral is Stored or Located:

SCHEDULE III

to

SECURITY AGREEMENT

SCHEDULE OF INTELLECTUAL PROPERTY

A.Trademarks

1.Owned

  Trademark Registration Number Registration Date Expiration Date

Trademark Application Application/Serial Number Application Date

2.Licensed

  Trademark Registration Number Registration Date Expiration Date Owner/ Licensor

Trademark Application Application/Serial Number Application Date

B.Patents

1.Owned

Patent Description Registration Number Registration Date Expiration Date

Patent Application Application/Serial Number Application Date

2.Licensed

Patent Description Registration Number Registration Date Expiration Date Owner/ Licensor

Patent Application Application/Serial Number Application Date

C.Copyrights

1.Owned

  Copyright Registration Number Registration Date

2.Licensed

Patent Description Registration Number Registration Number Expiration Date Owner/ Licensor

D.Other

EXHIBIT A

FORM OF

POWER OF ATTORNEY

This Power of Attorney is executed and delivered by INTERPHARM HOLDINGS INC., a Delaware corporation and INTERPHARM, INC., a New York corporation, (the “Grantors”) to Sutaria Family Realty, LLC (hereinafter referred to the “Attorney”), as the Collateral Agent for the benefit of the Secured Parties under a Security Agreement, dated as of November 7, 2007 and other related documents collectively (the “Documents”). No person to whom this Power of Attorney is presented, as authority for the Attorney to take any action or actions contemplated hereby, shall be required to inquire into or seek confirmation from the Grantors as to the authority of the Attorney to take any action described below, or as to the existence of or fulfillment of any condition to this Power of Attorney, which is intended to grant to the Attorney unconditionally the authority to take and perform the actions contemplated herein. The power of attorney granted hereby is coupled with an interest, and may not be revoked or canceled by the Grantors without the Attorney’s written consent.

The Grantors hereby irrevocably constitute and appoint the Attorney (and all officers, employees or agents designated by the Attorney), with full power of substitution, as the Grantors’ true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Grantors and in the name of the Grantors or in its own name, from time to time in the Attorney’s discretion, without notice to or assent by the Grantors, and at any time in the case of clause (h) below and at any time an Event of Default (as defined in the Security Agreement) has occurred and is continuing in the case of (a), (b), (c), (d), (e), (f), (g), (i) and (j) below, to do the following: (a) change the mailing address of the Grantors, open a post office box on behalf of the Grantors, open mail for therantor, and ask, demand, collect, give acquittances and receipts for, take possession of, endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, and notices in connection with any property of the Grantors constituting Collateral; (b) effect any repairs to any asset of the Grantors, or continue or obtain any insurance and pay all or any part of the premiums therefor and costs thereof, and make, settle and adjust all claims under such policies of insurance, and make all determinations and decisions with respect to such policies; (c) pay or discharge any taxes, liens, security interests, or other encumbrances levied or placed on or threatened against the Grantors or its property constituting Collateral; (d) defend any suit, action or proceeding brought against the Grantors if the Grantors do not defend such suit, action or proceeding or if the Attorney believes that the Grantors are not pursuing such defense in a manner that will maximize the recovery to the Attorney, and settle, compromise or adjust any suit, action, or proceeding described above and, in connection therewith, give such discharges or releases as the Attorney may deem appropriate; (e) file or prosecute any claim, litigation, suit or proceeding in any court of competent jurisdiction or before any arbitrator, or take any other action otherwise deemed appropriate by the Attorney for the purpose of collecting any and all such moneys due to the Grantors whenever payable and to enforce any other right in respect of the Grantors’ property constituting Collateral; (f) cause the certified public accountants then engaged by the Grantors to prepare and deliver to the Attorney at any time and from time to time, promptly upon the Attorney’s request, the following reports: (1) a reconciliation of all accounts, (2) an aging of all accounts, (3) trial balances, (4) test verifications of such accounts as the Attorney may request, and (5) the results of each physical verification of inventory; (g) communicate in its own name with any party to any contract with regard to the assignment of the right, title and interest of the Grantors in and under the contracts and other matters relating thereto; (h) file such financing statements with respect to the aforesaid Security Agreement, with or without the Grantors’ signatures, or to file a photocopy of the Security Agreement in substitution for a financing statement, as the Collateral Agent may deem appropriate and to execute in the Grantors’ names such financing statements and amendments thereto and continuation statements which may require the Grantors’ signatures; (i) execute, in connection with any sale provided for in any Document, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral and to otherwise direct such sale or resale, all as though the Attorney were the absolute owner of the property of the Grantors for all purposes, and (j) at the Attorney’s option and the Grantors’ expense, at any time or from time to time, all acts and other things that the Attorney reasonably deems necessary to perfect, preserve, or realize upon the Grantors’ property or assets and the Collateral Agent’s Liens thereon, all as fully and effectively as the Grantors might do. The Grantors hereby ratify, to the extent permitted by law, all that said Attorney shall lawfully do or cause to be done by virtue hereof.

[signature page follows]

IN WITNESS WHEREOF, this Power of Attorney is executed by each of the Grantors, and the Grantors have caused their seals to be affixed pursuant to the authority of its board of directors this 7th day of November, 2007.

The Grantors: INTERPHARM HOLDINGS INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

INTERPHARM, INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

NOTARY PUBLIC CERTIFICATES

On this 7th day of November, 2007, Peter Giallorenzo, who is personally known to me appeared before me in his/her capacity as the CFO of INTERPHARM HOLDINGS INC. and executed on behalf of such entity the Power of Attorney in favor of SUTARIA FAMILY REALTY, LLC to which this Certificate is attached.

/s/ Fei Chen

Notary Public

On this 7th day of November, 2007, Peter Giallorenzo who is personally known to me appeared before me in his/her capacity as the CFO of INTERPHARM, INC. and executed on behalf of such entity the Power of Attorney in favor of SUTARIA FAMILY REALTY, LLC to which this Certificate is attached.

/s/ Fei Chen

Notary Public

EX-10.11

Exhibit 10.11

CONSENT AND WAIVER AGREEMENT

THIS CONSENT AND WAIVER AGREEMENT (this “Agreement”) is made as the 7th day of November, 2007, by and among INTERPHARM HOLDINGS, INC., a Delaware corporation (the “Company”), TULLIS-DICKERSON CAPITAL FOCUS III, L.P., a Delaware limited partnership (“Tullis”), AISLING CAPITAL II, LP, a Delaware limited partnership (“Aisling”), P&K HOLDINGS I, LLC (“P&K Holdings”), a New York Limited Liability Company, RAMETRA HOLDINGS I, LLC (“Rametra Holdings”), a New York Limited Liability Company, RAJS HOLDINGS I, LLC (“Rajs Holdings” and, together with P&K Holdings, Perry Sutaria, Raj Sutaria and Rametra Holdings, the “Sutaria Stockholders”), a New York Limited Liability Company, PERRY SUTARIA (“PS”), individually and as Manager of the Sutaria Stockholders, RAJ SUTARIA (“RS”), individually, and CAMERON REID (“Reid”), individually. Capitalized terms in the Recitals hereto and not defined in such Recitals shall have the meanings ascribed to them in the Tullis Purchase Agreement, Aisling Purchase Agreement and Series B-1 and Series C-1 CODs, each of which is defined below.

RECITALS:

A. On May 15, 2006 the Company and Tullis entered into a Securities Purchase Agreement (the “Tullis Purchase Agreement”) and on May 26, 2006 the parties consummated the Tullis Purchase Agreement. In connection with the Tullis Purchase Agreement the Company (i) filed a Certificate of Designations, Preferences and Rights of Series B-1 Convertible Preferred Stock of the Company (the “Series B-1 COD”) pursuant to which it designated 15,000 shares of a series of the Company’s preferred stock, called Series B-1 Convertible Preferred Stock (“Series B-1 Stock”), and issued and sold to Tullis 10,000 of such shares and (ii) issued to Tullis a warrant to purchase 2,281,914 shares of common stock of the Company at an exercise price of $1.60 per share (the “Tullis Warrant”).

B. On September 11, 2006 the Company and Aisling entered into and consummated a Securities Purchase Agreement (the “Aisling Purchase Agreement”). In connection with the Aisling Purchase Agreement the Company (i) filed a Certificate of Designations, Preferences and Rights of Series C-1 Convertible Preferred Stock of the Company (the “Series C-1 COD”) pursuant to which it designated 10,000 shares of a series of the Company’s preferred stock, called Series C-1 Convertible Preferred Stock (“Series C-1 Stock”), and issued and sold to Aisling all 10,000 of such shares and (ii) issued to Aisling a warrant to purchase 2,281,914 shares of common stock of the Company at an exercise price of $1.60 per share (the “Aisling Warrant” and, together with the Tullis Warrant, the “Series B-1 and Series C-1 Warrants”).

C. Section 4(o)(ii) of the Tullis and Aisling Purchase Agreements (the “Purchase Agreement Share Limitation”) state:

“Other than as set forth in Section 1(c), from the date hereof until the date that is thirty (30) Trading Days (as defined in the Certificate of Designations) after the Effective Date (the “Trigger Date”), the Company will not, directly or indirectly, offer, sell, grant any option to purchase, or otherwise dispose of (or announce any offer, sale, grant or any option to purchase or other disposition of) any of its or its Subsidiaries’ equity or equity equivalent securities, including without limitation any debt, preferred stock or other instrument or security that is, at any time during its life and under any circumstances, convertible into or exchangeable or exercisable for shares of Common Stock or Common Stock Equivalents (any such offer, sale, grant, disposition or announcement being referred to as a “Subsequent Placement”).”

D. Sections 13(d) and 13(h) of each of the Series B-1 COD and the Series C-1 COD state, in relevant part, the following (the “COD Share Limitation”):

“(13)Protective Provisions. So long as the Investor holds at least 25% of the Preferred Shares issued on the Initial Issuance Date, in addition to any other rights provided by law, except where the vote or written consent of the holders of a greater number of shares is required by law or by another provision of the Certificate of Incorporation, without first obtaining the affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the Required Holders, voting together as a single class, the Company shall not:

(d)issue any shares of Common Stock, stock appreciation rights, stock options or other equity securities to independent third parties (e.g., investment banks, investor relations firms, consultants that are not affiliates of the Company) in excess of 2% of the fully diluted number of shares of Common Stock on the Initial Issuance Date;

*****

(h)issue any Common Stock or any securities convertible into or exchangeable for Common Stock at a price per share of Common Stock less than the Purchase Price (as defined in the Securities Purchase Agreement) (as adjusted from time to time to reflect stock slits, stock dividends, subdivisions, combinations, consolidations and other similar transactions with respect to the Common Stock);…”

E.The Company is seeking to effect a financing (the “Financing”) with Tullis, Aisling, the Sutaria Stockholders and Reid (collectively, the “STAR Note Holders”) on substantially the terms and conditions set forth in the term sheets annexed hereto as Exhibit A;

F. The Company requires a waiver under the Purchase Agreement Share Limitation and COD Share Limitation in order to consummate the Financing;

G.As more particularly described below, the Company is in default (or a Triggering Event (as such term is defined in the Series B-1 COD and the Series C-1 COD) has occurred) under the terms of (i) the Tullis Purchase Agreement and the Aisling Purchase Agreement; (ii) the Series B-1 COD and the Series C-1 COD; and (iii) the Registration Rights Agreement, dated May 15, 2006, as amended by the Amendment No. 1, dated September 11, 2006, among the Company, Tullis and Aisling (the “Registration Rights Agreement”);

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H. The Company has requested that Tullis and Aisling waive their rights arising out of such defaults, which are continuing;

I.As of the date hereof, the Sutaria Stockholders own or have the power and authority to vote with respect to collectively 35,686,738 shares of Common Stock, which represent in the aggregate approximately 45.2% of the total issued and outstanding voting capital stock of the Company (“Shares”);

J.As a condition to the willingness of Tullis and Aisling to enter into this Agreement, to permit the consummation of the transactions contemplated by the Financing and to waive the Existing Defaults (as defined below), Tullis and Aisling have required that the Sutaria Stockholders enter into certain voting agreements as contemplated hereby and that the Company exchange the Series B-1 Stock and Series C-1 Stock for new shares of Series D-1 Convertible Preferred Stock, and exchange the Series B-1 and Series C-1 Warrants for New Warrants (as defined below);

K.The exchange of the Series B-1 and Series C-1 Warrants for New Warrants, and the exchange of the Series B-1 Stock and Series C-1 Stock for new shares of Series D-1 Convertible Preferred Stock, are being made in reliance upon the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended; and

L. To the extent set forth herein, Tullis and Aisling desire to waive their rights under the Purchase Agreement Share Limitation and COD Share Limitation with respect to the Financing in exchange for agreements set forth herein.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

Section 1.Waiver.

(a)Notwithstanding the limitations set forth in the Purchase Agreement Share Limitation and COD Share Limitation, Tullis and Aisling, the owners of all of the outstanding shares of Series B-1 Stock and Series C-1 Stock and constituting the “Required Holders,” as such term is defined the Series B-1 COD and Series C-1 COD, hereby consent to the Financing and waive the application of the Purchase Agreement Share Limitation and COD Share Limitation with respect to the Financing, and such other limitations as may affect the Financing which are contained in the Series B-1 COD, the Series C-1 COD, the Tullis Purchase Agreement and the Aisling Purchase Agreement, solely with respect to the Financing (the “Financing Consent”).

(b)Each of Tullis and Aisling hereby waive the Existing Defaults (the “Default Waiver” and, together with the Financing Consent, the “Consent and Waiver”). “Existing Defaults” shall mean the following defaults and Triggering Events under each of (i) the Tullis Purchase Agreement and the Aisling Purchase Agreement; (ii) the Series B-1 COD and the Series C-1 COD; and (iii) the Registration Rights Agreement: (A) the failure of the Company to timely file with the Securities and Exchange Commission (and deliver to Tullis and Aisling) its Annual Report on Form 10-K for the year ended June 30, 2007; and (B) the failure of the Company to prevent the suspension of trading of its Common Stock on the American Stock Exchange as a result of (A). This Consent and Waiver shall be limited to those matters described herein, and shall not be deemed a waiver of any other breach or default occurring hereafter.

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(c)As a condition to the effectiveness of the Consent and Waiver, the Board of Directors of the Company shall have passed a resolution substantially in the following form:

“RESOLVED, that all securities to be issued from and after the date hereof to Tullis, Aisling, or any other person or entity that, at the time of such issuance, has a representative on the Board of Directors of the Company, including, without limitation, all securities issued pursuant to the Series B-1 COD, the Series C-1 COD, the Certificate of Designations, the Series B-1 and Series C-1 Warrants, the New Warrants, and any other securities to be issued by the Company to any such person or entity, shall be made in accordance with, and shall be subject to the exemptions contained in, Rule 16b-3 of the Exchange Act.”

Section 2. Exchange of Series B-1 Preferred, Series C-1 Preferred and Warrants.

(a) Information Statement. In connection with this Agreement, the holders of a majority of the Company’s capital stock entitled to vote have executed a written consent in the form attached hereto as Exhibit B approving the issuance of all of the securities contemplated by this Agreement and the Financing in accordance with applicable law and the rules and regulations of the American Stock Exchange (the “Stockholder Approval”). The Company shall, as soon as practicable, but no later than November 21, 2007, file with the Securities and Exchange Commission an Information Statement on Schedule 14C (the “Information Statement”), which has been previously reviewed by Tullis, Aisling and counsel of their choice, setting forth information regarding the Stockholder Approval. As soon as practicable thereafter, but no earlier than January 18, 2008 and no later than February 28, 2008, the Company shall provide each stockholder of the Company the Information Statement in accordance with applicable law and the rules and regulations of the American Stock Exchange; provided, however, that in the event of a review by the Securities and Exchange Commission (“SEC”) of the Information Statement which shall not be concluded by February 15, 2008, the Company shall provide each stockholder of the Company the Information Statement in accordance with applicable law and the rules and regulations of the American Stock Exchange within ten (10) business days of clearing comments received from the SEC. The Company shall use its reasonable best efforts to address any SEC comments on the Information Statement and to mail the Information Statement as soon as practicable.

(b)Stockholder Meeting. Notwithstanding anything to the contrary in Section 2(a), in the event that, under applicable law and the rules and regulations of the American Stock Exchange, the stockholders of the Company are unable to act by written consent, the Company shall, as soon as practicable, but no earlier than January 18, 2008 and no later than January 31, 2008, provide each stockholder entitled to vote at a special or annual meeting of stockholders of the Company (the “Stockholder Meeting”), which initially shall be promptly called and held not later than February 28, 2008 (the “Stockholder Meeting Deadline”), a proxy statement, soliciting each such stockholder’s affirmative vote at the Stockholder Meeting for approval of the resolutions set forth in the Stockholder Approval, and the Company shall solicit its stockholders’ approval of such resolutions and cause its Board of Directors to recommend to the stockholders that they approve such resolutions. The Company shall be obligated to seek to obtain the Stockholder Approval by the Stockholder Meeting Deadline. If, despite the Company’s reasonable best efforts, the Stockholder Approval is not obtained on or prior to the Stockholder Meeting Deadline, the Company shall cause an additional Stockholder Meeting to be held every three (3) months thereafter until such Stockholder Approval is obtained.

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(c) Filing of Certificate of Designations; Reservation of Shares. The Board of Directors of the Company has authorized a new series of convertible preferred stock of the Company designated as Series D-1 Convertible Preferred Stock, the terms of which are set forth in the Certificate of Designations, Preferences and Rights of Series D-1 Convertible Preferred Stock of the Company (the “Certificate of Designations”) in the form attached hereto as Exhibit C (the “Series D-1 Stock”), which Series D-1 Stock shall be convertible into the Company’s common stock, par value $0.01 per share (the “Common Stock”), in accordance with the terms of the Certificate of Designations. Promptly upon obtaining the Stockholder Approval, the Company shall file the Certificate of Designations with the Secretary of State of the State of Delaware in accordance with applicable law. The Company shall maintain a reserve from its duly authorized shares of Common Stock as may be required to fulfill its obligations in full under the Financing and upon conversion of the D-1 Stock and exercise of the New Warrants (as defined below).

(d)Exchange of Series B-1 Stock and Series C-1 Stock. As soon as practicable after the Stockholder Approval, in consideration of the Consent and Waiver, the Company shall issue the Series D-1 Stock to Aisling and Tullis in exchange for the shares of Series B-1 Stock and Series C-1 Stock. Each share of Series B-1 Stock and Series C-1 Stock shall be exchanged for 1.04125 shares of Series D-1 Stock.

(e)Exchange of Warrants. As soon as practicable, in consideration of the Consent and Waiver, the Company shall issue a warrant to purchase shares of Common Stock in the form attached hereto as Exhibit D (the “New Warrant”) to Aisling and Tullis in exchange for the Series B-1 and Series C-1 Warrants. Each New Warrant will provide for an exercise price of $0.95 per share and shall be exercisable for 2,281,914 shares of common stock.

(f)Waiver of Dividends. In consideration of the agreements set forth herein, Aisling and Tullis waive their right to receive dividends on the Series B-1 Stock and Series C-1 Stock for the quarters ended September 30, 2007 and December 31, 2007.

(g)Holding Period. For the purposes of Rule 144, the Company acknowledges that the holding period of (i) the New Warrants (and the shares for which the New Warrants are exercisable) may be tacked onto the holding period of the Series B-1 and Series C-1 Warrants (in the case of a Cashless Exercise, as defined in the New Warrants)) and (ii) the Series D-1 Stock (and the shares for which the Series D-1 Stock is convertible) may be tacked onto the holding period of the Series B-1 Stock and Series C-1 Stock, and the Company agrees not to take a position contrary to this Section 2(g). The Company’s acknowledgement and agreement set forth in this Section 2(g) shall be subject in all respect to Rule 144 and other applicable securities laws, as may be in effect from time to time.

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Section 3. Effect on Transaction Documents.Except as expressly set forth herein, all of the terms and conditions of the agreements, documents and instruments signed by the Company, Tullis and Aisling in connection with the Tullis Purchase Agreement and Aisling Purchase Agreement shall continue in full force and effect after the execution of this Agreement and shall not be in any way changed, modified or superseded by the terms set forth herein. For purposes of the Tullis Purchase Agreement, the Aisling Purchase Agreement and the Registration Rights Agreement, the Company agrees that the Series D-1 Stock shall be treated as shares issued in replacement of the Series B-1 Stock and Series C-1 Stock, and the term “Preferred Shares” in the Tullis Purchase Agreement, Aisling Purchase Agreement and the Registration Rights Agreement shall mean and include the Series D-1 Stock and any shares issued in replacement thereof in accordance with the terms thereof.

Section 4. Proxy.

 (a) Each of PS and the Sutaria Stockholders are, simultaneously herewith, executing the Stockholder Approval. Each of PS and the Sutaria Stockholders hereby agree that at any meeting of the stockholders of the Company, however called, and in any action by written consent of the Company’s stockholders, each of PS and the Sutaria Stockholders shall vote their shares of voting capital stock of the Company: (i) in favor of the Stockholder Approval; (ii) in favor of the Certificate of Designations; (iii) in favor of the Financing; and (iv) against any proposal or any other corporate action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Tullis Purchase Agreement, the Aisling Purchase Agreement or this Agreement not being fulfilled. Each of PS and the Sutaria Stockholders acknowledges receipt and review of a copy of each of the Exhibits hereto.

(b)   PS and the Sutaria Stockholders each hereby represents, warrants, covenants and agrees that, notwithstanding anything to the contrary herein, until the Stockholder Approval and the filing of the Certificate of Designations, he/it shall not offer or agree to sell, transfer, tender, assign, hypothecate or otherwise dispose of, grant a proxy or power of attorney with respect to (other than the Proxy or as set forth in this Agreement), or create or permit to exist any security interest, lien, claim, pledge, option, right of first refusal, agreement, or limitation on any shares of capital stock of the Company owned by him/it.

(c)   PS hereby represents, warrants, covenants and agrees that:

(i)   he is the sole managing member of each of the Sutaria Stockholders;

(ii)   as of the date hereof, the Sutaria Stockholders are the owners of the Shares, which aggregate of 35,686,738 shares of common stock of the Company, entitled to vote, without restriction, on all matters brought before holders of capital stock of the Company; the Shares are all the voting securities of the Company owned, either of record or beneficially, by the Sutaria Stockholders; and, except as contemplated by this Agreement and the Exhibits hereto are owned free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on such Sutaria Stockholders’ voting rights, charges and other encumbrances of any nature whatsoever;

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(iii)   the Proxy and this Agreement have been duly authorized and approved by each of the Sutaria Stockholders;

(iv)   he has the power and authority to execute and deliver the Proxy and this Agreement; and

(v)   by a date that is not more than sixty (60) days after the date of this Agreement, he shall take such steps that shall be necessary so as to appoint Raj Sutaria as his successor as the sole managing member of Rajs Holdings, Rametra Holdings, and P&K Holdings in the event of his death or incapacity.

Section 5. Certain Transfer Restrictions with Respect to Sutaria Stockholders; Tag Along Rights.

(a) Securities Notice. If any Sutaria Stockholder proposes to Transfer (as defined in Section 5(d) below) any shares of capital stock of the Company (“Shares”) held by it (each a “Selling Stockholder” and, together with any other Selling Stockholder(s), the “Selling Stockholders”) to a third party purchaser (the “Third Party Purchaser”) other than as otherwise agreed by both Tullis and Aisling in writing prior to such Transfer and other than any Exempt Transfer (as defined in Section 5(d) below), the Selling Stockholders shall, no less than twenty (20) business days prior to the consummation of such Transfer, send written notice (an “Offering Notice”) to Tullis, Aisling and Reid, which shall state (a) the identity of the Third Party Purchaser; (b) the type and number of such securities proposed to be transferred (the “Offered Securities”), including detailed terms of such securities (if other than Common Stock); (c) the proposed purchase price per share for the Offered Securities (the “Offer Price”); and (d) the terms and conditions of such sale. The Selling Stockholders hereby agree that, notwithstanding anything contained in this Agreement, they shall not, at any time, sell or otherwise transfer in the aggregate more than 12 million of the Shares in a conveyance or conveyances that are not Exempt Transfers without the prior approval of the Company’s Board of Directors.

(b) Tag-Along Right. If a Selling Stockholder is directly or indirectly transferring Offered Securities to a Third Party Purchaser pursuant to Section 4(a), then each of Tullis, Aisling and Reid shall have the right to sell to such Third Party Purchaser that number of shares equal to that percentage of the Offered Securities determined by dividing (i) the total number of outstanding shares of the Common Stock of the Company (on an as converted basis) then owned by Tullis, Aisling or Reid, as the case may be, by (ii) the sum of (x) the total number of shares of Common Stock (on an as-converted basis) then owned by Tullis, Aisling and Reid and (y) the total number of Shares then owned by the Selling Stockholders, in the aggregate, at a price equal to the Offer Price, with other terms set forth in the Offering Notice. The Selling Stockholders and Tullis, Aisling and Reid shall effect the sale of the Offered Securities and Tullis, Aisling and Reid shall sell the number of Offered Securities to be sold by them pursuant to this Section 5, and the number of Offered Securities to be sold to such Third Party Purchaser by the Selling Stockholder(s) shall be reduced accordingly.

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(c) Timing. The tag-along rights provided by this Section 5 must be exercised by Tullis, Aisling and Reid within fifteen (15) business days following receipt of the Offering Notice, by delivery of a written notice to PS indicating Tullis, Aisling or Reid’s election to exercise his or its rights and specifying the number of shares (up to the maximum number of shares owned by Tullis, Aisling or Reid required to be purchased by such Third Party Purchaser) each of them elects to sell (the “Tag-along Exercise Notice”), provided that Tullis, Aisling or Reid may waive its rights under this Section prior to the expiration of such fifteen (15) business day period by giving written notice to PS. The failure of Tullis, Aisling or Reid to respond within such fifteen (15) business day period shall be deemed to be a waiver of their rights under this Section and such proposed Transfer of Shares will be classified as an Exempt Transfer.

(d) Exempt Transfers. The tag-along rights set forth in this Section 5 shall not apply to (i) any transfer to a Permitted Holder (as defined below); provided that any such Permitted Holder agrees in writing to be bound by this Agreement and, if appropriate, the Proxy, in place of the relevant transferor, in an agreement in form satisfactory to counsel to Tullis, Aisling and Reid; or (ii) the sale in an unsolicited broker’s transaction pursuant to Rule 144 under the Securities Act of 1933, as amended (the “Exempt Transfers”). “Transfer” shall mean a sale, transfer, assignment, pledge, hypothecation, disposal of, mortgage, entering into any voting trust or other agreement, option or other arrangement or understanding with respect to Shares, whether directly or indirectly and whether voluntarily or involuntarily. “Permitted Holders” means Raj Sutaria, Mona Rametra, Perry Sutaria, and their respective estates, spouses, ancestors and lineal descendants, the legal representatives of any of the foregoing and the trustees of any bona fide trusts of which the foregoing are the sole beneficiaries or the grantors, or any entity of which the foregoing “beneficially owns” (as defined in Rule 13d-3 under the Exchange Act), individually or collectively with any of the foregoing, at least 51% of the total voting power of the voting stock of such entity.

(e)Prohibited Transfers. Any Transfer of Shares not made in conformance with this Agreement shall be null and void, shall not be recorded on the books of the Company and shall not be recognized by the Company.

(f)Termination. The provisions of this Section 5 shall terminate as to Aisling or Tullis on such date that such party holds less than twenty-five percent (25%) of the number of shares of Series D-1 Stock issued to it pursuant to this Agreement (or shares into which such Series D-1 Stock have converted, or if such Offered Securities are offered prior to the exchange of the Series B-1 Stock and Series C-1 Stock for Series D-1 Stock, the number of shares of Series B-1 Stock and Series C-1 Stock, respectively) (the “Minimum Percentage”). The provisions of this Section 5 shall terminate as to Reid on such date that he holds less than twenty-five percent (25%) of the original principal amount of the Company’s Secured Convertible 12% Notes issued to him in connection with the Financing (or shares into which such convertible notes have converted).

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Section 6.Board Representation. So long as Aisling holds the Minimum Percentage of Series D-1 Stock (or shares into which such shares of Series D-1 Stock have converted), Aisling shall have the right to nominate one individual to serve as a director on the Company’s Board of Directors. Aisling shall have the right to appoint such individual or to waive its right to appoint such individual at any time. Tullis, PS and the Sutaria Stockholders agree to vote, or cause to be voted, all Shares owned by them, or over which they have voting control, from time to time and at all times, in whatever manner as shall be necessary to ensure that at each annual or special meeting of stockholders at which an election of directors is held or pursuant to any written consent of stockholders, Aisling’s nominee, if any, shall be elected to the Board.

Section 7. Miscellaneous.

(a)Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the parties hereto.

(b)Notices. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered: (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile (provided confirmation of transmission is mechanically or electronically generated and kept on file by the sending party), or (iii) upon receipt, one Business Day after deposit with an overnight courier service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

If to the Company:

Interpharm Holdings, Inc.

75 Adams Avenue

Hauppauge, New York 11788

Telephone: (631) 952-0214

Facsimile:     (631) 952-9585

Attention:    Peter Giallorenzo

With a copy (for informational purposes only) to:

Guzov Ofsink, LLC

600 Madison Avenue, 14th Floor

New York, New York 10022

Telephone: (212) 371-8008, Extension 102

Facsimile:      (212) 688-7273

Attention:    Darren L. Ofsink, Esq.

If to the Sutaria Stockholders:

Perry Sutaria

            6 Buckingham Court

            Morristown, NJ 07960

            Telephone:        (973) 895-4870

            Facsimile:           (973) 538-6111

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            With a copy (for informational purposes only) to:

            Sadis & Goldberg, LLP

            551 Fifth Avenue - 21^st Floor

            New York, New York 10176

            Telephone:        (212) 573-6660

            Facsimile:           (212) 573-6661

            Attention:          Ron Geffner, Esq.

If to Tullis, to:

Tullis-Dickerson & Co., Inc.

Two Greenwich Plaza, 4^th Floor

Greenwich, CT 06830

Telephone:(203) 629-8700

Facsimile:    (203) 629-9293

Attention:Joan P. Neuscheler

With a copy (for informational purposes only) to:

Schulte Roth & Zabel LLP

919 Third Avenue

New York, New York 10022

Telephone:(212) 756-2000

Facsimile:   (212) 593-5955

Attention:Eleazer N. Klein, Esq.

If to Aisling, to:

Aisling Capital II, L.P.

888 Seventh Avenue, 30^th Floor

New York, New York 10106

Telephone:(212) 651-6394

Facsimile:    (212) 651-6379

Attention:  Andrew Schiff

With a copy (for informational purposes only) to:

Feldman Weinstein & Smith LLP

420 Lexington Avenue, Suite 2620

New York, NY 10170

Telephone: (212) 869-7000

Facsimile:     (212) 997-4242

Attention:    Joseph A. Smith

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If to Reid:

Interpharm Holdings, Inc.

75 Adams Avenue

Hauppauge, New York 11788

Telephone: (631) 952-0214

Facsimile:     (631) 952-9585

Attention:     Cameron Reid

(c)Recapitalization. This Agreement is intended to apply to all shares of the capital stock of the Company now or hereafter held by the PS and the Sutaria Stockholders. In the event that the PS or any of the Sutaria Stockholders acquire any additional shares of the capital stock of the Company hereafter, or in the event of any capital reorganization of the Company or if any Shares shall be reclassified, classified, split, exchanged, or changed in any manner, this Agreement shall be deemed to apply to all the shares of capital stock received and owned by PS and the Sutaria Stockholders.

(d)Benefit and Burden. This Agreement shall inure to the benefit of, and shall be binding upon, the parties hereto and their legatees, distributees, estates, executors, administrators, personal representatives, successors assigns and legal representatives. Each transferee or assignee of any Shares subject to this Agreement shall continue to be subject to the terms hereof and, as a condition precedent to the Company’s recognizing such transfer, each transferee or assignee shall agree in writing to be subject to the terms of this Agreement. The Company shall not permit the transfer of the Shares subject to this Agreement on its books or issue a new certificate representing any such Shares unless and until such transferee shall have complied with the terms of this Agreement. Each certificate representing the Shares subject to this Agreement shall be endorsed with the legend set forth in Section 7(f) below.

(e)Remedies. The undersigned acknowledges and agrees that Aisling and Tullis will be irreparably damaged in the event any of the provisions of this Agreement are not performed by the undersigned in accordance with their specific terms or are otherwise breached. Accordingly, it is agreed that each of Aisling and Tullis shall be entitled to an injunction to prevent breaches of this Agreement, and to specific performance of this Agreement and its terms and provisions in any action instituted in any court of the United States or any state having subject matter jurisdiction. All remedies, either under this Agreement or by law or otherwise afforded to any party, shall be cumulative and not alternative.

(f)Legend on Shares. Each certificate representing any Shares shall be endorsed by the Company with a legend reading substantially as follows:

“THE SHARES EVIDENCED HEREBY ARE SUBJECT TO A VOTING PROXY AND WAIVER AGREEMENT, AS MAY BE AMENDED FROM TIME TO TIME (COPIES OF WHICH MAY BE OBTAINED UPON WRITTEN REQUEST FROM THE COMPANY), AND BY ACCEPTING ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF THAT VOTING PROXY AND THAT WAIVER AGREEMENT, INCLUDING CERTAIN RESTRICTIONS ON TRANSFER AND OWNERSHIP SET FORTH THEREIN.”

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The Company agrees that it will cause the certificates evidencing the Shares to bear the legend required by this Section 7(f), and it shall supply, free of charge, a copy of the Proxy and this Agreement to any holder of a certificate evidencing Shares upon written request from such holder to the Company at its principal office. The parties to this Agreement agree that the failure to cause the certificates evidencing the Shares to bear the legend required by this Section 7(f) and/or the failure by the Company to supply, free of charge, a copy of the Proxy and this Agreement, shall not affect the validity or enforcement of the Proxy or this Agreement. Notwithstanding the foregoing, the Company shall cause the legend set forth in this Section 7(f) to be removed promptly upon request (and in any event within five business days of such request) in the event such Shares are Transferred in an Exempt Transfer under Section 5(d), other than an Exempt Transfer to a Permitted Holder.

(g)Expenses. The Corporation shall bear its own expenses and legal fees with respect to the transactions contemplated by this Agreement and the Proxy and shall pay, and save Aisling and Tullis harmless against all liability for the payment of all costs and other expenses incurred in connection with the preparation of this Agreement, the Proxy and the Financing, including the fees and disbursements of counsel to each of Aisling and Tullis for services rendered in connection therewith, not to exceed $130,000 in the aggregate.

(h)Execution and Counterparts. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.

(i)Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be determined in accordance with the laws of the State of Delaware.

(j)Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.

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(k)Headings. The headings in this Agreement are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.

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IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above.

INTERPHARM HOLDINGS, INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo
	Title: CFO

TULLIS-DICKERSON CAPITAL FOCUS III, L.P.
By:	Tullis-Dickerson Partners III, L.L.C., its general partner
By:	/s/ Joan P. Neuscheler
	Name: Joan P. Neuscheler
	Title: Principal

AISLING CAPITAL II, L.P.
By:	AISLING CAPITAL PARTNERS, LP Its General Partner
By:	AISLING CAPITAL PARTNERS, LLC  Its General Partner
By:	/s/ Dennis Purcell
	Name: Dennis Purcell
	Title:    SMD

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P&K HOLDINGS I, LLC
By:	/s/ Perry Sutaria
	Perry Sutaria, Managing Member

RAMETRA HOLDINGS I, LLC
By:	/s/ Perry Sutaria
	Perry Sutaria, Managing Member

RAJS HOLDINGS I, LLC
By:	/s/ Perry Sutaria
	Perry Sutaria, Managing Member

/s/ Perry Sutaria

PERRY SUTARIA

/s/ Raj Sutaria

RAJ SUTARIA

/s/ Cameron Reid

 CAMERON REID

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EXHIBIT A

FINANCING

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Confidential

TERM SHEET

November 6, 2007

INTERPHARM HOLDINGS INC.

Junior Subordinate Secured 12% Promissory Note due 2010

This Term Sheet is to set forth the indicative terms pursuant to which, subject to certain conditions set forth herein, the Sutaria family and/or their affiliates (the “Sutaria Parties” and/or the “Purchasers”) would purchase certain securities of Interpharm Holdings Inc. (the “Company”) and Interpharm Inc. (“Subsidiary” and together with the Company, the “Borrowers”) and consummate the other transactions contemplated herein (the “Transactions”).

