UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 (Mark
One)
  x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30,
2008
 or
 o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _____ to
_____
  Commission
File Number: 000-50587
 
 NATIONAL
PATENT DEVELOPMENT CORPORATION
 (Exact
Name of Registrant as Specified in its Charter)
 Delaware
                  
                  13-4005439(State
      or other jurisdiction of
                  
                  (I.R.S.
      Employerincorporation
      or organization)
                  
                  Identification
      No.)
 
 10
      East 40th Street, Suite 3110, New York, NY
                  
                  10016(Address
      of principal executive
      offices)
                  
                  (Zip
      code)
 
 (646)
      742-1600(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
o
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 Large
      accelerated filer
                        o
                        Accelerated
      filer
                        oNon-accelerated
      filer
                        o
                        Smaller
      reporting company
                        x(Do
      not check if a smaller reporting company)
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o   No  x
  As of November 5, 2008, there were
17,540,549 shares of the registrant’s common stock, $0.01 par value,
outstanding.
  
 
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
  TABLEOFCONTENTSPage
      No.Part I. Financial
      InformationItem
      1.
                                                                            Financial
      StatementsCondensed Consolidated Statements of Operations -

                                                                                Three and Nine Months Ended
                                                                                September 30, 2008 and 2007
    (Unaudited)
                                                                            1Condensed Consolidated Statements of Comprehensive Income
      (Loss) -

                                                                                Three
      and Nine Months Ended

                                                                                  September 30, 2008 and 2007
      (Unaudited)
                                                                            2Condensed Consolidated Balance Sheets -

                                                                                September 30, 2008 (Unaudited) and December 31,
      2007
                                                                            3Condensed Consolidated Statements of Cash Flows -

                                                                                Nine Months Ended September 30, 2008 and 2007
      (Unaudited)
                                                                            4Condensed Consolidated Statements of Changes in Stockholders’
      Equity -

                                                                                Nine Months Ended September 30, 2008
      (Unaudited)
                                                                            5Notes to Condensed Consolidated Financial Statements –

                                                                                Three and Nine Months Ended
                                                                                September 30, 2008 and 2007
      (Unaudited)
                                                                            6Item 2.
                                                                            Management’s Discussion and Analysis of Financial

                                                                                Condition and Results of Operations
                                                                            19Item 3.
                                                                            Quantitative and Qualitative Disclosure about Market
      Risk
                                                                            31Item 4.
                                                                            Controls and Procedures
                                                                            31Part
      II. Other InformationItem 2.
                                                                            Unregistered Sales of Equity Securities and Use of
      Proceeds
                                                                            32Item 6.
                                                                            Exhibits
                                                                            33SIGNATURES
                                                                            
                                                                            34
 
  PART
I.  FINANCIAL INFORMATION
 
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED CONSOLIDATEDSTATEMENTS OF OPERATIONS
 (Unaudited)
 (in
thousands, except per share data)
 
 Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Sales
                
                $
                31,216
                
                
                $
                32,938
                
                
                $
                94,114
                
                
                $
                98,726Cost
      of sales
                
                
                25,702
                
                
                
                26,953
                
                
                
                77,975
                
                
                
                81,758Gross
      margin
                
                
                5,514
                
                
                
                5,985
                
                
                
                16,139
                
                
                
                16,968Selling,
      general and administrative
                  expenses
                
                
                (6,271
                )
                
                
                (5,658
                )
                
                
                (17,460
                )
                
                
                (15,689
                )Charge
      related to resignation of Chairman
                  of
      Five Star
                
                -
                
                
                -
                
                
                
                (1,096
                )
                
                -Operating  profit
      (loss)
                
                
                (757
                )
                
                
                327
                
                
                
                (2,417
                )
                
                
                1,279Interest
      expense
                
                
                (370
                )
                
                
                (394
                )
                
                
                (1,060
                )
                
                
                (1,126
                )Gain
      on exchange of Valera for Indevus shares
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                17,031Investment
      and other income (loss), net
                
                
                (73
                )
                
                
                (957
                )
                
                
                78
                
                
                
                (1,739
                )Income
      (loss) from continuing operations
                  before
      income taxes and  minority interest
                
                
                (1,200
                )
                
                
                (1,024
                )
                
                
                (3,399
                )
                
                
                15,445Income
      tax (expense) benefit
                
                
                354
                
                
                
                ( 236
                )
                
                
                329
                
                
                
                (1,296
                )Income
      (loss) from continuing operations
                  before
      minority interest
                
                
                (846
                )
                
                
                (1,260
                )
                
                
                (3,070
                )
                
                
                14,149Minority
      interest
                
                
                (24
                )
                
                
                (142
                )
                
                
                (34
                )
                
                
                (578
                )Income
      (loss) from continuing operations
                
                
                (870
                )
                
                
                (1,402
                )
                
                
                (3,104
                )
                
                
                13,571Income
      (loss) from discontinued operations, net
                  of
      taxes, including an $87 gain on sales of
                  assets
      in 2008
                
                -
                
                
                
                51
                
                
                
                429
                
                
                
                (79
                )Net
      income (loss)
                
                $
                (870
                )
                
                $
                (1,351
                )
                
                $
                (2,675
                )
                
                $
                13,492Basic
      net income(loss) per share:Continuing
      operations
                
                $
                (0.05
                )
                
                $
                (0.08
                )
                
                $
                (0.19
                )
                
                $
                0.76Discontinued
      operations
                
                -
                
                
                -
                
                
                
                0.03
                
                
                -Net
      (loss) income per share
                
                $
                (0.05
                )
                
                $
                (0.08
                )
                
                $
                (0.16
                )
                
                $
                0.76Diluted
      net income (loss) per share:Continuing
      operations
                
                $
                (0.05
                )
                
                $
                (0.08
                )
                
                $
                (0.19
                )
                
                $
                0.76Discontinued
      operations
                
                -
                
                
                -
                
                
                
                0.03
                
                
                -Net
      (loss) income per share
                
                $
                (0.05
                )
                
                $
                (0.08
                )
                
                $
                (0.16
                )
                
                $
                0.76
  See
accompanying notes to consolidated financial statements.
  1
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTSOF COMPREHENSIVE INCOME
(LOSS)
 (Unaudited)
 (in
thousands)
  Three
      Months Ended
                                
                                
                                Nine
      Months EndedSeptember
      30,
                                
                                
                                September
      30,2008
                                
                                
                                2007
                                
                                
                                2008
                                
                                
                                2007Net
      income (loss)
                                
                                $
                                (870)
                                
                                
                                $
                                (1,351)
                                
                                
                                $
                                (2,675)
                                
                                
                                $
                                13,492Other
      comprehensive income (loss),
                                  before
      tax:Net
      unrealized gain (loss) on
                                  available-for-sale-securities
                                
                                
                                -
                                
                                
                                
                                (19)
                                
                                
                                
                                (102)
                                
                                
                                
                                (908)Reclassification
      adjustment
                                  principally
      for gain on exchange of
                                  Valera
      securities recognized in
                                  merger
      included innet
      income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (4,598)Reclassification
      adjustment for
                                  realized
      losses on Indevus shares
                                  included
      in net income
                                
                                
                                -
                                
                                
                                
                                768
                                
                                
                                
                                -
                                
                                
                                
                                1,023Reclassification
      adjustment for
                                  impairment
      of investment in
                                  Millennium
      Cell, Inc. included in
                                  net
      income (loss)
                                
                                
                                138
                                
                                
                                
                                266
                                
                                
                                
                                138
                                
                                
                                
                                266Net
      unrealized loss on interest rate
                                  swap,
      net of minority interest
                                
                                
                                (100)
                                
                                
                                
                                (75)
                                
                                
                                
                                (93)
                                
                                
                                
                                (120)Comprehensive
      income (loss)
                                  before
      tax
                                
                                
                                (832)
                                
                                
                                
                                (411)
                                
                                
                                
                                (2,732)
                                
                                
                                
                                9,155Income
      tax  benefit related to items
                                  of
      other comprehensive income
                                  (loss)
                                
                                
                                44
                                
                                
                                
                                30
                                
                                
                                
                                47
                                
                                
                                
                                47Comprehensive
      income (loss)
                                
                                $
                                (788)
                                
                                
                                $
                                (381)
                                
                                
                                $
                                (2,685)
                                
                                
                                $
                                9,202
  See
accompanying notes to consolidated financial statements.
 2
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (in
thousands)
  September
      30,
                                2008
                              
                              
                              December
      31,
                                2007(unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
                              
                              $
                              13,777
                              
                              
                              $
                              15,698Accounts
      receivable, less allowancefor
      doubtful accounts of $226 and $412
                              
                              
                              15,956
                              
                              
                              
                              12,755Inventories
                              
                              
                              24,267
                              
                              
                              
                              27,720Prepaid
      expenses and other current assets
                              
                              
                              542
                              
                              
                              
                              1,326Deferred
      tax asset
                              
                              
                              199
                              
                              
                              
                              470Total
      current assets
                              
                              
                              54,741
                              
                              
                              
                              57,969Marketable
      securities available for sale
                              
                              
                              7
                              
                              
                              
                              109Property,
      plant and equipment, net
                              
                              
                              981
                              
                              
                              
                              3,534Intangible
      assets
                              
                              
                              626
                              
                              
                              
                              -Deferred
      tax asset
                              
                              
                              927
                              
                              
                              
                              -Other
      assets
                              
                              
                              3,155
                              
                              
                              
                              3,293Total
      assets
                              
                              $
                              60,437
                              
                              
                              $
                              64,905Liabilities
      and stockholders’ equityCurrent
      liabilitiesCurrent
      maturities of long-term debt
                              
                              $
                              -
                              
                              
                              $
                              257Short
      term borrowings
                              
                              
                              19,474
                              
                              
                              
                              19,928Accounts
      payable and accrued expenses
                              
                              
                              13,891
                              
                              
                              
                              13,530Total
      current liabilities
                              
                              
                              33,365
                              
                              
                              
                              33,715Long-term
      debt less current maturities
                              
                              
                              -
                              
                              
                              
                              1,441Deferred
      tax liability
                              
                              
                              -
                              
                              
                              
                              279Minority
      interest
                              
                              
                              -
                              
                              
                              
                              2,902Common
      stock subject to exchange rights
                              
                              
                              -
                              
                              
                              
                              493Stockholders’
      equityCommon
      stock
                              
                              
                              181
                              
                              
                              
                              180Additional
      paid-in capital
                              
                              
                              28,412
                              
                              
                              
                              26,825Retained
      earnings (deficit)
                              
                              
                              (130
                              )
                              
                              
                              2,545Treasury
      stock, at cost
                              
                              
                              (1,364
                              )
                              
                              
                              (3,458
                              )Accumulated
      other comprehensive loss
                              
                              
                              (27
                              )
                              
                              
                              (17
                              )Total
      stockholders’ equity
                              
                              
                              27,072
                              
                              
                              
                              26,075Total
      liabilities and stockholders’ equity
                              
                              $
                              60,437
                              
                              
                              $
                              64,905
  See
accompanying notes to consolidated financial statements.
  3
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (in
thousands)
 Nine
      Months EndedSeptember
      30,2008
                        
                        
                        2007Cash
      flows from operations:Net
      income (loss)
                        
                        $
                        (2,675
                        )
                        
                        $
                        13,492Adjustments
      to reconcile net loss tonet
      cash used in operating activities:Depreciation
      and amortization
                        
