**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
  **FORM
        10-Q**
  
 
 **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
 
 
 **For
        The Quarterly Period Ended June 30, 2006**
  
 Commission
        File No. **001-31354**
  
 
 
 
 **LaPolla
        Industries, Inc.**
 *(Exact
        name of Registrant as Specified in its Charter)*
 
 **Delaware**
                *(State
                  of Incorporation)*
              
              **13-3545304**
                *(I.R.S.
                  Employer Identification No.)***Intercontinental
                  Business Park**
                **15402
                  Vantage Parkway East, Suite 322**
                **Houston,
                  Texas**
                *(Address
                  of Principal Executive Offices)*
              
              **77032**
                *(Zip
                  Code)*
  **(281)
        219-4700**
 *(Registrant’s
        Telephone Number)*
  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, and (2) has been subject to such filing requirements
        for
        the past 90 days.
 Yes þ  No o
  Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act). Yes o No
þ
 
 Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of the latest practicable date.
  As
        of
        July 12, 2006 there were 53,574,251 shares
        of Common Stock, par value $.01, outstanding.
   
 
  **LAPOLLA
        INDUSTRIES, INC.**
 **FORM
        10-Q**
 **FOR
        THE QUARTER ENDED JUNE 30, 2006**
 **INDEX**
 
 **Page****PART
                  I**
              
              
              **FINANCIAL
                  INFORMATION****Item
                  1**
              
              **Financial
                  Statements**
              
              **3****Item
                  2**
              
              **Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations**
              
              **10****Item
                  3**
              
              **Quantitative
                  and Qualitative Disclosures About Market
                  Risk**
              
              **13****Item
                  4**
              
              **Controls
                  and Procedures**
              
              **13****PART
                  II**
              
              
              **OTHER
                  INFORMATION****Item
                  1**
              
              **Legal
                  Proceedings**
              
              **13****Item
                  2**
              
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds**
              
              **13****Item
                  3**
              
              **Defaults
                  Upon Senior Securities**
              
              **13****Item
                  4**
              
              **Submission
                  of Matters to a Vote of Security
                  Holders**
              
              **13****Item
                  5**
              
              **Other
                  Information**
              
              **13****Item
                  6**
              
              **Exhibits**
              
              **13****SIGNATURES**
              
              **14****INDEX
                  OF EXHIBITS**
              
              **15**
 
 2
 
 **PART
        I — FINANCIAL INFORMATION**
 
 **Item
        1.**  **Financial
        Statements.**
  **LAPOLLA
        INDUSTRIES, INC.**
 **INDEX
        TO FINANCIAL STATEMENTS AND**
 **FINANCIAL
        STATEMENT SCHEDULES**
  **CONDENSED
                  CONSOLIDATED BALANCE SHEETS****June
                  30, 2006 (Unaudited) and December 31, 2005**
              **4****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)****Three
                  and Six Months Ended June 30, 2006 and 2005**
              **5****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)****Six
                  Months Ended June 30, 2006 and 2005**
              **6****NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (UNAUDITED)**
              **7**
  All
        schedules for which provision is made in the applicable accounting regulations
        of the Securities and Exchange Commission are not required under the related
        instructions or are not applicable, and therefore have been
        omitted.
  3
 
 **LAPOLLA
        INDUSTRIES, INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
  **June
                      30,**
                  
                  **December
                      31,****2006**
                  
                  **2005****(Unaudited)****ASSETS**Current
                      Assets:Cash
                  
                  $
                  14,389
                  
                  $
                  400,621Trade
                      Receivables, Net
                  
                  
                  4,971,073
                  
                  
                  4,209,931Inventories
                  
                  
                  2,738,450
                  
                  
                  1,393,603Prepaid
                      Expenses and Other Current Assets
                  
                  
                  851,699
                  
                  
                  295,557Deferred
                      Income Taxes, Net
                  
                  
                  1,175,302
                  
                  
                  1,140,172Total
                      Current Assets
                  
                  
                  9,750,914
                  
                  
                  7,439,884Property,
                      Plant and Equipment, Net
                  
                  
                  1,012,503
                  
                  
                  907,574Other
                      Assets:Goodwill
                  
                  
                  1,951,000
                  
                  
                  1,951,000Other
                      Intangible Assets, Net
                  
                  
                  176,935
                  
                  
                  188,476Deposits
                      and Other Non-Current Assets
                  
                  
                  136,591
                  
                  
                  148,107Total
                      Other Assets
                  
                  
                  2,264,527
                  
                  
                  2,287,583Total
                      Assets
                  
                  $
                  13,027,943
                  
                  $
                  10,635,041**LIABILITIES
                      AND STOCKHOLDERS’ EQUITY**Current
                      Liabilities:Accounts
                      Payable
                  
                  $
                  5,603,609
                  
                  $
                  4,074,946Accrued
                      Expenses and Other Current Liabilities
                  
                  
                  506,023
                  
                  
                  1,019,071Line
                      of Credit
                  
                  
                  2,499,074
                  
                  
                  21,816Loans
                      Payable - Related Party
                  
                  
                  590,000
                  
                  
                  3,000,000Current
                      Portion of Note Payable - Other
                  
                  
                  —
                  
                  
                  1,693,211Current
                      Portion of Long-Term Debt
                  
                  
                  109,472
                  
                  
                  78,543Current
                      Portion of Liabilities from Discontinued Operations
                  
                  
                  222,945
                  
                  
                  699,345Total
                      Current Liabilities
                  
                  
                  9,531,123
                  
                  
                  10,586,932Other
                      LiabilitiesNote
                      Payable - Related Party
                  
                  
                  3,000,000
                  
                  
                  —Non
                      Current Portion of Note Payable - Other
                  
                  
                  —
                  
                  
                  —Non
                      Current Portion of Long-Term Debt
                  
                  
                  154,316
                  
                  
                  218,417Non
                      Current Portion of Liabilities from Discontinued
                      Operations
                  
                  
                  238,870
                  
                  
                  140,641Reserve
                      for Litigation
                  
                  
                  5,000
                  
                  
                  175,378Total
                      Other Liabilities
                  
                  
                  3,398,186
                  
                  
                  534,436Total
                      Liabilities
                  
                  
                  12,929,309
                  
                  
                  11,121,368Stockholders’
                      Equity:Preferred
                      Stock, $1.00 Par Value; 2,000,000 Shares Authorized, of which
                      Designations:Series
                      A Convertible, 750,000 Shares Authorized; 62,500 Issued and
                      Outstanding(Less
                      Offering Costs of $7,465) atJune
                      30, 2006 and December 31, 2005; $62,500 aggregate liquidation
                      preference
                      at June 30,
                      2006 and December 31, 2005
                  
                  
                  55,035
                  
                  
                  55,035Common
                      Stock, $.01 Par Value; 65,000,000 Shares Authorized; 53,502,251
                      Issued andOutstanding
                      at June 30, 2006 and December 31, 2005, respectively
                  
                  
                  535,023
                  
                  
                  532,103Additional
                      Paid-In Capital
                  
                  
                  61,941,885
                  
                  
                  61,594,114Accumulated
                      Deficit
                  
                  
                  (62,433,309
                  )
                  
                  (62,667,579
                  )Total
                      Stockholders’ Equity
                  
                  
                  98,634
                  
                  
                  (486,327
                  )Total
                      Liabilities and Stockholders’ Equity
                  
                  $
                  13,027,943
                  
                  $
                  10,635,041
 See
            accompanying notes to condensed consolidated financial
            statements.
  4
  **LAPOLLA
        INDUSTRIES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
 
 
 **Three
                  Months Ended June 30,**
              
              **Six
                  Months Ended June 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005**Sales
              
              $
              7,576,888
              
              $
              5,206,176
              
              $
              13,619,002
              
              $
              7,663,829Cost
                  of Sales
              
              
              5,935,335
              
              
              4,183,298
              
              
              10,727,152
              
              
              6,388,291Gross
                  Profit
              
              
              1,641,553
              
              
              1,022,878
              
              
              2,891,850
              
              
              1,275,538Operating
                  Expenses:Selling,
                  General and Administrative
              
