UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q







QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934





For
The Quarterly Period Ended June 30, 2008





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 Park15402
      Vantage Parkway East, Suite 322Houston,
      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  ̈




Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See the definitions of “large
accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule
12b-2 of the Exchange Act (Check one):





Large
      Accelerated Filer   ̈
            Accelerated
      Filer   ̈
            Non-Accelerated
      Filer   ̈
            Smaller
      Reporting Company þ




Indicate
by check mark whether the Registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act).  YES  ̈  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
August 7, 2008 there were 61,944,803 shares of Common Stock, par value $.01,
outstanding.
















LAPOLLA INDUSTRIES, INC.


FORM
10-Q


FOR
THE QUARTER ENDED JUNE 30, 2008


INDEX





PagePART
      I
            FINANCIAL
      INFORMATIONItem
      1
            Financial Statements
            1Item
      2
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            9Item
      3
            Quantitative and Qualitative Disclosures About Market
      Risk
            13Item
      4
            Controls and Procedures
            13PART
      II
            OTHER
      INFORMATIONItem
      1
            Legal Proceedings
            14Item
      1A
            Risk Factors
            14Item
      2
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            14Item
      3
            Defaults Upon Senior Securities
            14Item
      4
            Submission of Matters to a Vote of Security
      Holders
            14Item
      5
            Other Information
            14Item
      6
            Exhibits
            14SIGNATURES
            15INDEX OF EXHIBITS
            16




(i)
 Index





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. 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. Except as required under the
federal securities laws and the rules and regulations of the
U.S. Securities and Exchange Commission (the “SEC”), we do not have any
intention or obligation to update publicly any forward-looking statements,
whether as a result of new information, future events, changes in assumptions,
or otherwise.





PART
I — FINANCIAL INFORMATION





As used
in this report, "LaPolla” and the "Company" or "Us" or "We" or “Our” refer to
the LaPolla Industries, Inc., unless the context otherwise requires. Our
Internet website address is www.lapollaindustries.com.
We make our periodic and current reports, together with amendments to these
reports, available on our website, free of charge, as soon as reasonably
practicable after such material is electronically filed with, or furnished to,
the SEC. The information on our Internet website is not incorporated by
reference in this Quarterly Report on Form 10-Q.





Item
1.  Financial Statements.





LAPOLLA
INDUSTRIES, INC.


INDEX
TO FINANCIAL STATEMENTS AND


FINANCIAL
STATEMENT SCHEDULES








CONDENSED
      CONSOLIDATED BALANCE SHEETSJune
      30, 2008 (Unaudited) and December 31, 2007
            2CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)Three
      and Six Months Ended June 30, 2008 and 2007
            3CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)Six
      Months Ended June 30, 2008 and 2007
            4NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
            5








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





1
 Index





LAPOLLA
INDUSTRIES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS





June
      30, 2008
            
            
            December
      31, 2007(Unaudited)AssetsCurrent
      Assets:Cash
            
            $
            68,046
            
            
            $
            339,855Trade
      Receivables, Net
            
            
            7,925,266
            
            
            
            3,350,154Inventories
            
            
            3,090,730
            
            
            
            2,698,097Prepaid
      Expenses and Other Current Assets
            
            
            605,346
            
            
            
            532,233Total
      Current Assets
            
            
            11,689,388
            
            
            
            6,920,339Property,
      Plant and Equipment, Net
            
            
            2,477,864
            
            
            
            2,626,068Other
      Assets:Goodwill
            
            
            1,951,000
            
            
            
            1,951,000Other
      Intangible Assets
            
            
            130,778
            
            
            
            142,318Deposits
      and Other Non-Current Assets
            
            
            207,160
            
            
            
            226,320Total
      Other Assets
            
            
            2,288,938
            
            
            
            2,319,638Total
      Assets
            
            $
            16,456,190
            
            
            $
            11,866,045Liabilities
      and Stockholders' EquityCurrent
      Liabilities:Accounts
      Payable
            
            $
            5,307,044
            
            
            $
            2,422,625Accrued
      Expenses and Other Current Liabilities
            
            
            1,761,859
            
            
            
            1,266,533Loan
      Payable – Related Party
            
            
            843,348
            
            
            
            —Current
      Portion of Convertible Term Note
            
            
            —
            
            
            
            589,761Current
      Portion of Long-Term Debt
            
            
            74,302
            
            
            
            84,939Total
      Current Liabilities
            
            
            7,986,553
            
            
            
            4,363,858Other
      Liabilities:Revolving
      Credit Note
            
            
            3,713,715
            
            
            
            4,879,152Non-Current
      Portion of Convertible Term Note
            
            
            565,260
            
            
            
            775,185Non
      Current Portion of Long-Term Debt
            
            
            57,871
            
            
            
            107,255Non
      Current Portion of Liabilities from Discontinued
Operations
            
            
            —
            
            
            
            848Total
      Other Liabilities
            
            
            4,336,846
            
            
            
            5,762,440Total
      Liabilities
            
            
            12,323,399
            
            
            
            10,126,298Stockholders'
      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) and $62,500 aggregate liquidation
      preference at June 30, 2008 and December 31, 2007,
      respectively
            
            
            55,035
            
            
            
            55,035Series
      D, 25,000 Shares Authorized;  8,176 Issued and Outstanding and
      $8,176,000 aggregate liquidation preference at June 30, 2008 and December
      31, 2007
            
            
            8,176
            
            
            
            8,176Common
      Stock, $.01 Par Value; 98,000,000 Shares Authorized; 61,944,803 and
      59,125,700 Issued and Outstanding at June 30, 2008 and December 31, 2007,
      respectively
            
            
            619,448
            
            
            
            591,257Additional
      Paid-In Capital
            
            
            77,016,206
            
            
            
            73,600,876Accumulated
      (Deficit)
            
            
            (73,566,075
            )
            
            
            (72,515,597
            )Total
      Stockholders' Equity
            
            
            4,132,790
            
            
            
            1,739,747Total
      Liabilities and Stockholders' Equity
            
            $
            16,456,190
            
            
            $
            11,866,045





The
Accompanying Notes are an Integral Part of the Financial Statements





2
 Index





LAPOLLA
INDUSTRIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,2008
            
            
            2007
            
            
            2008
            
            
            2007Sales
            
            $
            12,033,485
            
            
            $
            9,519,871
            
            
            $
            20,206,728
            
            
            $
            16,789,193Cost
      of Sales
            
            
            9,296,825
            
            
            
            7,726,476
            
            
            
            15,969,044
            
            
            
            13,813,350Gross
      Profit
            
            
            2,736,660
            
            
            
            1,793,395
            
            
            
            4,237,684
            
            
            
            2,975,843Operating
      Expenses:Selling,
      General and Administrative
            
            
            2,699,863
            
            
            
            2,074,246
            
            
            
            4,837,917
            
            
            
            4,061,749Professional
      Fees
            
            
            198,506
            
            
            
            104,027
            
            
            
            415,289
            
            
            
            136,646Depreciation
      and Amortization
            
            
            45,484
            
            
            
            60,886
            
            
            
            90,969
            
            
            
