**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, 2007**
 
 
 Commission
        File No. **001-31354**
 
 
 
 
 **LaPolla
                  Industries, Inc.***(Exact
                  name of Registrant as Specified  in  its
                  Charter)***Delaware**
                *(State
                  of Incorporation)*
              
              **13-3545304**
                *(I.R.S.
                  Employer Identification No.)***Intercontinental
                  Business Park**
                **15402
                  Vantage Parkway East, Suite 322**
                **Houston,
                  Texas**
                *(Address
                  of Principal Executive Offices)*
              
              **77032**
                *(Zip
                  Code)***(281)
                  219-4700**
                *(Registrant’s
                  Telephone Number)*
  Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months, and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes þNo o
  Indicate
        by check mark whether the registrant is an accelerated filer (as defined
        in Rule
        12b-2 of the Exchange Act).  Yes oNo þ
 
 Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of the latest practicable date.
  As
        of
        July 26, 2007 there were 53,635,699 shares of Common Stock, par value $.01,
        outstanding.
  
 
  **LAPOLLA
        INDUSTRIES, INC.**
 **FORM
        10-Q**
 **FOR
        THE QUARTER ENDED JUNE 30, 2007**
 **INDEX**
 
 **Page****PART
                  I**
              
              
              **FINANCIAL
                  INFORMATION****Item
                  1**
              
              **Financial
                  Statements**
              
              **3****Item
                  2**
              
              **Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations**
              
              **13****Item
                  3**
              
              **Quantitative
                  and Qualitative Disclosures About Market
                  Risk**
              
              **17****Item
                  4**
              
              **Controls
                  and Procedures**
              
              **17****PART
                  II**
              
              
              **OTHER
                  INFORMATION****Item
                  1**
              
              **Legal
                  Proceedings**
              
              **18****Item
                  1A**
              
              **Risk
                  Factors**
              
              **18****Item
                  2**
              
              **Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds**
              
              **19****Item
                  3**
              
              **Defaults
                  Upon Senior Securities**
              
              **19****Item
                  4**
              
              **Submission
                  of Matters to a Vote of Security
                  Holders**
              
              **19****Item
                  5**
              
              **Other
                  Information**
              
              **19****Item
                  6**
              
              **Exhibits**
              
              **19****SIGNATURES**
              
              **20****INDEX
                  OF EXHIBITS**
              
              **21**
  2
 ***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, 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
        Securities and Exchange Commission. 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 SHEETS****June
                  30, 2007 (Unaudited) and December 31, 2006**
              **4****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)****Three
                  and Six Months Ended June 30, 2007 and 2006**
              **5****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)****Six
                  Months Ended June 30, 2007 and 2006**
              **6****NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                  (UNAUDITED)**
              **7**
  All
        schedules for which provision is made in the applicable accounting regulations
        of the Securities and Exchange Commission are not required under the related
        instructions or are not applicable, and therefore have been
        omitted.
  3
 ***Index***
  **LAPOLLA
        INDUSTRIES, INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 
 **June
                  30,**
              
              
              **December
                  31,****2007**
              
              
              **2006****(Unaudited)**
              
              
              **(As
                  Restated)****ASSETS**Current
                  Assets:Cash
              
              $
              15,537
              
              
              $
              382,116Trade
                  Receivables, Net
              
              
              5,779,745
              
              
              
              3,595,431Inventories
              
              
              4,764,667
              
              
              
              2,882,236Prepaid
                  Expenses and Other Current Assets
              
              
              672,048
              
              
              
              537,253Total
                  Current Assets
              
              
              11,231,997
              
              
              
              7,397,036Property,
                  Plant and Equipment, Net
              
              
              2,765,541
              
              
              
              1,489,639Other
                  Assets:Goodwill
              
              
              1,951,000
              
              
              
              1,951,000Other
                  Intangible Assets, Net
              
              
              153,857
              
              
              
              165,396Deposits
                  and Other Non-Current Assets
              
              
              281,197
              
              
              
              149,237Total
                  Other Assets
              
              
              2,386,053
              
              
              
              2,265,633Total
                  Assets
              
              $
              16,383,592
              
              
              $
              11,152,308**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  Liabilities:Accounts
                  Payable
              
              $
              6,841,376
              
              
              $
              5,069,478Accrued
                  Expenses and Other Current Liabilities
              
              
              1,404,770
              
              
              
              1,091,947Line
                  of Credit
              
              
              —
              
              
              
              1,007,120Current
                  Portion of Convertible Term Note
              
              
              416,071
              
              
              
              —Current
                  Portion of Long-Term Debt
              
              
              91,930
              
              
              
              97,589Current
                  Portion of Liabilities from Discontinued Operations
              
              
              —
              
              
              
              232,479Total
                  Current Liabilities
              
              
              8,754,147
              
              
              
              7,498,613Other
                  LiabilitiesRevolving
                  Credit Note, Net
              
              
              3,846,726
              
              
              
              —Non
                  Current Portion of Convertible Term Note, Net
              
              
              970,832
              
              
              
              —Non
                  Current Portion of Long-Term Debt
              
              
              147,214
              
              
              
              202,923Non
                  Current Portion of Liabilities from Discontinued
                  Operations
              
              
              848
              
              
              
              103,650Total
                  Other Liabilities
              
              
              4,965,620
              
              
              
              306,573Total
                  Liabilities
              
              
              13,719,767
              
              
              
              7,805,186Stockholders’
                  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
                  at
                  June 30, 2007 and December 31, 2006; $62,500 aggregate liquidation
                  preference at June 30, 2007 and December 31, 2006
              
              
              55,035
              
              
              
              55,035Series
                  D, 25,000 Shares Authorized; 8,176 Issued and Outstanding at June
                  30, 2007
                  and December 31, 2006; $8,176,000 aggregate liquidation preference
                  at June
                  30, 2007 and December 31, 2006
              
              
              8,176
              
              
              
              8,176Common
                  Stock, $.01 Par Value; 70,000,000 Shares Authorized; 53,635,699
                  and
                  53,574,251 Issued and Outstanding at June 30, 2007 and December
                  31, 2006,
                  Respectively
              
              
              536,357
              
              
              
              535,743Additional
                  Paid-In Capital
              
              
              71,147,789
              
              
              
              70,201,151Accumulated
                  Deficit
              
              
              (69,083,532
              )
              
              
              (67,452,983
              )Total
                  Stockholders’ Equity
              
              
              2,663,825
              
              
              
              3,347,122Total
                  Liabilities and Stockholders’ Equity
              
              $
              16,383,592
              
              
              $
              11,152,308
 
 See
        accompanying notes to condensed consolidated financial
        statements.
  4
 ***Index***
  **LAPOLLA
        INDUSTRIES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
 
 **Three
                  Months Ended June 30,**
              
              
              **Six
                  Months Ended June 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****(As
                  Restated)**
              
              
              
              
              
              **(As
                  Restated)**Sales
              
              $
              9,519,871
              
              
              $
              7,561,627
              
              
              $
              16,789,193
              
              
              $
              13,561,562Cost
                  of Sales
              
              
              7,726,477
              
              
              
              6,267,584
              
              
              
              13,813,351
              
              
              
              11,430,771Gross
                  Profit
              
              
              1,793,394
              
              
              
              1,294,043
              
              
              
              2,975,842
              
              
              
              2,130,791Operating
                  Expenses:Selling,
                  General and Administrative
              
              
              2,074,246
              
              
              
              1,466,686
              
              
              
              4,061,749
              
              
              
              2,626,159Professional
                  Fees
              
              
              104,027
              
              
              
              44,774
              
              
              
              136,646
              
              
              
              114,253Depreciation
                  and Amortization
              
              
              60,886
              
              
              
              43,143
              
              
              
              126,580
              
              
              
              84,364Consulting
                  Fees
              
              
              14,729
              
              
              
              39,433
              
              
              
              40,309
              
              
              
              60,436Interest
                  Expense
              
              
              165,630
              
              
              
              26,147
              
              
              
              245,801
              
              
              
              41,319Interest
                  Expense – Related Party
              
              
              —
              
              
              
              44,877
              
              
              
              —
              
              
              
              90,247Other
                  (Income) Expense
              
              
              (5,208
              )
              
              
              —
              
              
              
              (4,694
              )
              
              
              —Total
                  Operating Expenses
              
              
              2,414,310
              
              
              
              1,665,060
              
              
              
              4,606,391
              
              
              
              3,016,778Operating
                  Loss
              
              
              (620,916
              )
              
              
              (371,017
              )
              
              
              (1,630,549
              )
              
              
              (885,987
              )Income
                  From Discontinued Operations, Net of Income Tax
                  Benefit-Deferred
              
              
              —
              
              
              
              29,000
              
              
              
              —
              
              
              
              324,068Net
                  Loss
              
              $
              (620,916
              )
              
              $
              (342,017
              )
              
              $
              (1,630,549
              )
              
              $
              (561,919
              )Plus:  Dividends
                  on Preferred Stock
              
              
              (203,840
              )
              
              
              —
              
              
              
              (405,550
              )
              
              
              —Net
                  Loss Available to Common Stockholders
              
              $
              (824,756
              )
              
              $
              (342,017
              )
              
              $
              (2,036,099
              )
              
              $
              (561,919
              )Net
                  Loss Per Share – Basic and Diluted:Continuing
                  Operations
              
              $
              (0.015
              )
              
              $
              (0.006
              )
              
              $
              (0.038
              )
              
              $
              (0.016
              )Discontinued
                  Operations
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              0.006Total
              
              $
              (0.015
              )
              
              $
              (0.006
              )
              
              $
              (0.038
              )
              
              $
              (0.010
              )Weighted
                  Average Shares Outstanding
              
              
              53,612,251
              
              
              
              53,318,521
              
              
              
              53,598,584
              
              
              
              53,264,083
 
 See
        accompanying notes to condensed consolidated financial
        statements
  5
 ***Index***
  **LAPOLLA
        INDUSTRIES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 **Six
                  Months Ended June 30,****2007**
              
              
              **2006****(As
                  Restated)***Cash
                  Flows From Operating Activities*Net
                  LossContinuing
                  Operations
              
              $
              (1,630,549
              )
              