Exchange and Symbol:	AMEX: IPA
Purchasers:	The Sutaria family and/or their affiliates (the “Purchasers”).
Securities:	The Borrowers’ Junior Subordinate Secured 12% Promissory Notes due 2010 (the “Notes”) in the original principal amount of $3,000,000.
Purchase Price:	$3,000,000.
Use of Proceeds:	The net proceeds of the offering shall be used by the Borrowers for their general working capital and other corporate purposes, but not for the purposes of redeeming any capital stock.
Closings:	The closing of the Transactions for the purchase of the Notes shall take place on November 7, 2007 (the “Closing”).
Terms of the Notes:	Interest: The Notes shall bear interest at a rate of 12% per annum, payable quarterly. For the first 12 months, interest shall be payable in cash or in additional promissory notes (the “PIK Notes”), at the option of the Company. Thereafter, unless the Holder otherwise consents, 8% of such interest shall be paid in cash, with the remaining 4% payable in cash or PIK Notes (as described above) at the Company’s option. The PIK Notes shall accrue interest at the same rate as the Note and be the same in all manner and respects as the Note. Maturity Date: October 1, 2010. Wells Default. The Note shall contain a provision that a default under the Wells Fargo (“Wells Fargo” or the “Senior Lender”) senior credit facility shall be a default under the Note. Prepayment: The Borrowers may prepay the Notes at a price equal to the then outstanding principal, plus all accrued but unpaid interest, at any time upon 30 days prior notice to the Holder.
Intercreditor Agreement:	The Purchasers will enter into an Intercreditor Agreement with the Senior Lender in form reasonably satisfactory to the Senior Lender (expected to be substantially in the form last proffered by the Senior Lender to the Purchasers).

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Security Interest:	The obligations under the Notes shall be secured by a third priority security interest in substantially all of the assets of the Company and the Subsidiary, subordinate to the Senior Lender and the STAR financing.
Definitive Agreements:	Each of the parties’ obligations to consummate the Transactions shall be conditioned upon, among other customary items the entry into definitive Notes and other definitive documents, containing the terms set forth herein and mutually acceptable to each party.
Conditions to Closing:	The Purchasers obligation to consummate the Transactions at each of the closings are also contingent upon, among other customary closing conditions, the following: (a) Receipt of a consent from Wells Fargo acceptable to the Purchasers waiving any existing defaults under the senior credit facility and consenting to the Transactions; and (b) Receipt of consent from the holders of the Series A-1 Convertible Cumulative Preferred Stock, Series B-1 Convertible Preferred Stock and the Series C-1 Convertible Stock acceptable to the Purchasers waiving any existing defaults thereunder and consenting to the Transactions.
Costs and Expenses:	Each of the Borrowers and the Purchasers will be responsible for and will bear all of its own costs and expenses incurred at any time in connection with pursuing or consummating the Transactions; provided, (a) the Purchasers shall be entitled to receive as reimbursement of its legal and due diligence expenses in the amount of $15,000 which amount shall be paid at the Closing and (b) in the event the Transactions are not consummated, other than due to the wrongful actions of the Purchasers, the Purchasers shall be entitled to receive as reimbursement of its legal and due diligence expenses in the amount of $10,000.
Neither this Term Sheet nor any discussion or negotiation of the proposed transaction constitutes an agreement or obligation on the part of any person to purchase securities of the Borrowers or enter into any agreement to purchase securities of the Borrowers. Except as to the section entitled Costs and Expenses, this Term Sheet creates no binding right in favor of any party.

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IN WITNESS WHEREOF, the parties hereto have caused this Term Sheet to be duly executed on the day and year first above written.

SUTARIA FAMILY
By:	/s/ Perry Sutaria
	Name: Perry Sutaria On Behalf of the Family

INTERPHARM HOLDINGS INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

INTERPHARM INC.
By:	/s/  PeterGiallorenzo
	Name: Peter Giallorenzo Title: CFO

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TERM SHEET

November 6, 2007

INTERPHARM HOLDINGS INC.

Secured 12% Promissory Note due 2009

This Term Sheet is to set forth the indicative terms pursuant to which, subject to certain conditions set forth herein, Tullis-Dickerson Capital Focus III, L.P. (“TD III”), Aisling Capital II, L.P. (“Aisling”), Cameron Reid (“Reid”), and Sutaria Family Realty, LLC (“SFR”; together with TD III, Aisling, and Reid, the “Purchasers”) would purchase certain securities of Interpharm Holdings Inc. (the “Company”) and Interpharm Inc. (“Subsidiary” and together with the Company, the “Borrowers”) and consummate the other transactions contemplated herein (the “Transactions”).

Exchange and Symbol:	AMEX: IPA
Purchasers:	TD III Aisling Reid SFR TOTAL	$ 833,333 833,333 833,333 2,500,000 $5,000,000
Securities:	The Borrowers’ Secured 12% Promissory Notes due 2009 (the “STAR Notes”) in the original principal amount of $5,000,000; as well as additional notes (the “Sutaria Notes”) to be issued to members of the Sutaria family and/or their affiliates (the “Sutaria Parties”) in an amount of no less than $3,000,000. All decisions with respect to the STAR Notes and the Convertible Notes (as defined below) shall be made as determined by two out of three of TD III, Aisling and Reid.
Purchase Price:	$5,000,000 for the STAR Notes, plus not less than $3,000,000 for the Sutaria Notes.
Use of Proceeds:	The net proceeds of the offering shall be used by the Borrowers for their general working capital and other corporate purposes, but not for the purposes of redeeming any capital stock.
Closings:	The closing of the $3,000,000 of Sutaria Notes shall take place on or about the date hereof. The closing of the Transactions for the purchase of $5,000,000 of the STAR Notes is expected to be completed on or before November 15, 2008. The closing of the Transactions for the exchange of the STAR Notes for Convertible Notes and Warrants (as defined below) shall take place no earlier than January 18, 2008 and no later than February 28, 2008.
Exchange of STAR Notes and Issuance of Warrants:	No earlier than January 18, 2008 and no later than February 28, 2008, the Company shall obtain stockholder approval for the exchange of the STAR Notes for (i) 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 such exchange and (ii) five year Warrants (the “Warrants”) to acquire 1,842,103 shares of Common Stock with an exercise price of $0.95 per share, as further described below.

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Terms of the STAR Notes:	Interest: The STAR Notes shall bear interest at a rate of 12% per annum, payable quarterly in cash or, at the Company’s option, accrued and added to principal. Maturity Date: October 1, 2009, provided in the event the Wells Fargo senior credit facility is amended, refinanced or extended such that the maturity date of the senior credit facility is later than February 1, 2011, the Maturity Date of the STAR Notes shall be extended to October 1, 2010. Financial Covenants. The STAR Notes shall contain financial covenants substantially similar to the financial covenants contained in the Wells Fargo senior credit facility. Prepayment: The Borrowers may not prepay the STAR Notes.
Terms of the Convertible Notes:	Interest: The Convertible Notes shall bear interest at a rate of 12% per annum, payable quarterly, in cash or in additional promissory notes (the “PIK Notes”), at the option of the Company. Maturity Date: October 1, 2009, provided in the event the Wells Fargo senior credit facility is amended, refinanced or extended such that the maturity date of the senior credit facility is later than February 1, 2011, the Maturity Date of the Convertible Notes shall be extended to October 1, 2010. Financial Covenants. The Convertible Notes shall contain financial covenants substantially similar to the financial covenants contained in the Wells Fargo senior credit facility. Prepayment: The Borrowers may prepay the Convertible Notes at a price equal to the then outstanding principal, plus all accrued but unpaid interest, at any time upon 30 days prior notice to the Purchasers. Conversion: The Convertible Notes (including any accrued interest thereon) shall be convertible at the option of the holder into shares of the Company’s Common Stock at a Conversion Price of $0.95. Anti-Dilution: In the event the Company is deemed to have issued Common Stock (other than certain excluded issuances) at a purchase price less than the Conversion Price, the Conversion Price shall be reset to a price equal to 90% of the price at which such shares of Common Stock are deemed to have been issued.
Warrants:	The Warrants shall be five year warrants to acquire 1,842,103 shares of Common Stock with an exercise price of $0.95 per share. The Warrants shall contain full ratchet anti-dilution provisions reducing the warrant exercise price to 90% of the price at which Common Stock is deemed to have been issued and accordingly increasing the number of warrant shares, and shall provide for cashless exercise in the event that a registration statement is not effective.

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Intercreditor Agreement:	The Purchasers will enter into an Intercreditor Agreement with Wells Fargo Bank (the “Senior Lender”) in form reasonably satisfactory to the Senior Lender (expected to be substantially in the form last proffered by the Senior Lender to Vicis).
Registration Rights:	The Purchasers shall have customary “piggy-back” registration rights in the event the Company files a registration statement other than on a Form S-8.
Security Interest	The obligations under the STAR Notes (and the Convertible Notes which are issued in exchange for the STAR Notes) shall be secured by a second priority security interest in substantially all of the assets of the Company and the Subsidiary, subordinate only to the lien of the Senior Lender.
Agreements with Affiliates	Sutaria Notes. Prior to the Closing, the Sutaria Parties shall purchase and the Company shall issue to the Sutaria Parties the Sutaria Notes in the aggregate amount of not less than $3,000,000. The Sutaria Notes shall be on substantially the same terms as the STAR Notes, except (a) the Sutaria Notes shall not be exchangeable for Convertible Notes and Warrants and (b) the Sutaria Notes shall be subordinate to the Notes. Tag-Along Right. The Purchasers shall have Tag-Along rights as previously negotiated in the Consent and Waiver Agreement.
Exchange of Series B-1 and C-1 Convertible Preferred Stocks and Amendment of Certain Warrants:	The Series B-1 and Series C-1 Convertible Preferred Stocks will be exchangeable for shares of Series D-1 Convertible Preferred Stock with a conversion price of $0.95, and the exercise price of the warrants issued with the Series B-1 and Series C-1 Convertible Preferred Stocks will be reset at $0.95.
Additional Covenant:	Variable Price Equity Issuance. The definitive agreements will contain provisions prohibiting the Company from issuing variable priced equity, variable priced equity linked securities or equity lines of credit for so long as the Purchasers hold any securities of the Company. MFN. In the event the Borrowers issues any security, the Purchasers shall have the right to exchange all or a portion of the STAR Notes and Convertible Notes (including the accrued interest thereon) for such other security.
Definitive Agreements:	Each of the parties’ obligations to consummate the Transactions shall be conditioned upon, among other customary items the entry into definitive Purchase Agreement, Notes, Warrants, Registration Rights Agreement, Mortgage and other definitive documents, containing the terms set forth herein and mutually acceptable to each party.

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	The definitive agreements shall contain customary terms and conditions, including representations and warranties, covenants and indemnities and such other terms and conditions as the parties shall agree.
Conditions to Closing:	The Purchasers obligation to consummate the Transactions at the closing are also contingent upon, among other customary closing conditions, the following: (a) Receipt of a consent from Wells Fargo acceptable to the Purchasers waiving any existing defaults under the senior credit facility and consenting to the Transactions; and (b) Receipt of consent from the holders of the Series A-1 Convertible Cumulative Preferred Stock, Series B-1 Convertible Preferred Stock and the Series C-1 Convertible Stock acceptable to the Purchasers waiving any existing defaults thereunder and consenting to the Transactions.
Costs and Expenses:	Each of the Borrowers and the Purchasers will be responsible for and will bear all of its own costs and expenses incurred at any time in connection with pursuing or consummating the Transactions; provided, (a) TD III and Aisling shall be entitled to receive reimbursement of their legal expenses with respect to the Transactions, up to $130,000, which amount shall be paid at the STAR Note closing, and (b) SFR and the Sutarias shall be entitled to receive reimbursement of their legal expenses with respect to the Transactions, up to [$50,000], which amount shall be paid at the STAR Note closing.
Neither this Term Sheet nor any discussion or negotiation of the proposed transaction constitutes an agreement or obligation on the part of any person to purchase securities of the Borrowers or enter into any agreement to purchase securities of the Borrowers.

Signatures Appear on Next Page

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IN WITNESS WHEREOF, the parties hereto have caused this Term Sheet to be duly executed on the day and year first above written.

AISLING CAPITAL II, L.P.
By:	AISLING CAPITAL PARTNERS, L.P., its general partner
By:	AISLING CAPITAL PARTNERS, LLC., its general partner
By:	/s/ Dennis Purcell
	Name: Dennis Purcell Title: SMD

TULLIS-DICKERSON CAPITAL FOCUS III, L.P.
By:	TULLIS-DICKERSON  PARTNERS, III, LLC, its general partner
By:	/s/ Joan P. Neuscheler
	Name: Joan P. Neuscheler Title: Principal

By:	/s/ Perry Sutaria
	Perry Sutaria, for the Sutaria family

SUTARIA FAMILY REALTY, LLC
By:	/s/ Maganlal Sutaria
	Name: Maganlal Sutaria Title: Managing Member
	/s/ Cameron Reid Cameron Reid

INTERPHARM HOLDINGS INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

INTERPHARM INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

24

EXHIBIT B

STOCKHOLDER APPROVAL

WRITTEN CONSENT

OF A

MAJORITY OF THE SHAREHOLDERS

OF

INTERPHARM HOLDINGS, INC.

TO ACTION TAKEN WITHOUT A MEETING

The undersigned, being the holders of a majority of the issued and outstanding shares of the common stock, par value $0.01 per share, of Interpharm Holdings, Inc. (the “Company”), do hereby consent to the following action taken without a meeting and do hereby adopt the following resolutions, as and for the action and the resolutions of the shareholders of the Company, to have the same force and effect as if taken and adopted at a duly called and noticed meeting of the shareholders of the Company at which a quorum was present and in attendance and acting throughout.

WHEREAS, the Company shall enter into financing transactions on the terms set forth in the term sheets (the “Term Sheets”) annexed hereto as Exhibit A (the “Financings”) and shall enter into a Waiver and Consent Agreement in the form annexed hereto as Exhibit B (the “Waiver”);

NOW THEREFORE, be it

RESOLVED, that the Company is hereby authorized to proceed with the Financings and Waiver on substantially the terms set forth in the documents annexed hereto;; and be it further

RESOLVED, that the execution, delivery and performance by the Company of each of the documents necessary for the Financing and Waiver be, and it hereby is, authorized and approved; and be it further

RESOLVED, that the issuance of the STAR Notes, Convertible Notes, the Sutaria Notes, the Warrants, and the Series D-1 Preferred as defined in the Term Sheets be, and it hereby is, authorized and approved; and be it further

RESOLVED, that the amendment of the Company’s Certificate of Incorporation to create the Series D-1 Preferred, as set forth in the Board Resolutions, be, and it hereby is, authorized and approved; and be it further

RESOLVED, that the Information Statement and other securities filings described in the Waiver be, and they hereby is, authorized and approved; and be it further

RESOLVED, that the consummation of each transaction contemplated by the Term Sheets and the Waiver be, and they hereby are, authorized and approved; and be it further

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RESOLVED, that the ratification of actions taken by the Company and its officers, directors, representatives and agents be, and it hereby is, authorized and approved; and be it further

RESOLVED, that all securities previously issued to Tullis-Dickerson Capital Focus III,  L.P. (“Tullis”) and Aisling Capital II, L.P. (“Aisling”, including, without limitation, all securities issued pursuant to the Certificate of Designations, Preferences and Rights of Series B-1 Convertible Preferred Stock of the Company and the Certificate of Designations, Preferences and Rights of the Series C-1 Convertible Preferred Stock of the Company (including as Conversion Shares, Dividend Shares and otherwise, as defined in such certificates of designation), the Warrants and otherwise issued to Tullis and Aisling by the Company, are ratified such that they shall be deemed to be issued in accordance with, and shall be deemed to be subject to the exemptions contained in, Rule 16b-3 of the Exchange Act.

This instrument of written consent shall be filed with the minutes of the meetings of the shareholders of the Company, and shall have the same force and effect as the vote of the shareholders.

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IN WITNESS WHEREOF, the undersigned have executed this instrument of written consent as of the day and year written below.

Dated: November 6, 2007

P&K HOLDINGS I, LLC
By:	/s/ Perry Sutaria
	Perry Sutaria, Managing Member

RAMETRA HOLDINGS I, LLC
By:	/s/ Perry Sutaria
	Perry Sutaria, Managing Member

RAJS HOLDINGS I, LLC
By:	/s/ Perry Sutaria
	Perry Sutaria, Managing Member

RAVIS HOLDINGS I, LLC
By:	/s/ Perry Sutaria
	Perry Sutaria, Managing Member
	/s/ Perry Sutaria PERRY SUTARIA
	/s/ Raj Sutaria RAJ SUTARIA

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EXHIBIT C

CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS

OF

SERIES D-1 CONVERTIBLE PREFERRED STOCK

OF

INTERPHARM HOLDINGS, INC.

Interpharm Holdings, Inc. (the "Company"), a corporation organized and existing under the General Corporation Law of the State of Delaware (the "DGCL"), does hereby certify that, pursuant to authority conferred upon the Board of Directors of the Company by the Certificate of Incorporation, as amended, of the Company, and pursuant to Section 151 of the DGCL, the Board of Directors of the Company, has adopted resolutions (a) authorizing the issuance of preferred stock, $0.01 par value per share, of the Company ("Preferred Stock") in one or more series and the provision of the designations, preferences and relative participating, optional or other rights, and the qualifications, limitations and restrictions relating to the shares of each such series, and (b) has adopted resolutions (i) designating 20,825 shares of the Company's previously authorized Preferred Stock as "Series D-1 Convertible Preferred Stock," $0.01 value per share (the "Preferred Shares"), and (ii) providing for the designations, preferences and relative participating, optional or other rights, and the qualifications, limitations or restrictions thereof, as follows:

RESOLVED, that the Company is authorized to issue up to 20,825 shares of Series D-1 Convertible Preferred Stock, $0.01 value per share, which shall have the following designations, powers, preferences, relative rights, qualifications, limitations and restrictions (with certain defined terms set forth in Section 2(a) below):

ARTICLE II.Dividends. The holders of the Preferred Shares (each, a "Holder" and collectively, the "Holders") shall be entitled to receive dividends ("Dividends") payable on the Stated Value (as defined below) of such Preferred Share at the Dividend Rate (as defined below). Dividends on the Preferred Shares shall commence accruing on the Initial Issuance Date and shall be computed on the basis of a 360-day year consisting of twelve 30-day months and shall be payable in arrears for each Calendar Quarter on the first day of the succeeding Calendar Quarter (as defined below) during the period beginning on the Initial Issuance Date and ending when no Preferred Shares remain outstanding (each, an "DividendDate") with the first Dividend Date being July 1, 2008. Prior to the payment of Dividends on a Dividend Date, Dividends on the Preferred Shares shall accrue at the Dividend Rate. If a Dividend Date is not a Business Day (as defined below), then the Dividend shall be due and payable on the Business Day immediately following such Dividend Date. Dividends shall be payable by adding the amount of such Dividend to the Stated Value of the Preferred Shares as Capitalized Dividends, or, at the option of the Company, in cash, provided that the Dividends which accrued during any period shall be payable in cash only if the Company indicates that the Dividend will be paid in cash in the Dividend Notice (as defined below). At least twenty-five (25) Trading Days prior to the applicable Dividend Date (the "Dividend Notice Date"), the Company shall provide written notice (the "Dividend Notice") to each Holder of Preferred Shares either indicating that the Dividend is to be paid in cash or confirming that the Dividend shall be paid as Capitalized Dividends.

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ARTICLE III.Conversion of Preferred Shares. Preferred Shares shall be convertible into the Company's common stock, par value $0.01 per share (the "Common Stock"), on the terms and conditions set forth in this Section 2.

3.1Certain Defined Terms. For purposes of this Certificate of Designations, the following terms shall have the following meanings:

(a)"Additional Amount" means, on a per Preferred Share basis, the product of (x) the result of the following formula: (Dividend Rate)(N/360) and (y) the Stated Value.

(b)"ANDA" means an Abbreviated New Drug Application which when submitted to the Food and Drug Administration's Center for Drug Evaluation and Research, Office of Generic Drugs, is accepted for review by the Food and Drug Administration.

(c)"Approved Stock Plan" means any employee benefit plan which has been approved by the Board of Directors and stockholders of the Company, pursuant to which the Company's securities may be issued to any employee, officer or director for services provided to the Company.

(d)"Bloomberg" means Bloomberg Financial Markets.

(e)"Business Day" means any day other than Saturday, Sunday or other day on which commercial banks in The City of New York are authorized or required by law to remain closed.

(f)"Calendar Quarter" means each of the following periods: the period beginning on and including January 1 and ending on and including March 31; the period beginning on and including April 1 and ending on and including June 30; the period beginning on and including July 1 and ending on and including September 30; and the period beginning on and including October 1 and ending on and including December 31.

(g)"Capitalized Dividends" means Dividends due on the Preferred Shares pursuant to Section 1 that have been capitalized by adding the amount of the Dividends to the Stated Value of the Preferred Shares.

(h)"Change of Control" means any Fundamental Transaction other than any reorganization, recapitalization or reclassification in which holders of the Company's voting power immediately prior to such reorganization, recapitalization or reclassification continue after such reorganization, recapitalization or reclassification to hold publicly traded securities of the Company and, directly or indirectly, the voting power of the surviving entity or entities necessary to elect a majority of the members of the board of directors (or their equivalent if other than a corporation) of such entity or entities.

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(i)"Closing Bid Price" and "Closing Sale Price" means, for any security as of any date, the last closing bid price and last closing trade price, respectively, for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing bid price or the closing trade price, as the case may be, then the last bid price or last trade price, respectively, of such security prior to 4:00:00 p.m., New York Time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last closing bid price or last trade price, respectively, of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if none of the foregoing apply, the last closing bid price or last trade price, respectively, of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no closing bid price or last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported in the "pink sheets" by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Closing Bid Price or the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Bid Price or the Closing Sale Price, as the case may be, of such security on such date shall be the fair market value as mutually determined by the Company and the Required Holders. If the Company and the Holder are unable to agree upon the fair market value of such security, then such dispute shall be resolved pursuant to Section 2(d)(vi). All such determinations shall be appropriately adjusted for any share dividend, share split, share combination or other similar transaction during the applicable calculation period.

(j)"Conversion Amount" means the sum of (1) the Additional Amount and (2) the Stated Value.

(k)"Conversion Price" means, with respect to the Preferred Shares, as of any Conversion Date or other date of determination, $0.95, subject to adjustment as provided herein.

(l)"Convertible Securities" means any shares or securities (other than Options) directly or indirectly convertible into or exchangeable or exercisable for Common Stock.

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(m)"Dividend Rate" means (i) eight and one-quarter percent (8.25%) per annum and (ii) for the period from and after the occurrence of a Triggering Event through such time that such Triggering Event is cured, ten percent (10%) per annum.

(n)"Eligible Market" means the Principal Market, NYSE, the Nasdaq Global Select Market, the Nasdaq Global Market or The Nasdaq Capital Market.

(o)"Equity Conditions" means: (i) on each day during the period beginning six months prior to the applicable date of determination and ending on and including the applicable date of determination (the "Equity Conditions Measuring Period"), (except as to Capitalized Dividends this condition (i) shall not apply prior to the earlier of the Effective Date and the Effectiveness Deadline (each as defined in the Registration Rights Agreement) (the "Required Registration Date"), and for purposes hereof the Equity Condition Measuring Period shall commence on the Required Registration Date) either (x) the Registration Statement (as defined in the Registration Rights Agreement, the "Registration Statement") filed pursuant to the Registration Rights Agreement shall be effective and available for the resale of all of the Registrable Securities (as defined in the Registration Rights Agreement) in accordance with the terms of the Registration Rights Agreement and there shall not have been any Grace Periods (as defined in the Registration Rights Agreement) or (y) all shares of Common Stock issuable upon conversion of the Preferred Shares and the exercise of Warrants shall be eligible for sale without restriction and without the need for registration under any applicable federal or state securities laws; (ii) on each day during the Equity Conditions Measuring Period, the Common Stock is designated for quotation on the Principal Market and shall not have been suspended from trading on such exchange or market (other than suspensions of not more than two days and occurring prior to the applicable date of determination due to business announcements by the Company) nor shall delisting or suspension by such exchange or market been threatened or pending either (A) in writing by such exchange or market or (B) by falling below the minimum listing maintenance requirements of such exchange or market; (iii) on each day during the Equity Conditions Measuring Period, the Company shall have delivered Conversion Shares upon conversion of the Preferred Shares and Common Stock upon exercise of the Warrants to the Holders on a timely basis as set forth in Section 2(c)(ii) hereof and Section 1(a) of the Warrants; (iv) any applicable Common Stock to be issued in connection with the event requiring determination may be issued in full without violating Section 12 hereof or the rules or regulations of the applicable Principal Market; (v) during the Equity Conditions Measuring Period, the Company shall not have failed to timely make any payments within five (5) Business Days of when such payment is due pursuant to any Transaction Document (as defined in the Securities Purchase Agreement); (vi) during the Equity Conditions Measuring Period, there shall not have occurred either (A) the public announcement of a pending, proposed or intended Fundamental Transaction which has not been abandoned, terminated or consummated or (B) a Triggering Event or an event that with the passage of time or giving of notice would constitute a Triggering Event; (vii) the Company shall have no actual knowledge of any fact that would cause (x) any Registration Statement required pursuant to the Registration Rights Agreement not to be effective and available for the resale of at least all of the Registrable Securities in accordance with the terms of the Registration Rights Agreement or (y) any Common Stock issuable upon conversion of the Preferred Shares and Common Stock issuable upon exercise of the Warrants not to be eligible for sale without restriction pursuant to Rule 144(k) and any applicable state securities laws; and (viii) the Company otherwise shall have been in material compliance with and shall not have materially breached any provision, covenant, representation or warranty of any Transaction Document.

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(p)"Exchange Act" means the Securities and Exchange Act of 1934, as amended.

(q)"Excluded Securities" means any Common Stock issued or issuable or deemed to be issued in accordance with Section 2(f) hereof by the Company: (i) in connection with any Approved Stock Plan; (ii) upon conversion of the Preferred Shares or upon the exercise of the Warrants; (iii) upon conversion, exercise or exchange of any Options or Convertible Securities which are outstanding on the day immediately preceding the Subscription Date, provided that such issuance of Common Stock upon exercise of such Options or Convertible Securities is made pursuant to the terms of such Options or Convertible Securities in effect on the date immediately preceding the Subscription Date and such Options or Convertible Securities are not amended, modified or changed on or after the Subscription Date; (iv) in connection with any stock split, stock dividend, recapitalization or similar transaction by the Company for which adjustment is made pursuant to Section 2(f)(ii); (v) Common Stock issued upon the conversion of any of those certain secured convertible 12% notes due 2009 of the Company and Interpharm, Inc. issued pursuant to the Securities Purchase Agreement dated October 31, 2007 (the “Convertible Notes”); (vi) Common Stock issued as payment of dividends on the Convertible Notes; and (vii) securities issued pursuant to acquisitions or other strategic transactions; provided that (A) such acquisition or other transaction is not with an Affiliate (as defined under Rule 405 of the Securities Act of 1933) of the Company or any individual who is related by blood, marriage or adoption to any Affiliate of the Company, (B) the primary purpose of such acquisition or other transaction is not to raise capital and (C) such security is issued at a price which is greater than or equal to the arithmetic average of the Closing Sale Price of the Common Stock for the ten (10) consecutive Trading Days immediately preceding the date of issuance.

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(r)"Founders" means (i) Maganlal K. Sutaria, any of his immediate family members and any Person affiliated with him or the immediate family members and (ii) any immediate family member of Munish K. Rametra and any Person affiliated with such immediate family members.

(s)"Fundamental Transaction" means that (i) the Company shall, directly or indirectly, in one or more related transactions, (A) consolidate or merge with or into (whether or not the Company is the surviving corporation) another Person, or (B) sell, assign, transfer, convey or otherwise dispose of all or substantially all of the properties or assets of the Company to another Person, or (C) allow another Person to make a purchase, tender or exchange offer that is accepted by the holders of more than the 50% of the outstanding Common Stock (not including any Common Stock held by the Person or Persons making or party to, or associated or affiliated with the Persons making or party to, such purchase, tender or exchange offer), (D) consummate a share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than the 50% of the outstanding Common Stock (not including any Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such share purchase agreement or other business combination), (E) reorganize, recapitalize or reclassify its Common Stock or (F) any "person" or "group" (as these terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act), other than the Founders, is or shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of the issued and outstanding Common Stock or the aggregate ordinary voting power represented by issued and outstanding Common Stock.

(t)"GAAP" means United States generally accepted accounting principles, consistently applied.

(u)"Indebtedness" shall have the meaning as set forth in the Securities Purchase Agreement.

(v)"Initial Issuance Date" means [___________].¹

(w)"Liquidation Event" means the voluntary or involuntary liquidation, dissolution or winding up of the Company or such Subsidiaries the assets of which constitute all or substantially all of the business of the Company and its Subsidiaries taken as a whole, in a single transaction or series of transactions.

¹ Insert date of issuance.

-

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(x)"N" means the number of days from, but excluding, the last Dividend Date with respect to which dividends have been paid or capitalized by the Company on the applicable Preferred Share, or the Initial Issuance Date if no Dividend Date has occurred, through and including the Conversion Date or other date of determination for such Preferred Share, as the case may be, for which such determination is being made.

(y)"Net Income" means, with respect to any Person for any applicable period, the pre-tax net income (loss) of such Person for such period, determined on a consolidated basis and in accordance with GAAP, but excluding from the determination of Net Income any non-cash charges related to the sale of the Preferred Shares.

(z)"NYSE" means The New York Stock Exchange, Inc.

(aa)"Options" means any rights, warrants or options to subscribe for or purchase Common Stock or Convertible Securities.

(bb)"Parent Entity" of a Person means an entity that, directly or indirectly, controls the applicable Person and whose common shares or equivalent equity security are quoted or listed on an Eligible Market, or, if there is more than one such Person or Parent Entity, the Person or Parent Entity with the largest public market capitalization as of the date of consummation of the Fundamental Transaction.

(cc)"Person" means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization and a government or any department or agency thereof.

(dd)"Principal Market" means the American Stock Exchange.

(ee)"Profitable" means, with respect to any Person for any applicable period, such Person having positive Net Income for such period.

(ff)"Registration Rights Agreement" means that certain registration rights agreement by and among the Company and the initial Holders of the Preferred Shares relating to the filing of a registration statement covering the resale of the Common Stock issuable upon conversion of the Preferred Shares and exercise of the Warrants, as such agreement may be amended from time to time as provided in such agreement.

(gg)"Required Holders" means the Holders of Preferred Shares representing at least a majority of the aggregate Preferred Shares then outstanding.

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(hh)"Rule 13e-3 Transaction" means a transaction involving the Company that would be deemed a "going private transaction" under Rule 13e-3 of the Exchange Act; provided, however, that for purposes of this definition the Founders shall be deemed "affiliates" of the Company for purposes of Rule 13e-3.

(ii)"SEC" means the Securities and Exchange Commission.

(jj)"Securities Purchase Agreement" means that certain securities purchase agreement by and among the Company and the initial Holders, dated as of May 15, 2006 or September 11, 2006, as the case may be, as such agreement further may be amended from time to time as provided in such agreement.

(kk)"Stated Value" means per Preferred Share the sum of (i) $1,000 and (ii) all Capitalized Dividends with respect to such Preferred Share.

(ll)"Subscription Date" means October 31, 2007.

(mm)"Subsidiary" has the meaning set forth in the Securities Purchase Agreement.

(nn)"Successor Entity" means the Person, which may be the Company, formed by, resulting from or surviving any Fundamental Transaction or the Person with which such Fundamental Transaction shall have been made, provided that if such Person is not a publicly traded entity whose common shares or equivalent equity security are quoted or listed for trading on an Eligible Market, Successor Entity shall mean such Person's Parent Entity if such Parent Entity is so quoted or listed.

(oo)"Trading Day" means any day on which the Common Stock is traded on the Principal Market, or, if the Principal Market is not the principal trading market for the Common Stock, then on the principal securities exchange or securities market on which the Common Stock is then traded; provided that "Trading Day" shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00:00 p.m., New York Time).

(pp)"Warrants" has the meaning ascribed to such term in the Securities Purchase Agreement, and shall include all warrants issued in exchange therefor or replacement thereof.

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(qq)"Weighted Average Price" means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market during the period beginning at 9:30:01 a.m., New York City Time, and ending at 4:00:00 p.m., New York City Time, as reported by Bloomberg through its "Volume at Price" function or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York City Time, and ending at 4:00:00 p.m., New York City Time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the "pink sheets" by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If the Weighted Average Price cannot be calculated for such security on such date on any of the foregoing bases, the Weighted Average Price of such security on such date shall be the fair market value as mutually determined by the Company and the Required Holders. If the Company and the Required Holders are unable to agree upon the fair market value of the Common Stock, then such dispute shall be resolved pursuant to Section 2(d)(iii) below with the term "Weighted Average Price" being substituted for the term "Closing Sale Price." All such determinations shall be appropriately adjusted for any share dividend, share split or other similar transaction during such period.

3.2Holder's Conversion Right. Subject to the provisions of Section 5 and Section 12, at any time or times on or after the Initial Issuance Date, any Holder shall be entitled to convert any whole number of Preferred Shares, plus the amount of any accrued but unpaid Dividends per Preferred Share then remaining, into fully paid and nonassessable shares of Common Stock in accordance with Section 2(d) at the Conversion Rate (as defined below).

3.3Conversion. The number of shares of Common Stock issuable upon conversion of each Preferred Share pursuant to Section 2(b) shall be determined according to the following formula (the "Conversion Rate"):

Conversion Amount

Conversion Price

No fractional shares of Common Stock are to be issued upon the conversion of any Preferred Share, but rather the number of shares of Common Stock to be issued shall be rounded up to the nearest whole number.

3.4Mechanics of Conversion. The conversion of Preferred Shares shall be conducted in the following manner:

(a)Holder's Delivery Requirements. To convert Preferred Shares into Common Stock on any date (the "Conversion Date"), the Holder shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior to 11:59 p.m., New York City Time, on such date, a copy of a properly completed notice of conversion executed by the registered Holder of the Preferred Shares subject to such conversion in the form attached hereto as Exhibit I (the "Conversion Notice") to the Company and the Company's transfer agent (the "Transfer Agent") and (B) if required by Section 2(d)(vii), surrender to a common carrier for delivery to the Company as soon as practicable following such date the original certificates representing the Preferred Shares being converted (or compliance with the procedures set forth in Section 14) (the "Preferred Share Certificates").

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(b)Company's Response. Upon receipt by the Company of copy of a Conversion Notice, the Company shall as soon as practicable, but in any event within two (2) Business Days, send, via facsimile, a confirmation of receipt of such Conversion Notice to such Holder and the Transfer Agent, which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein. On or before the third (3^rd) Business Day following the date of receipt by the Company of such Conversion Notice (the "Share Delivery Date"), the Company shall (A) provided the Transfer Agent is participating in the Depository Trust Company ("DTC") DTC Fast Automated Securities Transfer Program, cause the Transfer Agent to credit such aggregate number of shares of Common Stock to which the Holder shall be entitled to the Holder's or its designee's balance account with DTC through its Deposit Withdrawal Agent Commission system, or (B) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, cause the Transfer Agent to issue and deliver to the address as specified in the Conversion Notice, a certificate, registered in the name of the Holder or its designee, for the number of shares of Common Stock to which the Holder shall be entitled. If the number of Preferred Shares represented by the Preferred Share Certificate(s) submitted for conversion, as may be required pursuant to Section 2(d)(vii), is greater than the number of Preferred Shares being converted, then the Company shall, as soon as practicable and in no event later than three (3) Business Days after receipt of the Preferred Share Certificate(s) (the "Preferred Share Delivery Date") and at its own expense, issue and deliver to the Holder a new Preferred Share Certificate representing the number of Preferred Shares not converted.

(c)Dispute Resolution. In the case of a dispute as to the determination of the Closing Sale Price or the arithmetic calculation of the Conversion Rate, the Company shall instruct the Transfer Agent to issue to the Holder the number of shares of Common Stock that is not disputed and shall transmit an explanation of the disputed determinations or arithmetic calculations to the Holder via facsimile within one (1) Business Day of receipt of such Holder's Conversion Notice or other date of determination. If such Holder and the Company are unable to agree upon the determination of the Closing Sale Price or arithmetic calculation of the Conversion Rate within two (2) Business Days of such disputed determination or arithmetic calculation being transmitted to the Holder, then the Company shall within one (1) Business Day submit via facsimile (A) the disputed determination of the Closing Sale Price to an independent, reputable investment bank selected by the Company and approved by the Required Holders or (B) the disputed arithmetic calculation of the Conversion Rate to the Company's independent, outside accountant. The Company shall cause, at the Company's expense, the investment bank or the accountant, as the case may be, to perform the determinations or calculations and notify the Company and the Holders of the results no later than two (2) Business Days from the time it receives the disputed determinations or calculations. Such investment bank's or accountant's determination or calculation, as the case may be, shall be binding upon all parties absent error.

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(d)Miscellaneous; Record Holder. The Person or Persons entitled to receive the Common Stock issuable upon a conversion of Preferred Shares shall be treated for all purposes as the record holder or holders of such Common Stock on the Conversion Date.

(e)Company's Failure to Timely Convert.

