UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

                  For the quarterly period ended June 30, 2006

                                       OR

[ ] TRANSITION REPORT PURSAUNT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

For the transition period from                to
                              --------------------------------------------------

Commission File Number:                           333-118568
                       ---------------------------------------------------------

                     NATIONAL PATENT DEVELOPMENT CORPORATION
             (Exact Name of Registrant as Specified in its Charter)

         Delaware                                                 13-4005439
------------------------------------                        --------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization                                Identification No.)

777 Westchester Avenue, White Plains, NY                           10604
--------------------------------------------------------------------------------
(Address of principal executive offices)                        (Zip code)

                                 (914) 249-9700
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange act of 1934 during
the preceding 12 months (or for such shorter period) that the registrant was
required to file such reports and (2) has been subject to such filing
requirements for the past 90 days.      Yes     X         No

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12(b)-2 of the Exchange Act).  Yes      No      X

Indicate the number of shares outstanding of each of issuer's classes of common
stock as of August 8, 2006:

         Common Stock                                17,809,791 shares

<PAGE>




            NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES

                                TABLE OF CONTENTS


                                                                       Page No.

                          Part I. Financial Information

Item 1.      Financial Statements

             Condensed Consolidated Statements of Operations-
                Three Months and Six Months Ended

                June 30, 2006 and 2005 (Unaudited)                         1


             Condensed Consolidated Statements of Comprehensive Loss-
                Three Months and Six Months Ended

                June 30, 2006 and 2005 (Unaudited)                         2


             Condensed Consolidated Balance Sheets -

                June 30, 2006 (Unaudited) and December 31, 2005            3


             Condensed Consolidated Statements of Cash Flows -

                Six Months Ended June 30, 2006 and 2005 (Unaudited)        4


             Notes to Condensed Consolidated Financial Statements          5

Item 2.      Management's Discussion and Analysis of Financial
                Condition and Results of Operations                       13

Item 3.      Quantitative and Qualitative Disclosure about Market Risk    20

Item 4.      Controls and Procedures                                      20

                           Part II. Other Information

Item 6.      Exhibits                                                     21

             Signatures                                                   22




<PAGE>



4
                          PART I. FINANCIAL INFORMATION

            NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                       Three Months Ended                   Six Months Ended
                                                            June 30,                            June 30,
                                                        2006             2005               2006          2005
                                                        ----             ----               ----          ----
<S>                                                  <C>              <C>                <C>             <C>
  Sales                                              $31,161          $31,669            $62,366         $61,746
  Cost of sales                                       25,450           25,567             51,279          51,095
                                                     -------          -------            -------         -------
  Gross margin                                         5,711            6,102             11,087          10,651

  Selling, general and administrative
    expenses                                          (5,213)          (5,538)           (10,055)        (10,648)
  Loss on write-down of Illinois
    property                                                             (134)                              (134)
                                                           -          --------                 -          -------

        Operating  profit (loss)                         498              430              1,032            (131)

  Interest expense                                      (464)            (455)              (843)           (827)
  Investment and other income                             43              108                 77             271
                                                     -------         --------             ------        --------

       Income (loss) before income
        taxes and minority interest                       77               83                266            (687)

  Income tax expense                                    (140)            (328)              (378)           (371)
                                                   ----------       ----------         ----------      ----------

       Loss before minority interest                     (63)            (245)              (112)         (1,058)

  Minority interest                                     ( 53)            (150)              (153)           (157)
                                                   ----------      -----------        -----------     -----------

       Net loss                                     $   (116)        $   (395)          $   (265)     $   (1,215)
                                                    =========        =========          =========     ===========

  Net loss per share
       Basic and diluted                            $  (0.01)        $  (0.02)          $  (0.02)       $  (0.07)
                                                    =========        =========          =========       =========


</TABLE>



          See accompanying notes to consolidated financial statements.

<PAGE>


            NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
             CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
                                   (Unaudited)
                                 (in thousands)


<TABLE>
<CAPTION>
                                                     Three Months Ended                  Six Months Ended
                                                          June 30,                           June 30,
                                                       2006          2005                2006          2005
                                                       ----          ----                ----          ----
<S>                                                  <C>             <C>               <C>          <C>
  Net loss                                           $ (116)         $ (395)           $ (265)      $ (1,215)

  Other comprehensive income (loss), before
  tax:
  Net unrealized gain (loss) on
  available-for-sale-securities                         298            (206)            4,323            563
  Reclassification adjustment for gain on
  securities sold included in net loss                    -               -                 -           (152)

  Net unrealized gain (loss) on interest rate
  swap,
  net of minority interest                               21             (93)               66             58
                                                    -------        ---------          -------        -------

  Comprehensive income (loss) before tax                203            (694)            4,124           (746)

  Income tax (expense) benefit related to
  items of other comprehensive income (loss)             (8)             38               (26)           (25)
                                                    --------        -------            -------        -------

  Comprehensive income (loss)                         $ 195          $ (656)          $ 4,098         $ (771)
                                                      =====          =======          =======         =======

</TABLE>


          See accompanying notes to consolidated financial statements.



                                       2
<PAGE>



                     NATIONAL PATENT DEVELOPMENT CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                           June 30,              December 31,
                                                            2006                     2005
                                                            ----                     ----
                                                         (unaudited)
Assets
Current assets
<S>                                                         <C>               <C>
Cash and cash equivalents                                   $  4,683          $     5,115
Accounts receivable, less allowance
  for doubtful accounts of $533 and $480                      18,053               12,083
Receivable from GP Strategies Corporation                        725                1,142
Inventories                                                   23,434               24,021
Prepaid expenses and other current assets                        777                  997
Deferred tax asset                                               112                  352
                                                              ------               ------
Total current assets                                          47,784               43,170
Marketable securities available for sale                         522                  477
Property, plant and equipment, net                             2,994                3,085
Investment in Valera, including available
  for sale securities of $4,996 in 2006                        6,128                1,590
Other assets                                                   3,466                3,360
                                                           ---------            ---------
Total assets                                                 $60,894              $52,222
                                                             =======              =======

Liabilities and stockholder's equity
Current liabilities
Current maturities of long-term debt                        $    163             $    291
Short term borrowings                                         23,537               20,764
Accounts payable and accrued expenses                         11,311                9,566
                                                            --------               ------
Total current liabilities                                     35,011               30,621

Long-term debt less current maturities                         1,055                1,106
Deferred tax liability                                           279                  279
Interest rate collar, at market                                   36                   20

Minority interest                                              1,902                1,727

Stockholder's equity
Common Stock                                                     178                  178
Additional paid-in capital                                    25,965               25,921
Accumulated deficit                                           (8,027)              (7,762)
Accumulated other comprehensive income                         4,495                  132
                                                       -------------            ---------
Total stockholder's equity                                    22,611               18,469
                                                          ----------             --------
Total liabilities and stockholder's equity                   $60,894              $52,222
                                                             =======              =======
</TABLE>

          See accompanying notes to consolidated financial statements.


