10-Q

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

Commission File No. 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)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of October 13, 2006 there were 53,574,251 shares of Common Stock, par value $.01, outstanding.

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

2

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

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are not applicable, and therefore have been omitted.

3

LAPOLLA INDUSTRIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	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

See accompanying notes to condensed consolidated financial statements.

4

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

See accompanying notes to condensed consolidated financial statements.

5

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

See accompanying notes to condensed consolidated financial statements.

6

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Basis of Presentation.

The condensed financial statements included herein are unaudited. In the opinion of management, these statements include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the financial position of LaPolla Industries, Inc. (the “Company” or “LaPolla”) as of September 30, 2006, the results of operations for the three and nine months ended September 30, 2006 and 2005, and cash flows for the nine months ended September 30, 2006 and 2005. These condensed financial statements should be read in conjunction with the financial statements and notes included in LaPolla’s Annual Report on Form 10-K, for the year ended December 31, 2005. The results of operations for the three and nine months ended September 30, 2006 are not necessarily indicative of the results to be expected for the full year. Certain amounts in the prior years have been reclassified to conform to the 2006 unaudited condensed consolidated financial statement presentation. Refer to the Company’s 2005 annual report on Form 10-K for a description of major accounting policies. There have been no material changes to these accounting policies during 2006.

Note 2. Dependence on Few Suppliers.

The Company is dependent on a few suppliers for certain of its raw materials and finished goods. For the quarter ended September 30, 2006 and 2005, raw materials and finished goods purchased from the Company’s three largest suppliers accounted for approximately 56.47% and 72.35% of purchases, respectively.

Note 3. Trade Receivables.

The following is a summary of trade receivables at:

	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

On September 18, 2006, the Company received notice that one of its long standing customers owing $377,072 filed a voluntary petition under the provisions of Chapter 11 of the Bankruptcy Code on September 18, 2006, of which $201,572 was written off as bad debt and $175,500 reclassified as an other current asset based on filing a claim under our credit insurance policy for this particular customer. Additionally, the Company increased its provision for losses on trade receivables by $109,708.

Note 4. Inventories.

The following is a summary of inventories at:

	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.

The following is a summary of deferred income taxes at:

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 for a summary of deferred income taxes for discontinued operations.

Note 6. Discontinued Operations.

The consolidated financial statements and the related notes reflect the financial position, results of operations and cash flows on an aggregated basis for the Company’s discontinued operations for the periods presented. The following is a summary of the liabilities of discontinued operations at:

Liabilities	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

7

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED- CONTINUED)

Note 6. Discontinued Operations - continued.

Significant components of the Company's discontinued operations deferred tax assets and liabilities are as follows at:

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	$	—		$	—

Future tax benefit for net operating loss carry-forwards are subject to limitations based on discontinued operating subsidiaries’ abilities to generate future taxable income.

Note 7.Property, Plant and Equipment.

The following is a summary of property, plant and equipment at:

	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.

The following is a summary of goodwill at:

	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

The following is a summary of other intangible assets at:

	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.

On September 22, 2006, the Chairman and the Company established a collateralized $1,000,000 Line of Credit with Wachovia Bank, N.A. for working capital to improve management of cash flow and facilitate growth and expansion of the Company, of which $750,000 is secured by a certificate of deposit owned by the Chairman and $250,000 is secured by a certificate of deposit owned by the Company.

On September 22, 2006, the Chairman and the Company converted the $3,000,000 line of credit established with Wachovia bank, N.A. on May 31, 2006 previously reflected on the face of the Consolidated Balance Sheets to an unsecured three year note payable. See Note 10 (Note Payable - Other).

Note 10. Note Payable - Other.

On September 22, 2006, the Chairman and the Company converted its unsecured line of credit with Wachovia Bank, N.A. into an unsecured three year note payable bearing interest at LIBOR plus 2.25%. The Chairman assumed sole responsibility for this Note Payable - Other on September 27, 2006. See Note 11 - Note Payable - Related Party, Item (b).

8

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.

On March 20, 2006, the Company received a written commitment from the Chairman of the Board to provide $1,500,000 for working capital to facilitate growth and expansion of the Company. The funding will take the form of a demand loan bearing six percent (6%) interest per annum. The Chairman had loaned the Company funds aggregating $750,000, net under this commitment as of September 29, 2006, which amount, along with accrued interest, was then canceled in exchange for the issuance of Series D Preferred Stock. See Note 13 - Preferred Stock, Item (c).

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.

The following table reflects the computation of the basic and diluted net loss per common share:

	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

Basic and diluted net (loss) per share are the same since (a) the Company has reflected net losses for all periods presented and (b) the potential issuance of shares of the Company would be antidilutive. The securities that could potentially dilute (loss) per share in the future that were not included in the computation of diluted (loss) per share were (i) 69,447 and 364,000 shares, respectively, of nonvested restricted common stock issued to eligible directors but held by the Company pursuant to vesting restrictions under the Director Compensation Plan and (ii) exercise of 664,868 and 183,368 vested stock options, respectively, for the three and nine months ended September 30, 2006 and 2005.

9

LAPOLLA INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED- CONTINUED)

Note 15. Business Segment Information.

The Company is a national manufacturer and distributor with seven segments: Coatings, Foam, Paints, Sealants, Adhesives, Equipment, and All Other. The Company established these segments in the fourth quarter of 2005 due to a change in the structure of its internal organization which caused the composition of its prior reportable segments originally based on subsidiaries to change. The three and nine months ended September 30, 2005 has been restated to reflect the change. The Company’s segments are organized based on differences in products. The Company primarily manufactures coatings and distributes foam, paints, sealants, adhesives, equipment, and all other products. Production facilities are located in Texas, Florida and Arizona. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company allocates resources to segments and evaluates the performance of segments based upon reported segment income before income taxes. A substantial amount of administrative expenses are allocated to the segments. The portion not allocated to the segments represents the unallocated cost of certain corporate expenses, insurance, investor relations, and gains and losses related to the disposal of corporate assets and are included in Unallocated Amounts. There are no intersegment sales or transfers.

Segments

	Three Months Ended 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

The following are reconciliations of reportable segment profit or loss, and assets, to the Company’s consolidated totals for the periods indicated:

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.

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

Overview

This financial review presents our operating results for the quarter, and nine months, ended September 30, 2006 and 2005, and our financial condition at September 30, 2006. Except for the historical information contained herein, the following discussion contains forward-looking statements that are subject to known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from those expressed or implied by such forward-looking statements. We discuss such risks, uncertainties and other factors under the caption “Forward Looking Statements” in this section of this report. In addition, the following review should be read in connection with the information presented in our consolidated financial statements and the related notes for the year ended December 31, 2005.

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

Overall Results of Operations

The following is a summary of sales for the three months ended:

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

Sales increased $3,557,298, or 64%, for the third quarter of 2006 compared to the third quarter of 2005, due to an increase in the number of sales personnel, independent representatives, and independent distributors selling our various existing and new product brands across all of our segments except for the sealants segment, which resulted in greater penetration in the markets in which we participate.

Gross profit increased $541,202, or 48%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005, due to sales volume growth in all of our segments except for the sealants segment. The gross margin decreased 1.9% for the third quarter of 2006 compared to the third quarter of 2005, primarily due to a disproportionate increase in sales in our foam segment through independent distributors instead of direct to contractors at a lower gross margin. Notwithstanding the foregoing decrease, we are continuing to benefit from economies of scale realized from increased purchasing power for the raw materials related to our manufactured and finished goods, improved manufacturing efficiencies, and changes in our product mix.

Total costs and expenses are comprised of cost of sales, selling, general and administrative expenses, or SG&A, professional fees, depreciation and amortization, consulting fees, interest expense, interest expense - related party, and other income (expense). These total costs and expenses increased $3,705,732, or 59%, for the third quarter of 2006 compared to the third quarter of 2005, due primarily to an increase of $3,016,096 for cost of sales, $674,916 for SG&A, $7,747 for professional fees, $26,014 for depreciation and amortization, and $30,699 for interest expense, offset by a decrease of $38,265 for interest expense - related party and $16,745 for consulting fees.