              
              1,466,685
              
              
              1,620,713
              
              
              2,626,159
              
              
              2,710,215Professional
                  Fees
              
              
              44,775
              
              
              126,723
              
              
              114,253
              
              
              393,218Depreciation
                  and Amortization
              
              
              43,143
              
              
              26,153
              
              
              84,364
              
              
              48,712Consulting
                  Fees
              
              
              39,433
              
              
              64,011
              
              
              60,436
              
              
              125,392Interest
                  Expense
              
              
              26,147
              
              
              10,702
              
              
              41,319
              
              
              28,542Interest Expense - Related Party
              
              
              44,877
              
              
              43,694
              
              
              90,247
              
              
              82,344Other
                  (Income) Expense
              
              
              —
              
              
              (17,242
              )
              
              —
              
              
              (17,242
              )Total
                  Operating Expenses
              
              
              1,665,060
              
              
              1,874,754
              
              
              3,016,778
              
              
              3,371,181Operating
                  Income (Loss) Before Income Taxes
              
              
              (23,507
              )
              
              (851,876
              )
              
              (124,928
              )
              
              (2,095,643
              )Income
                  Tax Benefit (Expense)-Deferred
              
              
              (98,230
              )
              
              —
              
              
              35,130
              
              
              —Operating
                  Income (Loss)
              
              
              (121,737
              )
              
              (851,876
              )
              
              (89,798
              )
              
              (2,095,643
              )Income
                (Loss) From
                Discontinued Operations,Net of Income Tax Benefit-Deferred
              
              
              29,000
              
              
              2,514
              
              
              324,068
              
              
              (324,591
              )Net
                  Income (Loss)
              
              $
              (92,737
              )
              $
              (849,362
              )
              $
              234,270
              
              $
              (2,420,234
              )Net
                  Income (Loss) Per Share - Basic and Diluted:Continuing
                  Operations
              
              $
              (0.002
              )
              $
              (0.016
              )
              $
              (0.001
              )
              $
              (0.041
              )Discontinued
                  Operations
              
              
              0.000
              
              
              0.000
              
              
              0.006
              
              
              (0.006
              )Total
              
              $
              (0.002
              )
              $
              (0.016
              )
              $
              0.005
              
              $
              (0.047
              )Weighted
                  Average Shares Outstanding
              
              
              53,318,521
              
              
              50,306,865
              
              
              53,264,083
              
              
              50,252,462
 
 See
        accompanying notes to condensed consolidated financial
        statements.
  5
  **LAPOLLA
        INDUSTRIES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 **Six
                    Month Ended June 30,****2006**
                
                **2005***Cash
                    Flows From Operating Activities*Net
                    Income (Loss)Continuing
                    Operations
                
                $
                (89,798
                )
                $
                (2,095,645
                )Discontinued
                    Operations
                
                
                324,069
                
                
                (324,591
                )Adjustments
                    to Reconcile Net Income (Loss) to Net Cash Provided by (Used
                    in) by
                    Operating Activities:Depreciation
                    and Amortization
                
                
                125,222
                
                
                65,124Provision
                    for Losses on Trade Receivables
                
                
                23,757
                
                
                25,498Deferred
                    Income Taxes
                
                
                (35,130
                )
                
                —Loss
                    on Disposition of Property, Plant and Equipment
                
                
                —
                
                
                (2,657
                )Share
                    Based Compensation Expense
                
                
                350,691
                
                
                344,890Changes
                    in Assets and Liabilities, Net of Effects of Purchase of Business
                    Entity:Trade
                    Receivables
                
                
                (784,900
                )
                
                (1,340,505
                )Inventories
                
                
                (1,344,847
                )
                
                (292,637
                )Prepaid
                    Expenses and Other Current Assets
                
                
                (556,143
                )
                
                (12,364
                )Deposits
                    and Other Non Current Assets
                
                
                11,517
                
                
                (136,835
                )Accounts
                    Payable
                
                
                1,528,663
                
                
                1,429,855Accrued
                    Expenses and Other Current Liabilities
                
                
                (423,553
                )
                
                240,815Other
                    Liabilities
                
                
                (171,415
                )
                
                184,420Net
                    Operating Activities of Discontinued Operations
                
                
                (331,569
                )
                
                (410,931
                )Net
                    Cash Provided by (Used in) Operating Activities
                
                
                (1,373,436
                )
                
                (2,325,563
                )*Cash
                    Flows From Investing Activities*Additions
                    to Property, Plant and Equipment
                
                $
                (218,612
                )
                $
                (313,456
                )Payment
                    for Purchase of Business Entity, Net of Cash Acquired
                
                
                —
                
                
                (1,931,825
                )Net
                    Cash Provided by (Used in) Investing Activities
                
                
                (218,612
                )
                
                (2,245,281
                )*Cash
                    Flows From Financing Activities*Proceeds
                    from the Issuance of Stock
                
                $
                —
                
                $
                —Proceeds
                    from Lines of Credit
                
                
                3,199,074
                
                
                2,967Principal
                    Repayments on Lines of Credit
                
                
                (721,816
                )
                
                (122,063
                )Proceeds
                    from Loans Payable - Related Party
                
                
                670,000
                
                
                4,302,500Principal
                    Repayments on Loans Payable - Related Party
                
                
                (80,000
                )
                
                —Proceeds
                    from Note Payable - Other
                
                
                800,000
                
                
                500,000Principal
                    Repayments on Note Payable - Other
                
                
                (2,493,211
                )
                
                —Principal
                    Repayments on Long Term Debt
                
                
                (121,629
                )
                
                (29,500
                )Net
                    Financing Activities of Discontinued Operations
                
                
                (46,602
                )
                
                —Net
                    Cash Provided by (Used in) Financing Activities
                
                
                1,205,816
                
                
                4,653,904*Net
                    Increase (Decrease) In Cash*
                
                $
                (386,232
                )
                $
                83,060*Cash
                    at Beginning of Period*
                
                
                400,621
                
                
                24,465*Cash
                    at End of Period*
                
                $
                14,389
                
                $
                107,525*Supplemental
                    Disclosure of Cash Flow Information:*Cash
                    Payments for Income Taxes
                
                $
                —
                
                $
                —Cash
                    Payments for Interest
                
                $
                78,293
                
                $
                30,015*Supplemental
                    Schedule of Non Cash Investing and Financing
                    Activities*Property,
                    Plant and Equipment acquired via issuance of Long Term
                    Debt
                
                $
                37,349
                
                $
                184,420Common
                    Stock issued as Other Compensation pursuant to Employment
                    Agreements
                
                
                —
                
                
                5,600Common
                    Stock issued for Director Fees pursuant to Director Compensation
                    Plan
                
                
                183,960
                
                
                339,290Common
                    Stock issued in connection with Purchase of Business
                    Entity
                
                
                —
                
                
                22Common
                    Stock issued upon Cancellation of Indebtedness
                
                
                —
                
                
                6,000,000Conversion
                    of Loans Payable - Related Party to Note Payable - Related
                    Party
                
                $
                3,000,000
                
                $
                —
  See
        accompanying notes to condensed consolidated financial statements.
  6
 **LAPOLLA
            INDUSTRIES, INC.**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 **Note
                        1.**
                    **Basis
                        of Presentation.**
 
 The
              condensed financial statements included herein are unaudited. In the
              opinion of
              management, these statements include all adjustments, consisting only
              of normal,
              recurring adjustments, necessary for a fair presentation of the financial
              position of LaPolla Industries, Inc. (the “Company” or “LaPolla”) as of June 30,
              2006, the results of operations for the three and six months ended
              June 30, 2006
              and 2005, and cash flows for the six months ended June 30, 2006 and
              2005. These
              condensed financial statements should be read in conjunction with the
              financial
              statements and notes included in LaPolla’s Annual Report on Form 10-K, as may be
              amended from time to time, for the year ended December 31, 2005. The
              results of
              operations for the three and six months ended June 30, 2006 are not
              necessarily
              indicative of the results to be expected for the full year. Certain
              amounts in
              the prior years have been reclassified to conform to the 2006 unaudited
              condensed consolidated financial statement presentation. Refer to the
              Company’s
              2005 annual report on Form 10-K for a description of major accounting
              policies.
              There have been no material changes to these accounting policies during
              2006.
 
