**UNITED
      STATES**
 **SECURITIES
      AND EXCHANGE COMMISSION**
 **WASHINGTON,
      D.C. 20549**
 
 **FORM
      10-Q**
 
 
 (Mark
      One)
 
 x
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**
 
 For
                the quarterly period ended September 30,
                2007
 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.
                  Employer
                Identification
                  No.)
 
 **10
                  East 40th Street, Suite 3110, New York, NY**
              **10016**(Address
                  of principal executive offices)
              (Zip
                  code)
 
 **(646)
                  742-1600**(Registrant’s
                  telephone number, including area
                  code)
 Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.     Yes x      Noo
 
 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 1, 2007, there were 16,629,429 shares of the registrant’s common stock,
      $0.01 par value, outstanding.
  
  1
 
 **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, 2007 and 2006 (Unaudited)
              3Condensed
                  Consolidated Statements of Comprehensive Loss-Three Months and Nine Months EndedSeptember 30, 2007 and 2006 (Unaudited)
              4Condensed
                  Consolidated Balance Sheets -September 30, 2007 (Unaudited) and December 31, 2006
              5Condensed
                  Consolidated Statements of Cash Flows -Nine Months Ended September 30, 2007and 2006 (Unaudited)
              
              6Condensed
                  Consolidated Statement of Stockholders Equity
              7Nine Months Ended September 30, 2007 (Unaudited)Notes
                  to Condensed Consolidated Financial Statements
              8Item
                  2.
              Management's
                  Discussion and Analysis of FinancialCondition and Results of Operations
              24Item
                  3.
              Quantitative
                  and Qualitative Disclosure about Market Risk
              37Item
                  4.
              Controls
                  and Procedures
              
              37Part
                  II. Other InformationItem
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              38Item
                  6.
              Exhibits
              
              39Signatures
              
              40
 
 
 2
  
 **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,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006Sales
            
            **$**
            **35,205**
            
            
            $
            30,125
            
            
            **$**
            **105,270**
            
            
            $
            92,491Cost
                of sales
            
            ****
            **28,691**
            
            
            
            25,265
            
            
            ****
            **86,876**
            
            
            
            76,884Gross
                margin
            
            ****
            **6,514**
            
            
            
            4,860
            
            
            ****
            **18,394**
            
            
            
            15,607Selling,
                general and administrative
              expenses
            
            ****
            **(6,076**
            **)**
            
            
            (4,679
            )
            
            ****
            **(17,047**
            **)**
            
            
            (14,474
            )Operating  profit
            
            ****
            **438**
            
            
            
            181
            
            
            ****
            **1,347**
            
            
            
            1,133Interest
                expense
            
            ****
            **(448**
            **)**
            
            
            (391
            )
            
            ****
            **(1,280**
            **)**
            
            
            (1,234
            )Gain
                on exchange of Valera forIndevus shares
            
            
            
            
            
            
            
            
            
            ****
            **17,031**Investment
                and other income (loss), net
            
            ****
            **(963**
            **)**
            
            
            180
            
            
            ****
            **(1,732**
            **)**
            
            
            (2
            )Income
                (loss) before income taxes andminority interest
            
            ****
            **(973**
            **)**
            
            
            (30
            )
            
            ****
            **15,366**
            
            
            
            (103
            )Income
                tax expense
            
            ****
            **(236**
            **)**
            
            
            (54
            )
            
            ****
            **(1,296**
            **)**
            
            
            (400
            )Income
                (loss) before minority interest
            
            ****
            **(1,209**
            **)**
            
            
            (84
            )
            
            ****
            **14,070**
            
            
            
            (503
            )Minority
                interest
            
            ****
            **(142**
            **)**
            
            
            (11
            )
            
            ****
            **(578**
            **)**
            
            
            (147
            )Net
                income (loss)
            
            **$**
            **(1,351**
            **)**
            
            $
            (95
            )
            
            **$**
            **13,492**
            
            
            $
            (650
            )Net
                income (loss) per shareBasic
            
            **$**
            **(0.08**
            **)**
            
            $
            (0.01
            )
            