                        
                        489
                        
                        
                        
                        557Minority
      interest
                        
                        
                        34
                        
                        
                        
                        578Gain
      on sale of MXL
                        
                        
                        (87
                        )Expenses
      paid in common stock
                        
                        
                        46
                        
                        
                        
                        45Stock
      based compensation
                        
                        
                        1,694
                        
                        
                        
                        426Impairment
      of Investment
                        
                        
                        138
                        
                        
                        
                        266Gain
      on exchange of Valera for Indevus shares
                        
                        
                        -
                        
                        
                        
                        (17,031
                        )Deferred
      income taxes
                        
                        
                        (935
                        )Loss
      on sale of Indevus shares
                        
                        
                        -
                        
                        
                        
                        1,023Gain
      on issuance of stock by subsidiary
                        
                        
                        -
                        
                        
                        
                        (1
                        )Changes
      in other operating items, net ofeffect of acquisition
                          of Right-Wayand disposition of MXLAccounts
      receivable
                        
                        
                        (4,334
                        )
                        
                        
                        (4,544
                        )Inventory
                        
                        
                        2,445
                        
                        
                        
                        (1,092
                        )Prepaid
      expenses and other assets, net of cash sold
                        
                        
                        565
                        
                        
                        
                        5,888Accounts
      payable and accrued expenses
                        
                        
                        715
                        
                        
                        
                        252Net
      cash used in operations
                        
                        
                        (1,905
                        )
                        
                        
                        (141
                        )Cash
      flows from investing activities:Additions
      to property, plant and equipment, net
                        
                        
                        (617
                        )
                        
                        
                        (1,035
                        )Acquisition
      of additional interest in Five Star
                        
                        
                        (3,838
                        )
                        
                        
                        (106
                        )Net
      proceeds from sale of assets of MXL
                        
                        
                        4,661Acquisition
      of Right-Way by Five Star
                        
                        
                        -
                        
                        
                        
                        (3,399
                        )Investment
      in MXL
                        
                        
                        (275
                        )
                        
                        
                        -Proceeds
      from sale of investments
                        
                        
                        -
                        
                        
                        
                        17,598Repayment
      of receivable from GP Strategies
                        
                        -
                        
                        
                        
                        325Net
      cash provided by (used in) investing activities
                        
                        
                        (69
                        )
                        
                        
                        13,383Cash
      flows from financing activities:Proceeds
      from sale of common stock
                        
                        
                        
                        
                        
                        
                        480Exercise
      of common stock warrants
                        
                        
                        3,560Purchase
      of treasury stock
                        
                        
                        (1,115
                        )
                        
                        
                        (3,021
                        )(Repayment
      of) proceeds from short-term borrowings
                        
                        
                        (454
                        )
                        
                        
                        1,560Settlement
      of option
                        
                        
                        (240
                        )
                        
                        
                        -(Repayment
      of) proceeds from long-term debt, net
                        
                        
                        (1,698
                        )
                        
                        
                        280Net
      cash provided by (used in) financing activities
                        
                        
                        53
                        
                        
                        
                        ( 701
                        )Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        (1,921
                        )
                        
                        
                        12,541Cash
      and cash equivalents at beginning of period
                        
                        
                        15,698
                        
                        
                        
                        4,485Cash
      and cash equivalents at end of period
                        
                        $
                        13,777
                        
                        
                        $
                        17,026
 
 Non
      cash investing activities:Acquisition
      of shares of stock of Indevus in exchange for shares of stock of
                      Valera
      in a merger transaction
                    
                    $
                    14,960
  See accompanying notes to the condensed
consolidated financial statements.
  4
  NATIONAL
PATENT DEVELOPMENT CORPORATION
 CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY
 NINE
MONTHS ENDED SEPTEMBER 30, 2008
 (Unaudited)
 (in
thousands, except shares and per share data)
   Common
                    Stock
                    $(0.01
      par
                    value)
                  
                  
                  Additional
                    paid-in
                    capital
                  
                  
                  Retained
                    earnings
                  
                  
                  Treasury
                    stock,
      at cost
                  
                  
                  Accumulated
                    other
                    comprehensive
                    income
      (loss)
                  
                  
                  Total
                    stockholders’
                    equityBalance
      at December 31, 2007
                  
                  $
                  180
                  
                  
                  $
                  26,825
                  
                  
                  $
                  2,545
                  
                  
                  $
                  (3,458
                  )
                  
                  $
                  (17
                  )
                  
                  $
                  26,075Net
      unrealized loss on available
                    for
      sale securities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (102
                  )
                  
                  
                  (102
                  )Reclassification
      adjustment related
                    to
      realized loss on available for sale
                    securities
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  138
                  
                  
                  
                  138Net
      unrealized loss on interest  rate
                    swap,
      net of tax and minority
                    interest
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (46
                  )
                  
                  
                  (46
                  )Net
      loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,675
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (2,675
                  )Equity
      based compensation
                    expense
                  
                  
                  
                  
                  
                  
                  1,088
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,088Repurchased
      equity options of Five
                    Star,
      net of minority interest of $32
                  
                  
                  
                  
                  
                  
                  (150
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (150
                  )Settlement
      of option to acquire
                    shares
      of Five Star
                  
                  
                  
                  
                  
                  
                  (240
                  )
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (240
                  )Issuance
      of 1,423,886 treasury
                    shares
      upon exercise of warrants
                  
                  
                  
                  
                  
                  
                  351
                  
                  
                  
                  
                  
                  
                  
                  3,209
                  
                  
                  
                  
                  
                  
                  
                  3,560Purchase
      of 462,859 shares of
                    Treasury
      Stock
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,115
                  )
                  
                  
                  
                  
                  
                  
                  (1,115
                  )Reclassification
      of common stock
                    subject
      to exchange rights
                  
                  
                  
                  
                  
                  
                  493
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  493Issuance
      of 10,260 shares of
                    common
      stock to MXL  Retirement
                    and
      Savings Plan
                  
                  
                  1
                  
                  
                  
                  24
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  25Issuance
      of 8,549 shares of
                    common
      stock to directors
                  
                  
                  
                  
                  
                  
                  21
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  21Balance
      at September 30, 2008
                  
                  $
                  181
                  
                  
                  $
                  28,412
                  
                  
                  $
                  (130
                  )
                  
                  $
                  (1,364
                  )
                  
                  $
                  (27
                  )
                  
                  $
                  27,072
  See
accompanying notes to the condensed consolidated financial
statements.
 5
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
  1.           Basis
of presentation and summary of significant accounting policies
 
 Basis
of presentation
 
 The
accompanying condensed consolidated financial statements for the three months
and nine months ended September 30, 2008 and 2007 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, 2007 as presented
in our Annual Report on Form 10-K for the year ended December 31, 2007 filed
with the Securities and Exchange Commission (the “SEC”) on March 31,
2008.  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 2008 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”), through its wholly-owned subsidiary, Five Star Products, Inc. (“Five
Star”), is engaged in the wholesale distribution of home decorating, hardware
and finishing products. Five Star serves independent retail dealers in 12 states
in the Northeast. Products distributed include paint sundry items, interior and
exterior stains, brushes, rollers, caulking compounds and hardware
products.  The Company also owns certain other assets, including real
estate.  On June 19, 2008, the Company sold substantially all the
operating assets of its optical plastics molding and precision coating business,
MXL Industries, Inc. (see Note 3).  The results for MXL Industries
Inc. have been accounted for as a discontinued operation for all periods
presented.
  Recent
Accounting Pronouncements
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 141 (Revised 2007),“Business Combinations”.
SFAS No. 141(R), replaces SFAS No. 141,“Business Combinations”, and
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree, and any
goodwill acquired in a business combination. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of a business combination. SFAS No. 141(R) is to be
applied prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.  The impact that the adoption of SFAS No. 141(R)
will have on the Company’s financial statements is not presently determinable,
since it is dependant on future acquisitions, if any.
  In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements”, which defines fair value, establishes a
framework for measurement of fair value and expands disclosures about fair value
measurements. SFAS No. 157 clarifies that fair value should be based on
assumptions that market participants will use when pricing an asset or liability
and establishes a fair value hierarchy of three levels
that  prioritize the information used to develop those assumptions.
The provisions of SFAS No. 157 became effective for the Company beginning
January 1, 2008. Generally, the provisions of this statement are to be applied
prospectively. The Company adopted SFAS No. 157 in the first quarter of 2008.
The adoption of SFAS No. 157 did not have a material effect on the Company’s
consolidated financial statements.
  (Continued)
 6
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 In
February 2008, the FASB issued FASB Staff Position 157-2 “Partial Deferral of
the Effective Date of Statement 157” (“FSP 157-2”). FSP 157-2 delays the
effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal years beginning
after November 15, 2008. The Company does not expect adoption of SFAS 157 for
nonfinancial assets and liabilities on January 1, 2009 to have a material effect
on the Company’s consolidated financial statements.
  In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”.  This statement provides
companies with an option to report selected financial assets and liabilities at
fair value. Although, this statement became effective for the Company beginningJanuary 1, 2008,
the Company did not elect to value any financial assets and liabilities at fair
value.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements - an amendment of Accounting Research
Bulletin (“ARB”) No. 51” (“SFAS 160”).  SFAS 160 requires that
ownership interests in subsidiaries held by parties other than the parent, and
the amount of consolidated net income, be clearly identified, labeled, and
presented in the consolidated financial statements within equity, but separate
from the parent’s equity. It also requires once a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value. Sufficient disclosures are required to clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners.  SFAS No. 160 is effective for fiscal
years beginning after December 15, 2008, and is to be applied retrospectively
for all periods presented.
  In March 2008, the FASBissued Statement of Financial Accounting Standards No.
161 (“SFAS No. 161”), “Disclosures
about Derivative Instruments and Hedging
Activities - an amendment of FASB Statement No. 133”. SFAS No. 161 gives financial statement users better
information about the reporting entity's hedges by providing for qualitative
disclosures about the objectives and strategies for using derivatives, quantitative
data about the fair value of and gains and losses on derivative contracts, and
details of credit-risk-related contingent features in their hedged positions.
The standard is effective for financial statements issued for fiscal years and
interim periods beginning afterNovember 15, 2008,
with early application encouraged, but not required. The Company does not
anticipate that the adoption of SFAS No. 161 will have a material effect on the
Company’s consolidated financial statements.
  Use of estimates. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management 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. Actual results could differ from these
estimates.
  Concentrations of credit
risk. Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
investments, and accounts receivable from customers. The Company places its cash
investments with high quality financial institutions and limits the amount
of credit exposure to any one institution.
 (Continued)
 7
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 2.           Tender
Offer for shares of Five Star common stock
  On June
26, 2008, the Company, Five Star and NPDV Acquisition Corp., a newly-formed
wholly owned subsidiary of the Company (“NPDV”), entered into a Tender Offer and
Merger Agreement (the “Tender Offer Agreement”).  Pursuant to the
Tender Offer Agreement, on July 24, 2008, NPDV commenced a tender offer to
acquire all the outstanding shares of Five Star common stock not held by the
Company or NPDV at a purchase price of $0.40 per share (the “Offer Price”), net
to the seller in cash, without interest thereon and less any required
withholding taxes (the “Offer”).
  The Offer
expired at 12:00 Midnight, New York City time, on August 26, 2008, and on August
27, 2008, the Company announced the successful completion of the
Offer.  On August 28, 2008, NPDV merged with and into Five Star (the
“Merger”) with Five Star continuing as the surviving corporation, wholly-owned
by the Company.   Each share of Five Star common stock outstanding
immediately prior to the effective time of the Merger (other than shares held by
National Patent, Five Star or NPDV, all of which were cancelled and retired and
ceased to exist, were converted in the Merger into the right to receive the
price paid pursuant to the Offer, in cash. The Company paid approximately
$1,028,000 for the tendered shares, $661,000 for the remaining shares to be
tendered and incurred expenses related to the Merger of approximately
$626,000.  The total purchase price for the 17.7% minority interest
was $2,315,000.  The Company has recorded intangible assets
aggregating $626,000,  which represents 17.7% of the fair value of
Five Star’s customer lists, based on a preliminary valuation.  The
value of the customer lists will be amortized over a five year
period.
  In
addition, concurrently with the execution of the Tender Offer Agreement, the
Company and Five Star entered into letter agreements with certain executive
officers, employees and directors of Five Star, certain of whom are also
directors and executive officers of the Company (collectively the “Letter
Agreements”), pursuant to which these persons received cash of approximately
$182,000 in exchange for the termination of their vested and unvested options to
purchase shares of Five Star common stock and unvested shares of Five Star
restricted stock promptly following the completion of the Merger, which was
recorded as a charge to Additional paid-in capital.
  Further,
as a result of the termination of the agreements related to the options and
shares, resulted in $489,000 of previously unrecognized compensation cost
related to unvested share-based compensation arrangements of Five Star was
charged to operations in the quarter ended September 30, 2008.
  Prior to
the commencement of the Offer, in accordance with the Tender Offer Agreement,
(i) the Company transferred to NPDV (A) all of the shares of Five Star common
stock held by the Company and (B) a convertible note made by Five Star’s
wholly-owned subsidiary, and (ii) NPDV converted such note into an aggregate of
7,000,000 shares of Five Star common stock.
 (Continued)
 8
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
  3.           Discontinued
Operation - Sale of Assets of MXL Industries
  On June
19, 2008, pursuant to the terms of an Asset Purchase Agreement, dated as of June
16, 2008, by and among the Company, MXL Industries, Inc., a wholly-owned
subsidiary of the Company (“MXL Industries” or the “Seller”), MXL Operations,
Inc. (“Operations”), MXL Leasing, LP (“Leasing”) and MXL Realty, LP (“Realty”
and, collectively with Operations and Leasing, the “MXL Buyers”), the MXL Buyers
purchased substantially all the assets and assumed certain liabilities of
Seller’s optical plastics molding and precision coating businesses (the “MXL
Business”).  As consideration, the Seller received approximately
$5,200,000 in cash, of which approximately $2,200,000 was utilized to fully pay
bank debt of MXL Industries.  The sale resulted in a gain of $87,000
net of $143,000 of related expenses.
 