Cost of sales increased $3,016,096, or 67%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005, due to an increase in purchases of raw materials for manufactured and finished goods to support our sales growth.

SG&A increased $674,916, or 44%, for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005, due to an increase of $116,664 for payroll and related employee benefits, $113,536 for sales commissions, $66,370 for travel and related services, $147,644 for marketing, promotions and trade shows, $750 for director fees, $311,280 for bad debts, and $75,105 for corporate office expenses, offset by a decrease of $82,952 for insurances, $28,676 for advertising, $20,285 for recruiting fees, $5,625 for American Stock Exchange fees, $10,713 for investor relations, and $8,181 for rents.

Professional fees increased $7,747, or 17%, for the third quarter of 2006 compared to the third quarter of 2005, due to an increase of $17,527 in legal fees, offset by a decrease of $9,780 for outside accountants, auditing and auditing related services.

Depreciation and amortization expense increased $26,013, or 104%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005, due to an increase in depreciable property, plant and equipment, which is comprised of $38,170 for vehicles, $25,336 for machinery and equipment, $9,242 for officer furniture and equipment, and $77,617 for computer hardware and software.

Consulting fees decreased $16,745, or 33%, for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005, due to a decrease in outside professional services for investor relations, software implementation, and insurance.

Interest expense increased $30,699, or 135%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005, due to an increase in the aggregate amount of funds borrowed under our financing instruments.

Interest expense - related party decreased $38,264, or 42%, in the third quarter of 2006 compared to the third quarter of 2005, due to a decrease in the aggregate amount of funds borrowed under our financing instruments with the Chairman.

We had a loss of $5,000 from discontinued operations for the third quarter of 2006 for legal fees relating to litigation for discontinued operations compared to income of $5,269 for the third quarter of 2005.

Net loss and loss per share for the third quarter of 2006 were $1,385,767 and $0.025, respectively, compared to a $269,909 net loss and $0.006 net loss per share, for the third quarter of 2005. The net loss was primarily attributable to an increase in bad debt expense due to one of our long time customers filing for protection under Chapter 11 of the bankruptcy code, increase in the percentage used to calculate our provision for losses on trade receivables, increase in SG&A for our growing sales force, and decrease in our deferred tax asset due to the loss experienced in the third quarter of 2006.

We had accrued dividends of $1,323 from our newly designated Series D Preferred Stock sold to our Chairman in exchange for cancellation of indebtedness amounting to $6,900,000 at the end of the third quarter of 2006.

Net loss available to common stockholders and related loss per share for the third quarter of 2006 were $1,387,090 and $0.025. The increase in net loss is attributable to dividends accrued for the outstanding Series D Preferred Stock at the end of the third quarter of 2006.

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Results of Business Segments

The following is a summary of sales by segment for the three months ended:

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

Coatings sales increased $625,252, or 33%, for the third quarter of 2006 compared to the third quarter of 2005, due to an increase in our sales force and marketing and promotion programs, which resulted in greater market penetration. Segment profit decreased $33,143, or 19%, for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005. The decrease in our coatings segment profit for the quarter ended September 30, 2006 was primarily attributable to increases in expenses related to our growing sales force and bad debt write offs, partially offset by increased sales volumes, manufacturing efficiencies, economies of scale realized for increased purchasing power for raw materials for manufactured and finished goods.

Foam sales increased $2,812,036, or 92%, for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005, due to the same reasons enumerated in our coatings segment above, including the addition of independent distributors. Segment loss increased $195,537, or 101%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005. The increase in our foam segment loss for the third quarter of 2006 was primarily attributable to an increase in our foam products being sold through independent distributors at lower margins, partially offset by increased sales volumes of higher margin foam products for insulation markets compared to lower margin foam products for roofing markets direct to our customers, and increased purchasing power for finished goods.

Paints sales increased $32,422, or 15%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005, as a result of an increase in our sales force and limited regional advertising, marketing and promotional programs. Segment profit increased $2,422, or 13%, for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005. The increase in our paints segment profit for the three months ended September 30, 2006 was primarily attributable to increased sales volumes and purchasing power for finished goods.

Sealants sales decreased $55,149, or 21%, for the third quarter of 2006 compared to the third quarter of 2005, due to a slight decline in market demand. Segment profit decreased $6,443, or 22%, for the quarter ended September 30, 2006 compared to the quarter ended September 30, 2005. The sealants segment profit for the quarter ended September 30, 2006 was primarily attributable to higher selling prices.

Adhesives sales were $882 for the quarter ended September 30, 2006 compared to $-0- for the quarter ended September 30, 2005, as a result of an increase in demand. Segment loss was $15 for the third quarter of 2006 compared to a loss of $-0- for the third quarter of 2005.

Equipment sales increased $91,492, or 342%, for the three months ended September 30, 2006 compared to the three months ended September 30, 2005, as a result of an increase in our sales force. Segment profit increased $12,278, or 4,073%, for the third quarter of 2006 compared to the third quarter of 2005. The increase in our equipment segment profit for the three months ended September 30, 2006 was primarily attributable to increased sales volumes.

All Other sales increased $50,364, or 162%, for the third quarter of 2006 compared to the third quarter of 2005, due to an increase in walk-in customers in our Florida and Arizona locations needing sundry items. Segment profit was $17,234 for the quarter ended September 30, 2006 compared to a segment loss of $3,583 for the quarter ended September 30, 2005. The all other segment profit for the third quarter of 2006 was primarily attributable to increased sales volumes.

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

Overall Results of Operations

The following is a summary of sales for the nine months ended:

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

Sales increased $9,512,472, or 71%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, due to an increase in the number of sales personnel, independent representatives, and independent distributors selling our various existing and new product brands across all of our segments, which resulted in greater penetration in the markets in which we participate.

Gross profit increased $2,157,514, or 90%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period, due to sales volume growth in all of our segments. The gross margin increased 1.9% for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, due to economies of scale realized from increased purchasing power for the raw materials related to our manufactured and finished goods and improved manufacturing efficiencies, partially offset by a disproportionate increase in sales in our foam segment through independent distributors instead of direct to contractors at a lower gross margin.

Total costs and expenses are comprised of cost of sales, selling, general and administrative expenses, or SG&A, professional fees, depreciation and amortization, consulting fees, interest expense, interest expense - related party, and other income (expense). These total costs and expenses increased $7,690,191, or 48%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, due to primarily to an increase of $7,354,958 for cost of sales, $590,860 for SG&A, $61,665 for depreciation and amortization, and $43,475 for interest expense, offset by a decrease of $271,217 for professional fees, $81,701 in consulting fees, and $30,361 for interest expense - related party.

Cost of sales increased $7,354,958, or 67%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period, due to an increase in purchases of raw materials for manufactured and finished goods to support our sales growth.

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SG&A increased $590,860, or 14%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, due to an increase of $640,465 for payroll and related employee benefits, $204,066 for sales commissions, $40,948 for travel and related services, $291,093 for marketing, promotions and trade shows, $8,504 for recruiting fees, and $322,039 for bad debts, offset by a decrease of $116,468 for insurances, $101,912 for advertising, $339,640 for director fees, $31,000 for American Stock Exchange fees, $28,227 for investor relations, $14,892 for rents, and $284,117 for corporate office expenses.

Professional fees decreased $271,217, or 62%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period, due to a decrease of $53,991 for outside accountants, auditing and auditing related services and $217,226 for legal fees.

Depreciation and amortization expense increased $61,665, or 84%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, due to an increase in depreciable property, plant and equipment, which is comprised of $39,579 for vehicles, $262,634 for machinery and equipment, $9,242 for officer furniture and equipment, and $170,919 for computer hardware and software, and $3,846 for amortizable assets.

Consulting fees decreased $81,701, or 46%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period, due to a decrease in outside professional services for investor relations, software implementation, and insurance.

Interest expense increased $43,475, or 85%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, due to an increase in the aggregate amount of funds borrowed under our financing instruments.

Interest expense - related party decreased $30,361, or 18%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period, due to a decrease in the aggregate amount of funds borrowed under our financing instruments with the Chairman.

Income from discontinued operations increased $294,542 for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2006, due to gains from write offs of aged accounts payables and a reduction in the reserve for litigation, partially offset by an increase in legal fees.

