----

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**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 September 30, 2006**

**001-31354**

| **LaPolla                  Industries, Inc.**                                              |
|--------------------------------------------------------------------------------------------|
| *(Exact                  name of Registrant as Specified in its                  Charter)* |

| **Delaware**                                                |   |                                                     |   | **13-3545304**                                          |
|-------------------------------------------------------------|--------|----------------------------------------------------------|--------|---------------------------------------------------------|
| *(State                  of Incorporation)*                 |   |                                                     |   | *(I.R.S.                  Employer Identification No.)* |
|                                                        |   |                                                     |   |                                                    |
| **Intercontinental                  Business Park**         |   |                                                     |   |                                                    |
| **15402                  Vantage Parkway East, Suite 322**  |   |                                                     |   |                                                    |
| **Houston,                  Texas**                         |   |                                                     |   | **77032**                                               |
| *(Address                  of Principal Executive Offices)* |   |                                                     |   | *(Zip                  Code)*                           |
|                                                        |   |                                                     |   |                                                    |
|                                                        |   | **(281)                  219-4700**                      |   |                                                    |
|                                                        |   | *(Registrant’s                  Telephone Number)* |   |                                                    |

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**LAPOLLA        INDUSTRIES, INC.**

**FORM        10-Q**

**FOR        THE QUARTER ENDED SEPTEMBER 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** |   | **11**   |
|                                   |                        |   |                                                                                                                              |   |     |
|                                   | **Item                  3** |   | **Quantitative                  and Qualitative Disclosures About Market                  Risk**                                  |   | **14**   |
|                                   |                        |   |                                                                                                                              |   |     |
|                                   | **Item                  4** |   | **Controls                  and Procedures**                                                                                      |   | **14**   |
|                                   |                        |   |                                                                                                                              |   |     |
| **PART                  II**           |                        |   | **OTHER                  INFORMATION**                                                                                            |   |     |
|                                   |                        |   |                                                                                                                              |   |     |
|                                   | **Item                  1** |   | **Legal                  Proceedings**                                                                                            |   | **15**   |
|                                   |                        |   |                                                                                                                              |   |     |
|                                   | **Item                  2** |   | **Unregistered                  Sales of Equity Securities and Use of                  Proceeds**                                 |   | **15**   |
|                                   |                        |   |                                                                                                                              |   |     |
|                                   | **Item                  3** |   | **Defaults                  Upon Senior Securities**                                                                              |   | **15**   |
|                                   |                        |   |                                                                                                                              |   |     |
|                                   | **Item                  4** |   | **Submission                  of Matters to a Vote of Security                  Holders**                                         |   | **15**   |
|                                   |                        |   |                                                                                                                              |   |     |
|                                   | **Item                  5** |   | **Other                  Information**                                                                                            |   | **15**   |
|                                   |                        |   |                                                                                                                              |   |     |
|                                   | **Item                  6** |   | **Exhibits**                                                                                                                      |   | **16**   |
|                                   |                        |   |                                                                                                                              |   |     |
| **SIGNATURES**                         |                        | **17** |
|                                   |                        |   |                                                                                                                              |   |     |
| **INDEX                  OF EXHIBITS** |                        | **18** |

----

*Index*

**PART        I — FINANCIAL INFORMATION**

| **Item                    1.** | **Financial                    Statements.** |
|--------------------------------|----------------------------------------------|

**LAPOLLA        INDUSTRIES, INC.**

**INDEX        TO FINANCIAL STATEMENTS AND**

**FINANCIAL        STATEMENT SCHEDULES**

| **CONDENSED                  CONSOLIDATED BALANCE SHEETS**                                             |   |
|--------------------------------------------------------------------------------------------------------|--------|
|                                                                                                   |   |   |   |
|                                                                                                   |   | **September                  30, 2006 (Unaudited) and December 31, 2005** | **4** |
|                                                                                                   |   |   |   |
| **CONDENSED                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)**                       |   |
|                                                                                                   |   |   |   |
|                                                                                                   |   | **Three                  and Nine Months Ended September 30, 2006 and 2005** | **5** |
|                                                                                                   |   |   |   |
| **CONDENSED                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)**                       |   |
|                                                                                                   |   |   |   |
|                                                                                                   |   | **Nine                  Months Ended September 30, 2006 and 2005** | **6** |
|                                                                                                   |   |   |   |
| **NOTES                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                  (UNAUDITED)** | **7**  |