 The
Seller also made an aggregate investment in the MXL Buyers of $275,000,
allocated to each of Operations, Leasing and Realty in a manner so that as of
the effective time of the transaction, the Seller has a 19.9% interest in the
total capital of each of Leasing and Realty and a 40.95% non-voting interest in
the total capital of Operations.  Operations has the right to issue
additional shares before December 31, 2008 which, if issued, would reduce the
Seller’s interest in Operations to a minimum of 19.9%. Management of Operations
has communicated to the Company that it is their intent to invest additional
capital by the end of 2008, which would reduce the Company’s interest in
Operations to 19.9% on or before December 31, 2008.  Investors in the
Buyers include certain senior managers of the MXL
Business.
 
 The
results for MXL Industries have been accounted for as a discontinued operation
for all periods presented.
  The
summary comparative results of the discontinued operation is as follows (in
thousands):
  Three
      months ended
            
            
            Nine
      months endedSeptember
      30,
            
            
            September
      30,2008
            
            
            2007
            
            
            2008
            
            
            2007Sales
            
            $
            -
            
            
            $
            2,267
            
            
            $
            4,053
            
            
            $
            6,544Income
      (loss) from discontinued
              operation
            
            
            
            
            
            $
            51
            
            
            $
            375
            
            
            $
            (79
            )Provision
      for income taxes
            
            
            
            
            
            
            
            
            
            
            (33
            )Gain
      on sale of MXL net of taxes
            
            
            
            
            
            
            
            
            
            
            87Net
      income (loss) from discontinued
              operation
            
            $
            -
            
            
            $
            51
            
            
            $
            429
            
            
            $
            (79
            )
 
 Assets
and liabilities of the discontinued operation at December 31, 2007 are
summarized as follows (in thousands):
 
 Current
      assets
                      
                      $
                      2,924Non
      current assets
                      
                      
                      2,609Current
      liabilities
                      
                      
                      1,444Non
      current liabilities
                      
                      
                      1,709
 (Continued)
 9
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 4.           Per
share data
  Income
(loss) per share for the three months and nine months ended September 30, 2008
and 2007 are calculated as follows (in thousands, except per share
amounts):
  Three
      months ended
                    
                    
                    Nine
      months endedSeptember
      30,
                    
                    
                    September
      30,2008
                    
                    
                    2007
                    
                    
                    2008
                    
                    
                    2007Basic
      EPSNet
      income (loss)
                    
                    $
                    (870
                    )
                    
                    $
                    (1,351
                    )
                    
                    $
                    (2,675
                    )
                    
                    $
                    13,492Weighted
      average sharesOutstanding
                    
                    
                    16,856
                    
                    
                    
                    17,576
                    
                    
                    
                    16,557
                    
                    
                    
                    17,711Basic (loss) income
      per share:Continuing
      operations
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.19
                    )
                    
                    $
                    0.76Discontinued
      operations
                    
                    -
                    
                    
                    -
                    
                    
                    
                    0.03
                    
                    
                    -Total
      (loss ) income per share
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.16
                    )
                    
                    $
                    0.76Diluted
      EPSNet
      (loss) income
                    
                    $
                    (870
                    )
                    
                    $
                    (1,351
                    )
                    
                    $
                    (2,675
                    )
                    
                    $
                    13,492Weighted
      average shares outstanding
                    
                    
                    16,856
                    
                    
                    
                    17,576
                    
                    
                    
                    16,557
                    
                    
                    
                    17,711Dilutive
      effect of stock options
                    
                    -
                    
                    
                    -
                    
                    
                    -
                    
                    
                    
                    21Dilutive
      weighted average shares
                      outstanding
                    
                    
                    16,856
                    
                    
                    
                    17,576
                    
                    
                    
                    16,557
                    
                    
                    
                    17,733Diluted (loss) income
      per share:Continuing
      operations
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.19
                    )
                    
                    $
                    0.76Discontinued
      operations
                    
                    -
                    
                    
                    -
                    
                    
                    
                    0.03
                    
                    
                    -Total
      (loss )  income per share
                    
                    $
                    (0.05
                    )
                    
                    $
                    (0.08
                    )
                    
                    $
                    (0.16
                    )
                    
                    $
                    0.76
 
 The
following were not included in the diluted computation, as their effect would be
anti-dilutive:
 
 September
      30, 2008
                
                December
      31, 2007Options
                
                
                3,350,000
                
                782,830Warrants
      (see Note 14(b))
                
                
                1,423,887
                *
                1,423,887Five
      Star’s convertible note
                
                
                2,800,000
                *
                2,800,000Five
      Star’s options
                
                
                975,000
                *
                975,000
 * - From
January 1, 2008 through the dates of exercise of the warrants, conversion of
Five Star’s convertible note and termination of Five Star’s
options.
  5.           Treasury Stock
  On
December 15, 2006, the Company’s Board of Directors authorized the Company to
repurchase up to 2,000,000 shares, or approximately 11%, of its then-outstanding
shares of common stock, from time to time either in open market or privately
negotiated transactions. At September 30, 2008, the Company had repurchased
1,791,321 shares of its common stock for $4,092,000 under this repurchase
program (excluding the purchase from Mr. S.  Leslie Flegel in March
2008, which was not under such plan; see Note 14).
 (Continued)
 10
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 On August
13, 2008, the Company’s Board of Directors authorized an increase of 2,000,000
shares, or approximately 11% of the then-outstanding shares of Company common
stock, to the Company’s stock repurchase program originally authorized in
December 2006.  At September 30, 2008, 2,208,679 shares of
Company common stock remain available for repurchase under this repurchase
program.
  On August
11, 2008 the Company issued 1,423,886 shares of its common stock out of treasury
stock pursuant to exercise of warrants (see Note 14(b)).
  6.           Acquisition
of Right-Way Dealer Warehouse
  On April
5, 2007, Five Star acquired substantially all the assets of Right-Way Dealer
Warehouse, Inc. (“Right-Way”) for approximately $3,200,000 in cash and the
assumption of liabilities in the approximate amount of $50,000. Transaction
costs of approximately $200,000 were incurred by Five Star in connection with
this transaction. The assets consisted primarily of approximately $1,186,000 of
accounts receivable at fair value and approximately $2,213,000 of inventory at
fair value. The acquisition included all of Right-Way’s Brooklyn Cash &
Carry business and operations.  Five Star acquired the assets of
Right-Way in order to increase its presence and market share in its current
geographic area.
  The
results of operations of Right-Way are included in the consolidated financial
statements from the date of acquisition.  The following unaudited pro
forma consolidated amounts give effect to the acquisition of Right-Way as if it
had occurred on January 1, 2007. Right-Way had filed for reorganization under
Chapter 11 of the United States Bankruptcy Code prior to the acquisition by Five
Star.  The pro forma results of operations have been prepared for
comparative purposes only and are not necessarily indicative of the operating
results that would have been achieved had the acquisition been consummated as of
the above date, nor are they necessarily indicative of future operating
results.
  (in
      thousands, except per share data)
              
              Nine
      months ended
                September
      30, 2007Sales
              
              $
              109,604Income
      from continuing operations
              
              
              12,771Net
      income
              
              
              12,682Earnings  per
      shareBasic
      and fully dilutedContinuing
      operations
              