              $
              (885,987
              )Discontinued
                  Operations
              
              
              —
              
              
              
              324,069Adjustments
                  to Reconcile Net Loss to Net Cash Used in Operating
                  Activities:Depreciation
                  and Amortization
              
              $
              145,633
              
              
              $
              125,222Provision
                  for Losses on Trade Receivables
              
              
              (129,315
              )
              
              
              23,757Amortization
                  of Discount on Convertible Term and Revolving Credit Notes
              
              
              53,084
              
              
              
              —Share
                  Based Compensation Expense
              
              
              533,347
              
              
              
              350,691Changes
                  in Assets and Liabilities:Trade
                  Receivables
              
              
              (2,055,000
              )
              
              
              (784,900
              )Inventories
              
              
              (1,882,431
              )
              
              
              (1,377,945
              )Prepaid
                  Expenses and Other Current Assets
              
              
              (134,794
              )
              
              
              (263,605
              )Deposits
                  and Other Non Current Assets
              
              
              (131,960
              )
              
              
              11,517Accounts
                  Payable
              
              
              1,771,897
              
              
              
              1,528,663Accrued
                  Expenses and Other Current Liabilities
              
              
              83,161
              
              
              
              (423,880
              )Other
                  Liabilities
              
              
              (435
              )
              
              
              (1,039
              )Net
                  Operating Activities of Discontinued Operations
              
              
              (9,152
              )
              
              
              —Net
                  Cash Used in Operating Activities
              
              
              (3,386,514
              )
              
              
              (1,373,437
              )*Cash
                  Flows From Investing Activities*Additions
                  to Property, Plant and Equipment
              
              $
              (1,409,996
              )
              
              $
              (218,611
              )Net
                  Cash Used in Investing Activities
              
              
              (1,409,996
              )
              
              
              (218,611
              )*Cash
                  Flows From Financing Activities*Proceeds
                  from Revolving Credit Note
              
              
              4,000,000
              
              
              
              —Payments
                  on Revolving Credit Note
              
              
              —
              
              
              
              —Proceeds
                  from Line of Credit
              
              
              1,398,000
              
              
              
              3,199,074Payments
                  on Line of Credit
              
              
              (2,405,120
              )
              
              
              (721,816
              )Proceeds
                  from Loans Payable – Related Party
              
              
              617,000
              
              
              
              590,000Payments
                  on Loans Payable – Related Party
              
              
              (617,000
              )
              
              
              —Proceeds
                  from Convertible Term Note
              
              
              2,000,000
              
              
              
              —Proceeds
                  from Note Payable – Other
              
              
              —
              
              
              
              800,000Payments
                  on Note Payable – Other
              
              
              (13,336
              )
              
              
              (2,493,211
              )Principal
                  Repayments on Long Term Debt
              
              
              (223,484
              )
              
              
              (121,628
              )Net
                  Financing Activities of Discontinued Operations
              
              
              (326,129
              )
              
              
              (46,603
              )Net
                  Cash Provided by Financing Activities
              
              
              4,429,931
              
              
              
              1,205,816*Net
                  Decrease In Cash*
              
              $
              (366,579
              )
              
              $
              (386,232
              )*Cash
                  at Beginning of Period*
              
              
              382,116
              
              
              
              400,621*Cash
                  at End of Period*
              
              $
              15,537
              
              
              $
              14,389*Supplemental
                  Disclosure of Cash Flow Information:*Cash
                  Payments for Income Taxes
              
              $
              —
              
              
              $
              —Cash
                  Payments for Interest
              
              $
              192,715
              
              
              $
              78,293*Supplemental
                  Schedule of Non Cash Investing and Financing
                  Activities*Property,
                  Plant and Equipment acquired via Issuance of Long Term
                  Debt
              
              $
              28,000
              
              
              $
              37,349Common
                  Stock issued for Director Fees
              
              $
              28,440
              
              
              $
              183,960Conversion
                  of Loans Payable – Related Party to Note Payable – Related
                  Party
              
              $
              —
              
              
              $
              3,000,000
  See
        accompanying notes to condensed consolidated financial
        statements.
  6
 ***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 pursuant to the rules and regulations
        of
        the Securities and Exchange Commission. 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
        2007
        unaudited consolidated financial statement presentation. Reference is made
        to
        Management’s Discussion and Analysis of Financial Condition and Results of
        Operations on page 12. Risk factors that could impact results are discussed
        in
        Part II – Other Information, *Item 1A – Risk Factors* on page 18. Refer
        also to the Company’s 2006 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 quarter ended June
        30,
        2007. Certain amounts in prior periods have been reclassified to conform
        to the
        June 30, 2007 unaudited condensed consolidated financial statement presentation.
        ***Refer to*** Note 10 - Reclassifications, Restatements,
        and Corrections to Previously Issued Financial Statements.
 
 **Note
                  2.**
              **Dependence
                  on Few Suppliers.**
 
 The
        Company is dependent on a few suppliers for certain of its raw materials
        and
        finished goods.  For the quarters ended June 30, 2007 and 2006, raw
        materials and finished goods purchased from the Company’s three largest
        suppliers accounted for approximately 29% and 56% of purchases,
        respectively.
 
 **Note
                  3.**
              **Trade
                  Receivables.**
 
 The
        following is a summary of trade receivables at:
 
 **June
                  30, 2007**
              
              
              **December
                  31, 2006**Trade
                  Receivables
              
              $
              5,874,737
              
              
              $
              3,819,737Less:
                  Allowance for Doubtful Accounts
              
              
              (94,992
              )
              
              
              (224,306
              )Trade
                  Receivables, Net
              
              $
              (5,779,745
              )
              
              $
              3,595,431
 
 **Note
                  4.**
              **Inventories.**
 
 The
        following is a summary of inventories at:
 
 **June
                  30, 2007**
              
              
              **December
                  31, 2006**Raw
                  Materials
              
              $
              1,751,793
              
              
              $
              866,859Finished
                  Goods
              
              
              3,012,874
              
              
              
              2,015,377Total
              
              $
              4,764,667
              
              
              $
              2,882,236
  **Note
                  5.**
              **Discontinued
                  Operations.**
 
 The
        consolidated financial statements and the related notes reflect the financial
        position, results of operations and cash flows on an aggregated basis for
        the
        Company’s discontinued operations for the periods presented.  The
        following is a summary of the liabilities of discontinued operations
        at:
 
 *Liabilities*
              
              **June
                  30, 2007**
              
              
              **December
                  31, 2006**Accrued
                    Expenses and Other Current Liabilities
              
              $
              848
              
              
              $
              10,000Line
                    of Credit
              
              
              —
              
              
              
              326,129Total
                    Liabilities
              
              $
              848
              
              
              $
              336,129
  7
 ***Index***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **Note
                  5.**
              **Discontinued
                  Operations - continued.**
 
 The
        following is a summary of discontinued operations deferred income taxes
        at:
 
 *Deferred
                  Tax Assets:*
              
              **June
                  30, 2007**
              
              
              **December
                  31, 2006**Net
                  Operating Loss Carry-Forwards
              
              $
              33,189,532
              
              
              $
              33,189,532Statutory
                  Tax Rate
              
              
              34
              %
              
              
              34
              %Total
                  Deferred Tax Assets
              
              
              11,284,441
              
              
              
              11,284,441Valuation
                  Allowance for Deferred Tax Assets
              
              
              (11,284,441
              )
              
              
              (11,284,441
              )Net
                  Deferred Taxes
              
              $
              —
              
              
              $
              —
 
 Future
        tax benefit for net operating loss carry-forwards are subject to limitations
        based on the inability of discontinued operations to generate future taxable
        income.
 
 **Note
                  6.**
              **Property,
                  Plant and Equipment.**
 
 The
        following is a summary of property, plant and equipment at:
 
 **June
                  30, 2007**
              
              
              **December
                  31, 2006**Vehicles
              
              $
              414,147
              
              
              $
              487,037Leasehold
                  Improvements
              
              
              12,400
              
              
              
              12,400Office
                  Furniture and Equipment
              
              
              161,733
              
              
              
              133,634Computers
                  and Software
              
              
              559,082
              
              
              
              445,491Machinery
                  and Equipment
              
              
              912,130
              
              
              
              718,210Plant
                  Construction in Progress
              
              
              1,359,868
              
              
              
              212,592Total
                  Property, Plant and Equipment
              
              $
              3,419,360
              
              
              $
              2,009,364Less:
                  Accumulated Depreciation
              
              
              (653,819
              )
              
              
              (519,725
              )Total
                  Property, Plant and Equipment, Net
              
              $
              2,765,541
              
              
              $
              1,489,639
 
 **Note
                  7.**
              **Revolving
                  Credit Note, Convertible Term Note, Warrants, and Registration
                  Payment
                  Arrangements.**
 
 **(A)****Revolving
        Credit
        and Term Loan Agreement -**The Company entered into a Revolving Credit
        and Term Loan Agreement on February 21, 2007 (“Loan Agreement”) under which
        ComVest agreed to loan the Company up to $3,500,000 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 ComVest three
        tranches of warrants (“Original Warrants”) and register the conversion shares
        under the Convertible Term Note and warrant shares underlying the Warrants
        (“Registration Rights”). The Company received $2,500,000 at closing, of which
        $373,181 was allocated to the Revolving Credit Note, $1,492,726 was allocated
        to
        the Convertible Term Note, and $634,093 was allocated to the Warrants.
***See*** (B) below.
 
 **(B)****Amendment
        to
        Revolving Credit and Term Loan Agreement**– The Company entered into an
        Amendment on June 12, 2007 (“Amendment No. 1”) to the Loan Agreement under which
        ComVest agreed to loan up to an additional $1,500,000 under the Revolving
        Credit
        Note, which makes up to $5,000,000 available under that note, and the Company
        agreed to, among certain technical changes under the Revolving Credit and
        Convertible Term Notes (the “Notes”) and Original Warrants, repricing certain of
        the Original Warrants, and issue ComVest a new warrant (“New Warrant”) (Original
        Warrants and New Warrants are collectively referred to as “Warrants”). The
        Company did not receive any additional cash upon execution of Amendment No.
        1.
        However, based on repricing certain of the Original Warrants and issuance
        of a
        New Warrant contemporaneously with executing Amendment No. 1, the Company
        established an adjusted allocable amount, of which $373,181 was allocated
        to the
        Revolving Credit Note, $1,492,726 was allocated to the Convertible Term Note,
        and $634,093 was allocated to the Warrants. The discount on the Notes is
        being
        amortized to interest expense using the effective interest method over the
        term
        of the Notes. ***See*** (E) and (F) below.
 