(i)Cash Damages. If (I) within ten (10) calendar days after the Company's receipt of a Conversion Notice the Company shall fail to credit a Holder's balance account with DTC or issue and deliver a certificate to such Holder for the number of shares of Common Stock to which such Holder is entitled upon such Holder's conversion of Preferred Shares (a "Conversion Failure") or (II) within ten (10) calendar days of the Company's receipt of a Preferred Share Certificate the Company shall fail to issue and deliver a new Preferred Share Certificate representing the number of Preferred Shares to which such Holder is entitled pursuant to Section 2(d)(ii), then in addition to all other available remedies which such holder may pursue hereunder and under the Securities Purchase Agreement (including indemnification pursuant to Section 9(k) thereof), the Company shall pay additional damages to such Holder for each day after the Share Delivery Date that such conversion is not timely effected and/or each day after the Preferred Share Delivery Date that such Preferred Share Certificate is not delivered in an amount equal to 1.0% of the product of (I) the sum of the number of shares of Common Stock not issued to the Holder on or prior to the Share Delivery Date and to which such Holder is entitled as set forth in the applicable Conversion Notice and, in the event the Company has failed to deliver a Preferred Share Certificate to the Holder on or prior to the Preferred Share Delivery Date, the number of shares of Common Stock issuable upon conversion of the Preferred Shares represented by such Preferred Share Certificate as of the Preferred Share Delivery Date and (II) the Closing Sale Price of the Common Stock on the Share Delivery Date, in the case of the failure to deliver Common Stock, or the Preferred Share Delivery Date, in the case of failure to deliver a Preferred Share Certificate. If the Company fails to pay the additional damages set forth in this Section 2(d)(v) within five (5) Business Days of the date incurred, then the Holder entitled to such payments shall have the right at any time, so long as the Company continues to fail to make such payments, to require the Company, upon written notice, to immediately issue, in lieu of such cash damages, the number of shares of Common Stock equal to the quotient of (X) the aggregate amount of the damages payments described herein divided by (Y) the Conversion Price in effect on such Conversion Date as specified by the Holder in the Conversion Notice. In addition to the foregoing, if within three (3) Business Days after the Company's receipt of a Conversion Notice the Company shall fail to issue and deliver a certificate to a Holder or credit such Holder's balance account with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder's conversion of Preferred Shares, and if on or after such Business Day the Holder purchases (in an open market transaction or otherwise) Common Stock to deliver in satisfaction of a sale by the Holder of the Common Stock issuable upon such conversion that the Holder anticipated receiving from the Company (a "Buy-In"), then the Company shall, within three (3) Business Days after the Holder's request and in the Holder's discretion, either (i) pay cash to the Holder in an amount equal to the Holder's total purchase price (including brokerage commissions, if any) for the Common Stock so purchased (the "Buy-In Price"), at which point the Company's obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock times (B) the Closing Sale Price on the Conversion Date.

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(ii)Void Conversion Notice; Adjustment of Conversion Price. If for any reason a Holder has not received all of the Common Stock to which such Holder is entitled prior to the fifth (5^th) Business Day after the Share Delivery Date with respect to a conversion of Preferred Shares, then the Holder, upon written notice to the Company, with a copy to the Transfer Agent, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, any Preferred Shares that have not been converted pursuant to such Holder's Conversion Notice; provided that the voiding of a Holder's Conversion Notice shall not effect the Company's obligations to make any payments which have accrued prior to the date of such notice pursuant to Section 2(d)(v)(A) or otherwise. Thereafter, the Conversion Price of any Preferred Shares returned or retained by the Holder for failure to timely convert shall be adjusted to the lesser of (I) the Conversion Price relating to the voided Conversion Notice and (II) the lowest Weighted Average Price of the Common Stock during the period beginning on the Conversion Date and ending on the date such Holder voided the Conversion Notice, subject to further adjustment as provided in this Certificate of Designations.

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(f)Pro Rata Conversion; Disputes. Subject to Section 12, in the event the Company receives a Conversion Notice from more than one Holder for the same Conversion Date and the Company can convert some, but not all, of such Preferred Shares, the Company shall convert from each Holder electing to have Preferred Shares converted at such time a pro rata amount of such Holder's Preferred Shares submitted for conversion based on the number of Preferred Shares submitted for conversion on such date by such Holder relative to the number of Preferred Shares submitted for conversion on such date. In the event of a dispute as to the number of shares of Common Stock issuable to a Holder in connection with a conversion of Preferred Shares, the Company shall issue to such Holder the number of shares of Common Stock not in dispute and resolve such dispute in accordance with Section 2(d)(iii).

(g)Book-Entry. Notwithstanding anything to the contrary set forth herein, upon conversion of Preferred Shares in accordance with the terms hereof, any Holder thereof shall not be required to physically surrender the certificate representing the Preferred Shares to the Company unless (A) the full or remaining number of Preferred Shares represented by the certificate are being converted or (B) such Holder has provided the Company with prior written notice (which notice may be included in a Conversion Notice) requesting reissuance of Preferred Shares upon physical surrender of any Preferred Shares. The Holders and the Company shall maintain records showing the number of Preferred Shares so converted and the dates of such conversions or shall use such other method, reasonably satisfactory to the Holders and the Company, so as not to require physical surrender of the certificate representing the Preferred Shares upon each such conversion. In the event of any dispute or discrepancy, such records of the Company establishing the number of Preferred Shares to which the record holder is entitled shall be controlling and determinative in the absence of manifest error. Notwithstanding the foregoing, if Preferred Shares represented by a certificate are converted as aforesaid, a Holder may not transfer the certificate representing the Preferred Shares unless such Holder first physically surrenders the certificate representing the Preferred Shares to the Company, whereupon the Company will forthwith issue and deliver upon the order of such Holder a new certificate of like tenor, registered as such Holder may request, representing in the aggregate the remaining number of Preferred Shares represented by such certificate. A Holder and any assignee, by acceptance of a certificate, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of any Preferred Shares, the number of Preferred Shares represented by such certificate may be less than the number of Preferred Shares stated on the face thereof. Each certificate for Preferred Shares shall bear the following legend:

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Preferred Shares unless such Holder first physically surrenders the certificate representing the Preferred Shares to the Company, whereupon the Company will forthwith issue and deliver upon the order of such Holder a new certificate of like tenor, registered as such Holder may request, representing in the aggregate the remaining number of Preferred Shares represented by such certificate. A Holder and any assignee, by acceptance of a certificate, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of any Preferred Shares, the number of Preferred Shares represented by such certificate may be less than the number of Preferred Shares stated on the face thereof. Each certificate for Preferred Shares shall bear the following legend:

ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE, INCLUDING SECTION 2(d)(vii) THEREOF. THE NUMBER OF PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF PREFERRED SHARES STATED ON THE FACE HEREOF PURSUANT TO SECTION 2(d)(vii) OF THE CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE.

3.5Taxes. The Company shall pay any and all documentary, stamp, transfer (but only in respect of the registered holder thereof) and other similar taxes that may be payable with respect to the issuance and delivery of Common Stock upon the conversion of Preferred Shares.

3.6Adjustments to Conversion Price. The Conversion Price will be subject to adjustment from time to time as provided in this Section 2(f).

(a)Adjustment of Conversion Price upon Issuance of Common Stock. If and whenever on or after the Subscription Date, the Company issues or sells, or in accordance with this Section 2(f) is deemed to have issued or sold, any Common Stock (including the issuance or sale of Common Stock owned or held by or for the account of the Company but excluding Excluded Securities) for a consideration per share (the "New Securities Issuance Price") less than a price (the "Applicable Price") equal to the Conversion Price in effect immediately prior to such time (a "Dilutive Issuance"), then immediately after such issue or sale, the Conversion Price then in effect shall be reduced to an amount equal to ninety percent (90%) of the New Securities Issuance Price. For purposes of determining the adjusted Conversion Price under this Section 2(f)(i), the following shall be applicable:

(i)Issuance of Options. If the Company in any manner grants or sells any Options and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 2(f)(i)(A), the "lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion, exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities.

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(ii)Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities and the lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise thereof is less than the Applicable Price, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance of sale of such Convertible Securities for such price per share. For the purposes of this Section 2(f)(i)(B), the "lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise" shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion, exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or are to be made pursuant to other provisions of this Section 2(f)(i), no further adjustment of the Conversion Price shall be made by reason of such issue or sale.

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(iii)Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time, the Conversion Price in effect at the time of such change shall be adjusted to the Conversion Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 2(f)(i)(C), if the terms of any Option or Convertible Security that was outstanding as of the date of issuance of the Preferred Shares are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. No adjustment shall be made if such adjustment would result in an increase of the Conversion Price then in effect.

(iv)Calculation of Consideration Received. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, the Options will be deemed to have been issued for a consideration equal to the fair market value of such Options. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the arithmetic average of the Closing Sale Prices of such securities during the ten (10) consecutive Trading Days ending on the date of receipt of such securities. The fair value of any consideration other than cash or securities will be determined jointly by the Company and the Required Holders. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the "Valuation Event"), the fair value of such consideration will be determined within five (5) Business Days after the tenth (10^th) day following the Valuation Event by an independent, reputable appraiser selected by the Company and the Required Holders. The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne by the Company.

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(v)Record Date. If the Company takes a record of the holders of Common Stock for the purpose of entitling them (I) to receive a dividend or other distribution payable in Common Stock, Options or Convertible Securities or (II) to subscribe for or purchase Common Stock, Options or Convertible Securities, then such record date will be deemed to be the date of the issue or sale of the Common Stock deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be.

(b)Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Company at any time after the Subscription Date subdivides (by any share split, share dividend, recapitalization or otherwise) its outstanding Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Company at any time after the Subscription Date combines (by combination, reverse share split or otherwise) its outstanding Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased.

(c)Other Events. If any event occurs of the type contemplated by the provisions of this Section 2(f) but not expressly provided for by such provisions, then the Company's Board of Directors will make an appropriate adjustment in the Conversion Price so as to protect the rights of the Holders; provided that no such adjustment will increase the Conversion Price as otherwise determined pursuant to this Section 2(f).

(d)Notices.

(i)Immediately upon any adjustment of the Conversion Price pursuant to this Section 2(f), the Company will give written notice thereof to each Holder, setting forth in reasonable detail, and certifying, the calculation of such adjustment. In the case of a dispute as to the determination of such adjustment, then such dispute shall be resolved in accordance with the procedures set forth in Section 2(d)(iii).

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(ii)The Company will give written notice to each Holder at least ten (10) Business Days prior to the date on which the Company closes its books or takes a record (I) with respect to any dividend or distribution upon the Common Stock, (II) with respect to any pro rata subscription offer to holders of Common Stock or (III) for determining rights to vote with respect to any Fundamental Transaction or Liquidation Event, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such Holder.

(iii)The Company will also give written notice to each Holder at least ten (10) Business Days prior to the date on which any Fundamental Transaction or Liquidation Event will take place, provided that such information shall be made known to the public prior to or in conjunction with such notice being provided to such Holder.

(e)Voluntary Adjustment by Company. The Company may at any time, while any Series D-1 Preferred Shares are outstanding, reduce the then current Conversion Price to any amount and for any price deemed appropriate by the Board of Directors of the Company.

ARTICLE IV.Triggering Event.

4.1Triggering Event. A "Triggering Event" shall be deemed to have occurred at such time as any of the following events:

(a)the Company's (A) failure to cure a Conversion Failure by delivery of the required number of shares of Common Stock within ten (10) Trading Days after the applicable Conversion Date or (B) notice, written or oral, to any Holder, including by way of public announcement or through any of its agents, at any time, of its intention not to comply, as required, with a request for conversion of any Preferred Shares into Common Stock that is tendered in accordance with the provisions of this Certificate of Designations;

(b)the Company's failure to pay to the Holder any Dividends, Redemption Price, Change of Control Redemption Price, or other amounts when and as due pursuant to this Certificate of Designations or any other Transaction Document (as defined in the Securities Purchase Agreement);

(c)any event of default occurs with respect to any Indebtedness, including borrowings under the Credit and Security Agreement dated as of February 9, 2006 (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), under which the obligee or obligees of such Indebtedness are entitled to and do accelerate the maturity of at least an aggregate of $3,000,000 million in outstanding Indebtedness; or

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(d)the Company breaches any representation, warranty, covenant or other term or condition herein or in any Transaction Document; provided, however, that (A) in the case of a breach of a covenant or other term or condition herein or in any Transaction Document which is curable, only if such breach remains uncured for a period of at least ten (10) consecutive Business Days after the expiration of any applicable cure period and (B) in the case of any representation, warranty or covenant which is not already so qualified, the breach of the representation, warranty or covenant by the Company could reasonably be expected to have a Material Adverse Effect (as defined in the Securities Purchase Agreement) on the Company or on the Holder.

4.2Redemption Option Upon Triggering Event. In addition to all other rights of the Holders contained herein, after a Triggering Event, each Holder shall have the right to require the Company to redeem all or a portion of the Preferred Shares at a price per Preferred Share equal to the greater of (x) the Conversion Amount and (y) the product of (A) the Conversion Rate in effect at such time as such Holder delivers a Notice of Redemption at Option of Holder (as defined below) and (B) the Closing Sale Price of the Common Shares on the Trading Day immediately preceding such Triggering Event (the "Triggering Redemption Price").

4.3Mechanics of Redemption at Option of Buyer.

(a)Within one (1) Business Day after the occurrence of a qualifying Triggering Event, the Company shall deliver written notice thereof via facsimile and overnight courier ("Notice of Triggering Event") to each Holder.

(b)At any time after the earlier of a Holder's receipt of a Notice of Triggering Event and such Holder becoming aware of a Triggering Event, any Holder of Preferred Shares then outstanding may require the Company to redeem up to all of such Holder's Preferred Shares by delivering written notice thereof via facsimile and overnight courier ("Notice of Redemption at Option of Holder") to the Company, which Notice of Redemption at Option of Holder shall indicate the number of Preferred Shares that such Holder is electing to redeem.

4.4Payment of Redemption Price. Upon the Company's receipt of a Notice(s) of Redemption at Option of Buyer from any Holder, the Company shall immediately notify each Holder by facsimile of the Company's receipt of such notice(s). The Company shall deliver on the fifth (5^th) Business Day after the Company's receipt of the first Notice of Redemption at Option of Holder the applicable Redemption Price to all Holders that deliver a Notice of Redemption at Option of Holder prior to the fifth (5^th) Business Day after the Company's receipt of the first Notice of Redemption at Option of Holder; provided that, if required by Section 2(d)(vii), a Holder's Preferred Share Certificates shall have been delivered to the Transfer Agent. To the extent redemptions required by this Section 3 are deemed or determined by a court of competent jurisdiction to be prepayments of the Preferred Shares by the Company, such redemptions shall be deemed to be voluntary prepayments. If the Company is unable to redeem all of the Preferred Shares submitted for redemption, the Company shall (i) redeem a pro rata amount from each Holder based on the number of Preferred Shares submitted for redemption by such Holder relative to the total number of Preferred Shares submitted for redemption by all Holders and (ii) in addition to any remedy such Holder may have under this Certificate of Designation and the Securities Purchase Agreement, pay to each Holder interest at the rate of 3.0% per month (prorated for partial months) in respect of each unredeemed Preferred Share until paid in full. The Holders and Company agree that in the event of the Company's redemption of any Preferred Shares under this Section 3, the Holders' damages would be uncertain and difficult to estimate because of the parties' inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holders. Accordingly, any redemption premium due under this Section 3 is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holders' actual loss of its investment opportunity and not as a penalty.

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4.5Void Redemption. In the event that the Company does not pay the Redemption Price within the time period set forth in Section 3(d), at any time thereafter and until the Company pays such unpaid applicable Redemption Price in full, a Holder shall have the option to, in lieu of redemption, require the Company to promptly return to such Holder any or all of the Preferred Shares that were submitted for redemption by such Holder under this Section 3 and for which the applicable Redemption Price (together with any interest thereon) has not been paid, by sending written notice thereof to the Company via facsimile (the "Void Optional Redemption Notice"). Upon the Company's receipt of such Void Optional Redemption Notice, (i) the Notice of Redemption at Option of Holder shall be null and void with respect to those Preferred Shares subject to the Void Optional Redemption Notice, (ii) the Company shall immediately return any Preferred Shares subject to the Void Optional Redemption Notice, and (iii) the Conversion Price of such returned Preferred Shares shall be adjusted to the lesser of (A) the Conversion Price as in effect on the date on which the Void Optional Redemption Notice is delivered to the Company and (B) the lowest Weighted Average Price of the Common Shares during the period beginning on the date on which the Notice of Redemption at Option of Holder is delivered to the Company and ending on the date on which the Void Optional Redemption Notice is delivered to the Company.

4.6Disputes; Miscellaneous. In the event of a dispute as to the determination of the arithmetic calculation of the Redemption Price, such dispute shall be resolved pursuant to Section 2(d)(iii) above with the term "Redemption Price" being substituted for the term "Conversion Rate". A Holder's delivery of a Void Optional Redemption Notice and exercise of its rights following such notice shall not effect the Company's obligations to make any payments which have accrued prior to the date of such notice. In the event of a redemption pursuant to this Section 3 of less than all of the Preferred Shares represented by a particular Preferred Share Certificate, the Company shall promptly cause to be issued and delivered to the Holder of such Preferred Shares a Preferred Share Certificate representing the remaining Preferred Shares which have not been redeemed, if necessary.

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ARTICLE V.Other Rights of Holders.

5.1Assumption. The Company shall not enter into or be party to a Fundamental Transaction unless the Successor Entity assumes in writing all of the obligations of the Company under this Certificate of Designations and the other Transaction Documents in accordance with the provisions of this Section 4(a) pursuant to written agreements in form and substance satisfactory to the Required Holders and approved by the Required Holders prior to such Fundamental Transaction, including agreements to deliver to each holder of Preferred Shares in exchange for such Preferred Shares a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Certificate of Designations, including, without limitation, having a stated value and dividend rate equal to the Stated Value and Dividend Rate of the Preferred Shares held by such holder and having similar ranking to the Preferred Shares, and reasonably satisfactory to the Required Holders. Upon the occurrence of any Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Certificate of Designations referring to the "Company" shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Certificate of Designations with the same effect as if such Successor Entity had been named as the Company herein. Upon consummation of the Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon conversion or redemption of the Preferred Shares at any time after the consummation of the Fundamental Transaction, in lieu of the Common Stock (or other securities, cash, assets or other property) purchasable upon the conversion or redemption of the Preferred Shares prior to such Fundamental Transaction, such publicly traded common shares (or their equivalent) of the Successor Entity, as adjusted in accordance with the provisions of this Certificate of Designations. The provisions of this Section shall apply similarly and equally to successive Fundamental Transactions and shall be applied without regard to any limitations on the conversion or redemption of the Preferred Shares.

5.2Purchase Rights. If at any time the Company grants, issues or sells any Options, Convertible Securities or rights to purchase shares, warrants, securities or other property pro rata to the record holders of any class of Common Stock (the "Purchase Rights"), then the Holders will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of the Preferred Shares (without taking into account any limitations or restrictions on the convertibility of the Preferred Shares) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

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ARTICLE VI.[Reserved].

ARTICLE VII.Authorized Shares.

7.1Reservation. The Company shall have reserved not less than 25,000,000 of the shares of its authorized Common Stock for the conversion of the Preferred Shares and the issuance of shares of Common Stock upon exercise of all of the Warrants. The Company shall take all action necessary to reserve and keep available out of its authorized and unissued Common Stock the number of shares required to be reserved by the this paragraph (without regard to any limitations on conversions) (the "Required Amount"). The initial number of shares of Common Stock reserved for conversions of the Preferred Shares and each increase in the number of shares so reserved shall be allocated pro rata among the Holders based on the number of Preferred Shares held by each Holder at the time of issuance of the Preferred Shares or increase in the number of reserved shares, as the case may be (the "Authorized Share Allocation"). In the event a Holder shall sell or otherwise transfer any of such Holder's Preferred Shares, each transferee shall be allocated a pro rata portion of the number of reserved shares of Common Stock reserved for such transferor. Any Common Stock reserved and allocated to any Person which ceases to hold any Preferred Shares shall be allocated to the remaining Holders of Preferred Shares, pro rata based on the number of Preferred Shares then held by such Holders.

7.2Insufficient Authorized Shares. After the Capital Increase, if at any time while any of the Preferred Shares remain outstanding the Company does not have a sufficient number of authorized and unissued Common Stock to satisfy its obligation to have available for issuance upon conversion of the Preferred Shares at least a number of shares of Common Stock equal to the Required Amount (an "Authorized Share Failure"), then the Company shall as promptly as practicable take use reasonable best efforts to increase the Company's authorized Common Stock to an amount sufficient to allow the Company to have available the Required Amount for the Preferred Shares then outstanding.

ARTICLE VIII.Voting Rights.

8.1General Voting. Each Holder shall be entitled to the whole number of votes equal to the number of shares of Common Stock into which such holder's Preferred Shares would be convertible on the record date for the vote or consent of stockholders, and shall otherwise have voting rights and powers equal to the voting rights and powers of the Common Stock. Each holder shall be entitled to receive the same prior notice of any stockholders' meeting as is provided to the holders of Common Stock in accordance with the bylaws of the Company, as well as prior notice of all stockholder actions to be taken by legally available means in lieu of a meeting and shall vote as a class with the holders of Common Stock on all matters, except those matters required by law or by the terms hereof to be submitted to a class vote of the Holders of Preferred Shares, in which case the Holders of Preferred Shares only shall vote as a separate class.

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8.2Board Size. The authorized number of directors of the Company's Board of Directors shall initially be five (5); provided, however, that at any time following the approval of the Required Holders the authorized number of directors of the Company's Board of Directors may be increased or decreased from five (5) members.

8.3Board of Directors Election. So long as Tullis-Dickerson Capital Focus III, L.P. (the "Investor") or an affiliate of the Investor continues to hold at least twenty five percent (25%) of the cumulative aggregate number of Preferred Shares issued to the Investor on the Initial Issuance Date, the Investor shall be entitled to elect one (1) director to the Board of Directors of the Company (an "Investor Designee") at each annual election of directors; provided, however, that any Investor Designee other than Joan P. Neuscheler must be approved by the Company, such approval not to be unreasonably withheld or delayed. At any meeting held of the purpose of electing or nominating directors, the presence in person or by proxy of the Investor or its designee shall constituted a quorum for the election or nomination of the Investor Designee. Any director elected as provided herein may be removed during the aforesaid term of office, either with or without cause, by, and only by, the affirmative vote of the Investor or its designee, given either at a special meeting of such stockholders duly called for that purpose or pursuant to a written consent of stockholders, and any vacancy thereby created may be filled by the Investor or its designee represented at the meeting or pursuant to written consent of such holders. In case of any vacancy (other than a vacancy caused by removal) in the office of a director occurring among the director elected by the Investor or its designee pursuant hereto, the vacancy thereby created may be filled by the Investor or its designee represented at a special meeting of such stockholders duly called for that purpose or pursuant to written consent of the Investor or its designee.

ARTICLE IX.Change of Control Redemption Right. (a) No sooner than fifteen (15) days nor later than ten (10) days prior to the consummation of a Change of Control, but not prior to the public announcement of such Change of Control, the Company shall deliver written notice thereof via facsimile and overnight courier to the Holders (a "Change of ControlNotice"). In the event that the Successor Entity is not a publicly traded corporation whose common shares are quoted or listed for trading on an Eligible Market, at any time during the period (the "Change of Control Period") beginning after a Holder's receipt of a Change of Control Notice and ending on the date that is twenty (20) Trading Days after the consummation of such Change of Control, such Holder may require the Company to redeem prior to any payment on any Junior Shares (as defined below) all or any portion of such Holder's Preferred Shares by delivering written notice thereof ("Change of Control Redemption Notice") to the Company, which Change of Control Redemption Notice shall indicate the Conversion Amount the Holder is electing to redeem. Any Preferred Shares subject to redemption pursuant to this Section 8 shall be redeemed by the Company in cash at a price equal to (the "Change of Control Redemption Price") the greater of (i) the Conversion Amount being redeemed and (ii) the product of (A) the Conversion Amount being redeemed multiplied by (B) the quotient determined by dividing (I) the aggregate Change of Control Transaction Consideration (as defined below) by (II) the Conversion Price. In the event that any of the Change of Control Redemption Price is based on any Non-Cash Consideration (as defined below) (a "Non-Cash Change of Control"), then the Holder shall be entitled to indicate in its Change of Control Redemption Notice (the "Alternate Change of Control Redemption") that the Change of Control Redemption Price shall be equal to (i) cash in an amount equal to 110% of the Conversion Amount being redeemed, (ii) in exchange for the surrender to the Company of the Change of Control Eligible Dividend Shares (as defined below), the Change of Control Dividend Share Payment (as defined below) (the cash payments under the foregoing clauses (i) and (ii) are referred to herein as the "Alternate Change of Control Cash Payment") and (iii) as to the Change of Control Balance Amount (as defined below), the same form of consideration per share of Common Stock as that paid upon consummation of the Change of Control. The Company shall make payment of the Change of Control Redemption Price concurrently with the consummation of such Change of Control if such a Change of Control Redemption Notice is received prior to the consummation of such Change of Control and within five (5) Trading Days after the Company's receipt of such notice otherwise (the "Change of Control Redemption Date"). To the extent redemptions required by this Section 8 are deemed or determined by a court of competent jurisdiction to be prepayments of the Preferred Shares by the Company, such redemptions shall be deemed to be voluntary prepayments. Notwithstanding anything to the contrary in this Section 8, until the Change of Control Redemption Price (together with any interest thereon) is paid in full, the Conversion Amount submitted for redemption under this Section 8(a) may be converted, in whole or in part, by the Holder into Common Stock, or in the event the Conversion Date is after the consummation of the Change of Control, shares or equity interests of the Successor Entity substantially equivalent to the Company's Common Stock pursuant to Section 2(c)(i). The parties hereto agree that in the event of the Company's redemption of any portion of the Preferred Shares under this Section 8(a), the Holder's damages would be uncertain and difficult to estimate because of the parties' inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. Accordingly, any redemption premium due under this Section 8(a) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder's actual loss of its investment opportunity and not as a penalty. In the event that the Company does not pay the Change of Control Redemption Price on the Change of Control Redemption Date, then the Holder shall have the right to void the redemption pursuant to Section 3(e) with the term "Change of Control Redemption Price" being substituted for "Redemption Price" and "Change of Control Redemption Notice" being substituted for "Notice of Redemption at Option of Holder".

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For purposes of this Section 8(a), the following terms shall have the following meanings:

"Change of Control Balance Amount" means a number of shares of Common Stock equal to the quotient of (x) the Change of Control Cash Balance Amount divided by (y) Change of Control Transaction Consideration.

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"Change of Control Cash Balance Amount" means (A) the product of (x) the Change of Control Transaction Consideration and (y) the sum of (I) the Total Dividend Shares and (II) the number of shares of Common Stock then issuable upon conversion of the applicable Conversion Amount at then applicable Conversion Price minus (B) the Alternate Change of Control Cash Payment.

"Change of Control Dividend Share Payment" means a cash payment equal to the product of (x) the Change of Control Transaction Consideration and (y) the number of Change of Control Eligible Dividend Shares.

"Change of Control Eligible Dividend Shares" means a number of shares of Common Stock equal to the quotient of (x) the number of Dividend Shares previously issued to the Holder (the "Total Dividend Shares") and (y) the Change of Control Transaction Consideration.

"Change of Control Transaction Consideration" means an amount per share of Common Stock equal to the cash consideration and the aggregate cash value of any non-cash consideration ("Non-Cash Consideration") per share of Common Stock to be paid to the holders of Common Stock upon consummation of the Change of Control (any such non-cash consideration consisting of marketable securities to be valued at the higher of the Closing Sale Price of such securities as of the Trading Day immediately prior to or the Trading Day immediately following the public announcement of such proposed Change of Control and any other non-cash consideration to be valued in good faith by the Board of Directors of the Company).

Solely for purposes of clarification, in the event of a Non-Cash Change of Control and assuming that (a) the Non-Cash Change of Control occurs on the one year anniversary of the Issuance Date, (b) that 10,000 Preferred Shares are outstanding (such that the Conversion Amount equals $10,000,000), (c) there are no accrued but unpaid Dividends at such time, (d) Dividend Shares were issued at the Conversion Price (such that the 8.25% Dividend Rate for the first year yielded 537,880 Dividend Shares issued ($10,000,000 x 8.25%/$1.5338)), (e) solely for purposes of this example, compounding is ignored in calculating Dividends (if compounding were not ignored, the number of Dividend Shares in clause (d) would have been 554,750), (f) the Change of Control Transaction Consideration is $3 per share, and (g) the Holder elects to redeem all of its Preferred Shares (i.e., 10,000 Preferred Shares) in such Non-Cash Change of Control pursuant to the Alternate Change of Control Redemption, then the Change of Control Redemption Price shall be equal to:

(i) $11,000,000 (the Conversion Amount of $10,000,000 times 110%),

plus

(ii) in exchange for the surrender to the Company of the Change of Control Eligible Dividend Shares, which are 179,293 of the Dividend Shares of the Holder (the quotient of (x) the 537,880 Total Dividend Shares previously issued to the Holder and (y) the $3 Change of Control Transaction Consideration), $537,880 (the Change of Control Dividend Share Payment which is the product of (x) the $3 Change of Control Transaction Consideration and (y) the 179,293 Change of Control Eligible Dividend Shares),

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plus

(iii) the same form of consideration per share of Common Stock as that being paid upon consummation of the Change of Control as to 3,211,675 shares of Common Stock (determined as the quotient of:

(x) the Change of Control Cash Balance Amount ($9,635,025 (determined as (A) $21,172,905 (the product of (x) the $3 Change of Control Transaction Consideration and (y) 7,057,635 (the sum of (I) the 537,880 Total Dividend Shares and (II) the 6,519,755 shares of Common Stock then issuable upon conversion of the $10,000,000 Conversion Amount at the Conversion Price of $1.5338)) minus (B) the $11,537,880 Alternate Change of Control Cash Payment (the sum of (i) $11,000,000 and $537,880))

and

(y) the $3 Change of Control Transaction Consideration).

9.1No sooner than fifteen (15) days nor later than ten (10) days prior to the consummation of a Rule 13e-3 Transaction, but not prior to the public announcement of such Rule 13e-3 Transaction, the Company shall deliver written notice thereof via facsimile and overnight courier to the Holders (a "13e-3 Notice"). At any time during the period (the "13e-3 Period") beginning after a Holder's receipt of a 13e-3 Notice and ending on the date that is twenty (20) Trading Days after the consummation of such 13e-3 Transaction, such Holder may require the Company to redeem prior to the payment of any Junior Shares all or any portion of such Holder's Preferred Shares by delivering written notice thereof ("13e-3 Redemption Notice") to the Company, which 13e-3 Redemption Notice shall indicate the Conversion Amount the Holder is electing to redeem. Any Preferred Shares subject to redemption pursuant to this Section 8(b) shall be redeemed by the Company in cash at a price equal to the greater of (i) 110% of the Conversion Amount being redeemed and (ii) the product of (A) the Conversion Amount being redeemed multiplied by (B) the quotient determined by dividing (I) the arithmetic average of the Closing Sale Price over the twenty Trading Day period immediately prior to consummation of such Rule 13e-3 Transaction by (II) the Conversion Price (the "13e-3 Redemption Price"). The Company shall made payment of the 13e-3 Redemption Price concurrently with the consummation of such 13e-3 Transaction if such a 13e-3 Redemption Notice is received prior to the consummation of such 13e-3 Transaction and within five (5) Trading Days after the Company's receipt of such notice otherwise (the "13e-3 Redemption Date"). To the extent redemptions required by this Section 8(b) are deemed or determined by a court of competent jurisdiction to be prepayments of the Preferred Shares by the Company, such redemptions shall be deemed to be voluntary prepayments. Notwithstanding anything to the contrary in this Section 8(b), until the 13e-3 Redemption Price (together with any interest thereon) is paid in full, the Conversion Amount submitted for redemption under this Section 8(b) may be converted, in whole or in part, by the Holder into Common Stock, or in the event the Conversion Date is after the consummation of the 13e-3 Transaction, shares or equity interests of the Successor Entity substantially equivalent to the Company's Common Stock pursuant to Section 2(c)(i). The parties hereto agree that in the event of the Company's redemption of any portion of the Preferred Shares under this Section 8(b), the Holder's damages would be uncertain and difficult to estimate because of the parties' inability to predict future interest rates and the uncertainty of the availability of a suitable substitute investment opportunity for the Holder. Accordingly, any redemption premium due under this Section 8(b) is intended by the parties to be, and shall be deemed, a reasonable estimate of the Holder's actual loss of its investment opportunity and not as a penalty. In the event that the Company does not pay the 13e-3 Redemption Price on the 13e-3 Redemption Date, then the Holder shall have the right to void the redemption pursuant to Section 3(e) with the term "13e-3 Redemption Price" being substituted for "Redemption Price" and "13e-3 Redemption Notice" being substituted for "Notice of Redemption at Option of Holder".

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ARTICLE X.COMPANY'S RIGHT OF MANDATORY CONVERSION

10.1Mandatory Conversion. If at any time beginning with the fiscal quarter of the Company ending on June 30, 2007, (the "Mandatory Conversion Eligibility Date"), (i) the Company has (A) been Profitable for two (2) consecutive fiscal quarters (not taking into account any non-cash charges related to the issuance and sale of the Preferred Shares) (each such quarter, a "Positive Quarter") and (B) filed 25 ANDAs including 12 from a list agreed upon by the Required Holders and the Company, and (ii) the Equity Conditions shall have been satisfied or waived in writing by the Holder on each day during the period commencing on the Mandatory Conversion Notice Date and ending on the Mandatory Conversion Date (each, as defined below), the Company shall have the right to require the Holder to convert up to all of the Conversion Amount into fully paid, validly issued and nonassessable shares of Common Stock in accordance with Section 3(c) hereof at the Conversion Rate as of the Mandatory Conversion Date (as defined below) (a "Mandatory Conversion"). The Company may exercise its right to require conversion under this Section 9(a) on one occasion by delivering within not more than two (2) Trading Days following the end of the public announcement of such second consecutive Positive Quarter a written notice thereof by facsimile and overnight courier to all, but not less than all, of the Holders of Preferred Shares and the Transfer Agent (the "Mandatory Conversion Notice" and the date all of the Holders received such notice by facsimile is referred to as the "Mandatory Conversion Notice Date"). The Mandatory Conversion Notice shall be irrevocable. The Mandatory Conversion Notice shall state (i) the Trading Day selected for the Mandatory Conversion in accordance with Section 9(a), which Trading Day shall be at least twenty (20) Business Days but not more than sixty (60) Business Days following the Mandatory Conversion Notice Date (the "Mandatory Conversion Date"), (ii) the number of Preferred Shares of such Holder subject to the Mandatory Conversion, (iii) the aggregate Conversion Amount of the Preferred Shares subject to Mandatory Conversion from all of the Holders of the Preferred Shares pursuant to this Section 9 and (iv) the number of shares of Common Stock to be issued to such Holder on the Mandatory Conversion Date. Notwithstanding the foregoing, the Company may not effect a Mandatory Conversion of any applicable Holder under this Section if the number of shares of Common Stock issuable upon conversion of the Preferred Shares of any Holder subject to a Mandatory Conversion would cause such Holder's beneficial ownership of the Common Stock to exceed the Maximum Percentage as set forth in Section 5.

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10.2Pro Rata Conversion Requirements.

(a)If the Company elects to cause a conversion of any Conversion Amount of Preferred Shares pursuant to Section 9(a), then it must simultaneously take the same action in the same proportion with respect to all Preferred Shares.

(b)All Conversion Amounts converted by the Holder after the Mandatory Conversion Notice Date shall reduce the Conversion Amount required to be converted on the Mandatory Conversion Date. If the Company has elected a Mandatory Conversion, the mechanics of conversion set forth in Section 2(d) shall apply, to the extent applicable, as if the Company and the Transfer Agent had received from the Holder on the Mandatory Conversion Date a Conversion Notice with respect to the Conversion Amount being converted pursuant to the Mandatory Conversion.

ARTICLE XI.Liquidation, Dissolution, Winding-Up. In the event of a Liquidation Event, the Holders shall be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders (the "Liquidation Funds"), before any amount shall be paid to the holders of any of the capital shares of the Company of any class junior in rank to the Preferred Shares in respect of the preferences as to distributions and payments on the liquidation, dissolution and winding up of the Company ("Junior Shares"), an amount per Preferred Share equal to the Conversion Amount; provided that, if the Liquidation Funds are insufficient to pay the full amount due to the Holders and holders of shares of other classes or series of preferred shares of the Company that are of equal rank with the Preferred Shares as to payments of Liquidation Funds (the "Pari Passu Shares"), then each Holder and Pari Passu Shares shall receive a percentage of the Liquidation Funds equal to the full amount of Liquidation Funds payable to such Holder as a liquidation preference, in accordance with their respective certificate of designations (or equivalent), as a percentage of the full amount of Liquidation Funds payable to all holders of Preferred Shares and Pari Passu Shares. To the extent necessary, the Company shall cause such actions to be taken by any of its Subsidiaries so as to enable, to the maximum extent permitted by law, the proceeds of a Liquidation Event to be distributed to the Holders in accordance with this Section. All the preferential amounts to be paid to the Holders under this Section shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any Liquidation Funds of the Company to the holders of shares of other classes or series of preferred shares of the Company junior in rank to the Preferred Shares in connection with a Liquidation Event as to which this Section applies. The purchase or redemption by the Company of shares of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a Liquidation Event.