----

*Index*

**LAPOLLA        INDUSTRIES, INC.**

**CONDENSED        CONSOLIDATED BALANCE SHEETS**

|                                                                                                                                                                                                                                                                                                                                                               |   |  **September                    30,** |        |  **December                    31,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|-------------|-------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                               |   |  **2006**                             |        |  **2005**                            |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |  **(Unaudited)**                      |        |                                 |   |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                         |   |                                  |        |                                 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                  |        |                                 |   |
| Current                    Assets:                                                                                                                                                                                                                                                                                                                                 |   |                                  |        |                                 |   |
| Cash                    and Cash Equivalents                                                                                                                                                                                                                                                                                                                       |   | $                                          | 492,400     |                                      | $      | 400,621 |   |
| Trade                    Receivables, Net                                                                                                                                                                                                                                                                                                                          |   |                                       | 5,041,967   |                                      |   | 4,209,931 |   |
| Inventories                                                                                                                                                                                                                                                                                                                                                        |   |                                       | 3,388,976   |                                      |   | 1,393,603 |   |
| Prepaid                    Expenses and Other Current Assets                                                                                                                                                                                                                                                                                                       |   |                                       | 1,008,370   |                                      |   | 295,557 |   |
| Deferred                    Income Taxes, Net                                                                                                                                                                                                                                                                                                                      |   |                                       | 561,995     |                                      |   | 1,140,172 |   |
| Total                    Current Assets                                                                                                                                                                                                                                                                                                                            |   |                                       | 10,493,708  |                                      |   | 7,439,884 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| Property,                    Plant and Equipment, Net                                                                                                                                                                                                                                                                                                              |   |                                       | 1,090,730   |                                      |   | 907,574 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| Other                    Assets:                                                                                                                                                                                                                                                                                                                                   |   |                                       |        |                                      |   |   |   |
| Goodwill                                                                                                                                                                                                                                                                                                                                                           |   |                                       | 1,951,000   |                                      |   | 1,951,000 |   |
| Other                    Intangible Assets, Net                                                                                                                                                                                                                                                                                                                    |   |                                       | 171,166     |                                      |   | 188,476 |   |
| Deposits                    and Other Non-Current Assets                                                                                                                                                                                                                                                                                                           |   |                                       | 100,308     |                                      |   | 148,107 |   |
| Total                    Other Assets                                                                                                                                                                                                                                                                                                                              |   |                                       | 2,222,474   |                                      |   | 2,287,583 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| Total                    Assets                                                                                                                                                                                                                                                                                                                                    |   | $                                          | 13,806,912  |                                      | $      | 10,635,041 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| **LIABILITIES                    AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                  |   |                                       |        |                                      |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| Current                    Liabilities:                                                                                                                                                                                                                                                                                                                            |   |                                       |        |                                      |   |   |   |
| Accounts                    Payable                                                                                                                                                                                                                                                                                                                                |   | $                                          | 6,479,677   |                                      | $      | 4,074,946 |   |
| Accrued                    Expenses and Other Current Liabilities                                                                                                                                                                                                                                                                                                  |   |                                       | 415,397     |                                      |   | 1,019,071 |   |
| Line                    of Credit                                                                                                                                                                                                                                                                                                                                  |   |                                       | 488,214     |                                      |   | 21,816 |   |
| Loans                    Payable - Related Party                                                                                                                                                                                                                                                                                                                   |   |                                       | —     |                                      |   | 3,000,000 |   |
| Note                    Payable - Other                                                                                                                                                                                                                                                                                                                            |   |                                       | —     |                                      |   | 1,693,211 |   |
| Current                    Portion of Long-Term Debt                                                                                                                                                                                                                                                                                                               |   |                                       | 117,255     |                                      |   | 78,543 |   |
| Current                    Portion of Liabilities from Discontinued Operations                                                                                                                                                                                                                                                                                     |   |                                       | 228,316     |                                      |   | 699,345 |   |
| Total                    Current Liabilities                                                                                                                                                                                                                                                                                                                       |   |                                       | 7,728,859   |                                      |   | 10,586,932 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| Other                    Liabilities                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| Non                    Current Portion of Long-Term Debt                                                                                                                                                                                                                                                                                                           |   |                                       | 164,288     |                                      |   | 218,417 |   |
| Non                    Current Portion of Liabilities from Discontinued                    Operations                                                                                                                                                                                                                                                              |   |                                       | 161,855     |                                      |   | 140,641 |   |
| Reserve                    for Litigation                                                                                                                                                                                                                                                                                                                          |   |                                       | 2,500       |                                      |   | 175,378 |   |
| Total                    Other Liabilities                                                                                                                                                                                                                                                                                                                         |   |                                       | 328,643     |                                      |   | 534,436 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| Total                    Liabilities                                                                                                                                                                                                                                                                                                                               |   |                                       | 8,057,502   |                                      |   | 11,121,368 |   |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| Stockholders’                    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) at September 30,                    2006 and December 31, 2005; $62,500 aggregate liquidation preference                    at                    September 30,                    2006 and December 31, 2005 |   |                                       | 55,035      |                                      |   | 55,035 |   |
| Series                    D, 25,000 Shares Authorized; 6,900 Issued and Outstanding at                    September 30,                    2006; $6,900,000 aggregate                    liquidation preference at September 30,                    2006                                                                                                           |   |                                       | 6,900       |                                      |   | — |   |
| Common                    Stock, $.01 Par Value; 65,000,000 Shares Authorized; 53,574,251                    Issued and                    Outstanding at September 30, 2006 and December 31, 2005,                    respectively                                                                                                                                |   |                                       | 535,743     |                                      |   | 532,103 |   |
| Additional                    Paid-In Capital                                                                                                                                                                                                                                                                                                                      |   |                                       | 68,970,809  |                                      |   | 61,594,114 |   |
| Accumulated                    Deficit                                                                                                                                                                                                                                                                                                                             |   |                                       | (63,819,077 | )                                         |   | (62,667,579 | ) |
| Total                    Stockholders’ Equity                                                                                                                                                                                                                                                                                                                |   |                                       | 5,749,410   |                                      |   | (486,327 | ) |
|                                                                                                                                                                                                                                                                                                                                                               |   |                                       |        |                                      |   |   |   |
| Total                    Liabilities and Stockholders’ Equity                                                                                                                                                                                                                                                                                                |   | $                                          | 13,806,912  |                                      | $      | 10,635,041 |   |

----

*Index*

**LAPOLLA        INDUSTRIES, INC.**

**CONDENSED        CONSOLIDATED STATEMENTS OF OPERATIONS**

**(UNAUDITED)**

|                                                              |   | **Three                  Months Ended September 30,** |       | **Nine                  Months Ended September 30,** |   |
|-------------------------------------------------------------------|--------|-------------------------------------------------------|------------|------------------------------------------------------|--------|
|                                                              |   | **2006**                                              |       | **2005**                                             |   | **2006** |   | **2005** |   |
| Sales                                                             |   | $                                                     | 9,116,759  |                                                 | $      | 5,559,461 |   | $ | 22,735,762 |   | $ | 13,223,290 |   |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Cost                  of Sales                                    |   |                                                  | 7,454,610  |                                                 |   | 4,438,514 |   |   | 18,181,763 |   |   | 10,826,805 |   |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Gross                  Profit                                     |   |                                                  | 1,662,149  |                                                 |   | 1,120,947 |   |   | 4,553,999 |   |   | 2,396,485 |   |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Operating                  Expenses:                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Selling,                  General and Administrative              |   |                                                  | 2,184,581  |                                                 |   | 1,509,665 |   |   | 4,810,740 |   |   | 4,219,879 |   |
| Professional                  Fees                                |   |                                                  | 53,212     |                                                 |   | 45,465 |   |   | 167,465 |   |   | 438,683 |   |
| Depreciation                  and Amortization                    |   |                                                  | 51,023     |                                                 |   | 25,009 |   |   | 135,387 |   |   | 73,721 |   |
| Consulting                  Fees                                  |   |                                                  | 34,458     |                                                 |   | 51,203 |   |   | 94,893 |   |   | 176,595 |   |
| Interest                  Expense                                 |   |                                                  | 53,486     |                                                 |   | 22,787 |   |   | 94,806 |   |   | 51,329 |   |
| Interest                  Expense - Related Party                 |   |                                                  | 52,849     |                                                 |   | 91,114 |   |   | 143,096 |   |   | 173,458 |   |
| Other                  (Income) Expense                           |   |                                                  | —    |                                                 |   | (5,269 | ) |   | — |   |   | (22,511 | ) |
| Total                  Operating Expenses                         |   |                                                  | 2,429,609  |                                                 |   | 1,739,973 |   |   | 5,446,387 |   |   | 5,111,154 |   |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Operating                  (Loss) Before Income Taxes             |   |                                                  | (767,460   | )                                                    |   | (619,026 | ) |   | (892,388 | ) |   | (2,714,669 | ) |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Income                  Tax (Expense)-Deferred                    |   |                                                  | (613,307   | )                                                    |   | — |   |   | (578,177 | ) |   | — |   |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Operating                  (Loss)                                 |   |                                                  | (1,380,767 | )                                                    |   | (619,026 | ) |   | (1,470,565 | ) |   | (2,714,669 | ) |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Income                  (Loss) From Discontinued Operations,      |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Net                  of Income Tax Benefit-Deferred               |   |                                                  | (5,000     | )                                                    |   | 349,117 |   |   | 319,068 |   |   | 24,526 |   |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Net                  (Loss)                                       |   | $                                                     | (1,385,767 | )                                                    | $      | (269,909 | ) | $ | (1,151,497 | ) | $ | (2,690,143 | ) |
| Plus:                  Dividends on Preferred Stock               |   |                                                  | (1,323     | )                                                    |   | — |   |   | (1,323 | ) |   | — |   |
| Net                  (Loss) Available to Common Stockholders      |   | $                                                     | (1,387,090 | )                                                    | $      | (269,909 | ) | $ | (1,152,820 | ) | $ | (2,690,143 | ) |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Net                  Income (Loss) Per Share - Basic and Diluted: |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Continuing                  Operations                            |   | $                                                     | (0.025     | )                                                    | $      | (0.012 | ) | $ | (0.027 | ) | $ | (0.054 | ) |
| Discontinued                  Operations                          |   |                                                  | (0.000     | )                                                    |   | 0.006 |   |   | 0.005 |   |   | 0.000 |   |
| Total                                                             |   | $                                                     | (0.025     | )                                                    | $      | (0.006 | ) | $ | (0.022 | ) | $ | (0.054 | ) |
|                                                              |   |                                                  |       |                                                 |   |   |   |   |   |   |   |   |   |
| Weighted                  Average Shares Outstanding              |   |                                                  | 53,551,051 |                                                 |   | 50,306,865 |   |   | 53,360,621 |   |   | 50,351,466 |   |

