**UNITED
                STATES**
 **SECURITIES
                AND EXCHANGE COMMISSION**
 **WASHINGTON,
                D.C. 20549**
 
 **FORM
                  10-Q/A**
 **Amendment
                  No. 1**
 
 (Mark
                  One)
 
 x **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
 
 For the quarterly period ended September 30, 2006
 or
 **o** **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
 
 For 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
                        incorporation
                          or organization
                      
                      (I.R.S.
                          EmployerIdentification
                          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, or a non-accelerated filer. See definition of
                  accelerated
                  filer and large accelerated filer in Rule 12b-2 of the Exchange
                  Act. (Check
                  one):
  Large accelerated
                        filer    o
                      Accelerated filer   
                        o
                      Non-accelerated filer   
                        x
  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 10, 2006, there were 17,859,016 shares of the registrant’s common
                  stock, $0.01 par value, outstanding.
 
 **EXPLANATORY
                  NOTE**
 
 This
                  amendment on Form 10-Q/A (this “Form 10-Q/A”) to the Quarterly Report on Form
                  10-Q for the quarterly period ended September 30, 2006 (the “2006 Third
                  Quarter”), originally filed by National Patent Development Corporation
                  (the
“Company”) with the Securities and Exchange Commission (the “SEC”) on November
                  14, 2006 (the “Form 10-Q”), is being filed with the SEC due to the amendment and
                  restatement of the Company’s interim financial statements and other financial
                  information for the three and nine months ended September 30, 2006.
                  On May 15,
                  2007, the Company filed with the SEC an amendment to its Quarterly
                  Report on
                  Form 10-Q for the three month period ended March 31, 2006, and
                  on May 31, 2007,
                  immediately prior to filing this amendment on Form 10-Q/A, the
                  Company filed
                  with the SEC an amendment to its Quarterly Report on Form 10-Q
                  for the three and
                  six month periods ended June 30, 2006. The changes reflected in
                  the Company’s
                  Condensed Consolidated Financial Statements for the first three
                  quarters of 2006
                  were previously disclosed in
                  Note
                  20 to the Company’s Notes to Consolidated Financial Statements included in the
                  Company’s Annual Report on Form 10-K for the year ended December 31, 2006
                  filed
                  with the SEC on April 3, 2007 (the “2006 Form 10-K”).
  As
                  more
                  fully stated in Note 10 to the Company’s Notes to Condensed Consolidated
                  Financial Statements included in this Form 10-Q/A:
  ·
                    The
                        financial statements and other information contained in this
                        Form 10-Q/A
                        have been amended and restatedto
                        reflect the impact of a change in the financial statements
                        relating to the
                        recordation of shares of stock of Valera Pharmaceuticals,
                        Inc. (“Valera”)
                        owned by the Company through its wholly owned subsidiary,
                        MXL Industries,
                        Inc., and classified as available for sale during the period
                        (the “Valera
                        Shares”). In the fourth quarter of 2006, the Company charged*Investment
                        and other income (loss)*,
                        and credited*Accumulated
                        other comprehensive income*,
                        $180,000, representing unrealized gain for the period from
                        January 1, 2006
                        through September 30, 2006 on the Valera Shares, which unrealized
                        gain is
                        payable to related parties (as discussed in Note 7 to the
                        Company’s Notes
                        to Condensed Consolidated Financial Statements included in
                        this Form
                        10-Q/A).  ·
                    As
                        a result of the implementation of SAB 108 in December 2006,
                        previously
                        issued interim financial information consisting of costs
                        of goods sold,
                        gross margin and net loss for the first three quarters of
                        the year ended
                        December 31, 2006 has been revised to correct
                        errors.  
  
 
 Financial
                  data for the nine months ended September 30, 2006 has been restated
                  by
                  increasing net loss and net loss per share as follows:
  **Unaudited**
                        
                        **Nine
                            Months Ended**
                          **September
                            30, 2006**
                          **(Previously
                            Reported)**
                        
                        **Adjustment**
                        
                        **Nine
                            Months Ended**
                          **September
                            30, 2006**
                          **(As
                            Restated)**(in
                            thousands, except per share data)Net
                            loss
                        
                        **(
                            426 )**
                        
                        **(
                            224)**
                        
                        **(
                            650 )**Net
                            loss per share
                        
                        **(
                            .02 )**
                        
                        **(
                            .02 )**
                        
                        **(
                            .04 )**
  Financial
                data for the 2006 Third Quarter has been restated by decreasing net
                loss and net
                loss per share as follows:
  **Unaudited**
                        
                        **Three
                            Months Ended**
                          **September
                            30, 2006**
                          **(Previously
                            Reported)**
                        
                        **Adjustment**
                        
                        **Three
                            Months Ended**
                          **September
                            30, 2006**
                          **(As
                            Restated)**(in
                            thousands, except per share data)Net
                            loss
                        
                        **(
                            161 )**
                        
                        **66**
                        
                        **(
                            95 )**Net
                            loss per share
                        
                        **(
                            .01 )**
                        
                        **(
                            .00 )**
                        
                        **(
                            .01 )**
  This
                  amendment also revises Part I, Item 2. “Management’s Discussion and Analysis of
                  Financial Condition and Results of Operations” to reflect the impact of the
                  changes in the interim financial statements thereon, and Part I,
                  Item 4.
“Controls and Procedures” to identify the material deficiencies in the Company’s
                  internal controls and procedures as of September 30, 2006 and the
                  manner in
                  which the Company is addressing such deficiencies.
  As
                  a
                  result of this amendment, the certifications, pursuant to Section
                  302 and
                  Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished,
                  respectively, as exhibits to the Form 10-Q have been re-executed
                  and re-filed as
                  of the date of this Form 10-Q/A, as reflected in Part II, Item
                  6.
“Exhibits”.
  Except
                  as
                  described above, no other changes have been made to the Form 10-Q.
                  This Form
                  10-Q/A does not amend or update any other information set forth
                  in the Form
                  10-Q.
   
 
 **NATIONAL
                PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 
 **TABLE
                OF CONTENTS**
 
 
 Page
                                No.Part
                                I.Financial
                                InformationItem
                                1.
                            
                            Financial
                                StatementsCondensed
                                Consolidated Statements of Operations-Three
                                Months and Nine Months EndedSeptember
                                30, 2006 (Restated) and 2005 (Unaudited)
                            
                            1Condensed
                                Consolidated Statements of Comprehensive Loss-Three
                                Months and Nine Months EndedSeptember
                                30, 2006 (Restated) and 2005 (Unaudited)
                            
                            2Condensed
                                Consolidated Balance Sheets -September
                                30, 2006 (Restated and Unaudited) and December 31,
                                2005
                            
                            3Condensed
                                Consolidated Statements of Cash Flows -Nine
                                Months Ended September 30, 2006 (Restated)and
                                2005 (Unaudited)
                            
                            4Notes
                                to Condensed Consolidated Financial Statements
                            
                            5Item
                                2.
                            
                            Management's
                                Discussion and Analysis of FinancialCondition
                                and Results of Operations
                            
                            17Item
                                3.
                            
                            Quantitative
                                and Qualitative Disclosure about Market Risk
                            
                            28Item
                                4.
                            
                            Controls
                                and Procedures
                            
                            
                            
                            28Part
                                II. Other InformationItem
                                6.
                            
                            Exhibits
                            
                            
                            
                            29Signatures
                            
                            
                            
                            30
 
 
  **PART
                I. FINANCIAL INFORMATION**
 
 **NATIONAL
                PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 **(in
                thousands, except per share data)**
 
 **Three
                          Months Ended**
                      
                      **Nine
                          Months Ended****September
                          30,**
                      
                      **September
                          30,****2006**
                      
                      2005
                      
                      **2006**
                      
                      2005**Restated
                          - See Note 10**
                      
                      
                      
                      **Restated
                          - See Note 10**Sales
                      
                      **$**
                      **30,125**
                      
                      $
                      28,940
                      
                      **$**
                      **92,491**
                      
                      $
                      90,686Cost
                          of sales
                      
                      
                      **25,265**
                      
                      
                      25,217
                      
                      
                      **76,884**
                      
                      
                      76,762Gross
                          margin
                      
                      
                      **4,860**
                      
                      
                      3,723
                      
                      
                      **15,607**
                      
                      
                      13,924Selling,
                          general and administrativeexpenses
                      
                      
                      **(4,679**
                      **)**
                      
                      (4,866
                      )
                      
                      **(14,474**
                      **)**
                      
                      (15,198
                      )Operating
                          profit (loss)
                      
                      
                      **181**
                      
                      
                      (1,143
                      )
                      
                      **1,133**
                      
                      
                      (1,274
                      )Interest
                          expense
                      
                      
                      **(391**
                      **)**
                      
                      (396
                      )
                      
                      **(1,234**
                      **)**
                      
                      (1,223
                      )Investment
                          and other income (loss)
                      
                      
                      **180**
                      
                      
                      27
                      
                      
                      **(2**
                      **)**
                      
                      298Income
                          (loss) before income taxes and minority interest
                      
                      
                      **(30**
                      **)**
                      
                      (1,512
                      )
                      
                      **(103**
                      **)**
                      
                      (2,199
                      )Income
                          tax (expense) benefit
                      
                      
                      **(
                          54**
                      **)**
                      
                      (478
                      )
                      
                      **(400**
                      **)**
                      
                      107Loss
                          before minority interest
                      
                      
                      **(84**
                      **)**
                      
                      (1,034
                      )
                      
                      **(
                          503**
                      **)**
                      
                      (2,092
                      )Minority
                          interest
                      
                      
                      **(11**
                      **)**
                      
                      249
                      
                      
                      **(147**
                      **)**
                      
                      92Net
                          loss
                      
                      **$**
                      **(95**
                      **)**
                      $
                      (785
                      )
                      **$**
                      **(650**
                      **)**
                      $
                      (2,000
                      )Net
                          loss per shareBasic
                          and diluted
                      
                      **$**
                      **(0.01**
                      **)**
                      $
                      (0.04
                      )
                      **$**
                      **(0.04**
                      **)**
                      $
                      (0.11
                      )
 
 See
                accompanying notes to consolidated financial statements.
  1
  **NATIONAL
                PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**
 **(Unaudited)**
 **(in
                thousands)**
 
