SECURITIES AND EXCHANGE COMMISSION
                      WASHINGTON, DC 20549

                          FORM 10-QSB

     [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

          For the quarterly period ended May 31, 2006

     [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                SECURITIES EXCHANGE ACT OF 1934

    For the transition period from            to

                Commission file number 000-17741

                          EPOLIN, INC.
(Exact name of Small Business Issuer as Specified in its Charter)

New Jersey                                              22-2547226
(State or Other Jurisdiction                      (I.R.S. Employer
of Incorporation or                                 Identification
Organization)                                              Number)

                      358-364 Adams Street
                    Newark, New Jersey 07105
            (Address of Principal Executive Offices)

                         (973) 465-9495
        (Issuer's Telephone Number, Including Area Code)

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

                  Yes   [  X   ] No   [      ]

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

                  Yes   [      ] No   [  X   ]

State  the  number of shares outstanding of each of  the  Issuers
classes of common equity, as of the latest practicable date:

Common, no par value per share: 11,966,355 outstanding as of July
1, 2006

<PAGE>

                PART I - FINANCIAL INFORMATION


Item 1.   Financial Statements.

     See the Consolidated Financial Statements annexed to this
report.


Item 2.   Management's Discussion and Analysis or Plan of
Operation.

     The following discussion should be read in conjunction with
the Financial Statements included in this report and is qualified
in its entirety by the foregoing.

Forward-Looking Statements

     This report contains certain forward-looking statements and
information relating to the Company that are based on the beliefs
and assumptions made by the Company's management as well as
information currently available to the management.  When used in
this document, the words "anticipate", "believe", "estimate", and
"expect" and similar expressions, are intended to identify
forward-looking statements.  Such statements reflect the current
views of the Company with respect to future events and are
subject to certain risks, uncertainties and assumptions.  Should
one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may
vary materially from those described herein as anticipated,
believed, estimated or expected.  Certain of these risks and
uncertainties are discussed under the caption "Uncertainties and
Risk Factors" in Part I, Item 1 "Description of Business" of the
Company's Form 10-KSB for the year ended February 28, 2006.  The
Company does not intend to update these forward-looking
statements.

Executive Overview

     Epolin, Inc. (the "Company") is a specialized chemical
company primarily engaged in the manufacturing, marketing,
research and development of infrared dyes, laser absorbing dyes
and infrared dye formulations.  Our business is heavily weighted
towards the development, manufacture and sale of near infrared
dyes.  Applications for these dyes cover several markets that
include laser protection, welding, sunglasses, optical filters,
glazing and imaging and security inks and tagants.  We also
manufacture specialty chemicals for certain chemical
manufacturers.

     We have succeeded in growing over the last decade based on
the development, application and manufacture of near infrared
dyes.  Although we do not rely upon patents for protection of our
dye business, no competitors, to our knowledge, actively market
the large variety and volume of infrared dyes as sold by us.
Furthermore, we have embarked on an aggressive campaign to make
our dyes easier to use.  In this regard, we offer technical
service support for extrusion and injection molding of our dyes
with a variety of resin substrates.  Our dyes can now be uniquely
formulated to each customer's specifications and manufactured in
our own facility.  In addition, we hold a broad range of dyes in
inventory for immediate sale.

     We sell our products to manufacturers of plastics/resins,
credit cards, electronics, glass and other basic materials.  Our
customers are located in all regions of the world, although a
material portion of our business is dependent on certain domestic
customers, the loss of which could have a material effect on
operations.  As the service economy continues to dwarf the
manufacturing sector in the United States, we anticipate that our
products will be increasingly used by manufacturers located
abroad.  During the three months ended May 31, 2006,
approximately 40.6% of sales were to three customers.  Two of
these customers, located in the Eastern United States, accounted
for 29.6% of sales.  During the three months ended May 31, 2005,
approximately 44.1% of sales were to three customers.  Two of
these customers, located in the Eastern United States, accounted
for 39.0% of sales.  The loss of one or more key customers could
have a material adverse effect on the Company.

Results of Operations

     The following table sets forth operations data expressed as
a percentage of sales.

<PAGE>


                                         Three Months Ended

                                        May 31,        May 31,
                                        2006           2005

Sales                                   100%           100%
Cost of sales                           40.1           43.4

Gross Profit                            59.9           56.6
Selling, general and administrative     27.1           31.1

Operating Income                        32.8           25.5

Income before taxes                     33.7           26.4

Net income (after taxes)                20.6           17.1


Sales

     Sales increased to $1,094,000 for the three months ended May
31, 2006 from $806,000 for the three months ended May 31, 2005,
an increase of $288,000 or 35.7%.  During fiscal 2006 and
continuing through the first quarter of fiscal 2007, we
experienced strong increases in sales in our newer product areas,
such as our newer security inks and coatings products.  While
sales overseas remained relatively stagnant for the quarter ended
May 31, 2006 compared to the quarter ended May 31, 2005, sales in
the United States for the three months ended May 31, 2006
increased $337,000 compared to the prior year  period.

     Beginning in fiscal 2006, we began to place greater emphasis
on technical service as mentioned above which has resulted in
sales to customers who have not used our products before as well
as new uses of such dye products by regular customers.  We have
also increased our sales in dyes for the newer security inks
products which is an area we expect to achieve strong growth.

Gross Profit

     Gross profit, defined as sales less cost of sales, was
$655,000 or 59.9% of sales for the three months ended May 31,
2006 compared to $457,000 or 56.6% of sales for the three months
ended May 31, 2005.  In terms of absolute dollars, gross profit
increased $198,000.  As a percentage of sales, gross profit
increased 3.3% due primarily to a decrease in factory overhead of
4.3% and a slight increase in material costs of 1.0%.

     Cost of sales was $439,000 for the three months ended May
31, 2006 which represented 40.1% of sales compared to $350,000
for the three months ended May 31, 2005 which represented 43.4%
of sales.  The total cost of materials increased $49,000 in the
quarter ended May 31, 2006 compared to the prior year period.
Total factory overhead also increased $41,000 in the quarter
ended May 31, 2006 compared to the prior year period primarily
due to increases in research and development salaries, and
increases in applied factory overhead.

Selling, General and Administrative Expenses

     Selling, general and administrative expenses increased to
$296,000, or 27.1% of sales, for the three months ended May 31,
2006 from $251,000, or 31.1% of sales, for the three months ended
May 31, 2005, an increase of $45,000. As a percentage of sales,
however, selling, general and administrative expenses decreased
4.0% for the three months ended May 31, 2006 compared to the
three months ended May 31, 2005.    Such increase in absolute
dollars in selling, general and administrative expenses for the
quarter ended May 31, 2006 compared to the prior year  period
was primarily due to increases in officer salaries and employee
benefits, together with increases in consulting fees, offset by
decreases in commission expenses.  We recently restructured a
certain commission relationship which we have historically
maintained which has reduced our commission expenses.

Operating Income

     Operating income, in terms of absolute dollars, increased to
$359,000 for the three months ended May 31, 2006 from $206,000
for the prior year period, an increase of $153,000.  As a
percentage of sales, operating income increased

<PAGE>

to 32.8% of sales
for the three months ended May 31, 2006 from 25.5% of sales for
the three months ended May 31, 2005.  This change was primarily
due to increased sales for the period, together with decreases
achieved, in terms of a percentage of sales, in cost of sales,
and selling, general and administrative expenses as described
above.