Net loss and loss per share for the nine month period ended September 30, 2006 were $1,151,497 and $0.021, respectively, compared to a $2,690,143 net loss and $0.054 net loss per share, for the prior year’s nine month period. The net loss was primarily attributable to an increase in bad debt expense due to one of our long time customers filing for protection under Chapter 11 of the bankruptcy code, increase in the percentage used to calculate our provision for losses on trade receivables, increase in SG&A for our growing sales force, non-cash items relating to share-based compensation expenses, and decrease in our deferred tax asset due to the losses experienced in the nine months ended September 30, 2006, partially offset by higher selling prices, economies of scale realized from increased purchasing power for the raw materials related to our manufactured and finished goods, and improved manufacturing efficiencies.

We had accrued dividends of $1,323 from our newly designated Series D Preferred Stock sold to our Chairman in exchange for cancellation of indebtedness amounting to $6,900,000 at the end of the nine months ended September 30, 2006.

Net loss available to common stockholders and related loss per share for the nine month period third quarter of 2006 were $1,152,820 and $0.021. The net loss is attributable to dividends accrued for the outstanding Series D Preferred Stock at the end of the nine month period ended September 30, 2006.

Results of Business Segments

The following is a summary of sales by segment for the nine months ended:

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

Coatings sales increased $2,611,415, or 55%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, due to an increase in our sales force, advertising, marketing and promotion programs, which resulted in greater market penetration. Segment profit increased $301,139, or 110%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period. The increase in our coatings segment profit for the quarter ended September 30, 2006 was primarily attributable to increased sales volumes, higher selling prices, manufacturing efficiencies, economies of scale realized for increased purchasing power for raw materials for manufactured and finished goods, partially offset by increases in expenses related to our growing sales force and bad debt write offs.

Foam sales increased $5,972,505, or 85%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period, due to the same reasons enumerated in our coatings segment above, including the addition of independent distributors. Segment loss decreased $164,526, or 26%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The decrease in our foam segment loss for the nine months ended September 30, 2006 was primarily attributable to increased sales volumes of higher margin foam products for insulation markets compared to lower margin foam products for roofing markets direct to our customers, and increased purchasing power for finished goods, partially offset by an increase in our foam products being sold through independent distributors at lower margins.

Paints sales increased $270,076, or 45%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, as a result of an increase in our sales force and limited regional advertising, marketing and promotional programs. Segment profit increased $33,162, or 111%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period. The increase in our paints segment profit for the three months ended September 30, 2006 was primarily attributable to increased sales volumes and purchasing power for finished goods.

Sealants sales increased $118,218, or 19%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period, due to the same reasons enumerated in our paints segment, partially offset by a slight decline in market demand. Segment profit increased $15,758, or 51%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The sealants segment profit for the quarter ended September 30, 2006 was primarily attributable to higher selling prices and increased sales volumes, partially offset by higher costs for finished goods.

Adhesives sales increased $26,545, or 576%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005, due to increased demand. Segment loss decreased $205, or 29%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period. The decrease in our adhesives segment loss was primarily attributable to increased sales volume.

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Equipment sales increased $434,095, or 759%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period, due to the same reasons enumerated in our coatings and foam segments. Segment profit increased $20,786, or 605%, for the nine months ended September 30, 2006 compared to the nine months ended September 30, 2005. The increase in our equipment segment profit for the nine months ended September 30, 2006 was primarily attributable to increased sales volumes.

All Other sales increased $79,617, or 64%, for the nine month period ended September 30, 2006 compared to the prior year’s nine month period, due to an increase in walk-in customers in our Florida and Arizona locations needing sundry items. Segment profit was $45,663 for the nine months ended September 30, 2006 compared to a segment loss of $10,633 for the nine months ended September 30, 2005. The all other segment profit for the nine month period ended September 30, 2006 was primarily attributable to increased sales volumes.

Liquidity and Capital Resources

Net cash used in our operations was $1,800,149 for the nine months ended September 30, 2006 compared to $2,782,066 for the nine month ended September 30, 2005. The cash used in operations for the nine month period ended September 30, 2006 was attributable to our net loss for the nine month period, including the effect of adjustments to reconcile net loss to cash provided by or used in operating activities and adjusting for non-cash items, offset by increases in trade receivables, inventories, prepaid expenses and other current assets, and accounts payable, and decreases in accrued expenses and other current liabilities and other liabilities. For the nine months ended September 30, 2006 and 2005, net cash used in operating activities for discontinued operations was $331,569 and $800,179, respectively. Our Chairman and principal stockholder canceled $6,900,000 in indebtedness owed by us to him in exchange for 6,900 shares of our newly created Series D Preferred Stock. Cash from operations, available funds under the $1,000,000 line of credit, as well as the funds available from the $1,500,000 commitment from the Chairman of the Board, are expected to continue to be sufficient to meet our operating requirements and to fund our near term capital spending. Notwithstanding the foregoing, we may seek to raise additional funds through debt instruments and/or private placements of common stock or preferred stock to accredited sophisticated investors to fund our growth or an acquisition as part of our strategy for accelerating growth, depending on market conditions. Net cash used in investing activities was $365,616 for the nine months ended September 30, 2006 compared to $2,239,784 for the nine months ended September 30, 2005. We invested $170,919 in computer hardware and software, $39,579 in vehicles, and $262,634 in machinery and equipment during the nine month period ended September 30, 2006. Net cash provided by financing activities was $2,257,544 for the nine month period ended September 30, 2006 compared to $5,335,091 for the prior year’s nine month period. As of September 30, 2006, we are utilizing $511,786 from our line of credit and $1,500,000 remains available under our commitment from the Chairman of the Board. We also made $170,734 in principal repayments on our long term debt during the nine months ended September 30, 2006.

Forward Looking Statements

Statements made by us in this report and in other reports and statements released by us that are not historical facts constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, Section 21 of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. These forward-looking statements are necessarily estimates reflecting the best judgment of senior management and express our opinions about trends and factors which may impact future operating results. You can identify these and other forward-looking statements by the use of words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology. Such statements rely on a number of assumptions concerning future events, many of which are outside of our control, and involve risks and uncertainties that could cause actual results to differ materially from opinions and expectations. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by us about our businesses including, without limitation, the risk factors discussed below. In evaluating these statements, some of the factors that you should consider include the following: Financial position and results of operations, including general and administrative expense targets and effects on income from continuing operations; cash position and cash requirements, including the sufficiency of our cash requirements for the next twelve months; accounting estimates, including treatment of goodwill and intangible assets, doubtful accounts, inventory, warranty, and product returns; operations, supply chain, quality control, and manufacturing supply, capacity, and facilities; products and services, price of products, product lines, and product and sales channel mix; relationship with customers, suppliers and strategic partners; application specifications; credit facilities; real estate lease arrangements; industry trends and our response to these trends; sources of competition; outcome and effect of current and potential future litigation; common stock, including trading price; security of computer systems; and changes in accounting policies and practices, as may be adopted by regulatory agencies, and the Financial Accounting Standards Board. Consequently, while the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Although we believe our expectations are based on reasonable assumptions, judgments, and estimates, forward-looking statements involve known and unknown risks, uncertainties, contingencies, and other factors that could cause our or our industry's actual results, level of activity, performance or achievement to differ materially from those discussed in or implied by any forward-looking statements made by or on the Company and could cause our financial condition, results of operations, or cash flows to be materially adversely affected. We do not plan to update any such forward-looking statements and expressly disclaim any duty to update the information contained in this report except as required by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We do not issue or invest in financial instruments or their derivatives for trading or speculative purposes and are not subject to material foreign currency exchange risks at this time. Our outstanding debt and related interest expense, as it relates to interest rate exposure, in the United States is currently not material to our operations.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Our management, including our Principal Executive Officer and our Principal Financial Officer, does not expect that our disclosure controls or procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within us, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. We carried out an evaluation, under the supervision and with the participation of our management, including our Principal Executive Officer and our Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2006, the end of the quarterly period covered by this report. The evaluation of our disclosure controls and procedures included a review of the disclosure controls’ and procedures’ objectives, design, implementation and the effect of the controls and procedures on the information generated for use in this report. In the course of our evaluation, we sought to identify data errors, control problems or acts of fraud and to confirm the appropriate corrective actions, including process improvements, were being undertaken. Based on the foregoing, our Principal Executive Officer and our Principal Financial Officer concluded that, as of the period covered by this report, our disclosure controls and procedures were effective and operating at a level appropriate to provide reasonable assurance. There were no changes in our internal controls after the third quarter of 2006.

