form10ka.htm

Assets	2006		2005
Cash	$	—	$	—
Total Assets	$	—	$	—
Liabilities
Accounts Payable		—		199,427
Accrued Expenses and Other Current Liabilities		10,000		140,641
Line of Credit		326,129		499,918
Total Liabilities	$	336,129	$	839,986

See also Note 17 – Commitments and Contingencies, Reserve.

F-12/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 6. Discontinued Operations - continued.

Significant components of the Company's discontinued operations deferred tax assets at December 31:

	2006			2005
Deferred Tax Assets:
Net Operating Loss Carry-Forwards (No Temporary Differences)	$	33,635,473		$	33,949,445
Statutory Tax Rate		34	%		34	%
Total Deferred Tax Assets before Utilization		11,436,061			11,542,811
Income Taxes Currently Payable (Refundable)	$	106,750		$	44,870
Income Tax (Benefit) Utilized from Prior Year	$	(44,870	)	$	—
Total Income Tax (Benefit) to be Utilized		(106,750	)		(44,870	)
Total Deferred Tax Assets after Utilization		11,284,441			11,497,941
Valuation Allowance for Deferred Tax Assets		(11,284,441	)		(11,497,941	)
Net Deferred Taxes	$	—		$	—

Management believes that the realization of a certain portion of the future tax benefits for net operating loss carry-forwards for discontinued operations in the table above are “more likely than not” and, after deducting a valuation allowance, has provided an amount equal to the portion of deferred tax assets it deems are realizable.

At December 31, 2006, the Company had available for its discontinued operations, net operating loss carry-forwards of approximately $33,635,473 for Federal income tax purposes. Approximately $11,497,941 of the future tax benefit for the net operating loss carry-forwards are subject to limitations based on discontinued operations and discontinued operating subsidiaries’ abilities to generate future taxable income. The loss carry-forwards for discontinued operations, if not used, will expire as follows: $1,398,901 in 2012, $1,116,469 in 2013, $887,923 in 2014, $4,918,574 in 2015, $443,717 in 2016, $16,388 in 2017, $4,283,341 in 2018, $151,247 in 2019, $2,499,910 in 2020, $3,915,369 in 2021, $4,413,369 in 2022, $6,467,500 in 2023, and $3,122,765 in 2024.

Note 7. Property, Plant and Equipment.

The following is a summary of property, plant and equipment for the years ending December 31:

	2006			2005			Estimated Useful Life
Vehicles	$	487,037		$	379,676		5 Years
Leasehold Improvements		12,400			14,191		13 – 15 Years
Office Furniture and Equipment		133,634			164,258		3 – 7 Years
Computers and Software		445,491			312,999		3 – 5 Years
Machinery and Equipment		718,210			367,478		3 – 20 Years
Plant Construction in Progress		212,592			116,756
Total Property, Plant and Equipment	$	2,009,364		$	1,355,358
Less: Accumulated Depreciation		(519,725	)		(447,784	)
Total Property, Plant and Equipment, Net	$	1,489,639		$	907,574

Depreciation expense for the years ended 2006, 2005 and 2004 was $71,941, $138,210, and $83,002, respectively.

Note 8. Acquisition.

On January 25, 2005, the Company entered into a Stock Purchase Agreement with LaPolla Industries, Inc., a privately held Arizona corporation (“LaPolla Subsidiary”) and Billi Jo Hagan, Trustee of the Billi Jo Hagan Trust, Dated October 6, 2003, wherein the Company agreed to pay $2 Million in cash and restricted stock in exchange for 100% of the issued and outstanding capital stock of the LaPolla Subsidiary. On February 11, 2005, the parties entered into an Amendment to Stock Purchase Agreement and Closing Statement to close the transaction in accordance with the terms of the Agreement, as amended. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition.

	At February 11, 2005
Current Assets	$	1,904,599
Property, Plant and Equipment		45,243
Intangible Assets		207,706
Goodwill		1,177,000
Total Assets Acquired		3,334,548
Current Liabilities		(1,334,526	)
Total Liabilities Assumed		(1,334,526	)
Net Assets Acquired	$	2,000,022

Of the $207,706 of acquired intangible assets, $69,235 was assigned to a customer list with a useful life of five (5) years and $138,471 was assigned to product formulation with a useful life of 15 years. See also Note 22 - Merger of Subsidiaries.

F-13/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 9. Goodwill and Other Intangible Assets.

The following is a summary of Goodwill for the years ending December 31:

Goodwill

	2006		2005
Coatings	$	1,049,458	$	1,049,458
Foam		640,577		640,577
Paints		123,092		123,092
Sealants		125,507		125,507
Adhesives		172		172
Equipment		12,194		12,194
Infiniti Subsidiary		—		—
	$	1,951,000	$	1,951,000

The Company reassigned the $1,951,000 carrying value of the goodwill previously attributable to the LaPolla Subsidiary to certain reporting units described in the table above at December 31, 2005 based on the merger of the LaPolla Subsidiary into the Company on October 1, 2005. The $774,000 carrying value attributable to the Infiniti Subsidiary at December 31, 2004 was combined with the $1,177,000 carrying value attributable to the LaPolla Subsidiary based on the merger of the Infiniti Subsidiary into the LaPolla Subsidiary on April 1, 2005. See Note 22 - Merger of Subsidiaries.

The following is a summary of Other Intangible Assets for the years ending December 31:

Other Intangible Assets

	2006						2005
	Gross Amount		Accumulated Amortization			Amortization Period	Gross Amount		Accumulated Amortization			Amortization Period
Customer List	$	69,235	$	(25,387	)	5 Years	$	69,235	$	(11,540	)	5 Years
Product Formulation		138,471		(16,922	)	15 Years		138,471		(7,690	)	15 Years
	$	207,706	$	(42,309	)		$	207,706	$	(19,230	)

The Customer List and Product Formulation were acquired in connection with the acquisition of the LaPolla Subsidiary on February 11, 2005. The Company evaluates the amortization period of goodwill and other intangible assets on an ongoing basis, in light of any changes in business conditions, events or circumstances, which may indicate the potential impairment of goodwill and other intangible assets.

Note 10. Accounts Payable and Accrued Expenses and Other Current Liabilities.

The following is a summary of accounts payable and accrued expenses and other current liabilities for the years ending December 31:

	2006		2005
Accounts Payable	$	5,069,478	$	4,074,946
Accrued Payroll		31,310		7,670
Accrued Commissions		31,236		—
Accrued Inventory		378,745		1,150,950
Accrued Rent		66,949		44,088
Accrued Interest		6,667		42,472
Accrued Taxes and Other		290,205		418,125
Accrued Insurance		254,390		179,193
Accrued Warranty Reserve		9,109		9,109
Note Payable – Vendor		13,336		—
Reserve for Litigation		10,000		175,378
Total Accounts Payable and Accrued Expenses and Other Current Liabilities	$	6,161,425	$	6,101,931

Note 11. Line of Credit.

Line of credit is comprised of the following at December 31:

		2006		2005
(a)	$180,000 Line of Credit, maturing February 1, 2006, bears interest at prime plus 1% per annum, secured by all the assets of the Company and a personal guarantee from the Chairman of the Board.	$	—	$	21,816

(b)	$1,000,000 Line of Credit, established September 22, 2006, of which $750,000 is secured by a certificate of deposit owned by the Chairman and $250,000 is secured by a certificate of deposit owned by the Company.*	$	1,007,120	$	—

*See also Note 25 – Subsequent Events, Item (b).

F-14/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 12. Loans Payable – Related Party.

On March 20, 2006, the Company received a written commitment from the Chairman of the Board to provide $1,500,000 for working capital to facilitate growth and expansion of the Company. The funding took the form of a demand loan bearing six percent (6%) interest per annum during the 2006 year. Notwithstanding the face amount of the written commitment, the Chairman loaned the Company funds aggregating $1,750,000, net under this commitment at December 31, 2006. See Note 16 – Related Party Transactions, Item (g)(iii) (These Loans Payable – Related Party were canceled in exchange for preferred stock).

Note 13. Note Payable – Other.

On September 22, 2006, the Chairman and the Company converted its $3,000,000 unsecured line of credit with Wachovia Bank, N.A. into an unsecured three year note payable bearing interest at LIBOR plus 2.25%. The Chairman assumed sole responsibility for this Note Payable – Other on September 27, 2006. See Note 14 – Note Payable – Related Party, Item (b) (Note Payable – Other converted to Note Payable – Related Party).

Note 14. Note Payable – Related Party.

(a) On February 8, 2006, the Company executed a Promissory Note in favor of the Chairman of the Board for $3,000,000, bearing interest at six percent (6%) per annum, with principal to be paid on December 31, 2007 (“Related Party Note”). Prior to establishment of the Related Party Note, the Company owed the Chairman $3,000,000 which was advanced during 2005 for working capital and previously classified as Loans Payable – Related Party. The Related Party Note memorialized the cancellation of the demand nature of the $3,000,000 indebtedness owed by the Company to the Chairman and established a repayment date and condition of prepayment in the event the Company achieved a financing. See Note 16 – Related Party Transactions, Item (g)(i) (This Note Payable – Related Party was canceled in exchange for preferred stock).

(b) On September 27, 2006, the Chairman assumed sole responsibility for the $3,000,000 unsecured three year Note Payable – Other established with Wachovia Bank, N.A. on September 22, 2006 bearing interest at LIBOR plus 2.25%. See Note 16 – Related Party Transactions, Item (g)(ii) (This Note Payable – Related Party was canceled in exchange for preferred stock).

Note 15. Long-Term Debt.

The following is a summary of long-term debt for the years ending December 31:

	2006			2005
Various notes payable on vehicles and equipment, due in monthly installments of $10,503 including interest, maturing through 2011	$	300,512		$	294,206
Less: Current Maturities		(97,589	)		(76,020	)
Total Long-Term Debt	$	202,923		$	218,186
Debt Maturity Schedule:
Years Ending December 31
2007	$	97,589
2008		104,857
2009		81,338
2010		14,398
2011		2,330
Total	$	300,512

Note 16. Related Party Transactions.