Other Income

     Total other income for the three months ended May 31, 2006,
was $10,000 as compared to $7,000 for the three months ended May
31, 2005.  The Company realized $4,500 in rental income for the
three months ended May 31, 2006 compared to rental income of
$3,000 for the three months ended May 31, 2005.  Effective
November 1, 2002 and through August 2005, we subleased
approximately 2,500 square feet of our office space to a non-
related party to operate an optics and security inks laboratory
at an annual rental of $36,000.  Commencing as of September 2005,
new arrangements have been agreed upon for such space with a
different non-related party to operate a laboratory at an annual
rental of $18,000.  During the quarter ended May 31, 2005, the
previous tenant was behind in its rental payments which late
payments were made subsequent to May 31, 2005.  Our interest
income increased to $6,000 for the three months ended May 31,
2006 from $4,000 for the three months ended May 31, 2005.

Net Income

     During the three months ended May 31, 2006, we reported
income before taxes of $369,000 as compared to income before
taxes of $213,000 for the three months ended May 31, 2005.
Income taxes were $143,000 for the three months ended May 31,
2006, compared to $75,000 for the three months ended May 31,
2005.  The increase in income taxes was generally attributed to
changes from period to period in sales and expenses.  Net income
after taxes was $226,000 or $0.02 per share for the three months
ended May 31, 2006 as compared to net income after taxes of
$138,000 or $0.01 per share for the three months ended May 31,
2005.  The increase in net income after taxes for the quarter
ended May 31, 2006 compared to the prior year period was
primarily due to increases in sales, together with decreases
achieved, in terms of a percentage of sales, in cost of sales and
selling, general and administrative expenses.

     Net income in the future will be dependent upon our ability
to increase revenues faster than we increase our selling, general
and administrative expenses, research and development expenses
and other expenses.  Although we achieved an increase of $821,000
in sales for fiscal 2006 compared to fiscal 2005, and an increase
of $288,000 in sales for the first quarter of fiscal 2007
compared to the first quarter of fiscal 2006, we have also
incurred, in dollars, greater cost of sales and selling, general
and administrative expenses in these periods.  Certain of these
expenses are due to costs and expenses related to a greater
emphasis being placed on marketing, sales and technical service.
This meant hiring new staff, consultants, continuing efforts to
upgrade our facility and developing a new web site.  We are
encouraged, however, by the growth in our overall sales in fiscal
2006 (which was the largest annual rate of growth we have
achieved since our prior growth period from 1992 to 2002) which
growth has continued into fiscal 2007.

Operations Outlook

     Since fiscal 2005, we have been going through a period of
reassessing our direction in order to increase value for our
shareholders.  Our business, though reasonably healthy, did not
grow to the degree management anticipated from 2002 to 2005.
While the sales level of $2,880,000 reached during fiscal 2005
was at the time an all time high for the Company, it was not
significantly more than the sales level we achieved in 2004
($2,734,000), 2003 ($2,690,000) or 2002 ($2,550,000). The plateau
of sales during that four years was in contrast to the greater
sales growth the Company experienced prior to 2002 and beginning
in 1991.  Based upon these observations, we tried to learn what
could be done to stimulate growth and recapture the promise of
our early years.  As a result, we assembled a business plan and
began to make changes consistent with such plan.  The plan showed
us that developments coming out of our R&D were not reaching the
marketplace and therefore, not commanding their proper attention.
Through this teamwork of R&D with marketing, we revamped our web
site, streamlined our pricing structure and reached out to our
key customers and agents. We believe the business plan made clear
the necessity of hiring a Sales/Marketing executive along with
back up technical service help, both of which have been
accomplished.  In order to cover the cost of these additional
personnel and place a greater emphasis on company growth, we
suspended in fiscal 2005 the cash dividends program which we had
been in place during fiscal 2002, 2003 and 2004 in order to place
greater emphasis on business growth.  With the increase that we
achieved in sales in fiscal 2006 of $3,701,000 which was $821,000
greater than the prior year, and the increase in sales in the
first three months of fiscal 2007 which was $288,000 greater than
the prior year, we are confident that we will be able to
successfully accomplish our long term goals.

<PAGE>

     Another factor that was considered in the business plan was
management succession.  Murray S. Cohen, the Company's Chairman
of the Board and our long-time Chief Executive Officer,
previously announced his intention to step down as Chief
Executive Officer, while continuing to remain as Chairman of the
Board and Chief Scientist for the Company.  As of January 10,
2006, Dr. Cohen did step down as CEO, and Greg Amato, who has
been our Vice President of Sales and Marketing, was appointed to
fill this position.  Mr. Amato has been employed by the Company
since November 2004 and had been Vice President of Sales and
Marketing since January 2005.

Liquidity and Capital Resources

     Our primary source of funds is cash flow from operations in
the normal course of selling products.  On May 31, 2006, we had
working capital $2,595,000, a debt to equity ratio of 0.22 to 1,
and stockholders' equity of $3,490,000 compared to working
capital of $2,412,000, a debt to equity ratio of 0.14 to 1, and
stockholders' equity of $3,237,000 on May 31, 2005.  On May 31,
2006, we had $1,733,000 in cash and cash equivalents, total
assets of $4,262,000 and total liabilities of $771,000, compared
to $1,370,000 in cash and cash equivalents, total assets of
$3,696,000 and total liabilities of $459,000 on May 31, 2005.

     Net cash provided by operating activities for the three
months ended May 31, 2006 was $475,000 compared to $224,000 for
the three months ended May 31, 2005 which change was primarily
due to an increase in net income together with decreases in
accounts receivable and prepaid expenses and increases in
accounts payable, taxes payable and accrued expenses offset by an
increase in inventories.   Net cash used by investing activities
for the three months ended May 31, 2006 was $23,000 compared to
$86,000 for the three months ended May 31, 2005 which change was
primarily due to a decrease in equipment purchases.  For the
three months ended May 31, 2006, net cash used by financing
activities was $236,000 compared to $0 for the three months ended
May 31, 2005.  Such change was primarily due to the payment of
the dividend in the quarter ended May 31, 2006 for which there
was not a comparable item in the quarter ended May 31, 2005.

     We anticipate, based on currently proposed plans and
assumptions relating to our operations, that our current cash and
cash equivalents together with projected cash flows from
operations and projected revenues will be sufficient to satisfy
its contemplated cash requirements for more than the next 12
months.  Our contemplated cash requirements for fiscal 2007 and
beyond will depend primarily upon level of sales of our products,
inventory levels, product development, sales and marketing
expenditures and capital expenditures.  While we believe the
Company has remained strong in the sale of dyes in our
traditional markets of welding and eye protection, such sales did
not increase in volume in the past few complete fiscal years.  As
a result, we have begun to place a greater emphasis on sales,
marketing and technical support in order to grow our dye business
and our newer business in security inks and coatings which we
expect to contribute meaningful growth to the Company.

     Inflation has not significantly impacted our operations.

