**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
   **FORM
        10-Q**
  **QUARTERLY
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934**
  
 **For
        The Quarterly Period Ended September 30, 2007**
 Commission
        File No. **001-31354**
 
 
 
 
 **LaPolla
                  Industries, Inc.***(Exact
                  name of Registrant as Specified  in  its
                  Charter)***Delaware**
              
              **13-3545304***(State
                  of Incorporation)*
              
              *(I.R.S.
                  Employer Identification No.)***Intercontinental
                  Business Park**
                **15402
                  Vantage Parkway East, Suite 322**
                **Houston,
                  Texas**
              
              **77032***(Address
                  of Principal Executive Offices)*
              
              *(Zip
                  Code)***(281)
                  219-4700***(Registrant’s
                  Telephone Number)*
 
 Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months, and (2) has been subject to such filing requirements
        for
        the past 90 days. Yes 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
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act).  Yes    No þ
 Indicate
        the number of shares outstanding of each of the issuer's classes of common
        stock, as of the latest practicable date.
 
 As
        of
        November 5, 2007 there were 53,635,699 shares of Common Stock, par value
        $.01,
        outstanding.
  
 
 
  **LAPOLLA
        INDUSTRIES, INC.**
 **FORM
        10-Q**
 **FOR
        THE QUARTER ENDED SEPTEMBER 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**
              
              **18****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
 ***Table
            of Contents***
 
 **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****September
                  30, 2007 (Unaudited) and December 31, 2006**
              **4****CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)****Three
                  and Nine Months Ended September 30, 2007 and 2006**
              **5****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)****Nine
                  Months Ended September 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
 ***Table
            of Contents***
  **LAPOLLA
        INDUSTRIES, INC.**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 
 **September 30,**
              
              
              **December 31,****2007**
              
              
              **2006****(Unaudited)**
              
              
              **(As
                  Restated)****ASSETS**Current
                  Assets:Cash
              
              $
              73,029
              
              
              $
              382,116Trade
                  Receivables, Net
              
              
              4,991,221
              
              
              
              3,595,431Inventories
              
              
              3,437,776
              
              
              
              2,882,236Prepaid
                  Expenses and Other Current Assets
              
              
              540,512
              
              
              
              537,253Total
                  Current Assets
              
              
              9,042,538
              
              
              
              7,397,036Property,
                  Plant and Equipment, Net
              
              
              2,732,993
              
              
              
              1,489,639Other
                  Assets:Goodwill
              
              
              1,951,000
              
              
              
              1,951,000Other
                  Intangible Assets, Net
              
              
              148,087
              
              
              
              165,396Deposits
                  and Other Non-Current Assets
              
              
              245,968
              
              
              
              149,237Total
                  Other Assets
              
              
              2,345,056
              
              
              
              2,265,633Total
                  Assets
              
              $
              14,120,587
              
              
              $
              11,152,308**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  Liabilities:Accounts
                  Payable
              
              $
              3,923,826
              
              
              $
              5,069,478Accrued
                  Expenses and Other Current Liabilities
              
              
              1,199,689
              
              
              
              1,091,947Line
                  of Credit
              
              
              —
              
              
              
              1,007,120Loan
                  Payable – Related Party
              
              
              550,000
              
              
              
              —Current
                  Portion of Convertible Term Note
              
              
              666,925
              
              
              
              —Current
                  Portion of Long-Term Debt
              
              
              94,524
              
              
              
              97,589Current
                  Portion of Liabilities from Discontinued Operations
              
              
              —
              
              
              
              232,479Total
                  Current Liabilities
              
              
              6,634,706
              
              
              
              7,498,613Other
                  LiabilitiesRevolving
                  Credit Note, Net
              
              
              4,857,732
              
              
              
              —Non
                  Current Portion of Convertible Term Note, Net
              
              
              763,856
              
              
              
              —Non
                  Current Portion of Long-Term Debt
              
              
              123,217
              
              
              
              202,923Non
                  Current Portion of Liabilities from Discontinued
                  Operations
              
              
              848
              
              
              
              103,650Total
                  Other Liabilities
              
              
              5,545,912
              
              
              
              306,573Total
                  Liabilities
              
              
              12,180,617
              
              
              
              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
                  September 30, 2007 and December 31, 2006; $62,500 aggregate liquidation
                  preference at September 30, 2007 and December 31, 2006
              
              
              55,035
              
              
              
              55,035Series
                  D, 25,000 Shares Authorized; 8,176 Issued and Outstanding at September
                  30,2007 and December 31, 2006; $8,176,000 aggregate liquidation
                  preference
                  at September 30, 2007 and December 31, 2006
              
              
              8,176
              
              
              
              8,176Common
                  Stock, $.01 Par Value; 70,000,000 Shares Authorized; 53,635,699
                  and53,574,251 Issued and Outstanding at September 30, 2007 and
                  December
                  31, 2006 Respectively
              
              
              536,357
              
              
              
              535,743Additional
                  Paid-In Capital
              
              
              71,207,998
              
              
              
              70,201,151Accumulated
                  Deficit
              
              
              (69,867,596
              )
              
              
              (67,452,983
              )Total
                  Stockholders’ Equity
              
              
              1,939,970
              
              
              
              3,347,122Total
                  Liabilities and Stockholders’ Equity
              
              $
              14,120,587
              
              
              $
              11,152,308
 
 See
        accompanying notes to condensed consolidated financial
        statements.
  4
 ***Table
            of Contents***
  **LAPOLLA
        INDUSTRIES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
 
 **Three
                  Months Ended September 30,**
              
              
              **Nine
                  Months Ended September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****(As
                  Restated)**
              
              
              
              
              
              **(As
                  Restated)**Sales
              
              $
              8,369,502
              
              
              $
              9,037,490
              
              
              $
              25,158,695
              
              
              $
              22,599,052Cost
                  of Sales
              
              
              6,646,741
              
              
              
              7,528,351
              
              
              
              20,460,092
              
              
              
              18,959,122Gross
                  Profit
              
              
              1,722,761
              
              
              
              1,509,139
              
              
              
              4,698,603
              
              
              
              3,639,930Operating
                  Expenses:Selling,
                  General and Administrative
              
              
              2,135,274
              
              
              
              2,184,581
              
              
              
              6,197,023
              
              
              
              4,810,740Professional
                  Fees
              
              
              157,431
              
              
              
              53,212
              
              
              
              294,077
              
              
              
              167,465Depreciation
                  and Amortization
              
              
              55,113
              
              
              
              51,023
              
              
              
              181,693
              
              
              
              135,387Consulting
                  Fees
              
              
              58,871
              
              
              
              34,458
              
              
              
              99,180
              
              
              
              94,893Interest
                  Expense
              
              
              225,716
              
              
              
              53,486
              
              
              