----

*Index*

**LAPOLLA        INDUSTRIES, INC.**

**CONDENSED        CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(UNAUDITED)**

|                                                                                                                                                                 |   | **Nine                      Months Ended September 30,** |       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|------------|
|                                                                                                                                                                 |   | **2006**                                                 |       | **2005** |   |
| *Cash                      Flows From Operating Activities*                                                                                                          |   |                                                     |       |   |   |
| Net                      Income (Loss)                                                                                                                               |   |                                                     |       |   |   |   |   |
| Continuing                      Operations                                                                                                                           |   | $                                                        | (1,470,565 | ) | $ | (2,714,672 | ) |
| Discontinued                      Operations                                                                                                                         |   |                                                     | 319,069    |   |   | 24,526 |   |
| Adjustments                      to Reconcile Net Income (Loss) to Net Cash Provided by (Used                      in) by                      Operating Activities: |   |                                                     |       |   |   |   |   |
| Depreciation                      and Amortization                                                                                                                   |   |                                                     | 199,769    |   |   | 107,492 |   |
| Provision                      for Losses on Trade Receivables                                                                                                       |   |                                                     | 133,465    |   |   | 53,295 |   |
| Deferred                      Income Taxes                                                                                                                           |   |                                                     | 578,177    |   |   | — |   |
| Accrued                      Dividends on Preferred Stock                                                                                                            |   |                                                     | (1,323     | ) |   | — |   |
| Loss                      on Disposition of Property, Plant and Equipment                                                                                            |   |                                                     | —    |   |   | (2,657 | ) |
| Share                      Based Compensation Expense                                                                                                                |   |                                                     | 488,558    |   |   | 518,270 |   |
| Changes                      in Assets and Liabilities, Net of Effects of Purchase of Business                      Entity:                                          |   |                                                     |       |   |   |   |   |
| Trade                      Receivables                                                                                                                               |   |                                                     | (965,502   | ) |   | (1,436,770 | ) |
| Inventories                                                                                                                                                          |   |                                                     | (1,995,373 | ) |   | (362,374 | ) |
| Prepaid                      Expenses and Other Current Assets                                                                                                       |   |                                                     | (537,313   | ) |   | (166,941 | ) |
| Deposits                      and Other Non Current Assets                                                                                                           |   |                                                     | (127,700   | ) |   | (68,283 | ) |
| Accounts                      Payable                                                                                                                                |   |                                                     | 2,404,731  |   |   | 1,663,572 |   |
| Accrued                      Expenses and Other Current Liabilities                                                                                                  |   |                                                     | (320,021   | ) |   | 57,857 |   |
| Other                      Liabilities                                                                                                                               |   |                                                     | (174,552   | ) |   | 344,798 |   |
| Net                      Operating Activities of Discontinued Operations                                                                                             |   |                                                     | (331,569   | ) |   | (800,179 | ) |
| Net                      Cash Provided by (Used in) Operating Activities                                                                                             |   |                                                     | (1,800,149 | ) |   | (2,782,066 | ) |
|                                                                                                                                                                 |   |                                                     |       |   |   |   |   |
| *Cash                      Flows From Investing Activities*                                                                                                          |   |                                                     |       |   |   |  |   |
| Additions                      to Property, Plant and Equipment                                                                                                      |   | $                                                        | (365,616   | ) | $ | (307,959 | ) |
| Payment                      for Purchase of Business Entity, Net of Cash Acquired                                                                                   |   |                                                     | —    |   |   | (1,931,825 | ) |
| Net                      Cash Provided by (Used in) Investing Activities                                                                                             |   |                                                     | (365,616   | ) |   | (2,239,784 | ) |
|                                                                                                                                                                 |   |                                                     |       |   |   |   |   |
| *Cash                      Flows From Financing Activities*                                                                                                          |   |                                                     |       |   |   |   |   |
| Proceeds                      from Lines of Credit                                                                                                                   |   | $                                                        | 6,361,214  |   | $ | 25,594 |   |
| Principal                      Repayments on Lines of Credit                                                                                                         |   |                                                     | (5,894,816 | ) |   | (182,082 | ) |
| Proceeds                      from Loans Payable - Related Party                                                                                                     |   |                                                     | 4,360,000  |   |   | 4,302,500 |   |
| Principal                      Repayments on Loans Payable - Related Party                                                                                           |   |                                                     | (610,000   | ) |   | — |   |
| Proceeds                      from Note Payable - Other                                                                                                              |   |                                                     | 3,823,339  |   |   | 1,250,000 |   |
| Principal                      Repayments on Note Payable - Other                                                                                                    |   |                                                     | (5,493,211 | ) |   | — |   |
| Principal                      Repayments on Long Term Debt                                                                                                          |   |                                                     | (170,734   | ) |   | (40,921 | ) |
| Net                      Financing Activities of Discontinued Operations                                                                                             |   |                                                     | (118,248   | ) |   | — |   |
| Net                      Cash Provided by (Used in) Financing Activities                                                                                             |   |                                                     | 2,257,544  |   |   | 5,335,091 |   |
|                                                                                                                                                                 |   |                                                     |       |   |   |   |   |
| *Net                      Increase (Decrease) In Cash*                                                                                                               |   | $                                                        | 91,779     |   | $ | 333,241 |   |
| *Cash                      and Cash Equivalents at Beginning of Period*                                                                                              |   |                                                     | 400,621    |   |   | 24,465 |   |
| *Cash                      and Cash Equivalents at End of Period*                                                                                                    |   | $                                                        | 492,400    |   | $ | 357,706 |   |
|                                                                                                                                                                 |   |                                                     |       |   |   |   |   |
| *Supplemental                      Disclosure of Cash Flow Information:*                                                                                             |   |                                                     |       |   |   |   |   |
|                                                                                                                                                                 |   |                                                     |       |   |   |   |   |
| Cash                      Payments for Income Taxes                                                                                                                  |   | $                                                        | —    |   | $ | — |   |
| Cash                      Payments for Interest                                                                                                                      |   | $                                                        | 131,763    |   | $ | 34,579 |   |
|                                                                                                                                                                 |   |                                                     |       |   |   |   |   |
| *Supplemental                      Schedule of Non Cash Investing and Financing                      Activities*                                                     |   |                                                     |       |   |   |   |   |
|                                                                                                                                                                 |   |                                                     |       |   |   |   |   |
| Property,                      Plant and Equipment acquired via issuance of Long Term                      Debt                                                      |   | $                                                        | 37,349     |   | $ | 327,082 |   |
| Common                      Stock issued as Other Compensation pursuant to Employment                      Agreements                                                |   |                                                     | —    |   |   | 10,960 |   |
| Common                      Stock issued for Director Fees pursuant to Director Compensation                      Plan                                               |   |                                                     | 233,640    |   |   | 339,290 |   |
| Common                      Stock issued in connection with Purchase of Business                      Entity                                                         |   |                                                     | —    |   |   | 22 |   |
| Conversion                      of Loans Payable - Related Party to Note Payable - Related                      Party                                                |   |                                                     | 3,000,000  |   |   | — |   |
| Conversion                      of Line of Credit to Note Payable - Other                                                                                            |   |                                                     | 3,000,000  |   |   | — |   |
| Conversion                      of Note Payable - Other to Note Payable - Related Party                                                                              |   |                                                     | 3,000,000  |   |   | — |   |
| Common                      Stock issued upon Cancellation of Indebtedness - Related                      Party                                                      |   | $                                                        | 6,900,000  |   | $ | 6,000,000 |   |