            **$**
            **0.76**
            
            
            $
            (0.04
            )Diluted
            
            **$**
            **(0.08**
            **)**
            
            $
            (0.01
            )
            
            **$**
            **0.76**
            
            
            $
            (0.04
            )
 
 See
      accompanying notes to consolidated financial statements.
  3
  **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,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006Net
                income (loss)
            
            **$**
            **(1,351**
            **)**
            
            $
            (95
            )
            
            **$**
            **13,492**
            
            
            $
            (650
            )Other
                comprehensive income (loss), before tax:Net
                unrealized gain (loss) on
available-for-sale-securities
            
            ****
            **(19**
            **)**
            
            
            (314
            )
            
            ****
            **(908**
            **)**
            
            
            4,110Reclassification
                adjustment principally for gain on exchange of Valera securities
                recognized in merger included in net income
            
            
            
            
            
            
            
            
            
            ****
            **(4,598**
            **)**Reclassification
                adjustment for realized losses on Indevus included in net
                income
            
            ****
            **768**
            
            
            
            
            
            
            ****
            **1,023**Reclassification
                adjustment for impairment of investment in Millenium Cell included
                in net income (loss)
            
            ****
            **266**
            
            
            
            
            
            
            ****
            **266**Net
                unrealized loss on interest rate swap,net
                of minority interest
            
            ****
            **(75**
            **)**
            
            
            (95
            )
            
            ****
            **(120**
            **)**
            
            
            (29
            )Comprehensive
                income (loss) before tax
            
            ****
            **(411**
            **)**
            
            
            (504
            )
            
            ****
            **9,155**
            
            
            
            3,431Income
                tax  benefit related to items of other comprehensive income
              (loss)
            
            ****
            **30**
            
            
            
            37
            
            
            ****
            **47**
            
            
            
            11Comprehensive
                income (loss)
            
            **$**
            **(381**
            **)**
            
            $
            (467
            )
            
            **$**
            **9,202**
            
            
            $
            3,442
  See
      accompanying notes to consolidated financial statements.
  4
  **NATIONAL
      PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
      CONSOLIDATED BALANCE SHEETS**
 **(in
      thousands)**
 **September
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006****Assets**
            
            **(unaudited)****Current
                assets**Cash
                and cash equivalents
            
            **$**
            **17,026**
            
            
            $
            4,485Accounts
                receivable, less allowancefor
                doubtful accounts of  $529 and $566
            
            ****
            **17,669**
            
            
            
            11,939Receivable
                from GP Strategies Corporation
            
            
            
            
            
            
            251Inventories
            
            ****
            **25,840**
            
            
            
            22,535Prepaid
                expenses and other current assets
            
            ****
            **471**
            
            
            
            724Deferred
                tax asset
            
            ****
            **597**
            
            
            
            791**Total
                current assets**
            
            
            **61,603**
            
            
            
            40,725Property,
                plant and equipment, net
            
            ****
            **3,403**
            
            
            
            2,925Investment
                in Valera including available for sale
              securities
                of $4,823 at December 31, 2006
            
            
            
            
            
            
            5,955Other
                marketable securities available for sale
            
            ****
            **226**
            
            
            
            343Deferred
                tax asset
            
            ****
            **193**Other
                assets
            
            ****
            **3,686**
            
            
            
            3,286**Total
                assets**
            
            **$**
            **69,111**
            
            
            $
            53,234**Liabilities
                and stockholders’ equity****Current
                liabilities**Current
                maturities of long-term debt
            
            **$**
            **257**
            
            
            $
            151Short
                term borrowings
            
            ****
            **19,974**
            
            
            
            18,414Accounts
                payable and accrued expenses
            
            ****
            **16,112**
            
            
            
            9,978Payable
                to GP Strategies Corporation
            
            **74****Total
                current liabilities**
            
            ****
            **36,417**
            
            
            
            28,543Long-term
                debt less current maturities
            
            ****
            **1,506**
            
            
            
            1,332Deferred
                tax liability
            
            ****
            **279**
            
            
            
            279Other
                liabilities
            
            **1**
            
            
            247**Total
                liabilities**
            
            ****
            **38,203**
            
            
            
            30,401Minority
              interest
            
            
            **2,960**
            
            
            