 **Note
                        2.**
                    **Dependence
                        on Few Suppliers.**
 
 The
              Company is dependent on a few suppliers for certain of its raw materials
              and
              finished goods. For the quarter ended June 30, 2006 and 2005, raw materials
              and
              finished goods purchased from the Company’s three largest suppliers accounted
              for approximately 55% and 69% of purchases, respectively.
 
 **Note
                        3.**
                    **Trade
                        Receivables.**
 
 The
              following is a summary of trade receivables at:
 **June
                      30, 2006**
                  
                  **December
                      31, 2005**Trade
                      Receivables
                  
                  $
                  5,061,422
                  
                  $
                  4,276,522Less:
                      Allowance for Doubtful Accounts
                  
                  
                  (90,349
                  )
                  
                  (66,591
                  )Trade
                      Receivables, Net
                  
                  $
                  4,971,073
                  
                  $
                  4,209,931
 
 **Note
                      4.**
                  **Inventories.**
 
 The
            following is a summary of inventories at:
 
 **June
                      30, 2006**
                  
                  **December
                      31, 2005**Raw
                      Materials
                  
                  $
                  580,994
                  
                  $
                  591,398Finished
                      Goods
                  
                  
                  2,157,456
                  
                  
                  802,205Total
                  
                  $
                  2,738,450
                  
                  $
                  1,393,603
 
 **Note
                      5.**
                  **Deferred
                      Income Taxes.**
 
 The
            following is a summary of deferred income taxes at:
  *Deferred
                      Tax Assets:*
                  
                  **June
                      30, 2006**
                  
                  **December
                      31, 2005**Net
                      Operating Loss Carry-Forwards
                  
                  $
                  29,357,569
                  
                  $
                  29,232,642Temporary
                      Differences:Nondeductible
                      Accruals
                  
                  
                  (688,229
                  )
                  
                  (390,048
                  )Net
                      Operating Loss Carry-Forward after Temporary Differences
                  
                  
                  28,669,340
                  
                  
                  28,842,594Statutory
                      Tax Rate
                  
                  
                  34
                  %
                  
                  34
                  %Total
                      Deferred Tax Assets
                  
                  
                  9,747,576
                  
                  
                  9,806,482Valuation
                      Allowance for Deferred Tax Assets
                  
                  
                  (8,572,274
                  )
                  
                  (8,666,310
                  )Net
                      Deferred Taxes
                  
                  $
                  1,175,302
                  
                  $
                  1,140,172
 
 ***See
            also*** Note 6
            for a summary of deferred income taxes for discontinued operations.
 **Note
                        6.**
                    **Discontinued
                        Operations.**
 
 The
            consolidated financial statements and the related notes reflect the financial
            position, results of operations and cash flows on an aggregated basis
            for the
            Company’s discontinued operations for the periods presented. The following is
            a
            summary of the liabilities of discontinued operations at:
 
 *Liabilities*
                  
                  **June
                      30, 2006**
                  
                  **December
                      31, 2005**Accounts
                      Payable
                  
                  $
                  —
                  
                  $
                  199,427Line
                      of Credit
                  
                  
                  453,315
                  
                  
                  499,918Reserve
                      for Litigation
                  
                  
                  8,500
                  
                  
                  140,641Total
                      Liabilities
                  
                  $
                  461,815
                  
                  $
                  839,986
 
 Significant
            components of the Company's discontinued operations deferred tax assets
            and
            liabilities are as follows at:
  *Deferred
                      Tax Assets:*
                  
                  **June
                      30****,
                      2006**
                  
                  **December
                      31, 2005**Net Operating Loss Carry-Forwards (No Temporary
                      Differences)
                  
                  $
                  33,493,405
                  
                  $
                  33,949,445Statutory
                      Tax Rate
                  
                  
                  34
                  %
                  
                  34
                  %Total
                      Deferred Tax Assets before Utilization
                  
                  
                  11,387,758
                  
                  
                  11,542,811Income
                      Tax (Benefit) Utilized
                  
                  
                  (44,870
                  )
                  
                  —Income
                      Taxes Currently Payable (Refundable)
                  
                  
                  110,183
                  
                  
                  44,870Total
                      Income Tax (Benefit) to be Utilized
                  
                  
                  (110,183
                  )
                  
                  (44,870
                  )Total
                      Deferred Tax Assets after Utilization
                  
                  
                  11,232,704
                  
                  
                  11,497,941Valuation
                      Allowance for Deferred Tax Assets
                  
                  
                  (11,232,704
                  )
                  
                  (11,497,941
                  )Net
                      Deferred Taxes
                  
                  $
                  —
                  
                  $
                  —
 
 Future
            tax benefit for net operating loss carry-forwards are subject to limitations
            based on discontinued operating subsidiaries’ abilities to generate future
            taxable income.
  7
  **LAPOLLA
            INDUSTRIES, INC.**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
            CONTINUED)**
 
 **Note
                      7.**
                  **Property,
                      Plant and Equipment.**
 
 The
            following is a summary of property, plant and equipment at:
 
 **June
                      30****,
                      2006**
                  
                  **December
                      31, 2005**Vehicles
                  
                  $
                  381,085
                  
                  $
                  379,676Leasehold
                      Improvements
                  
                  
                  14,191
                  
                  
                  14,191Office
                      Furniture and Equipment
                  
                  
                  164,258
                  
                  
                  164,258Computers
                      and Software
                  
                  
                  406,300
                  
                  
                  312,999Machinery
                      and Equipment
                  
                  
                  604,776
                  
                  
                  367,478Plant
                      Construction in Progress
                  
                  
                  —
                  
                  
                  116,756Total
                      Property, Plant and Equipment
                  
                  $
                  1,570,610
                  
                  $
                  1,355,358Less:
                      Accumulated Depreciation
                  
                  
                  (561,467
                  )
                  
                  (447,784
                  )Total
                      Property, Plant and Equipment, Net
                  
                  $
                  1,009,143
                  
                  $
                  907,574
 
 **Note
                      8.**
                  **Goodwill
                      and Other Intangible
                      Assets.**
 
 The
            following is a summary of goodwill at:
 
 **June
                      30****,
                      2006**
                  
                  **December
                      31, 2005**Coatings
                  
                  $
                  1,049,458
                  
                  $
                  1,049,458Foam
                  
                  
                  640,577
                  
                  
                  640,577Paints
                  
                  
                  123,092
                  
                  
                  123,092Sealants
                  
                  
                  125,507
                  
                  
                  125,507Adhesives
                  
                  
                  172
                  
                  
                  172Equipment
                  
                  
                  12,194
                  
                  
                  12,194Totals
                  
                  $
                  1,951,000
                  
                  $
                  1,951,000
 
 The
            following is a summary of other intangible assets at:
 
 **June
                      30****,
                      2006**
                  
                  **December
                      31, 2005**Customer
                      List
                  
                  $
                  69,235
                  
                  $
                  69,235Product
                      Formulation
                  
                  
                  138,471
                  
                  
                  138,471Total
                      Other Intangible Assets
                  
                  $
                  207,706
                  
                  $
                  207,706Less:
                      Accumulated Amortization
                  
                  
                  (30,772
                  )
                  
                  (19,230
                  )Total
                      Other Intangible Assets, Net
                  
                  $
                  176,935
                  
                  $
                  188,476
 
 **Note
                      9.**
                  **Line
                      of Credit.**
 
 On
            May
            31, 2006, the Chairman and the Company established a $3,000,000 Line
            of Credit
            with Wachovia Bank, N.A. for working capital to improve management of
            cash flow
            and facilitate growth and expansion of the Company. Upon activation of
            the Line
            of Credit, the Company drew down $2,493,211 to pay off the Note Payable
            - Other
            previously reflected on the face of the Consolidated Balance Sheets. ***See*** Note
            11 -
            Note Payable - Other.
 **Note
                        10.**
                    **Loans
                        Payable - Related Party.**
 
 On
              March
              20, 2006, the Company received a written commitment from the Chairman
              of the
              Board to provide $1,500,000 for working capital to facilitate growth
              and
              expansion of the Company. The funding will take the form of a demand
              loan
              bearing six percent (6%) interest per annum. The Chairman loaned the
              Company
              funds aggregating $590,000, net under this commitment as of June 30,
              2006. ***See
              also*** Note 12
              - Note Payable - Related Party.
 