 **Three
                          Months Ended**
                      
                      **Nine
                          Months Ended****September
                          30,**
                      
                      **September
                          30,****2006**
                      
                      2005
                      
                      **2006**
                      
                      2005**Restated-See
                          Note 10**
                      
                      
                      
                      **Restated-See
                          Note 10**Net
                          loss
                      
                      **$**
                      **(95**
                      **)**
                      $
                      (785
                      )
                      **$**
                      **(650**
                      **)**
                      $
                      (2,000
                      )Other
                          comprehensive income (loss), before tax:Net
                          unrealized gain (loss) on available-for-sale-securities
                      
                      
                      **(314**
                      **)**
                      
                      116
                      
                      
                      **4,110**
                      
                      
                      679Reclassification
                          adjustment for (gain) on securities sold included in net
                          loss
                      
                      
                      
                      
                      
                      (7
                      )
                      
                      
                      
                      
                      (159
                      )Net
                          unrealized gain (loss) on interest rate swap,
                        net
                          of minority interest
                      
                      
                      **(95**
                      **)**
                      
                      100
                      
                      
                      **(29**
                      **)**
                      
                      158Comprehensive
                          income (loss) before tax
                      
                      
                      **(504**
                      **)**
                      
                      (576
                      )
                      
                      **3,431**
                      
                      
                      (1,322
                      )Income
                          tax (expense) benefit related to items of other comprehensive
                          income
                          (loss)
                      
                      
                      **37**
                      
                      
                      (41
                      )
                      
                      **11**
                      
                      
                      (66
                      )Comprehensive
                          income (loss)
                      
                      **$**
                      **(467**
                      **)**
                      $
                      (617
                      )
                      **$**
                      **3,442**
                      
                      $
                      (1,388
                      )
  See
                accompanying notes to consolidated financial statements.
  2
  **NATIONAL
                PATENT DEVELOPMENT CORPORATION**
 **CONDENSED
                CONSOLIDATED BALANCE SHEETS**
 **(in
                thousands)**
 
 **September
                          30,**
                      
                      **December
                          31,****2006**
                      
                      **2005****Restated
                          - See Note 10****(unaudited)****Assets****Current
                          assets**Cash
                          and cash equivalents
                      
                      **$**
                      **4,885**
                      
                      $
                      5,115Accounts
                          receivable, less allowancefor
                          doubtful accounts of $539 and $480
                      
                      
                      **15,674**
                      
                      
                      12,083Receivable
                          from GP Strategies Corporation
                      
                      
                      **537**
                      
                      
                      1,142Inventories
                      
                      
                      **21,855**
                      
                      
                      24,021Prepaid
                          expenses and other current assets
                      
                      
                      **1,205**
                      
                      
                      997Property
                          held for sale
                      
                      
                      **-**
                      
                      
                      352**Total
                          current assets**
                      
                      
                      **44,156**
                      
                      
                      43,170Marketable
                          securities available for sale
                      
                      
                      **386**
                      
                      
                      477Property,
                          plant and equipment, net
                      
                      
                      **2,914**
                      
                      
                      3,085Investment
                          in Valera , including availablefor
                          sale securities of $4,771 in 2006
                      
                      
                      **5,789**
                      
                      
                      1,590Other
                          assets
                      
                      
                      **3,316**
                      
                      
                      3,360**Total
                          assets**
                      
                      **$**
                      **56,561**
                      
                      $
                      52,222**Liabilities
                          and stockholders’ equity****Current
                          liabilities**Current
                          maturities of long-term debt
                      
                      **$**
                      **101**
                      
                      $
                      291Short
                          term borrowings
                      
                      
                      **18,820**
                      
                      
                      20,764Accounts
                          payable and accrued expenses
                      
                      
                      **12,637**
                      
                      
                      9,566**Total
                          current liabilities**
                      
                      
                      **31,558**
                      
                      
                      30,621Long-term
                          debt less current maturities
                      
                      
                      **1,030**
                      
                      
                      1,106Deferred
                          tax liability
                      
                      
                      **279**
                      
                      
                      279Other
                          liabilities
                      
                      
                      **189**
                      
                      
                      20Minority
                          interest
                      
                      
                      **1,747**
                      
                      
                      1,727**Stockholders’
                          equity**Common
                          Stock
                      
                      
                      **178**
                      
                      
                      178Additional
                          paid-in capital
                      
                      
                      **25,976**
                      
                      
                      25,921Accumulated
                          deficit
                      
                      
                      **(8,620**
                      **)**
                      
                      (7,762
                      )Accumulated
                          other comprehensive income
                      
                      
                      **4,224**
                      
                      
                      132**Total
                          stockholders’ equity**
                      
                      
                      **21,758**
                      
                      
                      18,469**Total
                          liabilities and stockholders’ equity**
                      
                      **$**
                      **56,561**
                      
                      $
                      52,222
 
 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 Ended****September
                          30,****2006**
                      
                      **2005****Restated-
                          See Note 10****Cash
                          flows from operations:**Net
                          loss
                      
                      **$**
                      **(650**
                      **)**
                      $
                      (2,000
                      )Adjustments
                          to reconcile net loss tonet
                          cash provided by (used in) operating activities:Depreciation
                          and amortization
                      
                      
                      **440**
                      
                      
                      461Minority
                          interest
                      
                      
                      **147**
                      
                      
                      (91
                      )Expenses
                          paid in common stock
                      
                      
                      **55**Services
                          provided by GP Strategies applied to repayment of
                          receivable
                      
                      
                      **666**Deferred
                          income taxes
                      
                      
                      **228**Net
                          gain on marketable securities
                      
                      
                      
                      
                      
                      (159
                      )Loss
                          on disposal of fixed assets
                      
                      
                      
                      
                      
                      276Changes
                          in other operating items
                      
                      
                      **1,363**
                      
                      
                      (1,699
                      )**Net
                          cash provided by (used in) operations**
                      
                      
                      **2,249**
                      
                      
                      (3,212
                      )**Cash
                          flows from investing activities:**Additions
                          to property, plant and equipment, net
                      
                      
                      **(269**
                      **)**
                      
                      (1,012
                      )Proceeds
                          from sale of investments
                      
                      
                      
                      
                      
                      1,351Proceeds
                          from sale of fixed assets
                      
                      
                      
                      
                      
                      1,514**Net
                          cash (used in) provided by investing activities**
                      
                      
                      **(269**
                      **)**
                      
                      1,853**Cash
                          flows from financing activities:**Distribution
                          to GP Strategies
                      
                      
                      
                      
                      
                      (91
                      )Contribution
                          from GP Strategies
                      
                      
                      **-**
                      
                      
                      5,000(Repayment
                          of) proceeds from short-term borrowings
                      
                      
                      **(1,944**
                      **)**
                      
                      3,188Repayment
                          of long-term debt
                      
                      
                      **(266**
                      **)**
                      
                      (3,026
                      )**Net
                          cash (used in) provided by financing activities**
                      
                      
                      **(
                          2,210**
                      **)**
                      
                      5,071Net
                          (decrease) increase in cash and cash equivalents
                      
                      
                      **(230**
                      **)**
                      
                      3,712Cash
                          and cash equivalents at beginning of period
                      
                      
                      **5,115**
                      
                      
                      2,087**Cash
                          and cash equivalents at end of period**
                      
                      **$**
                      **4,885**
                      
                      $
                      5,799
 
 
 See
                accompanying notes to the condensed consolidated financial
                statements.
 
 4
 **NATIONAL
                PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                to
                Condensed Consolidated Financial Statements
 (Unaudited)
  **1.**  **Basis
                of presentation and summary of significant accounting
                policies**
 
 *Basis
                of presentation*
 
 The
                accompanying Condensed Consolidated Balance Sheet as of September
                30, 2006 and
                the Condensed Consolidated Statements of Operations, Comprehensive
                Income (Loss)
                and Cash Flows for the three months and nine months ended September
                30, 2006 and
                2005 have not been audited, but have been prepared in conformity
                with accounting
                principles generally accepted in the United States for interim financial
                information and with the instructions to Form 10-Q and Article 10
                of Regulation
                S-X. These financial statements should be read in conjunction with
                the audited
                consolidated financial statements and notes thereto for the year
                ended December
                31, 2005 as presented in our Annual Report on Form 10-K. In the opinion
                of
                management, this interim information includes all material adjustments,
                which
                are of a normal and recurring nature, necessary for a fair presentation.
                The
                results for the 2006 interim periods are not necessarily indicative
                of results
                to be expected for the entire year.
 
 *Description
                of business.*National
                Patent Development Corporation (the “Company” or “National Patent Development
“), through its wholly owned subsidiary, MXL Industries, Inc. (“MXL”),
                manufactures polycarbonate parts requiring strict adherence to optical
                quality
                specifications, and in the application of abrasion and fog resistant
                coating to
                these parts. Products include shields and face masks and non-optical
                plastic
                products. The Company’s 64% owned subsidiary, Five Star Products, Inc. (“Five
                Star”), is engaged in the wholesale distribution of home decorating, hardware
                and finishing products. It serves over 3,500 independent retail dealers
                in
                twelve states in the Northeast. Products distributed include paint
                sundry items,
                interior and exterior stains, brushes, rollers, caulking compounds
                and hardware
                products.
 
 *Revenue
                recognition.* Revenue
                on product sales is recognized at the point in time when the product
                has been
                shipped, title and risk of loss has been transferred to the customer,
                and the
                following conditions are met: persuasive evidence of an arrangement
                exists, the
                price is fixed and determinable, and collectibility of the resulting
                receivable
                is reasonably assured. Allowances for estimated returns and allowances
                are
                recognized when sales are recorded.
 
 *Shipping
                and handling costs.* Shipping
                and handling costs are included as a part of selling, general and
                administrative
                expense. These cost amounted to $1,273,000, $1,356,000, $3,818,000
                and
                $3,913,000, for the three months and nine months ended September
                30, 2006 and
                2005, respectively.
 
 *Inventories.* Inventories are valued at the lower of cost, using the first-in,
                first-out
                method, or market.
 