----

*Index*

**LAPOLLA        INDUSTRIES, INC.**

**NOTES        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

| **Note                  1.** | **Basis                  of Presentation.** |
|------------------------------|---------------------------------------------|

| **Note                  2.** | **Dependence                  on Few Suppliers.** |
|------------------------------|---------------------------------------------------|

| **Note                  3.** | **Trade                  Receivables.** |
|------------------------------|-----------------------------------------|

|                                                   |   | **September                  30, 2006** |      | **December                  31, 2005** |   |
|--------------------------------------------------------|--------|-----------------------------------------|-----------|----------------------------------------|--------|
| Trade                  Receivables                     |   | $                                       | 5,242,024 |                                   | $      | 4,276,522 |   |
| Less:                  Allowance for Doubtful Accounts |   |                                    | (200,057  | )                                      |   | (66,591 | ) |
| Trade                  Receivables, Net                |   | $                                       | 5,041,967 |                                   | $      | 4,209,931 |   |

| **Note                  4.** | **Inventories.** |
|------------------------------|------------------|

|                            |   | **September                  30, 2006** |      | **December                  31, 2005** |   |
|---------------------------------|--------|-----------------------------------------|-----------|----------------------------------------|--------|
| Raw                  Materials  |   | $                                       | 686,337   |                                   | $      | 591,398 |   |
| Finished                  Goods |   |                                    | 2,702,639 |                                   |   | 802,205 |   |
| Total                           |   | $                                       | 3,388,976 |                                   | $      | 1,393,603 |   |

| **Note                  5.** | **Deferred                  Income Taxes.** |
|------------------------------|---------------------------------------------|

| *Deferred                  Tax Assets:*                                       |   | **September                  30, 2006** |       | **December                  31, 2005** |   |
|-------------------------------------------------------------------------------|--------|-----------------------------------------|------------|----------------------------------------|--------|
|  Net                  Operating Loss Carry-Forwards                      |   | $                                       | 30,125,029 |                                   | $      | 29,232,642 |   |
| Temporary                  Differences:                                       |   |                                    |       |                                   |   |   |   |
| Nondeductible                  Accruals                                       |   |                                    | (1,027,252 | )                                      |   | (390,048 | ) |
| Net                  Operating Loss Carry-Forward after Temporary Differences |   |                                    | 29,097,777 |                                   |   | 28,842,594 |   |
| Statutory                  Tax Rate                                           |   |                                    | 34         | %                                      |   | 34 | % |
| Total                  Deferred Tax Assets                                    |   |                                    | 9,893,244  |                                   |   | 9,806,482 |   |
| Valuation                  Allowance for Deferred Tax Assets                  |   |                                    | (9,331,249 | )                                      |   | (8,666,310 | ) |
| Net                  Deferred Taxes                                           |   | $                                       | 561,995    |                                   | $      | 1,140,172 |   |

***See        also***

| **Note                  6.** | **Discontinued                  Operations.** |
|------------------------------|-----------------------------------------------|

| *Liabilities*                           |   | **September                  30, 2006** |    | **December                  31, 2005** |   |
|-----------------------------------------|--------|-----------------------------------------|---------|----------------------------------------|--------|
| Accounts                  Payable       |   | $                                       | — |                                   | $      | 199,427 |   |
| Line                  of Credit         |   |                                    | 387,671 |                                   |   | 499,918 |   |
| Reserve                  for Litigation |   |                                    | 2,500   |                                   |   | 140,641 |   |
| Total                  Liabilities      |   | $                                       | 390,171 |                                   | $      | 839,986 |   |

----

*Index*

**LAPOLLA        INDUSTRIES, INC.**

**NOTES        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED-        CONTINUED)**

| **Note                  6.** | **Discontinued                  Operations - continued.** |
|------------------------------|-----------------------------------------------------------|

| *Deferred                  Tax Assets:*                                       |   | **September                  30****,                  2006** |        | **December                  31, 2005** |   |
|-------------------------------------------------------------------------------|--------|--------------------------------------------------------------|-------------|----------------------------------------|--------|
| Net                  Operating Loss Carry-Forwards (No Temporary Differences) |   | $                                                            | 33,498,405  |                                   | $      | 33,949,445 |   |
| Statutory                  Tax Rate                                           |   |                                                         | 34          | %                                      |   | 34 | % |
| Total                  Deferred Tax Assets before Utilization                 |   |                                                         | 11,389,458  |                                   |   | 11,542,811 |   |
| Income                  Tax (Benefit) Utilized                                |   |                                                         | (44,870     | )                                      |   | — |   |
| Income                  Taxes Currently Payable (Refundable)                  |   |                                                         | 108,483     |                                   |   | 44,870 |   |
| Total                  Income Tax (Benefit) to be Utilized                    |   |                                                         | (108,483    | )                                      |   | (44,870 | ) |
| Total                  Deferred Tax Assets after Utilization                  |   |                                                         | 11,236,105  |                                   |   | 11,497,941 |   |
| Valuation                  Allowance for Deferred Tax Assets                  |   |                                                         | (11,236,105 | )                                      |   | (11,497,941 | ) |
| Net                  Deferred Taxes                                           |   | $                                                            | —     |                                   | $      | — |   |