            126,580Consulting
      Fees
            
            
            23,212
            
            
            
            14,729
            
            
            
            35,546
            
            
            
            40,309Interest
      Expense
            
            
            147,165
            
            
            
            129,195
            
            
            
            306,295
            
            
            
            192,717Interest
      Expense – Related Party
            
            
            39,272
            
            
            
            —
            
            
            
            43,348
            
            
            
            —Interest
      Expense – Amortization of Discounts
            
            
            46,935
            
            
            
            36,435
            
            
            
            91,263
            
            
            
            53,084(Gain)
      Loss on Extinguishment of Debt
            
            
            (481,833
            )
            
            
            —
            
            
            
            (481,833
            )
            
            
            —Other
      (Income) Expense
            
            
            (50,633
            )
            
            
            (5,208
            )
            
            
            (50,633
            )
            
            
            (4,694
            )Total
      Operating Expenses
            
            
            2,667,971
            
            
            
            2,414,310
            
            
            
            5,288,161
            
            
            
            4,606,391Net
      Income (Loss)
            
            
            68,689
            
            
            
            (620,915
            )
            
            
            (1,050,477
            )
            
            
            (1,630,548
            )Plus:  Dividends
      on Preferred Stock
            
            
            (203,840
            )
            
            
            (203,840
            )
            
            
            (407,123
            )
            
            
            (407,680
            )Net
      (Loss) Available to Common Stockholders
            
            
            (135,151
            )
            
            
            (824,755
            )
            
            
            (1,457,600
            )
            
            
            (2,038,228
            )Net
      (Loss) Per Share-Basic and Diluted
            
            $
            (0.002
            )
            
            $
            (0.015
            )
            
            $
            (0.025
            )
            
            $
            (0.038
            )Weighted
      Average Shares Outstanding
            
            
            59,227,776
            
            
            
            53,612,251
            
            
            
            59,209,198
            
            
            
            53,598,584





The
Accompanying Notes are an Integral Part of the Financial Statements





3
 Index





LAPOLLA
INDUSTRIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six
      Months Ended June 30,2008
            
            
            2007Cash
      Flows From Operating ActivitiesNet
      Loss
            
            $
            (1,050,477
            )
            
            $
            (1,630,549
            )Adjustments
      to Reconcile Net (Loss) to Net Cash (Used in) Operating
      Activities:Depreciation
      and Amortization
            
            
            192,464
            
            
            
            145,633Provision
      for Losses on Accounts Receivable
            
            
            67,383
            
            
            
            (129,315
            )Amortization
      of Discount on Revolving Credit and Convertible Term Notes
            
            
            91,263
            
            
            
            53,084Share
      Based Compensation Expense
            
            
            851,544
            
            
            
            533,347Gain
      on Extinguishment of Debt
            
            
            (481,833
            )
            
            
            —Changes
      in Assets and Liabilities:Trade
      Receivables
            
            
            (4,575,112
            )
            
            
            (2,055,000
            )Inventories
            
            
            (392,633
            )
            
            
            (1,882,431
            )Prepaid
      Expenses and Other Current Assets
            
            
            (73,113
            )
            
            
            (134,794
            )Deposits
      and Other Non Current Assets
            
            
            (78,359
            )
            
            
            (131,960
            )Accounts
      Payable
            
            
            2,884,419
            
            
            
            1,771,897Accrued
      Expenses and Other Current Liabilities
            
            
            495,326
            
            
            
            83,161Other
      Liabilities
            
            
            (1,513,943
            )
            
            
            (435
            )Net
      Operating Activities of Discontinued Operations
            
            
            (848
            )
            
            
            (9,152
            )Net
      Cash (Used in) Operating Activities
            
            
            (3,583,919
            )
            
            
            (3,386,514
            )Cash
      Flows From Investing ActivitiesAdditions
      to Property, Plant and Equipment
            
            
            (17,868
            )
            
            
            (1,409,996
            )Net
      Cash (Used in) Investing Activities
            
            $
            (17,868
            )
            
            $
            (1,409,996
            )Cash
      Flows From Financing ActivitiesProceeds
      from Revolving Credit Note
            
            
            —
            
            
            
            4,000,000Proceeds
      from Convertible Term Note
            
            
            —
            
            
            
            2,000,000Principal
      Repayments on Convertible Term Note
            
            
            (400,000
            )
            
            
            —Proceeds
      from Line of Credit
            
            
            —
            
            
            
            1,398,000Payments
      to Line of Credit
            
            
            —
            
            
            
            (2,405,120
            )Proceeds
      from Loans Payable – Related Party
            
            
            3,800,000
            
            
            
            617,000Payments
      to Loans Payable – Related Party
            
            
            —
            
            
            
            (617,000
            )Payments
      to Note Payable – Other
            
            
            —
            
            
            
            (13,336
            )Principal
      Repayments on Long Term Debt
            
            
            (60,022
            )
            
            
            (223,484
            )Payment
      of Preferred Stock Dividends
            
            
            (10,000
            )
            
            
            —Net
      Financing Activities of Discontinued Operations
            
            
            —
            
            
            
            (326,129
            )Net
      Cash Provided by Financing Activities
            
            
            3,329,978
            
            
            
            4,429,931Net
      (Decrease) In Cash
            
            $
            (271,809
            )
            
            $
            (366,579
            )Cash
      at Beginning of Period
            
            
            339,855
            
            
            
            382,116Cash
      at End of Period
            
            $
            68,046
            
            
            $
            15,537Supplemental
      Disclosure of Cash Flow Information:Cash
      Payments for Income Taxes
            
            $
            —
            
            
            $
            —Cash
      Payments for Interest
            
            $
            306,295
            
            
            $
            192,715Supplemental
      Schedule of Non Cash Investing and Financing Activities:Property,
      Plant and Equipment acquired from Issuance of Long Term
    Debt
            
            $
            —
            
            
            $
            28,000Common
      Stock Issued-Exercise of Warrants for Principal Repayments to Revolving
      Credit Note
            
            
            67,500
            
            
            
            —Common
      Stock Issued-Exercise of Warrants for Principal Repayments to Convertible
      Term Note
            
            
            33,766
            
            
            
            —Common
      Stock Issued-Exercise of Warrants for Interest on Convertible Term
      Note
            
            
            33,734
            
            
            
            —Common
      Stock Issued-Conversion of Convertible Term Note for Principal Repayments
      to Convertible Term Note
            
            
            3,850
            
            
            
            —Common
      Stock Issued-Cancellation of Indebtedness for Principal Repayments to Loan
      Payable-Related Party
            
            
            2,000,000
            
            
            
            —Common
      Stock Issued-Director Fees
            
            
            —
            
            
            
            28,440




4
 Index





LAPOLLA
INDUSTRIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





Note
1.  Basis of Presentation.