                                       3
<PAGE>



            NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                                         Six Months Ended
                                                                                              June 30,
                                                                                       2006              2005
                                                                                       ----              ----
   Cash flows from operations:
<S>                                                                                 <C>             <C>
   Net loss                                                                         $ (265)         $ (1,215)
   Adjustments to reconcile net loss to
    net cash used in operating activities:
   Depreciation and amortization                                                       388               338
   Minority interest                                                                   153               157
   Expenses paid in common stock                                                        44
   Deferred income taxes                                                               240
   Net (gain) loss on marketable securities                                                             (152)

   Loss on sale of fixed assets                                                                           76
   Loss on write-down of Illinois property                                                               134

   Changes in other operating items                                                 (3,706)           (6,203)
                                                                                   --------          --------
   Net cash used in operations                                                      (3,146)           (6,865)

   Cash flows from investing activities:
   Additions to property, plant and equipment, net                                    (297)             (862)
   Proceeds from sale of investments                                                                   1,002
   Proceeds from sale of fixed assets                                                                     48
   Repayment of receivable from GP Strategies                                          417                -
                                                                                      ----               --

   Net cash provided by investing activities                                           120               188

   Cash flows from financing activities:
   Distribution to GP Strategies                                                                         (91)
   Contribution from GP Strategies                                                                     5,000
   Proceeds from short-term borrowings                                               2,773             7,460
   Repayment of long-term debt                                                        (179)           (1,793)
                                                                                  ---------       -----------
   Net cash provided by financing activities                                         2,594            10,576
                                                                                     -----            ------


   Net increase (decrease) in cash and cash equivalents                               (432)            3,899
   Cash and cash equivalents at beginning of period                                  5,115             2,087
                                                                                ----------        ----------
   Cash and cash equivalents at end of period                                       $4,683            $5,986
                                                                                  ========          ========

</TABLE>

   See accompanying notes to the condensed consolidated financial statements.



                                       4
<PAGE>



            NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES

              Notes to Condensed Consolidated Financial Statements

                     Six months ended June 30, 2006 and 2005
                                   (Unaudited)


1.       Basis of presentation and summary of significant accounting policies

Basis of presentation

The accompanying Condensed Consolidated Balance Sheet as of June 30, 2006 and
the Condensed Consolidated Statements of Operations and Cash Flows for the three
months and six months ended June 30, 2006 and 2005 have not been audited, but
have been prepared in conformity with accounting principles generally accepted
in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. These financial statements should
be read in conjunction with the audited consolidated financial statements and
notes thereto for the year ended December 31, 2005 as presented in our Annual
Report on Form 10-K. In the opinion of management, this interim information
includes all material adjustments, which are of a normal and recurring nature,
necessary for a fair presentation. The results for the 2006 interim periods are
not necessarily indicative of results to be expected for the entire year.

Description of business. National Patent Development Corporation (the "Company"
or "National Patent Development "), through its wholly owned subsidiary, MXL
Industries, Inc. ("MXL"), manufactures polycarbonate parts requiring strict
adherence to optical quality specifications, and in the application of abrasion
and fog resistant coating to these parts. Products include shields and face
masks and non-optical plastic products.

The Company's 64% owned subsidiary, Five Star Products, Inc. ("Five Star"), is
engaged in the wholesale distribution of home decorating, hardware and finishing
products. It serves over 3,500 independent retail dealers in twelve states in
the Northeast. Products distributed include paint sundry items, interior and
exterior stains, brushes, rollers, calking compounds and hardware products. On
May 9, 2006 the Company announced that both it and Five Star had signed a
non-binding letter of intent with FLJ Partners, LLC ("FLJ") providing for the
sale by the Company to FLJ of its interest in Five Star for $2,950,000, or
$.3230 per share, plus the repayment of the $2,800,000 note. The Company and
Five Star had agreed to negotiate exclusively with FLJ with respect to Five Star
until May 31, 2006. On June 26, 2006 the Company terminated discussions with FLJ
with respect to the sale of its interest in Five Star Products, Inc., as a
result of the inability of the parties to agree to proceed with the transaction.

Five Star Group has an unsecured note payable (the "Note") to JL Distributors,
Inc., a wholly-owned subsidiary of the Company following the spin-off of the
Company from GP Strategies ("GP Strategies") on November 24, 2004. The Note, as
amended, bore interest at 8% payable quarterly, and matured on June 30, 2005. On
June 30, 2005 the Company and Five Star agreed to extend the Note for a one-year
term maturing on June 30, 2006. In consideration for the Company extending the
Note, Five Star paid the Company a fee of one percent of the Note's outstanding
balance or $28,000. In addition, the interest rate on the Note was increased to
9%. The Note is subordinated to the indebtedness under the Loan Agreement
according to an Agreement of Subordination & Assignment (the "Subordination
Agreement") between Five Star Group, Inc. and JL Distributors, Inc. dated June


                                       5
<PAGE>

20, 2003. The Subordination Agreement permits the annual repayment of principal
under certain circumstances. On July 28, 2006 the Company and Five Star agreed
to extend the Note for an additional one-year term maturing on June 30, 2007. In
consideration for the Company extending the Note, Five Star paid a fee of one
percent of the Note's outstanding balance or $28,000. The interest rate on the
Note remains at 9%.

Revenue recognition. Revenue on product sales is recognized at the point in time
when the product has been shipped, title and risk of loss has been transferred
to the customer, and the following conditions are met: persuasive evidence of an
arrangement exists, the price is fixed and determinable, and collectibility of
the resulting receivable is reasonably assured. Allowances for estimated returns
and allowances are recognized when sales are recorded.

Shipping and handling costs. Shipping and handling costs are included as a part
of selling, general and administrative expense. These cost amounted to
$1,301,000, $1,329,000, $2,545,000 and $2,557,000, for the three months and six
months ended June 30, 2006 and 2005, respectively.

Inventories. Inventories are valued at the lower of cost or market, using the
first-in, first-out method.

Derivatives and hedging activities. The interest rate swap and interest rate
collar entered into by the Five Star in connection with its Loan and Security
Agreement (see Note 5) is being accounted for under SFAS No. 133, as amended,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires all derivatives to be recognized in the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through earnings.
If the derivative is a cash flow hedge, changes in the fair value of the
derivative are recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in fair
value is immediately recognized in earnings. Changes in the fair value of the
interest rate swap, which has been designated as a cash flow hedge, were
recognized in other comprehensive income. Changes in the fair value of the
interest rate collar are recognized in earnings. During the quarter ended and
six months ended June 30, 2006 the Company recognized a loss of $11,000 and
$16,000, respectively, as part of other income, for the changes in the fair
value of the interest rate collar. During the quarter ended and six months ended
June 30, 2005 the Company recognized a gain of $34,000 and $9,000, respectively,
as part of other income, for the changes in the fair value of the interest rate
collar.

Recent accounting pronouncements. In July 2006, the Financial Accounting
Standards Board (FASB) released FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" (FIN
48). FIN 48 clarifies the accounting and reporting for uncertainties in income
tax law. This Interpretation prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. The Company will
adopt this Interpretation in the first quarter of 2007. The cumulative effects,
if any, of applying this Interpretation will be recorded as an adjustment to


                                       6
<PAGE>

retained earnings as of the beginning of the period of adoption. The Company has
commenced the process of evaluating the expected effect of FIN 48 on its
Consolidated Financial Statements and is currently not yet in a position to
determine such effects.

2.       Stock based compensation.

The Company and Five Star have stock-based compensation plans for employees and
non-employee members of the Board of Directors. The plans provide for
discretionary grants of stock options, restricted stock shares, and other
stock-based awards. The plans are administered by the Compensation Committee of
the Board of Directors, consisting of non-employee directors. Effective January
1, 2006, the Company and Five Star adopted Statement of Financial Accounting
Standards No. 123 (revised 2004), "Share-Based Payment", ("SFAS 123R"),
utilizing the modified prospective method whereby prior periods will not be
restated for comparability. SFAS 123R requires recognition of stock-based
compensation expense in the statement of operations over the vesting period
based on the fair value of the award at the grant date. Previously, the Company
used the intrinsic value method under Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), as amended by related
interpretations of the FASB. Under APB 25, no compensation cost was recognized
for stock options because the quoted market price of the stock at the grant date
was equal to the amount per share the employee had to pay to acquire the stock
after fulfilling the vesting period. SFAS 123R supersedes APB 25 as well as
Statement of Financial Accounting Standard 123 "Accounting for Stock-Based
Compensation", which permitted pro forma footnote disclosures to report the
difference between the fair value method and the intrinsic value method. As of
December 31, 2005 and June 30, 2006, no awards have been granted under the
Company's plan. In addition, during the six months ended June 30, 2006, Five
Star did not grant any stock options or any other stock-based awards under its
plan, and therefore the adoption of this pronouncement did not have any effect
on the Company's consolidated results of operations for the three and six month
periods ended June 30, 2006.

