This financial review presents our operating results for the three and nine months ended September 30, 2009 and 2008, and our financial condition at September 30, 2009. 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 some of these risks, uncertainties and other factors throughout this report and provide a reference to additional risks under the caption "Risk Factors" in Item 1A of Part II below. 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, 2008 and quarters ended March 31, 2009 and June 30, 2009.

Lapolla's outlook remains positive through these challenging economic times. Foam sales continue to drive our focus and growth. Insulation foam, other than roofing, continues to outpace the current uncertain economy primarily due to high energy costs and increasing consumer awareness of its energy cost savings. We have focused much of our resources on foam technology through formulations, testing, approvals and credentials. For the nine month period ended September 30, 2009, Foam segment sales have increased by 12%, gross profit by 60%, and insulation foam within this segment has grown by over 27%, compared to the same period in 2008. International sales, including Canada, are impacting foam sales and are expected to play a much larger role in the foreseeable future. Although commercial roofing is down, directly affecting our roofing foam and coating sales, the Company believes pent up demand and growth opportunities exist which will likely result in increased sales volumes in the near term.

Performance for the Three Months Ended September 30, 2009 compared to the Three Months Ended September 30, 2008

Overall Results of Operations

The following is a summary of sales for the three months ended September 30:

2009 2008
Sales $ 14,022,690 $ 13,880,220

Our sales increased $142,470, or 1.0%, compared to the same period in 2008, due to an increase in sales in our Foam segment offset by a decrease in our Coatings segment. Although uncertain economic conditions persisted which served to limit our aggressive growth during the third quarter, we believe pent up demand for energy efficient products will likely accelerate due to current economic recovery indicators as well as rapidly growing awareness of government incentives for insulation in the American Recovery and Reinvestment Act of 2009 ("ARRA"). As the building industry recovers, Lapolla remains positioned to capitalize on the public's need for cost savings related to energy use.

Cost of sales decreased $984,930, or 8.7%, compared to the same period in 2008, due to favorable raw material pricing with key vendor strategic alliances from increased purchasing power in our Foam segment and lower sales volume in our Coatings segment.

Our gross profit increased $1,127,400, or 43.7%, compared to the same period in 2008, due to favorable raw material pricing in our Foam segment. Gross margin percentage increased by 7.9% compared to same period in 2008 due to price declines in key raw materials from increased purchasing power and lower freight costs in both segments.

Our total operating expenses are comprised of selling, general and administrative expenses, or SG&A, professional fees, depreciation, amortization of other intangible assets, consulting fees, interest expense, interest expense
- related party, interest expense - amortization of discounts, (gain) loss on extinguishment of debt, (gain) loss on derivative liability, and other (income) expense. These total operating expenses increased $742,078, or 29%, compared to the same period in 2008, due to an increase of $734,491 for SG&A, $5,644 for professional fees, $14,764 for depreciation, $12,338 for amortization of other intangible assets, $11,218 for consulting fees, $177,652 for interest expense, $64,079 for interest expense - related party, and $36,143 for interest expense - amortization of discounts, offset by an increase of $70,833 for other income and a $243,419 gain on derivative liability.

SG&A increased $734,491, or 39%, compared to the same period in 2008, due to an increase of $36,634 in corporate expenses, $91,672 in distribution/warehouse expenses, $86,560 in insurances, $176,458 in marketing and promotions, $201,043 in payroll and related employee benefits, $58,138 in sales commissions, $361,781 in share based compensation, and $16,792 in travel and travel related services, offset by a decrease of $17,281 in advertising, $130,258 in bad debts, $43,952 in investor relations, and $103,094 in rents.

Professional fees increased $5,644, or 6%, compared to the same period in 2008.

Depreciation expense increased $14,764, or 25%, compared to the same period in 2008, due primarily to an increase in depreciable assets.

Amortization of other intangible assets expense increased $12,338, or 22%, compared to the same period in 2008, due primarily to an increase in amortizable assets.

Consulting fees increased $11,218, or 41%, compared to the same period in 2008, due to primarily to fees for outside professional services for financial and investment banking services.

Interest expense increased $177,652, or 79%, compared to the same period in 2008, due primarily to an increase in the interest from the capital utilized from our ComVest credit instruments.

Interest expense - related party increased $64,079, or 502%, compared to the same period in 2008, due to an increase in the capital utilized from the Chairman of the Board's continuing financial commitment to the Company.

Interest expense - amortization of discount increased $36,143, or 18%, compared to the same period in 2008, due to the modification of our ComVest credit instruments in June 2008.

Gain on derivative liability was $243,419 compared to $-0- in the same period in 2008, due to a change in the fair value of our ComVest credit instruments derivatives.

Other income increased $70,833, or 1,493%, compared to the same period in 2008, due to an increase in royalty payments from the divestiture of our retail coatings business and a gain on the sale of an asset.

Net income increased $385,322, or 1,518%, compared to the same period in 2008 due to increased sales volumes in our Foam segment, gross margin percentage increases in both of our segments, and a gain on derivative liability. Net income per share increased $0.006, or 1,493%, compared to the same period in 2008.