14

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

The disclosures set forth under Part I, Item 3, “Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2005 filed on March 31, 2006 and Part II, Item 1 in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2006 and June 30, 2006, filed on May 15, 2006 and July 31, 2006, respectively, are hereby incorporated in their entirety herein by this reference, and supplemented below:

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

On April 7, 2006, the US District Court has dismissed all claims against Urecoats Industries, Inc. (n/k/a LaPolla Industries, Inc.). Discovery has commenced with respect to the allegations against Urecoats Manufacturing, Inc. (n/k/a RSM Technologies, Inc.) which operations were discontinued November 5, 2004, and trial date is set for February 6, 2007. RSM Technologies, Inc. has no assets. The outcome of this matter is undeterminable.

Various Lawsuits and Claims Arising in the Ordinary Course of Business

We are involved in various lawsuits and claims arising in the ordinary course of business, which are, in our opinion, immaterial both individually and in the aggregate with respect to our consolidated financial position, liquidity or results of operations.

Item 2. Changes in Securities and Use of Proceeds.

Recent Sales of Unregistered Securities

During the quarterly period ended September 30, 2006, we issued securities for certain private transactions, in reliance on Section 4(2) of the Act, as described below:

Common Stock

On July 12, 2006, an aggregate of 72,000 shares of restricted common stock automatically granted and issued to non-employee directors pursuant to the Director Compensation Plan upon election at the annual meeting of stockholders held on September 29, 2005 vested. We did not consider these shares issued and outstanding due to a vesting provision and non-delivery of the shares pending vesting and as such no value was ascribed to these shares when originally issued. The value ascribed to these vested shares was recorded at $49,680.

Preferred Stock

On September 29, 2006, we issued 6,900 shares of Series D Preferred Stock, pursuant to a Securities Purchase Agreement dated September 29, 2006, to the Chairman of the Board and principal stockholder of the Company, in exchange for cancellation of $6,900,000 in loans due and owing to him by the Company. See Item 5 - Other Information, Paragraphs (b) and (c) for more details.

Item 3. Defaults Upon Senior Securities.

None.

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

We held our Annual Meeting of Stockholders on July 12, 2006. At the Annual Meeting, our stockholders elected four directors as more fully described below. At our Annual Meeting, there were present in person or by proxy 42,603,648 votes, representing approximately 80% of the total outstanding eligible votes. The result of the proposal considered at the Annual Meeting was as follows:

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.

15

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 Index of Exhibits on Page 18.

16

S IGNATURES

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

		LAPOLLA INDUSTRIES, INC.
Date: 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

17

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.

18

EX-4.1

Exhibit 4.1

AMENDMENT TO

CERTIFICATE OF DESIGNATION

OF PREFERENCES OF

SERIES C CONVERTIBLE PREFERRED STOCK

OF LAPOLLA INDUSTRIES, INC.

A DELAWARE CORPORATION

PURSANT TO SECTION 151 OF

THE GENERAL CORPORATION LAW OF

THE STATE OF DELAWARE

LaPolla Industries, Inc. (the "Company") does hereby certify:

Pursuant to the authority vested in the Board of Directors of the Company given by Article Fourth of the Company's Restated Certificate of Incorporation, as amended, the Board of Directors of the Company has duly adopted the following resolutions and amendment:

WHEREAS, on January 8, 2002, the Company, under the former name of Urecoats Industries, Inc. adopted resolutions establishing a series of preferred stock consisting of 750,000 shares designated as “Series C Convertible Preferred Stock, par value $1.00 per share” and filed an appropriate designation of preferences, qualifications and limitations with respect thereto (“Designation of Preferences”);

WHEREAS, the Company has determined to reduce the number of shares of Series C Convertible Preferred Stock from 750,000 shares to 687,895 shares; and

NOW, THEREFORE, BE IT RESOLVED, that the Series C Convertible Preferred Stock of this corporation shall consist of 687,895 shares instead of 750,000 shares and the Certificate of Designation of Preferences is hereby amended to reflect such newly designated amount of Series S Convertible Preferred Stock.

Except as amended hereby, the Certificate of Designation of Preferences filed with the Secretary of State on February 28, 2002, is hereby ratified and approved.

This corporation, by its Executive Vice President, hereby declares under penalty of perjury under the laws of the State of Delaware that the matters set forth in this Certificate are true and correct.

	DATED: September 27, 2006		LAPOLLA INDUSTRIES, INC.
		By:	/s/ Michael T. Adams, EVP
			Michael T. Adams
			Executive Vice President
Attest:
	LAPOLLA INDUSTRIES, INC.
By:	/s/ Michael T. Adams, Secretary
	Corporate Secretary

EX-4.2

Exhibit 4.2

CERTIFICATE OF DESIGNATION

OF PREFERENCES OF

SERIES D PREFERRED STOCK

OF LAPOLLA INDUSTRIES, INC.

A DELAWARE CORPORATION

PURSUANT TO SECTION 151 OF THE

GENERAL CORPORATION LAW OF

THE STATE OF DELAWARE

LaPolla Industries Inc. (the "Company") does hereby certify:

Pursuant to the authority vested in the Board of Directors of the Company given by Article Fourth of the Company's Restated Certificate of Incorporation, as amended, the Board of Directors of the Company has duly adopted the following resolutions:

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for the issuance of a series of preferred stock of the corporation consisting of 25,000 shares designated as "Series D Preferred Stock, par value $1.00 per share" and does hereby fix the preferences, qualifications, limitations, restrictions and special or relative rights relating to said Series D Preferred Stock as follows:

(1) DESIGNATION; VOTING RIGHTS.

 (a) The series of preferred stock established hereby shall be designated the "Series D Preferred Stock, par value $1.00" which series shall herein be referred to as the "SERIES D PREFERRED STOCK" and the authorized number of Series D Preferred Stock shall be 25,000. The stated value per each Series D Preferred Share shall be $1,000, which includes a par value of $1.00 per share (the "STATED VALUE").

 (b) The holders of the outstanding Series D Preferred Stock (collectively, the "HOLDERS" and each a "HOLDER") shall 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 this Certificate of Designation.

(2) COMPANY REDEMPTION OPTION.

 (a) OPTION TO REDEEM UPON TRIGGERING EVENT. In addition to all other rights of the Company contained herein, after a Triggering Event has occurred (as defined below), the Company shall have the right in accordance with this Section 2(a), 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 (the "TRIGGERING EVENT REDEMPTION").

 (b) TRIGGERING EVENT. A "TRIGGERING EVENT" shall be deemed to have occurred only upon the liquidation or termination of the Company.

 (c) MECHANICS OF REDEMPTION UPON TRIGGERING EVENT. If the Company so elects within five (5) business day after the occurrence of a Triggering Event, the Company shall deliver written notice thereof (specifying the Triggering Event) via facsimile and overnight courier ("NOTICE OF TRIGGERING EVENT") to each Holder, notifying each Holder of its intention to redeem ("NOTICE OF REDEMPTION AT OPTION OF COMPANY UPON TRIGGERING EVENT"). Such Notice of Redemption at Option of Company Upon Triggering Event shall indicate the number of Series D Preferred Stock that the Company is redeeming.

(3) REISSUANCE OF CERTIFICATES. In the event of a redemption pursuant to this Certificate of Designation of less than all of the Series D Preferred Stock, represented by a particular Preferred Stock Certificate if requested by the Holder, the Company shall promptly cause to be issued and delivered to the Holder of such Series D Preferred Stock a new Series D Preferred Stock Certificate representing the remaining Series D Preferred Stock which have not been so redeemed.

(4) DIVIDENDS. The registered Holders of the outstanding Series D Preferred Stock shall be entitled to receive cumulative dividends at the rate of 7% per annum of the Stated Value per each Series D Preferred Share (the "DIVIDEND"). Such Dividend shall be 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) 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.