At June 30, 2006, Five Star had 1,100,000 options outstanding all of which were
exercisable under its stock option plan with an aggregate weighted average price
of $.14 per share and a contractual remaining life of .55 years. The aggregate
intrinsic value of the options outstanding at June 30, 2006 was $40,000.

The following table provides the pro forma effect on net earnings as if the
fair-value-based measurement method had been applied to all stock-based
compensation for the three months and six months ended June 30, 2005 (in
thousands, except per share amounts):


                                       7
<PAGE>


                                         Three Months Ended    Six Months Ended
                                              June 30,             June 30,
                                                2005                  2005
                                                ----                  ----
Net loss - As reported                        $ (395)             $ (1,215)
Compensation expense, net of tax
  Five Star stock options (1)                     (2)                   (3)
                                              -------               -------
  Pro forma net loss                            (397)             $ (1,218)
Basic and diluted loss per share
  As reported                                 $ (.02)             $  (.07)
  Pro forma net loss per share                $ (.02)             $  (.07)

(1) Expense relates to option grants made by Five Star prior to the acquisition
of a controlling interest in Five Star by the Company.

3.       Per share data

Basic and diluted loss per share for the three and six months ended June 30,
2006 and 2005 are based upon the actual number of the Company's shares
outstanding for the period. Outstanding warrants to acquire 1,423,887 common
shares issued in December 2004 were not included in the diluted computation, as
their effect would be anti-dilutive.

Loss per share for the three months and six months ended June 30, 2006 and 2005
are as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>

                                                  Three Months Ended                Six Months Ended
                                                       June 30,                         June 30,
                                                 2006           2005               2006           2005
                                                 ----           ----               ----           ----
  Basic and Diluted EPS
<S>                                           <C>            <C>                 <C>           <C>
  Net loss                                    $  (116)       $  (395)            $  (265)      $ (1,215)
  Weighted average shares
    outstanding, basic and diluted             17,834         17,803              17,831          17,801
  Basic and diluted loss per share             $ (.01)        $ (.02)            $  (.02)      $   (.07)


</TABLE>


                                       8
<PAGE>

4.       Long-term debt

Long-term debt

Long-term debt is comprised of the following (in thousands):

                                                 June 30,       December 31,
                                                    2006             2005
                                                 -------          -------
  MXL Pennsylvania Mortgage (a)                    $1,155          $1,205
  Other debt                                           62             186
  Capital lease obligations                             1               6
                                                 --------               -
                                                    1,218           1,397
                                                  -------         -------
  Less current maturities                            (163)           (291)
                                                 ---------          ------
                                                   $1,055          $1,106


(a) On March 8, 2001, MXL mortgaged its real estate and fixtures on its property
in Pennsylvania for $1,680,000. The loan requires monthly repayments of $8,333
plus interest at 2.5% above the one month LIBOR rate and matures on March 8,
2011, when the remaining amount outstanding of approximately $680,000 is due in
full. The loan is guaranteed by GP Strategies.

5.       Short term borrowings

Five Star short-term borrowings

In 2003, Five Star obtained a Loan and Security Agreement (the "Loan Agreement")
with Bank of America Business Capital (formerly Fleet Capital Corporation) (the
"Lender"). The Loan Agreement has a five-year term, with a maturity date of June
30, 2008. The Loan Agreement, as amended in August 1, 2005 provides for a
$35,000,000 revolving credit facility, which allows Five Star to borrow based
upon a formula of up to 65% of eligible inventory and 85% of eligible accounts
receivable, as defined therein. The interest rates under the Loan Agreement
consist of LIBOR plus a credit spread of 1.5% (7.6% at June 30, 2006) for
borrowings not to exceed $15,000,000 and the prime rate (8.0% at June 30, 2006)
for borrowings in excess of the above-mentioned LIBOR-based borrowings. The
credit spreads can be reduced in the event that Five Star achieves and maintains
certain performance benchmarks. At June 30, 2006 and December 31, 2005,
approximately $22,586,000 and $19,764,000 was outstanding under the Loan
Agreement and approximately $4,967,000 and $1,451,000 was available to be
borrowed, respectively. Substantially all of Five Star's assets are pledged as
collateral for these borrowings. Under the Loan Agreement Five Star is subject
to covenants requiring minimum net worth, limitations on losses, if any, and
minimum or maximum values for certain financial ratios. As of June 30, 2006,
Five Star was in compliance with all required covenants.



                                       9
<PAGE>

In connection with the Loan Agreement, Five Star also entered into a derivative
transaction with the Lender. The derivative transaction is an interest rate swap
and has been designated as a cash flow hedge. Effective July 1, 2004 through
June 30, 2008, Five Star will pay a fixed interest rate of 3.38% to the Lender
on notional principal of $12,000,000. In return, the Lender will pay to Five
Star a floating rate, namely, LIBOR, on the same notional principal amount. The
credit spread under the new Loan Agreement is not included in, and will be paid
in addition to this fixed interest rate of 3.38%. The fair value of the interest
rate swap amounted to $499,000 and $395,000 at June 30, 2006 and December 31,
2005, respectively and is included in other assets in the accompanying balance
sheets.

On June 17, 2004, Five Star also entered into a derivative interest rate collar
transaction during the period from July 1, 2004 through June 30, 2008 on
notional principal of $12,000,000. The transaction consists of an interest rate
floor of 2.25%, whereas if LIBOR is below 2.25%, the Lender will pay to Five
Star the difference between LIBOR and 2.25%, on the same notional principal
amount. The transaction also consists of an interest rate cap of 5.75%, whereas
if LIBOR is above 5.75%, Five Star will pay to the Lender the difference between
LIBOR and 5.75%, on the same notional principal amount.

MXL short-term borrowings

On March 1, 2005, MXL obtained a Line of Credit Loan (the "MXL Line") from M&T
Bank with a one year term, maturing on March 1, 2006, which has been extended to
June 30, 2007 on the same terms. The MXL Line provides for a $1,000,000
revolving credit facility, which is secured by MXL's eligible accounts
receivable, inventory and a secondary claim on the Lancaster, PA property. The
interest rates under the MXL Line consist of LIBOR plus a credit spread of 3% or
the prime rate plus a credit spread of 0.25%. The MXL Line is subject to an
unused commitment fee of 0.25% of the average daily unused balance of the line
payable quarterly. The Company has guaranteed the MXL Line. At June 30, 2006,
$950,000 was outstanding under the MXL Line and $50,000 was available to be
borrowed. The MXL Line contains certain financial covenants, most significant
being a cash flow coverage ratio of 1.25 to 1.00, which is calculated at
December 31.

6.       Inventories

Inventories are comprised of the following (in thousands):

                               June 30, 2006             December 31, 2005
                               -------------             -----------------
   Raw materials              $      413                 $      386
   Work in process                   264                        113
   Finished goods                 22,757                     23,522
                                 -------                   --------
                                 $23,434                    $24,021
                                 =======                    =======

                                       10
<PAGE>

7.       Investment in Valera Pharmaceuticals, Inc.  ("Valera")

Valera is a specialty pharmaceutical company engaged in the development and
commercialization of prescription pharmaceuticals principally utilizing Valera's
patented Hydron drug delivery technology.