              471,517
              
              
              
              94,806Interest
                  Expense – Related Party
              
              
              2,067
              
              
              
              52,849
              
              
              
              2,067
              
              
              
              143,096Other
                  (Income) Expense
              
              
              (134,251
              )
              
              
              —
              
              
              
              (138,945
              )
              
              
              —Total
                  Operating Expenses
              
              
              2,500,221
              
              
              
              2,429,609
              
              
              
              7,106,612
              
              
              
              5,446,387Operating
                  Loss
              
              
              (777,460
              )
              
              
              (920,470
              )
              
              
              (2,408,009
              )
              
              
              (1,806,457
              )Income
                  From Discontinued Operations, Net of Income Tax
                  Benefit-Deferred
              
              
              —
              
              
              
              (5,000
              )
              
              
              —
              
              
              
              319,068Net
                  Loss
              
              $
              (777,460
              )
              
              $
              (925,470
              )
              
              $
              (2,408,009
              )
              
              $
              (1,487,389
              )Plus:  Dividends
                  on Preferred Stock
              
              
              (205,970
              )
              
              
              (1,323
              )
              
              
              (611,520
              )
              
              
              (1,323
              )Net
                  Loss Available to Common Stockholders
              
              $
              (983,430
              )
              
              $
              (926,793
              )
              
              $
              (3,019,529
              )
              
              $
              (1,488,712
              )Net
                  Loss Per Share – Basic and Diluted:Continuing
                  Operations
              
              $
              (0.018
              )
              
              $
              (0.017
              )
              
              $
              (0.056
              )
              
              $
              (0.034
              )Discontinued
                  Operations
              
              
              0.000
              
              
              
              (0.000
              )
              
              
              0.000
              
              
              
              0.006Total
              
              $
              (0.018
              )
              
              $
              (0.017
              )
              
              $
              (0.056
              )
              
              $
              (0.028
              )Weighted
                  Average Shares Outstanding
              
              
              53,635,699
              
              
              
              53,551,051
              
              
              
              53,611,138
              
              
              
              53,360,621
 
 See
        accompanying notes to condensed consolidated financial
        statements
  5
 ***Table
            of Contents***
  **LAPOLLA
        INDUSTRIES, INC.**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 **Nine
                  Months Ended September 30,****2007**
              
              
              **2006****(As
                  Restated)***Cash
                  Flows From Operating Activities*Net
                  LossContinuing
                  Operations
              
              $
              (2,408,009
              )
              
              $
              (1,806,457
              )Discontinued
                  Operations
              
              
              —
              
              
              
              319,069Adjustments
                  to Reconcile Net Loss to Net Cash Used in Operating
                  Activities:Depreciation
                  and Amortization
              
              $
              253,030
              
              
              $
              199,769Provision
                  for Losses on Trade Receivables
              
              
              (129,314
              )
              
              
              133,465Amortization
                  of Discount on Convertible Term and Revolving Credit Notes
              
              
              107,968
              
              
              
              —Share
                  Based Compensation Expense
              
              
              799,636
              
              
              
              488,558Changes
                  in Assets and Liabilities:Trade
                  Receivables
              
              
              (1,281,454
              )
              
              
              (965,502
              )Inventories
              
              
              (555,540
              )
              
              
              (2,021,422
              )Prepaid
                  Expenses and Other Current Assets
              
              
              (3,258
              )
              
              
              (123,562
              )Deposits
                  and Other Non Current Assets
              
              
              (96,732
              )
              
              
              (127,700
              )Accounts
                  Payable
              
              
              (1,145,652
              )
              
              
              2,404,731Accrued
                  Expenses and Other Current Liabilities
              
              
              (258,838
              )
              
              
              32,146Other
                  Liabilities
              
              
              (435
              )
              
              
              (352
              )Net
                  Operating Activities of Discontinued Operations
              
              
              (9,152
              )
              
              
              (331,569
              )Net
                  Cash Used in Operating Activities
              
              
              (4,727,750
              )
              
              
              (1,800,149
              )*Cash
                  Flows From Investing Activities*Additions
                  to Property, Plant and Equipment
              
              $
              (1,479,076
              )
              
              $
              (365,616
              )Net
                  Cash Used in Investing Activities
              
              
              (1,479,076
              )
              
              
              (365,616
              )*Cash
                  Flows From Financing Activities*Proceeds
                  from Revolving Credit Note
              
              
              5,000,000
              
              
              
              —Payments
                  on Revolving Credit Note
              
              
              —
              
              
              
              —Proceeds
                  from Line of Credit
              
              
              1,398,000
              
              
              
              6,361,214Payments
                  on Line of Credit
              
              
              (2,405,120
              )
              
              
              (5,894,816
              )Proceeds
                  from Loans Payable – Related Party
              
              
              950,000
              
              
              
              4,360,000Payments
                  on Loans Payable – Related Party
              
              
              (400,000
              )
              
              
              (610,000
              )Proceeds
                  from Convertible Term Note
              
              
              2,000,000
              
              
              
              —Proceeds
                  from Note Payable – Other
              
              
              —
              
              
              
              3,823,339Payments
                  on Note Payable – Other
              
              
              (13,336
              )
              
              
              (5,493,211
              )Principal
                  Repayments on Long Term Debt
              
              
              (305,676
              )
              
              
              (170,734
              )Net
                  Financing Activities of Discontinued Operations
              
              
              (326,129
              )
              
              
              (118,248
              )Net
                  Cash Provided by Financing Activities
              
              
              5,897,739
              
              
              
              2,257,544*Net
                  Decrease In Cash*
              
              $
              (309,087
              )
              
              $
              91,779*Cash
                  at Beginning of Period*
              
              
              382,116
              
              
              
              400,621*Cash
                  at End of Period*
              
              $
              73,029
              
              
              $
              492,400*Supplemental
                  Disclosure of Cash Flow Information:*Cash
                  Payments for Income Taxes
              
              $
              —
              
              
              $
              —Cash
                  Payments for Interest
              
              $
              361,912
              
              
              $
              131,763*Supplemental
                  Schedule of Non Cash Investing and Financing
                  Activities*Property,
                  Plant and Equipment acquired via Issuance of Long Term
                  Debt
              
              $
              —
              
              
              $
              37,349Common
                  Stock issued for Director Fees
              
              $
              —
              
              
              $
              233,640Conversion
                  of Loans Payable – Related Party to Note Payable – Related
                  Party
              
              $
              —
              
              
              $
              3,000,000
 
 See
        accompanying notes to condensed consolidated financial
        statements.
  6
 ***Table
            of Contents***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED)**
 
 **Note
        1.  Basis of Presentation.**
 
 The
        consolidated financial statements included herein are unaudited. Certain
        information and footnote disclosures normally included in financial statements
        prepared in accordance with U.S. generally accepted accounting principles
        have
        been condensed or omitted pursuant to the rules and regulations of the
        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 September
        30, 2007. Certain amounts in prior periods have been reclassified to conform
        to
        the September 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 September 30, 2007 and 2006,
        raw materials and finished goods purchased from the Company’s three largest
        suppliers accounted for approximately 34% and 56% of purchases,
        respectively.
 