**Note        7.**
**Property,        Plant and Equipment.**

|                                                      |   | **September                  30****,                  2006** |      | **December                  31, 2005** |   |
|-----------------------------------------------------------|--------|--------------------------------------------------------------|-----------|----------------------------------------|--------|
| Vehicles                                                  |   | $                                                            | 419,255   |                                   | $      | 379,676 |   |
| Leasehold                  Improvements                   |   |                                                         | 14,191    |                                   |   | 14,191 |   |
| Office                  Furniture and Equipment           |   |                                                         | 173,500   |                                   |   | 164,258 |   |
| Computers                  and Software                   |   |                                                         | 483,918   |                                   |   | 312,999 |   |
| Machinery                  and Equipment                  |   |                                                         | 630,112   |                                   |   | 367,478 |   |
| Plant                  Construction in Progress           |   |                                                         | —   |                                   |   | 116,756 |   |
| Total                  Property, Plant and Equipment      |   | $                                                            | 1,720,976 |                                   | $      | 1,355,358 |   |
| Less:                  Accumulated Depreciation           |   |                                                         | (630,246  | )                                      |   | (447,784 | ) |
| Total                  Property, Plant and Equipment, Net |   | $                                                            | 1,090,730 |                                   | $      | 907,574 |   |

| **Note                  8.** | **Goodwill                  and Other Intangible                  Assets.** |
|------------------------------|-----------------------------------------------------------------------------|

|      |   | **September                  30****,                  2006** |      | **December                  31, 2005** |   |
|-----------|--------|--------------------------------------------------------------|-----------|----------------------------------------|--------|
| Coatings  |   | $                                                            | 1,049,458 |                                   | $      | 1,049,458 |   |
| Foam      |   |                                                         | 640,577   |                                   |   | 640,577 |   |
| Paints    |   |                                                         | 123,092   |                                   |   | 123,092 |   |
| Sealants  |   |                                                         | 125,507   |                                   |   | 125,507 |   |
| Adhesives |   |                                                         | 172       |                                   |   | 172 |   |
| Equipment |   |                                                         | 12,194    |                                   |   | 12,194 |   |
| Totals    |   | $                                                            | 1,951,000 |                                   | $      | 1,951,000 |   |

|                                                |   | **September                  30****,                  2006** |    | **December                  31, 2005** |   |
|-----------------------------------------------------|--------|--------------------------------------------------------------|---------|----------------------------------------|--------|
| Customer                  List                      |   | $                                                            | 69,235  |                                   | $      | 69,235 |   |
| Product                  Formulation                |   |                                                         | 138,471 |                                   |   | 138,471 |   |
| Total                  Other Intangible Assets      |   | $                                                            | 207,706 |                                   | $      | 207,706 |   |
| Less:                  Accumulated Amortization     |   |                                                         | (36,540 | )                                      |   | (19,230 | ) |
| Total                  Other Intangible Assets, Net |   | $                                                            | 171,166 |                                   | $      | 188,476 |   |

| **Note                  9.** | **Line                  of Credit.** |
|------------------------------|--------------------------------------|

***See***

| **Note                  10.** | **Note                  Payable - Other.** |
|-------------------------------|--------------------------------------------|

***See***

----

*Index*

**LAPOLLA        INDUSTRIES, INC.**

**NOTES        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED-        CONTINUED)**

| **Note                  11.** | **Note                  Payable - Related Party.** |
|-------------------------------|----------------------------------------------------|

| (a)   | On                February 8, 2006, the Company executed a Promissory Note in favor                of the                Chairman of the Board for $3,000,000, bearing interest at nine 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. On September 29, 2006, the Chairman canceled                this                Note Payable - Related Party, along with accrued interest, in exchange                for                the issuance of Series D Preferred Stock. ***See***                Note 13 - Preferred Stock, Item (c). |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b)   | On                September 27, 2006, the Chairman assumed sole responsibility for                the three                year unsecured Note Payable - Other established with Wachovia Bank,                N.A.                on September 22, 2006 bearing interest at LIBOR plus 2.25%. ***See***Note                10 - Note Payable - Other. *** ***On                September 29, 2006, the Chairman canceled this Note Payable - Related                Party, along with accrued interest, in exchange for the issuance                of Series                D Preferred Stock. ***See***                Note 13 - Preferred Stock, Item (c). |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **Note                  12.** | **Loans                  Payable - Related Party.** |
|-------------------------------|-----------------------------------------------------|

***See***

| **Note                  13.** | **Preferred                  Stock.** |
|-------------------------------|---------------------------------------|

| (a)   | **Series                C Convertible Preferred Stock**.** **The                Board of Directors amended the Series C Convertible Preferred Stock                designation reducing the original authorized amount of 750,000 shares                to                the actual number of preferred shares sold in that series, a total                amount                of 687,895 as of September 27, 2006. This made available 62,105 shares                under the Company’s 2,000,000 blanket preferred authorization for use in                establishing other preferred stock designations under the Company’s                Restated Certificate of Incorporation, as                amended. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b)**  ** | **Series                D Preferred Stock**.                The                Board of Directors designated a new series of preferred stock, Series                D                Preferred Stock, effective September 28, 2006, $1.00 par value per                share.                The Board authorized 25,000 shares for issuance having a stated and                liquidation value, per each share of Series D Preferred Stock of                $1,000,                which includes the par value of $1.00 per share. Holders of the                outstanding Series D Preferred Stock have no voting rights with respect                to                the Series D Preferred Stock, except as required by law, including                but not                limited to the General Corporation Law of Delaware, and as expressly                provided in the certificate of designation. The registered holders                of the                outstanding Series D Preferred Stock are entitled to receive cumulative                dividends at the rate of 10% per annum of the stated value per each                share                of Series D Preferred Stock. Such dividend is payable quarterly in                arrears                on the last day of March, June, September and December of each year,                commencing on December 31, 2006 (each of such dates being a "dividend                payment date"). Such dividend (a) shall accrue and may be accumulated                or                paid in the discretion of the Board of Directors, on each Series                D                Preferred Stock from the date of issuance of such Series D Preferred                Stock                (with appropriate pro-ration for any partial dividend period); (b)                shall                accrue from day-to-day, whether or not earned or declared; and (c)                dividends may be paid, subject to the terms hereof, in cash when                and as                declared by the Board of Directors of the Company out of funds legally                available therefor. |
|---------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (c)   | **Securities                Purchase Agreement - Related Party**.                On September 29, 2006, the Company entered into a Series D Preferred                Stock                Securities Purchase Agreement with the Chairman and principal stockholder.                As described above, the Company authorized 25,000 shares of the Series                D                Preferred Stock and issued and sold 6,900 shares, $1.00 par value,                in                exchange for the cancellation of $6,900,000 in loans and related                accrued                interest. ***Refer                to***                Notes 11 and 12 above for more information on the canceled loans.                ***See                also***                (b) above for a brief description of certain terms and conditions                of the                Series D Preferred Stock purchased, which is qualified in its entirety                by                the original agreement included as an exhibit to this                filing. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **Note                  14.** | **Net                  (Loss) Per Common Share - Basic and                  Diluted.** |
|-------------------------------|----------------------------------------------------------------------------------------|