            1,696Common
                stock subject to exchange rights
            
            ****
            **498****Stockholders’
                equity**Common
                Stock
            
            ****
            **180**
            
            
            
            178Additional
                paid-in capital
            
            ****
            **26,120**
            
            
            
            25,990Retained
                earnings (deficit)
            
            ****
            **4,315**
            
            
            
            (9,177
            )Accumulated
                other comprehensive income
            
            ****
            **44**
            
            
            
            4,334Treasury
                stock
            
            ****
            **(3,209**
            **)**
            
            
            (188
            )**Total
                stockholders’ equity**
            
            ****
            **27,450**
            
            
            
            21,137**Total
                liabilities and stockholders’ equity**
            
            **$**
            **69,111**
            
            
            $
            53,234
 
 See
      accompanying notes to consolidated financial statements.
  5
  **NATIONAL
      PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 **(in
      thousands)**
 
 **Nine
                Months Ended****September
                30,****2007**
            
            
            **2006****Cash
                flows from operations:**Net
                income (loss)
            
            **$**
            **13,492**
            
            
            $
            (650
            )Adjustments
                to reconcile net loss tonet
                cash provided by (used in) operating activities:Depreciation
                and amortization
            
            ****
            **557**
            
            
            
            440Minority
                interest
            
            ****
            **578**
            
            
            
            147Expenses
                paid in common stock
            
            ****
            **45**
            
            
            
            55Stock
                based compensation
            
            ****
            **426**Impairment
                of Investment
            
            ****
            **266**Gain
                on exchange of Valera for Indevus shares
            
            ****
            **(17,031**
            **)**Services
                provided by GP Strategies applied to repayment of
              receivable
            
            
            
            
            
            
            666Deferred
                income taxes
            
            
            
            
            
            
            228Loss
                on sale of Indevus shares
            
            ****
            **1,023**Gain
                on issuance of stock by subsidiary
            
            ****
            **(1**
            **)**Changes
                in other operating items net of effect of acquisition of
              Right-Way
            
            ****
            **504**
            
            
            
            1,363**Net
                cash (used in) provided by operations**
            
            ****
            **(141**
            **)**
            
            
            2,249**Cash
                flows from investing activities:**Additions
                to property, plant and equipment, net
            
            ****
            **(1,035**
            **)**
            
            
            (269
            )Acquisition
                of Right-Way by Five Star
            
            ****
            **(3,399**
            **)**Acquisition
                of additional interest in Five Star
            
            ****
            **(106**
            **)**Proceeds
                from sale of investments
            
            ****
            **17,598**Repayment
                of receivable from GP Strategies
            
            ****
            **325****Net
                cash provided by (used in) investing activities**
            
            ****
            **13,383**
            
            
            
            (269
            )**Cash
                flows from financing activities:**Proceeds
                from sale of common stock
            
            ****
            **480**Purchase
                of treasury stock
            
            ****
            **(3,021**
            **)**(Repayment
                of)  proceeds from short-term borrowings
            
            ****
            **1,560**
            
            
            
            (1,944
            )Proceeds
                from long-term debt
            
            ****
            **355**Repayment
                of long-term debt
            
            ****
            **(75**
            **)**
            
            
            (266
            )**Net
                cash used in financing activities**
            
            ****
            **(701**
            **)**
            
            
            (2,210
            )Net
                increase (decrease)  in cash and cash
                equivalents
            
            ****
            **12,541**
            
            
            
            (230
            )Cash
                and cash equivalents at beginning of period
            
            ****
            **4,485**
            
            
            
            5,115**Cash
                and cash equivalents at end of period**
            
            **$**
            **17,026**
            
            
            $
            4,885
 
 
 See
      accompanying notes to the condensed consolidated financial
      statements.
  6
  
 **NATIONAL
      PATENT DEVELOPMENT CORPORATION**
 **CONDENSED
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY**
 **NINE
      MONTHS ENDED SEPTEMBER 30, 2007**
 (in
      thousands, except shares and per share data)
  Common
              Stock
              $(.01
                par
              value)
            
            
            Additional
                paid-incapital
            
            
            Retained
                earnings (deficit)
            