 **(C)****Revolving
        Credit
        Note -**The Revolving Credit Note, as amended, bears interest equal to
        the greater of the Prime Rate (defined as interest publicly announced by
        Citibank, N.A.) plus (a) 1%, or 9.5%, for the original $3,500,000, and (b)
        1.5%,
        or 9.5%, for the additional $1,500,000; and is good until February 28, 2009.
        At
        June 30, 2007, the unamortized discount on the Amended Revolving Credit Note
        was
        $153,274.
  8
 ***Index***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **Note
                  7.**
              **Revolving
                  Credit Note, Convertible Term Note, Warrants, and Registration
                  Payment
                  Arrangements - continued.**
 
 **(D)****Convertible
        Term
        Note -**The Convertible Term Note, as amended, bears interest at the
        rate of 10% per annum, principle payments of $66,666.67 commence on September
        30, 2007 and end on February 28, 2010, 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 $.80 per share (“Conversion Shares”).
        The Company retired its line of credit with Wachovia Bank, N.A. at the
        closing.  The fees charged to the Company relating to the ComVest
        transaction are being amortized over the term of the Convertible Term Note.
        At
        June 30, 2007, the unamortized discount on the Convertible Term Note was
        $613,097.
 
 **(E)****Original
        Warrants** - The Original Warrants are for the purchase of three tranches
        of 500,000 shares of common stock, immediately exercisable, and expire February
        29, 2012, at exercise prices of $.68, $.77 and $.93 per share, respectively
        (“Warrant Shares”). The fair value of the Original Warrants of $634,093 at the
        time of issuance, which was determined using a lattice-based option-pricing
        model, was recorded as additional paid-in capital and reduced the carrying
        value
        of the Notes. The discount on the Notes is being amortized to interest expense
        over the term of the Notes. ***See*** (A) above. In
        connection with Amendment No. 1, the Company adjusted the exercise price
        of the
        Original Warrants to $.63 for 750,000 shares and $.77 for 750,000 shares.
        The
        incremental change in fair value of the Original Warrants of $674,793 at
        the
        time of the repricing, which was determined using a lattice-based option-pricing
        model, was recorded as additional paid-in capital and reduced the carrying value
        of the Notes. The discount on the Notes is being amortized to interest expense
        using the effective interest method over the term of the Notes.
***See*** (B), (C), and (D) above and (F)
        below.
 
 **(F)****New
        Warrant** - The New Warrant is for the purchase of 250,000 shares of
        common stock, immediately exercisable, and expires February 29, 2012, at
        an
        exercise price of $.55 per share. The fair value of the New Warrant of $153,547
        at the time of issuance, which was determined using a lattice-based
        option-pricing model, was recorded as additional paid-in capital and reduced
        the
        carrying value of the Notes. The discount on the Notes is being amortized
        to
        interest expense using the effective interest method over the term of the
        Notes.
***See*** (B), (C), (D), and (E) above.
 
 **(G)****Registration
        Rights**– The Registration Rights Agreement entered into on February 21,
        2007 requires the Company to file with the SEC not later than 90 days after
        the
        date of this agreement (“Original Filing Period”), a shelf registration
        (“Registration Statement”) to cover the resale of the Conversion Shares, Warrant
        Shares, and additional shares of common stock issuable pursuant to the
        anti-dilution provisions of the Convertible Term Note and Warrants (“Registrable
        Shares”). The Company is required to use its best efforts to cause the
        Registration Statement to be declared effective as promptly as possible after
        filing it with the SEC but in no event later than 150 days after the date
        of
        this agreement. If the Registration Statement is not declared effective within
        150 days after the date of this agreement, or shall cease to be available
        for
        use by the Holders as selling stockholders (A) where such unavailability
        continues for a period in excess of 5 days beyond certain allowed time periods
        for circumstances such as when a distribution would require the public
        disclosure of material non-public information concerning any transaction
        or
        negotiations involving the Company or any of its affiliates, the Company
        proposes to file a Registration Statement for the offering and sale of
        securities for its own account in an underwritten offering, and after the
        filing
        of the Company’s annual report on Fork 10-K or other event that requires the
        filing of a post-effective amendment to any Registration Statement, or (B)
        for
        any other reason such as a stop order, a material misstatement or omission
        in
        such Registration Statement or the information contained in such Registration
        Statement having become outdated and continues to be unavailable for a period
        in
        excess of 30 days, then the Company is required to pay to the Holders, ratably
        in proportion to the number of Registrable Shares held by each respective
        Holder, a cash fee equal to the product of $1,000 multiplied by the number
        of
        calendar days during which any of the events described above occurs and is
        continuing up to a maximum of $500,000. The approximate term of the registration
        payment arrangement is the period of time from the effective date of such
        Registration Statement until such date as is the earlier of the date on which
        all of the Registrable Shares covered by the Registration Statement are sold
        to
        the public, or the date on which the Conversion Shares and the Warrant Shares
        issued or issuable upon cashless exercise of the Warrants may be immediately
        sold without restriction by each Holder thereof without registration. In
        connection with Amendment No. 1 described in (B) above, ComVest agreed to
        amend
        the Original Filing Period from 90 days to June 22, 2007. The Company filed
        the
        required Registration Statement with the SEC on June 20, 2007, which was
        declared effective on June 29, 2007 by the SEC. ***See
        also*** (B), (C), (D), and (E) above and Index of Exhibits. The
        Company determined that no liability is recognizable at June 30, 2007 for
        registration payment arrangements.
  9
 ***Index***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **Note
                  8.**
              **Net
                  (Loss) Per Common Share – Basic and
                  Diluted.**
 
 The
        following table reflects the computation of the basic and diluted net loss
        per
        common share at:
  **Three
                    Months Ended June 30,**
                
                
                **Six
                    Months Ended June 30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006****Per
                    Share**
                
                
                
                
                
                **Per
                    Share**
                
                
                
                
                
                **Per
                    Share**
                
                
                
                
                
                **Per
                    Share****Amount**
                
                
                **Amount**
                
                
                **Amount**
                
                
                **Amount**
                
                
                **Amount**
                
                
                **Amount**
                
                
                **Amount**
                
                
                **Amount**Operating
                    (Loss)
                
                $
                (620,916
                )
                
                $
                (0.011
                )
                
                $
                (371,017
                )
                
                $
                (0.007
                )
                
                $
                (1,630,549
                )
                
                $
                (0.030
                )
                
                $
                (885,987
                )
                
                $
                (0.016
                )Income
                    (Loss) from Discontinued Operations, Net of Income Tax
                    Benefit-Deferred
                
                
                —
                
                
                
                —
                
                
                
                29,000
                
                
                
                0.001
                
                
                
                —
                
                
                
                —
                
                
                
                324,068
                
                
                
                0.006Net
                    (Loss)
                
                $
                (620,916
                )
                
                $
                (0.011
                )
                
                $
                (342,017
                )
                
                $
                (0.006
                )
                
                $
                (1,630,549
                )
                
                $
                (0.030
                )
                
                $
                (561,919
                )
                
                $
                (0.010
                )Plus:
                    Dividends on Preferred Stock
                
                
                (203,840
                )
                
                
                (0.004
                )
                
                
                —
                
                
                
                —
                
                
                
                (405,550
                )
                
                
                (0.008
                )
                
                
                —
                
                
                
                —Net
                    (Loss) Available to Common Stockholders
                
                $
                (824,756
                )
                
                $
                (0.015
                )
                
                $
                (342,017
                )
                
                $
                (0.006
                )
                
                $
                (2,036,099
                )
                
                $
                (0.038
                )
                
                $
                (561,919
                )
                
                $
                (0.010
                )Weighted
                    Average Common Shares Outstanding
                
                53,612,251
                
                
                53,318,521
                
                
                53,598,584
                
                
                53,264,083
 
 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) -0- and 72,000 shares, of
        nonvested restricted common stock issued to eligible directors but held by
        the
        Company pursuant to vesting restrictions under the former Director Compensation
        Plan, (ii) 73,000 and 186,368 shares upon exercise of vested and exercisable
        stock options, (iii) 576,300 and 876,300 shares upon exercise of vested and
        unexercisable stock options, (iv) 2,500,000 and -0- shares upon conversion
        of
        the Convertible Term Note, and (v) 1,750,000 and -0- shares upon exercise
        of
        outstanding warrants, for the three and six months ended June 30, 2007 and
        2006,
        respectively.
 
 **Note
                  9.**
              **Business
                  Segment Information.**
 
 The
        Company is a national manufacturer and distributor with seven segments:
        Coatings, Foam, Paints, Sealants, Adhesives, Equipment, and All Other. The
        Company’s segments are organized based on differences in products. The Company
        primarily manufactures coatings and foam and distributes paints, sealants,
        adhesives, equipment, and all other products. Production facilities are located
        in Texas and Arizona. The accounting policies of the segments are the same
        as
        those described in the summary of significant accounting policies. The Company
        allocates resources to segments and evaluates the performance of segments
        based
        upon reported segment income before income taxes. A substantial amount of
        administrative expenses are allocated to the segments. The portion not allocated
        to the segments represents the unallocated cost of certain corporate expenses,
        insurance, investor relations, and gains and losses related to the disposal
        of
        corporate assets and are included in *Unallocated Amounts*. There are no
        intersegment sales or transfers.
 