(5) LIQUIDATION, DISSOLUTION, WINDING-UP. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the Holders shall be entitled to receive in cash out of the assets of the Company, whether from capital or from earnings available for distribution to its stockholders (the "PREFERRED FUNDS"), before any amount shall be paid to the holders of any of the capital stock of the Company of any class junior in rank to the Series D Preferred Stock in respect of the preferences as to the distributions and payments on the liquidation, dissolution and winding up of the affairs of the Company, an amount per Series D Preferred Share equal to the sum of (i) Stated Value and (ii) all accrued and unpaid dividends (such sum being referred to as the "LIQUIDATION VALUE"). The purchase or redemption by the Company of stock of any class, in any manner permitted by law, shall not, for the purposes hereof, be regarded as a liquidation, dissolution or winding up of the affairs of the Company. Neither the consolidation or merger of the Company with or into any other Person, nor the sale or transfer by the Company of less than substantially all of its assets, shall, for the purposes hereof, be deemed to be a liquidation, dissolution or winding up of the affairs of the Company.

(6) PREFERRED RANK. All shares of common stock of the Company shall be of junior rank to all Series D Preferred Stock in respect to the preferences as to distributions and payments upon the liquidation, dissolution and winding up of the affairs of the Company. All other shares of preferred stock issued or issuable shall not be of senior rank and may not have a status greater than pari passu to all Series D Preferred Stock outstanding in respect to the preferences as to distributions and payments upon the liquidation, dissolution and winding up of the affairs of the Company. As long as the Series D Preferred Stock initially issued remain outstanding, then without the prior express written consent of the Holders of not less than a majority of the then outstanding Series D Preferred Stock, the Company shall not hereafter authorize or issue additional or other capital stock that is of senior rank or that is pari passu with the Series D Preferred Stock in respect of the preferences as to distributions and payments upon the liquidation, dissolution and winding up of the Company. Without the prior express written consent of the Holders of not less than a majority of the then outstanding Series D Preferred Stock, the Company shall not hereafter authorize or make any amendment to the Company's Restated Certificate of Incorporation, as amended, or bylaws, or file any resolution of the Board of Directors of the Company with the Delaware Secretary of State containing any provisions, which would adversely affect or otherwise impair the rights or relative priority of the Holders relative to the holders of the Common Stock or the holders of any other class of capital stock. In the event of the merger or consolidation of the Company, with or into another Corporation, if the Series D Preferred Stock are not redeemed in accordance with the terms hereof, such shares shall maintain their relative powers, designations and preferences provided for herein and no such merger shall result in their rights and preferences being inconsistent herewith.

(7) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS WITH RESPECT TO OTHER CAPITAL STOCK. Until all of the outstanding Series D Preferred Stock have been redeemed as provided herein, the Company shall not, directly or indirectly, redeem or declare or pay any cash dividend or distribution on its Common Stock or any other capital stock without the prior express written consent of the Holders of not less than a majority of the then outstanding Series D Preferred Stock.

(8) VOTE TO CHANGE THE TERMS OF SERIES D PREFERRED STOCK. Any change to this Certificate of Designation or the Company's Restated Certificate of Incorporation, as amended, which would amend, alter, change or repeal any of the rights, preferences, qualifications, limitations, restrictions and special or relative rights of the Series D Preferred Stock shall require the affirmative vote at a meeting duly called for such purpose of the Holders of not less than a majority of the then outstanding Series D Preferred Stock.

(9) LOST OR STOLEN CERTIFICATES. Upon receipt by the Company of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Preferred Stock Certificates representing the Series D Preferred Stock, and, in the case of loss, theft or destruction, of any indemnification undertaking by the Holder to the Company and, in the case of mutilation, upon surrender and cancellation of the Preferred Stock Certificate(s), the Company shall execute and deliver new Preferred Stock Certificate(s) of like tenor and date; provided, however, the Company shall not be obligated to re-issue Preferred Stock Certificates if the Holder contemporaneously requests the Company to convert such Series D Preferred Stock into Common Stock.

(10)         PREFERRED STOCK CAPITALIZATION. The authorized number of shares of Preferred Stock of said corporation is 2,000,000, of which 750,000 have been authorized for a Series A Convertible Preferred Stock designation with 62,500 currently issued, outstanding and unconverted; 500,000 have been authorized for a Series B Convertible Preferred Stock designation with 500,000 issued and converted; 687,895 have been authorized for an amended Series C Convertible Preferred Stock designation with 687,895 issued and converted; and 25,000 have been authorized for this Series D Preferred Stock, none of which has been issued as of the date hereof.

This corporation further declares by its duly designated executive officer signing this certificate under penalty of perjury under the laws of the State of Delaware that the matters set forth in this Certificate are true and correct.

	DATED: September 27, 2006		LAPOLLA INDUSTRIES, INC.
		By:	/s/ Michael T. Adams, EVP
			Michael T. Adams
			Executive Vice President
Attest:
	LAPOLLA INDUSTRIES, INC.
By:	/s/ Michael T. Adams, Secretary
	Corporate Secretary

EX-10.1

Exhibit 10.1

SECURITIES PURCHASE AGREEMENT

THIS SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of September 29, 2006, is by and between LaPolla Industries Inc., a Delaware corporation, with its principal place of business at 15402 Vantage Parkway East, Suite 322, Houston, Texas 77032 (the "COMPANY"), and Richard J. Kurtz, with a residence at Nine Duck Pond Road, Alpine, New Jersey 07620 (the "BUYER").

WHEREAS, the Company and the Buyer are executing and delivering this Agreement in reliance upon the exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933, as amended (the "ACT");

WHEREAS, the Company has authorized the following new series of its preferred stock, $1.00 par value per share: the Series D Preferred Stock (the "SERIES D PREFERRED STOCK"), with a stated value per share of Series D Preferred Stock of $1,000, which includes a $1.00 par value per share (The Series D Preferred Stock is referred to in this Agreement as the "SECURITIES"); and

WHEREAS, the Buyer wishes to purchase and the Company desires to sell an aggregate of 6,900 shares of Series D Preferred Stock for a total of $6,900,000, upon the terms and conditions stated in this Agreement.

NOW, THEREFORE, in consideration of the premises and covenants herein contained, the Company and the Buyer hereby agree as follows:

1.PURCHASE AND SALE OF SERIES D PREFERRED STOCK.

a.PURCHASE OF SERIES D PREFERRED STOCK. Subject to the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7(a) below, the Company shall issue and sell to the Buyer and the Buyer shall purchase from the Company, for an aggregate of $6,900,000 an aggregate of 6,900 shares of Series D Preferred Stock (the "CLOSING"). On the Closing Date, subject to receipt of the agreed upon consideration, the Company shall cause to be delivered to Buyer a stock certificate representing the number of shares of Series D Preferred Stock that Buyer is then purchasing, duly executed on behalf of the Company and registered in the name of the Buyer or his designee (the "STOCK CERTIFICATE").

b.CLOSING DATE. The date and time of the Closing (the "CLOSING DATE") shall be 10:00 a.m. Eastern Daylight Time on September 29, 2006, subject to satisfaction (or waiver) of the conditions to the Closing set forth in Sections 6 and 7(a) below (or such later date as is mutually agreed to by the Company and the Buyer).

c.FORM OF PAYMENT. On the Closing Date, Buyer shall cancel indebtedness in the form of loans bearing interest owed by Company to Buyer as payment of the applicable purchase price for the Series D Preferred Stock to be issued and sold to Buyer at the Closing.