              $
              .72Discontinued
      operationsNet
      income
              
              $
              .72
 
 7.           Incentive
stock plans and stock based compensation
  The
Company has a stock-based compensation plan for employees and non-employee
members of its Board of Directors. The plan provide for discretionary grants of
stock options, restricted stock shares, and other stock-based awards. The
Company’s plan is administered by the Compensation Committee of the Board of
Directors, which consists solely of non-employee directors.
  On
November 3, 2003, GP Strategies, which at the time was the Company’s sole
stockholder,  adopted an Incentive Stock Plan (the “2003 Plan”) under
which 1,750,000 shares of the Company’s common stock are available for grant to
employees, directors and outside service providers.  The 2003 Plan
permits awards of incentive stock options, nonqualified stock options,
restricted stock, stock units, performance shares, performance units and other
incentives payable in cash or in shares of the Company common
stock.  The term of any option granted under the 2003 Plan will not
exceed ten years from the date of grant and, in the case of incentive stock
options granted to a 10% or greater holder in the total voting stock of
the Company, three years from the date of grant.  The exercise price
of any option granted under the 2003 Plan may not be less than the fair market
value of the common stock on the date of grant or, in the case of incentive
stock options granted to a 10% or greater holder in the total voting stock, 110%
of such fair market value.
 (Continued)
 11
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 On March
1, 2007, the Company’s Board of Directors approved and adopted an amendment,
subject to stockholder approval (the “Amendment”), to the 2003 Plan (the “2003
Plan Amendment”) increasing the aggregate number of shares of Company common
stock issuable under the 2003 Plan from 1,750,000 shares to 3,500,000 shares
(subject to adjustment as provided in the 2003 Plan), and increasing the per
person annual limitation in the 2003 Plan from 250,000 shares to 2,500,000
shares.  The 2003 Plan Amendment was approved in December 2007 at the
Company’s 2007 Annual Stockholders Meeting.
  In March
2007, the Company granted an aggregate of 3,200,000 nonqualified stock options
to officers and directors under the 2003 Plan, of which 632,830 were granted
under the terms of the 2003 Plan as had then been approved by the Company’s
stockholders and the remainder were granted subject to stockholder approval of
the 2003 Plan Amendment.  The Company determined the estimated
aggregate fair value of the 632,830 options that were not subject to stockholder
approval on the date of grant and upon stockholder approval, which under
SFAS 123R is considered the date of grant, determined the estimated aggregate
fair value of the remaining 2,567,170 options. On July 30, 2007, the Company
granted an aggregate of 150,000 non-qualified stock options under the 2003
Plan.  The stock options granted on July 30, 2007 were not subject to
stockholder approval of the 2003 Plan Amendment.
  On July
30, 2007, the Board of Directors adopted the National Patent Development
Corporation 2007 Incentive Stock Plan (the “2007 NPDC Plan”), subject to
stockholder approval.  The 2007 NPDC Plan was approved by the
Company’s stockholders in December 2007 at the Company’s 2007 Annual
Stockholders Meeting.  As of September 30, 2008, no awards have been
granted under the 2007 NPDC Plan.  As of September 30, 2008, the
number of shares of common stock reserved and available for awards under the
2007 NPDC Stock Plan (subject to certain adjustments as provided therein) is
7,500,000.
  A summary
of the Company’s outstanding stock options during nine months then ended
September 31, 2008, is presented below. There was no share options
activity.
  Stock
                    Options
                  
                  Weighted
                    Average
                    Exercise
                    Price
                  
                  Weighted
                    Average
                    Contractual
                    Term
                  
                  Aggregate
                    Intrinsic
                    ValueOptions
      outstanding at January 1, 2008
                  3,350,000
                  
                  $
                  2.49
                  
                  8.9
                  
                  $
                  768,000*Options
      outstanding  at September 30, 2008
                  3,350,000
                  
                  
                  2.49
                  
                  8.5
                  
                  $
                  0
      *Options
      exercisable at September 30, 2008
                  1,117,000
                  
                  $
                  2.45
                  
                  8.5
                  
                  $
                  0
      *
 
 *
            The
      intrinsic value of a stock option is the amount by which the market value
      of the underlying stock exceeds the exercise price of the
      option.
  The
weighted average grant-date fair value of the options granted during year ended
December 31, 2007 was $0.82 per share.  No options were granted during
the nine months ended September 30, 2008.
  As of
September 30, 2008, there was $1,291,000 of total unrecognized compensation cost
related to non-vested options. This cost is expected to be recognized over the
vesting periods of the options, which on a weighted-average basis is
approximately 1.4 years.
 (Continued)
 12
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 8.           MXL
Industries debt
  On
December 31, 2007 MXL Industries’s long-term debt totaled $1,698,000, or
$1,441,000, net of current maturities of $257,000.  On June 19, 2008,
the long-term debt of approximately $1,575,000 was fully repaid to the banks
from the proceeds from the sale of MXL Industries.  See Note
3.
  On
December 31, 2007, MXL Industries’s short-term borrowing totaled
$625,000.  On June 19, 2008, the then-outstanding balance of
approximately $625,000 was fully repaid to M&T Bank from the proceeds from
the sale of MXL Industries. See Note 3.
  9.           Short
term borrowings
  Five
Star short-term borrowings
  On June
27, 2008, Five Star entered into a Restated and Amended Loan and Security
Agreement (the “Amended Loan Agreement”) with Bank of America, N.A. (“Bank of
America”). The Amended Loan Agreement extends the maturity date of that
certain Loan and Security Agreement, dated as of June 20, 2003, entered into by
Five Star and Bank of America (through its predecessor Fleet Capital
Corporation), as amended (the “2003 Loan Agreement”), to June 30, 2011. The
2003 Loan Agreement, as amended by the Amended Loan Agreement, is referred to
herein as the “Loan Agreement”.
  The
Amended Loan Agreement provides Five Star with a $35,000,000 revolving credit
facility (“Revolving Credit Facility”), subject to a $3,500,000 sub-limit for
letters of credit.  The Revolving Credit Facility allows Five Star to
borrow up to (a) 85% of eligible receivables plus (b) the greater of (i) the
lesser of $20,000,000 or 65% (to be reduced by 1% per quarter commencing July 1,
2008) of eligible inventory, or (ii) the lesser of $20,000,000 or 85% of the
appraised net orderly liquidation value of eligible inventory minus (c) the
amount of outstanding letter of credit obligations, as those terms are defined
therein.  All obligations under the Revolving Credit Facility are
collateralized by first priority liens on all of Five Star’s existing and future
assets.  In connection with the Amended Loan Agreement, on June 27,
2008, Five Star executed the Restated and Amended Promissory Note, dated as of
June 26, 2008, payable to Bank of America in the principal amount of $35,000,000
(the “Promissory Note”).  The Promissory Note was restated and
replaced the $35,000,000 Revolving Note, dated as of June 1, 2005, made by Five
Star in favor of Bank of America.  The principal amount under the
Promissory Note is due and payable on June 30, 2011.
  Loans
made to Five Star under the Revolving Credit Facility bear interest at a per
annum rate based on the Prime Rate of Bank of America plus 0.5%, or at a per
annum rate based on LIBOR plus 200 basis points, at Five Star’s
election.  The LIBOR and Prime Rate margins may be adjusted in the
event that Five Star Group achieves and maintains certain performance
benchmarks. At September 30, 2008 and December 31, 2007, approximately
$19,474,000 and $19,303,000 was outstanding under the Loan Agreement and
approximately $7,707,000 and $5,579,000 was available to be borrowed,
respectively.  Substantially all of Five Star’s assets are pledged as
collateral for these borrowings.
 (Continued)
 13
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 In connection with the March 25, 2008 resignation of Mr.Flegelas director and Chairman of the Board of Five Star, and as a director of the Company, and the
related agreement among Five Star, the Company and Mr.Flegeldated March
25, 2008 (see Note 14 (a)), Bank of America
amended the covenants related to the Loan Agreement in March 2008 to exclude
non-cash charges related to any equity instruments (common stock, options and
warrants) issued to any employee, director, or consultant from the covenant
calculations.
  In
connection with the Amended Loan Agreement, Five Star also entered into a
derivative transaction with Bank of America.  The derivative
transaction is an interest rate swap and has been designated as a cash flow
hedge.  Effective June 30, 2008 through June 30, 2011, Five Star will
pay a fixed interest rate of 3.62% to Bank of America on notional principal of
$20,000,000.  In return, Bank of America will pay to Five Star a
floating rate, namely, LIBOR, on the same notional principal
amount.  The credit spread under the Amended Loan Agreement is not
included in, and will be paid in addition to this fixed interest rate of
3.62%.  The fair value of the interest rate swap amounted to a
liability of $45,000 at September 30, 2008.
  Under the
Amended 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 September 30, 2008 Five Star was not in compliance with
its fixed charge coverage ratio as defined. The bank waived the covenant
violation for the quarter ended September 30, 2008.  There is no
assurance that Five Star can comply with this covenant in future
quarters.
  10.
            Inventories
  Inventories
are comprised of the following (in thousands):
 
 September
      30, 2008
                
                
                December
      31, 2007Raw
      materials
                
                $
                -
                
                
                $
                410Work
      in process
                
                
                -
                
                
                
                141Finished
      goods
                
                
                24,267
                
                
                
                27,169$
                24,267
                
                
                $
                27,720
 
 11.           Investment
in Indevus Pharmaceuticals, Inc.
 
 Indevus
Pharmaceuticals, Inc. (“Indevus”) is a biopharmaceutical company that engages in
the acquisition, development, and commercialization of products to treat
urological, gynecological, and men’s health conditions.
  Effective
April 18, 2007 (the “Effective Time”), all of the outstanding common stock of
Valera Pharmaceuticals, Inc. (“Valera”), a Delaware corporation in which the
Company had owned 2,070,670 shares of common stock at such time, was acquired by
Indevus pursuant to the terms and conditions of an Agreement and Plan of Merger,
dated as of December 11, 2006 (the “Merger Agreement”) and were converted into
an aggregate of 2,347,518 shares of Indevus common stock.  In April
2007, the Company recognized a pre-tax gain of $14,961,000 resulting from the
exchange of shares.  On May 3, 2007, Indevus announced that it had received
FDA approval for Supprelin-LA.  Therefore, in May 2007, as a result of
contingent rights received in the Merger Agreement, the Company received,
291,964 shares of Indevus common stock, and recognized an additional pre-tax
gain of $2,070,670.   The Company is entitled to two additional
contingent tranches of shares of Indevus common stock, to the extent certain
milestones with respect to specific product candidates are achieved. If each of
the contingent milestones is
achieved, the Company will receive $2,070,670 and $3,106,005, respectively,
worth of Indevus common stock on the date the milestone is met, at which date
additional gain will be recognized. During the quarter and nine months ended
September 30, 2007, the Company sold 2,347,518 and 2,639,482 shares,
respectively of Indevus on the open market, (which comprised all the Company’s
shares of Indevus common stock at this time) for total net proceeds of
$17,598,000 and recognized losses of   $787,000 and $1,023,000,
respectively, which are included in Investment and other income (loss),
net.
 (Continued)
 14
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 Two
related parties, Bedford Oak Partners and Mr. Jerome I. Feldman, were entitled
to receive 50% of any profit received from the sale on a pro-rata basis, of
458,019 shares of Indevus common stock in excess of $3.47 per share, and are
entitled to participate in 50% of the profits earned on 19.51% of shares of
Indevus common stock received by the Company upon conversion of the contingent
stock rights, described above, if any, at such time as such shares are sold by
the Company (see Note 13(a)). The Company paid $922,000 to the related parties
towards their profit share, upon sale of Indevus.
  12.           Investment
and other income (loss), net
  Investment
and other income (loss), net is comprised of the following (in
thousands):
  Three
      Months Ended
                
                
                Nine
      Months EndedSeptember
      30,
                
                
                September
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007Loss
      on sale of Indevus shares
                
                $
                
                
                
                $
                (710
                )
                
                $
                
                
                
                $
                (1,023
                )Indevus
      profit sharing
                
                
                
                
                
                
                (77
                )
                
                
                
                
                
                
                (680
                )Impairment
      of Investment in
                  Millennium
      Cell Inc.
                