 **Reportable
        Segments**
 
 The
        following table includes information about our reportable segments
        at:
 
 **Three
                  Months Ended June 30, 2007****Coatings**
              
              
              **Foam**
              
              
              **Paints**
              
              
              **Sealants**
              
              
              **Adhesives**
              
              
              **Equipment**
              
              
              **All
                  Other**
              
              
              **Totals**Sales
              
              $
              3,171,098
              
              
              $
              5,427,399
              
              
              $
              267,189
              
              
              $
              357,925
              
              
              $
              —
              
              
              $
              224,665
              
              
              $
              71,597
              
              
              $
              9,519,873Depreciation
                  and Amortization
              
              
              48,709
              
              
              
              10,410
              
              
              
              512
              
              
              
              687
              
              
              
              —
              
              
              
              431
              
              
              
              137
              
              
              
              60,886Interest
                  Expense
              
              
              55,172
              
              
              
              94,428
              
              
              
              4,649
              
              
              
              6,227
              
              
              
              —
              
              
              
              3,909
              
              
              
              1,245
              
              
              
              165,630Segment
                  Profit (Loss)
              
              
              35,346
              
              
              
              (256,480
              )
              
              
              30,388
              
              
              
              10,483
              
              
              
              —
              
              
              
              4,233
              
              
              
              42,674
              
              
              
              (133,356
              )Segment
                  Assets(1)
              
              
              5,627,960
              
              
              
              8,476,777
              
              
              
              508,865
              
              
              
              642,287
              
              
              
              173
              
              
              
              336,570
              
              
              
              103,373
              
              
              
              15,696,005Expenditures
                  for Segment Assets
              
              $
              76,653
              
              
              $
              841,577
              
              
              $
              4,165
              
              
              $
              8,604
              
              
              $
              —
              
              
              $
              3,502
              
              
              $
              1,116
              
              
              $
              935,617
 
 **Three
                  Months Ended June 30, 2006****Coatings**
              
              
              **Foam**
              
              
              **Paints**
              
              
              **Sealants**
              
              
              **Adhesives**
              
              
              **Equipment**
              
              
              **All
                  Other**
              
              
              **Totals**Sales
              
              $
              2,721,736
              
              
              $
              3,953,702
              
              
              $
              296,437
              
              
              $
              290,500
              
              
              $
              26,233
              
              
              $
              197,150
              
              
              $
              75,869
              
              
              $
              7,561,627Depreciation
                  and Amortization
              
              
              34,515
              
              
              
              7,049
              
              
              
              528
              
              
              
              518
              
              
              
              47
              
              
              
              351
              
              
              
              135
              
              
              
              43,143Interest
                  Expense
              
              
              22,334
              
              
              
              32,443
              
              
              
              2,432
              
              
              
              2,384
              
              
              
              215
              
              
              
              1,618
              
              
              
              623
              
              
              
              62,049Segment
                  Profit (Loss)
              
              
              102,437
              
              
              
              (83,285
              )
              
              
              (209
              )
              
              
              (20,051
              )
              
              
              747
              
              
              
              9,989
              
              
              
              (2,499
              )
              
              
              7,129Segment
                  Assets(1)
              
              
              4,313,632
              
              
              
              5,382,247
              
              
              
              478,609
              
              
              
              473,903
              
              
              
              31,633
              
              
              
              248,636
              
              
              
              90,991
              
              
              
              11,019,651Expenditures
                  for Segment Assets
              
              $
              57,485
              
              
              $
              12,229
              
              
              $
              917
              
              
              $
              6,350
              
              
              $
              81
              
              
              $
              610
              
              
              $
              235
              
              
              $
              77,907
  10
 ***Index***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **Note
                  9.**
              **Business
                  Segment Information -
                  continued.**
 
 **Reportable
        Segments - continued**
 
 **Six
                  Months Ended June 30, 2007****Coatings**
              
              
              **Foam**
              
              
              **Paints**
              
              
              **Sealants**
              
              
              **Adhesives**
              
              
              **Equipment**
              
              
              **All
                  Other**
              
              
              **Totals**Sales
              
              $
              5,314,096
              
              
              $
              9,884,839
              
              
              $
              540,227
              
              
              $
              651,613
              
              
              $
              —
              
              
              $
              325,270
              
              
              $
              73,148
              
              
              $
              16,789,193Depreciation
                  and Amortization
              
              
              101,264
              
              
              
              21,808
              
              
              
              1,192
              
              
              
              1,438
              
              
              
              —
              
              
              
              718
              
              
              
              160
              
              
              
              126,580Interest
                  Expense
              
              
              77,801
              
              
              
              144,718
              
              
              
              7,909
              
              
              
              9,540
              
              
              
              —
              
              
              
              4,762
              
              
              
              1,071
              
              
              
              245,801Segment
                  Profit (Loss)
              
              
              (12,531
              )
              
              
              (781,967
              )
              
              
              53,227
              
              
              
              6,297
              
              
              
              —
              
              
              
              (8,950
              )
              
              
              20,161
              
              
              
              (723,763
              )Segment
                  Assets (1)
              
              
              5,400,011
              
              
              
              8,733,113
              
              
              
              565,366
              
              
              
              658,971
              
              
              
              172
              
              
              
              278,487
              
              
              
              59,885
              
              
              
              15,696,005Expenditures
                  for Segment Assets
              
              $
              245,755
              
              
              $
              132,493
              
              
              $
              7,241
              
              
              $
              28,126
              
              
              $
              —
              
              
              $
              4,360
              
              
              $
              980
              
              
              $
              418,955
 
 **Six
                  Months Ended June 30, 2006****Coatings**
              
              
              **Foam**
              
              
              **Paints**
              
              
              **Sealants**
              
              
              **Adhesives**
              
              
              **Equipment**
              
              
              **All
                  Other**
              
              
              **Totals**Sales
              
              $
              4,783,034
              
              
              $
              7,104,802
              
              
              $
              622,558
              
              
              $
              519,054
              
              
              $
              30,265
              
              
              $
              345,299
              
              
              $
              156,550
              
              
              $
              13,561,562Depreciation
                  and Amortization
              
              
              67,491
              
              
              
              13,656
              
              
              
              1,197
              
              
              
              998
              
              
              
              58
              
              
              
              664
              
              
              
              300
              
              
              
              84,364Interest
                  Expense
              
              
              40,036
              
              
              
              59,471
              
              
              
              5,211
              
              
              
              4,345
              
              
              
              253
              
              
              
              2,890
              
              
              
              1,310
              
              
              
              113,516Segment
                  Profit (Loss)
              
              
              59,033
              
              
              
              (214,541
              )
              
              
              31,075
              
              
              
              (5,219
              )
              
              
              151
              
              
              
              9,507
              
              
              
              (1,240
              )
              
              
              (121,234
              )Segment
                  Assets (1)
              
              
              4,247,885
              
              
              
              5,391,575
              
              
              
              539,398
              
              
              
              472,600
              
              
              
              20,410
              
              
              
              243,096
              
              
              
              104,687
              
              
              
              11,019,651Expenditures
                  for Segment Assets
              
              $
              57,316
              
              
              $
              12,253
              
              
              $
              1,074
              
              
              $
              6,347
              
              
              $
              52
              
              
              $
              596
              
              
              $
              270
              
              
              $
              77,908
  
 (1)
              Segment
                  assets are the total assets used in the operation of each
                  segment.
 
 The
        following are reconciliations of reportable segment profit or loss, and assets,
        to the Company’s consolidated totals for the periods indicated:
 
 **Segment
        Profit or Loss**
 
 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,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Total
                  Profit or Loss for Reportable Segments
              
              $
              (133,356
              )
              
              $
              7,129
              
              
              $
              (723,763
              )
              
              $
              (121,234
              )Unallocated
                  Amounts:Corporate
                  Expenses
              
              
              (487,560
              )
              
              
              (378,146
              )
              
              
              (906,786
              )
              
              
              (764,753
              )(Loss)
                  Before Income Taxes
              
              $
              (620,916
              )
              
              $
              (371,017
              )
              
              $
              (1,630,549
              )
              
              $
              (885,987
              )
 
 **Assets****June
                  30, 2007**
              
              
              **December
                  31, 2006**Total
                  Assets for Reportable Segments(1)
              
              $
              15,696,007
              
              
              $
              10,232,938Other
                  Unallocated Amounts(2)
              
              
              687,585
              
              
              
              919,370Consolidated
                  Total
              
              $
              16,383,592
              
              
              $
              11,152,308
  
 (1)
              Segment
                  assets are the total assets used in the operation of each
                  segment.
 (2)
              Includes
                  corporate assets which are principally cash and cash equivalents
                  and
                  prepaid expenses and other current
                  assets.
 
 **Note
                  10.**
              **Reclassifications,
                  Restatements, and Corrections to Previously Issued Financial
                  Statements.**
 
 (**A**)***Reclassification
        of
        Prepaid Expenses to Trade Receivables***– The Company recorded the
        amount of claims filed under its credit insurance policies as Other Current
        Assets whenever it was determined that those trade receivables covered under
        its
        credit insurance policy were uncollectible on the face of the condensed
        consolidated balance sheet when these amounts should have maintained their
        classification as Trade Receivables. The Company reclassified the credit
        insurance receivables and included this amount in the Trade Receivables,
        Net for
        the quarter ended March 31, 2007. This information was previously disclosed
        in
        the Company’s Form 10-Q/A for the quarter ended March 31, 2007 filed with the
        SEC on August 20, 2007.
  11
 ***Index***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **Note
                  10.**
              **Reclassifications,
                  Restatements, and Corrections to Previously Issued Financial Statements
                  -
                  continued.**
 
 (**B**)***Reclassification
        of
        Prepaid Expenses to Other Non-Current Assets***– The Company recorded
        the transaction fees related to the Credit Facility as a Prepaid Expense
        on the
        face of the condensed consolidated balance sheet when the amount should have
        been classified as an Other Non-Current Asset. The Company reclassified the
        fees
        charged in connection with the Credit Facility established with ComVest
        originally included in the Prepaid Expenses line item on the Condensed
        Consolidated Balance Sheet and included this amount in the Other Non-Current
        Assets line item for the quarter ended March 31, 2007. This information was
        previously disclosed in the Company’s Form 10-Q/A for the quarter ended March
        31, 2007 filed with the SEC on August 20, 2007.
 