 **Note
        3.  Trade Receivables.**
 
 The
        following is a summary of trade receivables at:
 
 **September 30,
                  2007**
              
              
              **December 31,
                  2006**Trade
                  Receivables
              
              $
              5,086,213
              
              
              $
              3,819,737Less:
                  Allowance for Doubtful Accounts
              
              
              (94,992
              )
              
              
              (224,306
              )Trade
                  Receivables, Net
              
              $
              4,991,221
              
              
              $
              3,595,431
 
 **Note
        4.  Inventories.**
 
 The
        following is a summary of inventories at:
 
 **September 30,
                  2007**
              
              
              **December 31,
                  2006**Raw
                  Materials
              
              $
              1,350,195
              
              
              $
              866,859Finished
                  Goods
              
              
              2,087,581
              
              
              
              2,015,377Total
              
              $
              3,437,776
              
              
              $
              2,882,236
 
 **Note
        5.  Property, Plant and Equipment.**
 
 The
        following is a summary of property, plant and equipment at:
 
 **September 30,
                  2007**
              
              
              **December 31,
                  2006**Vehicles
              
              $
              414,147
              
              
              $
              487,037Leasehold
                  Improvements
              
              
              67,910
              
              
              
              12,400Office
                  Furniture and Equipment
              
              
              161,733
              
              
              
              133,634Computers
                  and Software
              
              
              560,777
              
              
              
              445,491Machinery
                  and Equipment
              
              
              2,213,534
              
              
              
              718,210Construction
                  in Progress
              
              
              70,902
              
              
              
              212,592Total
                  Property, Plant and Equipment
              
              $
              3,489,903
              
              
              $
              2,009,364Less:
                  Accumulated Depreciation
              
              
              (756,010
              )
              
              
              (519,725
              )Total
                  Property, Plant and Equipment, Net
              
              $
              2,733,893
              
              
              $
              1,489,639
  7
 ***Table
            of Contents***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **Note
        6.  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.***See also*** (D)
        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.  ***See also*** (D) 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 September 30, 2007, the unamortized discount on the Amended Revolving
        Credit Note was $142,268.
 
 **(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
        September 30, 2007, the unamortized discount on the Convertible Term Note
        was
        $569,219.
 
 **(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)**     **Collateral
        Agreement**– The Company entered into a Collateral Agreement on February
        21, 2007 under which the Company granted a security interest to ComVest under
        the Loan Agreement for substantially all of its assets.
  8
 ***Table
            of Contents***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **Note
        6.  Revolving Credit Note, Convertible Term Note, Warrants, and
        Registration Payment Arrangements - continued.**
 
 **(H)**     **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 the
        agreement. If the Registration Statement is not declared effective within
        150
        days after the date of the 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 Form 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. The Company determined that
        no
        liability is recognizable at September 30, 2007 for registration payment
        arrangements.
 
 **Note
        7.   Loans Payable – Related Party.**
 
 The
        Company received advances of $550,000, net, from the Chairman during the
        third
        quarter of 2007 for cash flow fluctuations and working capital purposes which
        were recorded as short term demand loans bearing interest at 8% per annum.
        Accrued interest was $2,067 at September 30, 2007.
 
 **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 September 30,**
              
              
              **Nine
                  Months Ended September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****Amount**
              
              
              **Per
                  Share Amount**
              
              
              **Amount**
              
              
              **Per
                  Share Amount**
              
              
              **Amount**
              
              
              **Per
                  Share Amount**
              
              
              **Amount**
              
              
              **Per
                  Share Amount**Operating
                  (Loss)
              
              $
              (777,460
              )
              
              $
              (0.015
              )
              
              $
              (920,470
              )
              
              $
              (0.017
              )
              
              $
              (2,408,009
              )
              
              $
              (0.045
              )
              
              $
              (1,806,457
              )
              
              $
              (0.034
              )Income
                  (Loss) from Discontinued Operations, Net of Income Tax
                  Benefit-Deferred
              
              
              —
              
              
              
              —
              
              
              
              (5,000
              )
              
              
              (0.000
              )
              
              
              —
              
              
              
              —
              
              
              
              319,068
              
              
              
              0.006Net
                  (Loss)
              
              $
              (777,460
              )
              
              $
              (0.015
              )
              
              $
              (925,470
              )
              
              $
              (0.017
              )
              
              $
              (2,408,009
              )
              
              $
              (0.045
              )
              
              $
              (1,487,389
              )
              
              $
              (0.028
              )Plus:
                  Dividends on Preferred Stock
              
              
              (205,970
              )
              
              
              (0.004
              )
              
              
              (1,323
              )
              
              
              (0.000
              )
              
              
              (611,520
              )
              
              
              (0.011
              )
              
              
              (1,323
              )
              
              
              (0.000
              )Net
                  (Loss) Available to Common Stockholders
              
              $
              (983,430
              )
              
              $
              (0.018
              )
              
              $
              (926,793
              )
              
              $
              (0.017
              )
              
              $
              (3,019,529
              )
              
              $
              (0.056
              )
              
              $
              (1,488,712
              )
              
              $
              (0.028
              )Weighted
                  Average Common Shares Outstanding
              
              
              53,635,699
              
              
              
              53,551,051
              
              
              
              53,611,138
              
              
              
              53,360,621
  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 69,447 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 171,368 shares upon exercise of vested and exercisable
        stock options, (iii) 876,300 and 576,300 shares upon exercise of vested and
        unexercisable stock options, (iv) 2,416,667 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 nine months ended September 30, 2007
        and
        2006, respectively.
  9
 ***Table
            of Contents***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **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 September 30, 2007****Coatings**
              
              
              **Foam**
              
              
              **Paints**
              
              
              **Sealants**
              
              
              **Adhesives**
              
              
              **Equipment**
              
              
              **All
                  Other**
              
              
              **Totals**Sales
              
              $
              2,361,431
              
              
              $
              5,316,909
              
              
              $
              87,853
              
              
              $
              180,517
              
              
              $
              —
              
              
              $
              349,788
              
              
              $
              73,004
              
              
              $
              8,369,502Depreciation
                  and Amortization
              
              
              44,090
              
              
              
              9,755
              
              
              
              161
              
              
              
              331
              
              
              
              —
              
              
              
              642
              
              
              
              134
              
              
              
              55,113Interest
                  Expense
              
              
              64,268
              
              
              
              144,704
              
              
              
              2,391
              
              
              