 **Note
                        11.**
                    **Note
                        Payable - Other.**
 
 On
              June
              2, 2005, the Company and the Chairman signed a Promissory Note with
              Wachovia
              bank, N.A. granting the Company access to $2,000,000, which was drawn
              against
              from time to time for the operations of the Company (“Note”), at a rate equal to
              1-month LIBOR plus two and one-quarter percent (2.25) per annum (“LIBOR-Based
              Rate”). On March 24, 2006, the parties amended the Note to increase the
              amount
              to $2,500,000, and extend the maturity date to January 1, 2008 (“Amended Note”).
              The Company borrowed $2,493,211 under the Amended Note until it was
              paid off on
              May 31, 2006. ***See*** Note
              9 -
              Line of Credit.
 
 **Note
                        12.**
                    **Note
                        Payable - Related Party.**
 
 On
              February 8, 2006, the Company executed a Promissory Note in favor of
              the
              Chairman of the Board for $3,000,000, which bears interest at six percent
              6% per
              annum, with principal to be paid on December 31, 2007 (“Related Party Note”);
              provided, however, that if the Company subsequent to the date hereof
              but prior
              to December 31, 2007 raises private debt or equity financing yielding
              gross
              proceeds of not less than $7,000,000, then the unpaid principal balance
              will
              become due and payable. Prior to establishment of the Related Party
              Note, the
              Company owed the Chairman $3,000,000 which was advanced during 2005
              for working
              capital and previously classified as Loans Payable - Related Party.
              The Related
              Party Note memorialized the cancellation of the demand nature of the
              $3,000,000
              indebtedness owed by the Company to the Chairman and established a
              repayment
              date and condition of prepayment in the event the Company achieves
              a
              financing.
  8
 
 **LAPOLLA
              INDUSTRIES, INC.**
 **NOTES
              TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
              CONTINUED)**
 
 **Note
                        13.**
                    **Business
                        Segment Information.**
 
 The
              Company is a national manufacturer and distributor with seven segments:
              Coatings, Foam, Paints, Sealants, Adhesives, Equipment, and All Other.
              The
              Company established these segments in the fourth quarter of 2005 due
              to a change
              in the structure of its internal organization which caused the composition
              of
              its prior reportable segments originally based on subsidiaries to change.
              The
              three and six months ended June 30, 2005 have been restated to reflect
              the
              change. The Company’s segments are organized based on differences in products.
              The Company primarily manufactures coatings and distributes foam, paints,
              sealants, adhesives, equipment, and all other products. Production
              facilities
              are located in Texas, Florida and Arizona. The accounting policies
              of the
              segments are the same as those described in the summary of significant
              accounting policies. The Company allocates resources to segments and
              evaluates
              the performance of segments based upon reported segment income before
              income
              taxes. A substantial amount of administrative expenses are allocated
              to the
              segments. The portion not allocated to the segments represents the
              unallocated
              cost of certain corporate expenses, insurance, investor relations,
              and gains and
              losses related to the disposal of corporate assets and are included
              in *Unallocated
              Amounts* .
              There
              are no intersegment sales or transfers.
  **Segments**
  **Three
                          Months Ended June 30, 2006****Coatings**
                      
                      **Foam**
                      
                      **Paints**
                      
                      **Sealants**
                      
                      **Adhesives**
                      
                      **Equipment**
                      
                      **All
                          Other**
                      
                      **Totals**Sales
                      
                      $
                      2,716,622
                      
                      $
                      3,963,958
                      
                      $
                      296,437
                      
                      $
                      290,740
                      
                      $
                      26,233
                      
                      $
                      196,971
                      
                      $
                      85,927
                      
                      $
                      7,576,888Depreciation
                          and Amortization
                      
                      
                      34,515
                      
                      
                      7,037
                      
                      
                      526
                      
                      
                      516
                      
                      
                      47
                      
                      
                      350
                      
                      
                      153
                      
                      
                      43,144Interest
                          Expense
                      
                      
                      22,247
                      
                      
                      32,461
                      
                      
                      2,428
                      
                      
                      2,381
                      
                      
                      215
                      
                      
                      1,613
                      
                      
                      704
                      
                      
                      62,049Segment
                          Profit (Loss)
                      
                      
                      311,628
                      
                      
                      30,552
                      
                      
                      24,237
                      
                      
                      5,887
                      
                      
                      904
                      
                      
                      (4,109
                      )
                      
                      28,134
                      
                      
                      397,233Segment
                          Assets(1)
                      
                      
                      4,395,637
                      
                      
                      5,523,154
                      
                      
                      488,226
                      
                      
                      483,624
                      
                      
                      32,485
                      
                      
                      254,812
                      
                      
                      105,840
                      
                      
                      11,283,777Expenditures
                          for Segment Assets
                      
                      $
                      57,453
                      
                      $
                      12,236
                      
                      $
                      915
                      
                      $
                      6,349
                      
                      $
                      81
                      
                      $
                      608
                      
                      $
                      265
                      
                      $
                      77,907
  **Three
                            Months Ended June 30, 2005****Coatings**
                        
                        **Foam**
                        
                        **Paints**
                        
                        **Sealants**
                        
                        **Adhesives**
                        
                        **Equipment**
                        
                        **All
                            Other**
                        
                        **Totals**Sales
                        
                        $
                        1,904,208
                        
                        $
                        2,860,424
                        
                        $
                        211,443
                        
                        $
                        189,548
                        
                        $
                        4,602
                        
                        $
                        6,232
                        
                        $
                        29,719
                        
                        $
                        5,206,176Depreciation
                            and Amortization
                        
                        
                        20,923
                        
                        
                        4,531
                        
                        
                        335
                        
                        
                        300
                        
                        
                        7
                        
                        
                        10
                        
                        
                        47
                        
                        
                        26,153Interest
                            Expense
                        
                        
                        16,700
                        
                        
                        25,086
                        
                        
                        1,854
                        
                        
                        1,662
                        
                        
                        40
                        
                        
                        55
                        
                        
                        261
                        
                        
                        45,658Segment
                            Profit (Loss)
                        
                        
                        194,787
                        
                        
                        (136,567
                        )
                        
                        20,653
                        
                        
                        24,286
                        
                        
                        (589
                        )
                        
                        679
                        
                        
                        (1,845
                        )
                        
                        101,404Segment
                            Assets(1)
                        
                        
                        2,966,392
                        
                        
                        3,520,118
                        
                        
                        335,948
                        
                        
                        316,322
                        
                        
                        4,805
                        
                        
                        18,467
                        
                        
                        29,918
                        
                        
                        7,191,970Expenditures
                            for Segment Assets
                        
                        $
                        140,896
                        
                        $
                        103,400
                        
                        $
                        7,643
                        
                        $
                        14,859
                        
                        $
                        166
                        
                        $
                        225
                        
                        $
                        1,074
                        
                        $
                        268,263
 
 **Six
                          Months Ended June 30, 2006****Coatings**
                      
                      **Foam**
                      
                      **Paints**
                      
                      **Sealants**
                      
                      **Adhesives**
                      
                      **Equipment**
                      
                      **All
                          Other**
                      
                      **Totals**Sales
                      
                      $
                      4,800,355
                      
                      $
                      7,151,652
                      
                      $
                      621,098
                      
                      $
                      519,294
                      
                      $
                      30,265
                      
                      $
                      373,021
                      
                      $
                      123,317
                      
                      $
                      13,619,002Depreciation
                          and Amortization
                      
                      
                      67,491
                      
                      
                      13,683
                      
                      
                      1,188
                      
                      
                      994
                      
                      
                      58
                      
                      
                      714
                      
                      
                      236
                      
                      
                      84,364Interest
                          Expense
                      
                      
                      40,012
                      
                      
                      59,610
                      
                      
                      5,177
                      
                      
                      4,328
                      
                      
                      252
                      
                      
                      3,109
                      
                      
                      1,028
                      
                      
                      113,516Segment
                          Profit
                      
                      
                      607,906
                      
                      
                      155,734
                      
                      
                      65,912
                      
                      
                      43,361
                      
                      
                      823
                      
                      
                      26,341
                      
                      
                      32,699
                      
                      
                      932,776Segment
                          Assets(1)
                      