(a) The Company issued common stock to officers and directors as follows:

	2006				2005
	Shares		Value		Shares		Value
Other Compensation		—	$	—		16,000	$	10,960
Board of Director Fees		364,000		233,640		360,767		339,290
		364,000	$	233,640		21,195,850	$	7,853,491

(b) The Company issued preferred stock to directors as follows:

	2006				2005
	Shares		Value		Shares		Value
Cancellation of Indebtedness		7,903	$	7,903,000		—	$	—
Series D Preferred Stock Accrued Dividends		73		73,000		—		—
		7,976	$	7,976,000		—	$	—

(c) On February 8, 2006, the Company executed a Promissory Note in favor of the Chairman of the Board for $3,000,000, bearing interest at six percent (6%) per annum, with principal to be paid on December 31, 2007 (“Note Payable - Related Party”). Prior to establishment of the Note Payable – Related Party Note, the Company owed the Chairman $3,000,000 which was advanced during 2005 for working capital and previously classified as Loans Payable – Related Party. The Related Party Note memorialized the cancellation of the demand nature of the $3,000,000 indebtedness owed by the Company to the Chairman and established a repayment date and condition of prepayment in the event the Company achieves a financing. On September 29, 2006, the Chairman canceled this Note Payable – Related Party, along with accrued interest, in exchange for the issuance of Series D Preferred Stock.

F-15/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 16. Related Party Transactions – continued.

(d) On March 20, 2006, the Company received a written commitment from the Chairman of the Board to provide $1,500,000 for working capital to facilitate growth and expansion of the Company. The funding took the form of a demand loan bearing six percent (6%) interest per annum. Notwithstanding the face amount of the written commitment, the Chairman loaned the Company funds aggregating $1,750,000, net under this commitment at December 31, 2006, which amount, along with accrued interest, was then canceled in exchange for the issuance of Series D Preferred Stock.

(e) On September 22, 2006, the Chairman and the Company converted its $3,000,000 unsecured line of credit with Wachovia Bank, N.A. into an unsecured three year note payable bearing interest at LIBOR plus 2.25%. The Chairman assumed sole responsibility for this Note Payable – Other on September 27, 2006.

(f) On September 27, 2006, the Chairman assumed sole responsibility for the three year unsecured Note Payable – Other established with Wachovia Bank, N.A. on September 22, 2006 bearing interest at LIBOR plus 2.25%. On September 29, 2006, the Chairman canceled this Note Payable – Related Party, along with accrued interest, in exchange for the issuance of Series D Preferred Stock.

(g) During 2006, 7,976 shares of Series D Preferred Stock were issued to the Chairman of the Board in exchange for the cancellation of indebtedness of $7,976,000, of which:

(i) 3,000 shares were for the cancellation of the $3,000,000 Promissory Note executed on February 8, 2006 in favor of the Chairman of the Board. See Item (c) above;

(ii) 3,000 shares were for the cancellation of the $3,000,000 Note Payable – Other, which was assumed by the Chairman of the Board. See Item (e) above;

(iii) 1,750 shares were for the cancellation of $1,750,000 in short term loans bearing interest at 6% per annum, which were advanced to the Company by the Chairman during 2006 for working capital. See Item (d) above;

(iv) 153 shares were for the cancellation of $153,000 in accrued interest relating to the financings described in Items (g)(i), (ii) and (iii) above up to the date of each respective cancellation; and

(v) 73 shares were for the cancellation of 73,000 in accrued dividends payable for the Company’s Series D Preferred Stock. See also Item (i) below.

(h) During 2006, 364,000 shares of restricted common stock were vested and earned by directors pursuant to the Director Plan, of which:

(i) 292,000 shares that were issued to the Chairman of the Board, pursuant to a one time grant of 1,168,000 shares approved by the shareholders on May 28, 2002, vested. The Company did not consider this portion of the shares outstanding due to a vesting provision and as such no value was ascribed to these shares by the Company when issued on May 28, 2002. The value ascribed to these shares on May 28, 2006 was $183,960; and

(ii) 72,000 shares that were automatically granted and issued to directors upon election at the shareholders meeting held on June 29, 2005, vested on the date of the annual stockholders meeting held July 12, 2006. The Company did not consider these shares outstanding when issued due to a vesting provision and as such no value was ascribed to these shares at that time. These transactions were valued and recorded at $49,680.

(i) During 2006, there were $175,262 in dividends accrued on Series D Preferred Stock held by the Chairman, of which $73,000 was paid in the form of Series D Preferred Stock and $102,262 was offset by an overpayment made to Wachovia Bank in connection with the Chairman’s assumption of the Note Payable – Other described in Item (f) above.

Note 17. Commitments and Contingencies.

Leases

The Company has operating leases as follows:

	Location	Description of Operations	Terms
1.	Houston, Texas	Corporate Headquarters, Sales, Marketing, Customer Service, Manufacturing, and Distribution	09-01-2005 to 12-31-2010
2.	Deerfield Beach, Florida	Customer Service, Manufacturing, and Distribution	01-01-2002 to 03-31-2009
3.	Tempe, Arizona	Customer Service, Manufacturing, and Distribution	11-01-2006 to 02-28-2010

The Houston, Texas and Tempe, Arizona leases include a lease concession which amount is included as part of the aggregate minimum lease payments and recognized on a straight-line basis over the minimum lease term. The Deerfield Beach, Florida lease term originally scheduled to expire on March 1, 2006 was extended to March 31, 2009.

Future minimum lease payments required under the non-cancelable operating leases for the years ending December 31:

2007	$	523,893
2008		510,863
2009		425,471
2010		365,750
Total Minimum Lease Payments	$	1,825,977

Rent expense for the years ended December 31, 2006, 2005 and 2004, was $430,723, $286,308, and $105,557, respectively.

F-16/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 17. Commitments and Contingencies – continued.

Reserve

The following is a summary of the reserve established for commitments and contingencies for the year ending December 31:

	2006		2005
Accounts Payable - Discontinued Operations	$	—	$	199,427
Line of Credit – Discontinued Operations		326,129		499,918
Accrued Expense and Other Current Liabilities – Discontinued Operations		10,000		140,641
Total	$	336,129	$	839,986

Legal Proceedings

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

On August 20, 2004, the Company was served notice that on June 24, 2004 in the United States District Court for the District of Puerto Rico the Plaintiff filed a complaint against the Defendants alleging breach of an Exclusive Distribution Agreement for the territory of Puerto Rico that was incorporated in a Sales Agreement entered into between the parties on May 21, 2002. The Plaintiff’s complaint essentially alleges that on October 29, 2003, Urecoats Manufacturing, Inc. arbitrarily terminated the Plaintiff’s “exclusivity” rights under its agreement with Urecoats Manufacturing, Inc. and as a result, it sustained damages aggregating $3,754,000. The Company believes the complaint and alleged damages to be totally without merit, is defending itself and, among other things, has asserted counterclaims for monies billed and remaining unpaid for goods delivered to the Plaintiff by Urecoats Manufacturing, Inc. pursuant to the Plaintiff’s purchase order. On April 7, 2006, the US District Court has dismissed all claims against Urecoats Industries, Inc. (n/k/a LaPolla Industries, Inc.). Discovery has commenced with respect to the allegations against Urecoats Manufacturing, Inc. (n/k/a RSM Technologies, Inc.) which operations were discontinued November 5, 2004, and trial date is set for December 11, 2007. RSM Technologies, Inc. has no assets. The outcome of this litigation cannot be determined at this time.

(b)	Raymond T. Hyer, Jr. and Sun Coatings, Inc., Plaintiffs v. Urecoats Industries Inc., et. al, Defendants

On October 3, 2003, in the Hillsborough County State Court, Division H, Plaintiffs filed a complaint against Urecoats Industries Inc. and Michael T. Adams, John G. Barbar, and a former officer of the Company, individually, alleging common law fraud and rescission in connection with their purchase of common stock in the Company. Plaintiff Hyer purchased $100,000 worth of common stock in June 2003 and Plaintiff Sun Coatings purchased $250,000 worth of common stock in July 2003. Plaintiffs allege that the Company and certain present and former officers failed to disclose the current financial condition of the Company and its subsidiaries (notwithstanding that the Plaintiffs signed subscription agreements admitting that they were provided all relevant and requested financial information). The Defendants’ motion to dismiss was denied by Order dated January 20, 2004. The Defendants answered the complaint on February 13, 2004 and asserted, among others, the affirmative defense that Plaintiffs’ claims are barred by their signed subscription agreements. Discovery has not yet commenced and no trial date is set. The outcome of this litigation cannot be determined at this time.

(c)	Various Lawsuits and Claims Arising in the Ordinary Course of Business

The Company is involved in various lawsuits and claims arising in the ordinary course of business. These other matters are, in the opinion of the Company’s management, immaterial both individually and in the aggregate with respect to the Company’s consolidated financial position, liquidity or results of operations.

Note 18. Net Loss Per Common Share - Basic and Diluted.

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

	For The Year Ended December 31,
	2006						2005						2004
				Per Share						Per Share						Per Share
	Amount			Amount			Amount			Amount			Amount			Amount
Operating (Loss)	$	(3,126,667	)	$	(0.058	)	$	(3,629,504	)	$	(0.071	)	$	(2,627,175	)	$	(0.091	)
Income (Loss) from Discontinued Operations		313,972			0.006			131,971			0.002			(3,141,333	)		(0.108	)
Net (Loss)	$	(2,812,695	)	$	(0.053	)	$	(3,497,533	)	$	(0.069	)	$	(5,768,508	)	$	(0.199	)
Plus: Dividends on Preferred Stock		(175,262	)		(0.003	)		—			—			—			—
Net (Loss) Available to Common Stockholders	$	(2,987,957	)	$	(0.055	)	$	(3,497,533	)	$	(0.069	)	$	(5,768,508	)	$	(0.199	)
Weighted Average Common Shares Outstanding		53,414,914						50,538,175						28,866,604

Basic and diluted net (loss) per share are the same since (a) the Company has reflected net losses for all periods presented and (b) the potential issuance of shares of the Company would be antidilutive. The securities that could potentially dilute (loss) per share in the future that were not included in the computation of diluted (loss) per share were (i) 69,447, 364,000, and 652,767 shares, respectively, of nonvested restricted common stock issued to eligible directors but held by the Company pursuant to vesting restrictions under the Director Plan, (ii) 76,180, 69,000, and 116,321 vested and exercisable stock options, respectively, and (iii) conversion of securities (Series A Preferred Stock) convertible into 2,250, 2,250, and 2,250 shares, respectively, of common stock, for the years ended December 31, 2006, 2005 and 2004, respectively.