Significant Accounting Policies

     Our discussion and analysis of the Company's financial
condition and results of operations are based upon our
consolidated financial statements which have been prepared in
conformity with U.S. generally accepted accounting principles.
Our significant accounting policies are described in Note B to
the consolidated financial statements included elsewhere herein.
The application of our critical accounting policies is
particularly important to the portrayal of our financial position
and results of operations.  These critical accounting policies
require us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities.  We
believe the following critical accounting policies reflect the
more significant judgments and estimates used in the preparation
of the consolidated financial statements.

     Inventories - Our inventories consist of raw materials,
work in process, finished goods and supplies which we value at
the lower of cost or market under the first-in, first-out
method.

     Plant, Property and Equipment - Our plant, property and
equipment are stated at cost. We compute provisions for
depreciation on the straight-line methods, based upon the
estimated useful lives of the various assets.  We also
capitalize the costs of major renewals and betterments. Repairs
and maintenance are charged to operations as incurred. Upon
disposition, the cost and related accumulated depreciation are
removed and any related gain or loss is reflected in earnings.

<PAGE>

     Income taxes - We account for income taxes under Statement
of Financial Accounting Standards No. 109, "Accounting for
Income Taxes", in which the asset and liability method is used
in accounting for income taxes.  We recognize deferred taxes for
temporary differences between the basis of assets and
liabilities for financial statement and for income tax purposes.
Temporary differences relate primarily to different accounting
methods used for depreciation and amortization of property and
equipment and deferred compensation.

     Revenue Recognition - We recognize revenue consistent with
the provisions of SEC Staff Accounting Bulletin No. 104, "Revenue
Recognition", which sets forth guidelines in the timing of
revenue recognition based upon factors such as passage of title,
payments and customer acceptance. Any amounts received prior to
satisfying our revenue recognition criteria will be recorded as
deferred revenue in the accompanying balance sheet. We recognize
revenue from product sales when there is persuasive evidence that
an arrangement exists, when title has passed, the price is fixed
or determinable, and we are reasonably assured of collecting the
resulting receivable. Our policy is to replace certain products
that do not conform to customer specifications, however
replacements are made at our discretion subject to in house
product lab analysis. There are no terms or conditions set forth
within our sales contracts that provide for product replacements.
We expense replacement costs as incurred.

     Stock-based Compensation - We have adopted disclosure-only
provisions of SFAS No. 123 "Accounting for Stock-Based
Compensation," and SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123."  Compensation cost for stock options, if any,
is measured as the excess of the quoted market price of the stock
at the date of grant over the amount an employee must pay to
acquire the stock.

     In December 2004, the FASB issued Statement of Financial
Accounting Standards ("SFAS") No. 123(R), "Share-Based Payment".
SFAS 123R revises SFAS No. 123 and supersedes APB 25 to require
companies to measure and recognize in operations the cost of
employee services received in exchange for an award of equity
instruments based on the grant-date fair value.  That cost will
be recognized over the vesting period during which an employee is
required to provide service in exchange for the award.  On
April 14, 2005, the Securities and Exchange Commission issued a
ruling that amended the effective date for SFAS 123R. As a
result, we adopted SFAS 123R on March 1, 2006.

Other Information

     As mentioned above, we did not pay any cash dividends during
the fiscal year ended February 28, 2005 but did declare and pay a
$0.02 cash dividend in August 2005.  Subsequent to the end of
fiscal 2006, the Company approved the adoption of a dividend
policy under which the Company will issue a regular annual cash
dividend on shares of its Common Stock.  The amount of the
dividend, record date and payment date will be subject to
approval every year by the Board of Directors.  In accordance
with the new dividend policy, in April 2006, the Board of
Directors declared and the Company paid the first regular annual
cash dividend of $0.02 per share in May 2006.

Off-Balance Sheet Arrangements

     The Company has no off-balance sheet arrangements as defined
in Item 303(c) of Regulation S-B.


Item 3.   Controls and Procedures.

     The Company's Principal Executive Officer and Principal
Financial Officer have reviewed the Company's disclosure controls
and procedures as of the end of the period covered by this
report.  Based upon this review, such officers believe that the
Company's disclosure controls and procedures are effective in
timely alerting them to material information required to be
included in this report.  There have been no significant changes
in internal control over financial reporting that occurred during
the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

<PAGE>

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings.

     There are no material pending legal proceedings to which the
Company is a party or to which any of its property is subject.


Item 2.  Unregistered Sales of Equity Securities and Use of
Proceeds.

     During the three months ended May 31, 2006, the Company
issued 31,000 shares of Common Stock upon exercise of previously
granted stock options at an aggregate exercise price of $8,710.
All of the foregoing securities were issued in reliance upon the
exemption from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended, for "transactions by the
issuer not involving any public offering".

     Information regarding repurchases made by the Company of
shares of its Common Stock during the quarter ended May 31, 2006,
is set forth below:








                                       Total         Maximum
                                       Number of     Number
                                       Shares        of Shares
             Total        Average      Purchased     That May
Period       Number of    Price        as Part of    Yet be
             Shares       Paid per     Publicly      Purchased
             Purchased    Share        Announced     Under the
                                       Plans         Plans or
                                       or            Programs(1)
                                       Programs(1)
March 1,
2006 to
March 31,
2006         5,000        $0.91        5,000          193,500


April 1,
2006 to
April 30,
2006             0            0            0              0



May 1, 2006
to
May 31,
2006             0            0            0              0


Total        5,000        $0.91        5,000          193,500

_________________________

(1)  In August 2001, the Board of Directors of the Company
     authorized a 500,000 share stock repurchase program.
     Pursuant to the repurchase program, the Company may purchase
     up to 500,000 shares of its common stock in the open market
     or in privately negotiated transactions from time to time,
     based on market prices.  The Company indicated that the
     timing of the buyback of the Company's shares will be
     dictated by overall financial and market conditions and
     other corporate considerations.  The repurchase program may
     be suspended without further notice.  During the three
     months ended May 31, 2006, a total of 5,000 shares were
     repurchased at a cumulative cost of $4,550.  Since August
     2001, a total of 306,500 shares have been repurchased under
     the program at a cumulative cost of $174,766.


Item 3.  Defaults Upon Senior Securities.

     None.



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

     None.

<PAGE>


Item 5.  Other Information.

          None.


Item 6.  Exhibits.

          31.1 Certification of Principal Executive Officer
          pursuant to Section 302 of the Sarbanes-Oxley Act of
          2002 (Rules 13a-14 and 15d-14 of the Exchange Act)
          31.2 Certification of Principal Financial Officer
          pursuant to Section 302 of the Sarbanes-Oxley Act of
          2002 (Rules 13a-14 and 15d-14 of the Exchange Act)
          32.1 Certification pursuant to Section 906 of the
          Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350)

<PAGE>


                           SIGNATURES

     In accordance with the requirements of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                   EPOLIN, INC.
                                   (Registrant)



Dated: July 14, 2006         By:   /s/ Murray S. Cohen
                                   Murray S. Cohen,
                                   Chairman of the Board



Dated: July 14, 2006         By:   /s/ James Ivchenko
                                   James Ivchenko,
                                   President
                                   (Principal Financial Officer)

<PAGE>



                           EPOLIN, INC. AND SUBSIDIARY

                              FINANCIAL STATEMENTS

                    THREE MONTHS ENDED MAY 31, 2006 AND 2005


<PAGE>

                                    CONTENTS

                                                                          Page
                                                                          ----

Accountant's Review Report                                                  1

Consolidated Financial Statements:

    Consolidated Balance Sheets                                           2 - 3

    Consolidated Statements of Income                                     4 - 5

    Consolidated Statements of Stockholders' Equity                         6

    Consolidated Statements of Cash Flows                                   7

Notes to Consolidated Financial Statements                                8 - 22

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
EPOLIN INC. AND SUBSIDIARY
Newark, NJ


         We have reviewed the accompanying Consolidated Balance Sheets of Epolin
Inc. and Subsidiary as of May 31, 2006 and 2005 and the related Consolidated
Statements of Income, Stockholders' Equity, and Cash Flows for the three-month
periods then ended. These interim financial statements are the responsibility of
the Company's management.