            
            Treasury
                stock, at
              cost
            
            
            Accumulated
              other
                comprehensive income (loss)
            
            
            Total
                stockholders’ equityBalance
                at December 31, 2006
            
            $
            178
            
            
            $
            25,990
            
            
            $
            (9,177
            )
            
            $
            (188
            )
            
            $
            4,334
            
            
            $
            21,137Proceeds
                from sale of 200,000
              shares
                of common stock
            
            
            2
            
            
            
            478
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            480Reclassification
                adjustment
              principally
                for gain on exchange of Valera securities
              recognized
                in merger included in net income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,598
            )
            
            
            (4,598
            )Reclassification
                adjustment for realized losses on Indevus included  in
                net income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            1,023
            
            
            
            1,023Impairment
                of investment in
              Millenium
                Cell Inc.
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            266
            
            
            
            266Net
                unrealized gain on available
              for
                sale securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (908
            )
            
            
            (908
            )Net
                unrealized gain on interest  rate swap, net of tax
                and minority interest
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (73
            )
            
            
            (73
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            13,492
            
            
            
            
            
            
            
            
            
            
            
            13,492Common
                stock subject to exchange rights
            
            
            
            
            
            
            (498
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (498
            )Equity
                based compensation expense
            
            
            
            
            
            
            105
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            105Purchase
                of 1,423,725 shares of
              treasury
                Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,021
            )
            
            
            
            
            
            
            (3,021
            )Issuance
                of 14,298 shares of common stock to MXL  Retirement and
                Savings Plan
            
            
            
            
            
            
            35
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            35Issuance
                of 4,123 shares ofcommon stock to directors
            
            
            
            
            
            
            10
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            10**Balance
                at September 30, 2007**
            
            **$**
            **180**
            
            
            **$**
            **26,120**
            
            
            **$**
            **4,315**
            
            
            **$**
            **(3,209**
            **)**
            
            **$**
            **44**
            
            
            **$**
            **27,450**
 
 See
      accompanying notes to the condensed consolidated financial
      statements.
  7
 **NATIONAL
          PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES** Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  **1.           Basis
      of presentation and summary of significant accounting
      policies**
 
 *Basis
      of presentation*
 
 The
      accompanying Condensed Consolidated Statements of Operations for the three
      months and nine months ended September 30, 2007 and 2006, the Condensed
      Consolidated Statements of Comprehensive Income (Loss) for the three months
      and
      nine months ended September 30, 2007 and 2006, the Condensed Consolidated
      Balance Sheet as of September 30, 2007, the Condensed Consolidated Statements
      of
      Cash Flows for the nine months ended September 30, 2007 and 2006 and the
      Condensed Consolidated Statement of Stockholders' Equity for the nine months
      ended September 30, 2007 have not been audited, but have been prepared in
      conformity with accounting principles generally accepted in the United States
      for interim financial information and with the instructions to Form 10-Q and
      Article 10 of Regulation S-X.  These financial statements should be
      read in conjunction with the audited consolidated financial statements and
      notes
      thereto for the year ended December 31, 2006 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 2007 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 57% 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.  In January 2007, the Company purchased 305,137
      shares of Five Star common stock, which represented 2% of the then outstanding
      Five Star common stock, for $106,000.
  On
      April
      5, 2007, Five Star acquired substantially all the assets of Right-Way Dealer
      Warehouse, Inc. ("Right-Way") including all of Right-Way's Brooklyn Cash &
Carry business and operations, which sells paint sundries and hardware supplies
      to local retail stores (see Note 14).
 
 *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
      costs amounted to $1,380,000, $4,139,000, $1,273,000 and $3,818,000, for the
      three months and nine months ended September 30, 2007 and 2006,
      respectively.
  (Continued)
 8
 **NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES**Notes
          to
          Condensed Consolidated Financial StatementsThree
          and
          nine months ended September 30, 2007 and 2006(Unaudited)
  *Inventories.*  Inventories
      are valued at the lower of cost or market, using the first-in, first-out
      method.
 