2.BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants with respect to only himself that:

a.INVESTMENT PURPOSE. Such Buyer is acquiring the Series D Preferred Stock for his own account for investment only and not with a view towards, or for resale in connection with, the unlawful public sale or distribution thereof, except pursuant to sales of such shares which are the subject of an effective registration statement duly filed under the Act or otherwise exempted under the Act and all applicable state blue sky laws; provided, however, that by making the representations herein, such Buyer does not agree to hold any Securities for any minimum period or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Act and all applicable state blue sky laws.

b.ACCREDITED INVESTOR STATUS. Buyer is an "accredited investor" as that term is defined in Rule 501(a) of Regulation D promulgated by the United States Securities and Exchange Commission (the "SEC") under the Act ("REGULATION D").

c.RELIANCE ON EXEMPTIONS. Buyer understands that the Series D Preferred Stock is being offered and sold to him in reliance on specific exemptions from the registration requirements of United States federal and state securities laws and that the Company is relying in part upon the truth and accuracy of, and Buyer's compliance with, the representations, warranties, agreements, acknowledgments and understandings of Buyer set forth herein in order to determine the availability of such exemptions and the eligibility of Buyer to acquire the Series D Preferred Stock.

d.INFORMATION. Buyer acknowledges that he is the Chairman of the Board of Directors of the Company and as such has been furnished with all materials relating to the business, finances and operations of the Company and materials relating to the offer and sale of the Series D Preferred Stock that have been requested by Buyer. No independent due diligence investigations conducted by Buyer shall modify, amend or affect Buyer's right to rely on the Company's representations and warranties contained in Section 3 below.

e.NO GOVERNMENTAL REVIEW. Buyer understands that no United States federal or state agency or any other government or governmental agency has passed on or made any recommendation or endorsement of the Series D Preferred Stock and the Warrants or the fairness or suitability of the investment in the Securities nor have such authorities passed upon or endorsed the merits of the offering of the Series D Preferred Stock.

f.TRANSFER OR RESALE. Buyer understands that the: (i) Securities have not been and are not being registered under the Act or any state securities laws, and may not be offered for sale, sold, assigned or transferred unless (A) (i) they have been subsequently registered thereunder and (ii) they are offered for sale, sold, assigned and transferred in compliance with the prospectus delivery requirements of the Act; or (B) Buyer shall have delivered to the Company an opinion of counsel, in a generally acceptable form, to the effect that such securities to be sold, assigned or transferred may be sold, assigned or transferred pursuant to an exemption from such registration.

g.LEGENDS.

(i)Buyer understands that the certificates or other instruments representing the Series D Preferred Stock shall bear a restrictive legend in substantially the following form (and a stop-transfer order may be placed against transfer of such stock certificates):

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.

(ii)Each certificate for Series D Preferred Stock shall also bear the following legend:

ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS RELATING TO THE SERIES D PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE. THE NUMBER OF SERIES D PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF SUCH SHARES STATED ON THE FACE HEREOF.

3.REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to Buyer as set forth in this Section 3.

a.ORGANIZATION AND QUALIFICATION. The Company is duly organized and validly existing in good standing under the laws of the jurisdiction in which it is organized, and has the requisite corporate power to own its properties and to carry on its business as now being conducted. The Company is duly qualified to do business and is in good standing in every jurisdiction in which the nature of the business conducted by it makes such qualification necessary, except to the extent that the failure to be so qualified or be in good standing would not have a Material Adverse Effect. "MATERIAL ADVERSE EFFECT" means any material adverse effect on (i) the business, properties, operations, condition (financial or otherwise), results of operations or objective prospects of the Company taken as a whole, (ii) on the ability of the Company to perform its obligations hereunder, under the Certificate of Designation or under the agreements or instruments to be entered into or filed in connection herewith or therewith, or (iii) the Securities.

b.AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS. (i) The Company has the requisite corporate power and authority to enter into and perform its obligations under this Agreement, to issue, sell and perform its obligations with respect to the Series D Preferred Stock in accordance with the terms hereof and the Certificate of Designation, (ii) the execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby and thereby, including without limitation the issuance of the Series D Preferred Stock, have been duly authorized by the Company's Board of Directors and no further consent or authorization is required by the Company, its Board of Directors or its shareholders, (iii) this Agreement and the certificates for the Series D Preferred Stock have been duly executed and delivered by the Company, (iv) this Agreement and the certificates for the Series D Preferred Stock constitute the valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as such enforceability may be limited by general principles of equity or applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or similar laws relating to, or affecting generally, the enforcement of creditors' rights and remedies, and (v) the Certificate of Designation will have been filed with the Secretary of State of the State of Delaware within sixty (60) days after the Closing date hereof and will be in full force and effect, enforceable against the Company in accordance with its terms.

c.CAPITALIZATION. As of September 29, 2006, the authorized capital stock of the Company consists of sixty seven million (67,000,000) shares, of which sixty five million (65,000,000) are for common stock and two million (2,000,000) for preferred stock. No shares of common stock or preferred stock are subject to preemptive rights or any other similar rights or any liens or encumbrances suffered or permitted by the Company. There are no securities or instruments containing anti-dilution or similar provisions that will be triggered by the issuance of any of the Securities as described in this Agreement. The Company has furnished to the Buyer copies of the Company's Restated Certificate of Incorporation, as amended, and as in effect on the date hereof (the "RESTATED CERTIFICATE OF INCORPORATION"), and the Company's Bylaws, as in effect on the date hereof (the "BYLAWS"), and the terms of all securities including the material rights of the holders thereof in respect thereto.

d.ISSUANCE OF SECURITIES. The Securities are duly authorized and, upon issuance in accordance with the terms hereof, shall be (i) validly issued, fully paid and non-assessable, (ii) free from all taxes, liens and charges with respect to the issue thereof and (iii) entitled to the rights and preferences set forth in the Certificate of Designation.

e.NO CONFLICTS. Except as otherwise expressly stated herein, the execution, delivery and performance of this Agreement, the performance by the Company of its obligations under the Certificate of Designation and the consummation by the Company of the transactions contemplated hereby will not (i) result in a violation of the Restated Certificate of Incorporation, as amended, any Certificate of Designation, Preferences and Rights of any outstanding series of preferred stock of the Company or Bylaws or (ii) conflict with, or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any material agreement, indenture or instrument to which the Company or any of its subsidiaries is a party, or result in a violation of any law, rule, regulation, order, judgment or decree (including federal and state securities laws and regulations and the rules and regulations of the principal market or exchange on which the common stock is traded or listed) applicable to the Company or by which any property or asset of the Company is bound or affected. The Company is not in violation of any term of or in default under its Restated Certificate of Incorporation or Bylaws, as applicable, any Certificate of Designation, Preferences and Rights of any outstanding series of preferred stock of the Company, or any material contract, agreement, indebtedness, indenture, instrument, judgment, decree or order (collectively referred to as the "MATERIAL CONTRACTS") or any statute, rule or regulation applicable to the Company. The business of the Company is not being conducted, and shall not be conducted, in violation of any material law, ordinance or regulation of any governmental entity. Except as specifically contemplated by this Agreement and as required under the Act and applicable blue sky laws, the Company is not required to obtain any consent, authorization or order of, or make any filing or registration with, any court or governmental or regulatory or self-regulatory agency in order for it to execute, deliver or perform any of its obligations under or contemplated by this Agreement or perform its obligations under the Certificate of Designation in accordance with the terms hereof or thereof.

f.SEC DOCUMENTS; FINANCIAL STATEMENTS. The Company has filed all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents incorporated by reference therein being hereinafter referred to as the "SEC DOCUMENTS"). As of their respective dates, the SEC Documents complied in all material respects with the requirements of the Exchange Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents. As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with generally accepted accounting principles, consistently applied during the periods involved (except (i) as may be otherwise indicated in such financial statements or the notes thereto, or (ii) in the case of unaudited interim statements, to the extent they may exclude footnotes or may be condensed or summary statements) and fairly present in all material respects the financial position of the Company as of the dates thereof and the results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

g.ACKNOWLEDGMENT REGARDING BUYERS' PURCHASE OF THE SERIES D PREFERRED STOCK. Purchaser's status as Chairman of the Board of Directors and holder of more than ten percent (10%) of the Company's outstanding shares, the Company acknowledges and agrees that for purposes hereof, Buyer is acting in the capacity of an arm's length purchaser with respect to this Agreement and the Certificate of Designation and the transactions contemplated hereby and thereby. The Company further acknowledges that for the purposes hereof, Buyer is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Agreement and the Certificate of Designation and the transactions contemplated hereby and thereby and any advice given by Buyer or any of his representatives or agents in connection with this Agreement and the Certificate of Designation and the transactions contemplated hereby and thereby is merely incidental to Buyer's purchase of the Series D Preferred Stock. The Company further represents to Buyer that the Company's decision to enter into this Agreement has been based solely on the independent evaluation by the Company and its representatives.