 (Continued)
 5
 **NATIONAL
                    PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                    to
                    Condensed Consolidated Financial Statements
 (Unaudited)
 *Derivatives
                and hedging activities.* The
                interest rate swap and interest rate collar entered into by Five
                Star in
                connection with its Loan and Security Agreement (see Note 5) is being
                accounted
                for under SFAS No. 133, as amended, "Accounting for Derivative Instruments
                and
                Hedging Activities." SFAS No. 133 requires all derivatives to be
                recognized in
                the balance sheet at fair value. Derivatives that are not hedges
                must be
                adjusted to fair value through earnings. If the derivative is a cash
                flow hedge,
                changes in the fair value of the derivative are recognized in other
                comprehensive income until the hedged item is recognized in earnings.
                The
                ineffective portion of a derivative's change in fair value is immediately
                recognized in earnings. Changes in the fair value of the interest
                rate swap,
                which has been designated as a cash flow hedge, were recognized in
                other
                comprehensive income. Changes in the fair value of the interest rate
                collar are
                recognized in earnings. During
                the quarter and nine months ended September 30, 2006 the Company
                recognized a
                gain of $27,000 and $11,000, respectively, as part of other income,
                for the
                changes in the fair value of the interest rate collar. During the
                quarter and
                nine months ended September 30, 2005 the Company recognized a loss
                of $14,000
                and $4,000, respectively, as part of other income, for the changes
                in the fair
                value of the interest rate collar.
  *Recent
                accounting pronouncements* *.* In
                July
                2006, the Financial Accounting Standards Board (FASB) released FASB
                Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
                interpretation of FASB Statement No. 109” (FIN 48).  FIN 48 clarifies the
                accounting and reporting for uncertainties in income tax law.  This
                Interpretation prescribes a comprehensive model for the financial
                statement
                recognition, measurement, presentation and disclosure of uncertain
                tax positions
                taken or expected to be taken in income tax returns.  The Company will
                adopt this Interpretation in the first quarter of 2007.  The cumulative
                effects, if any, of applying this Interpretation will be recorded
                as an
                adjustment to retained earnings as of the beginning of the period
                of
                adoption.  The Company has commenced the process of evaluating the expected
                effect of FIN 48 on its Consolidated Financial Statements and is
                currently not
                yet in a position to determine such effects.
  In
                September 2006, the Financial Accounting Standards Board (FASB) issued
                SFAS
                No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
                Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and
                132(R),” which requires employers to: (a) recognize in its statement of
                financial position an asset for a plan’s overfunded status or a liability for a
                plan’s underfunded status; (b) measure a plan’s assets and its obligations
                that determine its funded status as of the end of the employer’s fiscal year;
                and (c) recognize changes in the funded status of a defined benefit
                postretirement plan in the year in which the changes occur. Those
                changes will
                be reported in comprehensive income of a business entity. The requirement
                to
                recognize the funded status of a benefit plan and the disclosure
                requirements
                are effective as of the end of the fiscal year ending after December 15,
                2006, for entities with publicly traded equity securities. The requirement
                to
                measure plan assets and benefit obligations as of the date of the
                employer’s
                fiscal year-end statement of financial position is effective for
                fiscal years
                ending after December 15, 2008. The Company has no defined benefit pension
                plans.
  (Continued)
 6
 **NATIONAL
                    PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                    to
                    Condensed Consolidated Financial Statements
 (Unaudited)
  Also
                in
                September 2006, FASB issued SFAS No. 157, “ *Fair
                Value Measurements’* ”
which
                defines fair value, establishes a framework for measuring fair value
                in
                generally accepted accounting principles and expands disclosures
                about fair
                value measurements. This Statement is effective for financial statements
                issued
                for fiscal years beginning after November 15, 2007 and interim periods
                within those fiscal years. Earlier application is encouraged provided
                that the
                reporting entity has not yet issued financial statements for that
                fiscal year
                including financial statements for an interim period within that
                fiscal year.
                The company is assessing SFAS No. 157 and has not determined yet the impact
                that the adoption of SFAS No. 157 will have on its result of operations or
                financial position.
 
 **2.** **Stock
                based compensation**
  The
                Company and Five Star have stock-based compensation plans for employees
                and
                non-employee members of the Board of Directors. The plans provide
                for
                discretionary grants of stock options, restricted stock shares, and
                other
                stock-based awards. The plans are administered by the Compensation
                Committee of
                the Board of Directors, consisting of non-employee directors.
  Effective
                January 1, 2006, the Company and Five Star adopted Statement of Financial
                Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (“SFAS
                123R”), utilizing the modified prospective method whereby prior periods
                will not
                be restated for comparability. SFAS 123R requires recognition of
                stock-based
                compensation expense in the statement of operations over the vesting
                period
                based on the fair value of the award at the grant date. Previously,
                the Company
                used the intrinsic value method under Accounting Principles Board
                Opinion No.
                25, “Accounting for Stock Issued to Employees” (“APB 25”), as amended by related
                interpretations of the FASB. Under APB 25, no compensation cost was
                recognized
                for stock options because the quoted market price of the stock at
                the grant date
                was equal to the amount per share the employee had to pay to acquire
                the stock
                after fulfilling the vesting period. SFAS 123R supersedes APB 25
                as well as
                Statement of Financial Accounting Standard 123 “Accounting for Stock-Based
                Compensation”, which permitted pro forma footnote disclosures to report the
                difference between the fair value method and the intrinsic value
                method. As of
                September 30, 2006, no awards have been granted under the Company’s plan. In
                addition, during the nine months ended September 30, 2006, Five Star
                did not
                grant any stock options or any other stock-based awards under its
                plan, and
                therefore the adoption of this pronouncement did not have any effect
                on the
                Company’s consolidated results of operations for the three and nine month
                periods ended September 30, 2006.
  At
                September 30, 2006, Five Star had 1,100,000 options outstanding of
                which
                1,070,000 were exercisable under its stock option plan with an aggregate
                weighted average price of $0.14 per share and a contractual remaining
                life of
                0.3 years. The aggregate intrinsic value of the options outstanding
                at September
                30, 2006 was $40,000. During the nine months ended September 30,
                2006, there
                were no option exercises, forfeitures or expirations.
  The
                following table provides the pro forma effect on net earnings as
                if the
                fair-value-based measurement method had been applied to all stock-based
                compensation for the three months and nine months ended September
                30, 2005 (in
                thousands, except per share amounts):
 
 (Continued)
 7
 **NATIONAL
                    PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                    to
                    Condensed Consolidated Financial Statements
 (Unaudited)
 **Three
                          Months Ended**
                      
                      **Nine
                          Months Ended****September
                          30,**
                      
                      **September
                          30,**2005
                      
                      
                      
                      2005Net
                          loss - As reported
                      
                      
                      
                      
                      $
                      (785
                      )
                      
                      
                      
                      $
                      (2,000
                      )Compensation
                          expense, net of taxFive
                          Star stock options
                      
                      
                      
                      
                      
                      (2
                      )
                      
                      
                      
                      
                      (5
                      )Pro
                          forma net loss
                      
                      
                      
                      
                      
                      (787
                      )
                      
                      
                      
                      $
                      (2,005
                      )Basic
                          and diluted loss per shareAs
                          reported
                      
                      
                      
                      
                      $
                      (.04
                      )
                      
                      
                      
                      $
                      (.11
                      )Pro
                          forma net loss per share
                      
                      
                      
                      
                      $
                      (.04
                      )
                      
                      
                      
                      $
                      (.11
                      )
  **3.** **Per
                share data**
 
 Basic
                and
                diluted loss per share for the three months and nine months ended
                September 30,
                2006 and 2005 is based upon the actual number of National Patent
                Development
                shares outstanding during the periods. Outstanding warrants to acquire
                1,423,887
                common shares issued in December 2004 were not included in the 2006
                and 2005
                diluted computation, as their effect would be anti-dilutive. In addition,
                the
                diluted computation was not effected by Five Star’s outstanding
                options.
 Loss
                per
                share for the three months and nine months ended September 30, 2006
                and 2005 are
                as follows (in thousands, except per share amounts):
 
 **Three
                          Months Ended**
                      
                      **Nine
                          Months Ended****September
                          30,**
                      
                      **September
                          30,****2006**
                      
                      2005
                      
                      **2006**
                      
                      2005Basic
                          and Diluted EPSNet
                          loss
                      
                      **$**
                      **(95**
                      **)**
                      $
                      (785
                      )
                      **$**
                      **(650**
                      **)**
                      $
                      (2,000
                      )Weighted
                          average sharesoutstanding,
                          basic and diluted
                      
                      
                      **17,848**
                      
                      
                      17,810
                      
                      
                      **17,836**
                      
                      
                      17,804Basic
                          and diluted loss per share
                      
                      **$**
                      **(.01**
                      **)**
                      $
                      (.04
                      )
                      **$**
                      **(.04**
                      **)**
                      $
                      (.11
                      )
 
  (Continued)
 8
 **NATIONAL
                  PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                  to
                  Condensed Consolidated Financial Statements
 (Unaudited)
  **4.** **Long-term
                debt**
 
 *Long-term
                debt*
  Long-term
                debt is comprised of the following (in thousands):
  **September
                          30,**
                      
                      **December
                          31,****2006**
                      
                      **2005**MXL
                          Pennsylvania Mortgage (a)
                      
                      **$**
                      **1,130**
                      
                      $
                      1,205Other
                          debt
                      
                      
                      
                      
                      