F-17/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 19. Securities Transactions.

Common Stock

(a) During 2006, 364,000 shares of restricted common stock were vested and earned by directors pursuant to the Director Plan, which transactions were valued and recorded at $233,640. See also Note 16 - Related Party Transactions, Item (h)(i) and (ii).

Preferred Stock

(a) On September 29, 2006, the Company sold 6,900 shares of its Series D Preferred Stock, $1.00 par value, to the Chairman and principal stockholder, pursuant to a Securities Purchase Agreement, in exchange for the cancellation of $6,900,000 in notes, loans and related accrued interest owed by the Company to the Chairman, which preferred shares accrue dividends at 10% per annum on a quarterly basis.

(b) On December 28, 2006, the Company sold 200 shares of its Series D Preferred Stock, $1.00 par value, to an accredited sophisticated investor, pursuant to a Securities Purchase Agreement, for $200,000 in cash, which preferred shares accrue dividends at 10% per annum on a quarterly basis.

(c) On December 31, 2006, the Company sold 1,076 shares of its Series D Preferred Stock, $1.00 par value, to the Chairman and principal stockholder, pursuant to a Securities Purchase Agreement, in exchange for the cancellation of $1,076,000 in loans and related accrued interest, along with accrued dividends, owed by the Company to the Chairman, which preferred shares accrue dividends at 10% per annum on a quarterly basis.

Note 20. Share–Based Payment Arrangements.

The Company adopted reporting under SFAS 123R, effective July 1, 2005. Previously, the Company elected to apply the intrinsic-value-based method of accounting as allowed by Statement of Financial Accounting Standards No. 123, “Accounting for the Stock-Based Compensation”. Under this method, the Company measured stock based compensation for option grants to employees assuming that options granted at market price at the date of grant had no intrinsic value and restricted stock awards were valued based on a discounted market price of a share of unrestricted stock on the date the shares of restricted common stock were earned and vested. Prior to the adoption of the SFAS 123R, no compensation expense was ever recognized for stock options while compensation expense was recognized for restricted common stock only on the date when the shares were earned and vested. The Company has elected to use the modified prospective method, which requires compensation expense for all awards granted from the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption, to be recorded. The fair value concepts were not changed significantly in SFAS 123R; however, in adopting SFAS 123R, companies must choose among alternative valuation models and amortization assumptions. After assessing alternative valuation models and amortization assumptions, the Company decided to use a lattice-based option valuation model to calculate compensation expense over the requisite service period of a grant(s). The Company uses historical data starting after November 5, 2004 for estimated forfeitures and volatility based on the concentration of operating activities for the preceding seven years being related to the RSM Products, which were discontinued on November 5, 2004.

At December 31, 2006, the Company had two share-based compensation plans, the Equity Incentive Plan and Director Compensation Plan (described below), which plans replaced all prior compensation and incentive plans (“Predecessor Plans”). Compensation cost charged against income for all plans for 2006, 2005 and 2004 was $618,115, $673,793 and $261,994, respectively.

Equity Incentive Plan

The Company’s Equity Incentive Plan (“Equity Plan”), which is shareholder-approved, permits the grant of share options and shares to its employees for up to 3,250,000 shares of common stock. The Equity Plan replaced the Key Employee Stock Option Plan. The purpose of the Equity Plan is to advance the interests of the Company and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Company and by motivating such persons to contribute to the growth and profitability of the Company. The Equity Plan provides, among other things, financial performance measures upon which specific performance goals applicable to certain awards would be based and limits on the numbers of shares or compensation that could be made subject to certain awards. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant. Share options and shares may provide for accelerated vesting if there is a change in control (as defined in the Equity Plan). As described above, prior to the adoption of SFAS 123R, compensation expense was never recognized by the Company for share options. Therefore, certain portions of the 2005 numbers in the following analysis only relate to share options as of date of adoption.

The fair value of each stock option is estimated on the date of grant using a lattice-based valuation model that uses the assumptions noted in the following table. Because lattice-based valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed. Expected volatilities are based on the historical volatility of the Company’s common stock. The Company uses historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted is derived from the output of the valuation model and represents the periods of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

		2006
Expected Volatility		152.95 % - 277.54 %
Weighted-Average Volatility		203.32 %
Expected Dividends		—
Expected Term (in years)		5 - 6
Risk Free Rate		3.974 % - 4.21 %

As of December 31, 2006, total compensation cost related to non-vested stock options was $1,520,966, which is expected to be recognized over the 58 month period after December 31, 2006 (55.6 months on a weighted-average basis).

F-18/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 20. Share–Based Payment Arrangements - continued.

Stock option activity under the Company’s Equity Plan as of the years ended December 31, is summarized below:

	2006					2005
Options	Number			Weighted Average Exercise Price		Number of Options			Weighted Average Exercise Price
Outstanding-Beginning of Year		2,519,868		$	.78		115,321		$	3.16
Granted		300,000			.65		2,954,680			.67
Exercised		—			—		—			—
Canceled, Expired or Forfeited		(113,688	)		3.18		(550,133	)		.69
Outstanding-End of Year		2,706,180			.67		2,519,868			.78
Exercisable-End of Year		76,180		$	.68		119,868		$	2.98

The weighted-average grant-date fair value of options granted during 2006 and 2005 was $.65 and $.56, respectively.

Predecessor Stock Option Plans

The Company maintained a variety of stock options plans prior to 2005, all of which were replaced, superseded or allowed to expire according to their terms (“Predecessor Plans”). The Key Employee Stock Option Plan (“Key Employee Plan”) was superseded by and integrated into the Equity Plan. The applicable 2005 data for the Key Employee Plan from the date of adoption of SFAS 123R is included in the Equity Incentive Plan section above. Prior to 2005, the Key Employee Plan, originally established as the 2000 Stock Purchase and Option Plan and approved by the shareholders of the Company on June 20, 2000, was integrated with and into the 2002 Stock Option Plan (which was approved by the shareholders on May 28, 2002), for administrative convenience. The Company granted restricted options (Non Plan) from time to time for special circumstances in the past. The Company did not grant any Non Plan options in 2006, 2005 or 2004 and the Non Plan options previously granted expired according to their terms. There were 50,000 Non Plan options outstanding as of December 31, 2006, which expired on March 19, 2007. No fair value existed or was recorded for any Non Plan options. As described above, prior to the adoption of SFAS 123R, compensation expense was never recognized by the Company for any stock options.

Stock option activity under the Company’s Predecessor Plans as of the years ended December 31, is summarized below:

	2006				2005				2004
Options	Number of Options		Weighted Average Exercise Price		Number of Options		Weighted Average Exercise Price		Number of Options			Weighted Average Exercise Price
Outstanding-Beginning of Year		70,000	$	3.36		70,000	$	3.36		372,274		$	2.63
Granted		—		—		—		—		150,000			.27
Exercised		—		—		—		—		(200,000	)		.38
Canceled, Expired or Forfeited		20,000		10.00		—		—		(136,953	)		2.69
Outstanding-End of Year		50,000		.70		70,000		3.36		185,321			3.23
Exercisable-End of Year		50,000	$	.70		70,000	$	3.36		122,821		$	4.22

Equity Plan and Predecessor Plan

The following table summarized stock options outstanding under the Equity Plan and Predecessor Plans at December 31, 2006:

		Options Outstanding						Options Exercisable
Range of Exercise Prices		Number Outstanding at 12/31/06		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Number Exercisable At 12/31/06		Weighted Average Exercise Price
$	.65 - $ .80		2,703,000		3.01	$	.67		73,000	$	.67
$	.81 - $ .95		3,180		.20	$	.95		3,180	$	.95

Based on the Company’s closing stock price of $.57 on December 29, 2006, the last trading day of 2006, all of the options exercisable in the preceding table are out-of-the-money. Therefore, no intrinsic value existed at December 31, 2006.

F-19/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 20. Share–Based Payment Arrangements - continued.