              4,913
              
              
              
              —
              
              
              
              9,520
              
              
              
              1,987
              
              
              
              227,783Segment
                  Profit (Loss)
              
              
              195,826
              
              
              
              (203,896
              )
              
              
              5,820
              
              
              
              22,212
              
              
              
              —
              
              
              
              (14,122
              )
              
              
              (139,251
              )
              
              
              (133,410
              )Segment
                  Assets (1)
              
              
              4,309,963
              
              
              
              7,981,807
              
              
              
              244,394
              
              
              
              374,753
              
              
              
              173
              
              
              
              495,158
              
              
              
              100,799
              
              
              
              13,507,046Expenditures
                  for Segment Assets
              
              $
              10,873
              
              
              $
              97,858
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              108,731
 
 **Three
                  Months Ended September 30, 2006****Coatings**
              
              
              **Foam**
              
              
              **Paints**
              
              
              **Sealants**
              
              
              **Adhesives**
              
              
              **Equipment**
              
              
              **All
                  Other**
              
              
              **Totals**Sales
              
              $
              2,578,964
              
              
              $
              5,833,154
              
              
              $
              249,769
              
              
              $
              210,268
              
              
              $
              882
              
              
              $
              110,231
              
              
              $
              54,222
              
              
              $
              9,037,490Depreciation
                  and Amortization
              
              
              40,818
              
              
              
              9,216
              
              
              
              395
              
              
              
              332
              
              
              
              1
              
              
              
              174
              
              
              
              86
              
              
              
              51,023Interest
                  Expense
              
              
              27,328
              
              
              
              61,811
              
              
              
              2,647
              
              
              
              2,228
              
              
              
              9
              
              
              
              1,168
              
              
              
              575
              
              
              
              95,765Segment
                  Profit (Loss)
              
              
              127,111
              
              
              
              (479,522
              )
              
              
              21,503
              
              
              
              11,557
              
              
              
              (13
              )
              
              
              42,499
              
              
              
              (9,484
              )
              
              
              (286,349
              )Segment
                  Assets (1)
              
              
              3,851,492
              
              
              
              6,978,275
              
              
              
              394,465
              
              
              
              353,962
              
              
              
              1,130
              
              
              
              131,960
              
              
              
              58,912
              
              
              
              11,770,196Expenditures
                  for Segment Assets
              
              $
              70,181
              
              
              $
              47,757
              
              
              $
              2,045
              
              
              $
              7,173
              
              
              $
              7
              
              
              $
              902
              
              
              $
              445
              
              
              $
              128,510
 
 **Reportable
        Segments - continued**
 
 **Nine
                  Months Ended September 30, 2007****Coatings**
              
              
              **Foam**
              
              
              **Paints**
              
              
              **Sealants**
              
              
              **Adhesives**
              
              
              **Equipment**
              
              
              **All
                  Other**
              
              
              **Totals**Sales
              
              $
              7,675,527
              
              
              $
              15,201,748
              
              
              $
              628,080
              
              
              $
              832,130
              
              
              $
              —
              
              
              $
              675,058
              
              
              $
              146,154
              
              
              $
              25,158,697Depreciation
                  and Amortization
              
              
              145,354
              
              
              
              31,597
              
              
              
              1,305
              
              
              
              1,730
              
              
              
              —
              
              
              
              1,403
              
              
              
              304
              
              
              
              181,693Interest
                  Expense
              
              
              144,483
              
              
              
              286,156
              
              
              
              11,823
              
              
              
              15,664
              
              
              
              —
              
              
              
              12,707
              
              
              
              2,751
              
              
              
              473,584Segment
                  Profit (Loss)
              
              
              182,839
              
              
              
              (985,280
              )
              
              
              58,807
              
              
              
              28,319
              
              
              
              —
              
              
              
              (22,817
              )
              
              
              (119,040
              )
              
              
              (857,173
              )Segment
                  Assets (1)
              
              
              4,575,028
              
              
              
              7,623,136
              
              
              
              411,586
              
              
              
              507,726
              
              
              
              172
              
              
              
              322,266
              
              
              
              67,132
              
              
              
              13,507,045Expenditures
                  for Segment Assets
              
              $
              225,118
              
              
              $
              1,334,880
              
              
              $
              4,140
              
              
              $
              24,877
              
              
              $
              —
              
              
              $
              4,450
              
              
              $
              963
              
              
              $
              1,594,428
 
 **Nine
                  Months Ended September 30, 2006****Coatings**
              
              
              **Foam**
              
              
              **Paints**
              
              
              **Sealants**
              
              
              **Adhesives**
              
              
              **Equipment**
              
              
              **All
                  Other**
              
              
              **Totals**Sales
              
              $
              7,361,998
              
              
              $
              12,937,956
              
              
              $
              872,327
              
              
              $
              729,322
              
              
              $
              31,147
              
              
              $
              455,530
              
              
              $
              210,774
              
              
              $
              22,599,054Depreciation
                  and Amortization
              
              
              108,310
              
              
              
              22,922
              
              
              
              1,550
              
              
              
              1,296
              
              
              
              55
              
              
              
              810
              
              
              
              375
              
              
              
              135,387Interest
                  Expense
              
              
              68,177
              
              
              
              119,814
              
              
              
              8,078
              
              
              
              6,754
              
              
              
              288
              
              
              
              4,219
              
              
              
              1,952
              
              
              
              209,282Segment
                  Profit (Loss)
              
              
              174,027
              
              
              
              (672,306
              )
              
              
              49,330
              
              
              
              3,671
              
              
              
              (241
              )
              
              
              49,648
              
              
              
              (11,710
              )
              
              
              (407,582
              )Segment
                  Assets (1)
              
              
              4,248,217
              
              
              
              6,262,066
              
              
              
              502,114
              
              
              
              442,394
              
              
              
              13,705
              
              
              
              210,120
              
              
              
              91,580
              
              
              
              11,770,197Expenditures
                  for Segment Assets
              
              $
              155,460
              
              
              $
              186,975
              
              
              $
              12,606
              
              
              $
              15,992
              
              
              $
              450
              
              
              $
              6,583
              
              
              $
              3,046
              
              
              $
              381,112
 
 (1)      Segment
        assets are the total assets used in the operation of each
        segment.
  10
 ***Table
            of Contents***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **Note
        9.   Business Segment Information - continued.**
 
 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 September 30,**
              
              
              **Nine
                  Months Ended September 30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Total
                  Profit or Loss for Reportable Segments
              
              $
              (133,410
              )
              
              $
              (286,349
              )
              
              $
              (857,173
              )
              
              $
              (407,582
              )Unallocated
                  Amounts:Corporate
                  Expenses
              
              
              (644,050
              )
              
              
              (634,122
              )
              
              
              (1,550,835
              )
              
              
              (1,398,875
              )(Loss)
                  Before Income Taxes
              
              $
              (777,460
              )
              
              $
              (920,471
              )
              
              $
              (2,408,008
              )
              
              $
              (1,806,458
              )
 
 **Assets****September 30,
                  2007**
              
              
              **December 31,
                  2006**Total
                  Assets for Reportable Segments (1)
              
              $
              13,507,046
              
              
              $
              10,232,938Other
                  Unallocated Amounts (2)
              
              
              613,541
              
              
              
              919,370Consolidated
                  Total
              
              $
              14,120,587
              
              
              $
              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.
 