                
                (138
                )
                
                
                (266
                )
                
                
                (138
                )
                
                
                (266
                )Interest
      income
                
                
                57
                
                
                
                48
                
                
                
                192
                
                
                
                88Other
                
                
                8
                
                
                
                48
                
                
                
                24
                
                
                
                142$
                (73
                )
                
                $
                (957
                )
                
                $
                78
                
                
                $
                (1,739
                )
  13.           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, Chairman, Chief Executive Officer and a director of the
      Company, and approximately $568,000 from Jerome I. Feldman, who was at the
      time Chairman and Chief Executive Officer of the Company, which was
      utilized to exercise an option held by the Company 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.     On January 11, 2005, the Company
      prepaid the loans and all accrued interest in full. As further
      consideration for making these loans, Bedford Oak Partners and Mr. Feldman
      became entitled to a portion of the consideration received by the Company
      on the sale of certain Valera shares.  As a result of the
      acquisition of Valera by Indevus (see Note 11), this obligation presently
      relates to the sale of Indevus shares by the Company. From June 2007
      through and including September 12, 2007, the Company sold, in a series of
      open market transactions, all of the 2,639,482 shares of Indevus common
      stock held by the Company for an aggregate of approximately $17,598,000,
      net of commissions and brokerage fees.  The November 12, 2004 agreement
      among the Company, Bedford Oak Partners and Mr. Feldman provides for
      Bedford Oak Partners and Mr. Feldman to (i) receive 50% of any amount in
      excess of $3.47 per share which is received by the Company upon the sale
      of Indevus common stock and (ii) participate in 50% of the profits earned
      on 19.51% of shares of Indevus common stock received by the Company upon
      conversion of the contingent stock rights, described below, if any, at
      such time as such shares are sold by the Company.  The aggregate
      amount paid towards the profit sharing in 2007 was $922,000.
              