 *Derivatives
      and hedging activities.*The interest rate swap and interest rate
      collar entered into by Five Star in connection with its Loan and Security
      Agreement (see Note 7) 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.  For the three
      and nine months ended September 30, 2007, the Company recognized a gain of
      $1,000 and $5,000, respectively, and for the three 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.
  **2.**Accounting
        for uncertainty in income taxes**- ***FASB interpretation No.
        48*****
 
 In
      June 2006, the Financial Accounting
      Standards Board issued FASB Interpretation No. 48, “Accounting for Uncertainty
      in Income Taxes – an interpretation of FASB Statement No. 109” (hereinafter “FIN
      48”), which prescribes a recognition threshold and measurement attribute for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return.  FIN 48 also provides guidance
      on de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure and transition.  FIN 48 is effective for fiscal
      years beginning after December 15, 2006.  The adoption of FIN 48 in
      the first quarter of 2007 did not have anyeffecton the Company’s consolidated financial
      statements.The
      Company files income tax returns in
      the U.S. federal jurisdiction and various state jurisdictions. The statute
      of
      limitations for assessment of federal, state & local income taxes by the
      taxing authorities is open for years 2004 to 2006.
 
 **3.           Treasury
      Stock**
 
 On
      December 15, 2006, the Company’s Board of Directors authorized the Company to
      repurchase up to 2,000,000 shares, or approximately 11%, of its outstanding
      shares of common stock from time to time either in open market or privately
      negotiated transactions.  Through September 30, 2007, the Company had
      repurchased 1,423,725 shares of its common stock for
      $3,209,000.
  (Continued)
 9
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
 
 **4.           Incentive
      stock plans and stock based compensation.**
 
 The
      Company and Five Star have stock-based compensation plans for employees and
      non-employee members of their respective Boards of Directors. The plans provide
      for discretionary grants of stock options, restricted stock shares, and other
      stock-based awards. The Company’s plan is administered by the Compensation
      Committee of the Board of Directors, consisting of non-employee directors,
      and
      the Five Star plan is administered by Five Star’s entire Board of
      Directors.
  *Company
      Stock Option Plan*
  On
      November 3, 2003, GP Strategies Corporation (“GPS”), which at the time was the
      Company’s parent, adopted an Incentive Stock Plan (the “2003 Plan”) under which
      1,750,000 shares of the Company’s common stock are available for grant to
      employees, directors and outside service providers.  The 2003 Plan
      permits awards of incentive stock options, nonqualified stock options,
      restricted stock, stock units, performance shares, performance units and other
      incentives payable in cash or in shares of the Company’s common
      stock.  The term of any option granted under the 2003 Plan will not
      exceed ten years from the date of grant and, in the case of incentive stock
      options granted to a 10% or greater holder in the total voting stock of the
      Company, three years from the date of grant.  The exercise price of
      any option will not be less than the fair market value of the Common Stock
      on
      the date of grant or, in the case of incentive stock options granted to a 10%
      or
      greater holder in the total voting stock, 110% of such fair market
      value.
 