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ARTICLE XII.Preferred Rank. All Common Stock shall be of junior rank to all Preferred Shares with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Company. The rights of the Common Stock shall be subject to the preferences and relative rights of the Preferred Shares. Without the prior express written consent of the Required Holders, the Company shall not hereafter authorize or issue additional or other capital shares that is of senior or pari-passu rank to the Preferred Shares in respect of the preferences as to distributions and payments upon the liquidation, dissolution and winding up of the Company. The Company shall be permitted to issue preferred shares that are junior in rank to the Preferred Shares in respect of the preferences as to distributions and payments upon the liquidation, dissolution and winding up of the Company, provided that the maturity date (or any other date requiring redemption or repayment of such preferred shares) of any such junior preferred shares are not on or before the date no Preferred Shares are outstanding. In the event of the merger or consolidation of the Company with or into another corporation, the Preferred Shares shall maintain their relative powers, designations and preferences provided for herein and no merger shall result inconsistent therewith.

ARTICLE XIII.Limitation on Number of Conversion Shares. Notwithstanding anything to the contrary contained herein, the Company shall not be obligated to issue any shares of Common Stock upon conversion of the Preferred Shares or exercise of the Warrants if the issuance of such Common Stock would exceed that number of shares of Common Stock which the Company may issue upon conversion of the Preferred Shares without breaching the Company's obligations under the rules or regulations of the Principal Market (the "Exchange Cap"), except that such limitation shall not apply in the event that the Company (a) obtains the approval of its stockholders as required by the applicable rules of the Principal Market (or any successor rule or regulation) for issuances of Common Stock in excess of such amount, or (b) obtains a written opinion from outside counsel to the Company that such approval is not required, which opinion shall be reasonably satisfactory to the Required Holders. Until such approval or written opinion is obtained, no purchaser of Preferred Shares pursuant to the Securities Purchase Agreement (the "Purchasers") shall be issued, in the aggregate, upon conversion of Preferred Shares or exercise of the Warrants, Common Stock in an amount greater than the product of (i) the Exchange Cap amount multiplied by (ii) a fraction, the numerator of which is the number of Preferred Shares issued to such Purchaser pursuant to the Securities Purchase Agreement on the Initial Issuance Date and the denominator of which is the aggregate amount of all the Preferred Shares issued to the Purchasers pursuant to the Securities Purchase Agreement on the Initial Issuance Date (the "Exchange Cap Allocation"). In the event that any Purchaser shall sell or otherwise transfer any of such Purchaser's Preferred Shares, the transferee shall be allocated a pro rata portion of such Purchaser's Exchange Cap Allocation. In the event that any Holder shall convert all of such Holder's Preferred Shares into a number of shares of Common Stock which, in the aggregate, is less than such Holder's Exchange Cap Allocation, then the difference between such Holder's Exchange Cap Allocation and the number of shares of Common Stock actually issued to such Holder shall be allocated to the respective Exchange Cap Allocations of the remaining Holders on a pro rata basis in proportion to the number of Preferred Shares then held by each such Holder.

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ARTICLE XIV.Protective Provisions. So long as the Investor holds at least 25% of the Preferred Shares issued on the Initial Issuance Date, in addition to any other rights provided by law, except where the vote or written consent of the holders of a greater number of shares is required by law or by another provision of the Certificate of Incorporation, without first obtaining the affirmative vote at a meeting duly called for such purpose or the written consent without a meeting of the Required Holders, voting together as a single class, the Company shall not:

14.1amend or repeal any provision of, or add any provision to, the Certificate of Incorporation or bylaws, or file any certificate of designations or articles of amendment of any series of preferred shares, if such action would materially adversely alter or change the preferences, rights, privileges or powers of, or restrictions provided for the benefit of the Preferred Shares, regardless of whether any such action shall be by means of amendment to the Certificate of Incorporation or by merger, consolidation or otherwise;

14.2increase or decrease (other than by conversion) the authorized number of Preferred Shares;

14.3issue any shares of Common Stock, stock appreciation rights, stock options or other equity securities to officers, directors or employees of, or consultants (that are affiliates of the Company) to, the Company in excess of 2% of the fully diluted number of shares of Common Stock on the Initial Issuance Date;

14.4issue any shares of Common Stock, stock appreciation rights, stock options or other equity securities to independent third parties (e.g., investment banks, investor relations firms, consultants that are not affiliates of the Company) in excess of 2% of the fully diluted number of shares of Common Stock on the Initial Issuance Date;

14.5pay dividends or make any other distribution on the capital stock of the Company other than (i) dividends on the Preferred Stock or (ii) solely at such time as the Company is not in breach under any Transaction Document or under the Credit Agreement, the stated dividends on the shares of Series A-1 Preferred Stock;

14.6except as permitted herein, purchase, repurchase or redeem any shares of capital stock of the Company, excluding shares of Common Stock repurchased from an employee, consultant, officer or director pursuant to a restricted stock purchase agreement or an equity incentive agreement with employees giving the Company the right to repurchase shares upon the termination of services;

14.7effect any voluntary liquidation, dissolution or winding up of the Company;

14.8issue any Common Stock or any securities convertible into or exchangeable for Common Stock at a price per share of Common Stock less than the Purchase Price (as defined in the Securities Purchase Agreement) (as adjusted from time to time to reflect stock slits, stock dividends, subdivisions, combinations, consolidations and other similar transactions with respect to the Common Stock); provided, however, that if the Company has issued less than 15,000 Preferred Shares pursuant to the Securities Purchase Agreement, then the Company, provided it has complied with its obligations pursuant to Section 4(o) of the Securities Purchase Agreement, may 90 or more days after the Subscription Date, issue shares of Common Stock in an amount not in excess of the difference between the aggregate Purchase Price for all Preferred Shares issued in accordance with the Securities Purchase Agreement and $15,000,000.00;

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14.9enter into or amend any agreement with any stockholder, officer, director, any affiliate thereof or any other affiliate of the Company, other than on an arms' length basis;

14.10issue any Indebtedness that creates an obligation for the Company to repay in the aggregate more than $50 million in principal and interest;

14.11effect any acquisition of an equity interest or rights to acquire equity in any Person or assets of any Person, other than (i) a Person in which the Company owns a minority interest as of the Subscription Date and (ii) acquisitions in which the sole consideration consists of equity securities of the Company; provided, that, the value of any equity issued in accordance with clause (i) and (ii) shall not exceed $5 million in the aggregate;

14.12whether or not prohibited by the terms of the Preferred Shares, circumvent a right of the Preferred Shares; or

14.13agree to any of the foregoing.

ARTICLE XV.Lost or Stolen Certificates. Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Share Certificates representing the Preferred Shares, and, in the case of loss, theft or destruction, of an indemnification undertaking by the Holder to the Company in customary form and, in the case of mutilation, upon surrender and cancellation of the Preferred Share Certificate(s), the Company shall execute and deliver new Preferred Share Certificate(s) of like tenor and date; provided, however, the Company shall not be obligated to re-issue Preferred Share Certificates if the Holder contemporaneously requests the Company to convert such Preferred Shares into Common Stock.

ARTICLE XVI.Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designations shall be cumulative and in addition to all other remedies available under this Certificate of Designations, at law or in equity (including a decree of specific performance and/or other injunctive relief). No remedy contained herein shall be deemed a waiver of compliance with the provisions giving rise to such remedy. Nothing herein shall limit a Holder's right to pursue actual damages for any failure by the Company to comply with the terms of this Certificate of Designations. The Company covenants to each Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder thereof and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holders and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holders shall be entitled, in addition to all other available remedies, to an injunction restraining any breach, without the necessity of showing economic loss and without any bond or other security being required.

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ARTICLE XVII.Construction. This Certificate of Designations shall be deemed to be jointly drafted by the Company and all Holders and shall not be construed against any person as the drafter hereof.

ARTICLE XVIII.Failure or Indulgence Not Waiver. No failure or delay on the part of a Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

ARTICLE XIX.Notice. Whenever notice is required to be given under this Certificate of Designations, unless otherwise provided herein, such notice shall be given in accordance with Section 9(f) of the Securities Purchase Agreement (provided that if the Preferred Shares are not held by a Buyer (as defined in the Securities Purchase Agreement) then substituting the words "holder of Securities" for the word "Buyer").

ARTICLE XX.Transfer of Preferred Shares. A Holder may assign some or all of the Preferred Shares and the accompanying rights hereunder held by such Holder without the consent of the Company; provided that such assignment is in compliance with applicable securities laws.

ARTICLE XXI.Preferred Share Register. The Company shall maintain at its principal executive offices (or such other office or agency of the Company as it may designate by notice to the Holders), a register for the Preferred Shares, in which the Company shall record the name and address of the Persons in whose name the Preferred Shares have been issued, as well as the name and address of each transferee. The Company may treat the person in whose name any Preferred Share is registered on the register as the owner and holder thereof for all purposes, notwithstanding any notice to the contrary, but in all events recognizing any properly made transfers.

ARTICLE XXII.Stockholder Matters. Any stockholder action, approval or consent required, desired or otherwise sought by the Company pursuant to the rules and regulations of the Principal Market, the General Corporation Law of the State of Delaware, this Certificate of Designation or otherwise with respect to the issuance of the Preferred Shares or the Common Stock issuable upon conversion thereof or the issuance of any Warrants and the Common Stock issuable upon exercise thereof may be effected by written consent of the Company's stockholders or at a duly called meeting of the Company's stockholders, all in accordance with the applicable rules and regulations of the Principal Market and the General Corporation Law of the State of Delaware. This provision is intended to comply with the applicable sections of the General Corporation Law of the State of Delaware permitting stockholder action, approval and consent affected by written consent in lieu of a meeting.

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ARTICLE XXIII.Disclosure. Upon receipt or delivery by the Company of any notice in accordance with the terms of this Certificate of Designations, unless the Company has in good faith determined that the matters relating to such notice do not constitute material, nonpublic information relating to the Company or its Subsidiaries, the Company shall within one (1) Business Day after any such receipt or delivery publicly disclose such material, nonpublic information on a Current Report on Form 8-K or otherwise. In the event that the Company believes that a notice contains material, nonpublic information relating to the Company or its Subsidiaries, the Company so shall indicate to the Holders contemporaneously with delivery of such notice, and in the absence of any such indication, the Holders shall be allowed to presume that all matters relating to such notice do not constitute material, nonpublic information relating to the Company or its Subsidiaries.

ARTICLE XXIV.Redemption in Lieu of Sale. The Company may redeem the Preferred Shares in accordance with Section 4(r) of the Securities Purchase Agreement.

* * * * *

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IN WITNESS WHEREOF, the Company has caused this Certificate of Designations to be signed by [NAME], its [OFFICE], as of the ____ day of [_________]

INTERPHARM HOLDINGS, INC.
By:
	Name:
	Title:

61

EXHIBIT I

INTERPHARM HOLDINGS, INC. CONVERSION NOTICE

Reference is made to the Certificate of Designations of Series D-1 Convertible Preferred Shares (the "Certificate of Designations") of Interpharm Holdings, Inc, a Delaware corporation (the "Company"). In accordance with and pursuant to the Certificate of Designations, the undersigned hereby elects to convert the number of shares of Series D-1 Convertible Preferred Shares, $0.01 par value per share (the "Preferred Shares"), of the Company, indicated below into Common Stock, par value $0.01 per share (the "Common Stock"), of the Company, as of the date specified below.

Date of Conversion: _______________________________________________________

Number of Preferred Shares to be converted: _____________________________________

Share certificate no(s). of Preferred Shares to be converted: _________________________

Tax ID Number (If applicable): _______________________________________________

Please confirm the following information: ______________________________________________

Conversion Price: _________________________________________________________

Number of Common Stock to be issued: ________________________________________

Please issue the Common Stock into which the Preferred Shares are being converted in the following name and to the following address:

Issue to: _________________________________________

                        _________________________________________

Address: _________________________________________

Telephone Number: ________________________________

Facsimile Number: _________________________________

Authorization: ____________________________________

By: ________________________________

Title: _______________________________

Dated:

Account Number (if electronic book entry transfer):_______________________________

Transaction Code Number (if electronic book entry transfer):________________________

[NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT]

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ACKNOWLEDGMENT

The Company hereby acknowledges this Conversion Notice and hereby directs NORTH AMERICAN TRANSFER AGENT to issue the above indicated number of shares of Common Stock in accordance with the Irrevocable Transfer Agent Instructions dated May [ ], 2006 from the Company with respect to the Series B-1 Preferred Shares and dated September [ ] 2006 as to the Series C-1 Preferred Shares as if such Transfer Agent Instructions referred to Series D-1 Preferred Shares and acknowledged and agreed to by NORTH AMERICAN TRANSFER AGENT.

INTERPHARM HOLDINGS, INC.
By:
	Name:
	Title:

63

EXHIBIT D

FORM OF WARRANT

FORM OF WARRANT

NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. THE COMPANY MAY REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY PROPOSED OFFER, SALE, TRANSFER OR OTHER DISPOSITION IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

ANY TRANSFEREE OF THIS WARRANT SHOULD CAREFULLY REVIEW THE TERMS OF THE WARRANT, INCLUDING SECTION 4(b) HEREOF. THE NUMBER OF COMMON SHARES UNDERLYING THIS WARRANT MAY BE LESS THAN THE NUMBER OF COMMON SHARES STATED ON THE FACE HEREOF PURSUANT TO SECTION 4(b) HEREOF.

INTERPHARM HOLDINGS INC.

WARRANT

Warrant No. [ ] Dated: [_________], 2008

INTERPHARM HOLDINGS INC., a Delaware corporation (the “Company”), hereby certifies that, for value received, [______________] or its registered assigns (the “Holder”), is entitled to purchase from the Company up to a total of [     ]¹ shares of common stock, $0.01 par value per share (the “Common Stock”), of the Company (each such share, a “Warrant Share” and all such shares, the “Warrant Shares”) at an exercise price equal to $0.95 per share (as adjusted from time to time as provided in Section 9, the “Exercise Price”), at any time and from time to time from and after the date hereof and through and including the date that is five years from the date of issuance hereof (the “Expiration Date”), and subject to the following terms and conditions. This Warrant (this “Warrant”) is one of a series of similar Warrants issued pursuant to that certain Securities Purchase Agreement, dated as of November ___, 2007, by and among the Company and the Purchasers identified therein (the “Purchase Agreement”). All such Warrants are referred to herein, collectively, as the “Warrants.”

ARTICLE XXV.Definitions. In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Purchase Agreement.

ARTICLE XXVI.Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

 

² Holder’s pro rata share of 1,842,103.

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ARTICLE XXVII.Registration of Transfers. The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto on Annex B duly completed and signed, to the Company at its address specified herein. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a “New Warrant”), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant.

ARTICLE XXVIII.Exercise and Duration of Warrants.

28.1This Warrant shall be exercisable by the registered Holder at any time and from time to time on or after the date hereof to and including the Expiration Date. At 6:30 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value; provided that, if the average of the Closing Prices for the five Trading Days immediately prior to (but not including) the Expiration Date exceeds the Exercise Price on the Expiration Date, then this Warrant shall be deemed to have been exercised in full (to the extent not previously exercised) on a “cashless exercise” basis at 6:30 P.M. New York City time on the Expiration Date if a “cashless exercise” may occur at such time pursuant to Section 10 below.

28.2A Holder may exercise this Warrant by delivering to the Company (i) an exercise notice, in the form attached hereto on Annex A (the “Exercise Notice”), appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares as to which this Warrant is being exercised (which may take the form of a “cashless exercise” if so indicated in the Exercise Notice and if a “cashless exercise” may occur at such time pursuant to Section 10 below), and the date such items are delivered to the Company (as determined in accordance with the notice provisions hereof) is an “Exercise Date.” The Holder shall not be required to deliver the original Warrant in order to effect an exercise hereunder. Execution and delivery of the Exercise Notice shall have the same effect as cancellation of the original Warrant and issuance of a New Warrant evidencing the right to purchase the remaining number of Warrant Shares.

ARTICLE XXIX.Delivery of Warrant Shares.

29.1Upon exercise of this Warrant, the Company shall promptly (but in no event later than five Trading Days after the Exercise Date) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends unless a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective and the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144 under the 1933 Act. The Holder, or any Person so designated by the Holder to receive Warrant Shares, shall be deemed to have become holder of record of such Warrant Shares as of the Exercise Date. The Company shall, upon request of the Holder and provided a registration statement under the Securities Act providing for the resale of the Warrant Shares is then in effect, use its reasonable best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions.

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29.2This Warrant is exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. Upon surrender of this Warrant following one or more partial exercises, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares.

29.3In addition to any other rights available to a Holder, if the Company fails to deliver to the Holder a certificate representing Warrant Shares by the fifth Trading Day after the date on which delivery of such certificate is required by this Warrant, and if after such fifth Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares that the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within five Trading Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Price on the date of the event giving rise to the Company’s obligation to deliver such certificate.

29.4The Company’s obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

ARTICLE XXX.Charges, Taxes and Expenses. Issuance and delivery of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder or an Affiliate thereof. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

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ARTICLE XXXI.Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe.

ARTICLE XXXII.Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any securities exchange or automated quotation system upon which the Common Stock may be listed.

ARTICLE XXXIII.Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9.

33.1Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock (other than regular dividends on the Series A-1 Convertible Preferred Stock, Series B-1 Convertible Preferred Stock the Series C-1 Convertible Preferred Stock, or the Series D-1 Convertible Preferred Stock), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination.

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33.2Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, distributes to all of its holders of Common Stock (i) evidences of its indebtedness, (ii) any security (other than a distribution of Common Stock covered by the preceding paragraph), (iii) rights or warrants to subscribe for or purchase any security, or (iv) any other asset (in each case, “Distributed Property”), then in each such case the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution shall be adjusted (effective on such record date) to equal the product of such Exercise Price times a fraction of which the denominator shall be the average of the Closing Prices for the five Trading Days immediately prior to (but not including) such record date and of which the numerator shall be such average less the then fair market value of the Distributed Property distributed in respect of one outstanding share of Common Stock, as determined by the a nationally recognized accounting or investment banking firm selected by the Company (an “Appraiser”). In such event, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting or investment banking firm), in which case such fair market value shall be deemed to equal the average of the values determined by each of the Appraiser and such appraiser. As an alternative to the foregoing adjustment to the Exercise Price and number of Warrant Shares obtainable upon exercise of the Warrant determined pursuant to Section 9(e) below, at the request of the Holder delivered before the 90th day after such record date, the Company will deliver to such Holder, within five Trading Days after such request (or, if later, on the effective date of such distribution), the Distributed Property that such Holder would have been entitled to receive in respect of the Warrant Shares for which this Warrant could have been exercised immediately prior to such record date. If such Distributed Property is not delivered to a Holder pursuant to the preceding sentence, then upon expiration of or any exercise of the Warrant that occurs after such record date, such Holder shall remain entitled to receive, in addition to the Warrant Shares otherwise issuable upon such exercise (if applicable), such Distributed Property.

33.3Fundamental Transactions. If at any time while this Warrant is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange, pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (other than as a result of a subdivision or combination of shares of Common Stock covered by Section 9(a) above) (in any such case, a “Fundamental Transaction”), then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the “Alternate Consideration”). The aggregate Exercise Price for this Warrant will not be affected by any such Fundamental Transaction, but the Company shall apportion such aggregate Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. In the event of a Fundamental Transaction, the Company or the successor or purchasing Person, as the case may be, shall execute with the Holder a written agreement providing that:

(A) this Warrant shall thereafter entitle the Holder to purchase the Alternate Consideration in accordance with this Section 9(c),

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(B) in the case of any such successor or purchasing Person, upon such consolidation, merger, statutory exchange, combination, sale or conveyance such successor or purchasing Person shall be jointly and severally liable with the Company for the performance of all of the Company’s obligations under this Warrant and the Purchase Agreement, and

(C) if registration or qualification is required under the 1933 Act, the 1934 Act or applicable state law for the public resale by the Holder of shares of stock and other securities so issuable upon exercise of this Warrant, such registration or qualification shall be completed prior to such reclassification, change, consolidation, merger, statutory exchange, combination or sale.

If, in the case of any Fundamental Transaction, the Alternate Consideration includes shares of stock, other securities, other property or assets of a Person other than the Company or any such successor or purchasing Person, as the case may be, in such Fundamental Transaction, then such written agreement shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holder as the Board of Directors of the Company shall reasonably consider necessary by reason of the foregoing. At the Holder’s request, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder’s right to purchase the Alternate Consideration for the aggregate Exercise Price upon exercise thereof. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 9(c) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. If any Fundamental Transaction constitutes or results in a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the 1934 Act with respect to the Company in which the consideration issued consists principally of cash or stock in a non-public company, then at the request of the Holder delivered before the 90th day after such Fundamental Transaction, the Company (or any such successor or surviving entity) will purchase the Warrant from the Holder for a purchase price, payable in cash within five Trading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the Black-Scholes value of the remaining unexercised portion of this Warrant on the date of such request.

33.4Antidilution Adjustment of Conversion Price upon Issuance of Common Stock.If at any time this Warrant is outstanding, the Company issues or sells, or in accordance with this Section 9(d) is deemed to have issued or sold, any shares of Common Stock, with the exception of Excluded Stock, for a consideration per share (the “New Securities Issuance Price”) less than the Exercise Price in effect immediately prior to such time (each such sale or issuance, a “Dilutive Issuance”), then concurrent with such Dilutive Issuance, the Exercise Price then in effect shall be reduced to an amount equal to ninety percent (90%) of the New Securities Issuance Price.

For purposes of determining the adjusted Conversion Price under this Section 10(d), the following shall be applicable:

(a)Issuance of Options. If the Company in any manner grants or sells any Options (other than Excluded Stock) and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 9(d)(i), the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion, exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities.

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(b)Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities (other than Excluded Stock) and the lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise thereof is less than the Exercise Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance of sale of such Convertible Securities for such price per share. For the purposes of this Section 9(d)(ii), the “lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion, exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or is to be made pursuant to other provisions of this Section 9(d), no further adjustment of the Conversion Price shall be made by reason of such issue or sale.

(c)Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time (other than Excluded Stock), the Exercise Price in effect at the time of such change shall be adjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 9(d)(iii), if the terms of any Option or Convertible Security that was outstanding as of the Initial Closing Date are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. On the expiration of any Option or Convertible Security not exercised, the applicable Exercise Price then in effect shall forthwith be increased to the Exercise Price that would have been in effect at the time of such expiration had such Stock Purchase Rights or Convertible Securities never been issued. No adjustment shall be made if such adjustment would increase the applicable Exercise Price by an amount in excess of the adjustment originally made to the Exercise Price in respect of the issue, sale or grant of the applicable Option or Convertible Security. Notwithstanding anything to the contrary herein, in no event shall an adjustment to the Exercise Price be made retroactively with respect to any portion of the Warrant which has been exercised prior to the actual date of the dilutive issuance or change. In addition, to clarify for purposes of this Section 9(d), if an Option or Convertible Security has a price reset or similar provision that would cause the price to adjust based on a future event or contingency, then the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option” shall not become such adjusted price unless and until the happening of such event or contingency that actually gives effect to the adjustment.

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(d)Calculation of Consideration Received. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, then solely for purposes of this Section 9(d), the Options will be deemed to have been issued for a consideration equal to the exercise price of such Option. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the arithmetic average of the closing price of such securities during the ten (10) consecutive Trading Days ending on the date of receipt of such securities. The fair value of any consideration other than cash or securities will be determined jointly by the Company and Required Holders in good faith. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such consideration will be determined within five Business Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Company and the Required Holders. The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne equally by the Company and the Required Holders.

33.5Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to paragraphs (a), (b) or (d) of this Section, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the increased or decreased number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.

33.6Calculations. All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.

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33.7Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its expense will promptly, but in any event no later than 10 Trading Days after such occurrence compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company’s Transfer Agent.

33.8Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction, at least 20 calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.

ARTICLE XXXIV.Payment of Exercise Price. The Holder shall pay the Exercise Price in immediately available funds; provided, however, that if the Registration Statement did not become effective on or before the Required Effectiveness Date (as defined in the Registration Rights Agreement) and is not continuously effective through the Expiration Date, the Holder may satisfy its obligation to pay the Exercise Price through a “cashless exercise,” in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:

	X = Y [(A-B)/A]
where:
	X = the number of Warrant Shares to be issued to the Holder.
	Y = the number of Warrant Shares with respect to which this Warrant is being exercised.
	A = the arithmetic average of the Closing Prices for the five Trading Days immediately prior to (but not including) the Exercise Date.
	B = the Exercise Price.

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For purposes of Rule 144 promulgated under the 1933 Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued pursuant to the Purchase Agreement.

ARTICLE XXXV.Intentionally Blank.

ARTICLE XXXVI.Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable upon exercise of this Warrant, the number of Warrant Shares to be issued will be rounded up to the nearest whole share.

ARTICLE XXXVII.Notices. Any and all notices or other communications or deliveries hereunder (including without limitation any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices or communications shall be as set forth in the Purchase Agreement. The addresses for such communications shall be: (i) if to the Company, as set forth in the Purchase Agreement, or (ii) if to the Holder, to the address or facsimile number appearing on the Company’s Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 13.

ARTICLE XXXVIII.Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon 30 days’ notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or stockholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last address as shown on the Warrant Register.

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ARTICLE XXXIX.Miscellaneous.

39.1This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Borrowers shall not be permitted to assign this Note.

39.2The Company will not, by amendment of its governing documents or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any Warrant Shares above the amount payable therefor on such exercise, (ii) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares on the exercise of this Warrant, and (iii) will not close its stockholder books or records in any manner which unreasonably interferes with the timely exercise of this Warrant.

39.3GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS WARRANT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE COMPANY HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

39.4The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.

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39.5In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.

[Signature Page Follows]

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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.

INTERPHARM HOLDINGS INC.
By:
	Name:
	Title:

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Annex A

FORM OF EXERCISE NOTICE

(To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant)

To: INTERPHARM HOLDINGS INC.

The undersigned is the Holder of Warrant No. _______ (the “Warrant”) issued by Interpharm Holdings Inc., a Delaware corporation (the “Corporation”). Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant.

(a)The Warrant is currently exercisable to purchase a total of ______________ Warrant Shares.

(b)The undersigned Holder hereby exercises its right to purchase _________________ Warrant Shares pursuant to the Warrant.

(c)The Holder intends that payment of the Exercise Price shall be made as (check one):

____ “Cash Exercise”

____ “Cashless Exercise” (if permitted)

(d)If the holder has elected a Cash Exercise, the holder shall pay the sum of $____________ to the Company in accordance with the terms of the Warrant.

(e)Pursuant to this exercise, the Company shall deliver to the holder _______________ Warrant Shares in accordance with the terms of the Warrant.

Dated: _______________, ______	Name of Holder: (Print) _____________________________
	By:
		Name:
		Title:

ACKNOWLEDGEMENT

The Corporation hereby acknowledges this Exercise Notice and hereby directs [transfer agent] to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated November [__], 2007 from the Corporation and acknowledged and agreed to by [transfer agent].

INTERPHARM HOLDINGS INC.
By:
	Name:
	Title:

Annex B

FORM OF ASSIGNMENT

[To be completed and signed only upon transfer of Warrant]

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Interpharm Holdings Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Interpharm Holdings Inc. with full power of substitution in the premises.

Dated: _______________, ______
	(Signature must conform in all respects to name of holder as specified on the face of the Warrant)
	Address of Transferee
In the presence of:

EX-10.12

Exhibit 10.12

SECURITY AGREEMENT

SECURITY AGREEMENT (this “Security Agreement”) dated as of 14th day of November, 2007, by and among Interpharm Holdings Inc. (the “Company”) and Interpharm, Inc. (the “Subsidiary” and together with the Company, the “Debtors”), and Tullis-Dickerson Capital Focus III, L.P., in its capacity as the collateral agent (together with any successors thereto in such capacity, the “Collateral Agent”) for the benefit of the holders (the “Holders”) of the Notes (as defined below) (the Collateral Agent and the Holders are hereinafter referred to as the “Secured Parties”).

Recitals

A.Pursuant to the Securities Purchase Agreement, dated as of the date hereof (including all annexes, exhibits and schedules thereto, as from time to time amended, restated, supplemented or otherwise modified, the “Purchase Agreement”), among the Debtors and the Purchasers named therein (the “Purchasers”), the Debtors have agreed to issue, and subject to the terms thereof, and the Purchasers have agreed to purchase, the Debtors’ Secured 12% Notes due 2009 in the aggregate principal amount of $5,000,000 (together with all renewals, extensions and modifications thereof and any note or notes issued in substitution or exchange therefor, the “Notes”); and

B.As a condition to each of the Purchasers’ obligation to purchase the Notes, the Purchasers have required, and the Debtors have agreed, to execute and deliver this Security Agreement to provide collateral security for the obligations of (i) the Debtors under the Purchase Agreement, the Notes, this Security Agreement and any other agreements entered into, now or in the future by the Debtors in connection with the Purchase Agreement (hereinafter collectively referred to as the “Note Documents”).

Agreement

NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1.Defined Terms. Terms not otherwise defined in this Security Agreement (including Annex A hereto), unless the context indicates otherwise, have the meanings set forth in the Purchase Agreement, or if not defined in the Purchase Agreement, then as provided for by the Code to the extent the same are used or defined therein.

2.Grant Of Lien.

(a)To secure the prompt and complete payment, performance and observance when due (whether at stated maturity, by acceleration or otherwise) of all of the Secured Obligations, the Debtors hereby grant, assign, convey, mortgage, pledge, hypothecate and transfer to the Collateral Agent, for itself and the benefit of the Secured Parties, security interests in all of their right, title and interest in, to and under all personal property and other assets described below, whether now owned by or owing to, or hereafter acquired by or arising in favor of the Debtors, and whether owned or consigned by or to, or leased from or to, the Debtors, and regardless of where located (all of which being hereinafter collectively referred to as the “Collateral”): (i) all Accounts; (ii) all General Intangibles; (iii) all goods, including, without limitation, Inventory and Equipment; (iv) all real property and fixtures; (v) all Chattel Paper; (vi) all Instruments (including all promissory notes); (vii) all documents; (viii) all Deposit Accounts, including all deposits therein; (ix) all money, cash or cash equivalents of the Debtor; (x) all books and records pertaining to the Collateral; (xi) all investment property (including securities, whether certificated or uncertificated, securities accounts, security entitlements, commodity contracts or commodity accounts); (xii) to the extent not otherwise included, all Proceeds, tort claims, insurance claims and other rights to payments not otherwise included in the foregoing and products of the foregoing and all accessions to, substitutions and replacements for, and rents and profits of, each of the foregoing.

(b)In addition, to secure the prompt and complete payment, performance and observance of the Secured Obligations and in order to induce the Secured Parties as aforesaid, the Debtors hereby grant to the Collateral Agent, for the benefit of the Secured Parties, a right of setoff against the property of the Debtor held by the Secured Parties, consisting of property described above in Section 2(a) now or hereafter in the possession or custody of or in transit to the Secured Parties, for any purpose, including safekeeping, collection or pledge, for the account of the Debtors, or as to which the Debtors may have any right or power.

3.Representations and Warranties. The Debtors represent and warrant that:

(a)The Debtors are corporations duly organized and in good standing under the laws of the jurisdiction of its incorporation. The execution and delivery, and performance of this Security Agreement, the other Note Documents to which it is a party and the transactions contemplated hereunder and thereunder (i) are all within the Debtors’ corporate powers, (ii) have been duly authorized, (iii) are not in contravention of law or the terms of the Debtors’ certificates of incorporation or by-laws, or other organizational documentation, or any indenture, agreement or undertaking to which the Debtors are a party or by which their property is bound and (iv) will not result in the creation or imposition of, or require or give rise to any obligation to grant, any lien, security interest, charge or other encumbrance upon any property of the Debtors other than in favor of the Secured Parties. This Security Agreement and the other Note Documents to which the Debtors are a party constitute legal, valid and binding obligations of the Debtors enforceable in accordance with their respective terms.

(b)As of the date hereof and after the creation of the Secured Obligations and the security interest of the Secured Parties, the Debtors (i) own assets and property whose fair saleable value is greater than the amount that is likely to be required to pay all of their liabilities (including contingent liabilities as and when they become due); (ii) are able to pay all of its liabilities as such liabilities mature; (iii) have capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage; and (iv) are not “insolvent” within the meaning of Section 101(32) of the Bankruptcy Code.

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(c)The Debtors have rights in and the power to transfer, and are the sole beneficial owners of, each item of the Collateral upon which it purport to grant a Lien hereunder free and clear of any and all Liens.

(d)No effective security agreement, financing statement, equivalent security or Lien instrument or continuation statement covering all or any part of the Collateral is on file or of record in any public office, except such as may have been filed by the Debtors in favor of the Collateral Agent pursuant to this Security Agreement or the other Note Documents and except pursuant to the Senior Credit Agreement.

(e)This Security Agreement is effective to create a valid and continuing Lien on and, upon the filing of appropriate financing statements with the governmental offices listed on Schedule I hereto, a perfected Lien in favor of the Collateral Agent, for the benefit of the Secured Parties, on the Collateral with respect to which a Lien may be perfected by filing pursuant to Article 9 of the Code. As of the Closing, such Lien will be prior to all other Liens (other than Liens in favor of the lender under the Senior Credit Agreement), and is enforceable as such as against any and all creditors of and purchasers from the Debtors.

(f)The Debtors’ names as they appears in official filings in the jurisdiction of its incorporation or other organization, the type of entity of each Debtor (including corporation, partnership, limited partnership or limited liability company), organizational identification number issued by the Debtors’ jurisdictions of incorporation or organization or a statement that no such number has been issued, the Debtors’ jurisdictions of organization or incorporation, the location of the Debtors’ chief executive offices, principal places of business, offices and premises where Collateral is stored or located, and the locations of their books and records concerning the Collateral are set forth on Schedule II hereto. Each of the Debtors has only one state of incorporation or organization. The Debtors have not, during the five years prior to the date of this Security Agreement, been known by or used any other corporate or fictitious name or been party to any merger or consolidation, or acquired all or substantially all of the assets of any Person, or acquired any of its property or assets out of the ordinary course of business, except as set forth on Schedule II hereto. The Debtors have not (i) within the period of four months prior to the date hereof, changed their locations (as defined in Section 9-307 of the Code), (ii) except as specified on Schedule II hereto, heretofore changed their names, or (iii) except as specified on Schedule II hereto, heretofore became “new debtor” (as defined in Section 9-102(a)(56) of the Code) with respect to a currently effective security agreement previously entered into by any other Person.

(g)The Debtors do not own or license any Trademarks, Patents or Copyrights or other Intellectual Property, except as set forth on Schedule III hereto.

4.Covenants. The Debtors covenant and agree with the Collateral Agent, for the benefit of the Secured Parties, that from and after the date of this Security Agreement and until the Termination Date:

(a)Further Assurances.

(i)At any time and from time to time (including upon any written request of the Collateral Agent), at the sole expense of the Debtors, the Debtors shall promptly and duly execute and deliver any and all such further instruments and documents and take such further actions as may be necessary or desirable or reasonably requested by the Collateral Agent to obtain the full benefits of this Security Agreement and of the rights and powers herein granted, including (A) using all reasonable efforts to secure all consents and approvals necessary or appropriate to enforce the security interests granted hereunder; and (B) filing any financing statements, mortgages, continuation statements, assignments and amendments with respect to the Liens granted hereunder as to those jurisdictions that are not Uniform Commercial Code jurisdictions.

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(ii)The Debtors hereby irrevocably and unconditionally authorize the Collateral Agent at any time and from time to time to file in any filing office in any Uniform Commercial Code jurisdiction any initial financing statements, continuation statements, assignments and amendments thereto that (a) indicate the Collateral, and (b) contain any other information required by Article 9 of the Code for the sufficiency or filing office acceptance of any financing statement or amendment. The Debtors agree to furnish any such information to the Collateral Agent promptly upon request. The Debtors also ratify their authorization for the Collateral Agent to have filed in any Uniform Commercial Code jurisdiction any initial financing statements or amendments thereto if filed prior to the date hereof and ratifies and confirms the authorization of the Collateral Agent to file such financing statements (and amendments, if any). The Debtors hereby authorize the Collateral Agent to adopt on behalf of the Debtors any symbol required for authenticating any electronic filing. In the event that the description of the collateral in any financing statement naming the Collateral Agent or its designee as the secured party and the Debtors as debtors includes assets and properties of the Debtors that do not at any time constitute Collateral, whether hereunder, under any of the other Documents or otherwise, the filing of such financing statement shall nonetheless be deemed authorized by the Debtors to the extent of the Collateral included in such description and it shall not render the financing statement ineffective as to any of the Collateral or otherwise affect the financing statement as it applies to any of the Collateral. In no event shall the Debtors at any time file, or permit or cause to be filed, any correction statement or termination statement with respect to any financing statement (or amendment or continuation with respect thereto) naming the Collateral Agent or its designee as secured party and the Debtors as debtors.

(iii)The Debtors shall take all steps necessary to grant the Collateral Agent control of and a perfected Lien on all Chattel Paper, Instruments, Deposit Accounts, Investment Property, investment accounts, security accounts, commodity accounts, letters of credit or banker’s acceptance constituting Collateral (including, without limitation, the delivery to the Collateral Agent of all such Collateral, accompanied by such instruments of transfer or assignment duly executed in black, the delivery of a deposit or investment property control agreement executed by the Debtors and any applicable financial institution).

(iv)The Debtors shall, upon the occurrence and during the continuance of any Event of Default, upon request of the Collateral Agent, promptly notify (and the Debtors hereby authorize the Collateral Agent so to notify) each Account Debtor in respect of any Accounts of the Debtors that such Collateral has been assigned to the Collateral Agent hereunder, and that any payments due or to become due in respect thereof are to be made directly to the Collateral Agent.