h.NO GENERAL SOLICITATION. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has engaged in any form of general solicitation or general advertising (within the meaning of Regulation D under the Act) in connection with the offer or sale of any of the Securities offered hereby.

i.       NO INTEGRATED OFFERING. Neither the Company, nor any of its affiliates, nor any person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would require registration of any of the Securities under the Act or cause the offering of any of the Securities to be integrated with prior offerings by the Company for purposes of the Act or any applicable stockholder approval provisions, including, without limitation, under the rules and regulations of any exchange or automated quotation system on which any of the securities of the Company are listed or designated, nor will the Company take any action or steps that would require registration of the issuance by the Company of any of the Securities under the Act or cause the offering of the Securities to be integrated with other offerings.

j.       INTELLECTUAL PROPERTY RIGHTS. The Company owns or possesses adequate rights or licenses to use all trademarks, trade names, service marks, service mark registrations, service names, patents, patent rights, copyrights, inventions, licenses, approvals, governmental authorizations, trade secrets and rights (collectively "INTELLECTUAL PROPERTY RIGHTS") necessary to conduct their respective businesses as now conducted and as presently contemplated to be operated in the future except for Intellectual Property Rights that, individually or in the aggregate, would not be reasonably likely to have a Material Adverse Effect.

k.LEASES. Any real property and facilities held under lease by the Company are held under valid, subsisting and enforceable leases.

l.       INSURANCE. The Company is insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as is prudent and customary in the businesses in which the Company is engaged. The Company does not have any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not individually or in the aggregate have a Material Adverse Effect.

m.     INTERNAL ACCOUNTING CONTROLS. The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management's general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management's general or specific authorization and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences.

n.TAX STATUS. The Company has made all federal and state income and all other tax returns, reports and declarations required by any jurisdiction to which it is subject (unless and only to the extent that the Company has set aside on its books provisions reasonably adequate for the payment of all unpaid and unreported taxes) and has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company know of no basis for any such claim. The Company has not been notified that any of its tax returns is currently being audited by any taxing authority.

4.COVENANTS AND AGREEMENTS.

a.BEST EFFORTS. Each party shall use its best efforts timely to satisfy each of the conditions to be satisfied by it as provided in Sections 6 and 7 of this Agreement.

b.BLUE SKY. The Company shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for or to qualify the Securities for, or obtain exemption for the Securities for, sale to Buyer pursuant to this Agreement under applicable securities or "Blue Sky" laws of the State of New Jersey. The Company shall make all filings and reports relating to the offer and sale of the Securities required under applicable securities or "Blue Sky" laws of the State of New Jersey wherein the Buyer resides.

c.FINANCIAL INFORMATION. The Company agrees to file all reports, schedules, forms, statements and other documents required to be filed by it with the SEC pursuant to the reporting requirements of the Exchange Act so long as the Series D Preferred Stock shall be outstanding. The financial statements of the Company will be prepared in accordance with generally accepted accounting principles, consistently applied, and will fairly present in all material respects the consolidated financial position of the Company and results of its operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments).

d.CORPORATE EXISTENCE. So long as any Buyer beneficially owns any Securities pursuant to this Agreement, the Company shall maintain its corporate existence in good standing under the laws of the jurisdiction in which it is incorporated and shall not sell all or substantially all of the Company's assets, except in the event of a merger or consolidation or sale of all or substantially all of the Company's assets for cash, or, if for securities, where the surviving or successor entity in such transaction either (i) redeems all of the then outstanding Series D Preferred Stock in accordance with and subject to the terms of the Certificate of Designation applicable to such transactions, or (ii) assumes the Company's obligations hereunder and under the agreements and instruments entered into in connection herewith.

e.INSURANCE. The Company shall maintain liability, casualty and other insurance (subject to customary deductions and retentions) with responsible insurance companies against such risk of the types and in the amounts customarily maintained by companies of comparable size to the Company.

6.CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL. The obligation of the Company hereunder to issue and sell the Series D Preferred Stock to Buyer at the Closing is subject to the satisfaction of each of the following conditions, provided that these conditions are for the Company's sole benefit and may be waived by the Company at any time in its sole discretion:

a.Buyer shall have executed this Agreement and delivered the same to the Company.

b.Buyer shall have delivered to the Company the applicable purchase price for the Series D Preferred Stock being purchased by Buyer at Closing.

c.The representations and warranties of Buyer shall be true and correct in all material respects as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date), and Buyer shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied, or complied with by Buyer at or prior to the Closing Date.

7.CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.

a.CLOSING DATE. The obligation of Buyer hereunder to purchase the Series D Preferred Stock at the Closing is subject to the satisfaction, at or before the Closing Date, of each of the following conditions, provided that these conditions are for Buyer's sole benefit and may be waived by such Buyer at any time in his sole discretion:

i.        The Company shall have executed this Agreement and delivered the same to such Buyer.

ii.       The Certificate of Designation shall have been executed by the Company and filed with the Secretary of the State of Delaware, and a copy marked as filed shall have been delivered to such Buyer.

iii.The representations and warranties of the Company shall be true and correct in all material respects (except to the extent that any of such representations and warranties is already qualified as to materiality in Section 3 above, in which case such representations and warranties shall be true and correct without further qualification) as of the Closing Date as though made at that time (except for representations and warranties that speak as of a specific date) and the Company shall have performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by this Agreement to be performed, satisfied or complied with by the Company at or prior to the Closing Date. Buyer shall have received a certificate, executed by an authorized officer of the Company, dated as of the Closing Date, to the foregoing effect and as to such other matters as may be reasonably requested by Buyer.

iv.The Company shall have executed and delivered to Buyer the Stock Certificates (in such denominations as such Buyer shall request) for the Series D Preferred Stock being purchased by Buyer being given at the Closing.

v.       The Company shall have delivered to Buyer such other documents relating to the transactions contemplated by this Agreement as Buyer may reasonably request.

vi.The transactions contemplated hereby shall not violate any law, regulation or order then in effect and applicable to Buyer or the Company.

8.INDEMNIFICATION. In consideration of each Buyer's execution and delivery of this Agreement and acquiring the Securities hereunder and in addition to all of the Company's other obligations under this Agreement, the Company shall defend, protect, indemnify and hold harmless Buyer and each other holder of Securities from and against any and all actions, causes of action, suits, claims, losses, costs, penalties, fees, liabilities and damages, and expenses in connection therewith (irrespective of whether Buyer is a party to the action for which indemnification hereunder is sought), and including reasonable attorneys' fees and disbursements (the "BUYER INDEMNIFIED LIABILITIES"), incurred by Buyer (and shall advance the same) as a result of, or arising out of, or relating to (a) any misrepresentation or breach of any representation or warranty made by the Company in this Agreement, the Certificate of Designation or any other certificate, instrument or document contemplated hereby or thereby, (b) any breach of any covenant, agreement or obligation of the Company contained in this Agreement, the Certificate of Designation or any other certificate, instrument or document contemplated hereby or thereby, or (c) any cause of action, suit or claim brought or made against Buyer and arising out of or resulting from the execution, delivery, performance or enforcement of this Agreement or any other instrument, document or agreement executed pursuant hereto by the Buyer. Promptly after receipt by Buyer of notice of the commencement of any action or proceeding (including any governmental action or proceeding) involving the Buyer Indemnified Liabilities, Buyer shall deliver to the Company a written notice of the commencement thereof, and the Company shall have the right to participate in, and, to the extent it so desires, jointly with any other indemnifying party similarly noticed, to assume control of the defense thereof with counsel selected by the Company and reasonably satisfactory to Buyer; provided, however, that Buyer shall have the right to retain its own counsel with the fees and expenses to be paid by the Company, if, in the reasonable opinion of counsel retained by the Company, the representation by such counsel of the Buyer and the Company would be inappropriate due to actual differing interests between Buyer and any other party represented by such counsel in such proceeding. The Buyer shall cooperate fully with the Company in connection with any negotiation or defense of any such action or claim by the Company and shall furnish to the Company all information reasonably available to the Buyer which relates to such action or claim. The Company shall keep the Buyer fully apprised at all times as to the status of the defense or any settlement negotiations with respect thereto. The Company shall not be liable for any settlement of any action, claim or proceeding affected without its written consent, provided, however, that the Company shall not unreasonably withhold, delay or condition its consent. The Company shall not, without the consent of the Buyer, consent to entry of any judgment or enter into any settlement or other compromise which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Buyer of a release from all liability in respect to such claim or litigation. Following indemnification as provided for hereunder, the Company shall be subrogated to all rights of the Buyer with respect to all third parties, firms or corporations relating to the matter for which indemnification has been made. The failure to deliver written notice to the Company within a reasonable time of the commencement of any such action shall not relieve it of any liability to the Buyer, except to the extent that the Company is prejudiced in its ability to defend such action. To the extent that the foregoing undertaking by the Company may be unenforceable for any reason, the Company shall make the maximum contribution to the payment and satisfaction of each of the Buyer Indemnified Liabilities which is permissible under applicable law.