The
consolidated financial statements included herein are unaudited. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the SEC. In
the opinion of the management, the accompanying statements reflect adjustments
necessary to present fairly the financial position, results of operations and
cash flows for those periods indicated, and contain adequate disclosure to make
the information presented not misleading. Adjustments included herein are of a
normal, recurring nature unless otherwise disclosed in the Notes to the
consolidated financial statements. The consolidated financial statements
included herein should be read in conjunction with the financial statements and
Notes thereto included in LaPolla’s latest annual report on Form 10-K, including
any amendments thereto, in order to fully understand the basis of presentation.
Results of operations for interim periods are not necessarily indicative of the
results of operations for a full year. Certain amounts in the prior years have
been reclassified to conform to the 2008 unaudited consolidated financial
statement presentation. Reference is made to Management’s Discussion and
Analysis of Financial Condition and Results of Operations on page 9. Risk
factors that could impact results are discussed in Part II – Other Information,
Item 1A – Risk Factors
on page 14. Refer also to the Company’s 2007 Annual Report on Form 10-K,
including any amendments thereto, for a description of major accounting
policies. There have been no material changes to these accounting policies
during the six months ended June 30, 2008.





Note
2.  Dependence on Few Suppliers.





The
Company is dependent on a few suppliers for certain of its raw materials and
finished goods. For both of the quarters ended June 30, 2008 and 2007, raw
materials and finished goods purchased from the Company’s three largest
suppliers accounted for approximately 29% of purchases,
respectively.





Note
3.  Trade Receivables.





Trade
receivables are comprised of the following at:





June
      30, 2008
            
            
            December
      31, 2007Trade
      Receivables
            
            $
            8,171,089
            
            
            $
            3,528,594Less:
      Allowance for Doubtful Accounts
            
            
            (245,823
            )
            
            
            (178,440
            )Trade
      Receivables, Net
            
            $
            7,925,266
            
            
            $
            3,350,154





Note
4. Inventories.





The
following is a summary of inventories at:





June
      30, 2008
            
            
            December
      31, 2007Raw
      Materials
            
            $
            1,319,138
            
            
            $
            880,616Finished
      Goods
            
            
            1,771,592
            
            
            
            1,817,481Total
            
            $
            3,090,730
            
            
            $
            2,698,097





Note
5. Loans Payable – Related Party.





The
Company received advances of $3,800,000 from the Chairman of the Board for
working capital purposes pursuant to his 2008 commitment, of which $2,000,000
was canceled from the conversion of principal indebtedness in exchange for
restricted common stock of the Company in the six months ended June 30,
3008.  The advances were recorded as short term demand loans bearing
interest at 6% per annum. Accrued interest was $39,271 at June 30, 2008. See also
Notes 6 - Revolving Credit and Term Loan Agreement and Related Agreements, Item
E – Conversion of Principal Indebtedness for Equity, for additional
information.





5
 Index





LAPOLLA
INDUSTRIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED-CONTINUED)





Note
6.  Revolving Credit and Term Loan Agreement and Related
Agreements.





Background





The
Company entered into a Revolving Credit and Term Loan Agreement on February 21,
2007 with ComVest Capital LLC (“ComVest”), which was amended on June 12, 2007
(“Loan Agreement”), under which ComVest agreed to loan up to $5,000,000 under a
revolving credit note (“Revolving Credit Note”) and $2,000,000 under a
convertible term note (“Convertible Term Note”), and the Company agreed to issue
certain warrants (“Warrants”) to ComVest and register the conversion shares
under the Convertible Term Note and warrant shares underlying the Warrants
(“Registration Rights”). On June 30, 2008, the Company and ComVest amended and
restated the Loan Agreement, Revolving Credit Note, and Convertible Term Note,
amended the existing Warrants, and issued a new warrant (“New
Warrant”).  Per applicable rules, the amended and restated agreements
constituted a substantial modification, which caused an extinguishment of debt
resulting in a gain of $481,833, which is included in the accompanying statement
of operations for the periods ended June 30, 2008.  The modified debt
instruments were recorded at fair value resulting in a gain of $2,015,909, which
was partially offset by a charge of $1,534,076 for the write off of the old
warrant discount amortization ($464,639), deferred finance charges ($217,520),
and fair value difference between the old warrants and the old repriced
warrants, together with the fair value of the New Warrant
($851,917).  The modified debt will have a new effective interest rate
of approximately 30%.  The resulting discounts, as noted below, will
be amortized to interest expense using the effective interest method over the
term of the agreements. A brief summary of certain terms and conditions of the
Loan Agreement’s related agreements as described above are provided hereinbelow,
which summaries are qualified by reference to the full text of each respective
agreement included as exhibits to this report.





A.      Revolving Credit Note -The
Revolving Credit Note, as amended and restated, was increased to make up to
$9,500,000 available, and bears interest according to a coverage ratio formula
with a coverage ratio ranging from 1.0 to 2.0 and Prime rate ranging from Prime
plus 1% to Prime plus 0%. The coverage ration formula is defined as the ratio of
(i) Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)
minus capital expenditures paid in cash, to (ii) Debt Service (as such terms are
defined in the Loan Agreement), in each case for the fiscal quarter ending on
the date of the subject financial statements and calculation, and (b) the term
“Prime Rate” shall mean the “prime rate” or “base rate” of interest publicly
announced by Citibank, N.A. The term of the Revolving Credit Note was extended
to August 31, 2010. The balance outstanding was $4,932,500 and unamortized
discount was $1,218,785 at June 30, 2008.





B.      Convertible Term Note -The
Convertible Term Note, as amended and restated, was increased to up to
$3,000,000, bears interest at 10% per annum, the principal is payable (i) in
thirteen (13) equal monthly installments of $83,333.33 each, due and payable on
the first day of each calendar month commencing July 1, 2009 and continuing
through and including August 1, 2010, and (ii) in a final installment due and
payable on August 31, 2010 in an amount equal to the entire remaining principal
balance, and is convertible optionally by ComVest at any time or mandatorily by
LaPolla subject to satisfaction of certain conditions to common stock at the
rate of $.77 per share. The Convertible Term Note was personally guaranteed by
the Chairman of the Board. The balance outstanding was $1,362,384 and
unamortized discount was $797,124.





C.      Warrants - The existing
Warrants, as amended, are for the purchase of an aggregate of 1,500,000 shares
of common stock, exercisable at an adjusted price of $.60 per share, expire on a
date extended to June 30, 2013, and have a fair value of $1,241,360. The New
Warrant was issued for the purchase of 1,000,000 shares of common stock, is
exercisable at a price of $.78 per share, expires June 30, 2013, and has a fair
value of $824,526.  The fair value of the existing Warrants was
recalculated on the date of the amendment and restatement of the Loan Agreement,
Revolving Credit Note, and Convertible Term Note, and the New Warrant on the
date of grant or June 30, 2008. The fair value was calculated using a
lattice-based valuation model with the following assumptions: (a) expected
volatility of 220.67%, (b) $-0- expected dividends, (c) expected term of 5
years, and (d) risk-free rate of 3.382%. Expected volatilities are based on the
historical volatility of the Company’s common stock. The expected term of
warrants is derived from the output of the valuation model and represents the
periods of time that warrants granted are expected to be outstanding. The
risk-free rate for periods within the contractual life of the warrants is based
on the U.S. Treasury yield curve in effect at the time of grant.