 (**C**)***Restatement
        of Deferred Income Tax Asset and Income Tax Benefit-Deferred***– The
        Company believed that an appropriate set of circumstances existed based on
        various management assumptions and projections in the fourth quarter and
        year
        ended December 31, 2005 that would make a certain portion of its eligible
        cumulative losses from continuing operations recoverable for income tax purposes
        and established a deferred income tax asset for an amount equal to the amount
        it
        deemed more likely than not would be realized during 2006. The carrying amount
        of the deferred income tax asset was evaluated on a quarterly basis and adjusted
        in light of changing circumstances for each of the four quarters and year
        ended
        December 31, 2006 and the quarter ended March 31, 2007. Notwithstanding the
        foregoing, the Company reevaluated its recognition of a portion of its deferred
        income tax asset from continuing operations and reversing the amounts previously
        recognized until such time that the Company exceeds break-even or marginal
        cumulative profitability. The Company increased the valuation allowance related
        to its deferred income tax asset to fully reserve the carrying value of its
        deferred income tax asset and restated its results for the affected periods
        covered in this report to reflect the adjustments. This information was
        previously disclosed in the Company’s Form 10-K for the year ended December 31,
        2006 filed originally with the SEC on March 30, 2007, Form 10-K/A for the
        year
        ended December 31, 2006 filed with the SEC on August 20, 2007, and Form 10-Q/A
        for the quarter ended March 31, 2007 filed with the SEC on August 20,
        2007.
 
 (**D**)***Reclassification
        of
        Revolving Credit Note***– The Company classified the Revolving Credit
        Note liability (originally reflected as “Line of Credit”) as a Current Liability
        on the condensed consolidated balance sheets when it should have been classified
        as an Other Liability based on its February 28, 2009 maturity date. The Company
        reclassified the Revolving Credit Note liability originally included in the
        Current Liability section of the condensed consolidated balance sheet and
        included this amount in the Other Liabilities section for the quarter ended
        March 31, 2007. This information was previously disclosed in the Company’s Form
        10-Q/A for the quarter ended March 31, 2007 filed with the SEC on August
        20,
        2007.
 
 (**E**)***Restatement
        of Convertible Term Note and Revolving Credit Note Liabilities and Interest
        Expense***– The Company did not account for the fair value of the
        warrants issued in connection with the Credit Facility entered into with
        ComVest. The Company accounted for the fair value of warrants as additional
        paid-in capital, reduced the carrying values of the convertible term note
        and
        revolving credit note by the fair value of the warrants, and recorded interest
        expense using the effective interest method for the quarter ended March 31,
        2007. This information was previously disclosed in the Company’s Form 10-Q/A for
        the quarter ended March 31, 2007 filed with the SEC on August 20,
        2007.
 
 (**F**)***Disclosure
        of
        Accounting for Registration Payment Arrangements***– The Company
        entered into a Registration Rights Agreement contemporaneously with the
        establishment of a Credit Facility with ComVest on February 21, 2007, which
        agreement contains certain provisions that may require the Company to pay
        ComVest certain fees upon the happening of certain events, and did not disclose
        the particular details of the registration payment arrangement in the quarter
        ended March 31, 2007. The Company amended its Form 10-Q for the quarter ended
        to
        disclose the registration payment arrangement as required. This information
        was
        previously disclosed in the Company’s Form 10-Q/A for the quarter ended March
        31, 2007 filed with the SEC on August 20, 2007.
 
 (**G**)***Restatement
        of
        Accrued Expenses and Other Current Liabilities, Cost of Sales, and
        Sales*****– The Company restated the accrued expenses
        and other current liabilities on the Consolidated Balance Sheets and Sales
        and
        Cost of Sales on the Consolidated Statements of Operations for the first
        and
        second quarters of 2006. This information was previously disclosed in the
        Company’s Form 10-K for the year ended December 31, 2006 filed originally with
        the SEC on March 30, 2007, Form 10-K/A for the year ended December 31, 2006
        filed with the SEC on August 20, 2007, and Form 10-Q/A for the quarter ended
        March 31, 2007 filed with the SEC on August 20, 2007.
  12
 ***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 quarter, and six
        months,
        ended June 30, 2007 and 2006, and our financial condition at June 30, 2007.
        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, 2006, including any amendments thereto.
 
 **Performance
        for the Second Quarter of 2007 compared to the Second Quarter of
        2006**
 
 **Overall
        Results of Operations**
  The
        following is a summary of sales for the quarter ended June 30:
 
 **2007**
              
              
              **2006**Sales
              
              $
              9,519,871
              
              
              $
              7,561,627
 
 Our
        sales
        increased $1,958,244, or 26%, for the second quarter of 2007 compared to
        the
        second quarter of 2006, due to increased volumes on slightly lower pricing
        in
        our Foam segment,  and increased volumes in our Sealants and Equipment
        segments, slightly offset by decreased volumes in our Paints, and All Other
        segments
 
 Our
        gross
        profit increased $499,351, or 39%, for the three months ended June 30, 2007
        compared to the three months ended June 30, 2006, due to sales growth in
        our
        Coatings, Foam, and Sealants segments offset by a decrease in our Paints,
        Adhesives, and All Other segments. Gross profit increased 2 percentage points,
        to 19%, for the second quarter of 2007 compared to the second quarter of
        2006,
        largely due to material cost decreases in our Coatings, Sealants, and Paints
        segments and a favorable pricing mix in our All Other segment, offset slightly
        by material cost increases in our Foam segment, and decreased pricing in
        our
        Equipment segment.
 
 Our
        total
        costs and expenses are comprised of cost of sales, selling, general and
        administrative expenses, or SG&A, professional fees, depreciation,
        amortization, consulting fees, interest expense, and other expense. These
        total
        costs and expenses increased $2,208,143, or 28%, for the second quarter of
        2007
        compared to the first quarter of 2006, due to an increase of $1,458,893 for
        cost
        of sales, $607,561 for SG&A, $17,743 for depreciation, $94,606 for interest
        expense, and $59,252 for professional fees, offset by a decrease of $24,704
        in
        consulting fees and $5,208 of other income.
 
 Cost
        of
        sales increased $1,458,893, or 28%, for the three months ended June 30, 2007
        compared to the three months ended June 30, 2006, due to an increase in
        purchases of raw materials for manufactured goods and finished goods, to
        support
        our sales volume growth, and material cost increases in our Coatings and
        Foam
        segments, partially offset by material cost reductions in our Paints and
        Sealants segments.
 
 SG&A
        increased $607,561, or 41%, for the quarter ended June 30, 2007 compared
        to the
        quarter ended June 30, 2006, due to an increase of $145,073 for payroll and
        related employee benefits, $34,925 for sales commissions, $45,978 for travel
        and
        related services, $41,552 for insurances, $27,649 for investor relations,
        $82,589 for share based compensation, $6,119 for rents, and $255,993 for
        corporate office expenses, offset by a decrease of $9,884 for recruiting
        fees,
        $5,750 for American Stock Exchange Fees, $10,830 for marketing and promotions,
        and $5,881 for advertising. The increases were largely as a result of expanding
        the Company’s base infrastructure to promote and support additional sales
        volumes.
 
 Professional
        fees increased $59,272, or 132%, for the second quarter of 2007 compared
        to the
        second quarter of 2006, due to an increase of $49,133 for legal fees and
        $10,120
        for outside accountants, auditing and auditing related services.
 
 Depreciation
        and amortization expense increased $17,742, or 47%, for the three months
        ended
        June 30, 2007 compared to the three months ended June 30, 2006 due to an
        increase in depreciable property, plant and equipment.
 
 Consulting
        fees decreased $24,704, or 63%, for the second quarter of 2007 compared to
        the
        second quarter of 2006 due to a decrease in outside professional services
        for
        investor relations and information technology.
 
 Interest
        expense increased $94,606, or 133%, for the three months ended June 30, 2007
        compared to the three months ended June 30, 2006, due to an increase in the
        amount of capital being used from our credit instruments required to fund
        our
        continuing operations and amortization of the discount on the Convertible
        Term
        Note and Revolving Credit Note.
  13
 ***Index***
  Interest
        expense – related party was eliminated for the second quarter of 2007 compared
        to $44,877 for the second quarter of 2006 due to the establishment of a credit
        facility with ComVest which replaced our principal reliance on our Chairman
        for
        capital for our operations.
 
 Other
        income was $5,208 for the three months ended June 30, 2007 and primarily
        related
        to a gain on the sale of certain assets. We did not have any other income
        or
        expense for the comparable period in 2006.
 
 We
        did
        not have any recognizable income or expenses from discontinued operations
        for
        the second quarter of 2007 compared to income of $29,000 for the second quarter
        of 2006 from gains related to writes offs of aged accounts payables and a
        reduction in the reserve for litigation.
 
 Net
        loss
        for the three months ended June 30, 2007 was $620,916 compared to $342,017
        for
        the three months ended June 30, 2006 due to an increase in SG&A,
        depreciation and amortization, professional fees, and interest expense, offset
        by a decrease in consulting fees, an increase in sales, cost of sales, gross
        profit, and other income.
 
 Net
        loss
        per share for the second quarter of 2007 was $.011 compared to $0.006 for
        the
        second quarter of 2006.
 
 Dividends
        accrued on our outstanding Series D Preferred Stock were $203,840 for the
        quarter ended June 30, 2007.  We did not have any outstanding Series D
        Preferred Stock in the comparable period in 2006.
 
 Net
        loss
        available to common stockholders and related loss per share for the three
        months
        ended June 30, 2007 were $824,756 and $0.015. The increase in net loss is
        attributable to dividends accrued for the outstanding Series D Preferred
        Stock
        for the three months ended June 30, 2007.  We did not have an increase
        in net loss available to common stockholders for the comparable period in
        2006
        due to not having any outstanding Series D Preferred Stock at that
        time.
 
 **Results
        of Business Segments**
 
 The
        following is a summary of sales by segment for the three months ended June
        30:
 
 **Segments**
              
              **2007**
              
              
              **2006**Coatings
              
              $
              3,171,098
              
              
              $
              2,721,736Foam
              
              
              5,427,399
              
              
              
              3,953,702Paints
              
              
              267,189
              
              
              
              296,437Sealants
              
              
              357,925
              
              
              
              290,500Adhesives
              
              
              —
              
              
              
              26,233Equipment
              
              
              224,665
              
              
              
              197,150All
                  Other
              
              $
              71,597
              
              
              $
              75,869
 
 Coatings
        sales increased $449,362, or 17%, for the second quarter of 2007 compared
        to the
        second quarter of 2006, due to an increase in our sales force, advertising,
        marketing, and promotion programs.  Segment profit decreased $67,041,
        or 65%, for the quarter ended June 30, 2007 compared to the same period in
        2006.
        The decrease in our Coatings segment profit for the quarter ended June 30,
        2007
        was primarily attributable to cost increases for related raw
        materials.
 