|                                                                                                                     |   | **Three                    Months Ended September 30,** |                         |  **Nine                    Months Ended September 30,** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|------------------------------|--------------------------------------------------------------|--------|
|                                                                                                                     |   | **2006**                                                |                         |  **2005**                                               |   |  **2006** |   |  **2005** |   |
|                                                                                                                     |   |                                                    |                         |  **Per                    Share**                       |   |    |   |  **Per                    Share** |   |    |   |  **Per                    Share** |   |    |   |  **Per                    Share** |   |
|                                                                                                                     |   | **Amount**                                              |                         | **Amount**                                                   |   | **Amount** |   | **Amount** |   | **Amount** |   | **Amount** |   | **Amount** |   | **Amount** |   |
| Operating                    (Loss) Before Income Taxes                                                                  |   | $                                                       | (767,460                     | )                                                  | $      | (0.014 | )   | $ | (619,026 | )   | $ | (0.012 | )   | $ | (892,388 | )   | $ | (0.016 | )   | $ | (2,714,669 | )   | $ | (0.054 | ) |
| Income                    Tax (Expense)-Deferred                                                                         |   |                                                    | (613,                    307 | )                                                            |   | (0.011 | ) |   | — |   |   | — |   |   | (578,177 | ) |   | (0.010 | ) |   | — |   |   | — |   |
| Operating                    (Loss)                                                                                      |   | $                                                       | (1,380,767                   | )                                                            | $      | (0.025 | ) | $ | (619,026 | ) | $ | (0.012 | ) | $ | (1,470,565 | ) | $ | (0.026 | ) | $ | (2,714,669 | ) | $ | (0.054 | ) |
| Income                      (Loss) from Discontinued Operations, Net of Income Tax                      Benefit-Deferred |   |                                                    | (5,000                       | )                                                            |   | (0.000 | ) |   | 349,117 |   |   | 0.006 |   |   | 319,068 |   |   | 0.005 |   |   | 24,526 |   |   | 0.000 |   |
| Net                    (Loss)                                                                                            |   | $                                                       | (1,385,767                   | )                                                            | $      | (0.025 | ) | $ | (269,909 | ) | $ | (0.006 | ) | $ | (1,151,497 | ) | $ | (0.021 | ) | $ | (2,690,143 | ) | $ | (0.054 | ) |
| Plus:                    Dividends on Preferred Stock                                                                    |   |                                                    | (1,323                       | )                                                            |   | (0.000 | ) |   | — |   |   | — |   |   | (1,323 | ) |   | (0.000 | ) |   | — |   |   | — |   |
| Net                    (Loss) Available to Common Stockholders                                                           |   | $                                                       | (1,387,090                   | )                                                            | $      | (0.025 | ) | $ | (269,909 | ) | $ | (0.006 | ) | $ | (1,152,820 | ) | $ | (0.021 | ) | $ | (2,690,143 | ) | $ | (0.054 | ) |
| Weighted                    Average Common Shares Outstanding                                                            |   |                                                    | 53,551,051                   |                                                         |   |   |   |   | 50,306,865 |   |   |   |   |   | 53,360,621 |   |   |   |   |   | 50,351,466 |   |   |   |   |

----

*Index*

**LAPOLLA        INDUSTRIES, INC.**

**NOTES        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED-        CONTINUED)**

| **Note                  15.** | **Business                  Segment Information.** |
|-------------------------------|----------------------------------------------------|

*Unallocated        Amounts*

**Segments**

|                                             |   | **Three                  Months Ended September 30, 2006** |      |
|--------------------------------------------------|--------|------------------------------------------------------------|-----------|
|                                             |   | **Coatings**                                               |      | **Foam** |   | **Paints** |   | **Sealants** |   | **Adhesives** |   | **Equipment** |   | **All                  Other** |   | **Totals** |   |
| Sales                                            |   | $                                                          | 2,591,773 |   | $ | 5,864,422 |   | $ | 249,769 |   | $ | 210,268 |   | $ | 882 |   | $ | 118,253 |   | $ | 81,392 |   | $ | 9,116,759 |   |
| Depreciation                  and Amortization   |   |                                                       | 40,819    |   |   | 9,171 |   |   | 391 |   |   | 329 |   |   | 1 |   |   | 185 |   |   | 127 |   |   | 51,023 |   |
| Interest                  Expense                |   |                                                       | 27,225    |   |   | 61,602 |   |   | 2,624 |   |   | 2,209 |   |   | 9 |   |   | 1,242 |   |   | 855 |   |   | 95,766 |   |
| Segment                  Profit (Loss)           |   |                                                       | 140,823   |   |   | (388,208 | ) |   | 20,942 |   |   | 23,011 |   |   | (15 | ) |   | 12,579 |   |   | 17,234 |   |   | (173,634 | ) |
| Segment                  Assets(1)               |   |                                                       | 3,833,519 |   |   | 6,940,091 |   |   | 391,392 |   |   | 351,375 |   |   | 1,119 |   |   | 139,220 |   |   | 87,431 |   |   | 11,744,147 |   |
| Expenditures                  for Segment Assets |   | $                                                          | 59,162    |   | $ | 80,426 |   | $ | 3,425 |   | $ | 5,508 |   | $ | 12 |   | $ | 1,622 |   | $ | 1,116 |   | $ | 151,271 |   |

|                                               |   | **Three                    Months Ended September 30, 2005** |      |
|----------------------------------------------------|--------|--------------------------------------------------------------|-----------|
|                                               |   | **Coatings**                                                 |      | **Foam** |   | **Paints** |   | **Sealants** |   | **Adhesives** |   | **Equipment** |   | **All                    Other** |   | **Totals** |   |
| Sales                                              |   | $                                                            | 1,966,521 |   | $ | 3,052,386 |   | $ | 217,347 |   | $ | 265,417 |   | $ | — |   | $ | 26,761 |   | $ | 31,028 |   | $ | 5,559,460 |   |
| Depreciation                    and Amortization   |   |                                                         | 20,008    |   |   | 4,249 |   |   | 303 |   |   | 369 |   |   | — |   |   | 37 |   |   | 43 |   |   | 25,009 |   |
| Interest                    Expense                |   |                                                         | 33,842    |   |   | 52,532 |   |   | 3,741 |   |   | 4,568 |   |   | — |   |   | 461 |   |   | 534 |   |   | 95,678 |   |
| Segment                    Profit (Loss)           |   |                                                         | 173,968   |   |   | (192,672 | ) |   | 18,520 |   |   | 29,453 |   |   | — |   |   | 301 |   |   | (3,583 | ) |   | 25,987 |   |
| Segment                    Assets(1)               |   |                                                         | 2,964,710 |   |   | 3,613,385 |   |   | 334,773 |   |   | 384,004 |   |   | 172 |   |   | 38,257 |   |   | 30,219 |   |   | 7,365,520 |   |
| Expenditures                    for Segment Assets |   | $                                                            | 45,742    |   | $ | 17,797 |   | $ | 1,267 |   | $ | 5,356 |   | $ | — |   | $ | 156 |   | $ | 181 |   | $ | 70,499 |   |

|                                             |   | **Nine                  Months Ended September 30, 2006** |      |
|--------------------------------------------------|--------|-----------------------------------------------------------|-----------|
|                                             |   | **Coatings**                                              |      | **Foam** |   | **Paints** |   | **Sealants** |   | **Adhesives** |   | **Equipment** |   | **All                  Other** |   | **Totals** |   |
| Sales                                            |   | $                                                         | 7,392,130 |   | $ | 13,016,073 |   | $ | 870,867 |   | $ | 729,562 |   | $ | 31,147 |   | $ | 491,274 |   | $ | 204,709 |   | $ | 22,735,762 |   |
| Depreciation                  and Amortization   |   |                                                      | 108,309   |   |   | 22,971 |   |   | 1,537 |   |   | 1,287 |   |   | 55 |   |   | 867 |   |   | 361 |   |   | 135,387 |   |
| Interest                  Expense                |   |                                                      | 68,044    |   |   | 119,813 |   |   | 8,016 |   |   | 6,716 |   |   | 287 |   |   | 4,522 |   |   | 1,884 |   |   | 209,282 |   |
| Segment                  Profit (Loss)           |   |                                                      | 574,280   |   |   | (464,168 | ) |   | 63,115 |   |   | 46,544 |   |   | (507 | ) |   | 24,221 |   |   | 45,663 |   |   | 289,148 |   |
| Segment                  Assets(1)               |   |                                                      | 4,233,526 |   |   | 6,247,089 |   |   | 498,207 |   |   | 439,757 |   |   | 13,588 |   |   | 223,804 |   |   | 88,176 |   |   | 11,744,147 |   |
| Expenditures                  for Segment Assets |   | $                                                         | 216,146   |   | $ | 133,397 |   | $ | 8,925 |   | $ | 23,075 |   | $ | 319 |   | $ | 5,035 |   | $ | 2,098 |   | $ | 388,995 |   |