Net income available to common stockholders and related income per share were $204,613 and $0.003 compared to a net loss available to common stockholders and related loss per share which were $180,709 and $0.003 for the same period in 2008. Accrued dividends on our outstanding Series D Preferred Stock were $206,080 for both the current and prior comparable period.

Results of Business Segments

The following is a summary of sales by segment for the three months ended
September 30:

Segments       2009             2008
Foam       $ 11,895,900     $ 10,983,173
Coatings      2,126,790        2,897,047

Foam sales increased $912,727, or 8.3%, compared to the same period in 2008, due to increased insulation foam sales volumes and related equipment, partially offset by a decrease in commercial roofing foam. Cost of sales decreased $289,310, or 3.3%, compared to the same period in 2008, due to favorable raw material pricing with key vendor strategic alliances from increased purchasing power and lower commercial roofing foam sales volumes. Gross profit increased $1,202,037, or 57.4%, compared to the same period in 2008. Foam segment profit increased $588,957, or 94.3%, compared to the same period in 2008, due to a substantial gross margin percentage increase of 8.6 percentage points due to favorable raw material prices from increased purchasing power, partially offset by higher marketing costs.

Coatings sales decreased $770,257, or 26.6%, with a corresponding decrease in our cost of sales of $695,620, or 28.9%, due primarily to a decline in commercial demand. Gross profit decreased $74,637, or 15.3%, compared to the same period in 2008, due to lower sales volumes. Coatings segment profit decreased $5,497, or 5.2%, compared to the same period in 2008.

Performance for the Nine Months Ended September 30, 2009 compared to the Nine Months Ended September 30, 2008

Overall Results of Operations

The following is a summary of sales for the nine months ended September 30:

2009 2008
Sales $ 34,658,872 $ 34,086,949

Our sales increased $571,923, or 1.7%, compared to the same period in 2008, due primarily to an increase in foam and related equipment sales in our Foam segment, partially offset by a decrease in coatings sales in our Coatings segment. Insulation foam market share gains in our Foam segment continue as consumers and builders alike recognize the economic advantages foam provides compared to less energy-efficient conventional insulation products, such as fiberglass. We remain strategically positioned for further market share gains in the near term as high energy costs continue to adversely affect consumers.

Cost of sales decreased $1,557,456, or 5.7%, compared to the same period in 2008, due to favorable raw material pricing with key vendor strategic alliances from increased purchasing power in our Foam segment and lower sales volumes in our Coatings segment, offset by higher sales volumes in our Foam segment.

Our gross profit increased $2,129,379, or 31.1%, compared to the same period in 2008, due to improved margins associated with favorable raw material pricing from increased purchasing power. Gross margin percentage increased by 5.8% compared to same period in 2008 due primarily to increased purchasing power and decreased freight costs in both segments.

Our total operating expenses are comprised of SG&A, professional fees, depreciation, amortization of other intangible assets, consulting fees, interest expense, interest expense - related party, interest expense - amortization of discounts, (gain) loss on extinguishment of debt, (gain) loss on derivative liability, and other (income) expense. These total operating expenses increased $3,058,750, or 39%, compared to the same period in 2008, due to an increase of $1,887,725 for SG&A, $79,714 for depreciation, $136,120 for amortization of other intangible assets, $90,446 for consulting fees, $395,720 for interest expense, $101,172 for interest expense - related party, and $381,285 for interest expense - amortization of discounts, offset by a decrease of $75,549 for professional fees, an increase of $20,201 for other income, a $399,515 gain on derivative liability, and no gain on extinguishment of debt (we had a gain on extinguishment of debt of $481,833 in the comparable 2008 period).

SG&A increased $1,887,725, or 28%, compared to the same period in 2008, due to an increase of $28,461 in advertising, $660,915 in bad debts, $243,083 in distribution/warehouse expenses, $165,465 in insurances, $366,379 in marketing and promotions, $1,047,716 in payroll and related employee benefits, and $127,240 in travel and travel related services, offset by a decrease of $50,942 in corporate expenses, $139,576 in investor relations, $40,205 in rents, $78,836 in sales commissions, and $441,975 in share based compensation expense. The increases in our SG&A primarily relate to expenses attributable to our acquisition of certain assets and liabilities from AirTight Marketing and Distribution, Inc. on July 1, 2008 ("AirTight" and "Asset Purchase") and an increase in our bad debts. We did not have any AirTight expenses during the first six months of 2008. Cost control remains a priority as we continue to monitor expenses and look to improve cash flow.

Professional fees decreased $75,549, or 15%, compared to the same period in 2008, due to a decrease in legal fees, partially offset by an increases in auditing and auditing related services.

Depreciation expense increased $79,714, or 57%, compared to the same period in 2008, due primarily to an increase in depreciable assets acquired in the AirTight Asset Purchase.

Amortization of other intangible assets expense increased $136,120, or 202%, compared to the same period in 2008, due primarily to an increase in amortizable assets acquired in the AirTight Asset Purchase.