              The
      Company continues to hold contingent stock rights for certain products in
      development by Indevus that will become convertible into shares of Indevus
      common stock to the extent specific milestones with respect to each
      product are achieved.  If the remaining milestones are achieved, the
      Company will receive $2,070,670 and $3,106,005, respectively, worth of
      shares of Indevus common stock upon conversion of such contingent stock
      rights.  (See Note
11).
 (Continued)
 15
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 (b)
            Concurrently
      with its spin-off from GP Strategies Corporation (“GPS”), the Company and
      GPS entered into a management agreement under which certain of the
      Company’s executive officers who were also executive officers of GPS were
      paid by GPS subject to reimbursement by the Company. Additionally, GPS
      provided support with respect to corporate federal and state income taxes,
      corporate legal services, corporate secretarial administrative support,
      and executive management consulting.  The term of the agreement
      extended through November 24, 2007.
  The
      fee paid by the Company under this agreement was $335,000 for the nine
      months ended September 30, 2007 which includes approximately 80% of the
      cost of the compensation and benefits required to be provided by GPS to
      Jerome Feldman, who served as the Company’s Chief Executive Officer until
      May 31, 2007.
  (c)
            On
      April 5, 2007, the Five Star, in connection with its acquisition of
      Right-Way entered into a lease for a warehouse with a company owned
      by the former principal of Right-Way who presently serves as an
      executive of Five Star. See Note 6. The lease has an initial term of five
      years with two successive five-year renewal options and provides for an
      annual rent of $325,000, subject to adjustment. Rent expense for the
      warehouse for the three and nine months ended September 30, 2008 was
      $81,000 and $243,000, respectively.  For the three and nine
      months ended September 30, 2007, rent expense for the warehouse was
      $81,000 and $199,000, respectively. Five Star also has an option to
      purchase the warehouse at any time during the initial term of the lease
      for $7,750,000, subject to 3% annual
adjustment.
  14.           Stockholders
equity
  (a)
            Mr.  Flegel
      was named a director of the Company on March 2, 2007 and on March 1, 2007
      was appointed as Chairman and elected as a director of Five
      Star.  Effective March 2, 2007, Mr. Flegel entered into a
      three-year agreement with Five Star (the “FS Agreement”) which provided
      for an annual fee of $100,000 and reimbursement (i) for all travel
      expenses incurred in connection with his performance of services for Five
      Star and (ii) beginning in November 2007, for up to $125,000 per year of
      the cost of maintaining an office. In addition, pursuant to the FS Agreement,
      Mr. Flegel was issued 2,000,000 shares of Five Star common stock, all of
      which were fully vested upon issuance and not subject to
      forfeiture.  The 2,000,000 shares were valued at $720,000 based
      on the closing price of Five Star common stock on March 2, 2007. Such
      amount was to be charged to compensation expense over the term of the FS
      Agreement. At December 31, 2007, the unrecognized compensation was
      $520,000, of which $240,000 was included in Prepaid expenses and other
      current assets and $280,000 was included in Other assets. In addition, the
      Company recognized a gain of $1,000 on the reduction in ownership interest
      of Five Star at the time of
issuance.
 (Continued)
 16
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
  On
      March 2, 2007, the Company and Mr. Flegel entered into an agreement
      pursuant to which the Company sold to Mr. Flegel 200,000 shares of Company
      common stock for $480,000 ($2.40 per share).  The agreement gave
      Mr. Flegel the right to exchange any or all of the 200,000 shares of the
      Company’s common stock into shares of Five Star common stock held by the
      Company at the fixed rate of six shares of Five Star common stock for each
      share of Company common stock. The value of the option to convert the
      shares of Company common stock held by Mr. Flegel into shares of Five
      Star common stock which amounted to $264,000, has been valued using a
      Black Scholes formula and recognized as compensation expense by Five Star
      over the three year term of the FS Agreement. In addition, as the exchange
      rights, if exercised, would require the Company to effectively surrender
      net assets to redeem common stock, the Company accounted for the issuance
      of the 200,000 shares of Company common stock as temporary equity at an
      amount equivalent to the carrying value of Five Star’s equity that could
      be acquired by the holder of such shares ($493,000 at December 31,
      2007).
  On
      March 25, 2008, Mr. Flegel resigned as director and Chairman of the Board
      of Five Star, and as a director of the Company, effective
      immediately.  In connection with Mr. Flegel’s resignation, Five
      Star, the Company and Mr. Flegel entered into an agreement, dated March
      25, 2008, pursuant to which Mr. Flegel sold to the Company (i) 200,000
      shares of Company common stock, which was exchangeable into 1,200,000
      shares of Five Star common stock owned by the Company, at $3.60 per share,
      which equates to $0.60 per share of Five Star common stock had Mr. Flegel
      exercised his right to exchange these shares of  Company common
      stock into shares of Five Star common stock and (ii) 1,698,336, shares of
      Five Star common stock at $0.60 per share.  In addition, Mr.
      Flegel’s children and grandchildren agreed to sell to the
      Company an additional 301,664 shares Five Star common stock that
      they had received from Mr. Flegel at $0.60 per share. The market
      value of Company common stock on March 25, 2008 was $2.40 per
      share.  The excess cash paid of $1.20 per share over the market
      value on the 200,000 shares of Company common stock purchased from Mr.
      Flegel, or $240,000, was deemed to be the settlement of the option to
      exchange Company common stock for Five Star common stock and was charged
      to Additional paid-in capital. Five Star recorded a compensation charge of $1,096,000 in the first quarter
      of 2008 (included in Charge related to the
      resignation of the Chairman of the Board of Five Star)related to the above transactions,
      including the unrecognized value of
      the 2,000,000 shares of Five Star common stock issued and the option to
      convert the 200,000 shares of Company common
      stock discussed above.In
      addition, the expense included$440,000,which represents theexcess of the purchase price over the
      quoted market price of the 2,000,000 shares of Five Star common stock on
      the date of the agreement to acquire such shares.As a result of the repurchase of the 200,000
      shares of Company stock, which were
      also convertible into Five Star shares, the carrying value of the
      Company’s shares was reclassified from temporary to
      permanent equity.
 (Continued)
 17
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 Notes to
Condensed Consolidated Financial Statements
 Three and
nine months ended September 30, 2008 and 2007
 (Unaudited)
 Bank of America amended the covenants
      related to the 2003 Loan Agreement in March 2008 to exclude non-cash
      charges related to any equity instruments (common stock, options and
      warrants) issued to any employee, director, or consultant from the
      covenant calculations (see Note 9).
  The
      agreement also contained one-year non-compete, standstill and
      non-solicitation provisions. In addition, the three year FS Agreement was
      terminated upon his resignation.
  (b)
            On
      August 11, 2008, the Company, The Gabelli Small Cap Growth Fund, The
      Gabelli Equity Income Fund, The Gabelli ABC Fund and The Gabelli
      Convertible and Income Securities Fund Inc. (collectively, the
      “Warrantholders”), holders of warrants to purchase an aggregate of
      1,423,886 shares of Company common stock, dated as of December 3, 2004
      (the “Warrants”),  amended the Warrants to (i) extend the
      expiration date of the Warrants from August 14, 2008 to August 15, 2008
      and (ii) reduce the exercise price of the Warrants from $3.57 per share to
      $2.50, per share, which was in excess of the closing price on August 11,
      2008.  On August 13, 2008 the Warrantholders exercised the
      warrants and the Company issued and sold 1,423,886 shares of treasury
      stock to the Warrantholders for cash consideration of $2.50 per share,
      representing an aggregate purchase price of
  $3,560,000.
  15.             Income
taxes
  For the
nine months ended September 30, 2008, the income tax benefit, which primarily
results from the transactions referred to in the following paragraph, differs
from the benefit computed at the federal statutory rate primarily due to non
deductible compensation expenses and an increase in the valuation allowance with
respect to losses incurred by NPDC.
  In
connection with the increase in ownership of Five Star from less than 80% to
100% in the third quarter of 2008, the excess of the financial reporting basis
over tax basis in Five Star was no longer considered to be a taxable temporary
difference and accordingly a related $279,000 deferred income tax liability was
reflected as an income tax benefit in the three and nine months ended September
30, 2008.
 18
  Item
      2.
            Management’s Discussionand Analysis of Financial Condition
      and Results of Operations
  Cautionary
Statement Regarding Forward-Looking Statements
  This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). The Private Securities
Litigation Reform Act of 1995 provides a “safe harbor” for forward looking
statements. Forward-looking statements are not statements of historical facts,
but rather reflect our current expectations concerning future events and
results. We use words such as “expects”, “intends”, “believes”, “may”, “will”
and “anticipates” to indicate forward-looking statements.
  Factors
that may cause actual results to differ from those results expressed or implied,
include, but are not limited to, those listed under “Risk Factors” in our Annual
Reports on Form 10-K for the year ended December 31,2007 filed by National
Patent Development Corporation (the “Company”) with the Securities and Exchange
Commission (the “SEC”) on March 31, 2008 or an unexpected decline in revenue
and/or net income derived by the Company’s wholly-owned subsidiary, Five Star
Products, Inc. (“Five Star”), due to the loss of business from significant
customers or otherwise. In addition, Five Star is subject to the intense
competition in the do-it -yourself industry.
  We
caution that these risk factors may not be exhaustive. We operate in a
continually changing business environment, and new risk factors emerge from time
to time. We cannot predict these new risk factors, nor can we assess the effect,
if any, of the new risk factors on our business or the extent to which any
factor or combination of factors may cause actual results to differ from those
expressed or implied by these forward-looking statements.
  If any
one or more of these expectations and assumptions proves incorrect, actual
results will likely differ materially from those contemplated by the
forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us, whether as a
result of new information, future events or otherwise. You are cautioned not to
unduly rely on such forward-looking statements when evaluating the information
presented in this report.
  General
Overview
  Five Star
represents the only Company’s operating segment.  The Company also
owns certain other non-core assets, including an investment in MXL Operations
Inc., certain contingent stock rights in Indevus Pharmaceuticals, Inc.
(“Indevus”) and certain real estate in Pawling, New York and Killingly,
Connecticut.  The Company monitors Indevus for progress in achieving
the milestones related to contingent stock rights.  In the year ended
December 31, 2007, the Company sold 2,639,482 shares of Indevus stock, which
represents all of the shares of Indevus common stock held by the Company in
2007.   The Company may receive two contingent tranches of shares
of Indevus common stock, to the extent certain milestones with respect to
specific product candidates are achieved. If each of the contingent milestones
is achieved, the Company will receive $2,070,670 and $3,106,005, respectively,
worth of Indevus common stock on the date the milestone is met, at which date
additional gain will be recognized (see Note 11 to the
Condensed Consolidated Financial Statements).
  19
  On June
19, 2008, pursuant to the terms of an Asset Purchase Agreement, dated as of June
16, 2008 (the “MXL Agreement”), by and among the Company, MXL Industries, Inc.,
a wholly-owned subsidiary of the Company (“MXL Industries or the Seller”), MXL
Operations, Inc. (“Operations”), MXL Leasing, LP (“Leasing”) and MXL Realty, LP
(“Realty” and, collectively with Operations and Leasing, “the Buyers”), the
Buyers purchased substantially all the assets and assumed certain liabilities
(except the “Excluded Liabilities,” as defined in the MXL Agreement) of Seller’s
optical plastics molding and precision coating business (the “MXL
Business”).  As consideration, the Seller received approximately
$5,200,000 in cash, of which approximately $2,200,000 was utilized to fully pay
the bank debt relating to the MXL Business. See Note 3 to the Condensed
Consolidated  Financial Statements.
  The
Seller also made an aggregate capital contribution to the Buyers of $275,000,
allocated to each of Operations, Leasing and Realty in a manner so that the
Seller has a 19.9% interest in the total capital of each of Leasing and Realty
and a 40.95% interest in the total capital of Operations.  Operations
has the right to issue additional shares which, if issued, would reduce Seller’s
interest in each of the Buyers on a pro rata basis to a minimum of
19.9%.
  Due to
recent market events that have adversely affected all industries and the economy
as a whole, management has placed increased emphasis on monitoring the risks
associated with the current environment, including the collectability of
receivables, the fair value of assets, and the Company’s liquidity. At this
point in time, there has not been a material impact on the Company’s assets and
liquidity. Management will continue to monitor the risks associated with the
current environment and their impact on the Company’s results.
  Five
Star Overview
  Five
Star, a wholly-owned subsidiary of the Company (see Note 2 to the Condensed
Consolidated Financial Statements) is a 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
States by providing a complete line of competitively priced products, timely
delivery and attractive pricing and financing terms to its
customers.
  Five Star
operates in the Home Improvement market.  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
manufacturers. Management of Five Star believes that, 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.
  On April
5, 2007, Five Star acquired substantially all the assets (except “Excluded
Assets” as defined) and assumed the Assumed Liabilities (as defined) of
Right-Way Dealer Warehouse, Inc. (“Right-Way”) for approximately $3,200,000 in
cash and the assumption of liabilities of $50,000 (the ‘Right-Way Transaction”).
Transaction costs of $200,000 were incurred by Five Star in connection with the
Right-Way Transaction.  The assets consisted primarily of $1,186,000
of accounts receivable at fair value and $2,213,000 of inventory at fair value.
The acquisition included all of Right-Way’s Brooklyn Cash & Carry business
and operations which sells paint sundry and hardware supplies to local retail
stores.
  20
  Upon
closing of the Right-Way Transaction, Five Star leased a warehouse at which the
Right-Way Brooklyn Cash & Carry business is conducted from an affiliate of
the principal of Right-Way, with an option to purchase the
warehouse.  See Note 6 to the Condensed Consolidated Financial
Statements.
  To
further expand, Five Star is considering strategies intended to grow its revenue
base in the Northeast and Mid-Atlantic States through internal initiatives and
to acquire complementary distributors outside its current geographic
area.  There is no assurance that these growth plans can be executed
and, if executed, will be successful from an operational or financial
standpoint.  These plans could require capital in excess of the funds
presently available to Five Star.
  Management
discussion of critical accounting policies
  The
following discussion and analysis of the financial condition and results of
operations are based on the consolidated financial statements (unaudited) and
notes to consolidated financial statements (unaudited) contained in this report
that have been prepared in accordance with the rules and regulations of the
Securities and Exchange Commission and do not include all the disclosures
normally required in annual consolidated financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates that affect the reported amounts of assets, liabilities, sales and
expenses, and related disclosures of contingent assets and liabilities. We base
these estimates on historical results and various other assumptions believed to
be reasonable, all of which form the basis for making estimates concerning the
carrying values of assets and liabilities that are not readily available from
other sources. Actual results may differ from these estimates.
  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.
  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 collectability of the resulting receivable
is reasonably assured.  Allowances for estimated returns and
allowances are recognized when sales are recorded.
  Stock
based compensation
  The
Company accounts for stock based compensation pursuant to Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”). Under SFAS 123R, compensation cost is recognized over the vesting period
based on the fair value of the award at the grant date.
  21
  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 the Company’s historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
  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 the Company’s future
operations and future economic conditions which may affect those cash
flows.
  The
Company owns undeveloped land in Pawling, New York with a carrying amount of
approximately $2.5, million which management believes is less than its fair
value, less cost of sale and property in East Killingly, Connecticut with a
carrying amount of approximately $0.4 million.
  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.
  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.
  Vendor
allowances
  The
Company accounts for vendor allowances under the guidance provided by EITF
Issue No. 02-16, “Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor,” and EITF Issue No.
03-10, “Application of EITF Issue No. 02-16 by Resellers to Sales Incentives
Offered to Consumers by Manufacturers.” Vendor allowances reduce the
carrying cost of inventory unless they are specifically identified as a
reimbursement for promotional programs and/or other services provided. Any
such allowances received in excess of the actual cost incurred also reduce
the carrying cost of inventory.
  22
  Income
taxes
  Income
taxes are provided for based on the asset and liability method of accounting
pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes” and FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”.
Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
  Operating
Highlights
  Three
months ended September 30, 2008 compared to the three months ended September 30,
2007
  For the
three months ended September 30, 2008, the Company had loss from continuing
operations before income tax expense and minority interest of $(1,200,000)
compared to income (loss) from continuing operations before income tax expense
and minority interest of $(1,024,000) for the three months ended September 30,
2007.  The change in pre-tax loss from continuing operations is
primarily the result of the following:
(i)  reduced  operating income of $921,000, for Five Star
for the three months ended September 30, 2008, of which $489,000 relates to
non-cash compensation cost related to non-vested share-based compensation
arrangements related to the tender offer that was announced on June 26, 2008 and
completed on August 26, 2008, and the related merger that was effected on August
28, 2008, pursuant to which the Company acquired all of the outstanding shares
of Five Star common stock not held by the Company or its subsidiaries at a
purchase price of $0.40 per share, as described in Note 2 to the Condensed
Consolidated Financial Statements (the “Tender Offer and
Merger”);  (ii) an impairment charge of $138,000 and $266,000 in the
three months ended September 30, 2008 and 2007, respectively, related to the
Company’s investment in Millennium Cell, Inc. a technology company engaged in
the business of developing innovative fuel systems for the safe storage,
transportation and generation of hydrogen for use as an energy source and (iii)
a realized loss of $710,000 on the sale of 2,347,518 shares
of  Indevus common stock in the three months ended September 30,
2007.
  Sales
  For the
three months ended September 30, 2008 sales, which are comprised solely of the
sales of Five Star, were $31,216,000 a decrease of $1,722,000, or 5.2% from
September 30, 2007 sales of $32,938,000 for the three months ended September 30,
2007.The
decrease in sales was due to an overall weakness in the economy and in Five
Star’s marketplace.
  Gross
margin
  For the
three months ended September 30, 2008 gross margin, which is comprised solely of
Five Star, was $5,514,000, or 17.7% of net sales, for the quarter ended
September 30, 2008 as compared to $5,985,000, or 18.2% of net sales, for the
quarter ended September 30, 2007.The
decrease in gross margin for the quarter ended September 30, 2008 was a result
of reduced Five Star sales for the period.  The reduced gross margin
percentage in 2008 was the result of less vendor allowances recognized in 2008
related to estimated purchase volume for the year ended December 31,
2008.
  23
  Selling,
general, and administrative expenses
  For the
three months ended September 30, 2008, selling, general and administrative
(“SG&A”) expenses increased by $613,000 to $6,271,000 from $5,658,000 for
the three months ended September 30, 2007. The increase consists of an increase
in Five Star’s SG&A of $450,000 and increased SG&A at the corporate
level of $163,000.  The increased SG&A expenses incurred by Five
Star were primarily due to (i) a $489,000 charge for the unrecognized non-cash
compensation cost related to non-vested share-based compensation arrangements
terminated as a result of the Tender Offer and Merger, (ii) $79,000 of costs
incurred related to the Tender Offer and Merger, (iii) reduced vendor marketing
revenues $517,000, partially offset by, (iv) reduced professional fees of
approximately $500,000 and (v) reduced sales commissions and related selling
expenses of $57,000 due to reduced sales. The increase in corporate SG&A is
attributable to $164,000 of increased stock based compensation
expense.
  Investment
and other income (loss), net
  The
Company recognized net Investment and other income (loss) of $(73,000) for the
three months ended September 30, 2008, compared to $(957,000) for the three
months ended September 30, 2007.  Investment and other income (loss),
net includes interest income and investment income.  The reduced loss
of $884,000 is primarily attributable to the following; (i) a realized loss of
$710,000 on the sale of Indevus  common stock in the three months
ended September 30, 2007, (ii) an impairment charge of  $138,000 and
$266,000 for the three months ended September 30, 2008 and 2007, respectively,
related to the Company’s investment in Millennium Cell, and (iii) a $77,000
charge in the three months ended September 30, 2007 related to the Indevus
profit sharing.
  Income
taxes
  For the
three months ended September 30, 2008 and 2007, the Company recorded an income
tax (benefit) expense of $(354,000) and $236,000, respectively, which represents
the Company’s applicable federal, state and local tax expense for the periods
from continuing operations.  For the three months ended September 30,
2008, the income tax benefit differs from the tax computed at the federal
statutory income tax rate due primarily to an increase in the valuation
allowance with respect to losses incurred by the Company.  In
addition, the Company recorded discrete tax items during the third quarter of
2008, with respect to certain non-cash compensation expenses of Five Star, which
did not result in a tax benefit, and the write-off of a deferred tax liability
with respect to the Company’s investment in Five Star, which resulted in a
deferred tax benefit.  The tax effect of discrete items are reflected
in the periods in which they occur and are not reflected in the estimated annual
effective tax rate.  As of July 21, 2008, National Patent owned more
than 80% of Five Star, and is required to include Five Star in its federal
consolidated tax return.
 