Valera's lead product is a twelve-month implant that delivers histrelin, a
synthetic nonapeptide agonist of luteinizing hormone-releasing hormone (LHRH).
LHRH agonists have become a mainstay in treating locally advanced and metastatic
prostate cancer. On October 13, 2004, Valera announced that the FDA approved the
marketing of Vantas(TM), the name for Valera's long-acting LHRH implant for
treating prostate cancer. Prior to June 2000, Valera operated as a division of
GP Strategies. In connection with an offering of GP Strategies 6% Convertible
Subordinated Exchangeable Notes due June 2003, Valera was incorporated as a
separate company and became a wholly-owned subsidiary of GP Strategies through
GP Strategies' ownership of 100% of the common stock of Valera.

In December 2001, Valera completed a $7 million private placement of Series A
convertible preferred stock to certain institutional investors. As a condition
of the private placement, GP Strategies contractually gave up operating control
over Valera through an Investors Rights Agreement, which gave GP Strategies the
right to designate one director on Valera's board of directors and gave the
other stockholders the right to designate the other directors, and subsequent
thereto accounted for the investment under the equity method. As a result of
Valera's operating losses, GP Strategies investment was written down to zero.

In 2003, Valera completed a private placement offering pursuant to which Valera
raised approximately $13.5 million in gross proceeds from the sale of Series B
convertible preferred stock. As part of such transaction, GP Strategies was
granted an option until March 31, 2004, to purchase up to $5 million of the
Series B convertible preferred stock at the offering price of $0.725 per share,
which was subsequently verbally extended to June 30, 2004. On June 30, 2004, GP
Strategies transferred a portion of its option to an institutional investor, who
exercised such option and purchased from Valera 3,448,276 shares of Series B
convertible preferred stock for $0.725 per share. The balance of the option
expired unexercised. In consideration of such transfer, such institutional
investor granted the Company an option until October 28, 2004 to purchase up to
2,068,966 shares of Series B convertible preferred stock owned by such
institutional investor for prices ranging from $0.725 to $0.7685 per share. The
Company exercised such option on October 28, 2004 at a price of $0.7685 per
share, for an aggregate exercise price of $1,590,000. On November 12, 2004, the
Company obtained the funds necessary to pay the exercise price (see Note 9 (a)).
On August 16, 2004, Valera sold 11,600,000 shares of Series C convertible
preferred stock and received gross proceeds of $11.6 million. As of December 31,
2005 and 2004, the Company owned 10,000,000 shares of Valera common stock and
2,068,966 shares of Valera series B convertible preferred stock. Assuming
conversion of all of the outstanding shares of Series A, Series B and Series C


                                       11
<PAGE>

convertible preferred stock and exercise of stock options held by employees of
Valera at December 31, 2005, the Company would own approximately 18% of Valera.
On February 7, 2006 Valera completed an initial public offering of 3,862,500
shares of common stock at $9.00 per share. All the convertible preferred stock
outstanding at the time of the offering, including accrued dividends,
automatically converted into common stock. In addition, Valera effected a 1 for
6 reverse split of common stock. Subsequent to the public offering after giving
effect to the conversion of the Series B preferred stock and the reverse split
the Company owned 2,070,670 shares of Valera common stock or approximately 14%
of the outstanding shares of common stock. The Company entered into a lock-up
agreement with the underwriters of the public offering which restricts the
Company from selling or otherwise disposing of its shares of Valera common stock
until August 16, 2006.

On October 17, 2003, MXL received from GP Strategies in partial payment of a
note receivable the common shares of Valera and recorded such shares at zero
representing their carrying amount to GP STRATEGIES. As a result of the
Investors Rights Agreement referred to above, the Company was accounting for its
investment in Valera under the equity method. However as the Company had not
guaranteed obligations of Valera and had not otherwise committed to provide
further support for Valera, it had discontinued recognizing additional losses of
Valera.

As described above, the Company's investment in voting stock of Valera has
declined below 20%. In addition, at December 31, 2005 Valera's board of
directors consisted of nine directors only one of which has been designated by
the Company. Accordingly the Company believes that it no longer has the ability
to exercise significant influence over operating and financial policies of
Valera and no longer accounts for its investment in Valera by the equity method.
As a result thereof, as of December 31, 2005 the investment in Valera's Series B
convertible preferred stock is being accounted for at cost.

As a result of the initial public offering, the Company's investment in Valera's
common stock became a marketable security and accordingly, at June 30, 2006, the
investment, to the extent of shares available to be sold within a year at any
balance sheet date under Rule 144 or an effective registration statement, has
been classified as available for sale securities and measured at fair value with
the adjustment to fair value and changes therein to be retained by the Company
recorded in other comprehensive income. The remainder of the investment is
considered restricted and will continue to be carried at cost. In addition, if
it is determined that the Company is no longer an affiliate, the shares would
become freely tradable after the initial six month lock-up period. The Valera
shares available for sale over the next 12 months at June 30, 2006 totaled
595,422 and resulted in an unrealized gain of $4,279,000 being included in
accumulated other comprehensive income as of such date. Two related parties,
Bedford Oak Partners and Mr. Jerome I. Feldman, are entitled to receive 50% of
any profit received from the sale, on a pro-rata basis, of 404,004 shares of
Valera common stock in excess of $3.94 per share (see Note 9(a)). The unrealized
profit on Valera shares available for sale at June 30, 2006 which would be
payable to the related parties upon sale totaled $258,000, which is included in
Accounts payable and accrued expenses on the June 30, 2006 balance sheet.

                                       12
<PAGE>

8.       Business segments

The operations of the Company currently consist of the following two business
segments, by which the Company is managed.

The MXL Segment manufactures precision coated and molded optical plastic
products. MXL is a specialist in the manufacture of polycarbonate parts
requiring adherence to strict optical quality specifications, and in the
application of abrasion and fog resistant coatings to those parts.

The Five Star Segment distributes paint sundry items, interior and exterior
stains, brushes, rollers, caulking compounds and hardware products on a regional
basis.

The following tables set forth the sales and operating income (loss) of each of
the Company's operating segments (in thousands):

<TABLE>

<CAPTION>
                                       Three Months Ended                       Six Months Ended
                                             June 30,                              June 30,
                                        2006           2005                  2006          2005
                                        ----           ----                  ----          ----
      Sales
<S>                                    <C>             <C>                   <C>           <C>
      Five Star                        $28,938         $29,579               $57,890       $57,818
      MXL                                2,223           2,090                 4,476         3,928
                                     ---------       ---------             ---------     ---------
                                       $31,161         $31,669               $62,366       $61,746
</TABLE>

<TABLE>
<CAPTION>

                                       Three Months Ended                       Six Months Ended
                                            June 30,                                June 30,
                                        2006            2005                 2006          2005
                                        ----            ----                 ----          ----
      Segment operating income
      (loss)
<S>                                     <C>            <C>                   <C>           <C>
      Five Star                         $  791         $  1,181              $ 1,711       $ 1,659
      MXL                                  137             (202)                 231          (706)
                                     ---------       -----------             -------      ---------
                                         $ 928            $ 979              $ 1,942         $ 953
</TABLE>

A reconciliation of the segment operating income (loss) to loss before income
tax (expense) benefit and minority interests in the condensed consolidated
statements of operations is shown below (in thousands):