         We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.

         Based on our review, we are not aware of any material modifications
that should be made to the accompanying interim financial statements for them to
be in conformity with U.S. generally accepted accounting principles.



/s/ WEISMANN ASSOCIATES LLC
------------------------------------
Weismann Associates LLC
Livingston, NJ 07039

June 19, 2006

                                        1
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS
                                     ASSETS

                                                               May 31,
                                                     ---------------------------
Current assets:                                          2006           2005
                                                     ------------   ------------
 Cash and cash equivalents                           $  1,732,820      1,370,083
 Accounts receivable                                      631,102        449,787
 Inventories                                              681,280        716,238
 Prepaid expenses                                          40,884         35,042
 Deferred tax assets-current portion                        6,016          5,891
                                                     ------------   ------------

    Total current assets                                3,092,102      2,577,041
                                                     ------------   ------------

Plant, property and equipment - at cost:
 Land                                                      81,000         81,000
 Building and improvements                                704,578        642,838
 Laboratory equipment                                     243,958        194,135
 Office equipment                                         117,491        102,837
 Leasehold improvements                                   449,190        449,190
                                                     ------------   ------------

    Total                                               1,596,217      1,470,000

 Less:  Accumulated depreciation and amortization         807,816        756,179
                                                     ------------   ------------

    Net plant, property and equipment                     788,401        713,821
                                                     ------------   ------------
Other assets:
 Deferred tax assets-non current portion                  166,132        191,076
 Cash value - life insurance policy                       214,911        214,050
                                                     ------------   ------------

    Total other assets                                    381,043        405,126
                                                     ------------   ------------

    Total                                            $  4,261,546      3,695,988
                                                     ============   ============

        The accompanying notes are an integral part of these statements.

                                        2
<PAGE>
<TABLE>
<CAPTION>

                           EPOLIN, INC. AND SUBSIDIARY
                     CONSOLIDATED BALANCE SHEETS (CONTINUED)
                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                               May 31,
                                                                     ---------------------------
                                                                         2006           2005
                                                                     ------------   ------------
<S>                                                                  <C>                  <C>
Current liabilities:
  Accounts payable                                                   $     35,719         15,307
  Accrued expenses                                                        322,285         73,910
  Taxes payable:
    Payroll                                                                 1,653          2,322
    Income                                                                137,303         73,831
                                                                     ------------   ------------

    Total current liabilities                                             496,960        165,370
                                                                     ------------   ------------

Other liabilities - Deferred compensation                                 274,492        294,109
                                                                     ------------   ------------

      Total liabilities                                                   771,452        459,479
                                                                     ------------   ------------

Commitments and Contingencies

Stockholders' equity:
  Preferred stock, $15.513 par value; 940,000 shares authorized;
    none issued
  Preferred stock, series A convertible non-cumulative,
    $2.50 par value; redemption price and liquidation preference;
    60,000 shares authorized; 5,478 shares issued and redeemed
  Common stock, no par value; 20,000,000 shares authorized;
    12,890,000 and 12,729,000 shares issued, 11,966,355 and
    11,815,355 shares outstanding at 2006 and 2005, respectively        2,357,193      2,340,183
    Paid-in capital                                                        44,700          6,486
    Retained earnings                                                   1,418,283      1,211,772
                                                                     ------------   ------------

      Total                                                             3,820,176      3,558,441
    Less: Treasury stock-at cost                                          330,082        321,932
                                                                     ------------   ------------

      Total stockholders' equity                                        3,490,094      3,236,509
                                                                     ------------   ------------

      Total                                                          $  4,261,546      3,695,988
                                                                     ============   ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        3
<PAGE>
<TABLE>
<CAPTION>

                           EPOLIN, INC. AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                    THREE MONTHS ENDED MAY 31, 2006 AND 2005

                                                               2006           2005
                                                           ------------   ------------
<S>                                                        <C>                 <C>
Sales                                                      $  1,094,070        806,299
                                                           ------------   ------------

Cost of sales and expenses:
  Cost of sales                                                 438,918        349,551
  Selling, general and administrative                           296,116        251,057
                                                           ------------   ------------

    Total                                                       735,034        600,608
                                                           ------------   ------------

Operating income                                                359,036        205,691
                                                           ------------   ------------
Other income:
  Rental income                                                   4,500          3,000
  Interest                                                        5,542          4,069
                                                           ------------   ------------

    Total other income                                           10,042          7,069
                                                           ------------   ------------

Income before taxes                                             369,078        212,760

Income taxes                                                    143,179         74,608
                                                           ------------   ------------

Net income                                                 $    225,899        138,152
                                                           ============   ============
Per share data:
  Basic earnings per common share                          $       0.02           0.01
                                                           ============   ============

  Fully diluted earnings per common share                  $       0.02           0.01
                                                           ============   ============

  Weighted average number of common shares outstanding       11,959,942     11,815,355
                                                           ============   ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        4
<PAGE>
<TABLE>
<CAPTION>

                           EPOLIN, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                    THREE MONTHS ENDED MAY 31, 2006 AND 2005

                            Number of               Additional
                           Outstanding    Common      Paid-in-     Retained      Treasury      Treasury   Stockholders'
                             Shares       Stock       Capital      Earnings       Shares        Costs        Equity
                           ----------   ----------   ----------   ----------    ----------   ----------    ----------
<S>                        <C>          <C>               <C>      <C>             <C>         <C>          <C>
Balance - March 1, 2005    12,729,000   $2,340,183        6,486    1,073,620       913,645     (321,932)    3,098,357

Net income                         --           --           --      138,152            --           --       138,152
                           ----------   ----------   ----------   ----------    ----------   ----------    ----------

Balance - May 31, 2005     12,729,000   $2,340,183        6,486    1,211,772       913,645     (321,932)    3,236,509
                           ==========   ==========   ==========   ==========    ==========   ==========    ==========


Balance - March 1, 2006    12,859,000   $2,348,483        6,486    1,431,711       918,645     (325,532)    3,461,148

Dividends paid                     --           --           --     (239,327)           --           --      (239,327)

Common stock issued for
 stock option                  31,000        8,710       38,214           --            --           --        46,924

Treasury stock purchased           --           --           --           --         5,000       (4,550)       (4,550)

Net income                         --           --           --      225,899            --           --       225,899
                           ----------   ----------   ----------   ----------    ----------   ----------    ----------