 On
      March
      1, 2007the Company’s
      Board of Directors approved and adopted an amendment, subject to stockholder
      approval (the “Amendment”), to the 2003 Plan increasing the aggregate number of
      shares of Company common stock issuable under the 2003 Plan from 1,750,000
      shares to 3,500,000 shares (subject to adjustment as provided in the 2003 Plan),
      and increasing the per person annual limitation in the 2003 Plan from 250,000
      shares to 2,500,000 shares.  The Company expects to submit the Amendment to
      the Company's stockholders for approval at the Company's 2007 Annual
      Stockholders Meeting.
  In
      March
      2007, the Company granted an aggregate of 3,200,000 nonqualified stock options
      under the 2003 Plan (including the options referred to in Note 13(a) and (b)),
      of which 632,830 were granted under the terms of the 2003 Plan as presently
      approved by the Company’s stockholders and the remainder were granted subject to
      shareholder approval of the amendments referred to below.  The Company
      determined the estimated aggregate fair value of the 632,830 options which
      are
      not subject to shareholder approval on the date of grant to be $673,000 based
      on
      the Black-Scholes valuation model using the following assumptions: expected
      volatility of 49.27%, dividend yield of 0%, risk free interest of 4.5% and
      an
      expected life of 4 years.  Upon shareholder approval (see below), the
      Company will determine the estimated aggregate fair value of the remaining
      2,567,170 options based upon the closing price of the Company’s common stock on
      that date using the Black-Scholes valuation model.
  (Continued)
 10
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  On
      July
      30, 2007 the Company granted an aggregate of 150,000 non-qualified stock options
      under the 2003 Plan. The Company determined the estimated aggregate fair value
      of the 150,000 options on the date of grant to be $169,000 based on the
      Black-Scholes valuation model using the following assumptions: expected
      volatility of 46.95%, dividend yield of 0%, risk free interest rate of 4.6%
      and
      an expected life of 4 years.
  On
      July
      30, 2007 the Board of Directors adopted the National Patent Development
      Corporation 2007 Incentive Stock Plan (the ‘2007 Stock Plan”), subject to
      shareholder approval.  The Company expects to submit the 2007 NPDC
      Plan to the Company's stockholders for approval at the Company's 2007 Annual
      Stockholders Meeting.  As of September 30, 2007 no awards have been
      granted under the 2007 Stock Plan.
  The
      2007
      Stock Plan provides that the Compensation Committee of the Board of Directors
      may grant to those individuals who are eligible under the terms of the 2007
      Stock Plan incentive stock options, nonqualified stock options, performance
      shares, stock appreciation rights, restricted stock and other incentives payable
      in cash or in shares of common stock.  Such grants may be made to
      employees, officers and directors of the Company or its subsidiaries as well
      as
      to consultants, agents, advisors and independent contractors of the Company
      or
      its subsidiaries for certain bona fide services rendered.  The number
      of shares of common stock to be reserved and available for awards under the
      2007
      Stock Plan (subject to certain adjustments as provided therein) is
      7,500,000.
  A
      summary
      of the Company’s stock option activity as of September 30, 2007, and changes
      during the nine months then ended, which includes option activity described
      above,  is presented below:
  **Stock**
              **Options**
            
            
            **Weighted**
              **Average**
              **ExercisePrice**
            
            
            **Weighted**
              **Average**
              **Contractual**
              **Term**
            
            
            **Aggregate**
              **IntrinsicValue**Outstanding
                at January 1, 2007Granted
            
            
            782,830
            
            
            $
            2.49ExercisedForfeited
                or expiredOutstanding  and
                expected to vest at September 30, 2007
            
            
            782,830
            
            
            
            2.49
            
            
            
            4.4
            
            
            $
            0
            *Exercisable
                at September 30, 2007
  *The
      intrinsic value of a stock option is the amount by which the market value of
      the
      underlying stock exceeds the exercise price of the option.
  (Continued)
 11
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  Five Star Stock Option Plan
  On
      January 1, 1994, Five Star's Board of Directors adopted the Five Star Products,
      Inc. 1994 Stock Option Plan  (the “1994 Five Star Plan”), which became
      effective when approved by the Five Star stockholders on August 5,
      1994.  On January 1, 2002, the Board of Directors amended the 1994
      Five Star Plan increasing the total number of shares of common stock available
      for issuance under the plan to 4,000,000, subject to
      adjustment.  Options could be granted under the 1994 Five Star plan to
      any director, officer or other key employee of Five Star and its subsidiaries,
      and to consultants and other individuals providing services to Five
      Star.  Although there remain outstanding options which have been
      granted under 1994 Five Star Plan, no further options may be granted under
      this
      Plan.
 