                                       13
<PAGE>


<TABLE>
<CAPTION>

                                                      Three Months Ended                Six Months Ended
                                                           June 30,                         June 30,
                                                         2006          2005               2006          2005
                                                         ----          ----               ----          ----
<S>                                                      <C>           <C>              <C>             <C>
    Segment operating income                             $928          $979             $1,942          $953
    Corporate and other general and
    administrative expenses                              (429)         (549)              (910)       (1,084)
    Interest expense                                     (465)         (455)              (843)         (827)
    Investment and other income (loss)                     43           108                 77           271
                                                       ------      --------          ---------    ----------
    Income (loss) before income tax
       expense and minority interests                     $77           $83              $ 266       $  (687)

</TABLE>

9. Related party transactions

a) On November 12, 2004, the Company entered into an agreement to borrow
approximately $1,022,000 from Bedford Oak Partners, which is controlled by
Harvey P. Eisen, a director of the Company, and approximately $568,000 from
Jerome I. Feldman, who is Chairman and Chief Executive Officer of the Company,
to exercise the option to purchase Series B Convertible Preferred shares of
Valera. The loans bore interest at 6% per annum, matured on October 31, 2009,
and were secured by all shares of Valera owned by the Company, including the
purchased shares. Bedford Oak Partners and Jerome I. Feldman are entitled to
receive 50% of any profit received by the Company from the sale on a pro-rata
basis of the Valera purchased shares. On January 11, 2005, the Company prepaid
the loans, including accrued interest of approximately $16,000, to Bedford Oak
Partners and Jerome I. Feldman out of the proceeds from the claims relating to
the Learning Technologies acquisition.

b) Certain of the Company's executive officers are also executive officers of GP
Strategies and will remain on GP Strategies' payroll. The executive officers do
not receive any salary from the Company; however, they provide the Company with
management services under a management agreement between GP Strategies and the
Company. Services under the agreement relate to corporate federal and state
income taxes, corporate legal services, corporate secretarial administrative
support, and executive management consulting. The term of the agreement extends
for three years from the date of the spin-off, or through November 24, 2007, and
may be terminated by either the Company or GP Strategies on or after July 30,
2006 with 180 days prior written notice. Prior to July 1, 2005 GP Strategies
charged the Company a management fee to cover an allocable portion of the
compensation of these officers, based on the time they spent providing services
to the Company, in addition to an allocable portion of certain other corporate
expenses. Such fees amounted to $39,000 and $82,000 for the three months and six
months ended June 30, 2005.

Effective July 1, 2005 GP Strategies and the Company amended the above
management agreement. Pursuant to the amendment, the Company will pay GP


                                       14
<PAGE>

Strategies an annual fee of not less than $970,000 as compensation for these
services, payable in equal monthly installments. The fee includes $698,000 for
the period July 1, 2005 through June 30, 2006, representing approximately 80% of
the cost of the compensation and benefits required to be provided by GP
Strategies to Jerome Feldman, who serves as the Company's Chief Executive
Officer. Such fee shall be increased by 80% of any increase of the cost of the
compensation and benefits required to be provided by GP Strategies to Mr.
Feldman; in addition, the Company shall remain liable for paying to GP
Strategies 80% of the cost of the compensation and benefits required to be
provided by GP Strategies to Mr. Feldman if the management agreement expires, is
terminated, or is otherwise not extended through May 31, 2007. The Company paid
GP Strategies approximately $218,000 and $434,000 for the three months and six
months ended June 30, 2006 as compensation for services. The Company also
occupies a portion of corporate office space leased by GP Strategies. The
Company compensates GP Strategies approximately an additional $205,000 annually
for use of this space. GP Strategies' lease extends through December 31, 2006.

                                       15
<PAGE>

            NATIONAL PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES


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

General Overview

The Company operates in two segments: MXL and Five Star. The Company also owns
certain other non-core assets, including investments in 2 publicly held
companies, Millennium Cell and Valera Pharmaceuticals; and certain real estate.
The Company monitors Millennium Cell for progress in the commercialization of
Millennium Cell's emerging technology and monitors Valera Pharmaceuticals for
progress in the sales efforts related to their product.

MXL Overview

The primary business of MXL is the manufacture of polycarbonate parts requiring
adherence to strict optical quality specifications, and the application of
abrasion and fog resistant coatings to those parts. MXL also designs and
constructs injection molds for a variety of applications. Some of the products
that MXL produces include:

     o  facemasks and shields for recreation purposes and industrial safety
        companies,
     o  precision optical systems, including medical optics, military eye wear
        and custom molded and decorated products, and
     o  tools, including optical injection mold tools and standard injection
        mold tools.

MXL's manufactures and sells its products to various commercial and government
customers, who utilize MXL's parts to manufacture products that will be
ultimately delivered to the end-user. MXL's government customers include various
offices of the Department of Defense, while MXL's commercial customers are
primarily in the recreation, safety, and security industries. Some of MXL's
consumer based products are considered to be at the high-end of their respective
markets. As a result, sales of MXL's products may decline together with a
decline in discretionary consumer spending; therefore a key performance
indicator that the Company's management uses to manage the business is the level
of discretionary spending in key markets, specifically the United States and
Japan. Other key performance measures used by the Company's management to run
the business include:

     o  consumer confidence indices in key markets,
     o  sales levels of complementary items in the recreational vehicle market,
        such as motorcycles, RV's and snowmobiles,
     o  levels of defense spending, and
     o  new OSHA safety standards.



                                       16
<PAGE>

MXL believes that the principal strengths of its business are its
state-of-the-art injection molding equipment, advanced production technology,
high quality standards, and on time deliveries. However, due to the focused
nature of the market, MXL has a limited customer base and tends to be adversely
affected by a loss in business from its significant customers. To further grow,
MXL not only intends to regain market share in its existing market, but to
leverage its expertise as a molder and coater of optical quality products by
expanding into other markets and products.

Five Star Overview

Five Star is a publicly held company that is a leading distributor in the United
States of home decorating, hardware, and finishing products. Five Star offers
products from leading manufacturers in the home improvement industry and
distributes those products to retail dealers, which include lumber yards, "do-it
yourself" centers, hardware stores and paint stores. Five Star has grown to be
one of the largest independent distributors in the Northeast United Stated by
providing a complete line of competitively priced products, timely delivery and
attractive pricing and financing terms to its customers.

         The following key factors affect Five Star's financial and operation
performance:

     o  its ability to negotiate the lowest prices from its suppliers,
     o  its ability to increase revenue by obtaining new customers, while
        maintaining a level fixed cost structure by utilizing its existing
        warehouses,
     o  the housing market in general,
     o  consumers' confidence in the economy,
     o  consumers' willingness to invest in their homes, and
     o  weather conditions that are conducive to home improvement projects.

         The following key performance measures are utilized by the Company's
management to run Five Star's business:

     o  new U.S. housing starts,

     o  sales of existing homes,

     o  sales of high margin products to its customers,

     o  purchases from each vendor, and

     o  performance benchmarks used by Home Depot and Lowe's, such as number of
        stores and square footage, as well as financial benchmarks.

Five Star operates in the Home Improvement market, which has grown in recent
years and for which the Home Improvement Research Institute predicts average
annual industry growth of nearly 5% for the next several years. Nonetheless,
Five Star faces intense competition from large national distributors, smaller
regional distributors, and manufacturers that bypass the distributor and sell
directly to the retail outlet. The principal means of competition for Five Star
are its strategically placed distribution centers and its extensive inventory of
quality, name-brand products. In addition, Five Star's customers face stiff
competition from Home Depot and Lowe's, which purchase directly from


                                       17
<PAGE>

manufacturers. As a result of such competition, while the Home Improvement
market has expanded significantly in recent years, Five Star's revenue has
increased only incrementally, and such revenue would have declined if Five Star
had not entered into new geographic sales territories as described below. In
spite of this, the independent retailers that are Five Star's customers remain a
viable alternative to Home Depot and Lowe's, due to the shopping preferences of
and the retailer's geographic convenience for some consumers.