Balance - May 31, 2006     12,890,000   $2,357,193       44,700    1,418,283       923,645     (330,082)    3,490,094
                           ==========   ==========   ==========   ==========    ==========   ==========    ==========
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        5
<PAGE>
<TABLE>
<CAPTION>

                           EPOLIN, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    THREE MONTHS ENDED MAY 31, 2006 AND 2005

                                                                    2006           2005
                                                                ------------   ------------
<S>                                                             <C>                 <C>
Cash flows from operating activities:
  Net income                                                    $    225,899        138,152
  Adjustments to reconcile net income to net cash provided by
   operating activities:
     Depreciation and amortization                                    13,669          8,992
     Deferred tax expense                                              4,174          1,406
     Stock based compensation                                         38,214             --
     Obligation under deferred compensation agreement                (32,000)         6,019
  (Increase) decrease in:
     Accounts receivable                                              64,549        103,224
     Inventories                                                     (33,407)        34,178
     Prepaid expenses                                                 22,188         14,832
     Prepaid taxes                                                     1,599            600
  Increase (decrease) in:
     Accounts payable                                                 23,908         15,307
     Accrued expenses                                                 15,230       (169,504)
     Taxes payable                                                   131,449         70,561
                                                                ------------   ------------

        Net cash provided by operating activities                    475,472        223,767
                                                                ------------   ------------

Cash flows from investing activities:
  Increase in cash value - life insurance policy                          --         (7,880)
  Payments for equipment                                             (22,864)       (78,470)
                                                                ------------   ------------

        Net cash used by investing activities                        (22,864)       (86,350)
                                                                ------------   ------------

Cash used from financing activities:
  Issuance of common stock                                             8,710             --
  Treasury stock purchased                                            (4,550)            --
  Dividends paid                                                    (239,327)            --
                                                                ------------   ------------

        Net cash used by financing activities                       (235,167)            --
                                                                ------------   ------------

Increase in cash                                                     217,441        137,417
  Cash and cash equivalents:

  Beginning                                                        1,515,379      1,232,666
                                                                ------------   ------------

  Ending                                                        $  1,732,820      1,370,083
                                                                ============   ============
Supplemental information:
  Income taxes paid                                             $      5,955          2,427
                                                                ============   ============
</TABLE>

        The accompanying notes are an integral part of these statements.

                                        6
<PAGE>

                          EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note A - Organization:

         The Company is engaged in the development, production and sale of near
infrared dyes to the optical industry for laser protection and welding
applications and other dyes and specialty chemical products that serve as
intermediates and additives used in the adhesive, plastic, aerospace, credit
card security and protective documents industries to customers located in the
United States and throughout the world.

         The Company's wholly owned Subsidiary, Epolin Holding, Corp., was
incorporated in New Jersey as a real estate holding company whose assets consist
of land and a building. On January 29, 1998, the Company acquired 100% of the
stock in Epolin Holding Corporation. Prior to acquisition, two
officers/stockholders of the Company controlled it.

Note B - Summary of Significant Accounting Policies:

Basis of Presentation - The interim Consolidated Financial Statements presented
herein are unaudited and should be read in conjunction with the Consolidated
Financial Statements presented in the Company's Annual Report on Form 10-KSB for
the fiscal year ended February 28, 2006. Such interim Consolidated Financial
Statements reflect all normal and recurring adjustments that, in the opinion of
management, are necessary for a fair presentation of the financial position,
results of operations and cash flows of the Company for the periods presented.
All significant intercompany accounts and transactions have been eliminated.

The results of operations for the three-month interim period ended May 31, 2006
are not necessarily indicative of the results of operations for the fiscal year
ending February 28, 2007.

Cash and Cash Equivalents - Includes cash in bank and money market accounts for
purposes of preparing the Statement of Cash Flows.

Concentrations of Credit Risks - The Company and its Subsidiary at various times
of the year had cash deposits in financial institutions and a brokerage house in
excess of the amount insured by the agencies of the federal government. In
evaluating this credit risk, the Company periodically evaluates the stability of
the financial institution and brokerage house.

         Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of accounts receivable.
Generally, the Company does not require collateral or other securities to
support its accounts receivable. Three customers represented 45.7% of the
Company's trade receivables at May 31, 2006.

Source of Raw Materials - The Company purchases chemicals from several large
chemical manufacturers, further processing them into its saleable products.
Although the Company limits itself to a relatively small number of suppliers, it
is not restricted to such suppliers, and availability of such raw materials is
widespread.

                                        7
<PAGE>
<TABLE>
<CAPTION>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note B - Summary of Significant Accounting Policies (continued):

Principles of Consolidation - The accompanying Consolidated Financial Statements
include the accounts of the Company and Subsidiary. Inter-company transactions
and balances have been eliminated in consolidation. Condensed consolidating
financial statements as of May 31, 2006 and for the three month period then
ended are:

                      CONDENSED CONSOLIDATING BALANCE SHEET

                                                              Epolin
                                               Epolin         Holding,
                                                 Inc.          Corp.      Eliminations   Consolidated
                                            ------------   ------------   ------------   ------------
<S>                                         <C>                 <C>       <C>              <C>
Current assets                              $  2,865,845        226,257             --      3,092,102
Non-current assets                             1,395,068        665,520       (891,144)     1,169,444
                                            ------------   ------------   ------------   ------------
     Total                                  $  4,260,913        891,777       (891,144)     4,261,546
                                            ============   ============   ============   ============

     Total liabilities                           770,819        142,987       (142,354)       771,452
                                            ------------   ------------   ------------   ------------

Stockholders' equity:
  Common stock                                 2,357,193             --             --      2,357,193
  Additional paid-in capital                      44,700             --             --         44,700
  Retained earnings                            1,418,283        748,790       (748,790)     1,418,283
  Treasury stock                                (330,082)            --             --       (330,082)
                                            ------------   ------------   ------------   ------------

   Total stockholders' equity                  3,490,094        748,790       (748,790)     3,490,094
                                            ------------   ------------   ------------   ------------

     Total                                  $  4,260,913        891,777       (891,144)     4,261,546
                                            ============   ============   ============   ============
<CAPTION>

                   CONDENSED CONSOLIDATING STATEMENT OF INCOME

                                                              Epolin
                                               Epolin         Holding,
                                                 Inc.          Corp.      Eliminations   Consolidated
                                            ------------   ------------   ------------   ------------
<S>                                         <C>                 <C>       <C>              <C>
Sales                                       $  1,094,070             --             --      1,094,070
Other revenue                                         --         28,935        (24,435)         4,500
                                            ------------   ------------   ------------   ------------
     Total                                     1,094,070         28,935        (24,435)     1,098,570
                                            ------------   ------------   ------------   ------------

Cost of sales                                    438,918             --             --        438,918
Selling, general and administrative              314,301          6,250        (24,435)       296,116
                                            ------------   ------------   ------------   ------------

     Total                                       753,219          6,250        (24,435)       735,034
                                            ------------   ------------   ------------   ------------

Operating income                                 340,851         22,685             --        363,536

Other income - interest                            3,392          2,150             --          5,542
                                            ------------   ------------   ------------   ------------

Income before taxes                              344,243         24,835             --        369,078

Income taxes                                     140,945          2,234             --        143,179
                                            ------------   ------------   ------------   ------------

Net income                                  $    203,298         22,601             --        225,899
                                            ============   ============   ============   ============
</TABLE>

                                        8
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note B - Summary of Significant Accounting Policies (continued):

Accounts receivable - Accounts receivable are stated at the amount management
expects to collect from outstanding balances. Management provides for probable
uncollectible amounts though a charge to earnings and a credit to a valuation
allowance based on its assessment of the current status of individual accounts.
This allowance is an amount estimated by management to be adequate to absorb
possible losses. Balances that are still outstanding after management has used
reasonable collection efforts are written off through a charge to the valuation
allowance and a credit to accounts receivable.