Consulting fees increased $90,446, or 144%, compared to the same period in 2008, due to fees for outside professional services for financial and investment banking services.

Interest expense increased $395,720, or 74%, compared to the same period in 2008, due primarily to an increase in the interest from the capital utilized from our ComVest credit instruments.

Interest expense - related party increased $101,172, or 180%, compared to the same period in 2008, due to an increase in capital utilized from the Chairman of the Board's continuing financial commitment to the Company.

Interest expense - amortization of discount increased $381,285, or 132%, compared to the same period in 2008, due to the modification of our ComVest credit instruments in June 2008.

Gain on derivative liability was $399,515 compared to $-0- in the same period in 2008, due to a change in the fair value of our ComVest credit instruments derivatives.

Other income increased $20,201, or 36.5%, compared to the same period in 2008, due to an increase in royalty payments from the divestiture of our retail coatings business and a gain on the sale of an asset.

Net loss increased $929,372, or 90.6%, compared to the same period in 2008, as higher operating expenses relating to the AirTight Asset Purchase and the increase in bad debts relating to the current economic conditions were not present in the prior comparable period. Gross margin percentage increases in both of our segments served to limit our net loss for the period. Net loss per share increased $0.014, or 82.3%, compared to the same period in 2008.

Net loss available to common stockholders increased $927,132, or 56.6%, compared to the same period in 2008. Net loss per share available to common stockholders increased $0.013, or 48.1%, compared to the same period in 2008. Accrued dividends on our outstanding Series D Preferred Stock were $611,520 compared to $613,760 in the prior comparable period in 2008.

Results of Business Segments

The following is a summary of sales by segment for the nine months ended
September 30:

Segments       2009             2008
Foam       $ 29,255,499     $ 26,147,692
Coatings      5,403,373        7,939,257

Foam sales increased $3,107,807, or 11.9%, compared to the same period in 2008, due to increased wall foam insulation and related equipment sales volumes, partially offset by decreased sales volumes in commercial roofing foam. Cost of sales increased $150,556, or 0.7%, compared to the same period in 2008, due to higher sales volumes. Gross profit increased $2,957,251, or 60.48%, compared to the same period in 2008, primarily due to favorable raw material pricing with key vendor strategic alliances from increased purchasing power and lower freight costs. Foam segment profit increased $512,610, or 109%, compared to the same period in 2008, due to a substantial gross margin percentage increase of 8.1 percentage points due to favorable raw material pricing from increased purchasing power, partially offset by higher marketing costs and bad debts.

Coatings sales decreased $2,535,884, or 31.9%, with a corresponding decrease in our cost of sales of $1,708,012, or 28.4%, due primarily to a decline in commercial demand. Gross profit decreased $827,872, or 43%, compared to the same period in 2008, due to lower sales volumes. We had a segment loss of $112,274 compared to a segment profit of $637,764 for the same period in 2008. Pent up coatings demand is expected to resurge in the near term as the commercial building market recovers from the current economic slump.

Liquidity and Capital Resources

Net cash used in our operations was $3,185,679 for the nine months ended September 30, 2009 compared to $6,279,211 for the same period in 2008. The cash used in operations for the nine months ended September 30, 2009 was attributable to our net income for the period, including the effect of adjustments to reconcile net income to cash used in operating activities and adjusting for non-cash items, offset by increases in cash, trade receivables, deposits and other non current assets, and accrued expenses and other current liabilities, and decreases in inventories, prepaid expenses and other current assets, accounts payable, and other liabilities. The marked improvement in our gross profit and gross margin percentage in the three and nine months ended September 30, 2009 was a result of favorable raw material pricing with key vendor strategic alliances from increased purchasing power. Our operating cash flow has improved substantially due to increased sales volumes at higher profit margins from increased purchasing power. The Company believes the cash generated from operating cash flow is sufficient to meet its continuing working capital requirements. Although our ComVest credit facility debt matures in August 2010, the Company is seeking to extend the ComVest credit facility on favorable terms or raise capital from private placements of debt or common or preferred stock from accredited sophisticated investors to replace it with a new credit facility by the date of its maturity. If we are unable to refinance our ComVest credit facility or obtain new financing by August 31, 2010, our Company may be adversely affected. We have relied in the past on the financial commitment of the Chairman for funds to meet our working capital shortfalls when required and the Chairman has committed to Management to continue this practice for the near term.

Net cash used in investing activities was $156,331 for the nine months ended September 30, 2009 compared to $113,520 for the same period in 2008, for vehicles, computers and software, trade show displays, and for machinery and equipment.

Net cash provided by financing activities was $3,899,872 for the nine months ended September 30, 2009 compared to $6,396,262 for the same period in 2008. We made principal repayments of $250,000 on our ComVest Term Note, $130,128 on our long term debt, received proceeds of $200,000 from our Chairman of the Board for working capital, and paid $20,000 for Series D Preferred Stock dividends in the nine months ended September 30, 2009.