Five Star has also established a presence the Mid-Atlantic States, servicing
customers as far south as North Carolina, which has generated additional annual
revenues of approximately $10 million. Five Star services this territory from
its existing New Jersey warehouse, enabling Five Star to leverage its fixed
costs over a broader revenue base. To further expand, Five Star will attempt to
grow its revenue base in the Mid-Atlantic States, to acquire complementary
distributors and to expand the distribution of its use of private-label products
sold under the "Five Star" name.

Operating Highlights

Three months ended June 30, 2006 compared to the three months ended June 30,
2005

For the three months ended June 30, 2006, the Company had income before income
tax expense and minority interest of $77,000 compared to income before income
tax expense and minority interest of $83,000 for the three months ended June 30,
2005. The decrease in pre-tax income is primarily the result of the following;
(i)reduced segment operating income of $51,000, which is comprised of a $390,000
decrease in operating income for Five Star and a $339,000 increase in operating
income for MXL, (ii) reduced investment and other income of $65,000 and (iii) a
$134,000 write down of MXL's Illinois property in the three months ended June
30, 2005.

Sales

                                                Three months
                                               ended June 30,
                                          2006                 2005
                                          ----                 ----
         Five Star                      $28,938,000          $29,579,000
         MXL                              2,223,000            2,090,000
                                      -------------        -------------
                                        $31,161,000          $31,669,000

The decrease in Five Star sales of $641,000 was a result of a reduction in sales
volume among Five Star's existing customer base which was caused by weaker
economic conditions, and an unfavorable shift in weather conditions within the
Northeast.

The increase in MXL sales of $133,000 was a result of increased sales volume and
prices from existing customers resulting from a concerted effort to expand sales
opportunities with existing customers.

                                       18
<PAGE>


Gross margin

                                  Three months ended
                                       June 30,
                    ------------- --------- ----------------- ----------
                      2006             %          2005            %
                    ------             -      --------            -
     Five Star      $5,092,000        17.6       $5,604,000      18.9
     MXL               619,000        27.8          498,000      23.8
                    ----------      ------     ------------    ------
                    $5,711,000        18.3       $6,102,000      19.3
                    ----------        ----       ----------      ----

Five Star's gross margin of $5,092,000, or 17.6% of net sales, for the quarter
ended June 30, 2006 decreased by $512,000, or 9%, when compared to $5,604,000,
or 18.9% of net sales, for the quarter ended June 30, 2005. The decrease in
gross margin dollars and gross margin percentage for the quarter ended June 30,
2006 was a result of reduced sales and reduced promotional discounts from
vendors as a result of Five Star's decision to reduce inventory levels.

MXL's gross margin of $619,000, or 27.8% of sales, for the quarter ended June
30, 2005 increased by $121,000 or 24% when compared to gross profit of $498,000,
or 23.8% of sales, for the quarter ended June 30, 2005, mainly due to the
following; (i) increased margins in all product lines due to increased pricing,
(ii) improved product mix and (iii) increased sales.

Selling, general, and administrative expenses

For the three months ended June 30, 2006, selling, general and administrative
expenses decreased by $325,000 from $5,538,000 for the three months ended June
30, 2005 to $5,213,000 partially due to the following; (i) reduced general and
administrative expenses of $88,000 at the Company corporate level, (ii) reduced
selling, general and administrative expenses at Five Star of $122,000 primarily
attributable to an effort to reduce selling, general and administrative
expenses, (iii ) reduced selling, general and administrative expenses of $84,000
at MXL primarily due to reduced facility costs related to closing of the
Massachusetts facility in 2005 as well as increased operating efficiencies.

Loss on write-down of the Illinois facility

In the second quarter of 2005 the Company incurred an additional loss of
$134,000 to record the Illinois facility at fair value, based upon the expected
net proceeds from the sale of the Illinois facility, revised for commissions,
taxes and other closing costs.

Investment and other income (loss), net

National Patent Development recognized investment and other income of $43,000
for the three months ended June 30, 2006, compared to $108,000 for the three
months ended June 30, 2005 Investment and other income, net includes interest
income, investment income, and recognition of a gain or loss for the change in
the fair value of the Five Star's interest rate collar. The decrease of $65,000
is primarily attributable to the change in the fair value of Five Star's
interest rate collar as well as reduced interest income.

                                       19
<PAGE>

Income taxes

For the three months ended June 30, 2006 and 2005, the Company recorded an
income tax expense of $140,000, or an effective rate of 183% and an income tax
expense of $328,000, or an effective tax rate of 395%, respectively, which
represents the Company's applicable federal, state and local tax expense for the
periods. The provision for income taxes differs from the tax computed at the
federal statutory income tax rate due primarily to recording income tax expense
on the income of Five Star, a 64% owned subsidiary, which is not included in the
Company's consolidated return and not recording income tax benefit for the
losses of National Patent and MXL.

Six months ended June 30, 2006 compared to the six months ended June 30, 2005

For the six months ended June 30, 2006, the Company had income before income tax
expense and minority interest of $266,000 compared to a loss before income tax
expense and minority interest of $687,000 for the six months ended June 30,
2005. The increase in pre-tax income is primarily a result of the following; (i)
increased operating income of $937,000 at MXL, (ii) reduced corporate and other
general and administrative expenses of $171,000 and (iii) reduced Investment and
other income of $194,000.

Sales

                                                    Six months
                                                  ended June 30,
                                             2006                 2005
                                             ----                 ----
      Five Star                            $57,890,000          $57,818,000
      MXL                                    4,476,000            3,928,000
                                         -------------        -------------
                                           $62,366,000          $61,746,000

The increase in Five Star sales of $72,000 was a result of reduced unit sales
among Five Star's existing customer base which was caused by weaker economic
conditions, and an unfavorable shift in weather conditions within the Northeast,
offset by increased prices passed on to Five Star's customers due to increased
raw material costs for certain of the Company's vendors.

The increase in MXL sales of $548,000 was primarily a result of increased sales
volume and increase in prices to existing customers resulting from a concerted
effort to expand sales opportunities with existing customers.


                                       20
<PAGE>



Gross margin

                                     Six months ended
                                         June 30,
                     -------------- --------- ----------------- ----------
                        2006             %          2005            %
                     -------             -      --------            -
      Five Star       $9,860,000        17.0      $10,008,000      17.3
      MXL              1,227,000        27.4          643,000      16.4
                     -----------      ------   --------------    ------
                     $11,087,000        17.8      $10,651,000      17.2
                     -----------        ----      -----------      ----

Five Star's gross margin of $9,860,000, or 17% of net sales, for the six months
ended June 30, 2006 decreased by $148,000, or 1.5%, when compared to
$10,008,000, or 17.3% of net sales, for the six months ended June 30, 2005. The
reduced gross margin amount and percentage for the six months ended June 30,
2006 was primarily the result of reduced promotional discounts from vendors as a
result of Five Star's decision to reduce inventory levels, partially offset by
reduced warehousing expenses for the period.

MXL's gross margin of $1,227,000 or 27.4% of sales, for the six months ended
June 30, 2006 increased by $584,000 or 91% when compared to gross margin of
$643,000, or 16.4% of sales, for the six months ended June 30, 2005, mainly due
to the following; (i) increased margins in all product lines due to increased
pricing, (ii) improved product mix and, (iii) reduced costs due to exiting the
Massachusetts facility and the consolidation of all MXL's injection molding and
precision coating operations at its Lancaster PA facility.