Inventories - Consists of raw materials, work in process, finished goods and
supplies valued at the lower of cost or market under the first-in, first-out
method.

Fair Value of Financial Instruments - The carrying amount of all reported assets
and liabilities, which represent financial instruments, approximate the fair
values of such amounts due to the nature of their relatively short maturity.

Plant, Property and Equipment - Stated at cost. Provisions for depreciation are
computed on the straight-line methods, based upon the estimated useful lives of
the various assets.

A summary of the major categories of the Company's plant property and equipment
are as follows:

Building and improvements    Straight Line 39 Years
Machinery and equipment      Straight Line 5 - 7 Years
Furniture and Fixtures       Straight Line 7 Years
Leasehold Improvements       Straight Line 10 - 39 Years

         The costs of major renewals and betterments are capitalized. Repairs
and maintenance are charged to operations as incurred. Upon disposition, the
cost and related accumulated depreciation are removed and any related gain or
loss is reflected in earnings.

         Depreciation and amortization expense totaled $13,669 and $8,992 for
the three months ended May 31, 2006 and 2005, respectively.

Income taxes - The Company accounts for income taxes under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes", wherein
the asset and liability method is used in accounting for income taxes. Deferred
taxes are recognized for temporary differences between the basis of assets and
liabilities for financial statement and for income tax purposes. Temporary
differences relate primarily to different accounting methods used for
depreciation and amortization of property and equipment and deferred
compensation.

                                        9
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note B - Summary of Significant Accounting Policies (continued):

Use of Estimates - The preparation of the Company's financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates, judgments and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amount of
expenses during the reporting period. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

Revenue Recognition - The Company recognizes revenue consistent with the
provisions of SEC Staff Accounting Bulletin No. 104, "Revenue Recognition",
which sets forth guidelines in the timing of revenue recognition based upon
factors such as passage of title, payments, and customer acceptance. Any amounts
received prior to satisfying our revenue recognition criteria will be recorded
as deferred revenue in the accompanying balance sheet. The Company recognizes
revenue from product sales when there is persuasive evidence that an arrangement
exists, when title has passed, the price is fixed or determinable, and the
Company is reasonably assured of collecting the resulting receivable. The
Company's policy is to replace certain products that are in nonconformity with
customer specifications; however, replacements are made at the discretion of the
Company subject to in house product lab analysis. There are no terms or
conditions set forth within the Company's sales contracts that provide for
product replacements. Replacement costs are expensed as incurred.

Regulations - The Company expended approximately $3,826 through May 31, 2006 and
$7,228 through May 31, 2005, to maintain compliance with certain Federal and
State and City government regulations relative to the production of near
infrared dyes and specialty chemicals.

Net Income Per Share - Basic net income per share is calculated on the basis of
the weighted average number of shares outstanding during the period, excluding
dilution. Diluted net income per share is computed on the basis of the weighted
average number of shares plus potentially dilutive common shares arising from
the assumed exercise of stock options.

Advertising Costs - Advertising costs, included in operating expenses, are
expensed as incurred. Advertising expenses amounted to $4,476 and $5,718 for the
three months ended May 31, 2006 and 2005, respectively.

                                       10
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note B - Summary of Significant Accounting Policies (continued):

Stock-based Compensation - Prior to March 1, 2006 the Company accounted for
stock based compensation under Statement of Financial Accounting Standards No.
123 Accounting for Stock-Based Compensation (FAS 123). As permitted under this
standard, compensation cost was recognized using the intrinsic value method
described in Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25). Effective March 1, 2006, the Company has adopted
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment". SFAS 123R revises SFAS No. 123 and supersedes APB 25 to require
companies to measure and recognize in operations the cost of employee services
received in exchange for an award of equity instruments based on the grant-date
fair value. In accordance with the provisions of the Securities and Exchange
Commission Staff Accounting Bulletin No. 107, the Company has adapted the
modified-prospective transition method. Prior periods were not restated to
reflect the impact of adopting the new standard. As a result of the adoption of
FAS 123R, stock-based compensation expense recognized during the quarter ended
March 31, 2006 includes compensation expense for all share-based payments
granted on or prior to, but not yet vested as of March 1, 2006, based on the
grant date fair value estimated in accordance with the original provisions of
FAS 123, and compensation cost for all share-based payments granted on or
subsequent to March 1, 2006, based on the grant date fair value estimated in
accordance with the provisions of FAS 123R.

         During the quarter ended May 31, 2006, the Company recognized
stock-based compensation expenses of $5,214 related to outstanding stock options
according to the provisions of FAS 123R, using the modified-prospective
transition method.

         Prior to the adoption of FAS 123R and for the year ended February 28,
2006, no tax benefits from the exercise of stock options have been recognized.
Any future excess tax benefits derived from the exercise of stock options will
be recorded prospectively and reported as cash flows from financing activities
in accordance with FAS 123R.

         Deferred charges for options granted to non-employees are determined in
accordance with FAS No. 123 and EITF 96-18 "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" as the fair value of the consideration or the fair
value of the equity instruments issued, whichever is more reliably measured.

         The weighted average Black-Scholes value of options granted under the
stock plans during the three months ended May 31, 2006 and 2005 was $.18 and
$.10, respectively. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumptions used for grants:

Three Months Ended May 31,                               2006         2005
                                                      ----------   ----------
         Weighted average expected life in years               3            5
         Dividends per share                                0.02         0.04
         Volatility                                          6.0%         6.0%
         Risk-free interest rate                             4.5%         3.9%

                                       11
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note B - Summary of Significant Accounting Policies (continued)

         Stock-based Compensation - The Company's pro forma net earnings and pro
forma earnings per share based upon the fair value at the grant dates for awards
under Epolin's plans are disclosed below.