 (**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.
  11
 ***Table
            of Contents***
  **LAPOLLA
        INDUSTRIES, INC.**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(UNAUDITED-
        CONTINUED)**
 
 **Note
        10.  Reclassifications, Restatements, and Corrections to Previously
        Issued Financial Statements - continued.**
 
 (**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
        three
        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
 ***Table
            of Contents***
  **Item
        2.    Management’s Discussion and Analysis of
        Financial Condition and Results of Operations.**
 
 *Overview*
 
 This
        financial review presents our operating results for the quarter, and nine
        months, ended September 30, 2007 and 2006, and our financial condition at
        September 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 Three Months Ended September 30, 2007 compared to the Three Months
        Ended
        September 30, 2006**
 
 **Overall
        Results of Operations**
  The
        following is a summary of sales for the three months ended September
        30:
 
 **2007**
              
              
              **2006**Sales
              
              $
              8,369,502
              
              
              $
              9,037,490
 
 Our
        sales
        decreased $667,988, or 7.4%, for the third quarter of 2007 compared to the
        third
        quarter of 2006, largely due to a general downturn in the building products
        market which negatively affected all of our segments, and sale of our retail
        distribution channel, which affected our Paints, Sealants, and All Other
        segments sales volumes, slightly offset by increased volumes in our Equipment
        segment.
 
 Our
        gross
        profit increased $213,622, or 14.2%, for the three months ended September
        30,
        2007 compared to the three months ended September 30, 2006, due primarily
        to
        cost savings realized in our Foam segment through the addition of our foam
        resin
        manufacturing facility at the end of the second quarter of 2007, improvements
        in
        manufacturing efficiencies and favorable raw material pricing in our Coatings
        and Foam segments, and higher selling prices in our Sealants segment, offset
        by
        a decrease in our Paints and All Other segments sales volumes related to
        the
        strategic shift towards coatings and foam, and an unfavorable pricing mix
        in the
        Equipment and All Other segments. Gross margin increased 3.9 percentage points,
        to 20.6%, for the third quarter of 2007 compared to the third quarter of
        2006.
 
 Our
        total
        costs and expenses are comprised of cost of sales, selling, general and
        administrative expenses, professional fees, depreciation, amortization,
        consulting fees, interest expense, and other expense. These total costs and
        expenses decreased $810,998, or 8.1%, for the third quarter of 2007 compared
        to
        the third quarter of 2006, due to a decrease of $881,610 for cost of sales,
        $49,307 for SG&A, and $50,782 for interest expense – related party, offset
        by an increase of $104,219 for professional fees, $4,090 for depreciation
        and
        amortization, $24,413 for consulting fees, $172,230 for interest expense,
        and a
        gain of $134,251 in other income.
 
 Cost
        of
        sales decreased $881,610, or 11.7%, for the three months ended September
        30,
        2007 compared to the three months ended September 30, 2006, due to cost cutting
        measures undertaken during the quarter, vertical integration in our Foam
        segment, and improved manufacturing efficiencies and favorable raw material
        pricing in our Coatings and Foam segments, partially offset by lower sales
        volumes across all of our segments except for Equipment, and an unfavorable
        pricing mix in our Equipment and All Other segments.
 
 SG&A
        decreased $49,307, or 2.3%, for the quarter ended September 30, 2007 compared
        to
        the quarter ended September 30, 2006, primarily due to decreases of $339,077
        in
        bad debt expense and $29,000 in travel and related services, partially offset
        by
        increases of $128,422 in share based compensation, $73,040 in sales commissions,
        $45,885 in investor relations and American Stock Exchange fees, $41,396 in
        corporate office expenses, and $33,470 in payroll and related benefits. The
        decreases were largely as a result of realigning our base infrastructure
        towards
        our core foam and coatings businesses and to adapt to current market
        conditions.
 
 Professional
        fees increased $104,219, or 195.9%, for the third quarter of 2007 compared
        to
        the third quarter of 2006, due to an increase of $85,249 for outside
        accountants, auditing and auditing related services and $18,970 for legal
        fees.
 
 Depreciation
        and amortization expense increased $4,090, or 8%, for the three months ended
        September 30, 2007 compared to the three months ended September 30, 2006
        due to
        an increase in depreciable property, plant and equipment.
 
 Consulting
        fees increased $24,413, or 70.8%, for the third quarter of 2007 compared
        to the
        third quarter of 2006 due to an increase in outside professional services
        for
        investor relations and information technology.
  13
 ***Table
            of Contents***
  Interest
        expense increased $172,230, or 322%, for the three months ended September
        30,
        2007 compared to the three months ended September 30, 2006, due to an increase
        in the capital utilized from our credit instruments and amortization of the
        discount on the Convertible Term Note and Revolving Credit Note.
 
 Interest
        expense – related party decreased $50,782, or 96.1%, for the third quarter of
        2007 compared to the third quarter of 2006 due to the establishment of a
        credit
        facility with ComVest which minimized reliance on our Chairman for operating
        capital.
 
 Other
        income was $134,251 for the three months ended September 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 income or loss from discontinued operations for the third quarter
        of 2007 compared to a loss of $5,000 for the third quarter of 2006 due to
        an
        increase in reserve for litigation.
 
 Net
        loss
        for the three months ended September 30, 2007 was $777,460 compared to $920,470
        for the same period in 2006 due to a decrease in cost of sales, SG&A, and
        interest expense – related party, offset by an increase in gross profit,
        professional fees, depreciation and amortization, consulting fees, interest
        expense, and other income, and a decrease in sales.
 
 Net
        loss
        per share for the third quarter of 2007 was $0.015 compared to $0.017 for
        the
        third quarter of 2006.
 
 Dividends
        accrued on our outstanding Series D Preferred Stock were $205,970 for the
        quarter ended September 30, 2007 compared to $1,323 for the quarter ended
        September 30, 2006.
 
 Net
        loss
        available to common stockholders and related loss per share for the three
        months
        ended September 30, 2007 was $983,430 and $0.018 compared to $926,793 and
        $0.017
        for the three months ended September 30, 2006. The increase in net loss
        available to common stockholders and related loss per share are attributable
        to
        the net loss plus an increase in dividends accrued for the outstanding Series
        D
        Preferred Stock.
 