                      
                      4,339,027
                      
                      
                      5,541,433
                      
                      
                      548,716
                      
                      
                      481,367
                      
                      
                      20,912
                      
                      
                      267,816
                      
                      
                      84,506
                      
                      
                      11,283,777Expenditures
                          for Segment Assets
                      
                      $
                      154,829
                      
                      $
                      56,703
                      
                      $
                      4,924
                      
                      $
                      17,092
                      
                      $
                      240
                      
                      $
                      2,958
                      
                      $
                      978
                      
                      $
                      237,724
  **Six
                              Months Ended June 30, 2005****Coatings**
                          
                          **Foam**
                          
                          **Paints**
                          
                          **Sealants**
                          
                          **Adhesives**
                          
                          **Equipment**
                          
                          **All
                              Other**
                          
                          **Totals**Sales
                          
                          $
                          2,814,194
                          
                          $
                          3,991,182
                          
                          $
                          383,444
                          
                          $
                          345,927
                          
                          $
                          4,602
                          
                          $
                          30,417
                          
                          $
                          94,063
                          
                          $
                          7,663,829Depreciation
                              and Amortization
                          
                          
                          38,970
                          
                          
                          8,018
                          
                          
                          770
                          
                          
                          695
                          
                          
                          9
                          
                          
                          61
                          
                          
                          189
                          
                          
                          48,712Interest
                              Expense
                          
                          
                          34,671
                          
                          
                          49,171
                          
                          
                          4,724
                          
                          
                          4,262
                          
                          
                          57
                          
                          
                          375
                          
                          
                          1,159
                          
                          
                          94,419Segment
                              Profit (Loss)
                          
                          
                          98,717
                          
                          
                          (435,031
                          )
                          
                          11,039
                          
                          
                          1,424
                          
                          
                          (733
                          )
                          
                          3,164
                          
                          
                          (7,291
                          )
                          
                          (328,711
                          )Segment
                              Assets(1)
                          
                          
                          2,973,966
                          
                          
                          3,369,979
                          
                          
                          385,314
                          
                          
                          362,072
                          
                          
                          3,319
                          
                          
                          32,995
                          
                          
                          64,326
                          
                          
                          7,191,971Expenditures
                              for Segment Assets
                          
                          $
                          169,469
                          
                          $
                          110,468
                          
                          $
                          10,613
                          
                          $
                          19,750
                          
                          $
                          127
                          
                          $
                          842
                          
                          $
                          2,603
                          
                          $
                          313,872
  The
              following are reconciliations of reportable segment profit or loss,
              and assets,
              to the Company’s consolidated totals for the years indicated:
  **Profit
              or Loss**
 
 **Three
                        Months Ended June 30,**
                    
                    **Six
                        Months Ended June 30,****2006**
                    
                    **2005**
                    
                    **2006**
                    
                    **2005**Total
                        Profit or Loss for Reportable Segments
                    
                    $
                    397,232
                    
                    $
                    101,405
                    
                    $
                    932,777
                    
                    $
                    (328,712
                    )Unallocated
                        Amounts:Corporate
                        Expenses
                    
                    
                    (420,739
                    )
                    
                    (953,281
                    )
                    
                    (1,057,705
                    )
                    
                    (1,766,933
                    )Income
                        (Loss) Before Income Taxes
                    
                    $
                    (23,507
                    )
                    $
                    (851,876
                    )
                    $
                    (124,928
                    )
                    $
                    (2,095,645
                    )
 
 **Assets****June
                        30, 2006**
                    
                    **December
                        31, 2005**Total
                        Assets for Reportable Segments(1)
                    
                    $
                    11,283,777
                    
                    $
                    8,205,904Other
                        Unallocated Amounts(2)
                    
                    
                    1,744,166
                    
                    
                    2,429,137Consolidated
                        Total
                    
                    $
                    13,027,943
                    
                    $
                    10,635,041
 
 (1)
                    Segment
                        assets are the total assets used in the operation of each
                        segment.
 (2)
                      Includes
                          corporate assets which are principally cash, prepaid expenses
                          and other
                          current assets, and deferred tax
                          assets.
  9
 
 **Item2.**
                    **Management’s
                        Discussion and Analysis of Financial Condition and Results
                        of
                        Operations.**
 
 *Overview*
 
 This
              financial review presents our operating results for the quarter, and
              six months,
              ended June 30, 2006 and 2005, and our financial condition at June 30,
              2006.
              Except for the historical information contained herein, the following
              discussion
              contains forward-looking statements that are subject to known and unknown
              risks,
              uncertainties and other factors that may cause our actual results to
              differ
              materially from those expressed or implied by such forward-looking
              statements.
              We discuss such risks, uncertainties and other factors under the caption
              “Forward Looking Statements” in this section of this report. In addition, the
              following review should be read in connection with the information
              presented in
              our consolidated financial statements and the related notes for the
              year ended
              December 31, 2005.
 
 **Performance
              for the Second Quarter of 2006 compared to the Second Quarter of
              2005**
  **Overall
              Results of Operations**
  The
              following is a summary of sales for the three months ended:
 
 **June
                        30****,
                        2006**
                    
                    **June
                        30****,
                        2005**Sales
                    
                    $
                    7,576,888
                    
                    $
                    5,206,176
 
 Our
              sales
              increased $2,370,712, or 46%, for the second quarter of 2006 compared
              to the
              second quarter of 2005, due to an increase in the number of sales personnel,
              independent representatives, and distributors selling our various existing
              and
              new product lines across all of our segments, which resulted in greater
              penetration in the markets in which we participate.
 
 Our
              gross
              profit increased $618,675, or 60%, for the three months ended June
              30, 2006
              compared to the three months ended June 30, 2005, due to sales volume
              growth in
              all of our segments. The gross margin increased 2% for the second quarter
              of
              2006 compared to the second quarter of 2005, due to economies of scale
              realized
              from increased purchasing power for the raw materials related to our
              manufactured, and finished, goods, improved manufacturing efficiencies,
              and
              changes in our product mix.
 
 Our
              total
              costs and expenses are comprised of cost of sales, selling, general
              and
              administrative expenses, or SG&A, professional fees, depreciation and
              amortization, consulting fees, interest expense, interest expense -
              related
              party, and other income (expense). These total costs and expenses increased
              $1,542,343, or 25%, for the second quarter of 2006 compared to the
              second
              quarter of 2005, due to an increase of $1,752,037 for cost of sales,
              $16,989 for
              depreciation and amortization, $15,444 for interest expense, and $1,183
              for
              interest expense - related party, offset primarily by a decrease of
              $154,027 for
              SG&A, $81,948 for professional fees and $24,577 for consulting
              fees.
 
 Cost
              of
              sales increased $1,752,037, or 42%, for the three months ended June
              30, 2006
              compared to the three months ended June 30, 2005, due to an increase
              in
              purchases of raw materials for manufactured, and finished, goods to
              support our
              sales growth.
 
 SG&A
              decreased $154,027, or 10%, for the quarter ended June 30, 2006 compared
              to the
              quarter ended June 30, 2005, due to a decrease of $35,571 for insurances,
              $64,467 for advertising, $341,140 for director fees, $28,878 for investor
              relations, $5,438 for rents, $25,498 for bad debts, and $164,755 for
              corporate
              office expenses, offset by an increase of $349,258 for payroll and
              related
              employee benefits, $70,124 for sales commissions, $6,509 for travel
              and related
              services, $62,142 for marketing, promotions and trade shows, $15,313
              for
              recruiting fees, and $8,375 for American Stock Exchange Fees.
 
 Professional
              fees decreased $81,948, or 65%, for the second quarter of 2006 compared
              to the
              second quarter of 2005, due to a decrease of $29,380 for outside accountants,
              auditing and auditing related services and $52,568 for legal fees.
 
 Depreciation
              and amortization expense increased $16,989, or 83%, for the three months
              ended
              June 30, 2006 compared to the three months ended June 30, 2005, due
              to an
              increase of $16,989 relating to depreciable property, plant and
              equipment.
 
