Exhibit 10.2
 
FIVE STAR PRODUCTS, INC.
STOCK OPTION AGREEMENT
 
AGREEMENT, dated July 17, 2007 (the “Grant Date”), between Five Star Products,
Inc., a Delaware corporation (the “Company”), with an address at 10 East 40th
Street, Suite 3110, New York, NY 10016, and Ira Sobotko (the “Grantee”), with an
address c/o 10 East 40th Street, Suite 3110, New York, NY 10016.
 
WHEREAS, the Board of Directors of the Company has, on the Grant Date, pursuant
to the Five Star Products, Inc. 2007 Incentive Stock Plan, a copy of which is
annexed hereto as Exhibit A (the “Plan”; capitalized terms used but not defined
herein having the meanings ascribed thereto in the Plan), granted to the Grantee
options to purchase shares of the common stock, par value $.01 per share, of the
Company (the “Common Stock”), as hereinafter set forth, and authorized the
execution and delivery of this Agreement;
 
NOW, THEREFORE, the parties hereto agree as follows:
 
1.           The Grantee is hereby granted options (the “Options”) to purchase
from the Company, subject to the terms and conditions set forth in this
Agreement, all or any part of 125,000 shares of Common Stock (the “Option
Shares”) at an initial purchase price of $ 0.78 per share; provided, however
that notwithstanding any other provision of this Agreement, the Options granted
are contingent upon approval of the Plan by the shareholders of the Company as
provided in Section 16 hereof.
 
2.           The Options shall be exercisable as follows and subject to the
continuous employment of the Grantee with the Company until the applicable
vesting date:
 
(a)           Unless sooner terminated as hereinafter provided, this Option
shall become vested and exercisable up to 33.3% of the Option Shares on the date
of filing (such filing date, the “1 Vesting Date”) of the Company’s Annual
Report on Form 10-K (“Form 10-K”) with the Securities and Exchange Commission
(the “SEC”) for the fiscal year ending December 31, 2007 (“Fiscal 2007”),
subject to the Company’s achieving Adjusted EBITDA (as defined below) of at
least $5,000,000 for Fiscal 2007.  For purposes of this Agreement “Adjusted
EBITDA” means earnings before interest, taxes, depreciation, amortization and
extraordinary items and Nonrecurring Items (as defined in the Plan), all
determined in accordance with generally accepted accounting principles
consistently applied.
 
(b)           Unless sooner terminated as hereinafter provided, this Option
shall become vested and exercisable up to 33.3% of the Option Shares on the date
of filing (such filing date, the “2nd Vesting Date”) of the Company’s Form 10-K
with the SEC for the fiscal year ending December 31, 2008 (“Fiscal 2008”),
subject to the Company’s achieving Adjusted EBITDA of at least $7,500,000 for
Fiscal 2008.
 
(c)           Unless sooner terminated as hereinafter provided, this Option
shall become vested and exercisable up to 33.4% of the Option Shares on the date
of filing (such filing date, the “3rd Vesting Date”) of the Company’s Form 10-K
with the SEC for the fiscal year ending December 31, 2009 (“‘Fiscal 2009”),
subject to the Company’s achieving Adjusted EBITDA of at least $11,250,000 for
Fiscal 2009.
 

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(d)           If, on the 3rd Vesting Date, the Company’s aggregate Adjusted
EBITDA for Fiscal 2007, Fiscal 2008 and Fiscal 2009 equals or exceeds
$23,750,000, then any Option Shares that did not vest on the 1st Vesting Day,
2nd Vesting Date or 3rd Vesting Day shall become vested and exercisable on the
3rd Vesting Date.
 
(e)           Notwithstanding any other provision of this Agreement to the
contrary, in the event that Grantee is employed by the Company as of the end of
Fiscal 2007, 2008 or 2009, Grantee shall be entitled to the vesting of this
Option for that fiscal year, as set forth above, regardless of whether Grantee’s
employment terminates prior to the formal determination of vesting (i.e., based
on Adjusted EBITDA calculations) for such fiscal year, as set forth above.
 