                                                             Three Months Ended
                                                                May 31, 2005
                                                                ------------
Net earnings as reported                                        $    138,152

Deduct total additional stock-based employee
compensation cost, net of tax that would
have been included in net earnings under
fair value method                                                     32,300
                                                                ------------

Proforma net earnings                                           $    105,852
                                                                ============

Basic earnings per share:
  As reported                                                           0.01
                                                                ============
  Proforma                                                              0.01
                                                                ============

Average common shares outstanding                                 11,815,355
                                                                ============

Diluted earnings per share:
  As reported                                                           0.01
                                                                ============
  Proforma                                                              0.01
                                                                ============

Total diluted common shares outstanding                           11,962,900
                                                                ============


Note C - Inventories:

                                                           May 31,
                                                 ---------------------------
                                                     2006           2005
                                                 ------------   ------------
Raw materials and supplies                       $     62,756         66,032
Work in process                                       191,472        240,354
Finished goods                                        427,052        409,852
                                                 ------------   ------------

   Total                                         $    681,280        716,238
                                                 ============   ============

                                       12
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note D - Income Taxes:

1.  Federal and State deferred tax assets include:

                                                     2006           2005
                                                 ------------   ------------
    Temporary differences:
           Accelerated amortization              $     50,546         70,908
           Deferred compensation                      119,360        126,059
           Stock based compensation                     2,242             --
                                                 ------------   ------------
                  Total                               172,148        196,967

    Current portion                                     6,016          5,891
                                                 ------------   ------------

    Non-current portion                          $    166,132        191,076
                                                 ============   ============

2.  Income tax expense:

                                                     2006           2005
                                                 ------------   ------------
    Current:
           Federal                               $    110,241         58,500
           State                                       28,764         14,702
                                                 ------------   ------------

                  Total current                       139,005         73,202
                                                 ------------   ------------
    Deferred:
           Federal                                      3,300          1,112
           State                                          874            294
                                                 ------------   ------------

                  Total deferred                        4,174          1,406
                                                 ------------   ------------

                         Total                   $    143,179         74,608
                                                 ============   ============


                                       13
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note E - Treasury Stock:

         Consists of 923,645 shares as of May 31, 2006 at a net cost of $330,082
and 913,645 shares as of May 31, 2005 at a net cost of $321,932, respectively.

         The Company purchased 5,000 shares during the three months ended May
31, 2006.

Note F - Economic Dependency:

         A material portion of the Company's business is dependent on certain
domestic customers, the loss of which could have a material effect on
operations. During the three months ended May 31, 2006, approximately 40.6% of
sales were to three customers. Two of these customers, located in the Eastern
United States, accounted for 29.6% of sales. During the three months ended May
31, 2005, approximately 44.1% of sales were to three customers, two of these
customers, located in the Eastern United States, accounted for 39.0% of sales.

Note G - Rental Income Under Sublease:

         The Company entered into a sublease agreement with a non-related party
effective November 1, 2002 through August 31, 2005. Under the terms of the
lease, the tenant is to pay a base rent of $36,000 per year. The Company entered
into a new agreement with another non-related party effective September 1, 2005
for a term ending October 31, 2007. Under the terms of the new agreement, the
tenant is to pay a base rent of $18,000 per year.

Note H - Employee Benefits:

Simplified Employee Pension Plan - Effective June 1, 1994, the Company provides
a SAR/SEP plan to its employees as a retirement and income tax reduction
facility. Full time employees are eligible to participate immediately. Employees
may make pre-tax and after-tax contributions subject to Internal Revenue Service
limitations. Company contributions range from three to five percent after
completion of one year of service. Employer contributions totaled $12,683 and
$13,714 for the three months ended May 31, 2006 and 2005, respectively.

                                       14

<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note H - Employee Benefits (continued):

Stock Option Plan - The Company previously adopted The 1986 Stock Option Plan.
As of April 1996, under the terms of the Plan, options may no longer be granted.
On December 1, 1995, options to acquire up to 490,000 shares of the Company's
common stock were granted. Options exercised for all prior years totaled
455,000. Options cancelled for all prior years totaled 35,000. There were no
outstanding options as of May 31, 2006.

         The Company adopted the 1998 Stock Option Plan on December 1, 1998.
Under the terms of the plan, the Company reserved 750,000 shares of common stock
for issuance pursuant to the exercise of options to be granted under the Plan,
which do not meet the requirements of Section 422 of the Code. On September 15,
2001, the Board of Directors increased the reserve to 1,500,000. Options granted
expire five or ten years after the date granted and are subject to various
vesting periods as follows: (1) none exercisable prior to the first anniversary
of the date of grant, and (2) certain options will become exercisable as to 50%
of the shares underlying the option on each of the first and second
anniversaries of the date granted (3) certain options will become exercisable as
to 50% of the shares underlying the option on each of the second and fourth
anniversaries of the date granted. Options exercised through May 31, 2006
totaled 661,000. Options cancelled for all years totaled 160,000. All cancelled
options are available for future grants.

         A summary of the status of the Company's 1998 stock option plan as of
May 31, 2006, and the changes during the three months ended May 31, 2006 is
presented below:

                                                               Weighted-Average
Fixed Options:                                      Shares      Exercise Price
-------------                                    ------------   -------------
Balance - March 1, 2005                               322,000        $.30
        Granted                                       200,000         .54
        Cancelled                                     (35,000)        .25
        Exercised                                     (30,000)        .28
                                                 ------------

Balance - February 28, 2006                           457,000         .42
        Granted                                            --          --
        Cancelled                                      (5,000)        .25
        Exercised                                     (31,000)        .28
                                                 ------------

Balance - May 31, 2006                                421,000        $.42
                                                 ============


Exercisable at May 31, 2006                           160,000


                                       15
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note H - Employee Benefits (continued):

Stock Option and Stock-Based Employee Compensation - On November 1, 2004, the
Company entered into an "Option Agreement and Investment Agreement" with an
employee, the terms of which are as follows:

         1.       Stock Option - An option to purchase 100,000 shares of common
         stock at an exercise price equal to the fair market value of the
         Company's common stock at the date of grant. The option is exercisable
         only after the completion of the second year of employment.

         2.       Stock-based Employee Compensation - A grant of 100,000 shares
         of restricted common stock one year from the date of the agreement,
         provided the employee is then employed by the Company. In connection
         with this agreement, compensation in the amount of $33,000 was charged
         to selling, general and administrative expenses for the three months
         ended May 31, 2006.

Stock Option Plans - The following table summarizes information about fixed
stock options outstanding at May 31, 2006:
<TABLE>
<CAPTION>


             Outstanding Options                                Exercisable Options
----------------------------------------------------      -------------------------------
                      Number        Weighted-average         Number
   Range of        Outstanding         Remaining           Exercisable   Weighted-average
Exercise Price     at 2/28/06       Contractual Life       at 2/28/06     Exercise Price
--------------    ------------      ----------------      ------------   ----------------
<S>                     <C>           <C>                       <C>           <C>
    $.25                80,000        0.3 years                 80,000        $ .25
     .30                25,000        1.5                       25,000          .30
     .41               116,000        7.7                       55,000          .41
     .52               100,000        3.4                           --          .52
     .54               200,000        4.1                           --          .54
</TABLE>

There are 418,000 options attributable to future grants.

Note I - Segment Reporting:

         The Company currently operates in a single operating segment. In
addition, financial results are prepared and reviewed by management as a single
operating segment. The Company continually evaluates its operating activities
and the method utilized by management to evaluate such activities and will
report on a segment basis if and when appropriate to do so.

                                       16
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note I - Segment Reporting (continued):

Sales by geographic area are as follows:

                                                  Three Months Ended May 31,
                                                 ---------------------------
                                                     2006           2005
                                                 ------------   ------------
         United States                           $    816,459        479,116
         Asia                                         215,835        235,195
         Europe                                        56,618         80,670
         Other nations                                  5,158         11,318
                                                 ------------   ------------

            Total                                $  1,094,070        806,299
                                                 ============   ============

         One customer, located in the Southeastern United States, accounted for
more than 10% of revenues from continuing operations. This customer accounted
for 20.3% of sales of which 12.7% was near infrared dyes and 7.6% was security
inks.