 Consulting
              fees decreased $24,577, or 38%, for the quarter ended June 30, 2006
              compared to
              the quarter ended June 30, 2005, due to a decrease in outside professional
              services for investor relations, computer software, and insurance.
 
 Interest
              expense increased $15,444, or 144%, for the three months ended June
              30, 2006
              compared to the three months ended June 30, 2005, due to an increase
              in the
              aggregate amount of funds borrowed from the note payable - other, which
              note
              payable - other was subsequently replaced with a line of credit during
              the
              second quarter of 2006. Interest expense - related party increased
              $1,183, or
              3%, in the second quarter of 2006 compared to the second quarter of
              2005.
 
 We
              had
              income of $29,000 from discontinued operations for the second quarter
              of 2006
              due to a reduction in the reserve for litigation for discontinued operations
              compared to income of $2,514 for the second quarter of 2005.
 
 Net
              loss
              and loss per share for the second quarter of 2006 were $92,737 and
              $0.002,
              respectively, compared to a $849,361 net loss and $0.016 net loss per
              share, for
              the second quarter of 2005. The net loss was primarily attributable
              to non-cash
              items relating to share-based compensation expense and deferred tax
              asset.
 
 **Results
              of Business Segments**
 
 The
              following is a summary of sales by segment for the three months
              ended:
 
 **Segments**
                    
                    **June
                        30****,
                        2006**
                    
                    **June
                        30****,
                        2005**Coatings
                    
                    $
                    2,716,622
                    
                    $
                    1,904,208Foam
                    
                    
                    3,963,958
                    
                    
                    2,860,424Paints
                    
                    
                    296,437
                    
                    
                    211,443Sealants
                    
                    
                    290,740
                    
                    
                    189,548Adhesives
                    
                    
                    26,233
                    
                    
                    4,602Equipment
                    
                    
                    196,971
                    
                    
                    6,232All
                        Other
                    
                    $
                    85,927
                    
                    $
                    29,719
 
 Coatings
              sales increased $812,414, or 43%, for the second quarter of 2006 compared
              to the
              second quarter of 2005, due to an increase in our sales force and marketing
              and
              promotion programs, which resulted in greater market penetration. Segment
              profit
              increased $116,841, or 60%, for the quarter ended June 30, 2006 compared
              to the
              quarter ended June 30, 2005. Other factors increasing the coatings
              segment
              profit for the quarter ended June 30, 2006 were increased sales volumes,
              manufacturing efficiencies, economies of scales realized for increased
              purchasing power for raw materials for manufactured, and finished,
              goods.
  10
 
 Foam
              sales increased $1,103,534, or 39%, for the quarter ended June 30,
              2006 compared
              to the quarter ended June 30, 2005, due to the same reasons enumerated
              in our
              coatings segment above. Segment profit was $30,552 for the three months
              ended
              June 30, 2006 compared to a loss of $136,567 for the three months ended
              June 30,
              2005. Other factors attributable to the foam segment profit for the
              second
              quarter of 2006 were increased sales volumes of higher margin foam
              products for
              insulation markets compared to lower margin foam products for roofing
              markets
              and increased purchasing power for finished goods.
 
 Paints
              sales increased $84,994, or 40%, for the three months ended June 30,
              2006
              compared to the three months ended June 30, 2005, as a result of an
              increase in
              our sales force and limited regional advertising, marketing and promotional
              programs. Segment profit increased $3,584, or 17%, for the quarter
              ended June
              30, 2006 compared to the quarter ended June 30, 2005. Other factors
              increasing
              the paints segment profit for the three months ended June 30, 2006
              were
              increased sales volumes and purchasing power for finished goods.
 
 Sealants
              sales increased $101,192, or 53%, for the second quarter of 2006 compared
              to the
              second quarter of 2005, due to the same reasons enumerated in our paints
              segment. Segment profit decreased $18,399 for the quarter ended June
              30, 2006
              compared to the quarter ended June 30, 2005. The sealants segment loss
              for the
              quarter ended June 30, 2006 was attributable to higher costs for finished
              goods.
 
 Adhesives
              sales increased $21,631, 470%, for the quarter ended June 30, 2006
              compared to
              the quarter ended June 30, 2005, as a result of an increase in demand.
              Segment
              profit was $904 for the second quarter of 2006 compared to a loss of
              $589 for
              the second quarter of 2005.
 
 Equipment
              sales increased $190,739, or 3,061%, for the three months ended June
              30, 2006
              compared to the three months ended June 30, 2005, due to the same reasons
              enumerated in our coatings and foam segments. Segment loss was $4,109
              for the
              second quarter of 2006 compared to a profit of $679 for the second
              quarter of
              2005.
 
 All
              Other
              sales increased $56,208, or 189%, for the second quarter of 2006 compared
              to the
              second quarter of 2005, due to an increase in walk-in customers in
              our Florida
              and Arizona locations needing sundry items. Segment profit was $28,134
              for the
              quarter ended June 30, 2006 compared to a loss of $1,845 for the quarter
              ended
              June 30, 2005.
 
 **Performance
              for the Six Months Ended June 30, 2006 compared to the Six Months Ended
              June 30,
              2005**
 
 **Overall
              Results of Operations**
  The
              following is a summary of sales for the six months ended:
 **June
                        30****,
                        2006**
                    
                    **June
                        30****,
                        2005**Sales
                    
                    $
                    13,619,002
                    
                    $
                    7,663,829
 
 Our
              sales
              increased $5,955,173, or 78%, for the six months ended June 30, 2006
              compared to
              the six months ended June 30, 2005, due to an increase in the number
              of sales
              personnel, independent representatives, and distributors selling our
              various
              existing and new product lines across all of our segments, which resulted
              in
              greater penetration in the markets in which we participate.
 
 Our
              gross
              profit increased $1,616,312, or 127%, for the six month period ended
              June 30,
              2006 compared to the prior year’s six month period, due to sales volume growth
              in all of our segments. The gross margin increased 4.6% for the six
              months ended
              June 30, 2006 compared to the six months ended June 30, 2005, due to
              economies
              of scale realized from increased purchasing power for the raw materials
              related
              to our manufactured, and finished, goods and improved manufacturing
              efficiencies.
 
 Our
              total
              costs and expenses are comprised of cost of sales, selling, general
              and
              administrative expenses, or SG&A, professional fees, depreciation and
              amortization, consulting fees, interest expense, interest expense - related
              party, and other income (expense). These total costs and expenses increased
              $3,984,458, or 41%, for the six months ended June 30, 2006 compared
              to the six
              months ended June 30, 2005, due to an increase of $4,338,861 for cost
              of sales,
              $35,651 for depreciation and amortization, $12,776 for interest expense,
              and
              $7,903 for interest expense - related party, offset primarily by a
              decrease of
              $84,056 for SG&A, $278,964 for professional fees and $64,956 for consulting
              fees.
 
 Cost
              of
              sales increased $4,338,861, or 68%, for the six month period ended
              June 30, 2006
              compared to the prior year’s six month period, due to an increase in purchases
              of raw materials for manufactured, and finished, goods to support our
              sales
              growth.
 
 SG&A
              decreased $84,056, or 3%, for the six months ended June 30, 2006 compared
              to the
              six months ended June 30, 2005, due to a decrease of $33,516 for insurances,
              $25,423 for travel and related services, $73,236 for advertising, $340,390
              for
              director fees, $25,375 for American Stock Exchange Fees, $17,514 for
              investor
              relations, $6,711 for rents, and $359,221 for corporate office expenses,
              offset
              by an increase of $523,801 for payroll and related employee benefits,
              $90,530
              for sales commissions, $143,450 for marketing, promotions and trade
              shows,
              $28,789 for recruiting fees, and $10,759 for bad debts.
 
 Professional
              fees decreased $278,964, or 71%, for the six month period ended June
              30, 2006
              compared to the prior year’s six month period, due to a decrease of $43,911 for
              outside accountants, auditing and auditing related services and $235,053
              for
              legal fees.
 
 Depreciation
              and amortization expense increased $35,651, or 73%, for the six months
              ended
              June 30, 2006 compared to the six months ended June 30, 2005, due to
              an increase
              of $31,805 relating to depreciable property, plant and equipment and
              $3,846
              related to amortizable assets.
 