Director Compensation Plan

The Company’s Director Compensation Plan (“Director Plan”), which is shareholder-approved, permits the grant of up to 1,600,000 shares of restricted common stock to non-employee directors only. Each non-employee director who is then serving as a member of the Board is automatically granted an award consisting of a number of shares of restricted common stock of the Company equal to: 48,000 for the Chairman of the Board, who is also a non-employee director; and 12,000 for other non-employee directors, upon initial election to the Board for a one year term (or a lesser amount prorated monthly if the initial election is for a shorter period). In addition to the automatic grant of shares to non-employee directors described above, a one-time grant on M7528, 2002 of 1,168,000 post split shares of restricted stock was approved for the Chairman of the Board, which recognized his personal cost for substantially funding the Company and acting as Chairman of the Board without adequate compensation over a three-year period prior to the date of the grant. This one-time grant vested at the end of each year at the rate of 25% per year after the date of grant. The Company does not consider the shares of restricted common stock granted and issued under the Director Plan as outstanding at the time of grant due to vesting restrictions. The shares of restricted common stock when granted are issued by the Company with a second restriction and held in the custody of the Company until such time that they are earned and vested. At December 31, 2006, there were 69,447 shares of restricted common stock granted and issued but held in the custody of the Company (until they are earned and vested) which automatic grants awarded at the annual meeting of stockholders held on July 12, 2006 are scheduled to vest at the next annual meeting of stockholders scheduled for May 22, 2007. The Director Plan was designed to automatically terminate the day after the fourth anniversary of the annual meeting of stockholders in which it was approved by stockholders, or July 13, 2006. Notwithstanding the termination of the Director Plan, the last traunch of automatic grants (69,447 shares) are not affected by the termination and shall be earned and vested at the next scheduled annual meeting of stockholders (Scheduled for May 22, 2007 or as otherwise determined by the Board pursuant to the Company’s Bylaws). The compensation cost that has been charged against income for the Director Plan was $258,427, $428,642 and $254,144 for 2006, 2005 and 2004, respectively. Prior to adoption of SFAS 123R, compensation expense was recognized under the Director Plan only on the date when the shares were earned and vested. The fair value of each restricted stock award is estimated on the date of grant using a lattice-based valuation model that uses the assumptions noted in the following table. Because lattice-based valuation models incorporate ranges of assumptions for inputs, those ranges are disclosed, where applicable. Expected volatilities are based on the historical volatility of the Company’s common stock. The Company uses historical data to estimate award vesting and director termination within the valuation model and the straight-line method for attribution of compensation expense. The expected term of the of the awards are derived from the output of the valuation model and represent the period of time that awards granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

		2006
Expected Volatility		398.77 %
Weighted-Average Volatility		398.77 %
Expected Dividends		—
Expected Term (in years)		.8
Risk Free Rate		5.108 %

A summary of awards activity under the Director Plan, and changes during the year then ended or from the date of adoption of SFAS 123R to the year then ended, as applicable, are presented below:

	2006					2005
Awards	Shares			Aggregate Intrinsic Value		Shares			Aggregate Intrinsic Value
Outstanding-Beginning of Year		364,000		$	74,460		652,767		$	—
Granted		69,447			44,002		72,000			—
Vested		(364,000	)		233,640		(360,767	)		—
Canceled, Expired or Forfeited		—			—		—			—
Outstanding-End of Year		69,447		$	44,002		364,000		$	74,460

As of December 31, 2006, total compensation cost related to restricted stock not yet recognized was $19,214, which is expected to be recognized over the five month period after December 31, 2006 (4.3 months on a weighted-average basis).

Note 21. Preferred Stock.

Series A Convertible Preferred Stock

The Board of Directors reduced the number of authorized shares of Series A, $1.00 par value preferred stock, from 2,000,000 shares to 750,000 shares, leaving 1,250,000 shares to be designated a series of distinction and issued by the Board. Each share of the Series A preferred stock entities its holder to convert it into .036 shares of common stock, as adjusted in the event of future dilution; to receive $1.00 per share in the event of voluntary or involuntary liquidation, to have the same voting rights as the common stock, and to share equally in payments of any dividends declared by the Board of Directors.

Series C Convertible Preferred Stock

The Board of Directors designated a new series of preferred stock, Series C Convertible Preferred Stock, effective January 8, 2002, par value $1.00, and authorized 750,000 shares for issuance. The stated value per each share of Series C Convertible Preferred Stock was $20.00 per share. The certificate of designation of preferences of the Series C Convertible Preferred Stock had a mandatory conversion date of January 1, 2004. On January 1, 2004, the Company converted all 673,145 shares of the Series C Convertible Preferred Stock outstanding on said date, into 12,375,024 shares of restricted common stock (the conversion rate was determined at the time of purchase pursuant to a discount formula related to the amount of investment by each investor. The former registered holders of the Series C Convertible Preferred Stock were entitled to receive cumulative dividends at the rate of 4% per annum of the stated value per each share of Series C Convertible Preferred Stock. Such dividend accrued on each share of Series C Convertible Preferred Stock from the date of issuance of such share (with appropriate pro-ration for any partial dividend period) and accrued from day-to-day, whether or not earned or declared, until the mandatory conversion date. The dividends of $776,983 accrued as of January 1, 2004, were paid through the issuance of shares of restricted common stock in 2004. The Board of Directors amended the Series C Convertible Preferred Stock designation reducing the original authorized amount of 750,000 shares to the actual number of preferred shares sold in that series, a total amount of 687,895 as of September 27, 2006.

F-20/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 21. Preferred Stock – continued.

Series D Preferred Stock

The Board of Directors designated a new series of preferred stock, Series D Preferred Stock, effective September 28, 2006, $1.00 par value per share. The Board authorized 25,000 shares for issuance having a stated and liquidation value, per each share of Series D Preferred Stock of $1,000, which includes the par value of $1.00 per share. Holders of the outstanding Series D Preferred Stock have no voting rights with respect to the Series D Preferred Stock, except as required by law, including but not limited to the General Corporation Law of Delaware, and as expressly provided in the certificate of designation. The registered holders of the outstanding Series D Preferred Stock are entitled to receive cumulative dividends at the rate of 10% per annum of the stated value per each share of Series D Preferred Stock. Such dividend is payable quarterly in arrears on the last day of March, June, September and December of each year, commencing on December 31, 2006 (each of such dates being a "dividend payment date"). Such dividend (a) shall accrue and may be accumulated or paid in the discretion of the Board of Directors, on each Series D Preferred Stock from the date of issuance of such Series D Preferred Stock (with appropriate pro-ration for any partial dividend period); (b) shall accrue from day-to-day, whether or not earned or declared; and (c) dividends may be paid, subject to the terms hereof, in cash when and as declared by the Board of Directors of the Company out of funds legally available therefor. At December 31, 2006, the Company sold an aggregate of 8,176 shares for an aggregate consideration of $8,176,000. There was $175,262 in dividends accrued and paid at December 31, 2006.

Note 22. Merger of Subsidiaries.

(a) Effective April 1, 2005, the Infiniti Subsidiary, a Florida corporation, merged with and into the LaPolla Subsidiary, an Arizona corporation, whereupon the separate existence of the Infiniti Subsidiary ceased and the LaPolla Subsidiary continued as the surviving corporation. See also Item (b) below.

(b) Effective October 1, 2005, the LaPolla Subsidiary, an Arizona corporation, merged with and into the Company, a Delaware corporation, whereupon the separate existence of the LaPolla Subsidiary ceased and the Company continued as the surviving corporation.

Note 23. Business Segment Information.

The Company is a national manufacturer and distributor with seven segments: Coatings, Foam, Paints, Sealants, Adhesives, Equipment, and All Other. The Company established the seven segments in 2005 due to a change in the structure of its internal organization which caused the composition of its prior reportable segments (previously based on subsidiaries) to change. See Note 21 – Merger of Subsidiaries, Item (b). See also Note 5 – Discontinued Operations. Prior years have been restated to reflect the change. The Company’s segments are organized based on differences in products. The Coatings segment primarily supplies a variety of protective coatings for roofing systems for new and retrofit commercial and industrial applications, as well as residential, applications. The Foam segment primarily supplies both roofing and perimeter wall insulation applications. Roofing applications consist of foam and coatings systems in new and retrofit commercial and industrial applications. Perimeter wall insulation is used in commercial and industrial, as well as residential, applications. The Paints segment primarily supplies a variety of protective and decorative lines for commercial and industrial, as well as residential, applications. The Sealants segment primarily supplies penetrating sealers and stains over concrete and masonry for commercial and industrial, as well as residential, applications. Additionally, this segment also supplies caulking for general application in the construction industry. The Adhesives segment primarily supplies polyurethane as an adhesive for board stock insulation to roofing substrates for commercial and industrial applications. The Equipment segment supplies spray equipment and related accessories for foam and coatings installations for commercial and industrial, as well as residential, markets. The All Other segment supplies a variety of sundry items that are complementary to the applications of products for customers. The Company primarily manufactures coatings and distributes foam, paints, sealants, adhesives, equipment, and all other products. Production facilities are located in Texas, Florida and Arizona. Each of the businesses in which the Company is engaged is highly competitive. However, the diversification of product lines and national markets served tends to minimize the impact on the Company’s total sales and earnings of changes in demand for a particular product line. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company allocates resources to segments and evaluates the performance of segments based upon reported segment income before income taxes. A substantial amount of administrative expenses are allocated to the segments. The portion not allocated to the segments represents the unallocated cost of certain corporate expenses, insurance, investor relations, and gains and losses related to the disposal of corporate assets and are included in Unallocated Amounts. There are no intersegment sales or transfers.

Segments
2006	Coatings			Foam			Paints			Sealants			Adhesives			Equipment			All Other			Totals
Sales	$	9,562,664		$	17,717,636		$	1,195,929		$	1,032,501		$	31,147		$	546,020		$	228,839		$	30,314,736
Depreciation and Amortization		158,491			33,829			2,283			1,971			59			1,043			438			198,114
Interest Expense		80,036			148,291			10,010			8,642			261			4,570			1,914			253,724
Segment Profit (Loss)		(49,379	)		(1,395,510	)		48,394			(11,637	)		(1,105	)		33,416			(88,736	)		(1,464,557	)
Segment Assets⁽¹⁾		3,661,962			5,481,007			449,818			407,585			8,681			161,366			62,519			10,232,938
Expenditures for Segment Assets	$	427,796		$	282,056		$	19,039		$	47,055		$	496		$	8,692		$	3,642		$	788,776

2005	Coatings			Foam			Paints			Sealants			Adhesives			Equipment			All Other			Totals
Sales	$	6,705,777		$	11,213,965		$	781,988		$	964,221		$	39,781		$	301,145		$	172,386		$	20,179,263
Depreciation and Amortization		82,648			17,197			1,199			1,479			61			462			264			103,310
Interest Expense		89,265			149,276			10,410			12,835			530			4,009			2,293			268,618
Segment Profit (Loss)		(49,048	)		(1,718,676	)		(12,138	)		(17,985	)		(2,085	)		17,120			(29,113	)		(1,811,931	)
Segment Assets⁽¹⁾		3,128,028			4,116,535			365,483			424,384			12,503			105,539			53,437			8,205,905
Expenditures for Segment Assets	$	291,994		$	262,807		$	18,326		$	37,579		$	932		$	7,058		$	4,039		$	622,737

2004	Coatings			Foam			Paints			Sealants			Adhesives			Equipment			All Other			Totals
Sales	$	774,870		$	885,579		$	585,970		$	293,115		$	—		$	289		$	24,340		$	2,564,163
Depreciation and Amortization		66,402			8,216			5,436			2,719			—			3			226			83,002
Interest Expense		99,884			114,155			75,534			37,784			—			37			3,138			330,532
Segment Profit (Loss)		(249,292	)		(338,742	)		(144,522	)		(81,026	)		—			(110	)		(2,420	)		(816,112	)
Segment Assets⁽¹⁾		697,294			593,790			526,000			248,517			—			194			12,380			2,078,175
Expenditures for Segment Assets	$	129,325		$	10,719		$	7,093		$	16,875		$	—		$	4		$	295		$	164,311

F-21/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 23. Business Segment Information - continued.