 On
      March
      1, 2007, the Board of Directors of Five Star adopted the Five Star Products,
      Inc. 2007 Incentive Stock Plan (the “2007 Five Star Plan”), subject to the
      approval of the stockholders of Five Star.  Five Star expects to
      submit the 2007 Five Star Plan to its stockholders for approval at the Five
      Star
      2007 Annual Stockholders Meeting.  Based upon the Company’s intent to
      vote its shares of Five Star in favor of the 2007 Five Star Plan, which will
      assure its approval, the financial effect of all options and restricted stock
      issued under the 2007 Five Star Plan are reflected as if shareholder approval
      had been obtained prior to the date of grant. Under the 2007 Five Star Plan,
      Five Star may grant awards of non-qualified stock options, incentive stock
      options (if the 2007 Five Star Plan is submitted to and approved by stockholders
      of Five Star prior to February 28, 2008), restricted stock, stock units,
      performance shares, performance units, and other incentives payable in cash
      or
      in shares of Five Star’s common stock to officers, employees or members of the
      Board of Directors of Five Star and its subsidiaries. Five Star is authorized
      to
      grant an aggregate of 2,500,000 shares of Five Star Common Stock under the
      2007
      Five Star Plan.  Five Star may issue new shares or use shares held in
      treasury to deliver shares for equity grants or upon exercise of non-qualified
      stock options.
  On
      March
      2, 2007, subject to shareholder approval of the 2007 Five Star Plan, Five Star
      granted options under the 2007 Five Star Plan to purchase 250,000 shares of
      Five
      Star’s common stock to two employees and increased the exercise price and EBITDA
      target of 400,000 options granted to an employee on October 18, 2006. The
      exercise price of the 650,000 options was equal to $0.38, the average of the
      closing bid and asked prices of the common stock on March 2, 2007. The options
      will vest if Five Star meets certain EBITDA targets over the next three years
      provided that the option holders continue to be employees of Five
      Star.   Five Star determined the estimated aggregate fair value
      of these options on the date of grant to be $185,000 based on the Black-Scholes
      valuation model.  On July 17, 2007, subject to shareholder approval of
      the 2007 Five Star Plan, Five Star granted options under the 2007 Five Star
      Plan
      to purchase 125,000 shares of Five Star’s common stock to an officer. The
      exercise price of the 125,000 options was equal to $0.78, the average of the
      closing bid and asked prices of the common stock on July 17, 2007. The options
      will vest if Five Star meets certain EBITDA targets over the next three years
      provided that the option holders continue to be employees of Five
      Star.   Five Star determined the estimated aggregate fair value
      of these options on the date of grant to be $62,000 based on the Black-Scholes
      valuation model.  Achievement of performance criteria was determined
      as probable at March 2, 2007 and July 17, 2007, and therefore, compensation
      expense of $27,000 and $56,000 was recognized during the quarter and nine months
      ended September 30, 2007.
  (Continued)
 12
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  On
      April
      5, 2007, in connection with an employment agreement entered into
      with the principal of Right-Way Dealer Warehouse, Inc. (see Note 14), Five
      Star granted him an option to purchase 200,000 shares of Five Star common stock
      under the 2007 Five Star Plan, subject to shareholder approval. The options
      will
      vest if Five Star meets certain EBITDA targets over the next three years proved
      that the option holder continues to be employed by Five Star Group. At June
      30,
      2007, Five Star determined that it was probable it would meet 2007 EBITDA
      targets and accordingly recorded a charge of $8,000 and $16,000, respectively,
      for the three and nine months ended September 30, 2007.
  A
      summary
      of Five Star’s stock option activity as of June 30, 2007, and changes during the
      nine months then ended, which includes option activity described
      above,  is presented below:
   **Stock**
              **Options**
            
            
            **Weighted**
              **Average**
              **ExercisePrice**
            
            
            **Weighted**
              **Average**
              **Contractual**
              **Term**
            
            
            **Aggregate**
              **IntrinsicValue**Outstanding
                at January 1, 2007
            
            
            1,050,000
            
            
            $
            0.16Granted
            
            
            575,000
            
            
            
            0.43Exercised
            
            
            (200,000
            )
            
            
            0.16Forfeited
                or Expired
            
            
            (450,000
            )
            
            
            0.14Outstanding
                and expected to vest at September 30, 2007
            
            
            975,000
            
            
            
            0.51
            
            
            
            3.6
            
            
            $
            176,000
            *Exercisable
                at September 30, 2007
            
            
            0
            
            
            
            0
            
            
            