D.      Conversion of Principal Indebtedness
to Equity – On June 30, 2008, pursuant to the Loan Agreement, the
Chairman of the Board and majority stockholder converted $2,000,000 in principal
of the short term loans he advanced to the Company during the second quarter of
2008 into 2,564,103 shares of restricted common stock at the rate of $.78 per
share.





E.      Registration Rights – The
Company determined that no liability is recognizable at June 30, 2008 for
registration payment arrangements based on the fact that the Registration
Statement was effective at June 30, 2008.





6
 Index




LAPOLLA
INDUSTRIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED-CONTINUED)





Note
7.  Net Income (Loss) Per Common Share – Basic and
Diluted.





The
following table reflects the computation of the basic and diluted net income
(loss) per common share at June 30:





Three
      Months Ended
            
            
            Six
      Months Ended2008
            
            
            2007
            
            
            2008
            
            
            2007Amount
            
            
            Amount
            
            
            Amount
            
            
            AmountNet
      Income (Loss)
            
            $
            68,689
            
            
            $
            (620,916
            )
            
            $
            (1,050,477
            )
            
            $
            (1,630,549
            )Net
      Income (Loss) Per Share – Basic
            
            $
            0.001
            
            
            $
            (0.011
            )
            
            $
            (0.018
            )
            
            $
            (0.030
            )Weighted
      Average Common Shares Outstanding
            
            
            59,277,776
            
            
            
            53,612,251
            
            
            
            59,209,198
            
            
            
            53,598,584Net
      (Loss) Per Share – Diluted
            
            $
            0.001
            
            
            $
            (0.011
            )
            
            $
            (0.018
            )
            
            $
            (0.030
            )Weighted
      Average Common Shares Outstanding
            
            
            61,433,441
            
            
            
            53,612,251
            
            
            
            62,566,154
            
            
            
            53,598,584Plus:  Dividends
      on Preferred Stock
            
            
            (203,840
            )
            
            
            (203,840
            )
            
            
            (407,123
            )
            
            
            (405,550
            )Net
      (Loss) Available to Common Stockholders
            
            $
            (135,151
            )
            
            $
            (824,756
            )
            
            $
            (1,457,600
            )
            
            $
            (2,036,099
            )Net
      (Loss) Per Share – Basic and Diluted
            
            $
            (0.023
            )
            
            $
            (0.011
            )
            
            $
            (0.025
            )
            
            $
            (0.030
            )Weighted
      Average Common Shares Outstanding
            
            
            59,277,776
            
            
            
            53,612,251
            
            
            
            59,209,198
            
            
            
            53,598,584





For the
three month period ended June 30, 2008, the securities that could potentially
dilute net income per share in the future that were included in the computation
of diluted net income per share – diluted were (i) 1,769,330 shares of common
stock issuable upon conversion of the Convertible Term Note, (ii) 2,500,000
shares of common stock issuable upon exercise of warrants, (iii) 466,275 shares
of common stock issuable upon exercise of vested and exercisable stock options,
and (iv) 2,250 shares of common stock issuable upon conversion of Series A
Preferred Stock. For all other periods, 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) 1,769,330 and 2,597,403 shares of common stock issuable upon
conversion of the Convertible Term Note, (ii) 2,500,000 and 1,750,000 shares of
common stock issuable upon exercise of warrants, (iii) 466,275 and 73,000 shares
of common stock issuable upon exercise of vested and exercisable stock options,
and (iv) 2,250 and 2,250 shares of common stock issuable upon conversion of
Series A Preferred Stock, for the six month period ended June 30, 2008 and three
and six month period ended June 30, 2007, respectively.





Note
8.  Share–Based Payment Arrangements.





On May 5,
2008, the Company granted to its CEO and President an additional 2,000,000 stock
options under the Company’s Equity Incentive Plan, as amended (“Plan”), for the
purchase of common stock, at an exercise price of $.74 per share (100% of
closing price) which vests in 250,000 option increments, with the first
increment vesting on the earlier of June 30, 2008, provided the Company has net
pre-tax income for the fiscal quarter ending on that date, or the last day of
the Company’s first fiscal quarter ending after June 30, 2008 for which the
Company has a quarterly profit, and each of the remaining increments on the last
day of each the next seven fiscal quarters for which the Company has a quarterly
profit, and once vested, is exercisable on an inclining cumulative basis over a
four year period, subject in all cases to continued satisfactory employment
through the last day of each such quarter, and expiring December 31, 2013 (“New
Option”). The New Option amended existing stock options previously granted on
July 12, 2005 also for 2,000,000 shares, at an exercise price of $.67 per share
(100% of closing price), and expiring December 31, 2012 (“Existing Option”).
There were 1,520,000 options remaining unvested under the Existing Option, all
of which automatically vested when the New Option was granted on May 5,
2008.  The fair value of the New Option was calculated using a
lattice-based valuation model with the following assumptions: (a) expected
volatility of 227.18%, (b) $-0- expected dividends, (c) expected term of 5.7
years, and (d) risk-free rate of 3.266%. The expected volatility is based on the
historical volatility of the Company’s common stock. The expected term of the
New Option is derived from the output of the valuation model and represents the
period of time that the New Option granted is expected to be outstanding. The
risk-free rate for the period within the contractual life of the New Option is
based on the U.S. Treasury yield curve in effect at the time of grant. The total
compensation cost related to the New Option is $1,463,354, which is expected to
be recognized over an approximate 33 month period after the date of grant. At
June 30, 2008, the Company recognized an aggregate of $143,011 of compensation
cost related to the New Option based on the first tranche of 250,000 stock
options vesting based on the results of the second quarter of
2008.  The fair value of the Existing Option was calculated using a
lattice-based valuation model using the following assumptions: (a) expected
volatility of 152.95%, (b) $-0- expected dividends, (c) expected term of 6.0
years, and (d) risk-free rate of 3.974%. The expected volatility was based on
the historical volatility of the Company’s common stock. The expected term of
the Existing Option is derived from the output of the valuation model and
represents the period of time that the Existing Option granted is expected to be
outstanding. The risk-free rate for the period within the contractual life of
the Existing Option is based on the U.S. Treasury yield curve in effect at the
time of grant. The total compensation cost related to the Existing Option was
$1,250,575, of which $284,892 was recognized during the second quarter of 2008
and the balance in prior periods. The Company recognized an aggregate of
$601,766 and $851,554 in share based compensation expense during the three and
six month periods ended June 30, 2008, respectively.





7
 Index





LAPOLLA
INDUSTRIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED-CONTINUED)





Note
9.   Business Segment Information.





The
Company is a national manufacturer and supplier operating two segments based on
manufacturing competencies, Foam and Coatings. The Company consolidated and
restructured its segments at December 31, 2007 and prior periods have been
reclassified to reflect the change. 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 sales. Administrative expenses are
allocated to both segments. Unallocated costs reflect certain corporate expenses
(including a certain portion of non-cash items such as share based compensation
and the amortization of discounts related to certain debt instruments),
insurance, investor relations, and gains and losses related to the disposal of
corporate assets or extinguishments of liabilities and are included in Unallocated Amounts. There
are no intersegment sales or transfers.