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

Segments
Profit or Loss	2006			2005			2004
Total Profit or Loss for Reportable Segments	$	(1,464,556	)	$	(1,811,931	)	$	(816,113	)
Unallocated Amounts:
Corporate Expenses		(1,662,111	)		(1,817,572	)		(1,811,062	)
Income (Loss) Before Income Taxes	$	(3,126,667	)	$	(3,629,503	)	$	(2,627,175	)

Assets	2006			2005			2004
Total Assets for Reportable Segments⁽¹⁾	$	10,232,938		$	8,205,905		$	2,078,175
Other Unallocated Amounts⁽²⁾		919,370			1,288,963			65,957
Consolidated Total	$	11,152,308		$	9,494,868		$	2,144,132

____________________

⁽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 assets from discontinued operations, where applicable.

Note 24.Selected Quarterly Financial Data (Unaudited).

	2006 Quarters Ended,
	March 31			June 30			September 30			December 31
	Restated^{(A) (C)}			Restated^{(A) (C)}			Restated^{(A) (C)}			Restated^(C)
Sales	$	5,999,935		$	7,561,627		$	9,037,490		$	7,715,684
Gross Profit		836,748			1,294,043			1,509,139			1,177,905
Operating Income (Loss) Before Income Taxes		(514,970	)		(371,017	)		(920,471	)		(1,320,209	)
Income Tax Benefit-Current		—			—			—			—
Income Tax Benefit-Deferred		—			—			—			—
Operating Income (Loss)		(514,970	)		(371,017	)		(920,471	)		(1,320,209	)
Income (Loss) from Discontinued Operations, Net of Income Tax Benefit-Deferred		295,069			29,000			(5,000	)		(5,097	)
Net Income (Loss)	$	(219,901	)	$	(342,017	)	$	(925,471	)	$	(1,325,306	)
Net Income (Loss) Per Share-Basic:
Continuing Operations		(0.004	)		(0.006	)		(0.017	)		(0.024	)
Discontinued Operations	$	0.005		$	(0.000	)	$	(0.000	)	$	(0.000	)
Net Income (Loss) Per Share-Diluted:
Continuing Operations		(0.004	)		(0.006	)		(0.017	)		(0.024	)
Discontinued Operations	$	0.005		$	(0.000	)	$	(0.000	)	$	(0.000	)

	2005 Quarters Ended,
	March 31			June 30			September 30			December 31
				Restated^(B)			Restated^(B)			Restated^{(B) (C)}
Sales	$	2,457,653		$	5,206,176		$	5,559,461		$	6,955,973
Gross Profit		252,660			778,300			859,772			1,270,965
Operating Income (Loss) Before Income Taxes		(1,243,769	)		(1,096,455	)		(880,203	)		(409,077	)
Income Tax Benefit-Current		—			—			—			—
Income Tax Benefit-Deferred		—			—			—			—
Operating Income (Loss)		(1,243,769	)		(1,096,455	)		(880,203	)		(409,077	)
Income (Loss) from Discontinued Operations, Net of Income Tax Benefit-Deferred		(327,105	)		2,515			349,117			107,444
Net Income (Loss)	$	(1,570,874	)	$	(1,093,940	)	$	(531,086	)	$	(301,633	)
Net Income (Loss) Per Share-Basic:
Continuing Operations		(0.045	)		(0.038	)		(0.030	)		(0.005	)
Discontinued Operations	$	(0.012	)	$	0.000		$	0.012		$	0.004
Net Income (Loss) Per Share-Diluted:
Continuing Operations		(0.045	)		(0.038	)		(0.030	)		(0.005	)
Discontinued Operations	$	(0.012	)	$	0.000		$	0.012		$	0.004

(A) For 2006: 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. The restatement affected Sales, which decreased $42,180, $15,261, and $79,269; Gross Profit, which decreased $413,549, $347,510, and $153,010; Operating Loss Before Income Taxes, which increased $413,549, $347,510, and $153,010; Income Tax Benefit-Deferred, which decreased $140,623, $22,470, and $104,314; Operating Loss and Net Loss, which each increased $554,173, $325,040, and $48,697; and Net Loss Per Share – Basic and Diluted for Continuing Operations, which increased $0.011, $0.006, and $0.002; for March 30, June 30, and September 30, respectively. To illustrate:

For 2006:	3/31/2006			6/30/2006			9/30/2006
Net Income (Loss) (As Previously Reported)	$	327,008		$	(92,737	)	$	(1,385,767	)
Adjustments		(554,172	)		(325,040	)		(48,697	)
As Adjusted and Restated	$	(227,164	)	$	(417,777	)	$	(1,434,464	)

F-22/A

Index

LAPOLLA INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

Note 24. Selected Quarterly Financial Data (Unaudited) - continued.

(B) For 2005: Restatement of Accrued Expenses and Other Current Liabilities and Cost of Sales – The Company restated the accrued expenses and other current liabilities on the Consolidated Balance Sheets and Cost of Sales on the Consolidated Statements of Operations for the last three quarters of 2005. The restatement affected Gross Profit, which decreased $244,578 for June 30, $261,177 for September 30, and $328,348 for December 31, respectively; Operating Loss and Net Loss, which each increased $244,578 for June 30 and $261,177 for September 30, respectively; Operating Income and Net Income, which each decreased $326,348 for December 31, respectively; Net Loss Per Share – Basic and Diluted for Continuing Operations increased $.022 and $.018 for June 30 and September 30, respectively; and Net Income Per Share – Basic and Diluted for Continuing Operations decreased $.005 for December 31. No income tax effects were related to this restatement. To illustrate:

For 2005:	6/30/2005			9/30/2005			12/31/2005
Net Income (Loss) (As Previously Reported)	$	(849,361	)	$	(269,909	)	$	1,166,887
Adjustments		(244,578	)		(261,177	)		(328,348	)
As Adjusted and Restated	$	(1,093,939	)	$	(531,086	)	$	838,539

(1) For 2006, the Company restated deferred income taxes on the Consolidated Balance Sheets and Income Tax Benefit-Deferred on the Consolidated Statements of Operations for each of the four quarters of 2006. The restatement affected Income Tax Benefit-Deferred, which increased $7,263, $75,760 and $508,993 and decreased $390,392; Operating Loss and Net Loss, which each decreased $7,263, $75,760 and $508,993 and increased $390,392; and Net Loss Per Share – Basic and Diluted for Continuing Operations, which decreased $0.006, $0.002, and $0.01 and increased 0.007; for March 30, June 30, September 30, and December 31, respectively. To illustrate:

For 2006:	3/31/2006			6/30/2006			9/30/2006
Net (Loss) (As Adjusted and Restated Per Footnote A)	$	(227,164	)	$	(417,777	)	$	(1,434,464	)
Adjustments		7,263			75,760			508,993
As Adjusted and Restated	$	(219,901	)	$	(342,017	)	$	(925,471	)

For 2006:	12/31/2006
Net Income (Loss) (As Previously Reported)	$	(934,914	)
Adjustments		(390,392	)
As Adjusted and Restated	$	(1,325,306	)

(2) For 2005, the Company restated deferred income taxes on the Consolidated Balance Sheets and Income Tax Benefit-Deferred on the Consolidated Statements of Operations for the fourth quarter of 2005. The restatement affected Income Tax Benefit-Current and Income Tax Benefit-Deferred, which decreased $818,353 and $321,819; Operating Loss and Net Loss, which each increased $1,140,172; and Net Loss Per Share – Basic and Diluted for Continuing Operations, which increased $0.03 for December 31, 2005. To illustrate:

For 2005:	12/31/2005
Net Income (Loss) (As Adjusted and Restated Per Footnote (B))	$	838,539
Adjustments		(1,140,172	)
As Adjusted and Restated	$	(301,633	)

Note 25. Subsequent Events.

(a) On February 21, 2007, LaPolla Industries, Inc. (the “Company” or “LaPolla”) entered into a Revolving Credit and Term Loan Agreement with ComVest Capital, LLC (the “Credit Facility”). Under the terms of the Credit Facility, ComVest has agreed to loan up to $3,500,000 under a revolving credit note and $2,000,000 to the Company under a convertible term note.

(b) On February 21, 2007, in connection with the establishment of the Credit Facility described in Item (a) above, the Company entered into a Convertible Term Note of even date (the “Convertible Note”) and contemporaneously with closing received $1,339,491 for working capital purposes, $1,010,509 was paid to Wachovia Bank, N.A. to retire LaPolla’s former line of credit (See Note (11) – Line of Credit, Item (b)) and $150,000 was paid to ComVest for closing fees and transactional expenses. The Convertible Note 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.

(c) On February 21, 2007, in connection with the establishment of the Credit Facility described in Item (a) above, the Company entered into a Revolving Credit Note of even date (the “ComVest Revolver”) and contemporaneously with closing received $500,000 for working capital purposes. The ComVest Revolver bears interest equal to the greater of (a) the Prime Rate plus 1%, or 9.5% and is good until February 28, 2009.