                      186Capital
                          lease obligations
                      
                      
                      **1**
                      
                      
                      6**1,131**
                      
                      
                      1,397Less
                          current maturities
                      
                      
                      **(101**
                      **)**
                      
                      (291
                      )**$**
                      **1,030**
                      
                      $
                      1,106
  (a)  On
                March
                8, 2001, MXL mortgaged its real estate and fixtures on its property
                in
                Pennsylvania for $1,680,000. The loan requires monthly repayments
                of $8,333 plus
                interest at 2.5% above the one month LIBOR rate and matures on March
                8, 2011,
                when the remaining amount outstanding of approximately $680,000 is
                due in full.
                The loan is guaranteed by GP Strategies.
  **5.** **Short
                term borrowings**
  *Five
                Star short-term borrowings*
  In
                2003,
                Five Star obtained a Loan and Security Agreement (the “Loan Agreement”) with
                Bank of America Business Capital (formerly Fleet Capital Corporation)
                (the
“Lender”). The Loan Agreement has a five-year term, with a maturity date
                of June
                30, 2008. The Loan Agreement, as amended on August 1, 2005, provides
                for a
                $35,000,000 revolving credit facility, which allows Five Star to
                borrow based
                upon a formula of up to 65% of eligible inventory and 85% of eligible
                accounts
                receivable, as defined therein. The interest rates under the Loan
                Agreement
                consist of LIBOR plus a credit spread of 1.5% (7.57% at September
                30, 2006) for
                borrowings not to exceed $15,000,000 and the prime rate (8.25% at
                September 30,
                2006) for borrowings in excess of the above-mentioned LIBOR-based
                borrowings.
                The credit spreads can be reduced in the event that Five Star achieves
                and
                maintains certain performance benchmarks. At September 30, 2006 and
                December 31,
                2005, approximately $17,870,000 and $19,764,000 was outstanding under
                the Loan
                Agreement and approximately $6,286,000 and $1,451,000 was available
                to be
                borrowed, respectively. Substantially all of Five Star’s assets are pledged as
                collateral for these borrowings. Under the Loan Agreement Five Star
                is subject
                to covenants requiring minimum net worth, limitations on losses,
                if any, and
                minimum or maximum values for certain financial ratios. As of September
                30,
                2006, Five Star was in compliance with all required covenants.
  (Continued)
 9
 **NATIONAL
                    PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                    to
                    Condensed Consolidated Financial Statements
 (Unaudited)
 In
                connection with the Loan Agreement, Five Star also entered into a
                derivative
                transaction with the Lender. The derivative transaction is an interest
                rate swap
                and has been designated as a cash flow hedge. Effective July 1, 2004
                through
                June 30, 2008, Five Star will pay a fixed interest rate of 3.38%
                to the Lender
                on notional principal of $12,000,000. In return, the Lender will
                pay to Five
                Star a floating rate, namely, LIBOR, on the same notional principal
                amount. The
                fair value of the interest rate swap amounted to $351,000 and 395,000
                at
                September 30, 2006 and December 31, 2005, respectively, and is included
                in other
                assets in the accompanying balance sheets.
  On
                June
                17, 2004, Five Star also entered into a derivative interest rate
                collar
                transaction for the period from July 1, 2004 through June 30, 2008
                on notional
                principal of $12,000,000. The transaction consists of an interest
                rate floor of
                2.25%, whereby if LIBOR is below 2.25%, the Lender will pay to Five
                Star the
                difference between LIBOR and 2.25%, on the same notional principal
                amount. The
                transaction also consists of an interest rate cap of 5.75%, whereby
                if LIBOR is
                above 5.75%, Five Star will pay to the Lender the difference between
                LIBOR and
                5.75%, on the same notional principal amount.
  *MXL
                short-term borrowings*
 
 On
                March
                1, 2005, MXL obtained a Line of Credit Loan (the “MXL Line”) from M&T Bank
                with a one year term, maturing on March 1, 2006, which has been extended
                to June
                30, 2007 on the same terms. The MXL Line provides for a $1,000,000
                revolving
                credit facility, which is secured by MXL’s eligible accounts receivable,
                inventory and a secondary claim on the Lancaster, PA property. The
                interest
                rates under the MXL Line consist of LIBOR plus a credit spread of
                3% or the
                prime rate plus a credit spread of 0.25%. The MXL Line is subject
                to an unused
                commitment fee of 0.25% of the average daily unused balance of the
                line payable
                quarterly. National Patent Development has guaranteed the MXL Line.
                At September
                30, 2006, $950,000 was outstanding under the MXL Line and $50,000
                was available
                to be borrowed. The MXL Line contains certain financial covenants,
                most
                significant being a cash flow coverage ratio of 1.25 to 1.00, which
                is
                calculated annually at December 31 of each year.
  **6.** **Inventories**
 
 Inventories
                are comprised of the following (in thousands):
 **September
                          30, 2006**
                      
                      **December
                          31, 2005**Raw
                          materials
                      
                      **$**
                      **394**
                      
                      $
                      386Work
                          in process
                      
                      
                      **161**
                      
                      
                      113Finished
                          goods
                      
                      
                      **21,300**
                      
                      
                      23,522**$**
                      **21,855**
                      
                      $
                      24,021
 
 
 (Continued)
 10
 **NATIONAL
                    PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                    to
                    Condensed Consolidated Financial Statements
 (Unaudited)
 
 **7.** **Investment
                in Valera Pharmaceuticals, Inc. (“Valera”)**
 Valera
                is
                a specialty pharmaceutical company engaged in the development and
                commercialization of prescription pharmaceuticals principally utilizing
                Valera’s
                patented Hydron drug delivery technology.
 
 Valera ’s
                lead
                product is a twelve-month implant that delivers histrelin, a synthetic
                nonapeptide agonist of luteinizing hormone-releasing hormone (LHRH).
                LHRH
                agonists have become a mainstay in treating locally advanced and
                metastatic
                prostate cancer. On October 13, 2004, Valera announced that the FDA
                approved the
                marketing of VantasTM, the name for Valera’s long-acting LHRH implant for
                treating prostate cancer. Prior to June 2000, Valera operated
                as a division of GP Strategies. In connection with an offering of
                GP Strategies
                6% Convertible Subordinated Exchangeable Notes due June 2003,
                Valera was
                incorporated as a separate company and became a wholly-owned subsidiary
                of GP
                Strategies through GP Strategies’ ownership of 100% of
                the common stock of Valera.
  In December
                2 001,
                Valera completed a $7 million private placement of Series A convertible
                preferred stock
                to certain institutional investors. As a condition of the private
                placement, GP
                Strategies contractually gave up operating control over Valera through
                an Investors Rights Agreement,  which
                gave GP Strategies the right to designate one director on Valera’s board of
                directors and gave the other stockholders the right to designate
                the other
                directors, and
                subsequent thereto accounted for the investment under the equity
                method .
                As a
                result of Valera’s operating losses, GP Strategies investment was written down
                to zero.
  In
                2003, Valera completed a private placement offering pursuant to which Valera raised
                approximately $13.5 million in gross proceeds from the sale of Series
                B
                convertible preferred stock. As part of such transaction, GP
                Strategies was granted
                an option until March 31, 2004, to purchase up to $5 million of the Series
                B
                convertible preferred stock at the offering price of $ 0.725 per
                share, which was
                subsequently verbally extended to June 30, 2004. On June 30, 2004,
                GP Strategies
                transferred a portion of its option to an institutional investor,
                who exercised
                such option and purchased from Valera 3,448,276 shares of Series
                B convertible
                preferred stock for $0.725 per share. The balance of the option expired
                unexercised. In consideration of such transfer ,
                such
                institutional investor granted the Company an option until October
                28, 2004 to
                purchase up to 2,068,966 shares of Series
                B
                convertible preferred stock owned by such institutional investor
                for prices
                ranging from $0.725 to $0.7685 per share. The
                Company exercised such option on October 28, 2004 at a price of $0.7685
                per
                share, for an aggregate exercise price of $1,590,000. On November
                12, 2004, the
                Company obtained the funds necessary to pay the exercise price (see
                Note 9 (a)).
                On August 16, 2004, Valera sold 11,600,000 shares of Series C convertible
                preferred stock and received gross proceeds of $11.6 million. As
                of December 31,
                2005, the Company owned 10,000,000 shares of Valera common stock
                and 2,068,966
                shares of Valera series B convertible preferred stock. Assuming conversion
                of
                all of the outstanding shares of Series A, Series B and Series C
                convertible
                preferred stock and exercise of stock options held by employees of
                Valera at
                December 31, 2005, the Company would own approximately 18% of Valera.
                On
                February 7, 2006 Valera completed an initial public offering of 3,862,500
                shares
                of common stock at $9.00 per share. All the convertible preferred
                stock
                outstanding at the time of the offering, including accrued dividends,
                automatically converted into common stock. In addition, Valera effected
                a 1 for
                6 reverse split of common stock. Subsequent to the public offering
                after giving
                effect to the conversion of the Series B preferred stock and the
                reverse split
                the Company owned 2,070,670 shares of Valera common stock or approximately
                14%
                of the outstanding shares of common stock. The Company entered into
                a lock-up
                agreement with the underwriters of the public offering which restricted
                the
                Company from selling or otherwise disposing of its shares of Valera
                common stock
                until August 16, 2006.
  (Continued)
 11
 **NATIONAL
                    PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                    to
                    Condensed Consolidated Financial Statements
 (Unaudited)
 On
                October 17, 2003, MXL received from GP Strategies in partial payment
                of a note
                receivable the common shares of Valera and recorded such shares at
                zero
                representing their carrying amount to GP Strategies. As a result
                of the
                Investors Rights Agreement referred to above, the Company was accounting
                for its
                investment in Valera under the equity method. However as the Company
                had not
                guaranteed obligations of Valera and had not otherwise committed
                to provide
                further support for Valera, it had discontinued recognizing additional
                losses of
                Valera.
  As
                described above, the Company’s investment in voting stock of Valera has declined
                below 20%. In addition, at December 31, 2005 Valera’s board of directors
                consisted of nine directors only one of which has been designated
                by the
                Company. Accordingly the Company believes that it no longer has the
                ability to
                exercise significant influence over operating and financial policies
                of Valera
                and no longer accounts for its investment in Valera by the equity
                method. As a
                result thereof, as of December 31, 2005 the investment in Valera’s Series B
                convertible preferred stock is being accounted for at cost.
  As
                a
                result of the initial public offering, the Company’s investment in Valera’s
                common stock became a marketable security and accordingly, the investment,
                to
                the extent of shares available to be sold within a year at any balance
                sheet
                date under Rule 144 or an effective registration statement, has been
                classified
                as available for sale securities and measured at fair value with
                the adjustment
                to fair value and changes therein recorded in other comprehensive
                income. The
                remainder of the investment is considered restricted and will continue
                to be
                carried at cost. In addition, if it is determined that the Company
                is no longer
                an affiliate, the shares would become freely tradable after the initial
                six
                month lock-up period. The Valera shares available for sale over the
                next 12
                months at September 30, 2006 totaled 744,277 and resulted in an unrealized
                gain
                of $4,019,000 being included in accumulated other comprehensive income
                as of
                such date. Two related parties, Bedford Oak Partners and Mr. Jerome
                I. Feldman,
                are entitled to receive 50% of any profit received from the sale,
                on a pro-rata
                basis, of 404,004 shares of Valera common stock in excess of $3.94
                per share
                (see Note 9(a)). The unrealized profit on Valera shares available
                for sale at
                September 30, 2006 which would be payable to the related parties
                upon sale
                totaled $180,000, which is included in Investment and other income
                (loss) for
                the nine months ended September 30, 2006 and in and Other liabilities
                on the
                September 30, 2006 balance sheet.
  (Continued)
 12
 **NATIONAL
                    PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                    to
                    Condensed Consolidated Financial Statements
 (Unaudited)
 **8.**  **Business
                segments**
 The
                operations of the Company currently consist of the following two
                business
                segments, by which the Company is managed.
 