|                                               |   | **Nine                    Months Ended September 30, 2005** |      |
|----------------------------------------------------|--------|-------------------------------------------------------------|-----------|
|                                               |   | **Coatings**                                                |      | **Foam** |   | **Paints** |   | **Sealants** |   | **Adhesives** |   | **Equipment** |   | **All                    Other** |   | **Totals** |   |
| Sales                                              |   | $                                                           | 4,780,716 |   | $ | 7,043,568 |   | $ | 600,791 |   | $ | 611,344 |   | $ | 4,602 |   | $ | 57,178 |   | $ | 125,091 |   | $ | 13,223,290 |   |
| Depreciation                    and Amortization   |   |                                                        | 58,978    |   |   | 12,301 |   |   | 1,049 |   |   | 1,068 |   |   | 8 |   |   | 100 |   |   | 218 |   |   | 73,722 |   |
| Interest                    Expense                |   |                                                        | 68,727    |   |   | 101,258 |   |   | 8,637 |   |   | 8,789 |   |   | 66 |   |   | 822 |   |   | 1,798 |   |   | 190,097 |   |
| Segment                    Profit (Loss)           |   |                                                        | 273,140   |   |   | (628,694 | ) |   | 29,953 |   |   | 30,786 |   |   | (712 | ) |   | 3,435 |   |   | (10,633 | ) |   | (302,725 | ) |
| Segment                    Assets(1)               |   |                                                        | 3,007,011 |   |   | 3,524,696 |   |   | 369,097 |   |   | 375,833 |   |   | 2,056 |   |   | 35,607 |   |   | 51,221 |   |   | 7,365,521 |   |
| Expenditures                    for Segment Assets |   | $                                                           | 214,265   |   | $ | 130,254 |   | $ | 11,110 |   | $ | 25,289 |   | $ | 85 |   | $ | 1,057 |   | $ | 2,313 |   | $ | 384,373 |   |

**Profit        or Loss**

|                                                          |   | **Three                  Months Ended September 30,** |     | **Nine                  Months Ended September 30,** |   |
|---------------------------------------------------------------|--------|-------------------------------------------------------|----------|------------------------------------------------------|--------|
|                                                          |   | **2006**                                              |     | **2005**                                             |   | **2006** |   | **2005** |   |
| Total                  Profit or Loss for Reportable Segments |   | $                                                     | (173,634 | )                                                    | $      | 25,987 |   | $ | 289,149 |   | $ | (302,724 | ) |
| Unallocated                  Amounts:                         |   |                                                  |     |                                                 |   |   |   |   |   |   |   |   |   |
| Corporate                  Expenses                           |   |                                                  | (593,826 | )                                                    |   | (645,015 | ) |   | (1,181,536 | ) |   | (2,411,948 | ) |
| (Loss)                  Before Income Taxes                   |   | $                                                     | (767,460 | )                                                    | $      | (619,028 | ) | $ | (892,387 | ) | $ | (2,714,672 | ) |

| **Assets**                                               |   |                                    |       |                                   |   |
|----------------------------------------------------------|--------|-----------------------------------------|------------|----------------------------------------|--------|
|                                                     |   | **September                  30, 2006** |       | **December                  31, 2005** |   |
| Total                  Assets for Reportable Segments(1) |   | $                                       | 11,744,147 |                                   | $      | 8,205,904 |   |
| Other                  Unallocated Amounts(2)            |   |                                    | 2,062,764  |                                   |   | 2,429,137 |   |
| Consolidated                  Total                      |   | $                                       | 13,806,912 |                                   | $      | 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 and cash equivalents,                  prepaid                  expenses and other current assets, and deferred tax                  assets. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

*Index*

| **Item                  2.** | **Management’s                  Discussion and Analysis of Financial Condition and Results of                  Operations.** |
|------------------------------|------------------------------------------------------------------------------------------------------------------------------------|

*Overview*

**Performance        for the Third Quarter of 2006 compared to the Third Quarter of        2005**

**Overall        Results of Operations**

|   |   | **September                  30****,                  2006** |      | **September                  30****,                  2005** |   |
|--------|--------|--------------------------------------------------------------|-----------|--------------------------------------------------------------|--------|
| Sales  |   | $                                                            | 9,116,759 |                                                         | $      | 5,559,460 |   |

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*Index*

**Results        of Business Segments**

| **Segments**            |   | **September                    30****,                    2006** |      | **September                    30****,                    2005** |   |
|------------------------------|--------|------------------------------------------------------------------|-----------|------------------------------------------------------------------|--------|
| Coatings                     |   | $                                                                | 2,591,773 |                                                             | $      | 1,966,521 |   |
| Foam                         |   |                                                             | 5,864,422 |                                                             |   | 3,052,386 |   |
| Paints                       |   |                                                             | 249,769   |                                                             |   | 217,347 |   |
| Sealants                     |   |                                                             | 210,268   |                                                             |   | 265,417 |   |
| Adhesives                    |   |                                                             | 882       |                                                             |   | — |   |
| Equipment                    |   |                                                             | 118,253   |                                                             |   | 26,761 |   |
| All                    Other |   | $                                                                | 81,392    |                                                             | $      | 31,028 |   |

**Performance        for the Nine Months Ended September 30, 2006 compared to the Nine Months        Ended        September 30, 2005**

**Overall        Results of Operations**

|   |   | **September                  30****,                  2006** |       | **September                  30****,                  2005** |   |
|--------|--------|--------------------------------------------------------------|------------|--------------------------------------------------------------|--------|
| Sales  |   | $                                                            | 22,735,762 |                                                         | $      | 13,223,290 |   |

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*Index*

**Results        of Business Segments**

| **Segments**            |   | **September                    30****,                    2006** |       | **September                    30****,                    2005** |   |
|------------------------------|--------|------------------------------------------------------------------|------------|------------------------------------------------------------------|--------|
| Coatings                     |   | $                                                                | 7,392,130  |                                                             | $      | 4,780,715 |   |
| Foam                         |   |                                                             | 13,016,074 |                                                             |   | 7,043,568 |   |
| Paints                       |   |                                                             | 870,867    |                                                             |   | 600,791 |   |
| Sealants                     |   |                                                             | 729,562    |                                                             |   | 611,344 |   |
| Adhesives                    |   |                                                             | 31,147     |                                                             |   | 4,602 |   |
| Equipment                    |   |                                                             | 491,274    |                                                             |   | 57,178 |   |
| All                    Other |   | $                                                                | 204,709    |                                                             | $      | 125,091 |   |