(d) On February 21, 2007, in connection with the establishment of the Credit Facility described in Item (a) above, the Company issued three tranches of warrants to purchase an aggregate of 1,500,000 shares of LaPolla common stock at a price per share calculated based on the closing stock price over the last 20 days prior to the date of closing. The exercise prices for the 3 tranches of warrants are as follows (a) tranche 1 (110% of average closing price) = $0.68; (b) tranche 2 (125% of average closing price) = $0.77; and (c) tranche 3 (150% of average closing price) = $0.93.

F-23/A

Note 26. Restatements and Corrections to Previously Issued Financial Statements.

(A) The Company designed and implemented an Internal Control—Integrated Framework during 2006. During the implementation process, a deficiency was discovered in one of the general ledger reconciliation procedures. The Company developed, tested and implemented a new reconciliation procedure. Afterwards, management retroactively addressed the impact of the aforementioned defective reconciliation procedure and determined that certain corrections were required to make the financial statements from April 1, 2005 through September 30, 2006 accurate and corrected and restated them. As a result, previously reported net loss in the Company’s financial statements for the quarters ended June 30, 2005 and September 30, 2005, quarter and year ended December 31, 2005, and quarters ended March 31, 2006, June 30, 2006, and September 30, 2006, were understated, previously reported assets were unchanged, and previously reported liabilities were understated. Accordingly, the 2006 financial statements and the 2005 statement of operations have been restated and an adjustment has been made to retained earnings as of January 1, 2006, to correct for the error. The affected quarterly periods were also restated in this report.

(i) For 2006, 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. The restatement affected Sales, Gross Profit, Operating Loss Before Income Taxes, Operating Loss, and Net Loss. Refer to Note 24 – Selected Quarterly Financial Data, Footnote (A) for quarterly restatement information and illustrations.

(ii) For 2005, the Company restated the accrued expenses and other current liabilities on the Consolidated Balance Sheets and Cost of Sales on the Consolidated Statements of Operations for the last three quarters of 2005. The aggregate amount of liabilities, expenses, net loss, and accumulated deficit of the Company previously reported for the 2005 year were affected by the restatement. The restatement affected Gross Profit, which decreased $834,102; Operating Loss Before Income Taxes, Operating Loss, and Net Loss, which each increased $834,102; and Net Loss Per Share – Basic and Diluted for Continuing Operations, which increased $0.006. No income tax effects were related to this restatement. To illustrate:

	2005
Net Loss (As Previously Reported)	$	(1,523,259	)
Adjustments		(834,102	)
As Adjusted	$	(2,357,361	)

Refer to Note 24 – Selected Quarterly Financial Data, Footnote (B) for quarterly restatement information and illustrations.

The Company fully updated all affected portions of these consolidated financial statements and related notes to reflect the restatements and corrections described above, as well as corrected certain scrivener’s errors

(B) 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. Notwithstanding the foregoing, the Company reevaluated its recognition of a portion of its deferred income tax asset from continuing operations and is reversing the amounts previously recognized until such time that the Company exceeds break-even or marginal cumulative profitability. The Company has 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 each of the four quarters and year ended December 31, 2006 and the fourth quarter and year ended December 31, 2005 to reflect the adjustments.

The Company restated the deferred income taxes on the Consolidated Balance Sheets and income tax benefit-deferred on the Consolidated Statements of Operations for the fourth quarter and year ended December 31, 2005 and each of the four quarters and year ended December 31, 2006. The restatement affected Total Current Assets, Total Assets, Accumulated Deficit, Total Stockholders’ Equity, Total Liabilities and Stockholders’ Equity, Income Tax Benefit – Deferred, Operating Loss, Net Loss, and Net Loss Per Share – Basic and Diluted.

(i) For 2006, the restatement affected income tax benefit-deferred, which increased $201,624; Total Assets, which decreased $1,140,172; Operating Loss and Net Loss, which each decreased by $201,624; Net Loss Per Share – Basic and Diluted for Continuing Operations, which decreased $0.01; and Stockholders’ Equity, which decreased $1,140,172, for the 2006 year. To illustrate:

	2006
Net Loss (As Previously Reported)	$	(3,014,319	)
Adjustments		201,624
As Adjusted and Restated	$	(2,812,695	)

Refer to Note 24 – Selected Quarterly Financial Data, Footnote (C)(i) for quarterly restatement information and illustrations.

(ii) For 2005, the restatement affected income tax benefit-deferred, which decreased $1,140,172; Total Assets, which decreased $1,140,172; Operating Loss and Net Loss, which each increased by $1,140,172; Net Loss Per Share – Basic and Diluted for Continuing Operations, which increased $0.02; and Stockholders’ (Deficit), which increased $1,140,172. To illustrate:

	2005
Net Loss (As Adjusted and Restated Per Footnote (A)(ii) above	$	(2,357,361	)
Adjustments		(1,140,172	)
As Adjusted and Restated	$	(3,497,543	)

Refer to Note 24 – Selected Quarterly Financial Data, Footnote (C)(ii) for the fourth quarter restatement information and illustration.

F - 24/A

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)

Title of Each Class		Name of Exchange on which Registered
Common Stock, $0.01 par value		American Stock Exchange

		Page

PART I

	Item 1. Business	2

	Item 1A. Risk Factors	5

	Item 1B. Unresolved Staff Comments	6

	Item 2. Properties	6

	Item 3. Legal Proceedings	6

	Item 4. Submission of Matters to a Vote of Security Holders	6

PART II

	Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	6

	Item 6. Selected Financial Data	7

	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	8

	Item 7A. Quantitative and Qualitative Disclosures About Market Risk	11

	Item 8. Financial Statements and Supplementary Data	11

	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	11

	Item 9A. Controls and Procedures	11

	Item 9B. Other Information	11

PART III

	Item 10. Directors, Executive Officers and Corporate Governance	12

	Item 11. Executive Compensation	12

	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters	12

	Item 13. Certain Relationships and Related Transactions, and Director Independence	12

	Item 14. Principal Accountant Fees and Services	12

PART IV

	Item 15. Exhibits and Financial Statement Schedules	13

SIGNATURES		14

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		15

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS		16

INDEX OF EXHIBITS		17

Douglas J. Kramer	42	CEO and President since July 12, 2006

Mr. Kramer joined the Company in February 2005 as president and chief operating officer and was named Chief Executive Officer and President in July 2006. Mr. Kramer has 18 years Industry Experience including his most recent position as vice president of the Construction Products Division for Foam Enterprises, LLC, a wholly-owned subsidiary of the BASF Corporation, where he was employed from 1997 to 2004. Mr. Kramer has a background in Liberal Arts from Penn State University and the University of Texas.

John A. Campbell	41	CFO and Treasurer since February 1, 2006

Mr. Campbell is Chief Financial Officer and Corporate Treasurer. Prior thereto, Mr. Campbell was controller for the Company since September 19, 2005; the chief financial officer of JEMS Geriatric Services, Inc., Sugar Land, Texas, from June 2003 through September 2005; and controller for Sharps Compliance Corporation, a publicly traded Delaware corporation, with an office in Houston, Texas, from May 2001 through June 2003. He earned his Bachelor of Science degree in Accounting from Stephen F. Austin State University, Nacogdoches, Texas and Master of Science degree in Business Administration from the University of Phoenix, Arizona.

Michael T. Adams	41	CGO, EVP and Secretary since July 12, 2006

Mr. Adams has more than ten years experience with LaPolla. He was named Chief Governance Officer, Executive Vice President, and Secretary in July 2006. During his term with LaPolla, Mr. Adams served as president and interim chief executive officer from 2003 to 2005, executive vice president and corporate secretary from 1999 to 2003, and held various officer positions in the Company’s former subsidiaries since he first joined LaPolla in 1997. He has a Bachelor of Science and Master of Science in business administration, as well as Juris Doctor, from Nova Southeastern University in Fort Lauderdale, Florida.

*Calendar*	2006				2005
*Quarter*	*High*		*Low*		*High*		*Low*
First	$	.90	$	.44	$	.80	$	.26
Second	$	1.20	$	.55	$	1.11	$	.40
Third	$	.99	$	.56	$	.85	$	.55
Fourth	$	.90	$	.41	$	.86	$	.41

	Year Ended December 31,
	2006			2005			2004			2003			2002
	Restated^(B)			Restated^{(A) (B)}
Summary of Operations
Sales	$	30,314,736		$	20,179,263		$	2,564,163		$	2,405,539		$	2,466,035
Cost of Sales		25,496,901			17,017,566			2,091,931			1,900,775			2,040,975
Selling, General and Administrative		7,108,941			5,719,156			1,980,170			3,087,915			4,112,966
Operating (Loss)		(3,126,667	)		(3,629,514	)		(2,627,175	)		(4,515,731	)		(5,001,579	)
Income (Loss) from Discontinued Operations		313,972			131,971			(3,141,333	)		(6,668,245	)		(5,818,870	)
Net (Loss)	$	(2,812,695	)	$	(3,497,543	)	$	(5,768,508	)	$	(11,183,976	)	$	(10,820,449	)
Plus: Dividends on Preferred Stock		(175,262	)		—			—			(498,001	)		(259,634	)
Net (Loss) Available to Common Stockholders	$	(2,987,957	)	$	(3,497,543	)	$	(5,768,508	)	$	(11,681,977	)	$	(11,080,083	)
Net (Loss) Per Share - Basic and Diluted:
Continuing Operations	$	(0.052	)	$	(0.069	)	$	(0.091	)	$	(0.328	)	$	(0.386	)
Discontinued Operations		0.005			0.002			(0.108	)		(0.436	)		(0.427	)
Financial Position
Long-Term Debt		306,573			294,206			33,682			—			15,500
Total Assets	$	11,152,308		$	9,494,869		$	2,143,694		$	1,691,544		$	2,721,968
Total Stockholders’ Equity (Deficit)		3,548,746			(2,459,035	)		(7,142,185	)		(2,367,083	)		(2,569,668	)

	2005
Net Loss (As Adjusted and Restated in Footnote (A) above)	$	(2,357,361	)
Adjustments		(1,140,172	)
As Adjusted and Restated	$	(3,497,543	)