 Foam
        sales increased $1,473,697, or 37%, for the quarter ended June 30, 2007 compared
        to the quarter ended June 30, 2006, due to the same reasons enumerated in
        our
        coatings segment above. Segment loss increased $173,195, or 208%, for the
        three
        months ended June 30, 2007 compared to the same period in 2006. The increase
        in
        our Foam segment loss for the second quarter of 2007 was primarily attributable
        to cost increases related to resale foam purchases.
 
 Paints
        sales decreased $29,248, or 10%, for the three months ended June 30, 2007
        compared to the three months ended June 30, 2006, due to a slight decline
        in
        market demand. Segment profit was $30,388 for the quarter ended June 30,
        2007
        compared to a segment loss of $209 for the same period in 2006. The increase
        in
        our paints segment profit for the three months ended June 30, 2007 was primarily
        attributable to a decrease in the cost of resale paints.
 
 Sealants
        sales increased $67,425, or 23%, for the second quarter of 2007 compared
        to the
        second quarter of 2006, due to the same reasons enumerated in our coatings
        segment above. Segment profit was $10,483 for the quarter ended June 30,
        2007
        compared to a segment loss of $20,051 for the same period in 2006. The increase
        in our sealants segment profit for the quarter ended June 30, 2007 was primarily
        attributable to increased sales volumes and a favorable movement in raw material
        costs.
  14
 ***Index***
  Adhesives
        sales were -0- for the quarter ended June 30, 2007 compared to $26,233 for
        the
        quarter ended June 30, 2006, as a result of a decrease in demand. There was
        no
        segment profit or loss for the second quarter of 2007 compared to a segment
        profit of $747 for the same period in 2006. The decrease in our adhesives
        segment profit for the quarter ended June 30, 2007 was due to a decrease
        in
        sales.
 
 Equipment
        sales increased $27,515, or 14%, for the three months ended June 30, 2007
        compared to the three months ended June 30, 2006, due to the same reasons
        enumerated in our coatings segment. Segment profit decreased $5,756, or 58%,
        for
        the quarter ended June 30, 2007 compared to the same period in 2006. The
        decrease in our equipment segment profit for the three months ended June
        30,
        2007 was primarily attributable to decreased sales prices due to increased
        competition, partially offset by increased purchasing power for finished
        goods.
 
 All
        Other
        sales decreased $4,273, or 6%, for the second quarter of 2007 compared to
        the
        second quarter of 2006, due to a decrease in sales of sundry items. Segment
        profit was $42,674 for the quarter ended June 30, 2007 compared to a segment
        loss of $2,499 for the same period in 2006. The All Other segment profit
        for the
        second quarter of 2007 was primarily attributable to a favorable product
        margin
        mix.
 
 **Performance
        for the Six Months Ended June 30, 2007 compared to the Six Months Ended June
        30,
        2006**
 
 **Overall
        Results of Operations**
  The
        following is a summary of sales for the six months ended June 30:
 
 **2007**
              
              
              **2006**Sales
              
              $
              16,789,193
              
              
              $
              13,561,562
 
 Our
        sales
        increased $3,227,631, or 24%, for the six months ended June 30, 2007 compared
        to
        the six months ended June 30, 2006, due to increased sales volumes on slightly
        lower pricing in our Foam, Coatings, and Sealants segments, partially offset
        by
        decreased volumes in our Paints, Adhesives, and All Other segments.
 
 Our
        gross
        profit increased $845,051, or 40%, for the six months ended June 30, 2007
        compared to the six months ended June 30, 2006, due to sales volume growth
        in
        our Foam, Coatings, and Sealants segments partially offset by a decrease
        in our
        Paints, Adhesives, Equipment, and All Other segments. Gross profit increased
        by
        two percentage points, to 18%, for the six months ended June 30, 2007 compared
        to the same period of 2006, largely due to material cost decreases in our
        Coatings, Sealants, and Paints segments and a favorable pricing mix in our
        All
        Other segment, offset slightly by material cost increases in our Foam segment,
        and decreased pricing   in our Equipment segment.
 
 Our
        total
        costs and expenses are comprised of cost of sales, SG&A, professional fees,
        depreciation, amortization, consulting fees, interest expense, and other
        expense. These total costs and expenses increased $3,972,192 or 27%, for
        the six
        months ended June 30, 2007 compared to the comparable period in 2006, due
        to an
        increase of $2,382,580 for cost of sales, $1,435,590 for SG&A, $42,216 for
        depreciation and amortization, $114,235 for interest expense, and $22,393
        for
        professional fees, offset by a decrease of $20,127 in consulting fees, and
        an
        increase of $4,694 to other income.
 
 Cost
        of
        sales increased $2,382,580, or 21%, for the six months ended June 30, 2007
        compared to the same period in 2006, due to an increase in purchases of raw
        materials for manufactured goods and finished goods to support our sales
        volume
        growth, and material cost increases in our Coatings and Foam segments, partially
        offset by material cost reductions in our Paints and Sealants
        segments.
 
 SG&A
        increased $1,435,590, or 55%, for the six months ended June 30, 2007 compared
        to
        the six months ended June 30, 2006, due to an increase of $327,540 for payroll
        and related employee benefits, $110,029 for sales commissions, $74,267 for
        travel and related services, $19,433 for marketing, promotions and trade
        shows,
        $70,377 for insurances, $13,153 for advertising, $182,656 for share based
        compensation, $31,850 for rents, $660,423 for corporate office expenses,
        and
        $21,735 for investor relations, offset by a decrease of $22,491 for recruiting
        fees, $17,125 for American Stock Exchange Fees, $5,943 for investor relations,
        and $36,257 for bad debts.  The increases were largely a result of
        expanding the Company’s base infrastructure to promote and support additional
        sales volumes.
 
 Professional
        fees increased $22,393, or 20%, for the six months ended June 30, 2007 compared
        to the same period in 2006, due to an increase of $16,086 for legal fees
        and
        $6,308 for outside accountants, auditing and auditing related
        services.
 
 Depreciation
        and amortization expense increased $42,216, or 50%, for the six months ended
        June 30, 2007 compared to the same period in 2006 due to an increase in
        depreciable property, plant and equipment.
 
 Consulting
        fees decreased $20,127, or 33%, for the six months ended June 30, 2007 compared
        to the same period in 2006 due to a decrease in outside professional services
        for investor relations and information technology.
 
 Interest
        expense increased $114,235, or 87%, for the six months ended June 30, 2007
        compared to the six months ended June 30, 2006, due to an increase in the
        amount
        of capital being used from our credit instruments required to fund our
        continuing operations and amortization of the discount on the Convertible
        Term
        Note and Revolving Credit Note.
  15
 ***Index***
  Interest
        expense – related party was eliminated in the first quarter of 2007 compared to
        $90,247 for the six months ended June 30, 2006 due to the establishment of
        a
        credit facility with ComVest which replaced our principal reliance on our
        Chairman for capital for our operations.
 
 Other
        income was $4,694 for the six months ended June 30, 2007.  This was
        primarily related to a gain on the sale of certain assets.  We did not
        have any other income or expense for the comparable period in 2006.
 
 We
        did
        not have any recognizable income or expenses from discontinued operations
        for
        the six months ended June 30, 2007 compared to income of $324,069 for the
        six
        months ended June 30, 2006 from gains related to writes offs of aged accounts
        payables and a reduction in the reserve for litigation.
 
 Net
        loss
        for the six months ended June 30, 2007 was $1,630,549 compared to $561,919
        for
        the same period in 2006 due to an increase in SG&A, depreciation and
        amortization, professional fees, and interest expense, offset by a decrease
        in
        consulting fees, an increase in sales, cost of sales, gross profit, and other
        income.
 
 Net
        loss
        per share for the six months ended June 30, 2007 was $.030 compared to $0.010
        for the six months ended June 30, 2007.
 
 Dividends
        accrued on our outstanding Series D Preferred Stock were $405,550 for the
        six
        months ended June 30, 2007.  We did not have any outstanding Series D
        Preferred Stock in the comparable period in 2006.
 
 Net
        loss
        available to common stockholders and related loss per share for the three
        months
        ended June 30, 2007 were $2,036,099 and $0.038. The increase in net loss
        is
        attributable to dividends accrued for the outstanding Series D Preferred
        Stock
        for the six months ended June 30, 2007.  We did not have an increase
        in net loss available to common stockholders for the comparable period in
        2006
        due to not having any outstanding Series D Preferred Stock at that
        time.
 
 **Results
        of Business Segments**
 
 The
        following is a summary of sales by segment for the six months ended June
        30:
 
 **Segments**
              
              **2007**
              
              
              **2006**Coatings
              
              $
              5,314,096
              
              
              $
              4,783,034Foam
              
              
              9,884,839
              
              
              
              7,104,802Paints
              
              
              540,227
              
              
              
              622,558Sealants
              
              
              651,613
              
              
              
              519,054Adhesives
              
              
              ---
              
              
              
              30,265Equipment
              
              
              325,270
              
              
              
              345,299All
                  Other
              
              $
              73,148
              
              
              $
              156,550
 
 Coatings
        sales increased $531,062, or 11%, for the six months ended June 30, 2007
        compared to the same period in 2006, due to an increase in our sales force,
        advertising, marketing, and promotion programs.  Segment loss
        increased by $71,564, or 121%, for the quarter ended March 31, 2007 compared
        to
        a segment profit of $59,033 for the same period in 2006. The increase in
        our
        coatings segment loss for the six months ended June 30, 2007 was primarily
        attributable to cost increases for related raw materials.
 
 Foam
        sales increased $2,780,037, or 39%, for the six months ended June 30, 2007
        compared to the same period in 2006, due to the same reasons enumerated in
        our
        coatings segment above. Segment loss increased $567,426, or 264%, for the
        six
        months ended June 30, 2007 compared to the same period in 2006. The increase
        in
        our Foam segment loss in 2007 was primarily attributable to cost increases
        related to resale foam purchases.
 