Reportable
Segments





The
following table includes information about our reportable segments
at:





Three
      Months Ended June 30,2008
            
            
            2007Foam
            
            
            Coatings
            
            
            Totals
            
            
            Foam
            
            
            Coatings
            
            
            TotalsSales
            
            $
            9,110,929
            
            
            $
            2,922,556
            
            
            $
            12,033,485
            
            
            $
            5,601,725
            
            
            $
            3,918,146
            
            
            $
            9,519,871Cost
      of Sales
            
            
            7,302,090
            
            
            
            1,994,735
            
            
            
            9,296,825
            
            
            
            4,726,382
            
            
            
            3,000,095
            
            
            
            7,726,477Gross
      Profit
            
            
            1,808,838
            
            
            
            927,822
            
            
            
            2,736,660
            
            
            
            868,811
            
            
            
            924,583
            
            
            
            1,793,394Depreciation
      and Amortization
            
            
            30,994
            
            
            
            9,942
            
            
            
            40,936
            
            
            
            10,508
            
            
            
            50,378
            
            
            
            60,886Interest
      Expense
            
            
            132,519
            
            
            
            42,509
            
            
            
            175,028
            
            
            
            97,461
            
            
            
            68,169
            
            
            
            165,630Segment
      Profit (Loss)
            
            
            297,669
            
            
            
            493,709
            
            
            
            791,378
            
            
            
            (189,740
            )
            
            
            (56,384
            )
            
            
            (133,356
            )Segment
      Assets (1)
            
            
            10,768,487
            
            
            
            5,340,668
            
            
            
            16,182,989
            
            
            
            8,925,528
            
            
            
            6,770,477
            
            
            
            15,696,005Expenditures
      for Segment Assets
            
            $
            —
            
            
            $
            17,868
            
            
            $
            17,868
            
            
            $
            845,751
            
            
            $
            89,866
            
            
            $
            935,617





Six
      Months Ended June 30,2008
            
            
            2007Foam
            
            
            Coatings
            
            
            Totals
            
            
            Foam
            
            
            Coatings
            
            
            TotalsSales
            
            $
            15,175,004
            
            
            $
            5,031,724
            
            
            $
            20,206,728
            
            
            $
            10,125,114
            
            
            $
            6,664,079
            
            
            $
            16,789,103Cost
      of Sales
            
            
            12,367,295
            
            
            
            3,601,749
            
            
            
            15,969,044
            
            
            
            8,731,950
            
            
            
            5,081,400
            
            
            
            13,813,350Gross
      Profit
            
            
            2,807,709
            
            
            
            1,429,975
            
            
            
            4,237,684
            
            
            
            1,388,713
            
            
            
            1,587,130
            
            
            
            2,975,843Depreciation
      and Amortization
            
            
            61,485
            
            
            
            20,387
            
            
            
            81,872
            
            
            
            21,960
            
            
            
            104,620
            
            
            
            126,580Interest
      Expense
            
            
            248,336
            
            
            
            82,343
            
            
            
            330,680
            
            
            
            148,236
            
            
            
            97,565
            
            
            
            245,801Segment
      Profit (Loss)
            
            
            (67,332
            )
            
            
            527,303
            
            
            
            459,971
            
            
            
            (770,039
            )
            
            
            46,276
            
            
            
            (723,763
            )Segment
      Assets (1)
            
            
            10,768,487
            
            
            
            5,340,668
            
            
            
            16,182,989
            
            
            
            8,925,528
            
            
            
            6,770,477
            
            
            
            15,696,005Expenditures
      for Segment Assets
            
            $
            —
            
            
            $
            17,868
            
            
            $
            17,868
            
            
            $
            134,204
            
            
            $
            284,751
            
            
            $
            418,955





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





Three
      Months Ended June 30,
            
            
            Six
      Months Ended June 30,Profit
      or Loss
            
            2008
            
            
            2007
            
            
            2008
            
            
            2007Total
      Profit or Loss for Reportable Segments
            
            $
            791,378
            
            
            $
            (133,356
            )
            
            $
            459,971
            
            
            $
            (723,763
            )Unallocated
      Amounts:Corporate
      Expenses (2)
            
            
            (722,689
            )
            
            
            (487,559
            )
            
            
            (1,510,448
            )
            
            
            (906,785
            )Income
      (Loss) Before Income Taxes
            
            $
            68,689
            
            
            $
            (620,915
            )
            
            $
            (1,050,477
            )
            
            $
            (1,630,548
            )




Assets
            
            June
      30, 2008
            
            
            December
      31, 2007Total
      Assets for Reportable Segments (1)
            
            $
            16,085,471
            
            
            $
            11,260,074Other
      Unallocated Amounts (3)
            
            
            370,719
            
            
            
            605,972Consolidated
      Total
            
            $
            16,456,190
            
            
            $
            11,866,045







(1)
            Segment
      assets are the total assets used in the operation of each
      segment.


(2)
            Includes
      significant portions of non-cash items such as share based compensation
      and the amortization of discounts associated with certain debt
      instruments.


(3)
            Includes
      corporate assets which are principally cash and cash
      equivalents.





Note
10.   Subsequent Events.





On July
1, 2008, the Company entered into and closed an Amended and Restated Asset
Purchase Agreement with AirTight Marketing and Distribution, Inc., a Georgia
corporation (“AirTight”) and its stockholders, Larry P. Medford and Ted J.
Medford, wherein the Company agreed to pay $1,500,000 in cash and issue
2,000,000 shares of restricted common stock, par value $.01, in exchange for all
of the assets of AirTight. In connection with the AirTight Asset Purchase, the
Company entered into an Executive Employment Agreement and Stock Option
Agreement with one of the principals. Included in the Company's trade
receivables, net balance of $7,925,266 is $1,419,496 of receivables due from Air
Tight.




8
 Index





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





Overview





This
financial review presents our operating results for the three and six months
ended June 30, 2008 and 2007, and our financial condition at June 30, 2008.
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, 2007, including any amendments thereto.





Performance
for the Three Months Ended June 30, 2008 compared to the Three Months Ended June
30, 2007





Overall
Results of Operations





Sales





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





2008
            
            
            2007Sales
            
            $
            12,033,485
            
            
            $
            9,519,871





Our sales
increased $2,513,614, or 26.4%, compared to the same period in 2007, due
primarily to an increase in wall and roofing foam insulation sales in our Foam
segment. Increased market share in the Foam segment is due to gains in existing
foam markets, as well as aggressive growth associated with volatile energy
costs, and the recognition of foam’s energy conserving value by consumers and
distributors historically tied to conventional insulation markets, such as
fiberglass. LaPolla’s year over year substantial sales increase is indicative of
the public’s search for green building materials and sustained energy solutions
as we continue to grow market share despite a contracting housing market. As the
building industry recovers, LaPolla is positioned to further capitalize on the
public’s need for cost savings related to energy.





Cost
of Sales





Cost of
sales increased $ 1,570,348, or 20.3%, compared to the same period in 2007, due
to higher sales volumes in the Foam segment and higher freight costs associated
with rising oil prices.