 The
                MXL
                Segment, formerly called the Optical Plastics Segment, manufactures
                precision
                coated and molded optical plastic products. MXL is a specialist in
                the
                manufacture of polycarbonate parts requiring adherence to strict
                optical quality
                specifications, and in the application of abrasion and fog resistant
                coatings to
                those parts.
  The
                Five
                Star Segment, distributes paint sundry items, interior and exterior
                stains,
                brushes, rollers, caulking compounds and hardware products on a regional
                basis.
  The
                following tables set forth the sales and operating income (loss)
                of each of the
                Company's operating segments (in thousands):
  **Three
                          Months Ended**
                      
                      **Nine
                          Months Ended****September
                          30,**
                      
                      **September
                          30,****2006**
                      
                      2005
                      
                      **2006**
                      
                      2005**Sales**Five
                          Star
                      
                      **$**
                      **27,666**
                      
                      $
                      26,899
                      
                      **$**
                      **85,556**
                      
                      $
                      84,717MXL
                      
                      
                      **2,459**
                      
                      
                      2,041
                      
                      
                      **6,935**
                      
                      
                      5,969**$**
                      **30,125**
                      
                      $
                      28,940
                      
                      **$**
                      **92,491**
                      
                      $
                      90,686
  **Three
                          Months Ended**
                      
                      **Nine
                          Months Ended****September
                          30,**
                      
                      **September
                          30,****2006**
                      
                      2005
                      
                      **2006**
                      
                      2005**Segment
                          operating income (loss)**Five
                          Star
                      
                      **$**
                      **483**
                      
                      $
                      (722
                      )
                      **$**
                      **2,114**
                      
                      $
                      937MXL
                      
                      
                      **119**
                      
                      
                      83
                      
                      
                      **324**
                      
                      
                      (623
                      )**$**
                      **602**
                      
                      $
                      (639
                      )
                      **$**
                      **2,438**
                      
                      $
                      314
  A
                reconciliation of the segment operating income (loss) to income (loss)
                before
                income tax (expense) benefit and minority interests in the condensed
                consolidated statements of operations is shown below (in
                thousands):
  (Continued)
 13
 **NATIONAL
                    PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                    to
                    Condensed Consolidated Financial Statements
 (Unaudited)
 **Three
                          Months Ended**
                      
                      **Nine
                          Months Ended****September
                          30,**
                      
                      **September
                          30,****2006**
                      
                      2005
                      
                      **2006**
                      
                      2005Segment
                          operating income (loss)
                      
                      **$**
                      **602**
                      
                      $
                      (639
                      )
                      **$**
                      **2,438**
                      
                      $
                      314Corporate
                          and other general and administrative expenses
                      
                      
                      **(421**
                      **)**
                      
                      (504
                      )
                      
                      **(1,305**
                      **)**
                      
                      (1,588
                      )Interest
                          expense
                      
                      
                      **(391**
                      **)**
                      
                      (396
                      )
                      
                      **(1,234**
                      **)**
                      
                      (1,223
                      )Investment
                          and other income
                      
                      
                      **180**
                      
                      
                      27
                      
                      
                      **(2**
                      **)**
                      
                      298Income
                          (loss) before income taxexpense
                          and minority interests
                      
                      **$**
                      **(30**
                      **)**
                      $
                      (1,512
                      )
                      **$**
                      **(103**
                      **)**
                      $
                      (2,199
                      )
  **9.**  **Related
                party transactions**
 
 (a)  On
                November 12, 2004, the Company entered into an agreement to borrow
                approximately
                $1,022,000 from Bedford Oak Partners, which is controlled by Harvey
                P. Eisen, a
                director of the Company, and approximately $568,000 from Jerome I.
                Feldman, who
                is Chairman and Chief Executive Officer of the Company, to exercise
                the option
                to purchase Series B Convertible Preferred shares of Valera. The
                loans bore
                interest at 6% per annum, were scheduled to mature on October 31,
                2009, and were
                secured by all shares of Valera owned by the Company, including the
                purchased
                shares. Bedford Oak Partners and Jerome I. Feldman are entitled to
                receive 50%
                of any profit received by the Company from the sale on a pro-rata
                basis of the
                Valera purchased shares. On January 11, 2005, the Company prepaid
                the loans,
                including accrued interest of approximately $16,000, to Bedford Oak
                Partners and
                Jerome I. Feldman out of the proceeds from the claims relating to
                the Learning
                Technologies acquisition.
  b)  Certain
                of the Company’s executive officers are also executive officers of GP Strategies
                and will remain on GP Strategies’ payroll. The executive officers do not receive
                any salary from the Company; however, they provide the Company with
                management
                services under a management agreement between GP Strategies and the
                Company.
                Services under the agreement relate to corporate federal and state
                income taxes,
                corporate legal services, corporate secretarial administrative support,
                and
                executive management consulting. The term of the agreement extends
                for three
                years from the date of the spin-off, or through November 24, 2007,
                and may be
                terminated by either the Company or GP Strategies on or after July
                30, 2006 with
                180 days prior written notice. Prior to July 1, 2005 GP Strategies
                charged the
                Company a management fee to cover an allocable portion of the compensation
                of
                these officers, based on the time they spent providing services to
                the Company,
                in addition to an allocable portion of certain other corporate expenses.
                Such
                fees amounted to $656,000 for the six months ended June 30, 2005.
 
 (Continued)
 14
 **NATIONAL
                    PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                    to
                    Condensed Consolidated Financial Statements
 (Unaudited)
 Effective
                July 1, 2005, GP Strategies and the Company amended the above management
                agreement. Pursuant to the amendment, the Company will pay GP Strategies
                an
                annual fee of not less than $970,000 as compensation for these services,
                payable
                in equal monthly installments. The Company incurred a fee of $221,000
                and
                $653,000 for the three and nine months ended September 30, 2006,
                respectively,
                and $230,000 for the period July 1, 2005 through September 30, 2005,
                including
                approximately 80% of the cost of the compensation and benefits required
                to be
                provided by GP Strategies to Jerome Feldman, who serves as the Company’s Chief
                Executive Officer. Such fee shall be increased by 80% of any increase
                of the
                cost of the compensation and benefits required to be provided by
                GP Strategies
                to Mr. Feldman; in addition, the Company shall remain liable for
                paying to GP
                Strategies 80% of the cost of the compensation and benefits required
                to be
                provided by GP Strategies to Mr. Feldman if the management agreement
                expires, is
                terminated, or is otherwise not extended through May 31, 2007. The
                Company also
                occupies a portion of corporate office space leased by GP Strategies.
                The
                Company compensates GP Strategies approximately an additional $205,000
                annually
                for use of this space. GP Strategies’ lease extends through December 31,
                2006.
  **10.** **Restatement
                of previously issued financial statements and SAB 108
                Adjustment**
  In
                the
                fourth quarter of 2006, the Company charged Investment and other
                income (loss)
                for $180,000 and credited other comprehensive income representing
                unrealized
                gain for the period from January 1 through September 30, 2006 on
                Valera shares
                classified as available for sale which is payable to related parties
                (see Note
                7).
  In
                addition, as result of the implementation of SAB 108 in December
                2006,
                previously issued interim financial information consisting of costs
                of goods
                sold, gross margin and net income for the first three quarters of
                the year ended
                December 31, 2006 has been revised. The net effect on net income
                for the
                previously issued quarter and nine months ended September 30, 2006
                was a
                decrease of $13,000 and $44,000, respectively. There was no effect
                on earning
                per share for the period.
 
 Reconciliation
                of net losses previously reported to net loss as restated for the
                quarter and
                nine months ended September 30, 2006 (in thousands, except per share
                data) is as
                follows:
  (Continued)
 15
 **NATIONAL
                  PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                  to
                  Condensed Consolidated Financial Statements
 (Unaudited)
 
 Three
                          MonthsEnded
                      
                      Nine
                          MonthsEndedSeptember
                          30, 2006Net
                          loss previously reported
                      
                      $
                      (161
                      )
                      $
                      (426
                      )**Increase(decrease)**Investment
                          and other income (loss)
                      
                      
                      79
                      
                      
                      (180
                      )SAB
                          108 adjustment
                      
                      
                      (13
                      )
                      
                      (44
                      )Net
                          loss, as restated
                      
                      $
                      (95
                      )
                      $
                      (650
                      )Net
                          loss per share, as reported
                      
                      $
                      (.01
                      )
                      $
                      (.02
                      )Increase
                          (decrease)
                      
                      
                      
                      
                      
                      (.02
                      )Net
                          loss per share, as restated
                      
                      $
                      (.01
                      )
                      $
                      (.04
                      )
  The
                following is a reconciliation of the balance sheet captions at September
                30,
                2006 from previously reported to restated:
  (in
                          thousands)
                      
                      Previously
                          reported
                      
                      Adjustments
                      
                      
                      
                      RestatedInventories
                      
                      $
                      22,510
                      
                      $
                      (655
                      )
                      
                      (b
                      )
                      $
                      21,855Prepaid
                          expenses and other current assets
                      
                      
                      944
                      
                      
                      261
                      
                      
                      (b
                      )
                      
                      1,205Accounts
                          payable and accrued expenses
                      
                      
                      12,817
                      
                      
                      (180
                      )
                      
                      (a
                      )
                      
                      12,637Other
                          liabilities
                      
                      
                      9
                      
                      
                      180
                      
                      
                      (a
                      )
                      
                      189Minority
                          interest
                      
                      
                      1,889
                      
                      
                      (142
                      )
                      
                      (b
                      )
                      
                      1,747Accumulated
                          deficit
                      
                      
                      (8,188
                      )
                      
                      (180
                      )
                      
                      (a
                      )
                      
                      (8,620
                      )(252
                      )
                      
                      (b
                      )Accumulated
                          other comprehensive income
                      
                      
                      4,044
                      
                      
                      180
                      
                      
                      (a
                      )
                      