 Consulting
              fees decreased $64,957, or 52%, for the six month period ended June
              30, 2006
              compared to the prior year’s six month period, due to a decrease in outside
              professional services for investor relations, computer software, and
              insurance.
 
 Interest
              expense increased $12,776, or 45%, for the six months ended June 30,
              2006
              compared to the six months ended June 30, 2005, due to an increase
              in the
              aggregate amount of funds borrowed from the note payable - other, which
              note
              payable - other was subsequently replaced with a line of credit during
              the
              second quarter of 2006. Interest expense - related party increased
              $7,903, or
              10%, for the six month period ended June 30, 2006 compared to the prior
              year’s
              six month period.
 
 We
              had
              income of $324,069 from discontinued operations for the six month period
              ended
              June 30, 2006 as a result of gains from write offs of aged accounts
              payables and
              a reduction in the reserve for litigation, compared to a loss of $324,591
              for
              the prior year’s six month period.
 
 Net
              income and earnings per share - assuming dilution for the six months
              ended June
              30, 2006 were $234,270 and $.005, respectively, compared to a $2,420,234
              net
              loss and $.047 net loss per share, for the six months ended June 30,
              2005. The
              net income was due to increases in sales forces, selling prices, economies
              of
              scale realized from increased purchasing power for the raw materials
              related to
              our manufactured, and finished, goods and improved manufacturing efficiencies,
              partially offset by non-cash items relating to share-based compensation
              expense
              and deferred tax asset.
  11
 
 **Results
              of Business Segments**
 
 The
              following is a summary of sales by segment for the six months
              ended:
 
 Segments
                    
                    **June
                        30,
                        2006**
                    
                    **June
                        30,
                        2005**Coatings
                    
                    $
                    4,800,355
                    
                    $
                    2,814,194Foam
                    
                    
                    7,151,652
                    
                    
                    3,991,182Paints
                    
                    
                    621,098
                    
                    
                    383,444Sealants
                    
                    
                    519,294
                    
                    
                    345,927Adhesives
                    
                    
                    30,265
                    
                    
                    4,602Equipment
                    
                    
                    373,021
                    
                    
                    30,417All
                        Other
                    
                    $
                    123,317
                    
                    $
                    94,063
  Coatings
              sales increased $1,986,161, or 71%, for the six months ended June 30,
              2006
              compared to the six months ended June 30, 2005, due to an increase
              in our sales
              force, advertising, marketing and promotion programs, which
              resulted in greater market penetration, and
              higher selling prices. Segment profit increased $509,189, or 516%,
              for the six
              month period ended June 30, 2006 compared to the prior year’s six month period.
              Other factors increasing the coatings segment profit for the six months
              ended
              June 30, 2006 were increased sales volumes, manufacturing efficiencies
              and
              economies of scales realized for increased purchasing power for raw
              materials
              for manufactured, and finished, goods.
 
 Foam
              sales increased $3,160,470, or 79%, for the six month period ended
              June 30, 2006
              compared to the prior year’s six month period, due to the same reasons
              enumerated in our coatings segment above. Segment profit was $155,734
              for the
              six months ended June 30, 2006 compared to a loss of $435,031 for the
              six months
              ended June 30, 2005. Other factors increasing the foam segment profit
              for the
              six month period ended June 30, 2006 were increased sales volumes of
              higher
              margin foam products for insulation markets compared to lower margin
              foam
              products for roofing markets and increased purchasing power for finished
              goods.
 
 Paints
              sales increased $237,654, or 62%, for the six months ended June 30,
              2006
              compared to the six months ended June 30, 2005, as a result of an increase
              in
              our sales force and limited regional advertising, marketing and promotional
              programs. Segment profit increased $54,873, or 497%, for the six month
              period
              ended June 30, 2006 compared to the prior year’s six month period. Other factors
              increasing the paints segment profit for the six months ended June
              30, 2006 were
              increased sales volumes and purchasing power for finished goods.
 
 Sealants
              sales increased $173,367, or 50%, for the six month period ended June
              30, 2006
              compared to the prior year’s six month period, due to the same reasons
              enumerated in our paints segment. Segment profit increased $41,937,
              or 2,945%,
              for the six months ended June 30, 2006 compared to the six months ended
              June 30,
              2005. Other factors increasing the sealants segment profit for the
              six month
              period ended June 30, 2006 were increased sales volumes partially offset
              by
              higher costs for finished goods.
 
 Adhesives
              sales increased $25,663 for the six months ended June 30, 2006 compared
              to the
              six months ended June 30, 2005, due to increased demand. Segment profit
              was $823
              for the six month period ended June 30, 2006 compared to a loss of
              $733 for the
              prior year’s six month period.
 
 Equipment
              sales increased $342,604, or 1,126%, for the six month period ended
              June 30,
              2006 compared to the prior year’s six month period, due to the same reasons
              enumerated in our coatings and foam segments. Segment profit increased
              $23,177,
              or 733%, for the six months ended June 30, 2006 compared to the six
              months ended
              June 30, 2005. Other factors increasing the equipment segment profit
              for the six
              month period ended June 30, 2006 were increased sales volumes.
 
 All
              Other
              sales increased $29,254, or 31%, for the six month period ended June
              30, 2006
              compared to the prior year’s six month period, due to an increase in walk-in
              customers in our Florida and Arizona locations needing sundry items.
              Segment
              profit was $32,699 for the six months ended June 30, 2006 compared
              to a loss of
              $7,291 for the six months ended June 30, 2005.
 
 **Liquidity
              and Capital Resources**
 
 Net
              cash
              used in our operations was $1,373,436 for the six months ended June
              30, 2006
              compared to $2,325,563 for the six month ended June 30, 2005. The cash
              used in
              operations for the six month period ended June 30, 2006 was attributable
              to our
              net income for the six month period, including
              the effect of adjustments to reconcile net income to cash provided
              by or used in
              operating activities and adjusting for non-cash items ,
              offset
              by increases in trade receivables, inventories, prepaid expenses and
              other
              current assets, and accounts payable, and decreases in deposits and
              other non
              current assets, accrued expenses and other current liabilities and
              other
              liabilities. For the six months ended June 30, 2006 and 2005, net cash
              used in
              operating activities for discontinued operations was $331,569 and $410,931,
              respectively. Cash from operations, available funds under the $3,000,000
              line of
              credit, as well as the funds available from the $1,500,000 commitment
              from the
              Chairman of the Board, are expected to continue to be sufficient to
              meet our
              operating requirements and to fund our capital spending. It is important
              to note
              that our Condensed Consolidated Balance Sheets reflect a minimal cash
              balance at
              June 30, 2006 due to a sweep feature incorporated in the $3,000,000
              line of
              credit, which feature is being utilized to manage cash flow fluctuations
              and
              automatically pay down the line of credit when cash is available in
              our banking
              accounts to minimize interest expense. Notwithstanding the foregoing,
              we may
              seek to raise additional funds through private placements of common
              stock to
              accredited sophisticated investors to fund our trade receivables growth
              during
              2006, an acquisition as part of our strategy for accelerating growth,
              or to pay
              down our short and long term debts, depending on market conditions.
              Net cash
              used in investing activities was $218,612 for the six months ended
              June 30, 2006
              compared to $2,245,281 for the six months ended June 30, 2005. We invested
              $93,302 in computers and software and $120,542 in machinery and equipment
              during
              the six month period ended June 30, 2006. Net cash provided by financing
              activities was $1,205,816 for the six month period ended June 30, 2006
              compared
              to $4,653,904 for the prior year’s six month period. At June 30, 2006, we are
              utilizing $2,499,074 from our line of credit and borrowed $590,000
              under the
              $1,500,000 commitment from the Chairman of the Board. We also made
              $121,629 in
              principal repayments on our long term debt during the six months ended
              June 30,
              2006.
 