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(b)Maintenance of Records. The Debtors shall keep and maintain, at its own cost and expense, satisfactory and complete records of the Collateral, including a record of any and all payments received and any and all credits granted with respect to the Collateral in the same manner such records are presently kept and maintained.

(c)Limitation on Liens on Collateral. The Debtors will not create, permit or suffer to exist, and the Debtors will defend the Collateral against, and take such other action as is necessary to remove, any Lien on the Collateral, and will defend the right, title and interest of the Secured Parties in and to any of the Debtors’ rights under the Collateral against the claims and demands of all Persons whomsoever, other than Liens pursuant to the Senior Credit Agreement.

(d)Limitations on Disposition. The Debtors will not sell, license, lease, transfer or otherwise dispose of any of the Collateral (other than Inventory in the ordinary course of business), or attempt or contract to do so.

(e)Further Identification of Collateral. The Debtors will, if so requested by the Collateral Agent, furnish to the Collateral Agent, as often as the Collateral Agent reasonably requests, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Collateral Agent may reasonably request, all in such detail as the Collateral Agent may reasonably specify.

(f)Notices. The Debtors will advise the Collateral Agent promptly, in reasonable detail, (i) of any Lien or written claim made or asserted against any of the Collateral, and (ii) of the occurrence of any other event which could have a material adverse effect on the value of the Collateral or on the Liens created hereunder.

(g)No Reincorporation; No Name Change. The Debtors shall not reincorporate or reorganize itself under the laws of any jurisdiction other than the jurisdictions in which they are incorporated or organized as of the date hereof without the prior written consent of the Collateral Agent. The Debtors shall not change their legal names without first giving 30 days prior written notice of its intent to do so to the Collateral Agent.

5.Collateral Agent’s Appointment As Attorney-in-fact. On the Closing Date, the Debtors shall execute and deliver to the Collateral Agent a power of attorney (the “Power of Attorney”) substantially in the form attached hereto as Exhibit A. The power of attorney granted pursuant to the Power of Attorney is a power coupled with an interest and shall be irrevocable until the Termination Date. The powers conferred on the Collateral Agent, for the benefit of the Secured Parties, under the Power of Attorney are solely to protect the Collateral Agent’s interests (for the benefit of the Secured Parties) in the Collateral and shall not impose any duty upon the Secured Parties to exercise any such powers. The Collateral Agent agrees with the Secured Parties and the Borrowers that (a) except for the powers granted in clause (h) of the Power of Attorney, it shall not exercise any power or authority granted under the Power of Attorney unless an Event of Default has occurred and is continuing, (b) it shall not exercise any power or authority under the Power of Attorney unless such action has been approved in writing by the holders of a majority in principal amount of the Notes outstanding held by Tullis-Dickerson Capital Focus III, L.P., Aisling Capital II, L.P. and Cameron Reid or any of their successors in interest or transferees (the “Required Holders”), and (c) the Collateral Agent shall account for any moneys received by the Collateral Agent in respect of any foreclosure on or disposition of Collateral pursuant to the Power of Attorney provided that the Secured Parties shall not have any duty as to any Collateral, and the Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers. NONE OF THE SECURED PARTIES OR THEIR RESPECTIVE AFFILIATES, OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES SHALL BE RESPONSIBLE TO THE DEBTORS FOR ANY ACT OR FAILURE TO ACT UNDER ANY POWER OF ATTORNEY OR OTHERWISE, EXCEPT IN RESPECT OF DAMAGES ATTRIBUTABLE SOLELY TO THEIR OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS FINALLY DETERMINED BY A COURT OF COMPETENT JURISDICTION.

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6.Remedies: Rights Upon Default.

(a)In addition to all other rights and remedies granted to it under this Security Agreement, the other Note Documents and under any other instrument or agreement securing, evidencing or relating to any of the Secured Obligations, if any Event of Default shall have occurred and be continuing, the Collateral Agent may exercise all rights and remedies of a secured party under the Code. Without limiting the generality of the foregoing, the Debtors expressly agree that in any such event the Collateral Agent, on behalf of the Secured Parties, without demand of performance or other demand, advertisement or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Debtors or any other Person (all and each of which demands, advertisements and notices are hereby expressly waived to the maximum extent permitted by the Code and other applicable law), may forthwith enter upon the premises of the Debtors where any Collateral is located through self-help, without judicial process, without first obtaining a final judgment or giving the Debtors or any other Person notice and opportunity for a hearing on the Secured Parties’ claim or action and may collect, receive, assemble, process, appropriate and realize upon the Collateral, or any part thereof, and may forthwith sell, lease, license, assign, give an option or options to purchase, or sell or otherwise dispose of and deliver said Collateral (or contract to do so), or any part thereof, in one or more parcels at a public or private sale or sales, at any exchange at such prices as it may deem acceptable, for cash or on credit or for future delivery without assumption of any credit risk. The Collateral Agent shall have the right upon any such public sale or sales and, to the extent permitted by law, upon any such private sale or sales, to purchase for the benefit of the Secured Parties, the whole or any part of said Collateral so sold, free of any right or equity of redemption, which equity of redemption the Debtors hereby release. Such sales may be adjourned and continued from time to time with or without notice. The Collateral Agent shall have the right to conduct such sales on the Debtors’ premises or elsewhere and shall have the right to use the Debtors’ premises without charge for such time or times as the Collateral Agent deems necessary or advisable.

If any Event of Default shall have occurred and be continuing, the Debtors further agree, at the Collateral Agent’s request, to assemble the Collateral and make it available to the Collateral Agent at a place or places designated by the Collateral Agent which are reasonably convenient to the Collateral Agent and the Debtors, whether at the Debtors’ premises or elsewhere. Until the Collateral Agent is able to affect a sale, lease, or other disposition of Collateral, the Collateral Agent shall have the right to hold or use Collateral, or any part thereof, to the extent that it deems appropriate for the purpose of preserving Collateral or its value or for any other purpose deemed appropriate by the Collateral Agent. The Collateral Agent shall have no obligation to the Debtors to maintain or preserve the rights of the Debtors as against third parties with respect to Collateral while Collateral is in the possession of the Collateral Agent. The Collateral Agent may, if they so elect, seek the appointment of a receiver or keeper to take possession of Collateral and to enforce any of the Secured Parties’ or Collateral Agent’s remedies, with respect to such appointment without prior notice or hearing as to such appointment. The Collateral Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale to the Secured Obligations as provided in the Note Documents, and only after so paying over such net proceeds, and after the payment by the Collateral Agent of any other amount required by any provision of law, need the Collateral Agent account for the surplus, if any, to the Debtors. To the maximum extent permitted by applicable law, the Debtors hereby waive all claims, damages, and demands against the Secured Parties and the Collateral Agent arising out of the repossession, retention or sale of the Collateral except such as arise solely out of the gross negligence or willful misconduct of such Secured Party or Collateral Agent as finally determined by a court of competent jurisdiction. The Debtors agree that ten (10) days prior notice by the Collateral Agent of the time and place of any public sale or of the time after which a private sale may take place is reasonable notification of such matters. The Debtors shall remain liable for any deficiency if the proceeds of any sale or disposition of the Collateral are insufficient to pay all Secured Obligations, including any attorneys’ fees and other expenses incurred by the Collateral Agent to collect such deficiency.

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(b)Except as otherwise specifically provided herein, the Debtors hereby waive presentment, demand, protest or any notice (to the maximum extent permitted by applicable law) of any kind in connection with this Security Agreement or any Collateral.

(c)To the extent that applicable law imposes duties on Secured Parties or the Collateral Agent to exercise remedies in a commercially reasonable manner, the Debtors acknowledge and agree that it is not commercially unreasonable for the Secured Parties or Collateral Agent (i) to fail to incur expenses reasonably deemed significant by the Secured Parties or Collateral Agent to prepare Collateral for disposition or otherwise to complete raw material or work in process into finished goods or other finished products for disposition, (ii) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (iii) to fail to exercise collection remedies against Account Debtors or other Persons obligated on Collateral or to remove Liens on or any adverse claims against Collateral, (iv) to exercise collection remedies against Account Debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (v) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (vi) to contact other Persons, whether or not in the same business as the Debtors, for expressions of interest in acquiring all or any portion of such Collateral, (vii) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the Collateral is of a specialized nature, (viii) to dispose of Collateral by utilizing internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capacity of doing so, or that match buyers and sellers of assets, (ix) to dispose of assets in wholesale rather than retail markets, (x) to disclaim disposition warranties, such as title, possession or quiet enjoyment, (xi) to purchase insurance or credit enhancements to insure the Secured Parties and/or the Collateral Agent against risks of loss, collection or disposition of Collateral or to provide to the Secured Parties a guaranteed return from the collection or disposition of Collateral, or (xii) to the extent deemed appropriate by the Collateral Agent, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Collateral Agent in the collection or disposition of any of the Collateral. The Debtors acknowledge that the purpose of this Section 6(c) is to provide non-exhaustive indications of what actions or omissions by the Secured Parties or Collateral Agent would not be commercially unreasonable in the Secured Parties’ or Collateral Agent’s exercise of remedies against the Collateral and that other actions or omissions by the Secured Parties or Collateral Agent shall not be deemed commercially unreasonable solely on account of not being indicated in this Section 6(c). Without limitation upon the foregoing, nothing contained in this Section 6(c) shall be construed to grant any rights to the Debtors or to impose any duties on the Secured Parties or Collateral Agent that would not have been granted or imposed by this Security Agreement or by applicable law in the absence of this Section 6(c).

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(d)The Secured Parties and Collateral Agent shall not be required to make any demand upon, or pursue or exhaust any of their rights or remedies against, the Debtors, any other obligor, guarantor, pledgor or any other Person with respect to the payment of the Secured Obligations or to pursue or exhaust any of their rights or remedies with respect to any Collateral therefor or any direct or indirect guarantee thereof. The Secured Parties and Collateral Agent shall not be required to marshal the Collateral or any guarantee of the Secured Obligations or to resort to the Collateral or any such guarantee in any particular order, and all of its and their rights hereunder or under any other Document shall be cumulative. To the extent it may lawfully do so, the Debtors absolutely and irrevocably waive and relinquish the benefit and advantage of, and covenant not to assert against the Secured Parties or the Collateral Agent, any valuation, stay, appraisement, extension, redemption or similar laws and any and all rights or defenses it may have as sureties now or hereafter existing which, but for this provision, might be applicable to the sale of any Collateral made under the judgment, order or decree of any court, or privately under the power of sale conferred by this Security Agreement, or otherwise.

7.Grant Of Licenses To Use Intellectual Property Collateral. For the purpose of enabling the Collateral Agent to exercise rights and remedies under Section 6 hereof (including, without limiting the terms of Section 6 hereof, in order to take possession of, hold, preserve, process, assemble, prepare for sale, market for sale, sell or otherwise dispose of Collateral) at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, the Debtors hereby grant to the Collateral Agent, irrevocable, nonexclusive licenses (exercisable without payment of royalty or other compensation to the Debtors) to use, license or sublicense any Intellectual Property now owned or hereafter acquired by the Debtors, and wherever the same may be located, and including in such licenses access to all media in which any of the licensed items may be recorded or stored and to all computer software and programs used for the compilation or printout thereof.

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8.Indemnity; Expenses; Limitation On Secured Parties’ and Collateral Agent’s Duty In Respect Of Collateral.

(a)Whether or not the transactions contemplated hereby are consummated, the Debtors shall indemnify and hold the Secured Parties, the Collateral Agent, their respective Affiliates, and each of their directors, officers, agents and employees (collectively, the “Indemnified Persons”) harmless from and against any and all liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, charges, expenses and disbursements (including reasonable attorneys fees and expenses) of any kind or nature whatsoever which may at any time (including at any time following the termination of the Secured Obligations and the termination, resignation or replacement of the Collateral Agent or any assignment by a Secured Party) be imposed on, incurred by or asserted against any such Indemnified Person in any way relating to or arising out of or in connection with the execution, delivery, enforcement, performance or administration of this Security Agreement, the other Note Documents or any other agreement, letter or instrument delivered in connection with the transactions contemplated hereby or the consummation of the transactions contemplated hereby or any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnified Person is a party thereto (all the foregoing, collectively, the “Indemnified Liabilities”), in all cases, whether or not caused by or arising, in whole or in part, out of the negligence of any Indemnified Person; provided that such indemnity shall not, as to any Indemnified Person, be available to the extent that such Indemnified Liabilities are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnified Person. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 8 applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Debtors, their directors, shareholders or creditors or an Indemnified Party or any other Person, whether or not an Indemnified Person is otherwise a party thereto and whether or not any of the transactions contemplated hereunder or under any of the other Note Documents are consummated. All amounts due under this Section 8 shall be payable within five Business Days after demand therefor. The agreements in this Section 8 shall survive the resignation of the Collateral Agent, the assignment by a Secured Party and the repayment, satisfaction or discharge of all the other Secured Obligations. In the event that any investigation, litigation or proceeding is asserted or threatened in writing or instituted against any Indemnified Person, or any remedial, removal or response action which is requested of it or any other Indemnified Person, for which such Indemnified Person may desire indemnity or defense hereunder, such Indemnified Person shall notify the Debtors in writing of such event; provided that failure to so notify the Debtors shall not affect the right of any Indemnified Person to seek indemnification under this Section 8.

(b)The Debtors will upon demand pay to the Collateral Agent the amount of any and all reasonable expenses, including, without limitation, the fees and expenses of its counsel and of any experts and agents, that the Collateral Agent may incur in connection with (i) the administration of this Security Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from or other realization upon, any of the Collateral of the Debtors, (iii) the exercise or enforcement of any of the rights of the Secured Parties hereunder or (iv) the failure by the Debtors to perform or observe any of the provisions hereof.

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(c)The Secured Parties and Collateral Agent shall use reasonable care with respect to the Collateral in their possession or under their control. The Secured Parties and Collateral Agent shall not have any other duty as to any Collateral in its possession or control or in the possession or control of any agent or nominee of the Secured Parties, or any income thereon or as to the preservation of rights against prior parties or any other rights pertaining thereto.

9.Collateral Agent.

(a)Collateral Agent Has No Duty. The powers conferred on the Collateral Agent hereunder are solely to protect its interest (on behalf of the Secured Parties) in the Collateral and shall not impose any duty on it to exercise any such powers.

(b)Reasonable Care. The Collateral Agent is required to exercise reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, that the Collateral Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral if it takes such action for that purpose as any owner thereof reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Collateral Agent, to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care.

(c)Other Provisions Relating to the Collateral Agent.

(i)The Collateral Agent has such powers, rights and obligations as are expressly delegated to the Collateral Agent by the terms of this Security Agreement and the other Note Documents. Subject to Section 9(c)(iv), the Collateral Agent may, from time to time, appoint another Person to act as Collateral Agent. The Collateral Agent, acting in its capacity as such, shall have only such duties with respect to the Collateral as are set forth herein.

(ii)Except during the continuance of an Event of Default, the Collateral Agent need perform only those duties that are specifically set forth in this Security Agreement and no others, and no implied covenants or obligations will be read into this Security Agreement against the Collateral Agent. In case an Event of Default has occurred and is continuing, if so directed by the Required Holders, the Collateral Agent shall exercise those rights and powers vested in it by this Security Agreement, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs.

(iii)As to any matters not expressly provided for by this Security Agreement or the other Note Documents, the Collateral Agent shall not be required to take any action or exercise any discretion, but shall be required to act or to refrain from acting upon the instructions of the Required Holders and shall in all such cases be fully protected in acting, or in refraining from acting, in accordance with such instructions of the Required Holders, and any action taken or failure to act pursuant thereto shall be binding on the Holders. Notwithstanding any other provisions herein, the Collateral Agent shall not be required to advance or expend any funds or otherwise incur any financial liability in the performance of its duties or the exercise of its powers or rights hereunder at the request of the Required Holders unless the Debtors or the Holders have provided to the Collateral Agent security or indemnity, which the Collateral Agent, in its reasonable discretion, deems sufficient against any and all liability or expense which may be incurred by it by reason of taking or continuing to take such action. The Collateral Agent shall have no liability to either the Borrowers or the Secured Parties, or any of them, for the performance or non-performance of its duties hereunder, provided such performance or non-performance is within the standards and obligations expressly set forth herein.

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(iv)Subject to the appointment and acceptance of a successor Collateral Agent, the Collateral Agent may resign at any time by giving not less than thirty (30) days’ notice thereof to the Holders and the Debtors. Upon the acceptance of any appointment as Collateral Agent hereunder by a successor Collateral Agent, (A) such successor Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Collateral Agent, and the retiring Collateral Agent shall be discharged from its duties and obligations hereunder, and (B) the retiring Collateral Agent shall promptly transfer all Collateral within its possession or control to the possession or control of the successor Collateral Agent and shall execute and deliver such notices, instructions and assignments as may be necessary or desirable to transfer the rights of the Collateral Agent in respect of the Collateral to the successor Collateral Agent. After any retiring Collateral Agent’s resignation or replacement hereunder as Collateral Agent, the provisions of this Section shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Collateral Agent. Upon any such resignation or removal, the former Collateral Agent shall take all steps necessary to assign the Collateral to the successor Collateral Agent.

10.Reinstatement. This Security Agreement shall remain in full force and effect and continue to be effective should any petition be filed by or against the Debtors for liquidation or reorganization, should the Debtors become insolvent or make an assignment for the benefit of any creditor or creditors or should a receiver or trustee be appointed for all or any significant part of the Debtors’ assets, and shall continue to be effective or be reinstated, as the case may be, if at any time payment and performance of the Secured Obligations, or any part thereof, is, pursuant to applicable law, rescinded or reduced in amount, or must otherwise be restored or returned by any obligee of the Secured Obligations, whether as a “voidable preference,” “fraudulent conveyance,” or otherwise, all as though such payment or performance had not been made. In the event that any payment, or any part thereof, is rescinded, reduced, restored or returned, the Secured Obligations shall be reinstated and deemed reduced only by such amount paid and not so rescinded, reduced, restored or returned.

11.Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address specified in this Section prior to 5:00 p.m. (New York City time) on a Business Day, (b) the Business Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Security Agreement later than 5:00 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (c) the Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

If to the Debtors: Interpharm Holdings Inc. 75 Adams Avenue Hauppauge, NY 11788 Attention: Chief Executive Officer Fax: (631) 656-1009

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If to Collateral Agent: Tullis-Dickerson Capital Focus III, L.P. Two Greenwich Plaza, 4^th Floor Greenwich, CT 06830 Attn: Joan P. Neuscheler Fax: (203) 629-9293

12.Severability. Whenever possible, each provision of this Security Agreement shall be interpreted in a manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. This Security Agreement is to be read, construed and applied together with the Purchase Agreement and the other Note Documents which, taken together, set forth the complete understanding and agreement of the Collateral Agent, the Holders and the Debtors with respect to the matters referred to herein and therein.

13.No Waiver; Cumulative Remedies. The Secured Parties shall not by any act, delay, omission or otherwise be deemed to have waived any of its rights or remedies hereunder, and no waiver shall be valid unless in writing, signed by the Collateral Agent and then only to the extent therein set forth. A waiver by the Collateral Agent of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Collateral Agent would otherwise have had on any future occasion. No failure to exercise nor any delay in exercising on the part of the Secured Parties, any right, power or privilege hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or future exercise thereof or the exercise of any other right, power or privilege. The rights and remedies hereunder provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by law. None of the terms or provisions of this Security Agreement may be waived, altered, modified or amended except by an instrument in writing, duly executed by the Collateral Agent and the Debtor.

14.Limitation By Law. All rights, remedies and powers provided in this Security Agreement may be exercised only to the extent that the exercise thereof does not violate any applicable provision of law, and all the provisions of this Security Agreement are intended to be subject to all applicable mandatory provisions of law that may be controlling and to be limited to the extent necessary so that they shall not render this Security Agreement invalid, or unenforceable, in whole or in part, or not entitled to be recorded, registered or filed under the provisions of any applicable law.

15.Termination Of This Security Agreement. Subject to Section 10 hereof, this Security Agreement shall terminate upon the Termination Date.

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16.Successors And Assigns. This Security Agreement and all obligations of the Debtors hereunder shall be binding upon the successors and assigns of the Debtors (including any debtor-in-possession on behalf of the Debtors) and shall, together with the rights and remedies of the Collateral Agent, for the benefit of the Secured Parties, hereunder, inure to the benefit of the Secured Parties and all future holders of any instrument evidencing any of the Secured Obligations and their respective successors and assigns. No sales of participations, other sales, assignments, transfers or other dispositions of any agreement governing or instrument evidencing the Secured Obligations or any portion thereof or interest therein shall in any manner impair the Lien granted to the Collateral Agent, for the benefit of the Secured Parties, hereunder. The Debtors may not assign, sell, hypothecate or otherwise transfer any interest in or obligation under this Security Agreement.

17.Counterparts. This Security Agreement may be authenticated in any number of separate counterparts, each of which shall collectively and separately constitute one agreement. This Security Agreement may be authenticated by manual signature, facsimile or, if approved in writing by the Collateral Agent, electronic means, all of which shall be equally valid.

18.Governing Law. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS SECURITY AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN, AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. NOTHING IN THIS SECURITY AGREEMENT SHALL BE DEEMED OR OPERATE TO PRECLUDE THE SECURED PARTIES FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION TO REALIZE ON THE COLLATERAL OR ANY OTHER SECURITY FOR THE SECURED OBLIGATIONS, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER IN FAVOR OF THE SECURED PARTIES. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS SECURITY AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE COMPANY HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

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19.Waiver Of Jury Trial. BECAUSE DISPUTES ARISING IN CONNECTION WITH COMPLEX FINANCIAL TRANSACTIONS ARE MOST QUICKLY AND ECONOMICALLY RESOLVED BY AN EXPERIENCED AND EXPERT PERSON AND THE PARTIES WISH APPLICABLE STATE AND FEDERAL LAWS TO APPLY, THE PARTIES DESIRE THAT DISPUTES ARISING HEREUNDER OR RELATING HERETO BE RESOLVED BY A JUDGE APPLYING SUCH APPLICABLE LAWS. THEREFORE, TO ACHIEVE THE BEST COMBINATION OF THE BENEFITS OF THE JUDICIAL SYSTEM AND OF ARBITRATION, THE PARTIES HERETO WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT TO RESOLVE ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, AMONG THE SECURED PARTIES AND THE DEBTOR ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED IN CONNECTION WITH, THIS SECURITY AGREEMENT OR ANY OF THE OTHER NOTES DOCUMENTS OR THE TRANSACTIONS RELATED HERETO OR THERETO.

20.Expenses. The Debtors agree to reimburse the Secured Parties for all costs and expenses incurred by them (including, without limitation, the fees and expenses of legal counsel) in connection with (i) any Default or Event of Default and any enforcement or collection proceeding resulting therefrom, including, without limitation, all manner of participation in or other involvement with (w) performance by the Collateral Agent of any obligations of the Debtors in respect of the Collateral that the Debtors have failed or refused to perform, (x) bankruptcy, insolvency, receivership, foreclosure, winding up or liquidation proceedings, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Collateral Agent in respect thereof, by litigation or otherwise, including expenses of insurance, (y) judicial or regulatory proceedings and (z) workout, restructuring or other negotiations or proceedings (whether or not the workout, restructuring or transaction contemplated thereby is consummated) and (ii) the enforcement of this Section 20, and all such costs and expenses shall be Secured Obligations entitled to the benefits of the collateral security provided pursuant to Section 2.

21.Section Titles. The Section titles contained in this Security Agreement are and shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement among the parties hereto.

22.No Strict Construction. The parties hereto have participated jointly in the negotiation and drafting of this Security Agreement. In the event an ambiguity or question of intent or interpretation arises, this Security Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Security Agreement.

23.Benefit Of Secured Party. All Liens granted or contemplated hereby shall be for the benefit of the Secured Parties, and all proceeds or payments realized from Collateral in accordance herewith shall be applied to the Secured Obligations in the manner determined by the Collateral Agent in its sole discretion.

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IN WITNESS WHEREOF, each of the parties hereto has caused this Security Agreement to be executed and delivered by its duly authorized officer as of the date first set forth above.

The Debtors: INTERPHARM HOLDINGS INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

INTERPHARM, INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

The Collateral Agent: TULLIS-DICKERSON CAPITAL FOCUS III, L.P. By: Tullis Dickerson Partners III, L.L.C., its general partner
By:	/s/ Joan P. Neuscheler
	Name: Joan P. Neuscheler Title: Principal

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ANNEX A

to

SECURITY AGREEMENT

DEFINITIONS

Capitalized terms used in the Security Agreement shall have the following respective meanings, and all references to Sections, Exhibits, Schedules or Annexes in the following definitions shall refer to Sections, Exhibits, Schedules or Annexes of or to the Security Agreement:

“Account Debtor” means any Person who may become obligated to a Debtor under, with respect to, or on account of, an Account.

“Accounts” means all “accounts,” as such term is defined in the Code, now owned or hereafter acquired by a Debtor, including (as the context may reasonably permit) (a) all accounts receivable, other receivables, book debts and other forms of obligations (other than forms of obligations evidenced by Chattel Paper, or Instruments), (including any such obligations that may be characterized as an account or contract right under the Code), (b) all of a Debtor’s rights in, to and under all purchase orders or receipts for goods or services, (c) all of a Debtor’s rights to any goods represented by any of the foregoing (including unpaid sellers’ rights of rescission, reclamation and stoppage in transit and rights to returned, reclaimed or repossessed goods), (d) all rights to payment due to a Debtor for property sold, leased, licensed, assigned or otherwise disposed of, for a policy of insurance issued or to be issued, for a secondary obligation incurred or to be incurred, for energy provided or to be provided, for the use or hire of a vessel under a charter or other contract, arising out of the use of a credit card or charge card, or for services rendered or to be rendered by a Debtor or in connection with any other transaction (whether or not yet earned by performance on the part of a Debtor), (e) all health care insurance receivables and (f) all collateral security of any kind, given by any Account Debtor or any other Person with respect to any of the foregoing.

“Bankruptcy Code” means the provisions of Title 11 of the United States Code, 11 U.S.C. §§ 101 etseq.

“Business Day” means any day that is not a Saturday, a Sunday or a day on which banks are required or permitted to be closed in the City of New York.

“Chattel Paper” means any “chattel paper,” as such term is defined in the Code, including electronic chattel paper, now owned or hereafter acquired by a Debtor.

“Code” means the Uniform Commercial Code as the same may, from time to time, be enacted and in effect in the State of New York; provided, that to the extent that the Code is used to define any term herein and such term is defined differently in different Articles of the Code, the definition of such term contained in Article 9 of the Code shall govern; providedfurther, that in the event that, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, the Lien on any Collateral under the Security Agreement is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of New York, the term “Code” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions thereof relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions.

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“Collateral” has the meaning ascribed to it in Section 2(a).

“Copyright License” means any and all rights now owned or hereafter acquired by a Debtor under any written agreement granting any right to use any Copyright or Copyright registration.

“Copyrights” means all of the following now owned or hereafter adopted or acquired by the Debtor: (a) all copyrights, all General Intangibles of like nature (whether registered or unregistered), all registrations and recordings thereof, and all applications in connection therewith, including all registrations, recordings and applications in the United States Copyright Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof, (b) all reissues, extensions or renewals thereof, (c) the right to recover for all past, present and future infringements thereof and (d) all other rights of any kind whatsoever accruing thereunder as pertaining thereto.

“Default” means any condition or event which is, or, with notice or lapse of time or both, would become, an Event of Default.

“Deposit Accounts” means all “deposit accounts” as such term is defined in the Code, now or hereafter held in the names of a Debtor.

“Event of Default” means any event of default under, or any failure by the Parties to perform, keep, or observe any covenant or agreement contained in, the Purchase Agreement, this Security Agreement or any other Note Document, including, without limitation, the Notes.

“General Intangibles” means all “general intangibles,” as such term is defined in the Code, now owned or hereafter acquired by a Debtor, including (as the context may reasonably permit) all right, title and interest that a Debtor may now or hereafter have in or under any Contract, all payment intangibles, customer lists, Licenses, Copyrights, Trademarks, Patents, and all applications therefor and reissues, extensions or renewals thereof, rights in Intellectual Property, interests in partnerships, joint ventures and other business associations, licenses, permits, copyrights, trade secrets, proprietary or confidential information, inventions (whether or not patented or patentable), technical information, procedures, designs, knowledge, know-how, software, data bases, data, skill, expertise, experience, processes, models, drawings, materials and records, goodwill (including the goodwill associated with any Trademark or Trademark License), all rights and claims in or under insurance policies (including insurance for fire, damage, loss and casualty, whether covering personal property, real property, tangible rights or intangible rights, all liability, life, key man and business interruption insurance, and all unearned premiums), choses in action, rights to receive tax refunds and other payments, rights to receive dividends, distributions, cash, Instruments and other property in respect of or in exchange for any pledged Investment Property, rights of indemnification, all books and records, correspondence, credit files, invoices and other papers, including without limitation all tapes, cards, computer runs and other papers and documents in the possession or under the control of a Debtor or any computer bureau or service company from time to time acting for a Debtor.

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“Instruments” means all “instruments,” as such term is defined in the Code, now owned or hereafter acquired by a Debtor, wherever located, and, in any event, including all certificates of deposit, and all promissory notes and other evidences of indebtedness, other than instruments that constitute, or are a part of a group of writings that constitute, Chattel Paper.

“Intellectual Property” means collectively, all Copyrights, all Patents and all Trademarks, together with (a) all inventions, processes, production methods, proprietary information, know-how and trade secrets; (b) all Copyright Licenses, Patent Licenses and Trademark Licenses; (c) all information, customer lists, identification of suppliers, data, plans, blueprints, specifications, designs, drawings, recorded knowledge, surveys, engineering reports, test reports, manuals, materials standards, processing standards, performance standards, catalogs, computer and automatic machinery software and programs; (d) all field repair data, sales data and other information relating to sales or service of products now or hereafter manufactured; (e) all accounting information and all media in which or on which any information or knowledge or data or records may be recorded or stored and all computer programs used for the compilation or printout of such information, knowledge, records or data; (f) all licenses, consents, permits, variances, certifications and approvals of governmental agencies now or hereafter held by a Debtors and (g) all clauses of action, claims, and warranties now or hereafter owned or acquired by a Debtor in respect of any of the items listed above.

“Inventory” means all “inventory,” as such term is defined in the Code, now owned or hereafter acquired by a Debtor, wherever located, and in any event including (as the context may reasonably permit) inventory, merchandise, goods and other personal property that are held by or on behalf of a Debtor for sale or lease or are furnished or are to be furnished under a contract of service, or that constitute raw materials, work in process, finished goods, returned goods, or materials or supplies of any kind, nature or description used or consumed or to be used or consumed in a Debtor’s business or in the processing, production, packaging, promotion, delivery or shipping of the same, including all supplies and embedded software.

“Investment Property” means all “investment property” as such term is defined in the Code now owned or hereafter acquired by a Debtor, wherever located, including (as the context may reasonably permit) (i) all securities, whether certificated or uncertificated, including stocks, bonds, interests in limited liability companies, partnership interests, treasuries, certificates of deposit, and mutual fund shares; (ii) all securities entitlements of a Debtor, including the rights of a Debtor to any securities account and the financial assets held by a securities intermediary in such securities account and any free credit balance or other money owing by any securities intermediary with respect to that account; (iii) all securities accounts of a Debtor; (iv) all commodity contracts of a Debtor; and (v) all commodity accounts held by a Debtor.

“License” means any Copyright License, Patent License, Trademark License or other license of rights or interests now held or hereafter acquired by a Debtor.

“Lien” means any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, lien, charge, claim, security interest, easement or encumbrance, or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including any lease or title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, and the filing of, or agreement to give, any financing statement perfecting a security interest under the Code or comparable law of any jurisdiction).

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“Patent License” means rights under any written agreement now owned or hereafter acquired by a Debtor granting any right with respect to any invention on which a Patent is in existence.

“Patents” means all of the following in which a Debtor now hold or hereafter acquire any interest: (a) all letters patent of the United States or of any other country, all registrations and recordings thereof, and all applications for letters patent of the United States or of any other country, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any State, or any other country, (b) all reissues, continuations, continuations-in-part or extensions thereof, (c) all income, royalties, damages and payments now or hereafter due and/or payable under and with respect thereto, including, without limitation, damages and payments for past or future infringements thereof, (d) the right to sue for past, present and future infringements thereof, and (e) all rights corresponding thereto throughout the world.

“Person” means a corporation, an association, a partnership, an organization, a business, an individual, a government or political subdivision thereof or governmental authority.

“Proceeds” means “proceeds,” as such term is defined in the Code, including (as the context may reasonably permit) (a) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to a Debtor from time to time with respect to any of the Collateral, (b) any and all payments (in any form whatsoever) made or due and payable to a Debtor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Collateral by any governmental authority (or any Person acting under color of governmental authority), (c) any claim of a Debtor against third parties (i) for past, present or future infringement of any Patent or Patent License, or (ii) for past, present or future infringement or dilution of any Copyright, Copyright License, Trademark or Trademark License, or for injury to the goodwill associated with any Trademark or Trademark License, (d) any recoveries by a Debtor against third parties with respect to any litigation or dispute concerning any of the Collateral including claims arising out of the loss or nonconformity of, interference with the use of, defects in, or infringement of rights in, or damage to, Collateral, (e) all amounts collected on, or distributed on account of, other Collateral, including dividends, interest, distributions and Instruments with respect to Investment Property, and (f) any and all other amounts, rights to payment or other property acquired upon the sale, lease, license, exchange or other disposition of Collateral and all rights arising out of Collateral.

“Secured Obligations” means any and all obligations, liabilities and indebtedness of every kind, nature and description owing by a Debtor or any obligor to the Secured Parties under the Note Documents, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, a debtor or otherwise, whether arising under this Agreement or Note Documents, whether now existing or hereafter arising, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, and whether arising directly or howsoever acquired by a Secured Party.

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“Security Agreement” means this Security Agreement, as the same may be amended, supplemented, restated or otherwise modified from time to time.

“Termination Date” means the date on which all obligations of a Debtor to the Secured Parties or their assigns under the Note Documents, and the obligations of a Debtor under this Security Agreement and each other Note Document to which it is a party, have been indefeasibly satisfied.

“Trademark License” means rights under any written agreement now owned or hereafter acquired by a Debtor granting any right to use any Trademark.

“Trademarks” means all of the following now owned or hereafter existing or adopted or acquired by a Debtor: (a) all trademarks, trade names, corporate names, business names, trade styles, service marks, logos, other source or business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and General Intangibles of like nature (whether registered or unregistered), all registrations and recordings thereof, and all applications in connection therewith, including registrations, recordings and applications in the United States Patent and Trademark Office or in any similar office or agency of the United States, any state or territory thereof, or any other country or any political subdivision thereof, (b) all reissues, extensions or renewals thereof, (c) all rights corresponding thereto throughout the world (d) the right to recover for all past, present and future infringements thereof and (e) all other rights of any kind whatsoever accruing thereunder or pertaining thereto, together, in each case, with the product lines and goodwill of the business connected with the use of, and symbolized by, any of the foregoing.

The words “herein,” “hereof” and “hereunder” and other words of similar import refer to the Security Agreement as a whole, including all Annexes, Exhibits and Schedules, as the same may from time to time be amended, restated, modified or supplemented, and not to any particular section, subsection or clause contained in the Security Agreement or any such Annex, Exhibit or Schedule.

Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter genders. The words “including”, “includes” and “include” shall be deemed to be followed by the words “without limitation”; the word “or” is not exclusive; references to Persons include their respective successors and assigns or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of the same and any successor statutes and regulations. Whenever any provision in this Security Agreement refers to the knowledge (or an analogous phrase) of the Debtor, such words are intended to signify that the Debtor has actual knowledge or awareness of a particular fact or circumstance or a Debtor, if it had exercised reasonable diligence, would have known or been aware of such fact or circumstance.