9.MISCELLANEOUS.

a.COUNTERPARTS. This Agreement may be executed in two or more identical counterparts, all of which shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, PROVIDED THAT a facsimile signature shall be considered due execution and shall be binding upon the signatory thereto with the same force and effect as if the signature were an original, not a facsimile signature.

b.HEADINGS. The headings of this Agreement are for convenience of reference and shall not form part of, or affect the interpretation of, this Agreement.

c.SEVERABILITY. If any provision of this Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall not affect the validity or enforceability of the remainder of this Agreement in that jurisdiction or the validity or enforceability of any provision of this Agreement in any other jurisdiction.

d.ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the documents referred to herein, supersede all other prior or contemporaneous oral or written agreements between or among the Buyer, the Company, their affiliates and persons acting on their behalf with respect to the matters discussed herein, and this Agreement and the instruments referenced herein contain the entire understanding of the parties with respect to the matters covered herein and therein and, except as specifically set forth herein or therein, neither the Company nor Buyer makes any representation, warranty, covenant or undertaking with respect to such matters. No provision of this Agreement may be waived or amended other than by an instrument in writing signed by the Company and the holders of at least 2/3 of the then outstanding Series D Preferred Stock, but any such waiver or amendment shall bind all Buyers and holders.

e.NOTICES. Any notices, consents, waivers or other communications required or permitted to be given under the terms of this Agreement must be in writing and will be deemed to have been delivered (i) upon receipt, when delivered personally; (ii) upon receipt, when sent by facsimile, provided a copy is mailed by U.S. certified mail, return receipt requested; (iii) three (3) business days after being sent by U.S. certified mail, return receipt requested, or (iv) one (1) business day after deposit with a nationally recognized overnight delivery service, in each case properly addressed to the party to receive the same. The addresses and facsimile numbers for such communications shall be:

if to the Company: LaPolla Industries, Inc.

15402 Vantage Parkway East

Suite 322

Houston, Texas 77032

Telephone: (281) 219-4700

Attention: Michael T. Adams, Corporate Secretary

with a copy to:

Sierchio Greco & Greco, LLP

720 Fifth Avenue

Suite 1301

New York, New York 10019

Telephone: (212) 246-3030

Attention: Alfred V. Greco, Esquire

if to the Buyer:

Richard J. Kurtz

Nine Duck Pond Road

Alpine, New Jersey 07620

Telephone: (212) 768-3154

f.SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns, including any purchasers of the Securities. The Company shall not assign this Agreement or any rights or obligations hereunder without the prior written consent of the holders of two thirds (2/3) of the Series D Preferred Stock then outstanding. A Buyer may assign some or all of its rights hereunder without the consent of the Company, PROVIDED, HOWEVER, that (i) any such assignment shall not release such Buyer from its obligations hereunder unless such obligations are assumed by such assignee and the Company has consented to such assignment and assumption, which consent shall not be unreasonably withheld; (ii) Buyer may not assign his purchase or other rights hereunder in a manner that would cause the offering of Securities hereunder to be required to be registered under the Act; (iii) Buyer may not assign his purchase or other rights with respect to the Series D Preferred Stock; and (iv) Buyer may not assign his rights hereunder to an entity that in the good faith judgment of the Board of Directors of the Company is competitive with a core business of the Company.

g.NO THIRD PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective permitted successors and assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other person.

h.SURVIVAL. The representations and warranties of the Company and the Buyer contained in Sections 3 and 2, respectively, shall survive the Closing until three years after the Closing Date, including, without limitation, all financial statements thereto. The agreements and covenants set forth in Sections 4, 5 and 9, and the indemnification provisions set forth in Section 8, shall survive the Closing. Buyer shall be responsible only for his own representations, warranties, agreements and covenants hereunder.

i.       FURTHER ASSURANCES. Each party shall do and perform, or cause to be done and performed, all such further acts and things, and shall execute and deliver all such other agreements, certificates, instruments and documents, as the other party may reasonably request in order to carry out the intent and accomplish the purposes of this Agreement and the consummation of the transactions contemplated hereby.

j.       NO STRICT CONSTRUCTION. The language used in this Agreement will be deemed to be the language chosen by the parties to express their mutual intent, and no rules of strict construction will be applied against any party.

k.GOVERNING LAW; JURISDICTION; JURY TRIAL. All questions concerning the construction, validity, enforcement and interpretation of this Agreement shall be governed by the internal laws of the State of New York, without giving effect to any choice of law or conflict of law provision or rule that would cause the application of the laws of any jurisdiction other than the State of New York. Each party hereby irrevocably submits to the non-exclusive jurisdiction of the state and federal courts sitting in The City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address for such notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS AGREEMENT OR ANY TRANSACTION CONTEMPLATED HEREBY.

l.       REMEDIES. Buyer and each holder of the Securities shall have all rights and remedies set forth in this Agreement and the Certificate of Designation and all rights and remedies which such holders have been granted at any time under any other agreement or contract and all of the rights which such holders have under any law. Any person having any rights under any provision of this Agreement shall be entitled to enforce such rights specifically (without posting a bond or other security), to recover damages by reason of any breach of any provision of this Agreement and to exercise all other rights granted by law.

IN WITNESS WHEREOF, the Buyer and the Company have caused this Securities Purchase Agreement to be duly executed as of the date first written above.

LAPOLLA INDUSTRIES, INC.		RICHARD J. KURTZ
By:	/s/ Michael T. Adams, EVP	By:	/s/ Richard J. Kurtz
Name:	Michael T. Adams		Name: Richard J. Kurtz
Title:	Executive Vice President

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

I, Douglas J. Kramer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of LaPolla Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	October 30, 2006	LAPOLLA INDUSTRIES, INC.
		By:	/s/ Douglas J. Kramer, CEO
			Douglas J. Kramer
			Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

I, John A. Campbell, certify that:

1. I have reviewed this quarterly report on Form 10-Q of LaPolla Industries, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:	October 30, 2006	LAPOLLA INDUSTRIES, INC.
		By:	/s/ John A. Campbell, CFO
			John A. Campbell
			Principal Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The following certifications are being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350 and in accordance with SEC Release No. 33-8238. These certifications shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, nor shall they be incorporated by reference in any filing of the Company under the Securities Act of 1933, as amended, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

Certification of Principal Executive Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of LaPolla Industries, Inc., a Delaware corporation (the “Company”), hereby certifies, to his knowledge, that:

(i) the accompanying Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 30, 2006

LAPOLLA INDUSTRIES, INC.
By:	/s/ Douglas J. Kramer, CEO
	Douglas J. Kramer
	Principal Executive Officer

A signed original of this written statement required by Section 906 has been provided to LaPolla Industries, Inc. and will be retained by LaPolla Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Certification of Principal Financial Officer

Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of LaPolla Industries, Inc., a Delaware corporation (the “Company”), hereby certifies, to his knowledge, that:

(i) the accompanying Quarterly Report on Form 10-Q of the Company for the period ended September 30, 2006 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 30, 2006

LAPOLLA INDUSTRIES, INC.
By:	/s/ John A. Campbell, CFO
	John A. Campbell
	Principal Financial Officer

A signed original of this written statement required by Section 906 has been provided to LaPolla Industries, Inc. and will be retained by LaPolla Industries, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.