 **Results
        of Business Segments**
 
 The
        following is a summary of sales by segment for the three months ended September
        30:
 
 **Segments**
              
              **2007**
              
              
              **2006**Coatings
              
              $
              2,361,431
              
              
              $
              2,578,964Foam
              
              
              5,316,909
              
              
              
              5,833,154Paints
              
              
              87,853
              
              
              
              249,769Sealants
              
              
              180,517
              
              
              
              210,268Adhesives
              
              
              —
              
              
              
              882Equipment
              
              
              349,788
              
              
              
              110,231All
                  Other
              
              $
              73,004
              
              
              $
              54,222
 
 Coatings
        sales decreased $217,533, or 8.4%, for the third quarter of 2007 compared
        to the
        third quarter of 2006, due to a general downturn in the building products
        market. Segment profit increased $68,715, or 54.1%, for the quarter ended
        September 30, 2007 compared to the same period in 2006. The increase in our
        Coatings segment profit for the quarter ended September 30, 2007 was primarily
        attributable to improved manufacturing efficiencies and favorable raw material
        pricing.
 
 Foam
        sales decreased $516,245, or 8.9%, for the quarter ended September 30, 2007
        compared to the quarter ended September 30, 2006, due to the reasons enumerated
        in our Coatings segment above. Segment loss decreased $275,626, or 57.5%,
        for
        the three months ended September 30, 2007 compared to the same period in
        2006.
        The decrease in our Foam segment loss for the third quarter of 2007 was
        primarily attributable to cost savings realized through the addition of our
        foam
        resin manufacturing facility at the end of the second quarter of 2007, improved
        manufacturing efficiencies, and favorable raw material pricing.
 
 Paints
        sales decreased $161,916, or 64.8%, for the three months ended September
        30,
        2007 compared to the three months ended September 30, 2006, due to the sale
        of
        our retail distribution channel during the quarter. Segment profit decreased
        $15,683, or 72.9%, for the quarter ended September 30, 2007 compared to the
        same
        period in 2006. The decrease in our Paints segment profit for the three months
        ended September 30, 2007 was primarily attributable to the strategic shift
        towards our core Coatings and Foam and Coatings segments.
 
 Sealants
        sales decreased $30,111, or 14.1%, for the third quarter of 2007 compared
        to the
        third quarter of 2006, due to the reasons enumerated in our Coatings and
        Paints
        segment above. Segment profit increased $10,655, or 92.2%, for the quarter
        ended
        September 30, 2007 compared to the same period in 2006. The increase in our
        Sealants segment profit for the quarter ended September 30, 2007 was primarily
        attributable to higher sales prices.
  14
 ***Table
            of Contents***
  Adhesives
        sales were $ -0- for the quarter ended September 30, 2007 compared to $882
        for
        the quarter ended September 30, 2006, as a result of a decrease in demand.
        There
        was no segment profit or loss for the third quarter of 2007 compared to a
        segment loss of $13 for the same period in 2006. The decrease in our Adhesives
        segment profit for the quarter ended September 30, 2007 was due to a decrease
        in
        sales.
 
 Equipment
        sales increased $239,557, or 217.3%, for the three months ended September
        30,
        2007 compared to the three months ended September 30, 2006, due to a focused
        sales effort during the quarter. Segment loss was $139,251 for the quarter
        ended
        September 30, 2007 compared to a segment profit of $42,499 in the same period
        in
        2006. The segment loss for the three months ended September 30, 2007 was
        primarily attributable to an unfavorable pricing mix.
 
 All
        Other
        sales increased $18,782, or 34.6%, for the third quarter of 2007 compared
        to the
        third quarter of 2006, due to the reasons enumerated in our Coatings and
        Paint
        segments. Segment loss was $139,251 for the quarter ended September 30, 2007
        compared to a segment loss of $9,484 for the same period in 2006. The All
        Other
        segment loss was primarily attributable to an unfavorable pricing
        mix.
 
 **Performance
        for the Nine Months Ended September 30, 2007 compared to the Nine Months
        Ended
        September 30, 2006**
 
 **Overall
        Results of Operations**
  The
        following is a summary of sales for the nine months ended September
        30:
 
 **2007**
              
              
              **2006**Sales
              
              $
              25,158,695
              
              
              $
              22,599,052
 
 Our
        sales
        increased $2,559,643, or 11.3%, for the nine months ended September 30, 2007
        compared to the nine months ended September 30, 2006, due to increased sales
        volumes in our Coatings, Foam, and Equipment segments, partially offset by
        the
        sale of our retail distribution channel which decreased our Paints, Sealants,
        and All Other segments sales volumes.
 
 Our
        gross
        profit increased $1,058,673, or 29.1%, for the nine months ended September
        30,
        2007 compared to the nine months ended September 30, 2006, primarily due
        to
        sales volume growth in our Coatings and Foam segments, due primarily to cost
        savings realized in our Foam segment through the addition of our foam resin
        manufacturing facility at the end of the second quarter of 2007, improvements
        in
        manufacturing efficiencies and favorable raw material pricing in our Coatings
        and Foam segments, and higher selling prices in our Sealants segment, partially
        offset by a decrease in our Paints and All Other segments due to lower sales
        volumes related to the strategic shift towards our core Coatings and Foam
        segments, and an unfavorable pricing mix in the Equipment and All Other
        segments. Gross margin increased 2.6 percentage points, to 18.7%, for the
        nine
        months ended September 30, 2007 compared to same period in 2006.
 
 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 $3,161,195, or 13%, for
        the
        nine months ended September 30, 2007 compared to the same period in 2006,
        due to
        an increase of $1,500,970 for cost of sales, $1,386,283 for SG&A, $126,612
        for professional fees, $46,306 for depreciation and amortization, $4,287
        for
        consulting fees, and $376,711 for interest expense, offset by a decrease
        of
        $141,029 in interest expenses – related party, and a gain of $138,945 in other
        income.
 
 Cost
        of
        sales increased $1,500,970, or 7.9%, for the nine months ended September
        30,
        2007 compared to the same period in 2006, due to the increase in sales volumes
        enumerated above, partially offset by cost cutting measures undertaken during
        the third quarter of 2007, vertical integration in our Foam segment, and
        improved manufacturing efficiencies and favorable raw material pricing in
        our
        Coatings and Foam segments.
 