3.           The Options shall automatically become vested and shall be
immediately exercisable in full upon the occurrence of a Change in Control of
the Company or its parent, National Patent Development Corporation
(“NPDC”).  For purposes of this Agreement, a “Change in Control” of the Company
shall be deemed to have occurred if (i) National Patent Development Corporation
(“NPDC”) and its affiliates cease to own a majority of the voting stock of the
Company and (ii) within any 12-month period beginning on or after the date that
is three months after the date hereof, the persons who were directors of the
Company immediately before the beginning of such period (the “Company Incumbent
Directors”) shall cease (for any reason other than death) to constitute at least
a majority of the Board of Directors of the Company or the board of directors of
any successor to the Company, provided that any director who was not a director
of the Company immediately before the beginning of such period shall be deemed
to be a Company Incumbent Director if such director was elected to the Board of
Directors of the Company by, or on the recommendation of or with the approval
of, at least two-thirds of the directors who then qualified as Company Incumbent
Directors either actually or by prior operation of this Section 3, unless such
election, recommendation or approval was the result of an actual or threatened
election contest of the type contemplated by Regulation 14a-11 promulgated under
the Exchange Act.  For purposes of this Agreement, a “Change in Control” of NPDC
shall be deemed to have occurred if (i) a change in control of NPDC of a nature
that would be required to be reported in response to Item 5.01 of Current Report
on Form 8-K pursuant to Section 13 or 15(d) of the Exchange Act, other than a
change of control resulting in control by Grantee or a group including Grantee
occurs, (ii) any “person” (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than Grantee or a group including Grantee, is or
becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of NPDC representing 20% or more of
the combined voting power of NPDC’s then outstanding securities, or (iii) within
any 12-month period beginning on or after the date that is three months after
the date hereof, the persons who were directors of NPDC immediately before the
beginning of such period (the “NPDC Incumbent Directors”) shall cease (for any
reason other than death) to constitute at least a majority of the Board of
Directors of NPDC or the board of directors of any successor to NPDC, provided
that any director who was not a director of NPDC immediately before the
beginning of such period shall be deemed to be a NPDC Incumbent Director if such
director was elected to the Board of Directors of NPDC by, or on the
recommendation of or with the approval of, at least two-thirds of the directors
who then qualified as NPDC Incumbent Directors either actually or by prior
operation of this Section 8(d), unless such election, recommendation or approval
was the result of an actual or threatened election contest of the type
contemplated by Regulation 14a-11 promulgated under the Exchange Act of or any
successor provision.

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4.           All Options shall terminate and thereafter no longer be exercisable
(subject to Section 8) on the tenth anniversary of the Grant Date (the
“Expiration Date”).
 
5.           Option Shares purchased pursuant to this Agreement shall be paid
for in full at the time of purchase.  Payment may be made in cash, shares of
Common Stock, Options, or such other consideration as may be approved by the
Committee, or a combination thereof, provided that such consideration shall be
such that the Option Shares shall be fully paid and nonassessable.  If payment
is made in whole or part by tender of (a) shares of Common Stock, such shares
shall be valued at the Fair Market Value thereof, (b) Options, the Options
tendered as payment must be exercisable at the date of such tender, shall be
deemed to have been exercised for purposes of this Agreement, and shall be
valued at an amount equal to the excess of the Fair Market Value of the Option
Shares issuable on exercise of such Options over the aggregate exercise price of
such Options, or (c) consideration other than cash, shares of Common Stock, or
Options, such consideration shall have such value as determined by the Committee
(whose determination shall be final).  Upon receipt of written notice of
exercise of Options in the form attached hereto as Exhibit B together with
payment and delivery of any other required documentation, the Company shall,
without stock transfer tax to the Grantee or any other person entitled to
exercise such Options, deliver to the person exercising such Options a
certificate or certificates for the Option Shares so purchased.  It shall be a
condition to the performance of the Company’s obligation to issue or transfer
Common Stock upon exercise of Options that the Grantee or other person
exercising such Options pay, or make provision satisfactory to the Company for
the payment of, any taxes (other than stock transfer taxes) which the Company is
obligated to collect with respect to the issue or transfer of Common Stock upon
exercise, including any Federal, state, or local withholding taxes.
 
6.           No person shall have any rights as a stockholder with respect to
any Option Shares until the date a stock certificate is issued to such person
for such Option Shares.  Except as otherwise expressly provided herein, no
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
 
7.           Options are not transferable otherwise than by will or the laws of
descent and distribution and are exercisable, during the lifetime of the
Grantee, only by the Grantee or, in the event of Grantee’s legal disability, by
the Grantee’s legal representative.  The Grantee or his representative shall
give the Company notice of any transfer, specifying the name and address of the
transferee and the number and class of Options transferred.
 
8.           a)           If, for any reason other than death or disability,
Grantee’s Termination of Service occurs prior to the Expiration Date, such
Options may be exercised, to the extent of the number of shares and with the
exercise price with respect to which the Grantee could have exercised it on the
date of such Termination of Service, by the Grantee at any time prior to the
earlier of (i) the Expiration Date and (ii) two months after the date of such
Termination of Service.
 
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(b)           If Grantee becomes disabled (within the meaning of section
22(e)(3) of the Code) prior to the Expiration Date, and the Grantee’s
Termination of Service occurs as a consequence of such disability, the Options
may be exercised, to the extent of the number of shares and with the exercise
price with respect to which the Grantee could have exercised it on the date of
such Termination of Service, by the Grantee at any time prior to the earlier of
(i) the Expiration Date and (ii) six months after the date of such Termination
of Service.  In the event of the Grantee’s legal disability, the Options may be
exercised by the Grantee’s legal representative.
 
(c)           If Grantee’s Termination of Service occurs as a result of death
prior to the Expiration Date, or if the Grantee dies following his or her
Termination of Service but prior to the expiration of the period determined
under Sections 8(a) and (b) above, the Options may be exercised, to the extent
of the number of shares and with the exercise price with respect to which the
Grantee could have exercised them on the date of his or her death, by the
Grantee’s estate, personal representative, or beneficiary who acquired the right
to exercise the Options by bequest or inheritance or by reason of the death of
the Grantee.  Such post-death exercise may occur at any time prior to the
earlier of (i) the Expiration Date and (ii) one year after the date of the
Grantee’s death.
 