Selling, general, and administrative expenses

For the six months ended June 30, 2006, selling, general and administrative
expenses decreased by $593,000 from $10,648,000 for the six months ended June
30, 2005 to $10,055,000 due to the following; (i) reduced general and
administrative expenses of $174,000 at the Company's corporate level, (ii)
reduced selling, general and administrative expenses at Five Star of $200,000,
primarily attributable to a $175,000 recovery of bad debts written-off in prior
years, and (iii) reduced selling, general and administrative expenses of
$219,000 at MXL, primarily due to reduced facility costs related to closing of
the Massachusetts facility in 2005, as well as increased operating efficiencies.

Loss on write-down of the Illinois facility

In the second quarter of 2005, the Company incurred an additional loss of
$134,000 to record the Illinois facility at fair value, based upon the expected
net proceeds from the sale of the Illinois facility, revised for commissions,
taxes and other closing costs.

Investment and other income (loss), net.

The Company recognized investment and other income of $77,000 for the six months
ended June 30, 2006 as compared to $271,000 the six months ended June 30, 2005.


                                       21
<PAGE>

The reduced investment and other income, net is mainly due to a $152,000 gain on
the sale of Millennium Cell, Inc. common stock 2005.

Income taxes

For the six months ended June 30, 2006 and 2005, the Company recorded an income
tax expense of $378,000, or an effective rate of 142% and an income tax expense
of $371,000, or an effective tax rate of 54.7%, respectively, which represents
the Company's applicable federal, state and local tax expense for the periods.
The provision for income taxes differs from the tax computed at the federal
statutory income tax rate primarily due to (i) recording income tax expense on
the income of Five Star, a 64% owned subsidiary, which is not included in the
Company's consolidated return and (ii) not recording income tax benefit for the
losses of the Company and MXL.

Liquidity and capital resources

At June 30, 2006, the Company had cash and cash equivalents of $4,683,000. The
Company believes that cash anticipated to be generated from operations and
borrowing availability under existing credit agreements will be sufficient to
fund the Company's working capital requirements for at least the next twelve
months.

For the six months ended June 30, 2006, the Company's working capital increased
by $224,000 to $12,773,000 from $12,549,000 as of December 31, 2005. The working
capital increase was primarily a result of increased accounts receivable,
partially offset by increased short term borrowings.

The decrease in cash and cash equivalents of $432,000 for the six months ended
June 30, 2006 resulted from the following: (i) net cash used in operations of
$3,146,000, due primarily to a net loss of $265,000, an increase in accounts
receivable of $5,970,000, partially offset by an increase in accounts payable
and accrued expenses of $1,486,000 and reduced inventory of $587,000; (ii) net
cash provided by investing activities of $120,000 consisting of a repayment of a
receivable from GP Strategies of $417,000, partially offset by additions to
property, plant and equipment of $297,000; and (iii) net cash provided by
financing activities of $2,594,000, consisting of proceeds of short term
borrowings of $2,773,000, offset by repayments of long-term debt of $179,000.

In 2003, Five Star obtained a Loan and Security Agreement (the "Loan Agreement")
with Bank of America Business Capital (formerly Fleet Capital Corporation) (the
"Lender"). The Loan Agreement has a five-year term, with a maturity date of June
30, 2008. The Loan Agreement, as amended in August 1, 2005 provides for a
$35,000,000 revolving credit facility, which allows Five Star to borrow based
upon a formula of up to 65% of eligible inventory and 85% of eligible accounts
receivable, as defined therein. The interest rates under the Loan Agreement
consist of LIBOR plus a credit spread of 1.5% (7.6% at June 30, 2006) for
borrowings not to exceed $15,000,000 and the prime rate (8.0% at June 30, 2006)
for borrowings in excess of the above-mentioned LIBOR-based borrowings. The


                                       22
<PAGE>

credit spreads can be reduced in the event that Five Star achieves and maintains
certain performance benchmarks. At June 30, 2006 and December 31, 2005,
approximately $22,586,000 and $19,764,000 was outstanding under the Loan
Agreement and approximately $4,967,000 and $1,451,000 was available to be
borrowed, respectively. Substantially all of Five Star's assets are pledged as
collateral for these borrowings. Under the Loan Agreement Five Star is subject
to covenants requiring minimum net worth, limitations on losses, if any, and
minimum or maximum values for certain financial ratios. As of June 30, 2006 Five
Star was in compliance with all required covenants. The following table sets
forth the significant debt covenants at June 30, 2006:

<TABLE>
<CAPTION>

Covenant                                 Required                               Calculated
--------                                 --------                               ----------
<S>                                      <C>                                    <C>
Minimum tangible net worth               $6,000,000                             $7,795,000
Debt to tangible net worth               < 6                                    2.90
Fixed charge coverage                    >1.1                                   1.90
Quarterly income                         No loss in consecutive quarters        $278,000 -first quarter income
                                                                                $148,000- second quarter income
</TABLE>

On March 1, 2005, MXL obtained a Line of Credit Loan (the "MXL Line") from M&T
Bank with a one year term, maturing on March 1, 2006, which has been extended to
June 30, 2007 on the same terms. The MXL Line provides for a $1,000,000
revolving credit facility, which is secured by MXL's eligible accounts
receivable, inventory and a secondary claim on the Lancaster, PA property. The
interest rates under the MXL Line consist of LIBOR plus a credit spread of 3% or
the prime rate plus a credit spread of 0.25%. The MXL Line is subject to an
unused commitment fee of 0.25% of the average daily unused balance of the line
payable quarterly. The Company has guaranteed the MXL Line. At June 30, 2006,
$950,000 was outstanding under the MXL Line and $50,000 was available to be
borrowed. The MXL Line contains certain financial covenants, most significant
being a cash flow coverage ratio of 1.25 to 1.00, which is calculated at
December 31.


Management discussion of critical accounting policies

         The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Our estimates, judgments and assumptions
are continually evaluated based on available information and experience. Because
of the use of estimates inherent in the financial reporting process, actual
results could differ from those estimates.

         Certain of our accounting policies require higher degrees of judgment
than others in their application. These include valuation of accounts
receivable, accounting for investments, and impairment of long-lived assets
which are summarized below.



                                       23
<PAGE>

Revenue recognition

         Revenue on product sales is recognized at the point in time when the
product has been shipped, title and risk of loss has been transferred to the
customer, and the following conditions are met: persuasive evidence of an
arrangement exists, the price is fixed and determinable, and collectibility of
the resulting receivable is reasonably assured. Allowances for estimated returns
and allowances are recognized when sales are recorded.

Valuation of accounts receivable

         Provisions for allowance for doubtful accounts are made based on
historical loss experience adjusted for specific credit risks. Measurement of
such losses requires consideration of National Patent Development's historical
loss experience, judgments about customer credit risk, and the need to adjust
for current economic conditions. The allowance for doubtful accounts as a
percentage of total gross trade receivables was 2.87% and 4.2% at June 30, 2006
and December 31, 2005, respectively.

Impairment of long-lived tangible assets

         Impairment of long-lived tangible assets with finite lives results in a
charge to operations whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of
long-lived tangible assets to be held and used is measured by a comparison of
the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by determining the amount by which the
carrying amount of the assets exceeds the fair value of the asset. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less cost of sale.

         The measurement of the future net cash flows to be generated is subject
to management's reasonable expectations with respect to National Patent
Development's future operations and future economic conditions which may affect
those cash flows.