 SG&A
        increased $1,386,283, or 29%, for the nine months ended September 30, 2007
        compared to the nine months ended September 30, 2006, due to an increase
        of
        $366,894 for payroll and related employee benefits, $183,070 for sales
        commissions, $84,260 for insurances, $34,205 for travel and related services,
        $12,179 for advertising, $4,883 for marketing, promotions and trade shows,
        $311,078 for share based compensation, $59,371 for investor relations, $42,898
        for rents, and $687,528 for corporate office expenses, offset by a decrease
        of
        $15,871 for recruiting fees, $8,875 for American Stock Exchange Fees, and
        $375,334 for bad debts. The increases were largely a result of expanding
        the
        Company’s base infrastructure to promote and support additional sales volumes
        during the first half of 2007, partially offset by cost cutting efforts during
        the third quarter of 2007 to realign our base infrastructure towards our
        core
        foam and coatings businesses and to adapt to a current general economic
        downturn.
 
 Professional
        fees increased $126,612, or 76%, for the nine months ended September 30,
        2007
        compared to the same period in 2006, due to an increase of $91,556 for outside
        accountants, auditing and auditing related services and $35,056 for legal
        fees.
 
 Depreciation
        and amortization expense increased $46,306, or 34%, for the nine months ended
        September 30, 2007 compared to the same period in 2006 due to an increase
        in
        depreciable property, plant and equipment.
  15
 ***Table
            of Contents***
  Consulting
        fees increased $4,287, or 5%, for the nine months ended September 30, 2007
        compared to the same period in 2006 due to an increase in outside professional
        services for information technology, offset by a decrease in outside
        professional services for investor relations.
 
 Interest
        expense increased $376,711, or 397%, for the nine months ended September
        30,
        2007 compared to the nine months ended September 30, 2006, due to an increase
        in
        the capital utilized from our credit instruments and amortization of the
        discount on the Convertible Term Note and Revolving Credit Note.
 
 Interest
        expense – related party decreased $141,029 for the nine months ended September
        30, 2007 compared to the nine months ended September 30, 2006 due to the
        establishment of a credit facility with ComVest which minimized reliance
        on our
        Chairman for operating capital.
 
 Other
        income was $138,945 for the nine months ended September 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 income or loss from discontinued operations for the nine months
        ended September 30, 2007 compared to income of $319,068 for the comparable
        period in 2006 which resulted from gains related to writes offs of aged accounts
        payables partially offset by a decrease in the reserve for
        litigation.
 
 Net
        loss
        for the nine months ended September 30, 2007 was $2,408,009 compared to
        $1,806,457 for the same period in 2006 due to an increase in SG&A,
        professional fees, depreciation and amortization, consulting fees, and interest
        expense, offset by a decrease in interest expense - related party, and an
        increase in sales, cost of sales, gross profit, and other income.
 
 Net
        loss
        per share for the nine months ended September 30, 2007 was $0.045 compared
        to
        $0.034 for the same period in 2006.
 
 Dividends
        accrued on our outstanding Series D Preferred Stock were $611,520 for the
        nine
        months ended September 30, 2007 compared to $1,323 for the nine months ended
        September 30, 2006.
 
 Net
        loss
        available to common stockholders and related loss per share for the three
        months
        ended September 30, 2007 were $3,019,529 and $0.056 compared to $1,488,712
        and
        $0.028 for the three months ended September 30, 2006. The increase in net
        loss
        available to common stockholders and related loss per share are attributable
        to
        the net loss plus an increase in dividends accrued for the outstanding Series
        D
        Preferred Stock for the nine months ended September 30, 2007.
 
 **Results
        of Business Segments**
 
 The
        following is a summary of sales by segment for the nine months ended September
        30:
 
 **Segments**
              
              **2007**
              
              
              **2006**Coatings
              
              $
              7,675,527
              
              
              $
              7,361,998Foam
              
              
              15,201,748
              
              
              
              12,937,956Paints
              
              
              628,080
              
              
              
              872,327Sealants
              
              
              832,130
              
              
              
              729,322Adhesives
              
              
              —
              
              
              
              31,147Equipment
              
              
              675,058
              
              
              
              455,530All
                  Other
              
              $
              146,154
              
              
              $
              210,774
 
 Coatings
        sales increased $313,529, or 4.3%, for the nine months ended September 30,
        2007
        compared to the same period in 2006, due to an increase in our sales force,
        advertising, marketing, and promotion programs, partially offset by a general
        downturn in the building products market. Segment profit increased by $8,813,
        or
        5.1%, for the nine months ended September 30, 2007 compared to the same period
        in 2006. The increase in our Coatings segment profit for the nine months
        ended
        September 30, 2007 was primarily attributable to improved manufacturing
        efficiencies and favorable raw material pricing.
 
 Foam
        sales increased $2,263,792, or 17.5%, for the nine months ended September
        30,
        2007 compared to the same period in 2006, due to the reasons enumerated in
        our
        Coatings segment above. Segment loss increased $312,974, or 46.6%, for the
        nine
        months ended September 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 during the first six months of
        the
        year, partially offset by cost savings realized through the addition of
        our  foam resin manufacturing facility at the end of the second quarter of
        2007, improved manufacturing efficiencies, and favorable raw material
        pricing.
  16
 ***Table
            of Contents***
  Paints
        sales decreased $244,247, or 28%, for the nine months ended September 30,
        2007
        compared to the same period in 2006, due to the sale of our retail distribution
        channel during the third quarter of 2007. Segment profit increased by $9,477,
        or
        19.2%, for the nine months ended September 30, 2007 compared to the same
        period
        in 2006. The increase in our Paints segment profit for the nine months ended
        September 30, 2007 was primarily attributable to a decrease in the cost of
        resale paints, partially offset by the strategic shift towards our core Coatings
        and Foam segments associated with the sale of our retail distribution
        channel.
 
 Sealants
        sales increased $102,808, or 14.1%, for the nine months ended September 30,
        2007
        compared to the same period in 2006, due to the reasons enumerated in our
        coatings and paints segment above. Segment profit increased $24,648, or 671.5%,
        for the nine months ended September 30, 2007 compared to the same period
        in
        2006. The increase in our Sealants segment profit for the nine months ended
        September 30, 2007 was primarily attributable to increased sales volumes,
        purchasing power, and higher selling prices.
 
 Adhesives
        sales were $ -0- for the nine months ended September 30, 2007 compared to
        $31,147 for the same period in 2006, as a result of a decrease in
        sales.  There was no segment profit or loss for the nine months ended
        September 30, 2007 compared to a segment loss of $241 for the prior comparable
        period in 2006.
 
 Equipment
        sales increased $219,528, or 48.2%, for the nine months ended September 30,
        2007
        compared to the same period in 2006, due to a focused sales effort during
        the
        third quarter of 2007. Segment loss was $22,817 for the nine months ended
        September 30, 2007 compared to a segment profit of $49,648 in the prior
        comparable period in 2006. The Equipment segment loss for the nine months
        ended
        September 30, 2007 was primarily attributable to an unfavorable pricing
        mix.
 