 Paints
        sales decreased $82,331 or 13%, for the six months ended June 30, 2007 compared
        to the same period in 2006, due to a slight decline in market demand. Segment
        profit increased by $22,152, or 71%, for the six months ended June 30, 2007
        compared to the same period in 2006. The increase in our Paints segment profit
        for the six months ended June 30, 2007 was primarily attributable to a decrease
        in the cost of resale paints.
 
 Sealants
        sales increased $132,599, or 26%, for the six months ended June 30, 2007
        compared to the same period in 2006, due to the same reasons enumerated in
        our
        coatings segment above. Segment profit increased $11,516 or 220%, for the
        six
        months ended June 30, 2007 compared to a segment loss of $5,219 for the six
        months ended June 30, 2006. The increase in our Sealants segment profit for
        the
        six months ended June 30, 2007 was primarily attributable to increased sales
        volumes and a favorable movement in raw material costs.
 
 Adhesives
        sales were -0- for the six months ended June 30, 2007 compared to $30,265
        for
        the same period in 2006, as a result of a decrease in demand. Segment profit
        decreased $151 from the six months ended June 30, 2007 compared to the same
        period in 2006. The decrease in our adhesives segment loss for the six months
        ended June 30, 2007 was due to a decrease in sales resulting in a reduction
        in
        costs of sales.
  16
 ***Index***
  Equipment
        sales decreased $20,029, or 6%, for the six months ended June 30, 2007 compared
        to the same period in 2006, due to slightly decreasing sales volumes and
        pricing
        pressures from increased competition. Segment loss increased $18,457, or
        194%,
        from a segment profit of $9,507 for the six months ended June 30, 2006 to
        a loss
        of $8,950 for the six months ended June 30, 2007. The increase in our Equipment
        segment loss for the six months ended June 30, 2007 was directly related
        to the
        slightly lower volumes and pricing.
 
 All
        Other
        sales decreased $83,402, or 53%, for the six months ended 2007 compared to
        the
        same period in 2006, due to a decrease in the sale of sundry items. Segment
        profit was $20,161 for the six months ended June 30, 2007 compared to a segment
        loss of $1,240 for the same period in 2006. The increase in All Other segment
        profit for the six months ended June 30, 2007 was attributable to a favorable
        pricing mix on lower volumes.
 
 **Liquidity
        and Capital Resources**
 
 Net
        cash
        used in our operations was $3,386,514 for the six months ended June 30, 2007
        compared to $1,373,437 for the same period in 2006. The cash used in operations
        for the six months ended June 30, 2007 was attributable to our net income
        for
        the period, including the effect of adjustments to reconcile net income to
        cash
        provided by or used in operating activities and adjusting for non-cash items,
        offset by increases in trade receivables, inventories, prepaid expenses and
        other current assets, deposits and other non current assets, accounts payable,
        and accrued expenses and other current liabilities, and decreases in other
        liabilities. For the six months ended June 30, 2007 and 2006, net cash used
        in
        discontinued operations was $9,152 and $-0-, respectively. Although cash
        from
        operations and funds available from the Revolving Credit Note are expected
        to
        continue to be sufficient to meet our operating requirements and to fund
        our
        capital expenditures, we may seek to raise additional funds through private
        placements of common and preferred stock to accredited sophisticated investors
        to further fund our trade receivables growth, make an acquisition as part
        of our
        strategy for accelerating sales growth, increase our stockholders’ equity to an
        amount sufficient to maintain our listing on the American Stock Exchange,
        or pay
        down our short and long term debts, including our Convertible Term Note and
        Revolving Credit Note, depending on market conditions.
 
 Net
        cash
        used in investing activities was $1,409,996 for the six months ended June
        30,
        2007 compared to $218,611 for the same period in 2006. We invested $72,890
        in
        vehicles, $28,099 in office furniture and equipment, $113,590 for computers
        and
        software, $193,918 in machinery and equipment, and $1,147,279 for construction
        of manufacturing plants in the six months ended June 30, 2007.
 
 Net
        cash
        provided by financing activities was $4,429,931 for the six months ended
        June
        30, 2007 compared to $1,205,816 for the same period in 2006. We retired our
        former lines of credit, repaid certain short term loans received by us from
        our
        Chairman of the Board, satisfied certain closing fees and transactional
        expenses, continued construction of our manufacturing plants, and met certain
        of
        our working capital requirements with the $2,000,000 received under our
        Convertible Term Note and $4,000,000 drawn against our Revolving Credit Note,
        as
        amended, during the six month period ended June 30, 2007. We made $223,484
        in
        principal repayments on our long term debt during the six month period ended
        June 30, 2007.
 
 **Item
                  3.**
              **QuantitativeandQualitative Disclosures About Market
                  Risk.**
 
 We
        do not
        issue or invest in financial instruments or their derivatives for trading
        or
        speculative purposes and are not subject to material foreign currency exchange
        risks at this time. Our outstanding debt and related interest expense, as
        it
        relates to interest rate exposure, in the United States is currently not
        material to our operations.
 
 **Item
                  4.**
              **Controls
                  and Procedures.**
 
 We
        carried out an evaluation, under the supervision and with participation of
        our
        management, including our Principal Executive Officer and our Principal
        Financial Officer, of the effectiveness of the design and operation of our
        disclosure controls and procedures as of June 30, 2007, 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 our disclosure
        controls and procedures were effective at the reasonable assurance level,
        except
        for a certain matter. A material weakness existed which originated when the
        Company entered into those certain agreements described elsewhere in this
        report
        relating to the establishment of a Credit Facility with ComVest on February
        21,
        2007, as amended June 12, 2007. The Company was unaware of certain required
        accounting treatment relating to calculating the fair value of warrants,
        allocating such value to the variety of agreements, originally and as amended,
        issued in connection therewith, and amortizing such discount over the term
        of
        the agreements. Once the Company became aware of the particular matter, the
        Company consulted an outside CPA firm to review the matter in detail. The
        Company has accounted for the fair value of the warrants in this report and
        believes the material weakness identified above has been corrected. After
        correcting the material weakness identified above, our Principal Executive
        Officer and our Principal Financial Officer concluded that our disclosure
        controls and procedures are effective and operating at the requisite reasonable
        assurance level.  There was a change in our internal controls over
        financial reporting during the second quarter of 2007 that affected our internal
        controls over financial reporting, namely, the addition of a new CFO with
        a CPA
        license on June 11, 2007. We also made another change in our internal controls
        over financial reporting after the end of the second quarter of 2007, namely,
        the engagement of a new larger independent registered public accounting firm,
        Hein & Associates LLP on July 12, 2007. Both of the aforementioned changes,
        as well as the early adoption of the attestation requirements for the year
        ended
        December 31, 2006, were made to ensure that our disclosure controls and
        procedures kept pace with the rapid growth of the Company. 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.
  17
 ***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, 2006 and
        Part II, Item 1 in our Quarterly Report on Form 10-Q for the quarter
        ended March 31, 2007, are hereby incorporated in their entirety herein by
        this reference.
 
 V*arious
        Lawsuits and Claims Arising in the Ordinary Course of Business*
 
 We
        are
        involved in various lawsuits and claims arising in the ordinary course of
        business, which are, in our opinion, immaterial both individually and in
        the
        aggregate with respect to our consolidated financial position, liquidity
        or
        results of operations.
 
 **Item 1A.**
              **Risk
                  Factors.**
 
 The
        risk
        factors presented below update, and should be considered in addition to,
        the
        risk factors previously disclosed by us in Part I, Item 1A of our
        Annual Report on Form 10-K for the fiscal year ended December 31, 2006,
        Part II, Item 1A in our Quarterly Report on Form 10-Q for the quarter
        ended March 31, 2007, and Risk factors in our Registration Statement on
        Form S-3 filed with the SEC on June 20, 2007.
 
 ·***New
        Manufacturing
        Operations*********—**We recently
        established our first polyol blending facility. This blending operation was
        established as part of our strategy to improve the gross margins for the
        polyurethane foam systems that we sell in our foam segment and to provide
        an
        innovative polyol product for our customers. Our polyurethane foam systems
        are
        comprised of two basic components, polyols and isocyanates, each of which
        is 50%
        of the overall finished good sold to our customers. We do not manufacture
        the
        isocyanates and are required to obtain this constituent part which is available
        from a variety of suppliers in the ordinary course of our business. Although
        we
        now manufacture the polyols in our own facilities instead of purchasing the
        polyols and isocyanates as finished goods and redistributing them as we have
        done in the past, we may experience technical and other difficulties with
        the
        ramp-up and roll-out of our polyurethane foam systems, which may significantly
        affect our operations and results.
 
 ·***Availability
        and
        Cost of Raw Materials*********—**Certain raw materials are
        critical to our production processes and
        sales growth and our operating results are significantly affected by the
        cost of
        these raw materials. These include not only titanium dioxide and other resins
        in
        our coatings and paints segments, but also polyols and catalysts for our
        foam
        segment. Although we do not manufacture the isocyanates sold as part of our
        polyurethane foam systems, the isocyanates are a component of the finished
        good
        sold to our customers and a raw material for our purposes. We have made,
        and
        plan to continue to make, supply arrangements to meet planned operating
        requirements for the future. However, volatility in raw material costs,
        interruption in ordinary sources of supply and an inability to recover
        unanticipated increases in raw material costs from customers could result
        in
        lost sales or significantly increase the cost of doing business and
        profitability. We may not be able to fully offset the impact of higher raw
        materials through price increases or productivity improvements.
 
 ·***Retention
        of Key
        Personnel*******-****Our
        success depends upon our retention of key managerial, technical, selling
        and
        marketing personnel. The loss of the services of key personnel might
        significantly delay or prevent the achievement of our development and strategic
        objectives.  We must continue to attract, train and retain managerial,
        technical, selling and marketing personnel. Competition for such highly skilled
        employees in our industry is high, and we cannot be certain that we will
        be
        successful in recruiting or retaining such personnel. We also believe that
        our
        success depends to a significant extent on the ability of our key personnel
        to
        operate effectively, both individually and as a group. If we are unable to
        identify, hire and integrate new employees in a timely and cost-effective
        manner, our operating results may suffer.
 