20

SCHEDULE I

to

SECURITY AGREEMENT

FILING JURISDICTIONS

Debtors	Jurisdiction
Interpharm Holdings Inc.	Secretary of State of Delaware
Interpharm, Inc.	Secretary of State of New York

SCHEDULE II

to

SECURITY AGREEMENT

SCHEDULE OF OFFICES, LOCATIONS OF COLLATERAL

AND RECORDS CONCERNING DEBTORS’ COLLATERAL

I. The Debtors’ official names:

II. Types of entity (e.g. corporation, partnership, business trust, limited partnership, limited liability company):

Corporation

III. Organizational identification number issued by the Debtors’ jurisdiction of incorporation or organization or a statement that no such number has been issued:

IV. Jurisdictions of Incorporation or Organization of the Debtors:

V. Chief Executive Offices and principal places of business of the Debtors:

VI. Other Premises at which Collateral is Stored or Located:

SCHEDULE III

to

SECURITY AGREEMENT

SCHEDULE OF INTELLECTUAL PROPERTY

A.Trademarks

1.Owned

  Trademark Registration Number Registration Date Expiration Date

Trademark Application Application/Serial Number Application Date

2.Licensed

  Trademark Registration Number Registration Date Expiration Date Owner/ Licensor

Trademark Application Application/Serial Number Application Date

B.Patents

1.Owned

Patent Description Registration Number Registration Date Expiration Date

Patent Application Application/Serial Number Application Date

2.Licensed

Patent Description Registration Number Registration Date Expiration Date Owner/ Licensor

Patent Application Application/Serial Number Application Date

C.Copyrights

1.Owned

  Copyright Registration Number Registration Date

2.Licensed

Patent Description Registration Number Registration Number Expiration Date Owner/ Licensor

D.Other

EXHIBIT A

FORM OF

POWER OF ATTORNEY

This Power of Attorney is executed and delivered by INTERPHARM HOLDINGS INC., a Delaware corporation and INTERPHARM, INC., a New York corporation, (the “Grantors”) to Tullis-Dickerson Capital Focus III, L.P. (hereinafter referred to the “Attorney”), as the Collateral Agent for the benefit of the Secured Parties under a Security Agreement, dated as of November 14, 2007 and other related documents collectively (the “Documents”). No person to whom this Power of Attorney is presented, as authority for the Attorney to take any action or actions contemplated hereby, shall be required to inquire into or seek confirmation from the Grantors as to the authority of the Attorney to take any action described below, or as to the existence of or fulfillment of any condition to this Power of Attorney, which is intended to grant to the Attorney unconditionally the authority to take and perform the actions contemplated herein. The power of attorney granted hereby is coupled with an interest, and may not be revoked or canceled by the Grantors without the Attorney’s written consent.

The Grantors hereby irrevocably constitute and appoint the Attorney (and all officers, employees or agents designated by the Attorney), with full power of substitution, as the Grantors’ true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Grantors and in the name of the Grantors or in its own name, from time to time in the Attorney’s discretion, without notice to or assent by the Grantors, and at any time in the case of clause (h) below and at any time an Event of Default (as defined in the Security Agreement) has occurred and is continuing in the case of (a), (b), (c), (d), (e), (f), (g), (i) and (j) below, to do the following: (a) change the mailing address of the Grantors, open a post office box on behalf of the Grantors, open mail for Grantor, and ask, demand, collect, give acquittances and receipts for, take possession of, endorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, and notices in connection with any property of the Grantors constituting Collateral; (b) effect any repairs to any asset of the Grantors, or continue or obtain any insurance and pay all or any part of the premiums therefor and costs thereof, and make, settle and adjust all claims under such policies of insurance, and make all determinations and decisions with respect to such policies; (c) pay or discharge any taxes, liens, security interests, or other encumbrances levied or placed on or threatened against the Grantors or its property constituting Collateral; (d) defend any suit, action or proceeding brought against the Grantors if the Grantors do not defend such suit, action or proceeding or if the Attorney believes that the Grantors are not pursuing such defense in a manner that will maximize the recovery to the Attorney, and settle, compromise or adjust any suit, action, or proceeding described above and, in connection therewith, give such discharges or releases as the Attorney may deem appropriate; (e) file or prosecute any claim, litigation, suit or proceeding in any court of competent jurisdiction or before any arbitrator, or take any other action otherwise deemed appropriate by the Attorney for the purpose of collecting any and all such moneys due to the Grantors whenever payable and to enforce any other right in respect of the Grantors’ property constituting Collateral; (f) cause the certified public accountants then engaged by the Grantors to prepare and deliver to the Attorney at any time and from time to time, promptly upon the Attorney’s request, the following reports: (1) a reconciliation of all accounts, (2) an aging of all accounts, (3) trial balances, (4) test verifications of such accounts as the Attorney may request, and (5) the results of each physical verification of inventory; (g) communicate in its own name with any party to any contract with regard to the assignment of the right, title and interest of the Grantors in and under the contracts and other matters relating thereto; (h) file such financing statements with respect to the aforesaid Security Agreement, with or without the Grantors’ signatures, or to file a photocopy of the Security Agreement in substitution for a financing statement, as the Collateral Agent may deem appropriate and to execute in the Grantors’ names such financing statements and amendments thereto and continuation statements which may require the Grantors’ signatures; (i) execute, in connection with any sale provided for in any Document, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral and to otherwise direct such sale or resale, all as though the Attorney were the absolute owner of the property of the Grantors for all purposes, and (j) at the Attorney’s option and the Grantors’ expense, at any time or from time to time, all acts and other things that the Attorney reasonably deems necessary to perfect, preserve, or realize upon the Grantors’ property or assets and the Collateral Agent’s Liens thereon, all as fully and effectively as the Grantors might do. The Grantors hereby ratify, to the extent permitted by law, all that said Attorney shall lawfully do or cause to be done by virtue hereof.

[signature page follows]

IN WITNESS WHEREOF, this Power of Attorney is executed by each of the Grantors, and the Grantors have caused their seals to be affixed pursuant to the authority of its board of directors this 14^th day of November, 2007.

The Grantors: INTERPHARM HOLDINGS INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

INTERPHARM, INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo Title: CFO

NOTARY PUBLIC CERTIFICATES

On this 14^th day of November, 2007, Peter Giallorenzo, who is personally known to me appeared before me in his/her capacity as the CFO of INTERPHARM HOLDINGS INC. and executed on behalf of such entity the Power of Attorney in favor of TULLIS-DICKERSON CAPITAL FOCUS III, L.P. to which this Certificate is attached.

/s/ Fei Chen

Notary Public

On this 14th day of November, 2007, Peter Giallorenzo who is personally known to me appeared before me in his/her capacity as the CFO of INTERPHARM, INC. and executed on behalf of such entity the Power of Attorney in favor of TULLIS-DICKERSON CAPITAL FOCUS III, L.P. to which this Certificate is attached.

/s/ Fei Chen

Notary Public

EX-10.13

Exhibit 10.13

SECURITIES PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT (“Agreement”) is made as of the 14th day of November, 2007 by and among Interpharm Holdings Inc., a Delaware corporation (the “Company”), Interpharm, Inc., a New York corporation (the “Interpharm” and together with the Company, the “Borrowers”) and the Purchasers set forth on the signature page affixed hereto (each a “Purchaser” and collectively the “Purchasers”).

Recitals

A.The Company and the Purchasers are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) under the Securities Act of 1933, as amended (“1933 Act”), and the provisions of Regulation D (“Regulation D”), as promulgated by the U.S. Securities and Exchange Commission (the “SEC”) under the 1933 Act;

B.The Purchasers, severally and not jointly, wish to purchase, and the Company wishes to sell and issue to the Purchasers, upon the terms and subject to the conditions stated in this Agreement, the aggregate principal amount of the Company’s Secured 12% Notes due 2009, substantially in the form attached hereto as Exhibit A (the “STAR Notes”) set forth opposite such Purchaser’s name in column two of the Schedule of Purchasers.

C.Upon the receipt of certain approvals, the Company intends to exchange for the STAR Notes the Company’s (i) Secured Convertible 12% Notes due 2009, substantially in the form attached hereto as Exhibit B (the “Initial Convertible Notes”), which shall be convertible into shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”) and (ii) warrants, in substantially the form attached hereto as Exhibit C (the “Warrants”) to acquire up to that number of shares of Common Stock set forth opposite such Purchaser’s name in column three of the Schedule of Purchasers.

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Company and the Purchasers, severally and not jointly, agree as follows:

1.DEFINITIONS. In addition to those terms defined above and elsewhere in this Agreement, for the purposes of this Agreement, the following terms shall have the meanings here set forth:

1.1“1933 Act” has the meaning set forth in the Preamble.

1.2“1934 Act” means the Securities Exchange Act of 1934, as amended.

1.3“8-K Filing” is defined in Section 5.5.

1.4“Action” is defined in Section 3.9.

1.5“Affiliate” means, with respect to any Person, any other Person which directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such Person, as such terms are used in and construed under Rule 144 under the 1933 Act.

1.6“Agreement” has the meaning set forth in the Preamble.

1.7“Borrowers” has the meaning set forth in the Preamble.

1.8“Business Day” means any day other than Saturday, Sunday or other day on which commercial banks in the City of New York are authorized or required by law to remain closed.

1.9“Buy-In” is defined in Section 5.1(e).

1.10“Buy-In Price” is defined in Section 5.1(e).

1.11“Cash Amount” is defined in Section 5.4(c).

1.12“Closing” is defined in Section 2.1.

1.13“Closing Date” is defined in Section 2.2.

1.14“Closing Price” means, for any date, the closing bid price per share of the Common Stock for such date (or the nearest preceding date) on the primary Eligible Market or exchange or quotation system on which the Common Stock is then listed or quoted, or if the Common Stock is not listed or quoted of any Eligible Market, exchange or quotation system, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Required Holders, the cost of which shall be paid by the Company.

1.15“Collateral Agent” means Tullis-Dickerson Capital Focus III, L.P., a Delaware limited partnership, and its successors and assigns.

1.16“Common Stock” has the meaning set forth in the Preamble.

1.17“Company” has the meaning set forth in the Preamble.

1.18“Company Counsel” means Guzov Ofsink, LLC.

1.19“Contingent Obligation” is defined in Section 3.28.

1.20“Conversion Shares” means the shares of Common Stock issuable upon the conversion of the Convertible Notes.

1.21“Convertible Notes” means the Initial Convertible Notes and the PIK Notes.

1.22“Disclosure Materials” is defined in Section 3.7.

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1.23“Effective Date” means the date that the Registration Statement is first declared effective by the SEC.

1.24“Eligible Market” means any of the New York Stock Exchange, the American Stock Exchange, the NASDAQ Global Select Market, the NASDAQ Global Market, the NASDAQ Capital Market or the NASD Over-the-Counter Bulletin Board.

1.25“Environmental Law” is defined in Section 3.33.

1.26“Excluded Stock” means (a) the issuance of Common Stock upon exercise or conversion of any options or other securities outstanding as of the date of this Agreement and described in Schedule 3.6 (provided that such exercise or conversion occurs in accordance with the terms thereof, without amendment or modification, and that the applicable exercise or conversion price or ratio is described in such schedule), (b) the issuance of Common Stock or grant of options to employees, officers, directors or consultants of the Company pursuant to a stock option plan or other incentive stock plan duly adopted by the Company’s board of directors and/or approved by its shareholders, (c) the issuance of the Initial Convertible Notes and Warrants in exchange for the STAR Notes, (d) upon exercise of the Warrants, the conversion of the Convertible Notes and the payment of PIK Notes on the Initial Convertible Notes, (e) securities issued pursuant to acquisitions or other strategic transactions; provided, (i) such acquisition or other transaction is not with an Affiliate of the Company or any individual who is related by blood, marriage or adoption to any Affiliate of the Company, (ii) the primary purpose of such acquisition or other transaction is not to raise capital and (iii) such security is issued at a price which is greater than or equal to the arithmetic average of the Closing Price of the Common Stock for the ten (10) consecutive Trading Days immediately preceding the date of issuance, or (f) (i) issuance of shares of Series D-1 Convertible Preferred Stock in exchange for outstanding shares of the Series B-1 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock, (ii) issuance of the Amended and Restated Warrants in exchange for the warrants which were issued in connection with the issuance of the Series B-1 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock and (iii) issuance of Common Stock upon the conversion of the Series D-1 Convertible Preferred Stock or the exercise of such Amended and Restated Warrants, in each case in accordance with the terms of the Consent and Waiver Agreement, dated November __, 2007, among the Company, the holders of the Series B-1 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock, the Purchasers and the Sutaria Stockholders named therein.

1.27“FDA” is defined in Section 3.34.

1.28“FDCA” is defined in Section 3.34.

1.29“GAAP” is defined in Section 3.7.

1.30“Hazardous Materials” is defined in Section 3.33.

1.31“Indebtedness” is defined in Section 3.28.

1.32“Information Statement” is defined in Section 5.6.

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1.33“Interpharm” has the meaning set forth in the Preamble.

1.34“Intellectual Property Rights” is defined in Section 3.19.

1.35“Initial Convertible Notes” has the meaning set forth in the Preamble.

1.36“Lien” means any lien, charge, claim, security interest, encumbrance, right of first refusal or other restrictions.

1.37“Material Adverse Effect” means a material adverse effect on the (i) condition (financial or otherwise), business, assets or results of operations of any of the Borrowers, (ii)  the Borrowers’ ability to perform any of their obligations under the terms of the Transaction Documents in any material respect or (iii) rights and remedies of a Purchaser under the Transaction Documents.

1.38“Material Permits” is defined in Section 3.21.

1.39“Maximum Rate” is defined in Section 7.17.

1.40“Person” means an individual, corporation, partnership, limited liability company, trust, business trust, association, joint stock company, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, governmental authority or any other form of entity not specifically listed herein.

1.41“Pharmaceutical Product” is defined in Section 3.34.

1.42“PIK Notes” shall mean the Convertible Notes issuable as interest payment on the outstanding Convertible Notes in accordance with the terms of the Convertible Notes.

1.43“Preferred Stock Consents” is defined in Section 6.1(xii).

1.44“Purchase Price” is defined in Section 2.2(b).

1.45“Purchasers” has the meaning set forth in the Preamble.

1.46“Registrable Securities” is defined in Section 5.21.

1.47“Registration Statement” means a registration statement covering the resale of the Conversion Shares and the Warrant Shares.

1.48“Regulation D” has the meaning set forth in the Preamble.

1.49“Required Holders” means the holders of at least a majority of the then outstanding principal amount of the STAR Notes or the Convertible Notes held by Cameron Reid, Aisling Capital II, L.P. and Tullis-Dickerson Capital Focus III, L.P.

1.50“SEC” has the meaning set forth in the Preamble.

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1.51“SEC Reports” is defined in Section 3.7.

1.52“Securities” means the STAR Notes, the Convertible Notes, the Warrants, the Conversion Shares and the Warrant Shares issued or issuable to the applicable Purchaser pursuant to the Transaction Documents.

1.53“Security Agreement” means the Security Agreement, dated as of the date hereof, made by each of the Borrowers in favor of the Collateral Agent, as amended or supplemented from time to time in accordance with its terms.

1.54“Security Documents” means the Security Agreement and all other security agreements, pledge agreements, collateral assignments, mortgages, collateral agency agreements, control agreements, deeds of trusts or other grants or transfers for security executed by any Borrower creating (or purporting to create) a Lien upon property in favor of the Collateral Agent, in each case, as amended, modified, renewed, restated or replaced, in whole or in part, from time to time, in accordance with its terms.

1.55“Senior Credit Agreement” means the Credit and Security Agreement, dated as of February 9, 2006, by and between Interpharm, Inc. and Wells Fargo Bank, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreement may be amended, restated, supplemented, refinanced, replaced, refunded or otherwise modified from time to time, whether by the same lender or any other lender or group of lenders.

1.56“Senior Credit Facility Consent” is defined in Section 6.1(xi).

1.57“Shareholder Approval” is defined in Section 5.6(a).

1.58“STAR Notes” has the meaning set forth in the Preamble.

1.59“Stockholder Meeting” is defined in Section 5.6(b).

1.60“Stockholder Meeting Deadline” is defined in Section 5.6(b).

1.61“Subsidiary” means any Person in which the Company or Interpharm, directly or indirectly, owns capital stock or holds an equity or similar interest.

1.62“Sutaria Note” means the Junior Subordinate Secured 12% Promissory Note due 2010 issued by the Company to Maganlal K. Sutaria and Vilma Sutaria in the principal amount of $3,000,000, which financing is subordinate to the STAR Notes and the Convertible Notes.

1.63“Sutaria Parties” means P&K Holdings I, LLC, a New York limited liability company, Rajs Holdings I, LLC, a New York limited liability company, Rametra Holdings I, LLC, a New York limited liability company, Maganlal K. Sutaria, Vilma Sutaria, Perry Sutaria, Raj Sutaria, Mona Rametra and Sutaria Family Realty, LLC.

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1.64“Trading Day” means (a) any day on which the Common Stock is listed or quoted and traded on its primary Trading Market, (b) if the Common Stock is not then listed or quoted and traded on any Eligible Market, then any day on which trading occurs on the NASDAQ Global Market (or any successor thereto), or (c) if trading ceases to occur on the NASDAQ Global Market (or any successor thereto), any Business Day.

1.65“Trading Market” means the American Stock Exchange or any other Eligible Market, or any other national securities exchange, market or trading or quotation facility on which the Common Stock is then listed or quoted.

1.66“Transaction Documents” means this Agreement, the STAR Notes, the Convertible Notes, the Warrants, the Security Documents, and any other agreement, document or instrument entered into or delivered, now or in the future, by any of the Borrowers in connection with this Agreement or any of the other Transaction Documents.

1.67“Transfer Agent” means Continental Stock Transfer & Trust Company, or any successor transfer agent for the Company.

1.68“Transfer Agent Instructions” means the Irrevocable Transfer Agent Instructions, in the form of Exhibit D, executed by the Company and delivered to and acknowledged in writing by the Transfer Agent.

1.69“Warrant Shares” means the shares of Common Stock issuable upon the exercise of the Warrants.

1.70“Warrants” has the meaning set forth in the Preamble.

2.PURCHASE AND SALE OF SECURITIES.

2.1Purchase of STAR Notes. Subject to the terms and conditions of this Agreement and on the basis of the representations and warranties made herein, each of the Purchasers hereby, severally and not jointly, agrees to purchase, and the Company hereby agrees to sell and issue to each of the Purchasers, the respective amount of STAR Notes set forth opposite such Purchaser’s name on the Schedule of Purchasers (the “Closing”).

2.2Closing Date.

(a)Closing Date. The date and time of the Closing (the “Closing Date”) shall be 10:00 a.m. Eastern Time on or before November 25, 2007 (or such later date as is mutually agreed to by the Borrowers and the Purchasers). The Closing shall occur on the Closing Date at the offices of Guzov Ofsink, LLC, 600 Madison Avenue, 14^th Floor, New York, New York 10022.

(b)Purchase Price. At the Closing, each Purchaser shall deliver or cause to be delivered to the Borrowers the purchase price (the “Purchase Price”), which shall be equal to the original principal amount of the STAR Notes being purchased by such Purchaser at the Closing, in United States dollars and in immediately available funds, by wire transfer to a separate account of the Borrowers for such purpose.

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3.REPRESENTATIONS AND WARRANTIES OF THE BORROWERS. Each of the Borrowers, jointly and severally, hereby represents and warrants to the Purchasers that:

3.1Subsidiaries. None of the Borrowers has any direct or indirect Subsidiaries other than those listed in Schedule 3.1. Except as disclosed in Schedule 3.1, the Borrowers own, directly or indirectly, all of the capital stock or comparable equity interests of each Subsidiary free and clear of any Lien and all the issued and outstanding shares of capital stock or comparable equity interest of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights.

3.2Organization, Good Standing and Qualification. Each of the Borrowers and the Subsidiaries is a corporation validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization (as applicable), with all requisite power and authority to carry on its business as presently conducted and own and use its properties and assets. Each of the Borrowers and the Subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the conduct of its business or its ownership or leasing of property makes such qualification or licensing necessary, except where the failure to be so qualified or in good standing, as the case may be, would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect.

3.3Authorization; Enforcement. Each of the Borrowers has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by each of the Transaction Documents to which it is a party and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of each of the Transaction Documents by each of the Borrowers and the consummation by it of the transactions contemplated hereunder and thereunder have been duly authorized by all necessary action on the part of the Borrowers and no further consent or action is required by the Borrowers, their Boards of Directors or their stockholders in connection therewith, other than as set forth in Section 5.6. Each Transaction Document has been (or upon delivery will have been) duly executed by each of the Borrowers who is a party thereto and when delivered in accordance with the terms hereof, will constitute the valid and binding obligation of such Borrower enforceable against such Borrower in accordance with its terms; except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, or similar laws relating to, or affecting generally the enforcement of auditors rights and remedies or by other equitable principles of general application.

3.4No Conflicts. The execution, delivery and performance of the Transaction Documents by the Borrowers and the consummation by the Borrowers of the transactions contemplated hereby and thereby do not and will not (a) conflict with or violate any provision of any Borrower’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, (b) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Borrower or Subsidiary debt or otherwise) or other understanding to which a Borrower or any Subsidiary is a party or by which any property or asset of a Borrower or any Subsidiary is bound or affected, or (c) result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which a Company or a Subsidiary is subject (assuming the accuracy of Purchasers’ representations and warranties and compliance by the Purchasers’ of their respective covenants as set forth in this Agreement), including federal and state securities laws and regulations and the rules and regulations of any self-regulatory organization to which a Borrower or its securities are subject, or by which any property or asset of a Borrower or a Subsidiary is bound or affected; except in the case of each of clauses (b) and (c), such as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect.

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3.5Issuance of the Securities. The Securities have been duly authorized. The STAR Notes, when issued and paid for in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable, and free and clear of all Liens and charges and shall not be subject to preemptive or similar rights. The Convertible Notes and the Warrants, when issued in exchange for the STAR Notes in accordance with the terms of this Agreement, and the Conversion Shares and the Warrant Shares or other securities issuable upon conversion of the Convertible Notes and upon exercise of the Warrants, when so issued and paid for in accordance with the terms thereof, will be, validly issued, fully paid and nonassessable, and free and clear of all Liens and charges and shall not be subject to preemptive or similar rights. The Company has reserved from its duly authorized capital stock the maximum number of shares of Common Stock to be issued to the applicable Purchasers upon conversion or exercise of the Securities or issuable pursuant to the other Transaction Documents without giving effect to any anti-dilution or ratchet provisions. Assuming the continued validity of the Purchaser’s representations and warranties contained in Section 4, the offer, issuance and sale of the Securities to the Purchasers pursuant to this Agreement and upon conversion or exercise of the Securities are exempt from registration requirements of the 1933 Act.

3.6Capitalization.

(a)The aggregate number of shares and type of all authorized, issued and outstanding capital stock, options and other securities of the Company (whether or not presently convertible into or exercisable or exchangeable for shares of capital stock of the Company) is set forth in Schedule 3.6. All outstanding shares of capital stock are duly authorized, validly issued, fully paid and nonassessable and have been issued in compliance with all applicable securities laws. No securities of the Company are entitled to preemptive or similar rights, and no Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as a result of the purchase and sale of the Securities and except as disclosed in Schedule 3.6, there are no outstanding options, warrants, script rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common Stock. Except as set forth in Schedule 3.6 and except for customary adjustments as a result of stock dividends, stock splits, combinations of shares, reorganizations, recapitalizations, reclassifications or other similar events, there are no anti-dilution or price adjustment provisions contained in any security issued by the Company (or in any agreement providing rights to security holders), and the issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person (other than the Purchasers) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under such securities. To the knowledge of the Company, except as specifically disclosed in its SEC Reports, no Person or group of related Persons beneficially owns (as determined pursuant to Rule 13d-3 under the 1934 Act), or has the right to acquire, by agreement with or by obligation binding upon the Company, beneficial ownership of in excess of 5% of the outstanding Common Stock, ignoring for such purposes any limitation on the number of shares of Common Stock that may be owned at any single time.

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(b)As of the date hereof, the authorized capital stock of Interpharm consists of 150,000,000 shares of Common Stock, of which 65,813,668 shares are issued and outstanding. All outstanding shares of capital stock of Interpharm are owned by the Company and are duly authorized, validly issued, fully paid and nonassessable.

3.7SEC Reports; Financial Statements. Except as set forth in Schedule 3.7, the Company has filed all reports required to be filed by it under the 1933 Act and the 1934 Act, including pursuant to Section 13(a) or 15(d) of the 1934 Act, since June 30, 2006 (the foregoing materials being collectively referred to herein as the “SEC Reports” and, together with the Schedules to this Agreement, the “Disclosure Materials”) on a timely basis or has received a valid extension of such time of filing and has filed any such SEC Reports prior to the expiration of any such extension. As of their respective dates, the SEC Reports complied in all material respects with the requirements of the 1933 Act and the 1934 Act and the rules and regulations of the SEC promulgated thereunder, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the time of filing. Such financial statements have been, and the financial statements to be included in Company’s Annual Report of Form 10-K, for the year ended June 30, 2007 will be, prepared in accordance with the United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), (except (i) as may be otherwise specified in such financial statements or the notes thereto or (ii) in the case of unaudited interim statements, to the extent they do not include footnotes or may be condensed or summary statements), and fairly present in all material respects the financial position of the Company and its consolidated subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal year-end audit adjustments. All material agreements or commitments to which the Company or any Subsidiary is a party or to which the property or assets of the Company or any Subsidiary are subject are included as part of or specifically identified in the SEC Reports.

3.8Material Changes. Since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed on Schedule 3.8, (a) there has been no event, occurrence or development that, individually or in the aggregate, has had or that would reasonably be expected to result in a Material Adverse Effect, (b) none of the Borrowers has incurred any liabilities (contingent or otherwise), other than (A) trade payables, accrued expenses and other liabilities incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or required to be disclosed in filings made with the SEC, (c) the Company has not altered its method of accounting or the identity of its auditors, except as disclosed in its SEC Reports, (d) none of the Borrowers has declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock, and (e) none of the Borrowers has issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company stock option plans. The Company does not have pending before the SEC any request for confidential treatment of information.

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3.9Absence of Litigation. Except as set forth in Schedule 3.9, there is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Borrowers, threatened against or affecting any of the Borrowers, any Subsidiary, any of Borrower’s officers or directors in their capacities as such and any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (a) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (b) could, if there were an unfavorable decision, individually or in the aggregate, have or result in a Material Adverse Effect. Within the past five years, none of the Borrowers nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Borrowers, there is not pending or contemplated, any investigation by the SEC involving the Company or any current or former director or officer of any of the Borrowers. The SEC has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary.

3.10Compliance. Except as set forth in the SEC Reports, none of the Borrowers nor any Subsidiary, except in each case as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect, (a) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by a Borrower or any Subsidiary under), nor has any Borrower or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (b) is in violation of any order of any court, arbitrator or governmental body, or (c) is or has been in violation of any statute, rule or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters.

3.11Title to Assets. The Borrowers and their Subsidiaries have valid title to or leasehold rights for all real property that is material to the business of the Borrowers and the Subsidiaries and good and marketable title in all personal property owned by them that is material to the business of the Borrowers and the Subsidiaries, in each case free and clear of all Liens, except for Liens disclosed in the SEC filings or as do not, individually or in the aggregate, materially interfere with the use made and proposed to be made of such property by the Borrowers and the Subsidiaries. Any real property and facilities held under lease by the Borrowers and its Subsidiaries are held by them under valid, subsisting and enforceable leases of which the Borrowers and the Subsidiaries are in compliance; except as would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect.

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3.12Placement Agent’s Fees. No brokerage or finder’s fees or commissions are or will be payable by the Borrowers to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by this Agreement, and the Borrowers have not taken any action that would cause any Purchaser to be liable for any such fees or commissions. The Purchasers shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by this Agreement. The Company shall indemnify and hold harmless the Purchasers, their employees, officers, directors, agents, and partners, and their respective Affiliates, from and against all claims, losses, damages, costs (including the costs of preparation and attorney’s fees) and expenses suffered in respect of any such claimed or existing fees, as such fees and expenses are incurred.

3.13Private Placement. None of the Borrowers nor any Person acting on the Borrowers’ behalf has sold or offered to sell or solicited any offer to buy the Securities by means of any form of general solicitation or advertising. None of the Borrowers nor any of their Affiliates nor any Person acting on the Borrowers’ behalf has, directly or indirectly, at any time within the past six months, made any offer or sale of any security or solicitation of any offer to buy any security under circumstances that would (i) eliminate the availability of the exemption from registration under Regulation D under the 1933 Act in connection with the offer and sale of the Securities as contemplated hereby or (ii) cause the offering of the Securities pursuant to the Transaction Documents to be integrated with prior offerings by the Borrowers for purposes of any applicable law, regulation or stockholder approval provisions, including, without limitation, under the rules and regulations of any Trading Market. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading Market and no shareholder approval (except to the extent already obtained) is required for the Company to fulfill its obligations under the Transaction Documents. The Company is not, and is not an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. The Company is not a United States real property holding corporation within the meaning of the Foreign Investment in Real Property Tax Act of 1980.

3.14Listing and Maintenance Requirements. Except as set forth in the SEC Reports, the Company has not, in the two years preceding the date hereof, received notice (written or oral) from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. Except as set forth in the SEC Reports, the Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.

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3.15Registration Rights. Except as described in Schedule 3.15, the Company has not granted or agreed to grant to any Person any rights (including “piggy-back” registration rights) to have any securities of the Company registered with the SEC or any other governmental authority that have not been satisfied or waived.

3.16Application of Takeover Protections. There is no control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s certificate of incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Purchasers as a result of the Purchasers and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation the Company’s issuance of the Securities and the Purchasers’ ownership of the Securities.

3.17Disclosure. All disclosure provided to the Purchasers regarding the Borrowers, their business and the transactions contemplated hereby, including the Schedules to this Agreement, furnished by or on behalf of the Borrowers are true and correct and do not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The Borrowers acknowledge and agree that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 4.

3.18[Intentionally Blank]

3.19Intellectual Property. The Borrowers and their Subsidiaries own, or have rights to use, all inventions, know-how, patents, patent applications, trademarks, trademark applications, service marks, trade names, copyrights, licenses, trade secrets and other similar rights that are necessary or material for use in connection with their respective businesses now operated by them and presently contemplated to be operated by them and as described in the SEC Reports and which the failure to so have would have or reasonably be expected to result in a Material Adverse Effect (collectively, the “Intellectual Property Rights”). Schedule 3.19 sets forth a complete and accurate description of the Borrowers’ material Intellectual Property Rights, other than off-the-shelf commercial or shrinkwrap software and excluding all software or other material that is distributed as “free software,” “open source software” or under a similar licensing or distribution model. None of the Borrower’s or any Subsidiary’s Intellectual Property Rights have expired or terminated, or are expected to expire or terminate, within three years from the date of this Agreement. None of the Borrowers nor any Subsidiary has received written notice that the Intellectual Property Rights used by a Borrower or any Subsidiary violates or infringes upon the rights of any Person. To the knowledge of the Borrowers, the Borrowers’ and their Subsidiaries’ patents and other Intellectual Property Rights and the present activities of the Borrowers and their Subsidiaries do not infringe any patent, copyright, trademark, trade name or other proprietary rights of any third party, and there is no claim, action or proceeding being made or brought against, or to the Borrowers’ knowledge, being threatened against, a Borrower or any Subsidiary regarding any of the Intellectual Property Rights. None of the Borrowers has any knowledge of an infringement by another Person of any of the Intellectual Property Rights by third parties and has no reason to believe that any of its Intellectual Property Rights is unenforceable. The Borrowers have taken commercially reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties

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3.20Insurance. The Borrowers and their Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Borrowers and their Subsidiaries are engaged. The Borrowers have no reason to believe that they will not be able to renew their and the Subsidiaries’ existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business on terms consistent with the market for the Borrowers’ and such Subsidiaries’ respective businesses.

3.21Regulatory Permits. The Borrowers and their Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits would not, individually or in the aggregate, reasonably be expected to have or result in a Material Adverse Effect (“Material Permits”), and none of the Borrowers nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

3.22Transactions With Affiliates and Employees. Except as set forth in SEC Reports filed at least ten days prior to the date hereof and except for the transactions contemplated by the Transaction Documents, none of the officers or directors of the Borrowers and, to the knowledge of the Borrowers, none of the employees of the Borrowers, is presently a party to any transaction with any Borrower or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Borrowers, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee or partner.

3.23Form S-1 Eligibility. The Company is eligible to register the resale of its Common Stock for resale by the Purchasers under Form S-1 promulgated under the Securities Act.

3.24Solvency. None of the Borrowers have taken any steps to seek protection pursuant to any bankruptcy law nor do any of the Borrowers have any knowledge or reason to believe that its creditors intend to initiate involuntary bankruptcy proceedings. Based on the financial condition of the Borrowers as of the Closing Date, and giving effect to the transactions contemplated herein, (a) the Borrowers’ fair saleable value of its assets exceeds the amount that will be required to be paid on or in respect of the Borrowers’ existing debts and other liabilities (including known contingent liabilities) as they mature; (b) the Borrowers’ assets do not constitute unreasonably small capital to carry on its business for the current fiscal year as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Borrowers, and projected capital requirements and capital availability thereof; and (c) the current cash flow of the Borrowers, together with the proceeds the Borrowers would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its debt when such amounts are required to be paid. None of the Borrowers intends to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt).

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3.25Internal Accounting Controls. The Company and its Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that (a) transactions are executed in accordance with management’s general or specific authorizations, (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (c) access to assets is permitted only in accordance with management’s general or specific authorization, and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

3.26[Intentionally Blank].

3.27Foreign Corrupt Practices. None of the Borrowers nor any of their Subsidiaries nor, to the knowledge of the Borrowers, any director, officer, agent, employee or other Person acting on behalf of the Borrowers or any of their Subsidiaries has, in the course of its actions for, or on behalf of, the Borrowers (a) used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expenses relating to political activity; (b) made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; (c) violated or is in violation of any provision of the U.S. Foreign Corrupt Practices Act of 1977, as amended; or (d) made any unlawful bribe, rebate, payoff, influence payment, kickback or other unlawful payment to any foreign or domestic government official or employee.

3.28Indebtedness. Except as disclosed in Schedule 3.28, none of the Borrowers nor any of their Subsidiaries (a) has any outstanding Indebtedness (as defined below) in an individual amount of more than $500,000, (b) is in violation of any term of or in default under any contract, agreement or instrument relating to any Indebtedness, except where such violations and defaults would not reasonably be expected to result, individually or in the aggregate, in a Material Adverse Effect, or (c) is a party to any contract, agreement or instrument relating to any Indebtedness, the performance of which, in the judgment of the Company’s officers, is reasonably expected to have a Material Adverse Effect. For purposes of this Agreement: (i) “Indebtedness” of any Person means, without duplication (A) all indebtedness for borrowed money, (B) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business), (C) all reimbursement or payment obligations with respect to letters of credit, surety bonds and other similar instruments, (D) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses, (E) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to any property or assets acquired with the proceeds of such indebtedness (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property), (F) all monetary obligations under any leasing or similar arrangement which, in connection with GAAP, is classified as a capital lease, (G) all indebtedness referred to in clauses (A) through (F) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in any property or assets (including accounts and contract rights) owned by any Person, even though the Person which owns such assets or property has not assumed or become liable for the payment of such indebtedness, and (H) all Contingent Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (A) through (G) above; and (ii) “Contingent Obligation” means, as to any Person, any direct or indirect liability, contingent or otherwise, of that Person with respect to any indebtedness, lease, dividend or other obligation of another Person if the primary purpose or intent of the Person incurring such liability, or the primary effect thereof, is to provide assurance to the obligee of such liability that such liability will be paid or discharged, or that any agreements relating thereto will be complied with, or that the holders of such liability will be protected (in whole or in part) against loss with respect thereto.

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3.29Employee Relations. None of the Borrowers nor any of their Subsidiaries is a party to any collective bargaining agreement or employs any member of a union. The Borrowers believe that their relations with their employees are as disclosed in the SEC Reports. Except as disclosed in the SEC Reports, during the period covered by the SEC Reports, no executive officer of the Company or any of its Subsidiaries (as defined in Rule 501(f) of the 1933 Act) has notified the Company or any such Subsidiary that such officer intends to leave the Company or any such Subsidiary or otherwise terminate such officer’s employment with the Company or any such Subsidiary. To the knowledge of the Borrowers or any such Subsidiary, no executive officer of any Borrower or any of their Subsidiaries is in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement, non-competition agreement, or any other contract or agreement or any restrictive covenant, and the continued employment of each such executive officer does not subject such Borrower or any such Subsidiary to any liability with respect to any of the foregoing matters.

3.30Labor Matters. The Company and its Subsidiaries are in compliance in all material respects with all federal, state, local and foreign laws and regulations respecting labor, employment and employment practices and benefits, terms and conditions of employment, hiring promotion or pay, and wages and hours, except where failure to be in compliance would not, either individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect.

3.31Subsidiary Rights. No Subsidiary of a Borrower is currently prohibited, directly or indirectly, from paying any dividends to such Borrower, from making any other distribution on such Subsidiary’s capital stock, from repaying to the Borrowers any loans or advances to such Subsidiary from such Borrower or from transferring any of such Subsidiary’s property or assets to a Borrower or any other Subsidiary of the Borrowers. The Borrowers or one of their Subsidiaries has the unrestricted right to vote all capital securities of their Subsidiaries as owned by a Borrower or such Subsidiary.

3.32Tax Status. Each of the Borrowers and each of their Subsidiaries (a) has filed all foreign, federal and state income, franchise and all other tax returns, reports and declarations required by any jurisdiction to which it is subject, (b) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations, except those being contested in good faith and (c) has set aside on its books provision reasonably adequate for the payment of all taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction.