(d)           If the issuance of any shares of Common Stock on the exercise of
any Options pursuant to this Section 8 has not, at the time of such exercise,
been registered under the Securities Act, the Grantee or other person exercising
such Options shall execute and deliver such documents as the Company may
reasonably require to ensure compliance with the Securities Act and other
applicable securities laws, including acknowledgement that such shares are
“restricted securities” as defined in the regulations under the Act and are
acquired for investment purposes only and not with a view to resale or
distribution.
 
9.           The number and kind of shares issuable on exercise of, and the
exercise price of, the Options represented hereby shall be subject to adjustment
as provided in the Plan.
 
10.           The Company shall at all times reserve and keep available out of
its authorized Common Stock the full number of shares of Common Stock issuable
upon exercise of Options.
 
11.           b)           If at any time the Committee or the Board shall
determine, in its discretion, that the listing, registration, or qualification
of any of the Option Shares upon any securities exchange or under any state or
federal law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition of, or in connection with, the issue or
purchase of Option Shares, the Options may not be exercised in whole or in part
unless such listing, registration, qualification, consent, or approval shall
have been effected or obtained free of any conditions not acceptable to the
Committee or the Board, as applicable.  Any notice of exercise of Options which
would be effective except for this Section 11 shall be deemed effective
immediately upon satisfaction of all such conditions (even if such notice could
not otherwise then have been given).
 
(b)           The Company shall not be obligated to sell or issue any Option
Shares in any manner in contravention of the Securities Act, the Exchange Act,
or any state securities law.  The Board may, at any time, require as a condition
to the exercise of Options that the Option Shares be acquired for investment
purposes only and that the certificate therefor contain a legend restricting
transfer.

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12.           All notices hereunder shall be in writing, and (a) if to the
Company, shall be delivered personally to the Secretary of the Company or mailed
to its principal office, addressed to the attention of the Secretary, (b) if to
the Grantee, shall be delivered personally or via courier or mailed via
certified mail, postage prepaid, return receipt requested to the Grantee at the
address first set forth above, or (c) if to any subsequent holder of Options or
Option Shares, to the address specified for such holder in the notice provided
for in Section 7 or on the stock records of the Company.  Such addresses may be
changed at any time by notice from one party to the other.
 
13.           All decisions or interpretations made by the Committee with regard
to any question arising hereunder shall be binding and conclusive on the Company
and the Grantee.
 
14.           This Agreement shall bind and inure to the benefit of the parties
hereto and the successors and assigns of the Company and, to the extent provided
in Section 7, the executors, administrators, legatees, heirs, guardians, legal
representatives, successors, and assigns of the Grantee.
 
15.           This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without giving effect to rules governing
the conflict of laws.
 
16.           Notwithstanding any other provision of this Agreement, the Options
granted by this Agreement shall be void and of no force and effect unless the
shareholders of the Company shall within twelve months after the Grant Date
approve the Plan.  No Options may be exercised until the foregoing shareholder
approval is received.
 
 
 
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first above written.
 

  FIVE STAR PRODUCTS, INC.          
 
By:
/s/ JOHN C. BELKNAP       Title : Chief Executive Officer                    
GRANTEE              /s/ IRA  J. SOBOTKO     Ira Sobotko  

 

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EXHIBIT A
 
FIVE STAR PRODUCTS, INC.
 
2007 INCENTIVE STOCK PLAN
 
 
 
 
 

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EXHIBIT B
 
EXERCISE NOTICE
 
The undersigned, pursuant to the foregoing Option Agreement (terms used herein
have the meanings as defined in the Option Agreement), hereby elects to exercise
Options for ________shares of Common Stock (the “Shares”) at an exercise price
of $0.38 per share, and herewith (or as otherwise provided in the Option
Agreement) makes payment in full therefor pursuant to such Option Agreement.
 
1.           If the sale of the Shares and the resale thereof has not, prior to
the date hereof, been registered pursuant to a registration statement filed and
declared effective under the Securities Act of 1933 (the “Act”), the undersigned
hereby agrees, represents, and warrants that:
 
(a)           I am acquiring the Shares for my own account (and not for the
account of others) for investment and not with a view to the distribution or
resale thereof;
 
(b)           By virtue of my position, I have access to the same kind of
information which would be available in a registration statement filed under the
Act;
 
(c)           I am a sophisticated investor;
 
(d)           I understand that I may not sell or otherwise dispose of such
shares in the absence of either a registration statement under the Act or an
exemption from the registration provisions of the Act; and
 
(e)           The certificates representing such shares may contain a legend to
the effect of (d) above.
 
2.           If the sale of the Shares and the resale thereof has been
registered under the Act, the undersigned hereby represents and warrants that I
have received the applicable prospectus and all subsequent reports incorporated
therein by reference.
 

  Very truly yours,        
 
      (type name under signature line)  

Dated: _________________________                                          

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