	Payments Due By Period
	Less Than 1 Year		1-3 Years		3-5 Years		More Than 5 Years		Total
Long-Term Debt Obligations	$	97,154	$	186,195	$	16,728	$	—	$	300,077
Estimated Interest Payments on Long-Term Debt Obligations		20,361		17,175		1,099		—		38,635
Operating Lease Obligations		510,863		791,221		—		—		1,302,084
Total	$	628,378	$	994,591	$	17,827	$	—	$	1,640,796

(a)	1.	Consolidated Financial Statements and Supplementary Data:

		The following financial statements are included herein under Item 8 of Part II of this report, “Financial Statements and Supplementary Data”:

		Index to Consolidated Financial Statements	(i)
		Management’s Report on Internal Control Over Financial Reporting	F-1/A
		Report of Independent Registered Public Accounting Firm	F-2/A
		Consolidated Balance Sheets at December 31, 2006 and December 31, 2005	F-4/A
		Consolidated Statements of Operations for Each of the Years in the Three Year Period Ended December 31, 2006	F-5/A
		Consolidated Statements of Stockholders’ Equity for Each of the Years in the Three Year Period Ended December 31, 2006	F-6/A
		Consolidated Statements of Cash Flows for Each of the Years in the Three Year Period Ended December 31, 2006	F-8/A
		Notes to Consolidated Financial Statements	F-9/A
		Selected Quarterly Financial Data (Unaudited)	F-22/A

(a)	2.	Financial Statement Schedules:

		The following additional information should be read in conjunction with the consolidated financial statements under Item 15(a)1 of Part IV of this report:

		Report of Independent Registered Public Accounting Firm on Schedule	14
		Consolidated Schedule for the Years Ended December 31, 2006, 2005 and 2004:

		Schedule Number
		Valuation and Qualifying Accounts	15

All other schedules have been omitted for the reason that the required information is presented in the financial statements or notes thereto, the amounts involved are not significant or the schedules are not applicable.

(a)	3.	Exhibits:

		*See* Index of Exhibits below.

(b)	Item 601 Exhibits:

	Reference is hereby made to the Index of Exhibits under Item 15(a)3 of Part IV of this report.

Date:	August 20, 2007	LAPOLLA INDUSTRIES, INC.


		By: /s/ Douglas J. Kramer, CEO
		Douglas J. Kramer
		Chief Executive Officer


Date:	August 20, 2007	LAPOLLA INDUSTRIES, INC.


		By: /s/ Timothy J. Novak, CFO
		Timothy J. Novak
		Chief Financial Officer

			Additions
	Balance at		Charged to		Charged					Balance
	Beginning		Costs and		to Other					at End of
Classification	of Period		Expenses		Accounts		Deductions			Period
Year Ended December 31, 2006
Allowance for Doubtful Accounts	$	66,592	$	320,155	$	—	$	(162,441	)	$	224,306
Deferred Income Tax Assets Valuation Allowance ⁽²⁾		10,089,544		—		795,885		—			10,885,429
Year Ended December 31, 2005
Allowance for Doubtful Accounts	$	12,821	$	53,771	$	—	$	—		$	66,592
Deferred Income Tax Assets Valuation Allowance ⁽²⁾		—		—		10,089,544		—			10,089,544
Year Ended December 31, 2004
Allowance for Doubtful Accounts	$	12,028	$	793	$	—	$	—		$	12,821

	Notes:
	⁽¹⁾	Includes write-offs of uncollectible accounts.
	⁽²⁾	Includes financial data for current operations only.

Exhibit No.		Description
3.1		Restated Certificate of Incorporation dated June 28, 1994 as filed with the State of Delaware on June 16, 1994 (incorporated by reference to Exhibit 3.1 to Form 10-KSB dated December 31, 1998, filed April 16, 1999).
3.2		Certificate of Amendment of Restated Certificate of Incorporation dated February 12, 1999 as filed with State of Delaware February 12, 1999 (incorporated by reference to Exhibit 3.2 to Form 10-KSB dated December 31, 1998, filed April 16, 1999).
3.3		Certificate of Amendment of Restated Certificate of Incorporation dated June 21, 2000 as filed with the State of Delaware on June 26, 2000 (incorporated by reference to Exhibit 3(i) to Form 10-KSB dated December 31, 2000, filed March 30, 2001).
3.4		Certificate of Amendment of Restated Certificate of Incorporation dated May 28, 2002 as filed with the State of Delaware on May 28, 2002 (incorporated by reference to Exhibit 3.1 to Form 10-Q dated June 30, 2002, filed August 19, 2002).
3.5		Certificate of Amendment of Restated Certificate of Incorporation dated December 30, 2004 as filed with the State of Delaware on December 30, 2004 (incorporated by reference to Exhibit 3.5 to Form 10-K dated December 31, 2004, filed March 30, 2005).
3.6		Certificate of Amendment of Restated Certificate of Incorporation dated November 8, 2005 as filed with the State of Delaware on November 8, 2005 (incorporated by reference to Exhibit 3.6 to Form 10-K dated December 31, 2005, filed March 31, 2006).
3.7		Proforma Restated Certificate of Incorporation, as amended, and currently in effect (incorporated by reference to Exhibit 3.7 to Form 10-K dated December 31, 2005, filed March 31, 2006).
3.8		Bylaws, as amended, and currently in effect, of the Company (incorporated by reference to Exhibit 3.11 to Form 10-KSB dated December 31, 2005, filed March 31, 2006).
4.1		Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated September 30, 2001 filed with the State of Delaware November 2, 2001 (incorporated by reference to Exhibit 3.1 to Form 8-K dated September 30, 2001, filed October 25, 2001).
4.2		Amendment to Certificate of Designation of Preferences of Series B Convertible Preferred Stock dated December 31, 2001 (incorporated by reference to Exhibit 3.1.1 to Form 8-K dated December 31, 2001, filed January 31, 2002).
4.3		Certificate of Designation of Preferences of Series C Convertible Preferred Stock dated January 8, 2002 filed with the State of Delaware on February 28, 2002 (incorporated by reference to Exhibit 3.2 to Form 8-K dated January 8, 2002, filed January 31, 2002).
4.4		Amendment to Certificate of Designation of Preferences of Series C Convertible Preferred Stock dated September 27, 2006 filed with the State of Delaware on November 1, 2006 (incorporated by reference to Exhibit 4.1 to Form 10-Q dated September 30, 2006, filed November 1, 2006).
4.5		Certificate of Designation of Preferences of Series D Preferred Stock dated September 28, 2006 as filed with the State of Delaware on November 1, 2006 (incorporated by reference to Exhibit 4.2 to Form 10-Q dated September 30, 2006, filed November 1, 2006).
10.1		Securities Purchase Agreement dated September 30, 2001 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.1 to Form 8-K dated September 30, 2001, filed October 25, 2001).
10.2		Amendment to Securities Purchase Agreement dated September 30, 2001 between the Company and Richard J. Kurtz dated January 4, 2002 (incorporated by reference to Exhibit 10.1.1 to Form 8-K date December 31, 2001, filed January 31, 2002).
10.3		Securities Purchase Agreement dated December 31, 2001 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.2 to Form 8-K dated December 31, 2001, filed January 31, 2002).
10.4		Series C Preferred Stock Option Agreement dated January 8, 2002 between Richard J. Kurtz and the Company (incorporated by reference to Exhibit 10.3 to Form 8-K dated January 8, 2002, filed January 31, 2002).
10.5		Series C Preferred Stock Option Agreement dated March 21, 2003 between Richard J. Kurtz and the Company (incorporated by reference to Exhibit 10.6 to Form 10-Q dated March 31, 2003, filed May 15, 2003).
10.6		Securities Purchase Agreement dated September 29, 2006 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.1 to Form 10-Q dated September 30, 2006, filed January 31, 2002).
10.7		Securities Purchase Agreement dated December 31, 2006 between the Company and Richard J. Kurtz (incorporated by reference to Exhibit 10.7 to Form 10-K dated December 31, 2006, filed March 30, 2007).
10.8		Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K dated July 12, 2005, filed July 18, 2005).
10.9		Director Compensation Plan (incorporated by reference to Exhibit 10.9 to Form 10-K for December 31, 2004, filed March 30, 2005).
10.10		Amendment to Director Compensation Plan (incorporated by reference Exhibit 10.10 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.11		Director Compensation Plan, as amended (incorporated by reference Exhibit 10.11 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.12		Employment Agreement, effective January 1, 2002, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.5 to Form 10-Q dated March 31, 2002, filed May 15, 2002).
10.13		Executive Employment Agreement, effective January 28, 2005, between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated January 25, 2005, filed February 3, 2005).
10.14		Executive Employment Agreement, effective February 1, 2005, between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 1, 2005, filed February 10, 2005).
10.15		Stock Purchase Agreement entered into as of January 25, 2005, by Company, LaPolla Industries, Inc., and Billi Jo Hagan, as Trustee of the Billi Jo Hagan Trust, dated October 6, 2003 (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 11, 2005, filed February 17, 2005).
10.16		Amendment to Stock Purchase Agreement and Closing Statement entered into as of February 11, 2005, by and among the Company, LaPolla Industries, Inc., and Billi Jo Hagan, as Trustee of the Billi Jo Hagan Trust, dated October 6, 2003 (incorporated by reference to Exhibit 10.2 to Form 8-K dated February 11, 2005, filed February 17, 2005).
10.17		Option Agreement dated July 12, 2005 between Michael T. Adams and the Company (incorporated by reference to Exhibit 10.2 to Form 8-K dated July 12, 2005, filed July 18, 2005).
10.18		Option Agreement dated July 12, 2005 between Douglas J. Kramer and the Company (incorporated by reference to Exhibit 10.3 to Form 8-K dated July 12, 2005, filed July 18, 2005).
10.19		Amendment to Option Agreement dated July 28, 2005 between the Company and Michael T. Adams (incorporated by reference to Exhibit 10.1 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.20		Amendment to Option Agreement dated July 28, 2005 between the Company and Douglas J. Kramer (incorporated by reference to Exhibit 10.2 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.21		Termination Agreement dated July 25, 2005 between the Company and Michael T. Adams (incorporated by reference to Exhibit 10.5 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.22		Termination Agreement dated July 25, 2005 between the Company and Douglas J. Kramer (incorporated by reference to Exhibit 10.6 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.23		Executive Employment Agreement dated July 25, 2005 between the Company and Michael T. Adams (incorporated by to reference Exhibit 10.7 to Form 8-K dated July 25, 2005, filed July 29, 2005).
10.24		Executive Employment Agreement dated July 25, 2005 between the Company and Douglas J. Kramer (incorporated by to reference Exhibit 10.8 to Form 8-K dated July 25, 2005, filed July 29, 2005).