         Long-lived assets include net property and equipment. The Company had
long-lived assets of $788,401 and $713,821 located in the United States at May
31, 2006 and 2005, respectively.

Note J - Accrued Expenses:

Accrued expenses consisted of the following as of May 31, 2006 and 2005,
respectively:

                                                     2006           2005
                                                 ------------   ------------
         Salaries and wages                            23,462          8,358
         Employment agreement                         271,585         52,410
         Professional fees                             19,100          5,000
         Property taxes                                 8,138          8,142
                                                 ------------   ------------

            Total accrued expenses               $    322,285         73,910
                                                 ============   ============


                                       17
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note K - Earnings per Share:

         Basic earnings per share are computed on the basis of the weighted
average number of shares of common stock outstanding during the period. Diluted
earnings per share is computed on the basis of the weighted average number of
shares of common stock plus the effect of dilutive potential common shares
outstanding during the period using the treasury stock method. Dilutive
potential common shares include outstanding stock options. The components of
basic and diluted earnings per share are as follows:

                                                  Three Months Ended May 31,
                                                 ---------------------------
                                                     2006           2005
                                                 ------------   ------------
Basic Earnings Per Common Share:

Net income                                       $    225,899        138,152

Average common shares
 outstanding                                       11,959,942     11,815,355
                                                 ============   ============

Basic earnings per
 common share                                    $       0.02           0.01
                                                 ============   ============

Diluted Earnings Per Common Share:

Net income                                       $    225,899        138,152
                                                 ============   ============
Average common shares
 outstanding                                       11,959,942     11,815,355

Common shares issuable with respect
to options issued to employees
with a dilutive effect                                 93,618        147,545
                                                 ------------   ------------

Total diluted common shares
 outstanding                                       12,053,560     11,962,900
                                                 ============   ============

Diluted earnings per
 common share                                    $       0.02           0.01
                                                 ============   ============

                                       18
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note L - Commitments and Contingencies:

         Losses for contingencies such as litigation and environmental matters
are recognized in income when they are probable and can be reasonably estimated.
Gain contingencies are not recognized in income.

Lease Obligations - The Company leases its real estate under an operating lease
with a related party. The lease effective November 1, 1996 was for a term of
five (5) years with three (3) five (5) year options at annual rentals of
$97,740. The Cost of Living Index adjustment effective with the second year has
been waived by the subsidiary. Rent includes reimbursed insurance costs.
Generally, management expects that the lease will be renewed in the normal
course of business.

         Rental expense charged to operations, eliminated in consolidation,
amounted to $24,435 for the three months ended May 31, 2006 and 2005,
respectively.

Future minimum payments for the current option period:

           Fiscal years ending February:
           -----------------------------
                       2007                                     $73,305
                       2008                                      97,740
                       2009                                      65,160


Deferred Compensation - On December 29, 1995, the Company entered into a
deferred compensation agreement with James Ivchenko, President, whose additional
annual compensation of $19,645 plus interest is deferred until he reaches age 65
or is terminated. The obligation is funded by the cash value in a life insurance
policy. Commencing on December 2005, annual payments will be made to the officer
in the amount of $32,000 for ten consecutive years.

         In connection with this agreement, deferred compensation in the amount
of $6,020 was charged to selling, general and administrative expenses for the
three months ended May 31, 2005.

         On January 1, 1996, the Company entered into a deferred compensation
agreement with Dr. Murray S. Cohen, PhD, Chairman of the Board, wherein $25,000
per year was accrued. This agreement, with unfunded accruals of $79,041,
terminated on June 25, 1998, and will be paid upon retirement in either equal
consecutive monthly payments for a period not exceeding sixty (60) months or a
single payment equal to the then present value of the account, said selection to
be at the discretion of the Company.

                                       19
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note L - Commitments and Contingencies (continued):

Employment Agreements - Effective March 1, 1999, the Company entered into
ten-year employment agreements with officers/directors:

         Murray S. Cohen, PhD, Chairman of the Board - To be paid an annual
salary of not less than the greater of his annual base salary in effect
immediately prior to the effective date of the agreement or any subsequently
established annual base salary. He is to receive 2.00% on gross annual sales of
no more than $3,000,000, effective with the year ended February 28, 2000,
increasing by 0.25% a year during the term of the agreement. In the event of
death or disability during the fiscal year, Dr. Cohen or his estate will receive
100% of his annual salary plus additional compensation as described above, and
50% of his annual salary plus additional compensation each subsequent year for
the remainder of the ten-year term.

         James Ivchenko, President - To be paid an annual salary of not less
than the greater of his annual base salary in effect immediately prior to the
effective date of the agreement or any subsequently established annual base
salary. He is to receive 1.5% on gross annual sales of no more than $3,000,000,
effective with the year ended February 28, 2000, increasing by 0.25% a year
during the term of the agreement. In the event of death or disability during the
fiscal year, Mr. Ivchenko or his estate will receive 100% of his annual salary
plus additional compensation as described above, and 50% of his annual salary
plus additional compensation each subsequent year for the remainder of the
ten-year term.

         Accrued compensation included in selling, general and administrative as
of May 31, 2006 and 2005 was $76,585 and $52,410, respectively.

Bonus Agreement - Effective for the year ending February 28, 2006, the company
shall pay Gregory Amato, CEO, bonus compensation in an amount equal to ten
percent of the increase, if any, in the Company's current year consolidated net
income as compared to the consolidated net income for the fiscal year ending
February 28, 2005. The term net income shall mean consolidated net income after
taxes but before any extraordinary items. For subsequent fiscal years, the
employee shall be eligible for cash bonuses in such amounts as determined by the
Board of Directors.

Note M - Dividends:

         In April 2006, the Company's Board of Directors declared a cash
dividend of two cents per share on all common shares outstanding. The dividend,
in the amount of $239,327 was paid on May 1, 2006 to shareholders of record on
April 20, 2006.

                                       20
<PAGE>

                           EPOLIN, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                              MAY 31, 2006 AND 2005

Note N - Research and Development:

         The Company has developed substantial research and development
capability. The Company's efforts are devoted to (i) developing new products to
satisfy defined market needs, (ii) providing quality technical services to
assure the continued success of its products for its customers' applications,
(iii) providing technology for improvements to its products, processes and
applications, and (iv) providing support to its manufacturing plant for cost
reduction, productivity and quality improvement programs. Expenditures for
Company sponsored product research and product development of $127,237 and
$116,675 were included in cost of sales for the three months ended May 31, 2006
and 2005, respectively. Expenditures for fiscal year 2007 are projected to
remain at approximately the same level as in fiscal 2006.

Note O - Environmental Matters

         The Company's past and present daily operations include activities,
which are subject to extensive federal, and state environmental and safety
regulations. Compliance with these regulations has not had, nor does the Company
expect such compliance to have, any material effect upon expected capital
expenditures, net income, financial condition, or competitive position of the
Company. The Company believes that its current practices and procedures comply
with applicable regulations. The Company's policy is to accrue environmental and
related costs of a non-capital nature when it is both probable that a liability
has been incurred and that the amount can be reasonably estimated. No such
amounts have been accrued in these statements.

                                       21