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3.33Environmental. To the Borrowers’ knowledge, the Borrowers and their Subsidiaries and their properties, assets and operations are in compliance with, and hold all permits, authorizations and approvals required under, Environmental Laws (as defined below), except to the extent that failure to so comply or to hold such permits, authorizations or approvals, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect. Except as would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect, none of the Borrowers nor any of the Subsidiaries (a) is, to the Borrowers’ knowledge, the subject of any investigation, (b) has received any written notice or claim, (c) is a party to any pending or, to the Borrowers’ knowledge, threatened action, suit or proceeding, (d) is bound by any judgment, decree or order, or (e) has entered into any agreement, in each case relating to any alleged violation of any Environmental Law or any actual or alleged release or threatened release or cleanup at any location of any Hazardous Materials (as defined below). As used herein, “Environmental Law” means any federal, state, local or foreign law, statute, ordinance, rule, regulation, order, decree, judgment, injunction, permit, license, authorization or other binding requirement or common law relating to health, safety or the protection, cleanup or restoration of the environment or natural resources, including those relating to the distribution, processing, generation, treatment, storage, disposal, transportation, other handling or release or threatened release of Hazardous Materials, and “Hazardous Materials” means any material (including, without limitation, pollutants, contaminants, hazardous or toxic substances or wastes) that is regulated by or may give rise to liability under any Environmental Law.

3.34FDA.As to products subject to the jurisdiction of the U.S. Food and Drug Administration (“FDA”) under the Federal Food, Drug and Cosmetic Act, as amended, and the regulations thereunder (“FDCA”) that are manufactured, packaged, labeled, tested, distributed, sold, and/or marketed by the Borrowers or any of their Subsidiaries (each such product, a “Pharmaceutical Product”), such Pharmaceutical Product is being manufactured, packaged, labeled, tested, distributed, sold and/or marketed by the Borrowers in compliance with all applicable requirements under FDCA and similar laws, rules and regulations relating to registration, investigational use, premarket clearance, licensure, or application approval, good manufacturing practices, good laboratory practices, good clinical practices, product listing, quotas, labeling, advertising, record keeping and filing of reports, except where the failure to be in compliance would not have a Material Adverse Effect. There is no pending, completed or, to the Borrowers’ knowledge, threatened, action (including any lawsuit, arbitration, or legal or administrative or regulatory proceeding, charge, complaint, or investigation) against a Borrower or any of its Subsidiaries, and none of the Borrowers nor any of their Subsidiaries has received any notice, warning letter or other communication from the FDA or any other governmental entity, which (i) contest the premarket clearance, licensure, registration, or approval of, the uses of, the distribution of, the manufacturing or packaging of, the testing of, the sale of, or the labeling and promotion of any Pharmaceutical Product, (ii) withdraws its approval of, requests the recall, suspension, or seizure of, or withdraws or orders the withdrawal of advertising or sales promotional materials relating to, any Pharmaceutical Product, (iii) imposes a clinical hold on any clinical investigation by a Borrower or any of its Subsidiaries, (iv) enjoins production at any facility of a Borrower or any of its Subsidiaries, (v) enters or proposes to enter into a consent decree of permanent injunction with a Borrower or any of its Subsidiaries, or (vi) otherwise alleges any violation of any laws, rules or regulations by a Borrower or any of its Subsidiaries, and which, either individually or in the aggregate, would have a Material Adverse Effect. The properties, business and operations of the Borrower have been and are being conducted in all material respects in accordance with all applicable laws, rules and regulations of the FDA. The Borrowers have not been informed by the FDA that the FDA will prohibit the marketing, sale, license or use in the United States of any product proposed to be developed, produced or marketed by a Borrower or any of its Subsidiaries nor has the FDA expressed any concern as to approving or clearing for marketing any product being developed or proposed to be developed by a Borrower or any of its Subsidiaries.

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3.35Filings, Consents and Approvals. None of the Borrowers is required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by such Borrower of the Transaction Documents, other than the filing of the Amendment to the Certificates of Designation with the Secretary of State of the State of Delaware, the filing required pursuant to the 1933 Act and or the 1934 Act, the application(s) to each Trading Market for the listing of the Conversion Shares and the Warrant Shares for trading thereon in the time and manner required thereby, the approval and actions set forth in Section 5.6, applicable Blue Sky filings and the filings required by the Security Documents to perfect the security interest of the Purchasers.

4.REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. Each Purchaser, as to itself only and for no other Purchaser, hereby represents and warrants to the Company as follows:

4.1Organization; Authority. If Purchaser is an entity, such Purchaser is an entity duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Such Purchaser has the requisite power and authority (corporate, limited liability company, partnership or otherwise) to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution, delivery and performance by such Purchaser of this Agreement have been duly authorized by all necessary action on the part of such Purchaser. This Agreement has been duly executed by such Purchaser and, when delivered by such Purchaser in accordance with terms hereof, will constitutes the valid and legally binding obligation of such Purchaser, enforceable against it in accordance with its terms.

4.2Purchaser Status. At the time such Purchaser was offered the Securities, it was, and at the date hereof is, an “accredited investor” as defined in Rule 501(a) under the 1933 Act. Such Purchaser is not a broker-dealer, or required to be registered as a broker-dealer, under Section 15 of the 1934 Act.

4.3Experience of such Purchaser. Such Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.

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4.4General Solicitation. Such Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.

4.5No Public Sale or Distribution; Investment Intent. Such Purchaser is acquiring the Securities in the ordinary course of business for its own account for investment purposes only and not with a view towards, or for resale in connection with, the public sale or distribution thereof, and such Purchaser does not have a present intention nor a present arrangement to effect any distribution of the Securities to or through any person or entity; provided, however, that by making the representations herein, such Purchaser does not agree to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to an effective registration statement or an exemption under the 1933 Act.

4.6Information on the Company. Each Purchaser has been furnished with or has had access to the Disclosure Materials. In addition, the Purchaser has received in writing from the Borrowers such other information concerning its operations, financial condition and other matters as the Purchaser has requested in writing and considered all factors the Purchaser deems material in deciding on the advisability of investing in the Securities.

4.7Placement Agent’s Fees. The Borrowers have not incurred and will not incur, directly or indirectly, as a result of any action taken by such Purchaser, any liability for brokerage or finders’ fees or agents’ commissions or any similar charges in connection with this Agreement.

5.COVENANTS AND AGREEMENTS.

5.1Transfer Restrictions.

(a)The Purchasers covenant that the Securities may only be disposed of pursuant to an effective registration statement under the 1933 Act or pursuant to an available exemption from the registration requirements of the 1933 Act, and in compliance with any applicable state securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or to the Company or pursuant to Rule 144(k), the Company may require the transferor to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the 1933 Act. Notwithstanding the foregoing, the Company hereby consents to and agrees to register on the books of the Company and with its Transfer Agent, without any such legal opinion, any transfer of Securities by a Purchaser to an Affiliate of such Purchaser, provided that the transferee certifies to the Company that it is an “accredited investor” as defined in Rule 501(a) promulgated under the 1933 Act.

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(b)The Purchasers agree to the imprinting, except as otherwise permitted by Section 5.1(c), the following legend on any certificate evidencing Securities:

NEITHER THESE SECURITIES [NOR THE SECURITIES ISSUABLE UPON [EXERCISE][CONVERSION] HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES OR BLUE SKY LAWS. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON [EXERCISE][CONVERSION] HEREOF MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. THE COMPANY MAY REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY PROPOSED OFFER, SALE, TRANSFER OR OTHER DISPOSITION IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

(c)Certificates evidencing Securities shall not be required to contain the legend set forth in Section 5.1(b) or any other legend (i) while a registration statement covering the resale of such Securities is effective under the 1933 Act, or (ii) following any sale of such Securities pursuant to Rule 144, or (iii) if such Securities are eligible for sale under Rule 144(k), or (iv) if such legend is not required under applicable requirements of the 1933 Act (including judicial interpretations and pronouncements issued by the Staff of the SEC). The Company shall cause its counsel to issue the legal opinion included in the Transfer Agent Instructions to the Company’s Transfer Agent on the Effective Date. Following the Effective Date or at such earlier time as a legend is no longer required for certain Securities, the Company will, no later than three Trading Days following the delivery by a Purchaser to the Company or the Company’s transfer agent of a legended certificate representing such Securities, deliver or cause to be delivered to such Purchaser a certificate representing such Securities that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to any transfer agent of the Company that enlarge the restrictions on transfer set forth in Section 5.1(b). For so long as any Purchaser owns Securities, the Company will not effect or publicly announce its intention to effect any exchange, recapitalization or other transaction that effectively requires or rewards physical delivery of certificates evidencing the Common Stock.

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(d)The Company acknowledges and agrees that a Purchaser may from time to time pledge or grant a security interest in some or all of the Securities in connection with a bona fide margin agreement or other loan or financing arrangement secured by the Securities and, if required under the terms of such agreement, loan or arrangement, such Purchaser may transfer possession of such pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer of possession would not be subject to approval of the Company and no legal opinion of the pledgee, secured party or pledgor shall be required in connection therewith but such legal opinion may be required in connection with a subsequent transfer following default by the Purchaser of the pledge. Further, no notice shall be required of such pledge. At the appropriate Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of possession of the Securities, including the preparation and filing of any required prospectus supplement under Rule 424(b)(3) of the 1933 Act or other applicable provision of the 1933 Act to appropriately amend the list of selling stockholders thereunder. Except as otherwise provided in Section 5.1(c), any securities subject to a pledge or security interest as contemplated by this Section 5.1(d) shall continue to contain the legend set forth in Section 5.1(b) and be subject to the restrictions or transfer set forth in Section 5.1(a).

(e)In addition to any other rights available to a Purchaser, if the Company fails to deliver to such Purchaser a certificate representing Common Stock by the third Trading Day after the date on which delivery of such certificate is required by any Transaction Document, and if after such third Trading Day such Purchaser purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Purchaser of the shares that the Purchaser anticipated receiving from the Company (a “Buy-In”), then, in the Purchaser’s sole discretion, the Company shall, within three Trading Days after such Purchaser’s request either (i) pay cash to such Purchaser in an amount equal to such Purchaser’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to such Purchaser a certificate or certificates representing such Common Stock and pay cash to such Purchaser in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Price on the date of the event giving rise to the Company’s obligation to deliver such certificate.

5.2Furnishing of Information. As long as any Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the 1934 Act, except in the case of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2007 which shall be filed on or before November 16, 2007 in accordance with Section 5.8. As long as any Purchaser owns Securities, if the Company is not required to file reports pursuant to such laws, it will prepare and furnish to the Purchasers and make publicly available in accordance with paragraph (c) of Rule 144 such information as is required for the Purchasers to sell the Securities under Rule 144. The Company further covenants that it will take such further action as any holder of Securities may reasonably request to satisfy the provisions of Rule 144 applicable to the issuer of securities relating to transactions for the sale of securities pursuant to Rule 144.

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5.3Integration. The Company shall not, and shall use its best efforts to ensure that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the 1933 Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the 1933 Act of the sale of the Securities to the Purchasers, or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market.

5.4Reservation and Listing of Securities.

(a)The Company shall maintain a reserve from its duly authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount as may be required to fulfill its obligations in full under the Transaction Documents.

(b)The Company shall (i) in the time and manner required by each Trading Market, prepare and file with such Trading Market an additional shares listing application covering all of the shares of Common Stock issued or issuable under the Transaction Documents, (ii) take all steps necessary to cause such shares of Common Stock to be approved for listing on each Trading Market as soon as possible thereafter, (iii) provide to the Purchasers evidence of such listing, and (iv) maintain the listing of such Common Stock on each such Trading Market.

(c)In the case of a breach by the Company of Section 5.4(a), in addition to the other remedies available to the Purchasers, the Purchasers shall have the right to require the Company to either: (i) use its best efforts to obtain the required shareholder approval necessary to permit the issuance of such shares of Common Stock as soon as is possible, but in any event not later than the 60th day after such notice, or (ii) within five Trading Days after delivery of a written notice, pay cash to such Purchaser, an amount equal to the number of shares of Common Stock not issuable by the Company times 115% of the average Closing Price over the five Trading Days immediately prior to the date of such notice or, if greater, the five Trading Days immediately prior to the date of payment (the “Cash Amount”) which cash amount shall be in satisfaction of the Company’s obligation to deliver such shares. If the exercising or converting Purchaser elects the first option under the preceding sentence and the Company fails to obtain the required shareholder approval on or prior to the 60th day after such notice, then within three Trading Days after such 60th day, the Company shall pay the Cash Amount to such Purchaser, as liquidated damages and not as penalty.

5.5Securities Laws Disclosure; Publicity. On or before the fourth Trading Day following the execution of this Agreement, the Company shall file a Current Report on Form 8-K with the SEC (the “8-K Filing”) describing the material terms of the Transaction Documents and including as exhibits to such Current Report on Form 8-K this Agreement, the form of the STAR Notes, the form of the Convertible Notes, and the form of Warrants, in the form required by the 1934 Act, and no later than the fourth Trading Day following the Closing Date the Company shall file an additional Current Report on Form 8-K to disclose the Closing. Thereafter, the Company shall timely file any filings and notices required by the SEC or applicable law with respect to the transactions contemplated hereby and, if any disclosure therein differs materially from that which is contained in the 8-K Filing, provide copies thereof to the Purchasers promptly after filing. The Borrowers and the Purchasers shall consult with each other in issuing any press releases or otherwise making public statements or filings and other communications with the SEC or any regulatory agency or Trading Market with respect to the transactions contemplated hereby, and no party shall issue any such press release or otherwise make any such public statement, filing or other communication without the prior consent of the other, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement, filing or other communication. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the SEC (other than the Registration Statement and any exhibits to filings made in respect of this transaction in accordance with periodic filing requirements under the 1934 Act) or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure.

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5.6Information Statement.

(a)The Company shall, as soon as practicable, but no later than November 21, 2007, file with the SEC an Information Statement on Schedule 14C (the “Information Statement”), which has been previously reviewed by the Purchasers and a counsel of their choice, setting forth information regarding the written majority consent in lieu of a meeting of the holders of the majority of the Company’s capital stock entitled to vote approving the Company’s issuance of all of the Securities as described in this Agreement in accordance with applicable law and the rules and regulations of the Trading Market (the “Shareholder Approval”), including the exchange of the STAR Notes for (i) Initial Convertible Notes in principal amount equal to the principal and accrued and unpaid interest on the STAR Notes and (ii) Warrants to purchase the Warrant Shares.

As soon as practicable thereafter, but no earlier than January 18, 2008 and no later than February 28, 2008, the Company shall provide each stockholder of the Company the Information Statement in accordance with applicable law and the rules and regulations of the American Stock Exchange; provided, however, that in the event of a review by the SEC of the Information Statement which shall not be concluded by February 15, 2008, the Company shall provide each stockholder of the Company the Information Statement in accordance with applicable law and the rules and regulations of the American Stock Exchange within ten (10) business days of clearing comments received from the SEC. The Company shall use its reasonable best efforts to address any SEC comments on the Information Statement and to mail the Information Statement as soon as practicable.

(b)Notwithstanding anything to the contrary in Section 5.6(a), in the event that, under applicable law and the rules and regulations of the American Stock Exchange, the stockholders of the Company are unable to act by written consent, the Company shall, as soon as practicable, but no earlier than January 18, 2008 and no later than January 31, 2008, provide each stockholder entitled to vote at a special or annual meeting of stockholders of the Company (the “Stockholder Meeting”), which initially shall be promptly called and held not later than February 28, 2008 (the “Stockholder Meeting Deadline”), a proxy statement, soliciting each such stockholder’s affirmative vote at the Stockholder Meeting for approval of the resolutions set forth in the Shareholder Approval, and the Company shall solicit its stockholders’ approval of such resolutions and cause its Board of Directors to recommend to the stockholders that they approve such resolutions. The Company shall be obligated to seek to obtain the Shareholder Approval by the Stockholder Meeting Deadline. If, despite the Company’s reasonable best efforts, the Shareholder Approval is not obtained on or prior to the Stockholder Meeting Deadline, the Company shall cause an additional Stockholder Meeting to be held every three (3) months thereafter until such Shareholder Approval is obtained

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5.7Form D; Blue Sky. The Company shall file a Form D with respect to the Securities as required under Regulation D and provide a copy thereof to each Purchaser promptly after such filing. The Company shall, on or before each of the Closing Dates, take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities for sale to the Purchasers at each of the Closings pursuant to this Agreement under applicable securities or “Blue Sky” laws of the states of United States, and shall provide evidence of any such action so taken to the Purchasers on or prior to the Closing Dates. The Company shall make all filings and reports relating to the offer and sale of the Securities required under applicable securities or “Blue Sky” laws of the states of the United States following each of the Closing Dates.

5.8Form 10-K; Trading of Common Stock. As soon as practicable after the Closing, the Company shall promptly file with the SEC its Annual Report on Form 10-K for the year ended June 30, 2007, but in no event no later than by November 16, 2007, and thereafter, shall take all steps necessary to cause Common Stock to be listed for trading on the Trading Marked and the trading of the Common Stock on the Trading Market to resume without any further suspension (except for any suspensions of trading of not more than one Trading Day solely to permit dissemination of material information regarding the Company).

5.9MFN Provision. With the exception of the Excluded Stock, if any of the Borrowers or any of their Subsidiaries offers to issue or issues to any Person any security of such Borrower or any Subsidiary, then such Borrower shall offer to each Purchaser the right to exchange all or a portion of the STAR Notes or Convertible Notes then held by such Purchaser valued at the then outstanding principal amount, plus accrued and unpaid interest, of such STAR Notes or Convertible Notes for such security. Such offer shall be made at the same time and in the same manner as if such offer is being made to any other potential purchaser of such security. Each Purchaser shall have five (5) Trading Days to review the offer and determine whether it wants to exchange all or any portion of the STAR Notes or Convertible Notes.

5.10General Indemnity.

(a)The Borrowers, jointly and severally, agree to indemnify and hold harmless the Purchasers (and their respective directors, officers, affiliates, agents, successors and assigns) from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Purchasers as a result of any inaccuracy in, or breach of, the representations, warranties or covenants made by the Company herein or arising out of relating to any one or more of the following: (i) any presence of any Hazardous Material in, on, above or under the Borrowers real property located in Yaphank, New York; (ii) any past, present or threatened release of Hazardous Material in, on, above, under or from the Property; (iii) any activity by any Borrowers, any of their Affiliates or other users of the Property or any other Person in connection with any actual, proposed or threatened use, treatment, storage, holding, existence, disposition or other release, generation, production, manufacturing, processing, refining, control, management, abatement, removal, handling, transfer or transportation to or from the Property of any Hazardous Material at any time located in, under, on or above the Property; (iv) any activity by any Borrower, any of their Affiliate or other users of the Property in connection with any actual or proposed remediation of any Hazardous Materials at any time located in, under, on or above the Property; (v) any past, present or threatened violations of any Environmental Laws (or permits issued pursuant to any Environmental Law) in connection with the Property or operations thereon; (vi) any personal injury, wrongful death, or property damage caused by Hazardous Material arising under any statutory or common law or tort law theory.

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(b)Each Purchaser, severally but not jointly, agrees to indemnify and hold harmless the Borrowers and their directors, officers, affiliates, agents, successors and assigns from and against any and all losses, liabilities, deficiencies, costs, damages and expenses (including, without limitation, reasonable attorneys’ fees, charges and disbursements) incurred by the Borrowers as a result of any inaccuracy in or breach of the representations, warranties or covenants made by such Purchaser herein. The maximum aggregate liability of each Purchaser pursuant to its indemnification obligations under this Section 5.10 shall not exceed the portion of the Purchase Price paid by such Purchaser hereunder.

5.11No Conflicting Agreements. The Company will not, without obtaining prior approval from the Required Holders, take any action, enter into any agreement or make any commitment that would conflict or interfere in any material respect with the obligations to the Purchasers under the Agreements.

5.12Compliance with Laws. So long as the Purchasers beneficially own any Securities, the Company will use reasonable efforts to comply with all applicable laws, rules, regulations, orders and decrees of all governmental authorities, except to the extent non-compliance (in one instance or in the aggregate) would not have a Material Adverse Effect.

5.13Corporate Existence. So long as any Securities remain outstanding, each of the Borrowers shall maintain its corporate existence, except in the event of a merger, consolidation or sale of all or substantially all of such Borrower’s assets so long as the surviving or successor entity in such transaction (a) assumes such Borrower’s obligations hereunder and under the agreements and instruments entered into in connection herewith; (b) has no legal, contractual or other restrictions on its ability to perform the obligations of the Borrowers hereunder and under the agreements and instruments entered into in connection herewith; and (c)(i) in the case of the Company, is a publicly traded corporation whose common stock and the shares of capital stock issuable upon conversion and exercise of the Convertible Notes and Warrants are (or would be upon issuance thereof) listed for trading on an Eligible Market (other than the NASD Over-the-Counter Bulletin Board) or (ii) if not such a publicly traded corporation, then the buyer agrees that it will, at the election of the Purchasers, purchase such Purchasers’ Securities at a price equal to the greater of (A) 120% of the Purchase Price of such Securities or (B) the fair market value of such Securities on an as-converted and as-exercised basis based on the closing price immediately preceding such transaction or the redemption date, whichever is greater.

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5.14Use of Proceeds. The Borrowers shall use the proceeds from the sale of the STAR Notes and the Sutaria Note for general working capital purposes, and not for the purposes of redeeming any capital stock or other securities of any Borrower.

5.15Variable Price Security. So long as any of the Convertible Notes or the Warrants remain outstanding, neither the Company nor any of its Subsidiaries shall, without the prior written consent of the Purchaser, contract for any equity financing (including any debt financing with an equity component) or issue any equity securities of the Company or any Subsidiary or securities convertible or exchangeable into or for equity securities of the Company or any Subsidiary (including debt securities with an equity component) which, in any case (i) are convertible into or exchangeable for an indeterminate number of shares of common stock, (ii) are convertible into or exchangeable for Common Stock at a price which varies with the market price of the Common Stock, (iii) directly or indirectly provide for any “re-set” or adjustment of the purchase price, conversion rate or exercise price after the issuance of the security, or (iv) contain any “make-whole” provision based upon, directly or indirectly, the market price of the Common Stock after the issuance of the security, in each case, other than reasonable and customary anti-dilution adjustments for issuance of shares of Common Stock at a price which is below the market price of the Common Stock.

5.16Default Interest. If the Company fails to make any cash payment required by any Transaction Document in full when due then the Company shall pay interest thereon at a rate of 18% per annum (or such lesser maximum rate that is permitted to be paid under applicable law) from the date such payment was due until such amount, plus all such interest, is paid in full.

5.17Indebtedness; Liens. For so long as any obligations under the STAR Notes or the Convertible Notes are outstanding, the Borrowers will not, and will not permit any of their Subsidiaries to, without the written consent of the Required Holders, directly or indirectly, incur, create, assume or permit to exist any Indebtedness that is senior to or pari passu with the STAR Notes or the Convertible Notes in right of payment, other than pursuant to the Senior Credit Agreement. For so long as any obligations under the STAR Notes or the Convertible Notes are outstanding, the Borrowers will not, and will not permit any of their Subsidiaries to, without the written consent of the Required Holders, directly or indirectly, create, incur, assume or suffer to exist any Liens whatsoever on any of its assets or properties, except (i) Liens in favor of the Purchasers and the Collateral Agent created by the Security Documents; (ii) “Permitted Liens” as defined in the Senior Credit Agreement, as in existence as of the date hereof, and (iii) Liens securing the obligations of the Borrowers under the Sutaria Note, provided, that the obligations under the Sutaria Note and the Liens securing such obligations are, and shall be at all times be, subordinate to the obligations under the Convertible Notes and the Liens in favor of the Purchasers and the Collateral Agent.

5.18Covenants in Senior Credit Agreement. The Covenants made by the Borrowers in Section 6.2 of the Senior Credit Agreement (as amended from time to time thereunder), are hereby incorporated by reference herein and shall be deemed to have been made by the Borrowers to the Purchasers on and as of the date hereof; provided, however, in the event of any conflict or inconsistency between the provisions of the Senior Credit Agreement so incorporated herein and the provisions hereof, the provision of this Agreement shall control. The Borrowers shall promptly provide the Purchasers with copies of any amendment to the Senior Credit Agreement or any other agreement or instrument entered into in connection with the Senior Credit Agreement.

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5.19Dividends; Interest; Redemptions. None of the Borrowers will declare or pay any dividends (other than dividends payable solely in the stock of the Company) on any class of its capital stock, or make any payment on account of the purchase, redemption or other retirement on any of its capital stock or any securities (other than the Convertible Notes and Warrants) convertible into its capital stock; except, the Company may declare or pay regularly scheduled dividends on its Series A-1 Convertible Cumulative Preferred Stock, Series B-1 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock (and following the exchange of the Series B-1 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock for shares of Series D-1 Convertible Preferred Stock in accordance with that certain Consent and Waiver Agreement, dated the date hereof, relating to the Preferred Stock Consent, the Series D-1 Convertible Preferred Stock) provided that no default or event of default exists under this Agreement or any of the other Transaction Documents. None of the Borrowers shall pre-pay or redeem any of its Indebtedness which is junior or subordinate to the STAR Notes and the Convertible Notes; except, the Borrowers may pay regularly scheduled interest payments on such junior Indebtedness provided that no default or event of default exists under this Agreement or any of the other Transaction Documents and provided such payments are not prohibited by the Senior Credit Agreement or any agreement entered into in connection with the Senior Credit Agreement.

5.20[Intentionally Blank]

5.21“Piggy-Back” Registration Rights. The Company shall notify all of the Purchasers in writing at least fifteen (15) Trading Days prior to the filing of any registration statement under the 1933 Act (other than a registration statement on a Form S-8 or, with respect to exchange offering of debt, on a Form S-4) for purposes of a public offering of securities of the Company and will afford each Purchaser an opportunity to include in such registration statement all or part of such shares of Common Stock issuable or issued upon the conversion of the Convertible Notes or the exercise of Warrants (but excluding any such shares which can by sold, without any volume limitation, to the public pursuant to Rule 144 promulgated under the 1933 Act) (the “Registrable Securities”). Each Purchaser desiring to include in any such registration statement all or any part of the Registrable Securities shall within ten (10) Trading Days after the above-described notice from the Company, so notify the Company in writing. Upon written request of each Purchaser, the Company shall use commercially reasonable efforts to cause to be registered under the 1933 Act all of the Registrable Securities that each such Purchaser has requested to be registered. Notwithstanding any other provision of this Section 5.21, if the managing underwriter advises the Company in writing that marketing factors require a limitation of the number of shares to be underwritten, the managing underwriter may allocate the shares to be included in such registration, first, to the Company and any investors exercising demand registration rights; second, to the Purchaser and any other investors exercising “piggy-back” registration rights on a pro rata basis based on the total number of shares held by the Purchaser and such investors; and third, to any other stockholder of the Company on a pro rata basis.

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6.CONDITIONS.

6.1Conditions Precedent to the Obligations of the Purchasers. The obligation of each Purchaser to acquire the STAR Notes at the Closing is subject to the satisfaction or waiver by such Purchaser, at or before the Closing, of each of the following conditions:

(i)Representations and Warranties. The representations and warranties of the Borrowers contained herein shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made on and as of such date;

(ii)Performance. Each of the Borrowers shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by it at or prior to the Closing;

(iii)No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by the Transaction Documents;

(iv)Adverse Changes. Since the date of execution of this Agreement, no event or series of events shall have occurred that reasonably would reasonably be expected to have or result in a Material Adverse Effect;

(v)Officers’ Certificate. Such Purchaser shall have received a certificate, executed by the Chief Executive Officer and the Chief Financial Officer of the Company, dated as of the Closing Date, as to the effect (A) set forth in clauses (i), (ii) and (iv) of this Section 6.1; and (B) that each of the Borrowers will be, and the Borrowers and its Subsidiaries, on a consolidated basis, will be, solvent (as determined in accordance with Section 3.24) upon the consummation of the transactions contemplated herein and in the other Transaction Documents;

(vi)Opinion Letters. Such Purchaser shall have received the opinion of counsel to the Borrowers and of counsel to the Sutaria Parties dated as of the Closing Date, in form, scope and substance reasonably satisfactory to such Purchaser;

(vii)Transaction Documents. Each of the Borrowers shall have executed each of the Transaction Documents to which it is a party and shall have delivered the same to such Purchaser;

(viii)Securities. The Company shall have executed and delivered to such Purchaser the STAR Notes being purchased by such Purchaser at the Closing;

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(ix)Transfer Agent Instructions. The Transfer Agent Instructions shall have been delivered to and acknowledged in writing by the Company’s transfer agent;

(x)Secretary’s Certificate. Each of the Borrowers shall have delivered to such Purchaser a secretary’s certificate dated as of the Closing Date, as to (A) the certificate or articles of incorporation of such Borrower; (B) the bylaws of such Borrower; and (C) duly adopted resolutions of the Board of Directors of such Borrower relating to the Transaction Documents and the transactions contemplated therein;

(xi)Senior Credit Facility Waiver and Consent. Such Purchaser shall have received evidence, in form and substance reasonably satisfactory to such Purchaser, that the lenders under the Senior Credit Agreement have (A) waived any existing default under the Senior Credit Agreement; and (B) consented to the entry and consummation of the transactions contemplated by this Agreement and the other Transaction Documents, including, without limitation, the issuance of the STAR Notes, the Convertible Notes and the granting of the security interest by the Borrowers pursuant to the Security Documents (the “Senior Credit Facility Consent”;

(xii)Preferred Stock Waiver and Consent. Such Purchaser shall have received evidence, in form and substance reasonably satisfactory to such Purchaser, that all of the holders of each of the Series A-1 Convertible Cumulative Preferred Stock, Series B-1 Convertible Preferred Stock and Series C-1 Convertible Preferred Stock have (A) waived any existing default under the terms of any such preferred stock or any other document, agreement or instrument relating thereto; and (B) consented to the entry and consummation of the transactions contemplated by this Agreement and the other Transaction Documents, including, without limitation, the exchange of the STAR Notes for the Initial Convertible Notes and the Warrants and the issuance of additional Convertible Notes (the “Preferred Stock Consents”);

(xiii)Sutaria Parties. The Sutaria Parties shall have provided the Borrowers with additional debt financing in an amount not less than $3,000,000 pursuant to the Sutaria Note, which Sutaria Note shall be subordinate to the STAR Notes and the Convertible Notes, upon terms reasonably satisfactory to the Purchasers and their counsel; and

(xiv)Other Documents. The Borrowers shall have delivered, or caused to have delivered, any other documents reasonably requested by a Purchaser or counsel to a Purchaser in connection with the Closing.

6.2Conditions Precedent to the Obligations of the Borrowers. The obligation of the Borrowers to sell Securities at the Closing is subject to the satisfaction or waiver by the Borrowers, at or before the Closing, of each of the following conditions:

(a)Representations and Warranties. The representations and warranties of the Purchasers contained herein shall be true and correct in all material respects as of the date when made and as of the Closing Date as though made on and as of such date;

(b)Performance. The Purchasers shall have performed, satisfied and complied in all material respects with all covenants, agreements and conditions required by the Transaction Documents to be performed, satisfied or complied with by the Purchasers at or prior to the Closing; and

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(c)No Injunction. No statute, rule, regulation, executive order, decree, ruling or injunction shall have been enacted, entered, promulgated or endorsed by any court or governmental authority of competent jurisdiction that prohibits the consummation of any of the transactions contemplated by the Transaction Documents.

7.MISCELLANEOUS.

7.1Termination. This Agreement may be terminated by the Borrowers or any Purchaser, by written notice to the other parties, if the Closing has not been consummated by the third Business Day following the date of this Agreement; provided that no such termination will affect the right of any party to sue for any breach by the other party (or parties).

7.2Fees and Expenses. At the Closing, the Borrowers shall pay to (i) Aisling Capital II, L.P. and Tullis-Dickerson Capital Focus III, L.P. an aggregate of up to $130,000 for their legal fees and expenses incurred in connection with the preparation and negotiation of the Transaction Documents and (ii) the Sutaria Parties an aggregate of $50,000 for their legal fees and expenses incurred in connection with the preparation and negotiation of the Transaction Documents and the Sutaria Note. Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Borrowers shall pay all transfer agent fees, stamp taxes and other taxes and duties levied in connection with the issuance of any Securities.

7.3Entire Agreement. The Transaction Documents, together with the Exhibits and Schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules. At or after the Closing, and without further consideration, the Borrowers will execute and deliver to the Purchasers such further documents as may be reasonably requested in order to give practical effect to the intention of the parties under the Transaction Documents.

7.4Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the date of transmission, if such notice or communication is delivered via facsimile or e-mail at the facsimile number or e-mail address specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (b) the Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Agreement later than 6:30 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City time) on such date, (c) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as follows:

If to the Borrowers:	Interpharm Holdings Inc. 75 Adams Avenue Hauppauge, NY 11788 Attn: Chief Operating Officer Fax No.: 631-952-9587 Tel No.: 631-952-0214 E-Mail: pgiallorenzo@interphaminc.com
With a copy to:	Guzov Ofsink, LLC 600 Madison Avenue, 14th Floor New York, NY 10022 Attn: Darren L. Ofsink, Esq. Fax No.: 212-688-7273 Tel No.: 212-371-8008 E-Mail: dofsink@golawintl.com
If to the Purchasers	To the address set forth under such Purchaser’s name on the signature pages attached hereto.

or such other address as may be designated in writing hereafter, in the same manner, by such Person.

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7.5Amendments; Waivers. No provision of this Agreement may be waived or amended except in a written instrument signed by the Borrowers and the Required Holders. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right.

7.6Construction. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

7.7Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Borrowers may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchasers. Any Purchaser may assign its rights under this Agreement to any Person to whom such Purchaser assigns or transfers any Securities, provided such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions hereof that apply to the “Purchasers”. Notwithstanding anything to the contrary herein, the Securities may be pledged to any Person in connection with a bona fide margin account or other loan or financing arrangement secured by such Securities.

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7.8No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except that each Indemnitee is an intended third-party beneficiary of Section 5.10 and may enforce the provisions of such Section directly against the Company.

7.9Governing Law; Venue; Waiver Of Jury Trail. THE CORPORATE LAWS OF THE STATE OF DELAWARE SHALL GOVERN ALL ISSUES CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS STOCKHOLDERS. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. EACH OF THE BORROWERS HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

7.10Survival. The representations, warranties, agreements and covenants contained herein shall survive the Closing and the delivery, conversion and/or exercise of the Securities, as applicable.

7.11Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile signature page were an original thereof.

7.12Severability. If any provision of this Agreement is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement.

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7.13Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) the Transaction Documents, whenever the Collateral Agent or the Required Holders exercise a right, election, demand or option under a Transaction Document and the Borrowers do not timely perform its related obligations within the periods therein provided, then such Collateral Agent or the Required Holders may rescind or withdraw, in their sole discretion from time to time upon written notice to the Borrowers, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.

7.14Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Borrowers shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Borrowers of such loss, theft or destruction and customary and reasonable indemnity, if requested. The applicants for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs associated with the issuance of such replacement Securities.

7.15Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, each of the Purchasers and the Borrowers will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations described in the foregoing sentence and hereby agrees to waive in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.

7.16Payment Set Aside. To the extent that any Borrower makes a payment or payments to any Purchaser pursuant to any Transaction Document or a Purchaser enforces or exercises its rights hereunder or thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to a Borrower, a trustee, receiver or any other person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

7.17Usury. To the extent it may lawfully do so, each of the Borrowers hereby agrees not to insist upon or plead or in any manner whatsoever claim, and will resist any and all efforts to be compelled to take the benefit or advantage of, usury laws wherever enacted, now or at any time hereafter in force, in connection with any claim, action or proceeding that may be brought by any Purchaser in order to enforce any right or remedy under any Transaction Document. Notwithstanding any provision to the contrary contained in any Transaction Document, it is expressly agreed and provided that the total liability of the Borrowers under the Transaction Documents for payments in the nature of interest shall not exceed the maximum lawful rate authorized under applicable law (the “Maximum Rate”), and, without limiting the foregoing, in no event shall any rate of interest or default interest, or both of them, when aggregated with any other sums in the nature of interest that any Borrower may be obligated to pay under the Transaction Documents exceed such Maximum Rate. It is agreed that if the maximum contract rate of interest allowed by law and applicable to the Transaction Documents is increased or decreased by statute or any official governmental action subsequent to the date hereof, the new maximum contract rate of interest allowed by law will be the Maximum Rate of interest applicable to the Transaction Documents from the effective date forward, unless such application is precluded by applicable law. If under any circumstances whatsoever, interest in excess of the Maximum Rate is paid by the Borrowers to any Purchaser with respect to indebtedness evidenced by the Transaction Documents, such excess shall be applied by such Purchaser to the unpaid principal balance of any such indebtedness or be refunded to the Borrowers, the manner of handling such excess to be at such Purchaser’s election.

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7.18Adjustments in Share Numbers and Prices. In the event of any stock split, subdivision, dividend or distribution payable in shares of Common Stock (or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly shares of Common Stock), combination or other similar recapitalization or event occurring after the date hereof, each reference in any Transaction Document to a number of shares or a price per share shall be amended to appropriately account for such event.