	Page

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING	F-1/A

REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2/A

CONSOLIDATED BALANCE SHEETS

Years Ended December 31, 2006 and 2005	F-4/A

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2006, 2005, and 2004	F-5/A

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2006, 2005, and 2004	F-6/A

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2006, 2005 and 2004	F-8/A

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-9/A

	2006			2005
Trade Receivables	$	3,819,737		$	4,276,522
Less: Allowance for Doubtful Accounts		(224,306	)		(66,591	)
Trade Receivables, Net	$	3,595,431		$	4,209,931

	2006		2005
Raw Materials	$	866,859	$	591,398
Finished Goods		2,015,377		802,205
Total	$	2,882,236	$	1,393,603

Exhibit No.		Description
10.25		Employment Agreement, effective September 1, 2005, by and between C. David Stearns and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated September 1, 2005, filed September 9, 2005).
10.26		Employment Letter dated February 1, 2006 by and between John A. Campbell and the Company (incorporated by reference to Exhibit 10.1 to Form 8-K dated February 1, 2006, filed February 2, 2006).
14.1		Code of Business Ethics and Conduct, as amended, and currently in effect (incorporated by reference to Exhibit 14.1 to Form 10-K dated December 31, 2005 filed March 31, 2006).
31.1-A		Certification of Principal Executive Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2-A		Certification of Principal Financial Officer Required Under Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32-A		Certification of Principal Executive Officer and Principal Financial Officer Required Under Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.

	As of December 31,
	2006		2005
	Restated^(B)		Restated^(A)(B)
Assets

Current Assets:
Cash	$	382,116	$	400,621
Trade Receivables, Net (Note 2)		3,595,431		4,209,931
Inventories (Note 3)		2,882,236		1,393,603
Prepaid Expenses and Other Current Assets		537,253		295,557
Deferred Income Taxes, Net (Note 5)		—		—
Total Current Assets		7,397,036		6,299,712

Property, Plant and Equipment, Net (Note 7)		1,489,639		907,574

Other Assets:
Goodwill (Note 9)		1,951,000		1,951,000
Other Intangible Assets, Net (Note 9)		165,396		188,474
Deposits and Other Non-Current Assets		149,237		148,108
Total Other Assets		2,265,633		2,287,583

Total Assets	$	11,152,308	$	9,494,868

Liabilities and Stockholders' Equity (Deficit)

Current Liabilities:
Accounts Payable (Note 10)	$	5,069,478		$	4,074,946
Accrued Expenses and Other Current Liabilities (Note 10)		1,091,947			2,026,985
Line of Credit (Note 11)		1,007,120			21,816
Note Payable – Other (Note 13)		—			1,693,211
Current Portion of Long-Term Debt (Note 15)		97,589			78,543
Current Portion of Liabilities from Discontinued Operations (Note 6)		232,479			699,345
Total Current Liabilities		7,498,613			8,594,846

Other Liabilities:
Note Payable – Related Party (Note 12)		—			3,000,000
Non Current Portion of Long-Term Debt (Note 15)		202,923			218,416
Non Current Portion of Liabilities from Discontinued Operations (Note 6)		103,650			140,642
Total Other Liabilities		306,573			3,359,058

Total Liabilities		7,805,186			11,953,904

Stockholders' Equity (Deficit):
Preferred Stock, $1.00 Par Value; 2,000,000 Shares Authorized, of which Designations:
Series A Convertible, 750,000 Shares Authorized; 62,500 Issued and Outstanding (Less Offering Costs of $7,465) for 2006 and 2005, respectively; $62,500 aggregate liquidation preference for 2006 and 2005, respectively.		55,035			55,035
Series D Convertible, 25,000 Shares Authorized; 8,176 and -0- Issued and Outstanding for 2006 and 2005, Respectively; $8,176,000 aggregate liquidation preference for 2006 and 2005, respectively.		8,176			—
Common Stock, $.01 Par Value; 65,000,000 Shares Authorized; 53,574,251 and 53,210,251 Issued and Outstanding for 2006 and 2005, respectively		535,743			532,103
Additional Paid-In Capital		70,201,151			61,594,114
Accumulated (Deficit)		(67,452,983	)		(64,640,287	)
Total Stockholders' Equity (Deficit)		3,347,122			(2,459,035	)

Total Liabilities and Stockholders' Equity (Deficit)	$	11,152,308		$	9,494,868

	Preferred Stock Amounts
	Series A		Series C			Series D		Par Value
As of the Year Ended	Shares		Shares			Shares		$1.00
December 31, 2003		62,500		673,145			—	$	728,180

Issuance of Common Stock		—		—			—		—
Issuance of Preferred Stock		—		—			—		—
Conversion of Preferred Stock to Common Stock		—		(673,145	)		—		(673,145	)
Net (Loss)		—		—			—		—
Preferred Stock Accrued Dividends and Other Adjustments		—		—			—		—
Payment of Preferred Stock Dividends with Common Stock		—		—			—		—

December 31, 2004		62,500		—			—	$	55,035

Issuance of Common Stock		—		—			—		—
Issuance of Preferred Stock		—		—			—		—
Share-Based Compensation Expense		—		—			—		—
Net (Loss)		—		—			—		—
Preferred Stock Accrued Dividends and Other Adjustments		—		—			—		—
Payment of Preferred Stock Dividends with Common Stock		—		—			—		—

December 31, 2005		62,500		—			—	$	55,035

Accumulated Deficit as Previously Reported for January 1, 2006		62,500		—			—	$	55,035
Adjustments (A)(B)		—		—			—		—
Accumulated Deficit as Restated for January 1, 2006		62,500		—			—	$	55,035
Issuance of Common Stock		—		—			—		—
Issuance of Preferred Stock		—		—			8,103		8,103
Share-Based Compensation Expense		—		—			—		—
Net (Loss)		—		—			—		—
Preferred Stock Accrued Dividends and Other Adjustments		—		—			—		—
Payment of Preferred Stock Dividends with Preferred Stock		—		—			73		73

December 31, 2006		62,500		—			8,176	$	63,211

	Common Stock Amounts						Additional			Accumulated
As of the Year Ended	Shares			Par Value $.01			Paid-In Capital			(Deficit)			Total
December 31, 2003		16,458,375		$	164,584		$	52,114,399		$	(55,374,246	)	$	(2,367,083	)

Issuance of Common Stock		630,786			6,308			340,453			—			346,761
Issuance of Preferred Stock		—			—			—			—			—
Conversion of Preferred Stock to Common Stock		12,375,024			123,750			549,395			—			—
Net (Loss)		—			—			—			(5,768,508	)		(5,768,508	)
Preferred Stock Accrued Dividends and Other Adjustments		(327,530	)		(3,275	)		(127,063	)		—			(130,338	)
Payment of Preferred Stock Dividends with Common Stock		2,877,714			28,777			748,206			—			776,983

December 31, 2004		32,014,369		$	320,144		$	53,625,390		$	(61,142,754	)	$	(7,142,185	)

Issuance of Common Stock		21,195,882			211,959			7,641,555			—			7,853,513
Issuance of Preferred Stock		—			—			—			—			—
Share-Based Compensation Expense		—			—			327,169			—			327,169
Net (Loss)		—			—			—			(2,357,361	)		(2,357,361	)
Preferred Stock Accrued Dividends and Other Adjustments		—			—			—			—			—
Payment of Preferred Stock Dividends with Common Stock		—			—			—			—			—

December 31, 2005		53,210,251		$	532,103		$	61,594,114		$	(64,640,287	)	$	(2,459,035	)

Accumulated Deficit as Previously Reported for January 1, 2006		53,210,251		$	532,103		$	61,594,114		$	(62,667,579	)	$	(486,327	)
Adjustments (A)(B)		—			—			—			(1,972,708	)		(1,972,708	)
Accumulated Deficit as Restated for January 1, 2006		53,210,251		$	532,103		$	61,594,114		$	(64,640,287	)	$	(2,459,035	)
Issuance of Common Stock		364,000			3,640			230,000			—			233,640
Issuance of Preferred Stock		—			—			8,094,897			—			8,103,000
Share-Based Compensation Expense		—			—			384,475			—			384,476
Net (Loss)		—			—			—			(2,812,695	)		(2,812,695	)
Preferred Stock Accrued Dividends and Other Adjustments		—			—			(175,262	)		—			(175,262	)
Payment of Preferred Stock Dividends with Preferred Stock		—			—			72,927			—			73,000
December 31, 2006		53,574,251		$	535,743		$	70,201,151		$	(67,452,983	)	$	(3,347,122	)

Date: August 20, 2007	LAPOLLA INDUSTRIES, INC.



	By:	/s/ Douglas J. Kramer
		Douglas J. Kramer
		Principal Executive Officer

Date: August 20, 2007	LAPOLLA INDUSTRIES, INC.



	By:	/s/ Timothy J. Novak
		Timothy J. Novak
		Principal Financial Officer

Dated: August 20, 2007	LAPOLLA INDUSTRIES, INC.




	By:	/s/ Douglas J. Kramer
		Douglas J. Kramer
		Principal Executive Officer



	By:	/s/ Timothy J. Novak
		Timothy J. Novak
		Principal Financial Officer