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*Index*

**Liquidity        and Capital Resources**

**Forward        Looking Statements**

| **Item                  3.** | **Quantitative                  and Qualitative Disclosures About Market                  Risk.** |
|------------------------------|---------------------------------------------------------------------------------------------------|

| **Item4.** | **Controls                  and Pr**o**cedures.** |
|------------|---------------------------------------------------|

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*Index*

**PART        II — OTHER INFORMATION**

| **Item 1.** | **Legal                  Proceedings.** |
|------------------|-----------------------------------------|

***Joglar        Painting, Inc., Plaintiff v. Urecoats Industries Inc., Urecoats Manufacturing,        Inc, et. al., Defendants***

*arious        Lawsuits and Claims Arising in the Ordinary Course of Business*

| **Item                  2.** | **Changes                  in Securities and Use of                  Proceeds.** |
|------------------------------|----------------------------------------------------------------------------------|

**Recent        Sales of Unregistered Securities**

**Common        Stock**

**Preferred        Stock**

***See***

| **Item3.** | **Defaults                  Upon Senior Securities.** |
|------------|-------------------------------------------------------|

| **Item4.** | **Submission                  of Matters to a Vote of Security                  Holders.** |
|------------|--------------------------------------------------------------------------------------------|

**Proposal        One - Election of Directors**

|                                                               |   |                                   |       |         |   |
|--------------------------------------------------------------------|--------|----------------------------------------|------------|--------------|--------|
|                                                               |   | **Affirmative                  Votes** |       | **Withheld** |   |
| 1.                  Richard J. Kurtz                               |   |                                   | 42,546,931 |         |   | 56,718 |   |
| 2.                  Lt. General Arthur J. Gregg, US Army (Retired) |   |                                   | 42,582,884 |         |   | 50,965 |   |
| 3.                  Michael T. Adams                               |   |                                   | 42,549,831 |         |   | 53,818 |   |
| 4.                  Gilbert M. Cohen                               |   |                                   | 42,531,031 |         |   | 72,618 |   |

| **Item 5.** | **Other                  Information.** |
|------------------|-----------------------------------------|

| (a)**  ** | **Series                C Convertible Preferred Stock**.** **On                September 27, 2006, the Board of Directors amended the Series C                Convertible Preferred Stock designation reducing the original authorized                amount of 750,000 shares to the actual number of preferred shares                sold in                that series, a total amount of 687,895 as of September 27, 2006.                This made                available 62,105 shares under the Company’s 2,000,000 blanket preferred                authorization for use in establishing other preferred stock designations                under the Company’s Restated Certificate of Incorporation, as amended.                ***See***                Index of Exhibits, Exhibit 4.1. |
|---------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b)   | **Series                D Preferred Stock**.                The                Board of Directors designated a new series of preferred stock, Series                D                Preferred Stock, effective September 28, 2006, $1.00 par value per                share.                The Board authorized 25,000 shares for issuance having a stated and                liquidation value, per each share of Series D Preferred Stock of                $1,000,                which includes the par value of $1.00 per share. Holders of the                outstanding Series D Preferred Stock have no voting rights with respect                to                the Series D Preferred Stock except as expressly provided in the                certificate of designation. The Series D Preferred Stock has a redemption                option. After a Triggering Event has occurred (as defined below),                the                Company shall have the right, at its sole option, to (i) redeem all,                or                any part (pro-rata) of the Series D Preferred Stock and (ii) pay                to each                Holder, to the extent cumulated, if at all, accrued but unpaid dividends                thereon. A "Triggering Event" shall be deemed to have occurred only                upon                the liquidation or termination of the Company. If the Company so                elects                within five (5) business day after the occurrence of a Triggering                Event,                the Company shall deliver written notice thereof to each Holder.                The                registered holders of the outstanding Series D Preferred Stock are                entitled to receive cumulative dividends at the rate of 10% per annum                of                the stated value per each share of Series D Preferred Stock, payable                quarterly in arrears, commencing on December 31, 2006. Such dividend                (a)                shall accrue and may be accumulated or paid in the discretion of                the Board                of Directors, on each Series D Preferred Stock from the date of issuance;                (b) shall accrue from day-to-day, whether or not earned or declared;                and                (c) dividends may be paid, subject to the terms hereof, in cash when                and                as declared by the Board of Directors of the Company out of funds                legally                available therefor. ***See***                Index of Exhibits, Exhibit 4.2. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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*Index*

| **Item                5.** | **Other                  Information - continued.** |
|----------------------------|-----------------------------------------------------|

| (c)**  ** | **Securities                Purchase Agreement - Related Party**.                On September 29, 2006, the Company entered into a Series D Preferred                Stock                Securities Purchase Agreement with the Chairman and principal stockholder.                The Company authorized 25,000 shares of the Series D Preferred Stock                and                issued and sold 6,900 shares, $1.00 par value, in exchange for the                cancellation of $6,900,000 in loans and related accrued interest.                ***Refer***                to                paragraph (b) above for more details on the Series D Preferred Stock.                ***See                also***                Index of Exhibits, Exhibit 10.1 for the full text of the Securities                Purchase Agreement. |
|---------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| **Item                  6.** | **Exhibits.** |
|------------------------------|---------------|

***See***

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*Index*

**S        IGNATURES**

|                                      |   |   | **LAPOLLA                    INDUSTRIES, INC.** |   |
|-------------------------------------------|--------|--------|-------------------------------------------------|--------|
|                                      |   |   |                                            |   |
|                                      |   |   |                                            |   |
|                                      |   |   |                                            |   |
| Date:                    October 30, 2006 |   | By:    | /s/                    Douglas J. Kramer, CEO   |   |
|                                      |   |   | Douglas                    J. Kramer            |   |
|                                      |   |   | President                    and CEO            |   |
|                                      |   |   |                                            |   |
|                                      |   |   |                                            |   |
|                                      |   |   | **LAPOLLA                    INDUSTRIES, INC.** |   |
|                                      |   |   |                                            |   |
|                                      |   |   |                                            |   |
|                                      |   |   |                                            |   |
| Date:                    October 30, 2006 |   | By:    | /s/                    John A. Campbell, CFO    |   |
|                                      |   |   | John                    A. Campbell             |   |
|                                      |   |   | CFO                    and Treasurer            |   |
|                                      |   |   |                                            |   |
|                                      |   |   |                                            |   |
|                                      |   |   | **LAPOLLA                    INDUSTRIES, INC.** |   |
|                                      |   |   |                                            |   |
|                                      |   |   |                                            |   |
|                                      |   |   |                                            |   |
| Date:                    October 30, 2006 |   | By:    | /s/                    Michael T. Adams, CGO    |   |
|                                      |   |   | Michael                    T. Adams             |   |
|                                      |   |   | CGO,                    EVP and Secretary       |   |

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*Index*

**INDEX        OF EXHIBITS**

| **Exhibit****Number** | **Description** |
|-----------------------|-----------------|
|                  |            |   |
| 4.1                   |            | Amendment                  dated September 27, 2006 to Certificate of Designation of Preferences                  of                  Series C Convertible Preferred Stock dated January 8,                  2002. |
| 4.2                   |            | Certificate                  of Designation of Preferences of Series D Preferred Stock dated                  September                  28, 2006. |
| 10.1                  |            | Securities                  Purchase Agreement dated September 29, 2006 between the Company                  and                  Richard J. Kurtz. |
| 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. |

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