                      4,224
  (a)
                    Investment
                        and other income adjustment (b)
                    SAB
                        108 adjustment 
 (Continued)
 16
  **NATIONAL
                PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
  **Item
                2.**   **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations**
  **General
                Overview**
 
 The
                Company operates in two segments: MXL and Five Star. The Company
                also owns
                certain other non-core assets, including investments in 2 publicly
                held
                companies, Millennium Cell and Valera Pharmaceuticals; and certain
                real estate.
                The Company monitors Millennium Cell for progress in the commercialization
                of
                Millennium Cell’s emerging technology and monitors Valera Pharmaceuticals for
                progress in the sales efforts related to their product.
  **MXL
                Overview**
 
 The
                primary business of MXL is the manufacture of polycarbonate parts
                requiring
                adherence to strict optical quality specifications, and the application
                of
                abrasion and fog resistant coatings to those parts. MXL also designs
                and
                constructs injection molds for a variety of applications. Some of
                the products
                that MXL produces include:
  ·
                    facemasks
                        and shields for recreation purposes and industrial safety
                        companies, ·
                    precision
                        optical systems, including medical optics, military eye wear
                        and custom
                        molded and decorated products, and ·
                    tools,
                        including optical injection mold tools and standard injection
                        mold tools. 
 MXL
                manufactures and sells its products to various commercial and government
                customers, who utilize MXL’s parts to manufacture products that will be
                ultimately delivered to the end-user. MXL’s government customers include various
                offices of the Department of Defense, while MXL’s commercial customers are
                primarily in the recreation, safety, and security industries. Some
                of MXL’s
                consumer based products are considered to be at the high-end of their
                respective
                markets. As a result, sales of MXL’s products may decline together with a
                decline in discretionary consumer spending; therefore a key performance
                indicator that the Company’s management uses to manage the business is the level
                of discretionary spending in key markets, specifically the United
                States and
                Japan. Other key performance measures used by the Company’s management to run
                the business include:
  ·
                    consumer
                        confidence indices in key markets, ·
                    sales
                        levels of complementary items in the recreational vehicle
                        market, such as
                        motorcycles, RV’s and snowmobiles, ·
                    levels
                        of defense spending, and ·
                    new
                        OSHA safety standards. 
 17
  MXL
                believes that the principal strengths of its business are its state-of-the-art
                injection molding equipment, advanced production technology, high
                quality
                standards, and on time deliveries. However, due to the focused nature
                of the
                market, MXL has a limited customer base and tends to be adversely
                affected by a
                loss in business from its significant customers. To further grow,
                MXL not only
                intends to regain market share in its existing market, but to leverage
                its
                expertise as a molder and coater of optical quality products by expanding
                into
                other markets and products.
 
 **Five
                Star Overview**
  Five
                Star
                is a publicly held company that is a leading distributor in the United
                States of
                home decorating, hardware, and finishing products. Five Star offers
                products
                from leading manufacturers in the home improvement industry and distributes
                those products to retail dealers, which include lumber yards, “do-it yourself”
centers, hardware stores and paint stores. Five Star has grown to
                be one of the
                largest independent distributors in the Northeast United Stated by
                providing a
                complete line of competitively priced products, timely delivery and
                attractive
                pricing and financing terms to its customers.
  The
                following key factors affect Five Star’s financial and operation
                performance:
 
 ·
                    its
                        ability to negotiate the lowest prices from its
                        suppliers, ·
                    its
                        ability to increase revenue by obtaining new customers, while
                        maintaining
                        a level fixed cost structure by utilizing its existing
                        warehouses, ·
                    the
                        housing market in general, ·
                    consumers’
                        confidence in the economy, ·
                    consumers’
                        willingness to invest in their homes, and ·
                    weather
                        conditions that are conducive to home improvement
                        projects.  The
                following key performance measures are utilized by the Company’s management to
                run Five Star’s business:
 
 ·
                    new
                        U.S. housing starts, ·
                    sales
                        of existing homes, ·
                    sales
                        of high margin products to its customers, ·
                    purchases
                        from each vendor, and ·
                    performance
                        benchmarks used by Home Depot and Lowe’s, such as number of stores and
                        square footage, as well as financial
                        benchmarks. 
 Five
                Star
                operates in the Home Improvement market, which has grown in recent
                years and for
                which the Home Improvement Research Institute predicts average annual
                industry
                growth of nearly 5% for the next several years. Nonetheless, Five
                Star faces
                intense competition from large national distributors, smaller regional
                distributors, and manufacturers that bypass the distributor and sell
                directly to
                the retail outlet. The principal means of competition for Five Star
                are its
                strategically placed distribution centers and its extensive inventory
                of
                quality, name-brand products. In addition, Five Star’s customers face stiff
                competition from Home Depot and Lowe’s, which purchase directly from
                manufacturers. As a result of such competition, while the Home Improvement
                market has expanded significantly in recent years, Five Star’s revenue has
                increased only incrementally, and such revenue would have declined
                if Five Star
                had not entered into new geographic sales territories as described
                below. In
                spite of this, the independent retailers that are Five Star’s customers remain a
                viable alternative to Home Depot and Lowe’s, due to the shopping preferences of
                and the retailer’s geographic convenience for some consumers.
 
 18
  Five
                Star
                has also established a presence in the Mid-Atlantic States, servicing
                customers
                as far south as North Carolina. Five Star services this territory
                from its
                existing New Jersey warehouse, enabling Five Star to leverage its
                fixed costs
                over a broader revenue base. To further expand, Five Star will attempt
                to grow
                its revenue base in the Mid-Atlantic States, to acquire complementary
                distributors and to expand the distribution of its use of private-label
                products
                sold under the “Five Star” name.
 
 **Operating
                Highlights**
  ***Three
                months ended September 30, 2006 compared to the three months ended
                September 30,
                2005***
 
 For
                  the
                  three months ended September 30, 2006, the Company had a loss before
                  income tax
                  expense and minority interest of $30,000 compared to a loss before
                  income tax
                  expense and minority interest of $1,512,000 for the three months
                  ended September
                  30, 2005. The reduced loss is primarily a result of significantly
                  improved
                  operating profits at Five Star, which increased by $1,277,000,
                  as well as
                  marginally increased profitability at MXL. In addition, the Company
                  had reduced
                  general and administrative expenses at the corporate level by $83,000
                  and
                  increased investment and other income by $153,000.
  **Sales**
  **Three
                          months**
                        **ended
                          September 30,****2006**
                      
                      2005Five
                          Star
                      
                      **$**
                      **27,666,000**
                      
                      $
                      26,899,000MXL
                      
                      
                      **2,459,000**
                      
                      
                      2,041,000**$**
                      **30,125,000**
                      
                      $
                      28,940,000
  The
                increase in Five Star sales of $767,000 or 3% was primarily the result
                of
                increased prices and reduced sales discounts offered to existing
                customers.
  The
                increase in MXL sales of $418,000 was a result of increased sales
                volume and
                prices from existing customers resulting from a concerted effort
                to expand sales
                opportunities with existing customers.
  19
 
 **Gross
                margin**
  **Three
                            months ended****September
                            30,**2006
                        
                        %
                        
                        2005
                        
                        %Five
                            Star
                        
                        **$**
                        **4,284,000**
                        
                        
                        **15.5**
                        
                        $
                        3,204,000
                        
                        
                        11.9MXL
                        
                        
                        **576,000**
                        
                        
                        **23.4**
                        
                        
                        519,000
                        
                        
                        25.4**$**
                        **4,860,000**
                        
                        
                        **16.1**
                        
                        $
                        3,723,000
                        
                        
                        12.9
 
 Five
                  Star’s gross margin of $4,284,000, or 15.5% of net sales, for the quarter
                  ended
                  September 30, 2006 increased by $1,080,000 when compared to $3,204,000,
                  or 11.9%
                  of net sales, for the quarter ended September 30, 2005. The increase
                  in gross
                  margin and gross margin percentage for the quarter ended September
                  30, 2006 was
                  a result of increased sales during the three months ended September
                  30, 2006 as
                  well as the following factors which occurred in the quarter ended
                  September 30,
                  2005; (i) an unfavorable shift in the product mix sold, (ii) lower
                  prices due to
                  competition, (iii) an increase in pricing by vendors, and some
                  resistance to
                  price increases by customers, (iv) reduced promotional discounts
                  from vendors as
                  a result of Five Star’s decision to reduce inventory levels.
  MXL’s
                gross margin of $576,000, or 23.4% of sales, for the quarter ended
                September 30,
                2006 increased by $57,000 when compared to gross profit of $519,000,
                or 25.4% of
                sales, for the quarter ended September 30, 2005, as a result of increased
                sales,
                partially offset by reduced gross margin percentage due to increased
                production
                and facility related costs.
  **Selling,
                general, and administrative expenses**
 
 For
                  the
                  three months ended September 30, 2006, selling, general and administrative
                  expenses decreased by $187,000 from $4,866,000 for the three months
                  ended
                  September 30, 2005 to $4,679,000 for the three months ended September
                  30, 2006.
                  The decrease in selling, general and administrative expenses was
                  primarily
                  attributable to the following; (i) reduced general and administrative
                  expenses
                  of $83,000 at the Company corporate level and (ii) reduced selling,
                  general and
                  administrative expenses at Five Star of $124,000 primarily attributable
                  to an
                  overall effort to reduce selling, general and administrative expenses.
  **Investment
                and other income, net**
 
 National
                  Patent Development recognized net investment and other income of
                  $180,000 for
                  the three months ended September 30, 2006, compared to $27,000
                  for the three
                  months ended September 30, 2005. Investment and other income, net
                  includes
                  interest income, investment income, and recognition of a gain or
                  loss for the
                  change in the fair value of the Five Star’s interest rate collar. The increase
                  of $153,000 is primarily attributable to the decrease in the unrealized
                  profit
                  of $79,000 which would be paid to related parties upon sale of
                  Valera available
                  for sale shares, as well as the change in the fair value of Five
                  Star’s interest
                  rate collar and increased interest income.
  20
  **Income
                taxes**
  For
                  the
                  three months ended September 30, 2006 and 2005, although the Company
                  had a
                  consolidated pre-tax loss for the periods, the Company recorded
                  an income tax
                  expense of $54,000 and $478,000, respectively, due to recording
                  income tax
                  expense on the income of Five Star, a 64% owned subsidiary, which
                  is not
                  included in the Company’s consolidated return and not recording income tax
                  benefit for the losses of National Patent Development and
                  MXL.
  ***Nine
                months ended September 30, 2006 compared to the nine months ended
                September 30,
                2005***
 
 For
                  the
                  nine months ended September 30, 2006, the Company had income before
                  income tax
                  expense and minority interest of $103,000 compared to a loss before
                  income tax
                  expense and minority interest of $2,199,000 for the nine months
                  ended September
                  30, 2005. The change to pre-tax income is primarily a result of
                  the following;
                  (i) increased operating income of $1,248,000 at Five Star and $947,000
                  at MXL,
                  (ii) reduced corporate and other general and administrative expenses
                  of $283,000
                  and (iii) reduced Investment and other income of $300,000.
  **Sales**
  **Nine
                          months**
                        **ended
                          September 30,****2006**
                      
                      2005Five
                          Star
                      
                      **$**
                      **85,556,000**
                      
                      $
                      84,717,000MXL
                      
                      
                      **6,935,000**
                      
                      
                      5,969,000**$**
                      **92,491,000**
                      
                      $
                      90,686,000
 
 The
                increase in Five Star sales of $839,000 was primarily the result
                of increased
                prices passed on to Five Star’s customers as well as reduced sales
                discounts.
 