 ·***Overall
        Economic
        Conditions and Demand for Products*********—**General economic conditions
        in markets in which we do business can
        impact the demand for our goods. Decreased demand for our products can have
        a
        negative impact on our financial performance and cash flow. Demand for our
        products depends on the general economic conditions affecting the industries
        in
        which we do business. A downturn in economic conditions in an industry served
        by
        us may negatively impact demand for our products, in turn negatively impacting
        our operations and financial results. Further, changes in demand for our
        products can magnify the impact of economic cycles on our
        businesses.
 
 ·***Acquisitions***-****As part of our business strategy, we
        regularly consider and, as appropriate, make acquisitions of technologies,
        products and businesses that we believe are complementary to our business.
        Acquisitions typically entail many risks and could result in difficulties
        in
        integrating the operations, personnel, technologies and products of the
        companies acquired, some of which may result in significant charges to earnings.
        If we are unable to successfully integrate our acquisitions with our existing
        business, we may not obtain the advantages that the acquisitions were intended
        to create, which may materially adversely affect our business, results of
        operations, financial condition and cash flows, our ability to develop and
        introduce new products and the market price of our stock. In connection with
        acquisitions, we could experience disruption in our business or employee
        base,
        or key employees of companies that we acquire may seek employment elsewhere,
        including with our competitors. Furthermore, the products of companies we
        acquire may overlap with our products or those of our customers, creating
        conflicts with existing relationships or with other commitments that are
        detrimental to the integrated businesses.
  18
 ***Index***
  ·***American
        Stock Exchange
        Compliance Plan*******—
We
        received notice from the American
        Stock Exchange (“Exchange”) on April 20, 2007 that after review of our Form 10-K
        for the fiscal year ended December 31, 2006, we did not meet certain of the
        Exchange’s continued listing standards. Specifically, the Company is below
        certain of the Exchange’s continued listing standards due to stockholders’
equity of less than $4 Million and losses from continuing operations and/or
        net
        losses in three out of its four most recent fiscal years; and stockholders’
equity of less than $6 Million and losses from continuing operations and/or
        net
        losses in its five most recent fiscal years, as set forth in Sections
        1003(a)(ii) and (iii) of the Exchange’s Company Guide. We were afforded an
        opportunity to submit a plan of compliance to the Exchange and on May 21,
        2007
        presented our plan to the Exchange (“Compliance Plan”). On July 10, 2007, the
        Exchange notified us that it accepted our Compliance Plan and granted us
        an
        extension until October 22, 2007 to regain compliance with the continued
        listing
        standards. The Company is subject to periodic review by the Exchange’s Staff
        during the extension period. Failure to make progress consistent with the
        Compliance Plan or to regain compliance with the continued listing standards
        by
        the end of the extension period, the Exchange Staff will likely initiate
        delisting proceedings as appropriate. If the Exchange initiates delisting
        procedures, we may decide to appeal the ruling, and depending on the outcome
        of
        the appeal or otherwise, we will pursue having our common stock quoted on
        the
        OTC Bulletin Board.
 
 **Item
                  2.**
              **Unregistered
                  Sales of EquitySecurities and Use of
                  Proceeds.**
 
 **Recent
        Sales of Unregistered Securities**
 
 During
        the quarterly period ended June 30, 2007, we issued common stock for a certain
        private transaction, in reliance on Section 4(2) of the Act, as described
        below:
 
 (1)  
        On May 22, 2007, an aggregate of 57,447 shares of restricted common stock
        automatically granted and issued to non-employee directors pursuant to the
        Director Compensation Plan upon election at the annual meeting of stockholders
        held on July 12, 2006 vested.  We did not consider these shares issued
        and outstanding due to a vesting provision and non-delivery of the shares
        pending vesting.  The value ascribed to these vested shares was
        $21,600.
 
 **Item
                  3.**
              **Defaults
                  Upon Senior Securities.**
 
 None.
 
 **Item
                  4.**
              **Submission
                  of Matters to a Vote of Security Holders.**
 
 The
        2007
        Annual Meeting of Stockholders was held on Tuesday, May 22, 2007 at 9:00
        AM EST
        with the following results:
 
 Proposal
        1:Election of
        Directors.
 
 
 **For**
              
              
              **Withheld**1.
              
              Richard
                  J. Kurtz
              
              
              41,882,057
              
              
              
              665,0952.
              
              Lt.
                  Gen. Arthur J. Gregg, US Army (Retired)
              
              
              41,883,507
              
              
              
              663,6453.
              
              Jay
                  C. Nadel
              
              
              41,865,757
              
              
              
              681,3954.
              
              Augustus
                  J. Larson
              
              
              41,863,757
              
              
              
              683,3955.
              
              Michael
                  T. Adams
              
              
              41,888,807
              
              
              
              658,3456.
              
              Douglas
                  J. Kramer
              
              
              41,864,307
              
              
              
              682,8457.
              
              Howard
                  L. Brown
              
              
              33,489,548
              
              
              
              0
 
 Proposal
        2:                      Ratify
        and Approve Amendments to Equity Incentive Plan:
 
 **For**
              
              
              **Against**
              
              
              **Abstentions**
              
              
              **Broker
                  Non-Votes**33,991,045
              
              
              
              750,474
              
              
              
              150,732
              
              
              
              6,574,066
 
 Proposal
        3:                      Approve
        Amendment to Restated Certificate of Incorporation:
 
 **For**
              
              
              **Against**
              
              
              **Abstentions**33,987,545
              
              
              
              684,944
              
              
              
              154,277
 
 **Item 5.**
              **Other
                  Information.**
 
 None.
 
 **Item
                  6.**
              **Exhibits.**
 
 ***See***
        Index of Exhibits on Page 21.
  19
 ***Index***
  **SIGNATURES**
 
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 **LAPOLLA
                  INDUSTRIES, INC.**Date:
              August
                  20, 2007
              
              By:
              /s/
                Douglas J. KramerName:
              Douglas
                  J. KramerTitle:
              CEO
                  and President**LAPOLLA
                  INDUSTRIES, INC.**Date:
              August
                  20, 2007
              
              By:
              /s/
                Timothy J. NovakName:
              Timothy
                  J. NovakTitle:
              CFO
                  and Treasurer
  20
 ***Index***
  **INDEX
        OF EXHIBITS**
 
 **Exhibit
                  Number**
              
              **Description**4.1
              
              Certificate
                  of Amendment of Restated Certificate of Incorporation dated May
                  22, 2007
                  as filed with the State of Delaware on June 18, 2007.4.2
              
              Pro
                  Forma Restated Certificate of Incorporation, as amended May 22,
                  2007, and
                  currently in effect.10.1
              
              Revolving
                  Credit and Term Loan Agreement between LaPolla and ComVest dated
                  February
                  21, 2007 (incorporated by reference to Exhibit 10.1 to Form 8-K
                  dated and
                  filed February 23, 2007).10.2
              
              Convertible
                  Term Note between LaPolla and ComVest dated February 21, 2007
                  (incorporated by reference to Exhibit 10.2 to Form 8-K dated and
                  filed
                  February 23, 2007).10.3
              
              Revolving
                  Credit Note between LaPolla and ComVest dated February 21, 2007
                  (incorporated by reference to Exhibit 10.3 to Form 8-K dated and
                  filed
                  February 23, 2007).10.4
              
              Warrant
                  No. CV-1 To Purchase Shares of Common Stock to ComVest dated February
                  21,
                  2007 (incorporated by reference to Exhibit 10.4 to Form 8-K dated
                  and
                  filed February 23, 2007).10.5
              
              Warrant
                  No. CV-2 To Purchase Shares of Common Stock to ComVest dated February
                  21,
                  2007 (incorporated by reference to Exhibit 10.5 to Form 8-K dated
                  and
                  filed February 23, 2007).10.6
              
              Warrant
                  No. CV-3 To Purchase Shares of Common Stock to ComVest dated February
                  21,
                  2007 (incorporated by reference to Exhibit 10.6 to Form 8-K dated
                  and
                  filed February 23, 2007).10.7
              
              Amendment
                  No. 1 to Revolving Credit and Term Loan Agreement between LaPolla
                  and
                  ComVest dated June 12, 2007 (incorporated by reference to Exhibit
                  10.7 to
                  Form 8-K dated June 12, 2007 and filed June 14, 2007).10.8
              
              Amended
                  and Restated Convertible Term Note between LaPolla and ComVest
                  dated June
                  12, 2007 (incorporated by reference to Exhibit 10.8 to Form 8-K
                  dated June
                  12, 2007 and filed June 14, 2007)..10.9
              
              Amended
                  and Restated Revolving Credit Note between LaPolla and ComVest
                  dated June
                  12, 2007 (incorporated by reference to Exhibit 10.9 to Form 8-K
                  dated June
                  12, 2007 and filed June 14, 2007).10.10
              
              Warrant
                  No. CV-4 To Purchase Shares of Common Stock to ComVest dated June
                  12, 2007
                  (incorporated by reference to Exhibit 10.10 to Form 8-K dated June
                  12,
                  2007 and filed June 14, 2007).10.11
              
              Equity
                  Incentive Plan (incorporated by reference to Exhibit 10.1 to Form
                  8-K
                  dated July 12, 2005 filed July 18, 2005).10.12
              
              First
                  Amendment to Equity Incentive Plan (incorporated by reference to
                  Appendix
                  A to Definitive Proxy Statement dated and filed April 30,
                  2007).99.1
              
              Collateral
                  Agreement between LaPolla and ComVest dated February 21, 2007
                  (incorporated by reference to Exhibit 99.1 to Form 8-K dated and
                  filed
                  February 23, 2007).99.2
              
              Registration
                  Rights Agreement between LaPolla and ComVest dated February 21,
                  2007
                  (incorporated by reference to Exhibit 99.2 to Form 8-K dated and
                  filed
                  February 23, 2007).99.3
              
              Extension
                  Under Registration Rights Agreement dated June 12, 2007 (incorporated
                  by
                  reference to Exhibit 99.3 to Form 8-K dated June 12, 2007 and filed
                  June
                  14, 2007).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.






21