Gross
Profit





Our gross
profit increased $ 943,266, or 52.6%, compared to the same period in 2007, due
to an increase in our higher sales volumes augmented by improved margins
associated with our in-house, manufactured foam resins. Gross margin percentage
increased 3.9% compared to same period in 2007 due primarily to efficiencies
recognized from our new foam resin plant which started up in the latter part of
2007 (while 2007 first half results reflected outside-purchased, distributed
foam resins).  In addition, the divestiture of our retail coatings
business in 2007 has allowed LaPolla to focus on our core competencies,
generating a more strategic product mix with coatings sales linked to roofing
foam insulation. Further improvement in margins is expected as volumes increase,
plant productivity gains are realized, and purchasing power related to raw
materials increases.





Operating
Expenses





Our total
operating expenses are comprised of selling, general and administrative
expenses, or SG&A, professional fees, depreciation and amortization,
consulting fees, interest expense, interest expense – related party, interest
expense – amortization of discounts, (gain) loss on extinguishment of debt, and
other (income) expense. These total operating expenses increased $253,661, or
10.5%, compared to the same period in 2007, due to an increase of $625,617 for
SG&A, $94,479 for professional fees, $8,483 for consulting fees, $17,970 for
interest expense, $39,272 for interest expense – related party, $10,500 for
interest expense – amortization of discounts, partially offset by a $481,833
gain on extinguishment of debt, $45,425 for other income (royalties), and a
decrease of $15,402 for depreciation and amortization.





SG&A
increased $625,617, or 30.2%, compared to the same period in 2007, due primarily
to an increase in non cash, share based compensation of $351,304, higher
commissions of $219,694 associated with increased sales volumes, and an
additional $67,383 to our allowance for doubtful accounts, partially offset by a
decrease in payroll and related employee benefits of $43,995 and travel and
related expenses of $48,061. The increase in commissions was anticipated, as we
continue to grow sales, market share and margins.  Cost control
remains a priority as we continue to monitor expenses and look to capitalize on
bundling corporate purchases.





9
 Index





Professional
fees increased $94,479, or 90.8%, compared to the same period in 2007, due
primarily to legal fees.





Depreciation
and amortization expense decreased $15,401, or 25.3%, compared to the same
period in 2007.





Consulting
fees increased $8,483, or 57.6%, compared to the same period in 2007, due to an
increase in outside professional services aimed at cost reductions.





Interest
expense increased $17,970, or 13.9%, compared to the same period in 2007, due
primarily to an increase in the interest from the capital utilized from our
ComVest credit instruments.





Interest
expense – related party was $39,272 compared to $-0- in the same period in 2007,
due to utilizing capital from the Chairman of the Board’s financial commitment
to the Company.





Interest
expense – amortization of discount increased $10,500, or 28.8%, compared to the
same period in 2007, due primarily to the restructuring of our Convertible Term
Note and Revolving Credit Note.





Gain on
extinguishment of debt was $481,833 compared to $-0- in the same period in 2007,
due to the modification of our ComVest credit instruments.





Other
income increased $45,425, or 872.2%, compared to the same period in 2007, due to
the recognition of royalty payments associated with the divestiture of our
retail coatings business in 2007.





Net
Loss





Net
income was $68,689 compared to net loss of $620,915 for the same period in 2007,
due to substantial gains in Foam sales and margins associated with a product mix
tailored to green building materials and energy solutions. An increase in non
cash charges, such as share based compensation and allowance for doubtful
accounts were partially offset by a non cash gain on the extinguishment of debt.
Cost controls have been implemented and our key focuses are sales and margin
growth. Net income per share was $.001 compared to net loss of $.01 per share
for the same period in 2007.





Net loss
available to common stockholders decreased $689,604, or 83.6%, and related loss
per share decreased $.013, or 86.6%, compared to the same period in 2007. The
decrease in net loss available to common stockholders and related loss per share
are attributable to the decrease in the net loss and increase in the number of
shares of common stock issued and outstanding for the current period in 2008
compared to the prior period in 2007. Dividends accrued on our outstanding
Series D Preferred Stock were $203,840 for both of the 2008 and 2007
periods.





Results
of Business Segments





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





Segments
            
            2008
            
            
            2007Foam
            
            $
            9,110,929
            
            
            $
            5,601,725Coatings
            
            
            2,922,556
            
            
            
            3,918,146





Foam
sales increased $3,509,204, or 62.6%, compared to the same period in 2007, due
to increased volumes associated with energy efficient building products amid
volatile crude oil prices.  The attainment of critical third party
approvals and credentials on our foam formulations has allowed us to penetrate
markets previously unavailable. Cost of sales increased $2,575,708, or 54.5%,
compared to the same period in 2007, due to higher sales volumes. Gross profit
increased $940,027, or 108.2%, compared to the same period in 2007, due to
higher sales volumes in this energy efficient product line and improved
manufacturing efficiencies from our new Foam facility, partially offset by
higher freight and transportation costs. Segment profit was $297,699 compared to
a segment loss of $189,740 for the same period for 2007 primarily due to sales
and margin increases in an economy continuing to search for energy
solutions.





Coatings
sales decreased $995,590, or 25.4%, with a corresponding decrease in our cost of
sales of $1,005,360, or 33.5%. Gross profit increased $3,239, or .003%, compared
to the same period in 2007, due to an improved product mix associated with the
divestiture of our retail distribution channel in 2007. We had a segment profit
of $493,709 compared to a segment loss of $56,384 for the same period in 2007,
as the 2007 divestiture of our retail coatings business allowed us to focus on
higher margin coatings used in conjunction with our insulating roofing
foam.





10
 Index





Performance
for the Six Months Ended June 30, 2008 compared to the Six Months Ended June 30,
2007





Overall
Results of Operations





Sales





The
following is a summary of sales for the six months ended
June 30:





2008
            
            
            2007Sales
            
            $
            20,206,728
            
            
            $
            16,789,193





Our sales
increased $3,417,535, or 20.4%, compared to the same period in 2007, due
primarily to an increase in wall and roofing foam insulation sales in our Foam
segment, partially offset by a decline in retail coatings sales volumes as a
result of the divestiture of our retail distribution channel in 2007 in our
Coatings segment. Market share gains continue to be attained in our Foam segment
as consumers and distributors recognize the economic advantages foam provides
homeowners and commercial landlords as compared to less energy-efficient
conventional insulation products, such as fiberglass. Volatile oil prices, and
the associated impact on utilities such as electricity and natural gas, position
us for further market share gains in the future.  Public awareness of
green building materials and sustained energy solutions has escalated, and our
foam and coatings product lines will provide millions of people the opportunity
to realize sought after, environmentally conscious, energy cost
savings.





Cost
of Sales





Cost of
sales increased $2,155,694, or 15.6%, compared to the same period in 2007, due
to higher sales volumes in our Foam segment and higher freight costs associated
with higher oil prices.





Gross
Profit





Our gross
profit increased $1,261,841, or 42.4%, compared to the same period in 2007, due
to an increase in sales in our Foam segment, partially offset by a decrease in
retail coatings sales as a result of the divestiture of our retail distribution
channel in 2007 in our Coatings segment. Gross margin percentage increased 3.2%
compared to same period in 2007 due primarily to efficiencies recognized from
our new foam resin plant, as well as an improved coatings products mix more
aligned with our core competencies.  Further improvement in margins is
expected as volumes increase, plant productivity gains are realized, and
purchasing power related to raw materials increases.