 All
        Other
        sales decreased $64,620, or 30.7%, for the nine months ended 2007 compared
        to
        the same period in 2006, due to the reasons enumerated in our Coatings and
        Paint
        segments. Segment loss increased $107,331, or 916.6%, for the nine months
        ended
        September 30, 2007 compared to the same period in 2006. The increase in our
        All
        Other segment loss was primarily attributable to lower sales volumes, partially
        offset by a favorable pricing mix.
 
 **Liquidity
        and Capital Resources**
 
 Net
        cash
        used in our operations was $4,727,750 for the nine months ended September
        30,
        2007 compared to $1,800,149 for the same period in 2006. The cash used in
        operations for the nine months ended September 30, 2007 was attributable
        to our
        net loss for the period, including the effect of adjustments to reconcile
        net
        loss to cash provided by or used in operating activities and adjusting for
        non-cash items, offset by increases in trade receivables, inventories, prepaid
        expenses and other current assets, deposits and other non current assets,
        and
        decreases in accounts payable, accrued expenses and other current liabilities,
        and other liabilities. We had a marked improvement in our gross profit in
        the
        third quarter of 2007 largely as a result of our strategic shift towards
        in
        house foam resin manufacturing, which allowed significant cost savings over
        the
        resale of third party manufactured products.  We also undertook
        certain cost cutting measures during the third quarter of 2007, including
        but
        not limited to, closing our manufacturing operations in Florida and selling
        off
        our retail distribution channel, all of which were designed to focus all
        available resources on our core foam and coatings businesses and to increase
        our
        available cash generated from operations to fund our working capital
        requirements. The downturn in the building products market directly affected
        our
        business. We continue to have access to capital through related parties to
        meet
        our working capital requirements. We may seek to raise additional funds through
        private placements of common and preferred stock to accredited sophisticated
        investors to further fund our operations, increase our distribution channels,
        pursue acquisitions as part of our strategy for accelerating sales growth,
        or
        pay down our short and long term debts, including but not limited to, our
        Convertible Term Note and Revolving Credit Note, depending on market
        conditions.
 
 Net
        cash
        used in investing activities was $1,479,076 for the nine months ended September
        30, 2007 compared to $365,616 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, $231,224 in machinery and equipment, and $1,218,704 for
        construction of manufacturing plants in the nine months ended September 30,
        2007.
 
 Net
        cash
        provided by financing activities was $5,897,739 for the nine months ended
        September 30, 2007 compared to $2,257,544 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 $5,000,000 drawn against our Revolving
        Credit Note, as amended, during the nine month period ended September 30,
        2007.
        We made principal repayments of $245,787 on our long term debt during the
        nine
        month period ended September 30, 2007.
 
 **Item
        3.    Quantitative and Qualitative
        Disclosures About Market Risk.**
 
 We
        do not
        issue or invest in financial instruments or their derivatives for trading
        or
        speculative purposes and are not subject to material foreign currency exchange
        risks at this time. Our outstanding debt and related interest expense, as
        it
        relates to interest rate exposure, in the United States is currently not
        material to our operations.
  17
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            of Contents***
  **Item
        4.    Controls and
        Procedures.**
 
 We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in our Exchange Act reports is recorded,
        processed, summarized and reported within the time periods specified in the
        SEC’s rules and forms, and that such information is accumulated and communicated
        to our management, including our Principal Executive Officer and our Principal
        Financial Officer, as appropriate, to allow timely decisions regarding required
        disclosures. Our management, including our Principal Executive Officer and
        our
        Principal Financial Officer, does not expect that our disclosure controls
        or
        procedures will prevent all error and all fraud. A control system, no matter
        how
        well conceived and operated, can provide only reasonable, not absolute,
        assurance that the objectives of the control system are met. Further, the
        benefits of controls must be considered relative to their costs. Because
        of the
        inherent limitations in all control systems, no evaluation of controls can
        provide absolute assurance that all control issues and instances of fraud,
        if
        any, within us, have been detected. These inherent limitations include the
        realities that judgments in decision-making can be faulty, and that breakdowns
        can occur because of simple error or mistake. Additionally, controls can
        be
        circumvented by the individual acts of some persons, by collusion of two
        or more
        people, or by management override of the control.
 
 We
        carried out an evaluation, under the supervision and with participation of
        our
        management, including our Principal Executive Officer and our Principal
        Financial Officer, of the effectiveness of the design and operation of our
        disclosure controls and procedures as of September 30, 2007, the end of the
        quarterly period covered by this report. The evaluation of our disclosure
        controls and procedures included a review of the disclosure controls’ and
        procedures’ objectives, design, implementation and the effect of the controls
        and procedures on the information generated for use in this report. In the
        course of our evaluation, we sought to identify data errors, control problems
        or
        acts of fraud and to confirm the appropriate corrective actions, including
        process improvements, were being undertaken. There were no changes in our
        internal controls over financial reporting during the third quarter of 2007
        that
        affected our internal controls over financial reporting.
 
 Based
        on
        the foregoing, our Principal Executive Officer and our Principal Financial
        Officer concluded that, as of the period covered by this report, our disclosure
        controls and procedures were effective and operating at a level appropriate
        to
        provide reasonable assurance.  There 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.
 
 **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.
 
 · 
        ***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 resins in our coatings and
        paints segments, but also polyols 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 goods 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.
  18
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            of Contents***
  · ***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.
 
 **Item
        2.     Unregistered Sales of Equity
        Securities and Use of Proceeds.**
 
 **Recent
        Sales of Unregistered Securities**
 
 None.
 
 **Item
        3.    Defaults Upon Senior
        Securities.**
 
 None.
 
 **Item
        4.    Submission of Matters to a Vote of
        Security Holders.**
 
 None.
 
 **Item 5.   
Other
        Information.**
 
 None.
 
 **Item
        6.    Exhibits.**
 
 ***See***
        Index of Exhibits on Page 21.
  19
 ***Table
            of Contents***
  **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:
              November
                  14, 2007
              
              By:
              /s/  Douglas
                  J. Kramer, CEOName:
              Douglas
                  J. KramerTitle:
              CEO
                  and President**LAPOLLA
                  INDUSTRIES, INC.**Date:
              November
                  14, 2007
              
              By:
              /s/  Timothy
                  J. Novak, CFOName:
              Timothy
                  J. NovakTitle:
              CFO
                  and Treasurer
  20
 ***Table
            of Contents***
  **INDEX
        OF EXHIBITS**
 
 **Exhibit
                  Number**
              
              **Description**31.1
              
              Certification
                  of Principal Executive Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.31.2
              
              Certification
                  of Principal Financial Officer pursuant to Section 302 of the
                  Sarbanes-Oxley Act of 2002.32
              
              Certification
                  of Principal Executive Officer and Principal Financial Officer
                  pursuant to
                  § 906 of Sarbanes-Oxley Act of
                  2002.


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