 For the
three months ended September 30, 2007, the provision for income taxes differed
from the tax computed at the federal statutory income tax rate due primarily to
recording income tax expense on the income of Five Star, which was not included
in the Company’s consolidated return for 2007, and state income taxes recorded
on the sale of shares of Indevus common stock.  A federal tax
provision was not recorded with respect to the gain recognized for tax purposes
on the sale of shares of Indevus common stock since it was offset by the
Company’s net operating and capital loss carryforwards.
  24
  Nine
months ended September 30, 2008 compared to the nine months ended September 30,
2007
  For the
nine months ended September 30, 2008 the Company had a loss from continuing
operations before income tax benefit and minority interest of $3,399,000
compared to income from continuing operations before income tax expense and
minority interest of $15,445,000 for the nine months ended September 30,
2007.  The decrease in pre-tax income from continuing operations is
primarily a result of the following: (i) reduced  operating income of
$3,263,000 for Five Star for the nine months ended September 30, 2008 ; (ii) a
net gain of $17,031,000 recognized on the merger of Valera and Indevus in the
nine months ended September 30, 2007   (see Note 11 to the
Condensed Consolidated Financial Statements); (iii) a charge of $680,000
representing the unrealized profit which would be paid to related parties upon
the sale of Indevus available for sale shares in the nine months ended September
30, 2007, (iv) an impairment charge of $138,000 and $266,000, in the nine months
ended September 30, 2008 and 2007, respectively, related to the Company’s
investment in Millennium Cell and (iv) a realized loss of $1,023,000 on the sale
of 2,639,482 shares of Indevus common stock in  the nine months ended
September 30, 2007.
  Five
Star’s  reduced operating profit for the nine months ended September
30, 2008 was primarily attributable to (i) a $1,096,000 non-cash compensation
expense related to the termination of  the Five Star’s agreement with
Mr. Flegel during the first nine months of 2008 (see Note 14(a) to the Condensed
Consolidated Financial Statements), which is reflected in Charge related to
resignation of Chairman of the Board in the Condensed Consolidated Statement of
Operations, (ii) a non-cash compensation charge of $489,000 related to the
cancellation of certain Five Star equity awards in the first nine months (see
Note 2 to the Condensed Consolidated Financial Statements), (iii) reduced gross
margin of $829,000 due to reduced sales  for the first nine
months  of 2008 as compared to the first nine months of 2007 (iv)
increased general and administrative expenses primarily due the acquisition of
Right-Way in April 2007 and approximately $300,000 of expenses related to the
Tender Offer and Merger that were incurred in the first nine months of 2008 (see
Note 2 to the Condensed Consolidated Financial Statements), and (iv) reduced
vendor marketing revenue recognized in the first nine months of
2008.
  Sales
  The
Company had sales, which are comprised solely of the sales of Five Star, of
$94,114,000 for the nine months ended September 30, 2008, as compared to sales
of $98,726,000 for the nine months ended September 30, 2007.  The
decrease in Five Star sales for the nine months ended September 30, 2008 of
$4,612,000, or 4.7%, as compared to the prior year period was due to an overall
weakness in the economy and the Company’s marketplace, offset by sales generated
by Right-Way Brooklyn, the Five Star’s Cash and Carry facility purchased in
April 2007.
  Gross
margin
 
 Gross
margin for the nine months ended September 30, 2008 was $16,139,000 or 17.1% of
net sales as compared to $16,968,000 or 17.2% of net sales for the nine months
ended September 30, 2007.
  The
decrease in gross margin for the nine months ended September 30, 2008 of
$829,000 was primarily the result of reduced Five Star sales for the
period.
  25
  Selling,
general, and administrative expenses
  For the
nine months ended September 30, 2008, selling, general and administrative
expenses increased by $1,771,000 from $15,689,000 for the nine months ended
September 30, 2007 to $17,460,000 for the nine months
ended September 30, 2008, primarily attributable to increased SG&A expenses
incurred by Five Star for the period.  Five Star had increased
SG&A expenses of $1,338,000 for the nine months ended September 30, 2008 as
compared to the nine months ended September 30, 2007 due to: (i) $304,000 of
costs incurred related to the Tender Offer and Merger for the 2008 period (see
Note 2 to the Condensed Consolidated  Financial Statements);
(ii)  a non-cash compensation charge of $489,000 related to the
cancellation of certain Five Star equity awards (see Note 2 to the Condensed
Consolidated Financial Statements),; (iii) increased delivery costs of
$76,000 for the 2008 period due to increased fuel costs;  (iv) a
general increase in operating costs for the 2008 period primarily due to
increased costs incurred due to the operation Right-Way and (v) reduced vendor
marketing revenue of $449,000 recognized by Five Star.   In
addition, there were increased expenses at the corporate level of $154,000 for
the first nine months of 2008, primarily due to equity based compensation
expense of $687,000 for the  2008 period as compared to $160,000 for
the first nine months of  2007, partially offset by reduced
professional fees and personnel costs for the 2007 period.
  Gain
on exchange of shares of Valera common stock for shares of Indevus common
stock
  For the
nine months ended September 30, 2007 the Company recognized a gain of
$17,031,000 as a result of the merger of Valera Pharmaceuticals, Inc., in which
the Company had an approximately 14% interest and Indevus, in which the Company
obtained an approximate 3% interest as a result of the merger. The gain includes
the receipt of the first of three contingent tranches of shares of Indevus
common stock, which was valued at $2,070,000 and received in May 2007. The
Company continues to hold contingent stock rights for certain products in
development by Indevus that will become convertible into shares of Indevus
common stock to the extent specific milestones with respect to each product are
achieved.  If all milestones are achieved, the Company will receive
$2,070,670 and $3,106,005, respectively, worth of shares of Indevus common stock
upon conversion of such contingent stock rights. The Agreement and Plan of
Merger, dated as of December 11, 2006, effecting the merger of Valera and
Indevus provides that the merger was treated as a tax-free merger under Internal
Revenue Code Section 368
  Investment
and other income (loss), net
  The
Company recognized Investment and other income (loss) of $78,000 for the nine
months ended September 30, 2008 as compared to Investment and other income
(loss) of ($1,732,000) for the nine months ended September 30,
2007.  The change in Investment and other income (loss) is mainly due
to the following; (i) the realized profit of $680,000 for the first nine months
of 2007, which was paid to related parties upon sale by the Company of all its
shares of Indevus common stock during such period, and (ii) a loss of $1,023,000
on the sale of 2,639,482 shares of Indevus common stock in the first nine months
of 2007.  In addition, the Company recorded an impairment charge of
$138,000 and $266,000 in 2008 and 2007, respectively, related to the Company’s
investment in Millennium Cell.   At September 30, 2007 the
Company had sold all its shares of Indevus common stock. The Company may yet
receive still has two additional contingent tranches of Indevus common stock to
the extent certain milestones with respect to specific product candidates are
achieved (see Note 11 to the Condensed Consolidated Financial
Statements).
  26
  Income
taxes
  For the
nine months ended September 30, 2008 and 2007, the Company recorded an income
tax (benefit) expense of $(329,000) and $1,296,000, respectively, which
represents the Company’s applicable federal, state and local tax expense for the
periods from continuing operations.  For the nine months ended September
30, 2008, the income tax benefit differs from the tax computed at the federal
statutory income tax rate
due primarily to an increase in the valuation allowance with respect to losses
incurred by the Company.  In addition, the Company recorded a discrete
tax item during the first quarter of 2008, with respect to $704,000 of non-cash
compensation expense of Five Star, which did not result in a tax
benefit.  The Company also recorded discrete tax items during the
third quarter of 2008 with respect to certain non-cash compensation expenses of
Five Star, which did not result in a tax benefit, and the write-off of a
deferred tax liability with respect to the Company’s investment in Five Star,
which resulted in a deferred tax benefit.  The tax effect of discrete
items are reflected in the periods in which they occur and are not reflected in
the estimated annual effective tax rate.  As of July 21, 2008,
National Patent owns more than 80% of Five Star, and is required to include Five
Star in its federal consolidated tax return.
 
 Income
tax expense of $33,000 was recorded as part of discontinued operations for the
nine months ended September 30, 2008, as it relates to tax on the operations of
MXL Industries and the gain related to its sale
 
 Financial
condition
  The
increase in accounts receivable and the reduction in inventory at September 30,
2008 as compared to December 31, 2007 are the result of seasonal
fluctuations.
  Liquidity
and capital resources
  At
September 30, 2008, the Company had cash and cash equivalents totaling of
$13,777,000. The Company believes that cash, investments on hand 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. On
August 13, 2008 the holders of certain warrants to acquire shares of Company
common stock exercised their warrants and the Company issued and sold 1,423,886
shares of its common stock to such warrant holders for cash consideration of
$2.50 per share, or an aggregate of $3,560,000 (see Note 14(b) to the Condensed
Consolidated Financial Statements).
  For the
nine months ended September 30, 2008, the Company’s working capital decreased by
$2,878,000 to $21,376,000 from $24,254,000 as of December 31, 2007.
  The
decrease in cash and cash equivalents of $1,921,000 for the nine months ended
September 30, 2008 as compared to December 31, 2007 resulted from:
  ·
            net
      cash used in operations of $1,905,000, due primarily to a net loss of
      $2,675,000;
  ·
            an
      increase in accounts receivable of $4,334,000, partially offset by a
      decrease in inventory of $2,445,000 and an increase in accounts payable
      and accrued expenses of $715,000;
  ·
            net
      cash used in investing activities of $69,000, primarily due to net cash
      proceeds of $4,661,000 from the sales of certain assets of MXL Industries
      (see Note 3 to the Consolidated Condensed Financial Statements), partially
      offset by acquisition of additional interest in Five Star of $3,838,000,
      which is comprised of:
  §
            $2,315,000
      related to the Tender Offer and Merger (see Note 2 to the Consolidated
      Condensed Financial Statements);
and
  §
            purchases
      of Five Star common stock for $1,523,000, which was comprised of $763,000
      in open market purchases and $1,200,000 from S. Leslie Flegel, the former
      Chairman of Five Star, of which $440,000 was charged to operations (see
      Note 14(a) to the Condensed Consolidated Financial
      Statements);
   27
  ·
              net
      cash provided by financing activities of $53,000, consisting of proceeds
      from the exercise of common stock warrants of $3,560,000 (see Note 14(b)
      to the Condensed Consolidated Financial Statements), partially offset
      by repayments of short term borrowings of $454,000, purchases of treasury
      stock of 1,115,000 and repayments of long-term debt of
      $1,698,000.
  The
increase in accounts receivables and the reduction in inventory at September 30,
2008 as compared to December 31, 2007 are principally the result of seasonal
fluctuations.
  On June
27, 2008, Five Star entered into a Restated and Amended Loan and Security
Agreement (the “Amended Loan Agreement”), with Bank of America, N.A. (“Bank of
America”). The Amended Loan Agreement extends the maturity date of that
certain Loan and Security Agreement, dated as of June 20, 2003, entered into by
Five Star and Bank of America (through its predecessor Fleet Capital
Corporation), as amended (the “2003 Loan Agreement”), to June 30,
2011.  The 2003 Loan Agreement, as amended by the Amended Loan
Agreement, is referred to herein as the “Loan Agreement’.
  The
Amended Loan Agreement provides Five Star with a $35,000,000 revolving credit
facility (“Revolving Credit Facility”), subject to a $3,500,000 sub-limit for
letters of credit.  The Revolving Credit Facility allows Five Star to
borrow up to (a) 85% of eligible receivables plus (b) the greater of (i) the
lesser of $20,000,000 or 65% (to be reduced by 1% per quarter commencing July 1,
2008) of eligible inventory, or (ii) the lesser of $20,000,000 or 85% of the
appraised net orderly liquidation value of eligible inventory minus (c) the
amount of outstanding letter of credit obligations, as those terms are defined
therein.  All obligations under the Revolving Credit Facility are
secured by first priority liens on all of Five Star’s existing and future
assets.  In connection with the Amended Loan Agreement, on June 27,
2008, Five Star executed the Restated and Amended Promissory Note, dated as of
June 26, 2008, payable to Bank of America in the principal amount of $35,000,000
(the “Promissory Note”).  The Promissory Note restates and replaces a
certain $35,000,000 Revolving Note, dated as of June 1, 2005, made by Five Star
in favor of Bank of America.  The principal amount under the
Promissory Note is due and payable on June 30, 2011
  Loans
made to Five Star under the Revolving Credit Facility bear interest at a per
annum rate based on the Prime Rate of Bank of America plus 0.5%, or at a per
annum rate based on LIBOR plus 200 basis points, at Five Star’s
election.  The LIBOR and Prime Rate margins may be adjusted in the
event that Five Star Group achieves and maintains certain performance
benchmarks. At September 30, 2008 and December 31, 2007, $19,474,000 and
$19,303,000 was outstanding under the Loan Agreement and $7,707,000 and
$5,579,000 was available to be borrowed, respectively.  Substantially
all of Five Star’s assets are pledged as collateral for these
borrowings.  Under the Amended 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.
  In
connection with the 2003 Loan Agreement, Five Star also entered into a
derivative transaction with Bank of America.  The derivative
transaction is an interest rate swap and has been designated as a cash flow
hedge.  Effective June 30, 2008 through June 30, 2011, Five Star will
pay a fixed interest rate of 3.62% to Bank of America on notional principal of
$20,000,000.  In return, Bank of America 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
3.62%.  The fair value of the interest rate swap amounted to $(45,000)
at June 30, 2008 and is included in other assets in the accompanying balance
sheets.
  28
  In
connection with the March 25, 2008 resignation of Mr. Flegel as director and
Chairman of the Board of Five Star, and as a director of the Company and the
related agreement among Five Star, the Company and Mr. Flegel dated March 25,
2008 (see Note 14(a) to the Condensed Consolidated Financial Statements),
Bank of America amended the covenants related to the 2003 Loan Agreement in
March 2008 to exclude non-cash charges related to any equity instruments (common
stock, options and warrants) issued to any employee, director, or consultant
from the covenant calculations.
  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 September 30, 2008 Five Star was not in compliance with
its fixed charge coverage ratio, which is determined as a ratio of net
income before income taxes, amortization and depreciation, as adjusted for non
cash compensation expenses and cash outflow for income taxes and fixed assets to
interest expenses. The bank waived the covenant violation for the quarter ended
September 30, 2008.  There is no assurance that Five Star can comply
with this covenant in future quarters. The following table sets forth the
significant debt covenants at September 30, 2008:
  Covenant
            