Operating
Expenses





Our total
operating expenses are comprised of selling, general and administrative
expenses, or SG&A, professional fees, depreciation and amortization,
consulting fees, interest expense, interest expense – related party, interest
expense – amortization of discounts, (gain) loss on extinguishment of debt, and
other (income) expense. These total operating expenses increased $681,770, or
14.8%, compared to the same period in 2007, due to an increase of $776,168 for
SG&A, $278,643 for professional fees, $113,578 for interest expense, $43,348
for interest expense – related party, and $38,179 for interest expense –
amortization of discount, partially offset by a $481,833  gain on
extinguishment of debt, $45,939 for other income (royalties), a decrease of
$35,611 for depreciation and amortization, and $4,763 for consulting
fees.





SG&A
increased $776,168, or 19.1%, compared to the same period in 2007, due primarily
to increases in non cash, share based compensation of $318,207, allowance for
doubtful accounts of $67,383, recruiting fees of $46,101, research and
development of $77,780, and higher commissions of $244,101 associated with
increased sales volumes, partially offset by a decrease in payroll and related
employee benefits of $85,223 and travel and related expenses of $32,540. The
increase in commissions was anticipated, as we continue to grow sales, market
share and margins. Cost control remains a priority as we continue to monitor
expenses and look to improve cash flow.





Professional
fees increased $278,643, or 203.9%, compared to the same period in 2007, due to
an increases for auditing and auditing related services as well as higher than
expected legal fees.





Depreciation
and amortization expense decreased $35,611, or 28.1%, compared to the same
period in 2007.





Consulting
fees decreased $4,763, or 11.8%, compared to the same period in 2007, due to a
decrease in outside professional services.





Interest
expense increased $113,578, or 58.9%, compared to the same period in 2007, due
primarily to an increase in the interest from the capital utilized from our
ComVest credit instruments.





11
 Index





Interest
expense – related party was $43,348 compared to $-0- in the same period in 2007,
due to us utilizing capital from the Chairman of the Board’s financial
commitment to the Company.





Interest
expense – amortization of discount increased $38,179, or 71.9%, compared to the
same period in 2007, due primarily to the restructuring of our Convertible Term
Note and Revolving Credit Note.





Gain on
extinguishment of debt was $481,833 compared to $-0- in the same period in 2007,
due to the modification of our ComVest credit instruments.





Other
income increased $49,939, or 978.7%, compared to the same period in 2007, due to
the recognition of royalty payments associated with the divestiture of our
retail coatings business in 2007.





Net
Loss





Net loss
decreased $580,071, or 35.6%, compared to the same period in 2007, due to
increases in Foam sales and margins, while non cash expenses (share based
compensation, amortization of discounts, and allowance for doubtful accounts),
were partially offset by non cash gains (extinguishment of debt).  In
addition, SG&A costs included higher commissions, legal fees, and interest
expense. Cost controls have been implemented and our key focuses are sales and
margin growth. Net loss per share decreased $.017, or less than 1%, compared to
the same period in 2007.





Net loss
available to common stockholders decreased $580,628, or 28.5%, and related loss
per share decreased $.013, or 34.2%, compared to the same period in 2007. The
decrease in net loss available to common stockholders and related loss per share
are attributable to the decrease in the net loss and increase in the number of
shares of common stock issued and outstanding for the current period in 2008
compared to the prior period in 2007. Dividends accrued on our outstanding
Series D Preferred Stock were $407,123 for the current period in 2008 compared
to $405,550 in the prior period in 2007.





Results
of Business Segments





The
following is a summary of sales by segment for the six months ended
June 30:





Segments
            
            2008
            
            
            2007Foam
            
            $
            15,175,004
            
            
            $
            10,125,114Coatings
            
            
            5,031,724
            
            
            
            6,664,079





Foam
sales increased $5,049,890, or 49.9%, compared to the same period in 2007, due
to increased volumes associated with energy efficient building products amid
volatile crude oil prices and attainment of certain third party approvals and
credentials on our foam formulations. Cost of sales increased $3,635,345, or
41.6%, compared to the same period in 2007, due to higher sales volumes. Gross
profit increased $1,418,996, or 102.2%, compared to the same period in 2007, due
to higher sales volumes and improved manufacturing efficiencies, partially
offset by higher freight and transportation costs. Segment loss decreased
$702,707, or 91.3%, primarily from increased volumes and margins associated with
the aggressive growth realized in our energy saving product lines and
improvement from manufacturing our own foam resins. As volatile energy costs
continue, builders and owners alike are opting for sustainable and energy
efficient materials, such as LaPolla’s spray polyurethane foam, which is
providing substantial volume increases despite sluggish economic
conditions.





Coatings
sales decreased $1,632,355, or 24.5%, with a corresponding decrease in our cost
of sales of $1,479,651, or 29.1%.  Gross profit decreased $157,155, or
9.9%, compared to the same period in 2007, due to the divestiture of our retail
distribution channel in 2007, partially offset by an improved product
mix.  Segment profit increased $481,027, or 103.9%, compared to the
same period in 2007, as the 2007 divestiture of our retail coatings business
allowed us to focus on higher margin coatings used in conjunction with our
insulating roofing foam.





12
 Index





Liquidity
and Capital Resources





Net cash
used in our operations was $3,583,919 for the six months ended June 30, 2008
compared to $3,386,514 for the same period in 2007. The cash used in operations
for the six months June 30, 2008 was attributable to our net loss for the
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, accounts payable, accrued expenses and
other current liabilities, and other liabilities, and decreases in cash,
inventories, prepaid expenses and other current assets, deposits and other non
current assets, and net operating activities of discontinued
operations.





The
current quarter included non cash items such as $601,766 of share based
compensation expense, partially offset by a $481,833 gain on the extinguishment
of debt.  The marked improvement in our gross profit in the three and
six months ended June 30, 2008 was a result of increased sales in our foam
business as consumers recognize the value of our energy efficient polyurethane
spray foam and the attainment of required third party approvals and credentials
necessary to enter certain of our target markets. Although our sales and
operating cash flows have increased past the cash flow breakeven point, we may
seek to raise capital through private placements of common or preferred stock
from accredited sophisticated investors to not only fund our aggressive
strategic growth plans, including acquisitions, but also to reduce our interest
expense.





Net cash
used in investing activities was $17,868 for the six months ended June 30, 2008
compared to $1,409,996 for the same period in 2007. The $17,868 related to our
Coating Plant in Houston, Texas.





Net cash
provided by financing activities was $3,329,978 for the six months ended June
30, 2008 compared to $4,429,931 for the same period in 2007. We made principal
repayments of $400,000 on our Convertible Term Note, $60,022 on our long term
debt, received proceeds of $3,800,000 from our Chairman of the Board for working
capital, and paid $10,000 in dividends on our Series D Preferred Stock in the
six months ended June 30, 2008.