 **Forward
              Looking Statements**
 
 Statements
              made by us in this report and in other reports and statements released
              by us
              that are not historical facts constitute “forward-looking statements” within the
              meaning of Section 27A of the Securities Act of 1933, Section 21 of
              the Securities Exchange Act of 1934 and the Private Securities Litigation
              Reform
              Act of 1995. These forward-looking statements are necessarily estimates
              reflecting the best judgment of senior management and express our opinions
              about
              trends and factors which may impact future operating results. You can
              identify
              these and other forward-looking statements by the use of words such
              as “may,”
“will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “intends,” “potential,” “continue,” or the negative of such terms,
              or other comparable terminology. Such statements rely on a number of
              assumptions
              concerning future events, many of which are outside of our control,
              and involve
              risks and uncertainties that could cause actual results to differ materially
              from opinions and expectations. Any such forward-looking statements,
              whether
              made in this report or elsewhere, should be considered in context with
              the
              various disclosures made by us about our businesses including, without
              limitation, the risk factors discussed below. In evaluating these statements,
              some of the factors that you should consider include the following:
              Financial
              position and results of operations, including general and administrative
              expense
              targets and effects on income from continuing operations; cash position
              and cash
              requirements, including the sufficiency of our cash requirements for
              the next
              twelve months; accounting estimates, including treatment of goodwill
              and
              intangible assets, doubtful accounts, inventory, warranty, and product
              returns;
              operations, supply chain, quality control, and manufacturing supply,
              capacity,
              and facilities; products and services, price of products, product lines,
              and
              product and sales channel mix; relationship with customers, suppliers
              and
              strategic partners; application specifications; credit facilities;
              real estate
              lease arrangements; industry trends and our response to these trends;
              sources of
              competition; outcome and effect of current and potential future litigation;
              common stock, including trading price; security of computer systems;
              and changes
              in accounting policies and practices, as may be adopted by regulatory
              agencies,
              and the Financial Accounting Standards Board. Consequently, while the
              list of
              factors presented here is considered representative, no such list should
              be
              considered to be a complete statement of all potential risks and
              uncertainties.
  12
  Unlisted
              factors may present significant additional obstacles to the realization
              of
              forward-looking statements. Although we believe our expectations are
              based on
              reasonable assumptions, judgments, and estimates, forward-looking statements
              involve known and unknown risks, uncertainties, contingencies, and
              other factors
              that could cause our or our industry's actual results, level of activity,
              performance or achievement to differ materially from those discussed
              in or
              implied by any forward-looking statements made by or on the Company
              and could
              cause our financial condition, results of operations, or cash flows
              to be
              materially adversely affected. We do not plan to update any such forward-looking
              statements and expressly disclaim any duty to update the information
              contained
              in this report except as required by law.
 
 **Item3.**
                    **Quantitative
                        and Qualitative Disclosures About Market
                        Risk.**
 
 We
              do not
              issue or invest in financial instruments or their derivatives for trading
              or
              speculative purposes and are not subject to material foreign currency
              exchange
              risks at this time. Our outstanding debt and related interest expense,
              as it
              relates to interest rate exposure, in the United States is currently
              not
              material to our operations.
 
 **Item4.**
                    **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, including our Principal Executive Officer and our
              Principal
              Financial Officer, as appropriate, to allow timely decisions regarding
              required
              disclosures. Our management, including our Principal Executive Officer
              and our
              Principal Financial Officer, does not expect that our disclosure controls
              or
              procedures will prevent all error and all fraud. A control system,
              no matter how
              well conceived and operated, can provide only reasonable, not absolute,
              assurance that the objectives of the control system are met. Further,
              the
              benefits of controls must be considered relative to their costs. Because
              of the
              inherent limitations in all control systems, no evaluation of controls
              can
              provide absolute assurance that all control issues and instances of
              fraud, if
              any, within us, have been detected. These inherent limitations include
              the
              realities that judgments in decision-making can be faulty, and that
              breakdowns
              can occur because of simple error or mistake. Additionally, controls
              can be
              circumvented by the individual acts of some persons, by collusion of
              two or more
              people, or by management override of the control. We carried out an
              evaluation,
              under the supervision and with the participation of our management,
              including
              our Principal Executive Officer and our Principal Financial Officer,
              of the
              effectiveness of the design and operation of our disclosure controls
              and
              procedures as of June 30, 2006, the end of the quarterly period covered
              by this
              report. The evaluation of our disclosure controls and procedures included
              a
              review of the disclosure controls’ and procedures’ objectives, design,
              implementation and the effect of the controls and procedures on the
              information
              generated for use in this report. In the course of our evaluation,
              we sought to
              identify data errors, control problems or acts of fraud and to confirm
              the
              appropriate corrective actions, including process improvements, were
              being
              undertaken. Based on the foregoing, our Principal Executive Officer
              and our
              Principal Financial Officer concluded that, as of the period covered
              by this
              report, our disclosure controls and procedures were effective and operating
              at a
              level appropriate to provide reasonable assurance. There were no changes
              in our
              internal controls after the second quarter of 2006.
 
 **PART
              II — OTHER INFORMATION**
  **Item
                        1.**
                    **Legal
                        Proceedings.**
 
 The
              disclosures set forth under Part I, Item 3, “Legal Proceedings” in our
              Annual Report on Form 10-K for the year ended December 31, 2005 and
              Part II, Item 1 in our Quarterly Report on Form 10-Q for the quarter
              ended March 31, 2006, are hereby incorporated in their entirety herein by
              this reference.
 
 V *arious
              Lawsuits and Claims Arising in the Ordinary Course of Business*
 
 We
              are
              involved in various lawsuits and claims arising in the ordinary course
              of
              business, which are, in our opinion, immaterial both individually and
              in the
              aggregate with respect to our consolidated financial position, liquidity
              or
              results of operations.
 
 **Item2.**
                    **Changes
                        in Securities and Use of
                        Proceeds.**
  **Recent
              Sales of Unregistered Securities**
 
 During
              the quarterly period ended June 30, 2006, we issued restricted common
              stock for
              certain private transactions, in reliance on Section 4(2) of the Act,
              as
              described below:
 
 (a) On
              May
              28, 2006, the fourth increment of 292,000 shares of restricted common
              stock
              granted and issued to our Chairman pursuant to a one time grant of
              1,168,000
              shares under the Director Compensation Plan (“Director Plan”), vested. We did
              not consider these shares issued and outstanding due to a vesting provision
              and
              non-delivery of the shares pending vesting and as such no value was
              ascribed to
              these shares when originally issued on May 28, 2002. The value ascribed
              to these
              vested shares was recorded at $183,960.
  **Item
                        3.**
                    **Defaults
                        Upon Senior Securities.**
  None.
 
 **Item4.**
                    **Submission
                        of Matters to a Vote of Security
                        Holders.**
  None.
  **Item5.**
                    **Other
                        Information.**
 
 Pursuant
              to SEC regulations, we are required to include a copy of our written
              audit
              committee charter as an appendix in our proxy statement at least once
              every
              three years. We did not include our audit committee charter in our
              most recent
              proxy statement as required and are including it as an exhibit to this
              report to
              satisfy this requirement.
  **Item
              6. Exhibits.**
  ***See*** Index of
              Exhibits on Page 15.
  13
  **SIGNATURES**
  Pursuant
              to the requirements of the Securities Exchange Act of 1934, the registrant
              has
              duly caused this report to be signed on its behalf by the undersigned
              thereunto
              duly authorized.
 
 **LAPOLLA
                      INDUSTRIES, INC.**Date:
                    July
                        28, 2006
                    
                    By:
                    
                    /s/
                    Douglas
                        J. Kramer, CEODouglas
                        J. KramerPresident
                        and CEO**LAPOLLA
                      INDUSTRIES, INC.**Date:
                    July
                        28, 2006
                    
                    By
                    
                    /s/
                    John
                        A. Campbell, CFOJohn
                        A. CampbellCFO
                        and Treasurer
  14
  **INDEX
              OF EXHIBITS**
 
 **Exhibit**
                      **Number**
                    
                    **Description**99.1
                    
                    Audit
                        Committee Charter, as Amended December 20, 2004.31.1
                    
                    Certification
                        of Principal Executive Officer pursuant to Section 302 of
                        the
                        Sarbanes-Oxley Act of 2002.31.2
                    
                    Certification
                        of Principal Financial Officer pursuant to Section 302 of
                        the
                        Sarbanes-Oxley Act of 2002.32
                    
                    Certification
                        of Principal Executive Officer and Principal Financial Officer
                        pursuant to
                        § 906 of Sarbanes-Oxley Act of
                        2002.
   15