         As of June 30, 2006, National Patent Development holds undeveloped land
in Pawling, New York with a carrying amount of approximately $2.5 million and in
East Killingly, Connecticut with a carrying amount of approximately $0.4
million, which management believes is less than its fair value, less cost of
sale.

Accounting for investments

         The Company's investment in marketable securities are classified as
available-for-sale and recorded at their market value with unrealized gains and
losses recorded as a separate component of stockholders' equity. A decline in
market value of any available-for-sale security below cost that is deemed to be
other than temporary, results in an impairment loss, which is charged to
earnings.


                                       24
<PAGE>

         Determination of whether an investment is impaired and whether an
impairment is other than temporary requires management to evaluate evidence as
to whether an investment's carrying amount is recoverable within a reasonable
period of time considering factors which include the length of time that an
investment's market value is below its carrying amount and the ability of the
investee to sustain an earnings capacity that would justify the carrying amount
of the investment.

         On October 17, 2003, the Company received GP Strategies' shares of
Valera Pharmaceuticals pursuant to the Repayment and recorded such shares at
zero representing their carrying amount to GP Strategies after reflecting Valera
losses. On December 31, 2005, the Company owned 100% of Valera's common stock
and 2,068,966 shares of the Series B convertible preferred stock (a 17.7%
ownership interest, assuming conversion of Valera outstanding preferred stock
and exercise of stock options held by employees of Valera) but no longer had
financial and operating control of Valera. As a condition of a private placement
of preferred stock in December 2001, GP Strategies contractually gave up
operating control over Valera through an Investors Rights Agreement. At December
31, 2005 the Company accounted for its investment in Valera's Series B
convertible preferred stock under the cost method. On February 7, 2006 Valera
completed an initial public offering of 3,862,500 shares of common stock at
$9.00 per share. After giving effect to the conversion of the preferred stock
into common stock and a 1 for 6 reverse stock split of common stock effected by
Valera in connection with the offering, the Company's preferred shares were
converted into common stock and the Company now owns 2,070,670 shares of common
stock of Valera or approximately 14% of the currently outstanding shares of
common stock as of June 30, 2006.

         Subsequent to Valera's initial public offering, the Company's
investment in Valera's common stock became a marketable security and accordingly
the investment, to the extent of shares available to be sold within a year at
any balance sheet date under Rule 144 or an effective registration statement, is
classified as available for sale securities and measured at fair value with the
adjustment to fair value and changes therein to be retained by the Company
recorded in other comprehensive income. The remainder of the investment is
considered restricted and will continue to be carried at cost. In addition, if
it is determined that the Company is no longer an affiliate, the shares would
become freely tradable after the initial six month lock-up period. The Valera
shares available for sale over the next 12 months at June 30, 2006 totaled
595,422. Two related parties, Bedford Oak Partners and Mr. Jerome I. Feldman,
are entitled to receive 50% of any profit received from the sale, on a pro-rata
basis, of 404,004 shares of Valera common stock in excess of $3.94 per share.
The amounts payable to the related parties totaled $258,000 at June 30, 2006 and
has been recorded as a liability within Accounts payable and accrued expenses on
the June 30, 2006 balance sheet.

Income taxes

To arrive at our income tax provision and other tax balances, significant
judgment is required. In the ordinary course of our business, there are many
transactions and calculations where the ultimate tax outcome is uncertain. Some
of these uncertainties arise as a consequence of the treatment of capital
assets, financing transactions and multistate taxation of operations. Although


                                       25
<PAGE>

we believe that our estimates are reasonable, no assurance can be given that the
final tax outcome of these matters will not be different than that which is
reflected in our historical tax provisions and accruals. Such differences could
have a material impact on our income tax provision, other tax accounts and net
income in the period in which such determination is made.

The Company records a valuation allowance against deferred income tax assets
when management believes it is more likely than not that some portion or all of
the deferred income tax assets will not be realized. Management considers
factors such as reversal of deferred income tax liabilities, projected future
taxable income, tax planning strategies, changes in tax law and other factors .A
change to these factors could impact the estimated valuation allowance and
income tax expense.

Under SFAS No. 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities, and are measured using enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. SFAS No. 109 provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. Based on the weight of
available evidence, we have provided a valuation allowance against certain
deferred tax assets. The valuation allowance was based on the historical
earnings patterns within individual tax jurisdictions that make it uncertain
that we will have sufficient income in the appropriate jurisdictions to realize
the full value of the assets. We will continue to evaluate the realizability of
the deferred tax assets on a quarterly basis.


Forward-looking statements

The forward-looking statements contained herein reflect National Patent
Development's management's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those in the forward-looking statements, all of which are difficult to
predict and many of which are beyond the control of National Patent Development,
including, but not limited to the risks and uncertainties detailed in National
Patent Development's periodic reports and registration statements filed with the
Securities and Exchange Commission.




                                       26
<PAGE>


Item 3.    Quantitative and Qualitative Disclosure About Market Risk

  We have no material changes to the disclosure on this matter made in our
  report on Form 10-K for the fiscal year ended December 31, 2005.

Item 4.    Controls and Procedures

     a. Evaluation of disclosure controls and procedures. The Company's Chief
        Executive Officer and Chief Financial Officer have reviewed and
        evaluated the effectiveness of the Company's disclosure controls and
        procedures (as defined in Exchange Act Rules 240.13a-14(c) and
        15d-14(c)) as of a date within ninety days before the filing date of
        this quarterly report. Based on that evaluation, the Chief Executive
        Officer and Chief Financial Officer have concluded that the Company's
        current disclosure controls and procedures are effective as of the
        evaluation date, providing them with material timely information
        relating to the Company required to be disclosed in the reports the
        Company files or submits under the Exchange Act. The Chief Executive
        Officer and Chief Financial Officer have also concluded that the
        Company's current disclosure controls and procedures are designed, and
        are effective as of the evaluation date, to give reasonable assurance
        that the information required to be disclosed by the Company in the
        reports that it files under the Exchange Act is recorded, processed,
        summarized and reported within the time periods specified in the rules
        and forms of the Securities and Exchange Commission.

     b. Changes in internal controls. There have been no significant changes in
        the Company's internal controls or in other factors that could
        significantly affect these controls subsequent to the date of their
        evaluation.



                                       27
<PAGE>


                           PART II. OTHER INFORMATION

Item 6.           Exhibits

                  a.       Exhibits

                           31.1 Certification of Chief Executive Officer of the
                           Company dated August 14, 2006 pursuant to Securities
                           and Exchange Act Rule 13d-14(a)/15(d-14(a), as
                           adopted pursuant to Section 302 and 404 of the
                           Sarbanes-Oxley Act of 2002.*

                           31.2 Certification of Chief Financial Officer of the
                           Company dated August 14, 2006 pursuant to Securities
                           and Exchange Act Rule 13d-14(a)/15(d-14(a), as
                           adopted pursuant to Section 302 and 404 of the
                           Sarbanes-Oxley Act of 2002.*

                           32.2 Certification of Chief Executive Officer and
                           Chief Financial Officer of the Company dated August
                           14, 2006 pursuant to 18 U.S.C. Section 1350 as
                           adopted pursuant to Section 906 of the Sarbanes-Oxley
                           Act of 2002.*

________

*Filed herewith



                                       28
<PAGE>





                                   SIGNATURES


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


                                        NATIONAL PATENT DEVELOPMENT CORPORATION


DATE: August 14, 2006                   Jerome I. Feldman
                                        Chairman of the Board and
                                        Chief Executive Officer


DATE: August 14, 2006                   Scott N. Greenberg
                                        Chief Financial Officer


                                       29
<PAGE>