 The
                increase in MXL sales of $966,000 was primarily a result of increased
                sales
                volume and increase in prices to existing customers resulting from
                a concerted
                effort to expand sales opportunities with existing customers.
  21
 
 **Gross
                margin**
 **Nine
                            months ended****September
                            30,**2006
                        
                        %
                        
                        2005
                        
                        %Five
                            Star
                        
                        **$**
                        **13,804,000**
                        
                        
                        **16.1**
                        
                        $
                        12,762,000
                        
                        
                        15.1MXL
                        
                        
                        **1,803,000**
                        
                        
                        **26.0**
                        
                        
                        1,162,000
                        
                        
                        19.5**$**
                        **15,607,000**
                        
                        
                        **16.9**
                        
                        $
                        13,924,000
                        
                        
                        15.4
 
 Five
                  Star’s gross margin of $13,804,,000, or 16.1% of net sales, for the
                  nine months
                  ended September 30, 2006 increased by $1,042,000 when compared
                  to $12,762,000,
                  or 15.1% of net sales, for the nine months ended September 30,
                  2005. The
                  increased gross margin amount was the result of an increased gross
                  margin
                  percentage, as well as increased sales volume. The increased gross
                  margin
                  percentage for the nine months ended September 30, 2006 was primarily
                  the result
                  of Five Star’s ability to effectively pass price increases on to its customers
                  in 2006.
  MXL’s
                gross margin of $1,803,000 or 26% of sales, for the nine months ended
                September
                30, 2006 increased by $641,000 when compared to gross margin of $1,162,000,
                or
                19.5% of sales, for the nine months ended September 30, 2005, mainly
                due to the
                following; (i) increased margins in all product lines due to increased
                pricing,
                (ii) improved product mix, (iii) reduced costs due to exiting the
                Massachusetts
                facility and the consolidation of all MXL’s injection molding and precision
                coating operations at its Lancaster PA facility, and (iv) increased
                sales.
  **Selling,
                general, and administrative expenses**
 
 For
                  the
                  nine months ended September 30, 2006, selling, general and administrative
                  expenses decreased by $724,000 from $15,198,000 for the nine months
                  ended
                  September 30, 2005 to $14,474,000 for the nine months ended September
                  30, 2006
                  due to the following; (i) reduced general and administrative expenses
                  of
                  $283,000 at the Company’s corporate level, (ii) reduced selling, general and
                  administrative expenses at Five Star of $135,000, attributable
                  to a $175,000
                  recovery of bad debts written-off in prior years and reduced selling
                  and
                  delivery expenses, partially offset by reduced vendor marketing
                  allowances (iii)
                  reduced selling, general and administrative expenses of $330,000
                  at MXL,
                  primarily due to reduced facility costs related to closing of MXL’s
                  Massachusetts facility in 2005, as well as increased operating
                  efficiencies. In
                  addition, for the nine months ended September 30, 2005 the Company
                  incurred a
                  loss of $140,000, based upon the final proceeds from the sale of
                  the Illinois
                  facility, net of commissions, taxes and other closing costs. This
                  loss is
                  included as part of selling, general and administrative expenses
                  on the
                  consolidated statement of operation for the period.
  22
 
 **Investment
                  and other income (loss), net.**
  National
                  Patent Development recognized investment and other income (loss)
                  of ($2,000) for
                  the nine months ended September 30, 2006 as compared to income
                  of $298,000 the
                  nine months ended September 30, 2005. The reduced Investment and
                  other income is
                  mainly due to the following; (i) a gain on sale of Millennium Cell,
                  Inc. common
                  stock of $192,000 during the nine months ended September 30, 2005,
                  (ii) a loss
                  on the sale of Avenue Entertainment Group, Inc common stock of
                  $33,000 during
                  the nine months ended September 30, 2005, (iii) increased interest
                  income for
                  the nine months ended September 30, 2006, and (iv) the unrealized
                  profit of
                  $180,000 which would be paid to related parties upon sale of Valera
                  available
                  for sale shares.
  **Income
                taxes**
 
 For
                  the
                  nine months ended September 30, 2006 and 2005, the Company recorded
                  an income
                  tax expense of $400,000 and an income tax benefit of $107,000,
                  respectively,
                  which represents the Company’s applicable federal, state and local tax expense
                  and benefit for the periods. The provision for income taxes differs
                  from the tax
                  computed at the federal statutory income tax rate due to (i) recording
                  income
                  tax expense on the income of Five Star, a 64% owned subsidiary,
                  which is not
                  included in the Company’s consolidated return and (ii) not recording income tax
                  benefit for the losses of the Company and MXL.
  **Liquidity
                and capital resources**
 
 At
                September 30, 2006, the Company had cash and cash equivalents of
                $4,885,000. The
                Company believes that cash anticipated to be generated from operations
                and
                borrowing availability under existing credit agreements will be sufficient
                to
                fund the Company’s working capital requirements for at least the next twelve
                months.
  For
                  the
                  nine months ended September 30, 2006, the Company’s working capital increased by
                  $49,000 to $12,598,000 from $12,549,000 as of December 31, 2005.
                  The working
                  capital increase was primarily a result of increased accounts receivable,
                  partially offset by increased accounts payable and accrued
                  expenses.
 
 The
                  decrease in cash and cash equivalents of $230,000 for the nine
                  months ended
                  September 30, 2006 resulted from the following: (i) net cash provided
                  by
                  operations of $2,249,000, due primarily to a net loss of $650,000,
                  an increase
                  in accounts receivable of $3,652,000, partially offset by an increase
                  in
                  accounts payable and accrued expenses of $3,071,000 and reduced
                  inventory of
                  $2,166,000; (ii) net cash used in investing activities of $269,000
                  consisting of
                  additions to property, plant and equipment, and (iii) net cash
                  used in financing
                  activities of $2,210,000, consisting of repayments of short term
                  borrowings of
                  $1,944,000 and repayments of long-term debt of $266,000.
 
 23
 
 In
                2003,
                Five Star entered into a Loan and Security Agreement (the “Loan Agreement”) with
                Bank of America Business Capital (formerly Fleet Capital Corporation)
                (the
“Lender”). The Loan Agreement has a five-year term, with a maturity date
                of June
                30, 2008. The Loan Agreement, as amended in August 1, 2005 provides
                for a
                $35,000,000 revolving credit facility, which allows Five Star to
                borrow based
                upon a formula of up to 65% of eligible inventory and 85% of eligible
                accounts
                receivable, as defined therein. The interest rates under the Loan
                Agreement
                consist of LIBOR plus a credit spread of 1.5% (7.57% at September
                30, 2006) for
                borrowings not to exceed $15,000,000 and the prime rate (8.25% at
                September 30,
                2006) for borrowings in excess of the above-mentioned LIBOR-based
                borrowings.
                The credit spreads can be reduced in the event that Five Star achieves
                and
                maintains certain performance benchmarks. At September 30, 2006 and
                December 31,
                2005, approximately $17,870,000 and $19,764,000 was outstanding under
                the Loan
                Agreement and approximately $6,286,000 and $1,451,000 was available
                to be
                borrowed, respectively. Substantially all of Five Star’s assets are pledged as
                collateral for these borrowings. Under the Loan Agreement Five Star
                is subject
                to covenants requiring minimum net worth, limitations on losses,
                if any, and
                minimum or maximum values for certain financial ratios. As of September
                30, 2006
                Five Star was in compliance with all required covenants. The following
                table
                sets forth the significant debt covenants at September 30, 2006:
  **Covenant**
                      **Required**
                      **Calculated**Minimum
                          tangible net worth
                      $6,000,000
                      $7,846,000Debt
                          to tangible net worth
                      <
                          6
                      2.28Fixed
                          charge coverage
                      >1.1
                      1.68Quarterly
                          income
                      No
                          loss in consecutive quarters
                      $278,000
                          -first quarter income $148,000- second quarter income
                        $51,000-
                          third quarter income
 
 On
                  March
                  1, 2005, MXL obtained a Line of Credit Loan (the “MXL Line”) from M&T Bank
                  with a one year term, maturing on March 1, 2006, which has been
                  extended to June
                  30, 2007 on the same terms. The MXL Line provides for a $1,000,000
                  revolving
                  credit facility, which is secured by MXL’s eligible accounts receivable,
                  inventory and a secondary claim on the Lancaster, PA property.
                  The interest
                  rates under the MXL Line consist of LIBOR plus a credit spread
                  of 3% or the
                  prime rate plus a credit spread of 0.25%. The MXL Line is subject
                  to an unused
                  commitment fee of 0.25% of the average daily unused balance of
                  the line payable
                  quarterly. The Company has guaranteed the MXL Line. At September
                  30, 2006,
                  $950,000 was outstanding under the MXL Line and $50,000 was available
                  to be
                  borrowed. The MXL Line contains certain financial covenants, most
                  significant
                  being a cash flow coverage ratio of 1.25 to 1.00, which is calculated
                  annually
                  at December 31 of each year.
 