            Required
            
            CalculatedMinimum
      tangible net worth
            
            $7,000,000
            
            $9,543,000Debt
      to tangible net worth
            
            <
      6
            
            2.04Fixed
      charge coverage
            
            >1.0
            
            0.93Quarterly
      income (loss)
            
            No
      loss in consecutive quarters
            
            $98,000 – second
      quarter profit (*)$115,000 – third
      quarter profit (*)
 
 *
            The
      Loan Agreement excludes non-cash charges related to any equity instruments
      (common stock, options and warrants) issued to any employee, director, or
      consultant from the covenant
calculations.
  Recent
accounting pronouncements
  In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
SFAS No. 141 (Revised 2007),“Business Combinations”.
SFAS No. 141(R), replaces SFAS No. 141,“Business Combinations”, and
establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, any noncontrolling interest in the acquiree, and any
goodwill acquired in a business combination. SFAS No. 141(R) also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of a business combination. SFAS No. 141(R) is to be
applied prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.  The impact that the adoption of SFAS No. 141(R)
will have on the Company’s financial statements is not presently determinable,
since it is dependant on future acquisitions, if any.
  29
  In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements”, which defines fair value, establishes a
framework for measurement of fair value and expands disclosures about fair value
measurements. SFAS No. 157 clarifies that fair value should be based on
assumptions that market participants will use when pricing an asset or liability
and establishes a fair value hierarchy of three levels
that  prioritize the information used to develop those assumptions.
The provisions of SFAS No. 157 became effective for the Company beginning
January 1, 2008. Generally, the provisions of this statement are to be applied
prospectively. The Company adopted SFAS No. 157 in the first quarter of 2008.
The adoption of SFAS No. 157 did not have a material effect on the Company’s
consolidated financial statements.
  In
February 2008, the FASB issued FASB Staff Position 157-2 “Partial Deferral of
the Effective Date of Statement 157” (“FSP 157-2”). FSP 157-2 delays the
effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), to fiscal years beginning
after November 15, 2008. The Company does not expect adoption of SFAS 157 for
nonfinancial assets and liabilities on January 1, 2009 to have a material effect
on the Company’s consolidated financial statements.
  In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”.  This statement provides
companies with an option to report selected financial assets and liabilities at
fair value. Although, this statement became effective for the Company beginning
January 1, 2008, the Company did not elect to value any financial assets and
liabilities at fair value.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements - an amendment of Accounting Research
Bulletin (“ARB”) No. 51” (“SFAS 160”).  SFAS 160 requires that
ownership interests in subsidiaries held by parties other than the parent, and
the amount of consolidated net income, be clearly identified, labeled, and
presented in the consolidated financial statements within equity, but separate
from the parent’s equity. It also requires once a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value. Sufficient disclosures are required to clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners.  SFAS No. 160 is effective for fiscal
years beginning after December 15, 2008, and is to be applied retrospectively
for all periods presented.
  In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161 (“SFAS
No. 161”), “Disclosures about Derivative Instruments and Hedging Activities - an
amendment of FASB Statement No. 133”. SFAS No. 161 gives financial statement
users better information about the reporting entity's hedges by providing for
qualitative disclosures about the objectives and strategies for using
derivatives, quantitative data about the fair value of and gains and losses on
derivative contracts, and details of credit-risk-related contingent features in
their hedged positions. The standard is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged, but not required. The Company does not
anticipate that the adoption of SFAS No. 161 will have a material effect on the
Company’s consolidated financial statements.
  30
  Item
3.  Quantitative andQualitative Disclosure About Market
Risk
  Not
required.
  Item
4.  Controls and Procedures
  The
Company has established disclosure controls and procedures designed to ensure
that information required to be disclosed in the reports that the Company files
or submits under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in SEC rules and forms and is
accumulated and communicated to management, including the principal executive
officer and principal financial officer, to allow timely decisions regarding
required disclosure.
  The
Company’s principal executive officer and principal financial officer, with the
assistance of other members of the Company’s management, have evaluated the
effectiveness of the design and operation of the Company’s disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of the end of the period covered by this quarterly report.
Based upon such evaluation, the Company’s principal executive officer and
principal financial officer have concluded that the Company’s disclosure
controls and procedures are effective as of the end of the period covered by
this quarterly report.
  The
Company’s principal executive officer and principal financial officer have also
concluded that there was no change in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the quarter ended September 30, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
   31
  PART
II. OTHER INFORMATION
  Item
2.   Unregistered SalesOfEquity Securities and
Use of Proceeds.
  The
following table provides common stock repurchases made by or on behalf of the
Company during the third quarter ended September 30, 2008.
 
 Issuer
Purchases of Equity Securities (1)
  Period
            
            Total
              Number
      of
              Shares
              Purchased
            
            
            Average
              Price
      Paid
              Per
      Share
            
            
            Total
      Number of
              Shares
              Purchased
              As
      Part of
              Publicly
              Announced
      Plan
              or
      Program
            
            
            Maximum
              Number
      of
              Shares
      That
              May
      Yet be
              Purchased
              Under
      the Plan
              or
      ProgramBeginning
            EndingJuly
      1, 2008
            July
      31, 2008
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            255,038August
      1, 2008
            August
      31, 2008
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            2,255,038September
      1, 2008
            September
      30, 2008
            
            
            46,359
            
            
            $
            2.10
            
            
            
            46,359
            
            
            
            2,208,679Total
            
            
            46,359
            
            
            $
            2.10
            
            
            
            46,359
            
            
            
            2,208,679
 
 (1)
            On
      December 15, 2006, the Company’s Board of Directors authorized the Company
      to repurchase up to 2,000,000 shares, or approximately 11%, of its
      outstanding shares of common stock on that date, from time to time either
      in open market or privately negotiated transactions. The Company undertook
      this repurchase program in an effort to increase shareholder
      value.
 
 On August
13, 2008, the Company’s Board of Directors authorized an increase of 2,000,000
shares, or approximately 11% of the Company’s then-outstanding shares of common
stock, to the Company’s stock repurchase program originally adopted in December
2006.  Immediately prior to this increase, a total of 255,038 shares
remained available for repurchase under this repurchase program.
 
 32
 
 Item
6.                Exhibits
 10.1
                            
                            Letter
      Agreement amending certain warrant certificates, dated as of August 11,
      2008, by and among National Patent Development Corporation, The Gabelli
      Small Cap Growth Fund, The Gabelli Equity Income Fund, The Gabelli ABC
      Fund, and The Gabelli Convertible and Income Securities Fund Inc.
      (incorporated by reference to Exhibit 10.1 to the Form 8-K filed by the
      registrant on August 12, 2008)10.2
                            
                            National
      Patent Development Corporation Warrant Certificate, dated as of December
      3, 2004, issuing 379,703 warrants to The Gabelli Small Cap Growth Fund
      (incorporated by reference to Exhibit 10.2 to the Form 8-K filed by the
      registrant on August 12, 2008)10.3
                            
                            National
      Patent Development Corporation Warrant Certificate, dated as of December
      3, 2004, issuing 379,703 warrants to The Gabelli Convertible Securities
      and Income Fund Inc. (incorporated by reference to Exhibit 10.3 to the
      Form 8-K filed by the registrant on August 12, 2008)10.4
                            
                            National
      Patent Development Corporation Warrant Certificate, dated as of December
      3, 2004, issuing 379,703 warrants to The Gabelli Equity Income Fund
      (incorporated by reference to Exhibit 10.4 to the Form 8-K filed by the
      registrant on August 12, 2008)10.5
                            
                            National
      Patent Development Corporation Warrant Certificate, dated as of December
      3, 2004, issuing 284,777 warrants to The Gabelli ABC Fund (incorporated by
      reference to Exhibit 10.5 to the Form 8-K filed by the registrant on
      August 12, 2008)31.1
                            *
                            Certification
      of principal executive officer of the registrant,
      pursuant to Securities Exchange Act Rule 13a-14(a)31.2
                            *
                            Certification
      of principal financial officer of the registrant,
      pursuant to Securities Exchange Act Rule 13a-14(a)32.1
                            *
                            Certifications
      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
      The Sarbanes-Oxley Act of 2002, signed by the principal executive officer
      of the registrant
      and the principal financial officer of the registrant
 ______________________
 *Filed
herewith
 
 33
 
 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
              CORPORATIONDate: November
      14, 2008
            
            /s/ HARVEY
      P. EISENName:  
      Harvey P.EisenTitle:    
      Chairman of the Board and Chief Executive OfficerDate: November
      14, 2008
            
            /s/ IRA
      J. SOBOTKOName:  
      Ira J. SobotkoTitle:    
      Vice President, Chief Financial
Officer
 
   34