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. Our operations are conducted presently in the United
States, and, as such, we are not subject to foreign currency exchange risks.
Although we have outstanding debt and related interest expense, market risk in
interest rate exposure in the United States is currently not material to our
operations.  However, we are experiencing an increase in international
business and are utilizing letters of credit to mitigate any risk of
collection.





Item
4.  Controls and Procedures.





Quarterly
Evaluation





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 our disclosure controls and
procedures as of June 30, 2008, the end of the quarterly period covered by this
report. Based on the foregoing, our Principal Executive Officer and our
Principal Financial Officer concluded that, as of June 30, 2008, our disclosure
controls and procedures were effective.





Changes
in Internal Controls





There
were no changes in our internal controls over financial reporting during the
second quarter of 2008 that materially affected, or were reasonably likely to
materially affect, our internal control over financial reporting. There has
been no change in our internal controls over financial reporting that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting subsequent to the date of this
report.





13
 Index





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, 2007, including
any amendments thereto, are hereby incorporated in their entirety herein by this
reference.





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 1A.  Risk
Factors.





The
disclosures set forth under Part I, Item 1A, “Risk Factors” in our
Annual Report on Form 10-K for the year ended December 31, 2007, including
any amendments thereto, are hereby incorporated in their entirety herein by this
reference.




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




Recent
Sales of Unregistered Securities





On June
30, 2008, the Company sold to Richard J. Kurtz, its Chairman of the Board and
principal stockholder, in a private transaction in reliance on Section 4(2) of
the Securities Exchange Act of 1933, as amended, 2,564,103 shares of restricted
common stock, par value $.01, at a price per share of $.78, through cancellation
of $2,000,000 of principal indebtedness owed to him by the Company. The price
per share reflects the ten (10) day volume weighted average price (VWAP) of the
Company’s common stock as traded on the NASDAQ OTC Bulletin Board prior to June
30, 2008.





Item
3.  Defaults Upon Senior Securities.




None.





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





On May 1,
2008, subject to approval of stockholders, the Board of Directors resolved to
amend our Company’s Restated Certificate of Incorporation, as amended (the
“Restated Certificate”), by increasing the authorized common stock
capitalization limit from 70 Million shares to 98 Million shares and to amend
our Equity Incentive Plan, as amended (the “Equity Plan”), to increase the
number of shares of common stock reserved under the Plan from 6 Million shares
to 10 Million shares. On the record date of May 2, 2008, stockholders
representing 67.49% of the 59,298,700 shares of the Company’s outstanding common
stock, approved and consented to amendments to the Restated Certificate and
Equity Plan.  On May 19, 2008, an Information Statement was mailed to
all of our stockholders to comply with the requirements of Section 14(c) of the
Securities Exchange Act of 1934, as amended, providing information to all
stockholders in connection with actions by written consent taken on May 2, 2008.
The written consent became effective 20 calendar days after the date the
Information Statement and related materials were mailed or on June 10,
2008.





Item 5.  Other
Information.





None.





Item
6.  Exhibits.




See Index
of Exhibits on Page 16.





14
 Index





SIGNATURES





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





LAPOLLA
      INDUSTRIES, INC.Date:
            August
      19, 2008
            
            By:
            /s/  Douglas
      J. Kramer, CEOName:
            Douglas
      J. KramerTitle:
            CEO
      and PresidentLAPOLLA
      INDUSTRIES, INC.Date:
            August
      19, 2008
            
            By:
            /s/  Paul
      Smiertka, CFOName:
            Paul
      SmiertkaTitle:
            CFO
      and Treasurer





15
 Index





INDEX
OF EXHIBITS





Exhibit
      Number
            
            Description4.1
            
            Certificate
      of Amendment of Restated Certificate of Incorporation dated June 10, 2008
      as filed with the State of Delaware on June 10, 2008.4.2
            
            Pro
      Forma Restated Certificate of Incorporation, as amended June 10, 2008, and
      currently in effect.10.1
            
            Second
      Amendment to Equity Incentive Plan dated May 1, 2008 (incorporated by
      reference to Appendix B to Schedule 14C Information Statement dated May
      19, 2008, filed May 19, 2008).10.2
            
            Pro
      Forma Equity Incentive Plan. As amended May 19, 2008, and currently in
      effect.10.1
            
            Employment
      Agreement dated May 5, 2008 between Douglas J. Kramer and the Company
      (incorporated by reference to Exhibit 10.1 to Form 8-K dated May 5, 2008,
      filed May 7, 2008.10.2
            
            Option
      Agreement dated May 5, 2008 between Douglas J. Kramer and the Company
      (incorporated by reference to Exhibit 10.2 to Form 8-K dated May 5, 2008,
      filed May 7, 2008.10.3
            
            Amended
      and Restated Revolving Credit and Term Loan Agreement between LaPolla and
      ComVest dated June 30, 2008 (incorporated by reference to Exhibit 10.1 to
      Form 8-K dated June 30, 2008, filed July 7, 2008).10.4
            
            Amended
      and Restated Convertible Term Note between LaPolla and ComVest dated June
      30, 2008 (incorporated by reference to Exhibit 10.2 to Form 8-K dated June
      30, 2008, filed July 7, 2008).10.5
            
            Guaranty
      between ComVest and Richard J. Kurtz dated June 30, 2008 (incorporated by
      reference to Exhibit 10.3 to Form 8-K dated June 30, 2008, filed July 7,
      2008).10.6
            
            Amended
      and Restated Revolving Credit Note between LaPolla and ComVest dated June
      30, 2008 (incorporated by reference to Exhibit 10.4 to Form 8-K dated June
      30, 2008, filed July 7, 2008).10.7
            
            Confirmation
      of Debt-to-Equity Conversion between Richard J Kurtz and LaPolla dated
      June 30, 2008 (incorporated by reference to Exhibit 10.5 to Form 8-K dated
      June 30, 2008, filed July 7, 2008).10.8
            
            Warrant
      No. CV-1 To Purchase Shares of Common Stock issued to ComVest dated
      February 21, 2007 (incorporated by reference to Exhibit 10.4 to Form 8-K
      dated and filed February 23, 2007).10.9
            
            Warrant
      No. CV-2 To Purchase Shares of Common Stock issued to ComVest dated
      February 21, 2007 (incorporated by reference to Exhibit 10.5 to Form 8-K
      dated and filed February 23, 2007).10.10
            
            Warrant
      No. CV-3 To Purchase Shares of Common Stock issued to ComVest dated
      February 21, 2007 (incorporated by reference to Exhibit 10.6 to Form 8-K
      dated and filed February 23, 2007).10.11
            
            Warrant
      No. CV-5 To Purchase Shares of Common Stock issued to ComVest dated June
      30, 2008 (incorporated by reference to Exhibit 10.9 to Form 8-K dated June
      30, 2008, filed July 7, 2008).10.12
            
            Warrant
      Amendment Letter re: Repricing of Warrants CV-1, CV-2, and CV-3 dated June
      30, 2008 between LaPolla and ComVest dated June 30, 2008 (incorporated by
      reference to Exhibit 10.10 to Form 8-K dated June 30, 2008, filed July 7,
      2008).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.






16