 24
 
 **Management
                discussion of critical accounting policies**
  The
                preparation of our financial statements in conformity with accounting
                principles
                generally accepted in the United States of America requires us to
                make estimates
                and assumptions that affect the reported amounts of assets and liabilities
                and
                disclosure of contingent assets and liabilities at the date of the
                financial
                statements and the reported amounts of revenues and expenses during
                the
                reporting period. Our estimates, judgments and assumptions are continually
                evaluated based on available information and experience. Because
                of the use of
                estimates inherent in the financial reporting process, actual results
                could
                differ from those estimates.
 Certain
                of our accounting policies require higher degrees of judgment than
                others in
                their application. These include valuation of accounts receivable,
                accounting
                for investments, and impairment of long-lived assets which are summarized
                below.
 
 *Revenue
                recognition*
  Revenue
                on product sales is recognized at the point in time when the product
                has been
                shipped, title and risk of loss has been transferred to the customer,
                and the
                following conditions are met: persuasive evidence of an arrangement
                exists, the
                price is fixed and determinable, and collectibility of the resulting
                receivable
                is reasonably assured. Allowances for estimated returns and allowances
                are
                recognized when sales are recorded.
  *Valuation
                of accounts receivable*
 
 Provisions
                for allowance for doubtful accounts are made based on historical
                loss experience
                adjusted for specific credit risks. Measurement of such losses requires
                consideration of National Patent Development’s historical loss experience,
                judgments about customer credit risk, and the need to adjust for
                current
                economic conditions. The allowance for doubtful accounts as a percentage
                of
                total gross trade receivables was 3.3% and 3.9% at September 30,
                2006 and
                December 31, 2005, respectively.
  *Impairment
                of long-lived tangible assets*
 
 Impairment
                of long-lived tangible assets with finite lives results in a charge
                to
                operations whenever events or changes in circumstances indicate that
                the
                carrying amount of an asset may not be recoverable. Recoverability
                of long-lived
                tangible assets to be held and used is measured by a comparison of
                the carrying
                amount of the asset to future undiscounted net cash flows expected
                to be
                generated by the asset. If such assets are considered to be impaired,
                the
                impairment to be recognized is measured by determining the amount
                by which the
                carrying amount of the assets exceeds the fair value of the asset.
                Assets to be
                disposed of are reported at the lower of their carrying amount or
                fair value
                less cost of sale.
 
 25
  The
                measurement of the future net cash flows to be generated is subject
                to
                management’s reasonable expectations with respect to National Patent
                Development’s future operations and future economic conditions which may affect
                those cash flows.
 
 As
                of
                September 30, 2006, National Patent Development holds undeveloped
                land in
                Pawling, New York with a carrying amount of approximately $2.5 million
                and in
                East Killingly, Connecticut with a carrying amount of approximately
                $0.4
                million, which management believes is less than its fair value, less
                cost of
                sale.
 
 *Accounting
                for investments*
  The
                Company’s investment in marketable securities are classified as
                available-for-sale and recorded at their market value with unrealized
                gains and
                losses recorded as a separate component of stockholders’ equity. A decline in
                market value of any available-for-sale security below cost that is
                deemed to be
                other than temporary, results in an impairment loss, which is charged
                to
                earnings.
 
 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.
  *Income
                taxes*
  To
                arrive
                at our income tax provision and other tax balances, significant judgment
                is
                required. In the ordinary course of our business, there are many
                transactions
                and calculations where the ultimate tax outcome is uncertain. Some
                of these
                uncertainties arise as a consequence of the treatment of capital
                assets,
                financing transactions and multistate taxation of operations. Although
                we
                believe that our estimates are reasonable, no assurance can be given
                that the
                final tax outcome of these matters will not be different than that
                which is
                reflected in our historical tax provisions and accruals. Such differences
                could
                have a material impact on our income tax provision, other tax accounts
                and net
                income in the period in which such determination is made.
  The
                Company records a valuation allowance against deferred income tax
                assets when
                management believes it is more likely than not that some portion
                or all of the
                deferred income tax assets will not be realized. Management considers
                factors
                such as reversal of deferred income tax liabilities, projected future
                taxable
                income, tax planning strategies, changes in tax law and other factors.
                A change
                to these factors could impact the estimated valuation allowance and
                income tax
                expense.
  26
  Under
                SFAS No. 109, “Accounting for Income Taxes,” deferred tax assets and
                liabilities are determined based on differences between the financial
                reporting
                and tax basis of assets and liabilities, and are measured using enacted
                tax
                rates and laws that will be in effect when the differences are expected
                to
                reverse. SFAS No. 109 provides for the recognition of deferred tax
                assets if realization of such assets is more likely than not. Based
                on the
                weight of available evidence, we have provided a valuation allowance
                against
                certain deferred tax assets. The valuation allowance was based on
                the historical
                earnings patterns within individual tax jurisdictions that make it
                uncertain
                that we will have sufficient income in the appropriate jurisdictions
                to realize
                the full value of the assets. We will continue to evaluate the realizability
                of
                the deferred tax assets on a quarterly basis.
  **Forward-looking
                statements**
  The
                forward-looking statements contained herein reflect National Patent
                Development’s management’s current views with respect to future events and
                financial performance. These forward-looking statements are subject
                to certain
                risks and uncertainties that could cause actual results to differ
                materially
                from those in the forward-looking statements, all of which are difficult
                to
                predict and many of which are beyond the control of National Patent
                Development,
                including, but not limited to the risks and uncertainties detailed
                in National
                Patent Development’s periodic reports and registration statements filed with the
                Securities and Exchange Commission.
     27
  **Item
                3.**  **Quantitative
                and Qualitative Disclosure About Market Risk**
  We
                have
                no material changes to the disclosure on this matter made in our
                report on Form
                10-K for the fiscal year ended December 31, 2005.
  **Item
                4.**  **Controls
                and Procedures**
 
 The
                  Company’s Chief Executive Officer and Chief Financial Officer completed
                  an
                  evaluation of 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 Securities Exchange Act of 1934, as amended)
                  for the
                  quarterly period ended on September
                  30, 2006 and concluded that the Company’s disclosure controls and procedures
                  were effective as of the end of that period .
                  Subsequently, information came to management’s attention regarding the Company’s
                  recordation of certain financial information that caused the Chief
                  Executive
                  Officer and the Chief Financial Officer to reconsider the results
                  of this
                  evaluation and conclude that, as of the end of the fiscal period
                  covered by the
                  original Quarterly Report on Form 10-Q the Company's disclosure
                  controls and
                  procedures were not effective to assure that certain line items
                  of our condensed
                  consolidated financial statements were prepared in conformance
                  with generally
                  accepted accounting principles and that a material weakness existed
                  as of
                  September 30, 2006. A material weakness is a control deficiency
                  or combination
                  of control deficiencies that results in more than a remote likelihood
                  that a
                  material misstatement of the annual or interim financial statements
                  will not be
                  prevented or detected.
  The
                  Chief
                  Executive Officer and Chief Financial Officer have determined that,
                  for the
                  quarterly periods ended on March
                  31,
                  2006 , June
                  30,
                  2006 and September 30, 2006, the
                  Company did not maintain effective disclosure controls and procedures.
                  Specifically, the Company did not maintain effective disclosure
                  controls and
                  procedures to ensure the proper recordation of unrealized gain for
                  the
                  period from January 1, 2006 through September 30, 2006 on shares
                  of Valera
                  common stock owned by a subsidiary of the Company and classified
                  as available
                  for sale, which unrealized gain is payable to related parties .
                  This
                  control deficiency resulted in the misstatement of four line items,
                  namely,
                  Investment and other income (loss), Net loss, Accumulated other
                  comprehensive
                  income and Net loss per share.
  The
                  Company included a schedule of the effect of the restatement on
                  quarterly data
                  in the Notes to Consolidated Financial Statements included in its
                  Annual Report
                  on Form 10-K for the year ended December 31, 2006 filed with the
                  SEC on April 3,
                  2007.
  **Remediation
                  Plan**
  As
                  of the
                  date of the filing of this Form 10-Q/A, the Company has taken the
                  following
                  steps to remediate the material weakness described above:
  ·
                    The
                        Company has taken a thorough review of the classification
                        requirements of
                        each component line item and the individual elements that
                        comprise each
                        line item of its Condensed Consolidated Statement of Operations
                        and its
                        Condensed Consolidated Balance Sheet in accordance with Generally
                        Accepted
                        Accounting Principles.  ·
                    The
                        Company has engaged outside consultants to review the Company's
                        accounting
                        position where the accounting treatment is considered by
                        the Company to be
                        particularly complex or, under certain circumstances, to
                        involve
                        subjective decision making.  28
  **The
                  Company is in the process of identifying and targeting for hire
                  additional
                  internal accounting and finance personnel and anticipates hiring
                  such persons by
                  the end of the second quarter of 2007. The Company’s Chief Executive Officer and
                  Chief Financial Officer have 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 Securities Exchange Act of 1934, as amended)
                  that occurred
                  during the quarter ended September 30, 2006 that has materially
                  affected, or is
                  reasonably likely to materially affect, the Company’s internal control over
                  financial reporting.**
 
 **PART
                II. OTHER INFORMATION**
 
 **Item
                6.**  **Exhibits**
 Exhibit
                            No.
                        
                        Description31.1
                        *
                        Certification
                            of Chief Executive Officer of the Company, pursuant to
                            Securities Exchange
                            Act Rule 13a-14(a)31.2
                        *
                        Certification
                            of Chief Financial Officer of the Company, pursuant to
                            Securities Exchange
                            Act Rule 13a-14(a)32
                        *
                        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 Chief Executive
                            Officer of
                            the Company and the Chief Financial Officer of the Company
 
 ______________________
 *Filed
                herewith
 
 
 
  29
  **SIGNATURES**
 
 Pursuant
                to the requirements of the Securities Exchange Act of 1934, the registrant
                has
                duly caused this report to be signed in its behalf by the undersigned
                thereunto
                duly authorized.
 
 
 **NATIONAL
                          PATENT
                          DEVELOPMENT****CORPORATION**DATE:
                          May 31, 2007
                        /s/
                          JEROME I.
                          FELDMANName:
                        Jerome I. FeldmanTitle:
                        Chairman of the Board andChief
                            Executive OfficerDATE:
                          May 31, 2007
                        /s/
                          SCOTT N.
                          GREENBERGName:
                        Scott N. GreenbergTitle:
                        Chief Financial
                          Officer
  
 
 
 
 30