[Signature Pages Follow]

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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

INTERPHARM HOLDINGS INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo
	Title: CFO

INTERPHARM, INC.
By:	/s/ Peter Giallorenzo
	Name: Peter Giallorenzo
	Title: CFO

[Signature Page for Purchasers Follows]

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AISLING CAPITAL II, L.P.
By: AISLING CAPITAL PARTNERS, L.P., its general partner
By: AISLING CAPITAL PARTNERS, LLC, its general partner
By:	/s/ Dennis Purcell
	Name: Dennis Purcell
	Title: SMD

Address for Notice:

888 Seventh Avenue, 30^th Floor

New York, New York 10106

Facsimile No.: (212) 651-6379

Telephone No.: (212) 651-6394

E-Mail: dschiff@aislingcapital.com

Attn: Andrew Schiff

With a copy to:

Feldman Weinstein & Smith LLP

420 Lexington Avenue, Suite 2620

New York, New York 10170

Facsimile No.: (212) 997-4242

Telephone No.: (212) 869-7000

E-Mail: jsmith@feldmanweinstein.com

Attn: Joseph A. Smith

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TULLIS-DICKERSON CAPITAL FOCUS III, L.P.
By: Tullis-Dickerson Partners III, L.L.C.., its general partner
By:	/s/ Joan P. Neuscheler
	Name: Joan P. Neuscheler
	Title: Principal

Address for Notice:

Two Greenwich Plaza, 4^th Floor

Greenwich, CT 06830

Facsimile No.: (203) 629-9293

Telephone No.: (203) 629-8700

E-Mail: jneuscheler@tullisdickerson.com

Attn: Joan P. Neuscheler

With a copy to:

Law offices of Gloria M. Skigen

Two Greenwich Plaza, 4^th Floor

Greenwich, CT 06830

Facsimile: (203) 861-2498

Telephone No.: (203) 861-1717

E-Mail: gskigen@tullisdickerson.com

Attn: Gloria M. Skigen

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SUTARIA FAMILY REALTY, LLC
By:	/s/ Maganlal Sutaria
	Name: Maganlal Sutaria
	Title: Managing Member

Address for Notice:

Sutaria Family Realty, LLC

6 Buckingham Court

Morristown, NJ 07960

Facsimile No.: (973) 538-6111

Telephone No.: (973) 895-4870

E-Mail: psutaria@muanj.com

Attn: Perry Sutaria

With a copy to:

Sadis & Goldberg, LLP

551 Fifth Avenue, 21^st Floor

New York, New York 10176

Facsimile No.: (212) 573-8038

Telephone No.: (212) 573-8140

E-Mail: dviola@sglawyers.com

Attn: Daniel G. Viola, Esq.

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By:	/s/ Cameron Reid
	Name: Cameron Reid

Address for Notice:

c/o Interpharm Holdings, Inc.

75 Adams Avenue

Hauppauge, NY 11788

Facsimile No.: (631) 952-9587

Telephone No.: (631) 952-0214

E-Mail: creid@interpharminc.com

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EXHIBITS

Schedule of Purchasers

A.Form of STAR Note

B.Form of Convertible Note

C.Form of Warrant

D. Transfer Agent Instructions

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SCHEDULE OF PURCHASERS

Purchaser	STAR Notes		Warrant Shares
Sutaria Family Realty, LLC	$	2,500,000		921,052
Tullis-Dickerson Capital Focus III, L.P.	$	833,334		307,017
Aisling Capital II, L.P.	$	833,333		307,017
Cameron Reid	$	833,333		307,017
TOTAL	$	5,000,000		1,842,103

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EXHIBIT A

STAR NOTE

(Please refer to Exhibit 4.3 of this Form 10K)

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EXHIBIT B

INITIAL CONVERTIBLE NOTE

(Please refer to Exhibit 4.12)

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EXHIBIT C

FORM OF WARRANT

NEITHER THESE SECURITIES NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT, AND, ACCORDINGLY, MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS. THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES. THE COMPANY MAY REQUIRE AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY PROPOSED OFFER, SALE, TRANSFER OR OTHER DISPOSITION IS IN COMPLIANCE WITH THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.

ANY TRANSFEREE OF THIS WARRANT SHOULD CAREFULLY REVIEW THE TERMS OF THE WARRANT, INCLUDING SECTION 4(b) HEREOF. THE NUMBER OF COMMON SHARES UNDERLYING THIS WARRANT MAY BE LESS THAN THE NUMBER OF COMMON SHARES STATED ON THE FACE HEREOF PURSUANT TO SECTION 4(b) HEREOF.

INTERPHARM HOLDINGS INC.

WARRANT

Warrant No. [ ] Dated: [_________], 2008

INTERPHARM HOLDINGS INC., a Delaware corporation (the “Company”), hereby certifies that, for value received, [______________] or its registered assigns (the “Holder”), is entitled to purchase from the Company up to a total of [     ]¹ shares of common stock, $0.01 par value per share (the “Common Stock”), of the Company (each such share, a “Warrant Share” and all such shares, the “Warrant Shares”) at an exercise price equal to $0.95 per share (as adjusted from time to time as provided in Section 9, the “Exercise Price”), at any time and from time to time from and after the date hereof and through and including the date that is five years from the date of issuance hereof (the “Expiration Date”), and subject to the following terms and conditions. This Warrant (this “Warrant”) is one of a series of similar Warrants issued pursuant to that certain Securities Purchase Agreement, dated as of November ___, 2007, by and among the Company and the Purchasers identified therein (the “Purchase Agreement”). All such Warrants are referred to herein, collectively, as the “Warrants.”

¹ Holder’s pro rata share of 1,842,103.

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8.Definitions. In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Purchase Agreement.

9.Registration of Warrant. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.

10.Registration of Transfers. The Company shall register the transfer of any portion of this Warrant in the Warrant Register, upon surrender of this Warrant, with the Form of Assignment attached hereto on Annex B duly completed and signed, to the Company at its address specified herein. Upon any such registration or transfer, a new warrant to purchase Common Stock, in substantially the form of this Warrant (any such new warrant, a “New Warrant”), evidencing the portion of this Warrant so transferred shall be issued to the transferee and a New Warrant evidencing the remaining portion of this Warrant not so transferred, if any, shall be issued to the transferring Holder. The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the rights and obligations of a holder of a Warrant.

11.Exercise and Duration of Warrants.

11.1This Warrant shall be exercisable by the registered Holder at any time and from time to time on or after the date hereof to and including the Expiration Date. At 6:30 P.M., New York City time on the Expiration Date, the portion of this Warrant not exercised prior thereto shall be and become void and of no value; provided that, if the average of the Closing Prices for the five Trading Days immediately prior to (but not including) the Expiration Date exceeds the Exercise Price on the Expiration Date, then this Warrant shall be deemed to have been exercised in full (to the extent not previously exercised) on a “cashless exercise” basis at 6:30 P.M. New York City time on the Expiration Date if a “cashless exercise” may occur at such time pursuant to Section 10 below.

11.2A Holder may exercise this Warrant by delivering to the Company (i) an exercise notice, in the form attached hereto on Annex A (the “Exercise Notice”), appropriately completed and duly signed, and (ii) payment of the Exercise Price for the number of Warrant Shares as to which this Warrant is being exercised (which may take the form of a “cashless exercise” if so indicated in the Exercise Notice and if a “cashless exercise” may occur at such time pursuant to Section 10 below), and the date such items are delivered to the Company (as determined in accordance with the notice provisions hereof) is an “Exercise Date.” The Holder shall not be required to deliver the original Warrant in order to effect an exercise hereunder. Execution and delivery of the Exercise Notice shall have the same effect as cancellation of the original Warrant and issuance of a New Warrant evidencing the right to purchase the remaining number of Warrant Shares.

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12.Delivery of Warrant Shares.

12.1Upon exercise of this Warrant, the Company shall promptly (but in no event later than five Trading Days after the Exercise Date) issue or cause to be issued and cause to be delivered to or upon the written order of the Holder and in such name or names as the Holder may designate, a certificate for the Warrant Shares issuable upon such exercise, free of restrictive legends unless a registration statement covering the resale of the Warrant Shares and naming the Holder as a selling stockholder thereunder is not then effective and the Warrant Shares are not freely transferable without volume restrictions pursuant to Rule 144 under the 1933 Act. The Holder, or any Person so designated by the Holder to receive Warrant Shares, shall be deemed to have become holder of record of such Warrant Shares as of the Exercise Date. The Company shall, upon request of the Holder and provided a registration statement under the Securities Act providing for the resale of the Warrant Shares is then in effect, use its reasonable best efforts to deliver Warrant Shares hereunder electronically through the Depository Trust Corporation or another established clearing corporation performing similar functions.

12.2This Warrant is exercisable, either in its entirety or, from time to time, for a portion of the number of Warrant Shares. Upon surrender of this Warrant following one or more partial exercises, the Company shall issue or cause to be issued, at its expense, a New Warrant evidencing the right to purchase the remaining number of Warrant Shares.

12.3In addition to any other rights available to a Holder, if the Company fails to deliver to the Holder a certificate representing Warrant Shares by the fifth Trading Day after the date on which delivery of such certificate is required by this Warrant, and if after such fifth Trading Day the Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares that the Holder anticipated receiving from the Company (a “Buy-In”), then the Company shall, within five Trading Days after the Holder’s request and in the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased (the “Buy-In Price”), at which point the Company’s obligation to deliver such certificate (and to issue such Common Stock) shall terminate, or (ii) promptly honor its obligation to deliver to the Holder a certificate or certificates representing such Common Stock and pay cash to the Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (A) such number of shares of Common Stock, times (B) the Closing Price on the date of the event giving rise to the Company’s obligation to deliver such certificate.

12.4The Company’s obligations to issue and deliver Warrant Shares in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of Warrant Shares. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.

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13.Charges, Taxes and Expenses. Issuance and delivery of certificates for shares of Common Stock upon exercise of this Warrant shall be made without charge to the Holder for any issue or transfer tax, withholding tax, transfer agent fee or other incidental tax or expense in respect of the issuance of such certificates, all of which taxes and expenses shall be paid by the Company; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the registration of any certificates for Warrant Shares or Warrants in a name other than that of the Holder or an Affiliate thereof. The Holder shall be responsible for all other tax liability that may arise as a result of holding or transferring this Warrant or receiving Warrant Shares upon exercise hereof.

14.Replacement of Warrant. If this Warrant is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation hereof, or in lieu of and substitution for this Warrant, a New Warrant, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction and customary and reasonable indemnity, if requested. Applicants for a New Warrant under such circumstances shall also comply with such other reasonable regulations and procedures and pay such other reasonable third-party costs as the Company may prescribe.

15.Reservation of Warrant Shares. The Company covenants that it will at all times reserve and keep available out of the aggregate of its authorized but unissued and otherwise unreserved Common Stock, solely for the purpose of enabling it to issue Warrant Shares upon exercise of this Warrant as herein provided, the number of Warrant Shares which are then issuable and deliverable upon the exercise of this entire Warrant, free from preemptive rights or any other contingent purchase rights of persons other than the Holder (taking into account the adjustments and restrictions of Section 9). The Company covenants that all Warrant Shares so issuable and deliverable shall, upon issuance and the payment of the applicable Exercise Price in accordance with the terms hereof, be duly and validly authorized, issued and fully paid and nonassessable. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any securities exchange or automated quotation system upon which the Common Stock may be listed.

16.Certain Adjustments. The Exercise Price and number of Warrant Shares issuable upon exercise of this Warrant are subject to adjustment from time to time as set forth in this Section 9.

16.1Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding, (i) pays a stock dividend on its Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock (other than regular dividends on the Series A-1 Convertible Preferred Stock, Series B-1 Convertible Preferred Stock the Series C-1 Convertible Preferred Stock, or the Series D-1 Convertible Preferred Stock), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, or (iii) combines outstanding shares of Common Stock into a smaller number of shares, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to clause (i) of this paragraph shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution, and any adjustment pursuant to clause (ii) or (iii) of this paragraph shall become effective immediately after the effective date of such subdivision or combination.

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16.2Pro Rata Distributions. If the Company, at any time while this Warrant is outstanding, distributes to all of its holders of Common Stock (i) evidences of its indebtedness, (ii) any security (other than a distribution of Common Stock covered by the preceding paragraph), (iii) rights or warrants to subscribe for or purchase any security, or (iv) any other asset (in each case, “Distributed Property”), then in each such case the Exercise Price in effect immediately prior to the record date fixed for determination of stockholders entitled to receive such distribution shall be adjusted (effective on such record date) to equal the product of such Exercise Price times a fraction of which the denominator shall be the average of the Closing Prices for the five Trading Days immediately prior to (but not including) such record date and of which the numerator shall be such average less the then fair market value of the Distributed Property distributed in respect of one outstanding share of Common Stock, as determined by the a nationally recognized accounting or investment banking firm selected by the Company (an “Appraiser”). In such event, the Holder, after receipt of the determination by the Appraiser, shall have the right to select an additional appraiser (which shall be a nationally recognized accounting or investment banking firm), in which case such fair market value shall be deemed to equal the average of the values determined by each of the Appraiser and such appraiser. As an alternative to the foregoing adjustment to the Exercise Price and number of Warrant Shares obtainable upon exercise of the Warrant determined pursuant to Section 9(e) below, at the request of the Holder delivered before the 90th day after such record date, the Company will deliver to such Holder, within five Trading Days after such request (or, if later, on the effective date of such distribution), the Distributed Property that such Holder would have been entitled to receive in respect of the Warrant Shares for which this Warrant could have been exercised immediately prior to such record date. If such Distributed Property is not delivered to a Holder pursuant to the preceding sentence, then upon expiration of or any exercise of the Warrant that occurs after such record date, such Holder shall remain entitled to receive, in addition to the Warrant Shares otherwise issuable upon such exercise (if applicable), such Distributed Property.

16.3Fundamental Transactions. If at any time while this Warrant is outstanding, (i) the Company effects any merger or consolidation of the Company with or into another Person, (ii) the Company effects any sale of all or substantially all of its assets in one or a series of related transactions, (iii) any tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (iv) the Company effects any reclassification of the Common Stock or any compulsory share exchange, pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (other than as a result of a subdivision or combination of shares of Common Stock covered by Section 9(a) above) (in any such case, a “Fundamental Transaction”), then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the “Alternate Consideration”). The aggregate Exercise Price for this Warrant will not be affected by any such Fundamental Transaction, but the Company shall apportion such aggregate Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. In the event of a Fundamental Transaction, the Company or the successor or purchasing Person, as the case may be, shall execute with the Holder a written agreement providing that:

(A) this Warrant shall thereafter entitle the Holder to purchase the Alternate Consideration in accordance with this Section 9(c),

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(B) in the case of any such successor or purchasing Person, upon such consolidation, merger, statutory exchange, combination, sale or conveyance such successor or purchasing Person shall be jointly and severally liable with the Company for the performance of all of the Company’s obligations under this Warrant and the Purchase Agreement, and

(C) if registration or qualification is required under the 1933 Act, the 1934 Act or applicable state law for the public resale by the Holder of shares of stock and other securities so issuable upon exercise of this Warrant, such registration or qualification shall be completed prior to such reclassification, change, consolidation, merger, statutory exchange, combination or sale.

If, in the case of any Fundamental Transaction, the Alternate Consideration includes shares of stock, other securities, other property or assets of a Person other than the Company or any such successor or purchasing Person, as the case may be, in such Fundamental Transaction, then such written agreement shall also be executed by such other Person and shall contain such additional provisions to protect the interests of the Holder as the Board of Directors of the Company shall reasonably consider necessary by reason of the foregoing. At the Holder’s request, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a new warrant consistent with the foregoing provisions and evidencing the Holder’s right to purchase the Alternate Consideration for the aggregate Exercise Price upon exercise thereof. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such successor or surviving entity to comply with the provisions of this Section 9(c) and insuring that the Warrant (or any such replacement security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. If any Fundamental Transaction constitutes or results in a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the 1934 Act with respect to the Company in which the consideration issued consists principally of cash or stock in a non-public company, then at the request of the Holder delivered before the 90th day after such Fundamental Transaction, the Company (or any such successor or surviving entity) will purchase the Warrant from the Holder for a purchase price, payable in cash within five Trading Days after such request (or, if later, on the effective date of the Fundamental Transaction), equal to the Black-Scholes value of the remaining unexercised portion of this Warrant on the date of such request.

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16.4Antidilution Adjustment of Conversion Price upon Issuance of Common Stock.If at any time this Warrant is outstanding, the Company issues or sells, or in accordance with this Section 9(d) is deemed to have issued or sold, any shares of Common Stock, with the exception of Excluded Stock, for a consideration per share (the “New Securities Issuance Price”) less than the Exercise Price in effect immediately prior to such time (each such sale or issuance, a “Dilutive Issuance”), then concurrent with such Dilutive Issuance, the Exercise Price then in effect shall be reduced to an amount equal to ninety percent (90%) of the New Securities Issuance Price.

For purposes of determining the adjusted Conversion Price under this Section 10(d), the following shall be applicable:

(a)Issuance of Options. If the Company in any manner grants or sells any Options (other than Excluded Stock) and the lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option is less than the Conversion Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the granting or sale of such Option for such price per share. For purposes of this Section 9(d)(i), the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon granting or sale of the Option, upon exercise of the Option and upon conversion, exchange or exercise of any Convertible Security issuable upon exercise of such Option. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon the exercise of such Options or upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities.

(b)Issuance of Convertible Securities. If the Company in any manner issues or sells any Convertible Securities (other than Excluded Stock) and the lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise thereof is less than the Exercise Price in effect immediately prior to such Dilutive Issuance, then such share of Common Stock shall be deemed to be outstanding and to have been issued and sold by the Company at the time of the issuance of sale of such Convertible Securities for such price per share. For the purposes of this Section 9(d)(ii), the “lowest price per share for which one share of Common Stock is issuable upon such conversion, exchange or exercise” shall be equal to the sum of the lowest amounts of consideration (if any) received or receivable by the Company with respect to any one share of Common Stock upon the issuance or sale of the Convertible Security and upon the conversion, exchange or exercise of such Convertible Security. No further adjustment of the Conversion Price shall be made upon the actual issuance of such Common Stock upon conversion, exchange or exercise of such Convertible Securities, and if any such issue or sale of such Convertible Securities is made upon exercise of any Options for which adjustment of the Conversion Price had been or is to be made pursuant to other provisions of this Section 9(d), no further adjustment of the Conversion Price shall be made by reason of such issue or sale.

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(c)Change in Option Price or Rate of Conversion. If the purchase or exercise price provided for in any Options, the additional consideration, if any, payable upon the issue, conversion, exchange or exercise of any Convertible Securities, or the rate at which any Convertible Securities are convertible into or exchangeable or exercisable for Common Stock changes at any time (other than Excluded Stock), the Exercise Price in effect at the time of such change shall be adjusted to the Exercise Price which would have been in effect at such time had such Options or Convertible Securities provided for such changed purchase price, additional consideration or changed conversion rate, as the case may be, at the time initially granted, issued or sold. For purposes of this Section 9(d)(iii), if the terms of any Option or Convertible Security that was outstanding as of the Initial Closing Date are changed in the manner described in the immediately preceding sentence, then such Option or Convertible Security and the Common Stock deemed issuable upon exercise, conversion or exchange thereof shall be deemed to have been issued as of the date of such change. On the expiration of any Option or Convertible Security not exercised, the applicable Exercise Price then in effect shall forthwith be increased to the Exercise Price that would have been in effect at the time of such expiration had such Stock Purchase Rights or Convertible Securities never been issued. No adjustment shall be made if such adjustment would increase the applicable Exercise Price by an amount in excess of the adjustment originally made to the Exercise Price in respect of the issue, sale or grant of the applicable Option or Convertible Security. Notwithstanding anything to the contrary herein, in no event shall an adjustment to the Exercise Price be made retroactively with respect to any portion of the Warrant which has been exercised prior to the actual date of the dilutive issuance or change. In addition, to clarify for purposes of this Section 9(d), if an Option or Convertible Security has a price reset or similar provision that would cause the price to adjust based on a future event or contingency, then the “lowest price per share for which one share of Common Stock is issuable upon the exercise of any such Option or upon conversion, exchange or exercise of any Convertible Securities issuable upon exercise of such Option” shall not become such adjusted price unless and until the happening of such event or contingency that actually gives effect to the adjustment.

(d)Calculation of Consideration Received. In case any Option is issued in connection with the issue or sale of other securities of the Company, together comprising one integrated transaction in which no specific consideration is allocated to such Options by the parties thereto, then solely for purposes of this Section 9(d), the Options will be deemed to have been issued for a consideration equal to the exercise price of such Option. If any Common Stock, Options or Convertible Securities are issued or sold or deemed to have been issued or sold for cash, the consideration received therefor will be deemed to be the gross amount received by the Company therefor. If any Common Stock, Options or Convertible Securities are issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company will be the fair value of such consideration, except where such consideration consists of marketable securities, in which case the amount of consideration received by the Company will be the arithmetic average of the closing price of such securities during the ten (10) consecutive Trading Days ending on the date of receipt of such securities. The fair value of any consideration other than cash or securities will be determined jointly by the Company and Required Holders in good faith. If such parties are unable to reach agreement within ten (10) days after the occurrence of an event requiring valuation (the “Valuation Event”), the fair value of such consideration will be determined within five Business Days after the tenth (10th) day following the Valuation Event by an independent, reputable appraiser selected by the Company and the Required Holders. The determination of such appraiser shall be deemed binding upon all parties absent manifest error and the fees and expenses of such appraiser shall be borne equally by the Company and the Required Holders.

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16.5Number of Warrant Shares. Simultaneously with any adjustment to the Exercise Price pursuant to paragraphs (a), (b) or (d) of this Section, the number of Warrant Shares that may be purchased upon exercise of this Warrant shall be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable hereunder for the increased or decreased number of Warrant Shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment.

16.6Calculations. All calculations under this Section 9 shall be made to the nearest cent or the nearest 1/100th of a share, as applicable. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Company, and the disposition of any such shares shall be considered an issue or sale of Common Stock.

16.7Notice of Adjustments. Upon the occurrence of each adjustment pursuant to this Section 9, the Company at its expense will promptly, but in any event no later than 10 Trading Days after such occurrence compute such adjustment in accordance with the terms of this Warrant and prepare a certificate setting forth such adjustment, including a statement of the adjusted Exercise Price and adjusted number or type of Warrant Shares or other securities issuable upon exercise of this Warrant (as applicable), describing the transactions giving rise to such adjustments and showing in detail the facts upon which such adjustment is based. Upon written request, the Company will promptly deliver a copy of each such certificate to the Holder and to the Company’s Transfer Agent.

16.8Notice of Corporate Events. If the Company (i) declares a dividend or any other distribution of cash, securities or other property in respect of its Common Stock, including without limitation any granting of rights or warrants to subscribe for or purchase any capital stock of the Company or any Subsidiary, (ii) authorizes or approves, enters into any agreement contemplating or solicits stockholder approval for any Fundamental Transaction or (iii) authorizes the voluntary dissolution, liquidation or winding up of the affairs of the Company, then the Company shall deliver to the Holder a notice describing the material terms and conditions of such transaction, at least 20 calendar days prior to the applicable record or effective date on which a Person would need to hold Common Stock in order to participate in or vote with respect to such transaction, and the Company will take all steps reasonably necessary in order to insure that the Holder is given the practical opportunity to exercise this Warrant prior to such time so as to participate in or vote with respect to such transaction; provided, however, that the failure to deliver such notice or any defect therein shall not affect the validity of the corporate action required to be described in such notice.

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17.Payment of Exercise Price. The Holder shall pay the Exercise Price in immediately available funds; provided, however, that if the Registration Statement did not become effective on or before the Required Effectiveness Date (as defined in the Registration Rights Agreement) and is not continuously effective through the Expiration Date, the Holder may satisfy its obligation to pay the Exercise Price through a “cashless exercise,” in which event the Company shall issue to the Holder the number of Warrant Shares determined as follows:

	X = Y [(A-B)/A]
where:
	X = the number of Warrant Shares to be issued to the Holder.
	Y = the number of Warrant Shares with respect to which this Warrant is being exercised.
	A = the arithmetic average of the Closing Prices for the five Trading Days immediately prior to (but not including) the Exercise Date.
	B = the Exercise Price.

For purposes of Rule 144 promulgated under the 1933 Act, it is intended, understood and acknowledged that the Warrant Shares issued in a cashless exercise transaction shall be deemed to have been acquired by the Holder, and the holding period for the Warrant Shares shall be deemed to have commenced, on the date this Warrant was originally issued pursuant to the Purchase Agreement.

18.Intentionally Blank.

19.Fractional Shares. The Company shall not be required to issue or cause to be issued fractional Warrant Shares on the exercise of this Warrant. If any fraction of a Warrant Share would, except for the provisions of this Section, be issuable upon exercise of this Warrant, the number of Warrant Shares to be issued will be rounded up to the nearest whole share.

20.Notices. Any and all notices or other communications or deliveries hereunder (including without limitation any Exercise Notice) shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section prior to 6:30 p.m. (New York City time) on a Trading Day, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number specified in this Section on a day that is not a Trading Day or later than 6:30 p.m. (New York City time) on any Trading Day, (iii) the Trading Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given. The address for such notices or communications shall be as set forth in the Purchase Agreement. The addresses for such communications shall be: (i) if to the Company, as set forth in the Purchase Agreement, or (ii) if to the Holder, to the address or facsimile number appearing on the Company’s Warrant Register or such other address or facsimile number as the Holder may provide to the Company in accordance with this Section 13.

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21.Warrant Agent. The Company shall serve as warrant agent under this Warrant. Upon 30 days’ notice to the Holder, the Company may appoint a new warrant agent. Any corporation into which the Company or any new warrant agent may be merged or any corporation resulting from any consolidation to which the Company or any new warrant agent shall be a party or any corporation to which the Company or any new warrant agent transfers substantially all of its corporate trust or stockholders services business shall be a successor warrant agent under this Warrant without any further act. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed (by first class mail, postage prepaid) to the Holder at the Holder’s last address as shown on the Warrant Register.

22.Miscellaneous.

22.1This Warrant shall be binding on and inure to the benefit of the parties hereto and their respective successors and permitted assigns. The Borrowers shall not be permitted to assign this Note.

22.2The Company will not, by amendment of its governing documents or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holder against impairment. Without limiting the generality of the foregoing, the Company (i) will not increase the par value of any Warrant Shares above the amount payable therefor on such exercise, (ii) will take all such action as may be reasonably necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares on the exercise of this Warrant, and (iii) will not close its stockholder books or records in any manner which unreasonably interferes with the timely exercise of this Warrant.

22.3GOVERNING LAW; VENUE; WAIVER OF JURY TRIAL. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION DOCUMENTS), AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS WARRANT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE COMPANY HEREBY WAIVES ALL RIGHTS TO A TRIAL BY JURY.

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22.4The headings herein are for convenience only, do not constitute a part of this Warrant and shall not be deemed to limit or affect any of the provisions hereof.

22.5In case any one or more of the provisions of this Warrant shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Warrant shall not in any way be affected or impaired thereby and the parties will attempt in good faith to agree upon a valid and enforceable provision which shall be a commercially reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Warrant.

[Signature Page Follows]

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IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized officer as of the date first indicated above.

INTERPHARM HOLDINGS INC.

By: 

Name: __________________________________

Title: ___________________________________

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Annex A

FORM OF EXERCISE NOTICE

(To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant)

To: INTERPHARM HOLDINGS INC.

The undersigned is the Holder of Warrant No. _______ (the “Warrant”) issued by Interpharm Holdings Inc., a Delaware corporation (the “Corporation”). Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant.

(a)The Warrant is currently exercisable to purchase a total of ______________ Warrant Shares.

(b)The undersigned Holder hereby exercises its right to purchase _________________ Warrant Shares pursuant to the Warrant.

(c)The Holder intends that payment of the Exercise Price shall be made as (check one):

____ “Cash Exercise”

____ “Cashless Exercise” (if permitted)

(d)If the holder has elected a Cash Exercise, the holder shall pay the sum of $____________ to the Company in accordance with the terms of the Warrant.

(e)Pursuant to this exercise, the Company shall deliver to the holder _______________ Warrant Shares in accordance with the terms of the Warrant.

Dated: _______________, ______	Name of Holder:
	(Print) _______________________________________
	By:
	Name:_______________________________________
	Title:________________________________________

ACKNOWLEDGEMENT

The Corporation hereby acknowledges this Exercise Notice and hereby directs [transfer agent] to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated November [__], 2007 from the Corporation and acknowledged and agreed to by [transfer agent].

INTERPHARM HOLDINGS INC.

By:

Name: ______________________________________

Title: ______________________________________

Annex B

FORM OF ASSIGNMENT

[To be completed and signed only upon transfer of Warrant]

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ________________________________ the right represented by the within Warrant to purchase ____________ shares of Common Stock of Interpharm Holdings Inc. to which the within Warrant relates and appoints ________________ attorney to transfer said right on the books of Interpharm Holdings Inc. with full power of substitution in the premises.

Dated: _____________, ______
	(Signature must conform in all respects to name of holder as specified on the face of the Warrant)
	Address of Transferee
In the presence of:

EXHIBIT D

TRANSFER AGENT INSTRUCTIONS

Continental Stock Transfer & Trust Company,

17 Battery Place,

New York, NY 10004-1123

Ladies and Gentlemen:

Reference is made to that certain Securities Purchase Agreement, dated as of November 14, 2007 (the “Agreement”), by and among Interpharm Holdings Inc., a Delaware corporation, (the “Company”), Interpharm, Inc., a New York corporation, and the purchasers named therein (the “Holders”) pursuant to which the Company anticipates issuing the Company’s (a)  Secured Convertible 12% Notes due 2009 (the “Convertible Notes”) which shall be convertible into shares of the Company’s common stock, par value $0.01 per share (the “Common Stock”) and (b) warrants, which are exercisable into shares of Common Stock (the “Warrants”).

This letter shall serve as our irrevocable authorization and direction to you (provided that you are the transfer agent of the Company at such time) to issue shares of Common Stock upon conversion of the Convertible Notes (the “Conversion Shares”) and upon exercise of the Warrants (the “Warrant Shares”) to or upon the order of a Holder from time to time upon delivery to you of a properly completed and duly executed Conversion Notice or Exercise Notice, as the case may be, in the form attached hereto as Exhibit I and Exhibit II, which has been acknowledged by the Company as indicated by the signature of a duly authorized officer of the Company thereon.

You acknowledge and agree that so long as you have previously received (a) written confirmation from the Company’s legal counsel that either (i) a registration statement covering resales of the Conversion Shares or the Warrant Shares has been declared effective by the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “1933 Act”), or (ii) sales of the Common Shares and the Warrant Shares may be made in conformity with Rule 144(k) under the 1933 Act (“Rule 144”), and (b) if applicable, a copy of such registration statement, then within three (3) business days after your receipt of a Conversion Notice or an Exercise, you shall issue the certificates representing the Conversion Shares or the Warrant Shares, as the case may be, and such certificates shall not bear any legend restricting transfer of the Conversion Shares or the Warrant Shares thereby and should not be subject to any stop-transfer restriction.

A form of written confirmation (from counsel to the Company) that a registration statement covering resales of the Conversion Shares or the Warrant Shares, as the case may be, has been declared effective by the SEC under the 1933 Act is attached hereto as Exhibit III.

Please be advised that the Holders have relied upon this instruction letter as an inducement to enter into the Agreement and accordingly, each Holder is a third party beneficiary of these instructions. Please execute this letter in the space indicated to acknowledge your agreement to act in accordance with these instructions. Should you have any questions concerning this matter, please contact me at (732) 390-1797.

Very truly yours,
INTERPHARM HOLDINGS INC.
By:	/s/ Kenneth Cappel
	Name: Kenneth Cappel
	Title: Executive Vice President

ACKNOWLEDGED AND AGREED:

Continental Stock Transfer & Trust Company,

17 Battery Place,

New York, NY 10004-1123

By: /s/ Gregory Denman

Name: Gregory Denman

Title: Vice President

Exhibit I

FORM OF CONVERSION NOTICE

(To be executed by the registered Holder

in order to convert a Convertible Notes)

TO:INTERPHARM HOLDINGS INC.

Re: Secured Convertible 12% Note due 2009 (this “Note”) issued by Interpharm Holdings, Inc. and Interpharm, Inc. to [______________] on or about _______ [__], 2008 in the original principal amount of $[______________]

The undersigned hereby elects to convert the aggregate principal amount and interest indicated below of this Note into shares of common stock, par value $0.01 per share (the “Common Stock”), of Interpharm Holdings Inc., a Delaware corporation (the “Corporation”), according to the conditions hereof, as of the date written below.

Date of Conversion:
Aggregate Principal Amount and Interest of Note Being Converted:
Number of Shares of Common Stock to be Issued:
Applicable Conversion Price:
Please issue the Common Stock into which this Note are being converted, in the following name and to the following address:
Issue to:
Authorization:
	By:
	Name: _______________________________
Dated:
Account Number (if electronic book entry transfer):
Transaction Code Number (if electronic book entry transfer):

ACKNOWLEDGEMENT

The Corporation hereby acknowledges this Conversion Notice and hereby directs [transfer agent] to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated November __, 2007 from the Corporation and acknowledged and agreed to by [transfer agent].

INTERPHARM HOLDINGS INC.

By: 

Name: _____________________________________

Title: _____________________________________

Exhibit II

FORM OF EXERCISE NOTICE

(To be executed by the Holder to exercise the right to purchase shares of Common Stock under the foregoing Warrant)

To: INTERPHARM HOLDINGS INC.

The undersigned is the Holder of Warrant No. _______ (the “Warrant”) issued by Interpharm Holdings Inc., a Delaware corporation (the “Corporation”). Capitalized terms used herein and not otherwise defined have the respective meanings set forth in the Warrant.

(a)The Warrant is currently exercisable to purchase a total of ______________ Warrant Shares.

(b)The undersigned Holder hereby exercises its right to purchase _________________ Warrant Shares pursuant to the Warrant.

(c)The Holder intends that payment of the Exercise Price shall be made as (check one):

____ “Cash Exercise”

____ “Cashless Exercise” (if permitted)

(d)If the holder has elected a Cash Exercise, the holder shall pay the sum of $____________ to the Company in accordance with the terms of the Warrant.

(e)Pursuant to this exercise, the Company shall deliver to the holder _______________ Warrant Shares in accordance with the terms of the Warrant.

Dated: _______________, ______	Name of Holder:
	(Print) _______________________________________
	By:
	Name:______________________________________
	Title:_______________________________________

ACKNOWLEDGEMENT

The Corporation hereby acknowledges this Exercise Notice and hereby directs [transfer agent] to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated November __, 2007 from the Corporation and acknowledged and agreed to by [transfer agent].

INTERPHARM HOLDINGS INC.

By: 

Name: _____________________________________

Title: ______________________________________

Exhibit III

[Counsel’s Letterhead]

[Transfer Agent]

To Whom It May Concern:

We are counsel to Interpharm Holdings Inc., a Delaware corporation (the “Company”), and have represented the Company in connection with the Company’s recent filing of a Registration Statement on Form [SB-2/S-3] (File No. ______) (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) relating to ____ shares of the Company’s common stock of the Company, par value $0.01 per share (the “Registrable Securities”), issued or to be issued to the selling stockholders (the “Selling Stockholders”) listed in the selling stockholders table at pages __ of the final prospectus, a copy of which is attached hereto as Exhibit A.

In connection with the foregoing, we advise you that the SEC has entered an order declaring the Registration Statement effective under the Securities Act of 1933, as amended (the “1933 Act”), on _______ __, 200__. We have no knowledge that any stop order suspending its effectiveness has been issued or that any proceedings for that purpose are pending before, or threatened by, the SEC.

Very truly yours,

cc:[LIST NAME OF HOLDERS]

EX-21.1

Exhibit 21.1

Interpharm Holdings, Inc.

List of Subsidiaries

Name of Subsidiary	Jurisdiction	Ownership Percentage
Interpharm, 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%

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements of Interpharm Holdings, Inc. on Form S-3, dated December 29, 1998 (333-69809) and the post-effective amendments thereto; Form S-8, dated May 6, 1999 (333-47385) and the post-effective amendment thereto; Form S-3, dated June 29, 2001 (333-64198); and Form S-8, dated August 7, 2003 (333-107833) of our report dated September 22, 2006, with respect to our audits of the consolidated financial statements of Interpharm Holdings, Inc., as of June 30, 2007 and 2006 and for each of the three years in the period ended June 30, 2007, which report is included in this Annual Report on Form 10-K of Interpharm Holdings, Inc. for the year ended June 30, 2007.

/s/ Marcum & Kliegman llp

Marcum & Kliegman llp

Melville, New York

November 14, 2007

EX-31.1

Exhibit 31.1 CERTIFICATION

I, Cameron Reid, certify that:

1. I have reviewed this annual report on Form 10-K of Interpharm Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and

c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 15, 2007

s/ Cameron Reid

Cameron Reid

Chief Executive Officer

EX-31.2

Exhibit 31.2 CERTIFICATION

I, Peter Giallorenzo, certify that:

1. I have reviewed this annual report on Form 10-K of Interpharm Holdings, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this report (the "Evaluation Date"); and

c) presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 15, 2007

/s/ Peter Giallorenzo

Peter Giallorenzo

Chief Financial Officer

EX-32.1

Exhibit 32.1

Written Statement of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, the Chief Executive Officer and the Chief Financial Officer of Interpharm Holdings, Inc. (the “Company”), each hereby certifies that to his knowledge, on the date hereof:

(1)	the Form 10-K of the Company for the period ended June 30, 2007 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and
(2)	information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 15, 2007

s/ Cameron Reid

Cameron Reid

Chief Executive Officer

/s/ Peter Giallorenzo

Peter Giallorenzo

Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Interpharm Holdings, Inc. and will be retained by Interpharm Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.