            0
  *The
      intrinsic value of a stock option is the amount by which the market value of
      the
      underlying stock exceeds the exercise price of the option.
  During
      the nine month period ended September 30, 2007, 400,000 options outstanding
      as
      of January 1, 2007 were modified.
  (Continued)
 13
 NATIONAL
            PATENT DEVELOPMENT CORPORATION AND
            SUBSIDIARIES Notes
            to
            Condensed Consolidated Financial Statements Three
            and
            nine months ended September 30, 2007 and 2006 (Unaudited)
 On
        March
        2, 2007, subject to Five Star shareholder approval, Five Star granted 1,000,000
        shares of restricted stock to its chief executive officer (see Note 12(b))
        valued at $0.38 per share under the 2007 Five Star Plan. This restricted
        stock
        will vest if Five Star meets certain EBITDA targets over the next three years
        provided that he continues to be employed by Five Star or the Company. At
        March
        2, 2007, Five Star determined that achievement of the performance criteria
        was
        probable and therefore compensation expense of $31,000 and $73,000 was
        recognized during the quarter and nine months ended September 30,
        2007.
  **5.           Per
      share data**
  Income
      (loss) per share for the three months and nine months ended September 30, 2007
      and 2006 are calculated as follows (in thousands, except per share
      amounts):
  **Three
                    Months Ended**
                
                
                **Nine
                    Months Ended****September
                    30,**
                
                
                **September 30,****2007**
                
                
                2006
                
                
                **2007**
                
                
                2006**Basic
                    EPS**Net
                    income (loss)
                
                **$**
                **(1,351**
                **)**
                
                $
                (95
                )
                
                **$**
                **13,492**
                
                
                $
                (650
                )Weighted
                    average sharesoutstanding
                
                ****
                **17,576**
                
                
                
                17,848
                
                
                ****
                **17,711**
                
                
                
                17,836Basic
                    earnings (loss) per share
                
                **$**
                **(.08**
                **)**
                
                $
                (.01
                )
                
                **$**
                **.76**
                
                
                $
                (.04
                )**Diluted
                    EPS**Net
                    income (loss)
                
                **$**
                **(1,351**
                **)**
                
                $
                (95
                )
                
                **$**
                **13,492**
                
                
                $
                (650
                )Weighted
                    average
                
                ****
                **17,576**
                
                
                
                17,848
                
                
                ****
                **17,711**
                
                
                
                17,836shares
                    outstandingDilutive
                    effect of stock options
                
                ****
                **--**
                
                
                
                --
                
                
                ****
                **21**
                
                
                
                --Diluted
                    weighted average shares outstanding
                
                ****
                **17,576**
                
                
                
                17,848
                
                
                ****
                **17,732**
                
                
                
                17,836Diluted
                    earnings (loss)per
                    share
                
                **$**
                **(.08**
                **)**
                
                $
                (.01
                )
                
                **$**
                **.76**
                
                
                $
                (.04
                )
  Outstanding
      warrants to acquire 1,423,887 common shares issued in December 2004 were not
      included in the diluted computation, as their effect would be
      anti-dilutive.  In addition, the effect on the diluted computation of
      outstanding options and the convertible note of Five Star (see Note 13(d))
      was
      anti-dilutive and accordingly did not effect such computation.
  (Continued)
 14
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  **6.           Long-term
      debt**
  *Long-term
      debt*
 
 Long-term
      debt is comprised of the following (in thousands):
 
 **September
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006**MXL
                Pennsylvania Mortgage (a)
            
            **$**
            **1,030**
            
            
            $
            1,105MXL
                term loan (b)
            
            ****
            **733**
            
            
            
            377Capital
                lease obligations
            
            ****
            **-**
            
            
            
            1****
            **1,763**
            
            
            
            1,483Less
                current maturities
            
            ****
            **(257**
            **)**
            
            
            (151
            )**$**
            **1,506**
            
            
            $
            1,332
 
 a)
            The
                loan, which is collateralized by real estate and fixtures, 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 Corporation (“GPS”), formerly the parent
                entity of MXL and the Company, under an agreement entered into
                concurrently with GPS’s spin-off of these entities.  If GPS
                defaults under the terms of the guarantee the bank would have the
                right to
                accelerate MXL’s payments under the
                loan.
 
 b)
            On
                November 27, 2006,  MXL entered into a 5 year $785,000 Term Loan
                for the financing of machinery and equipment at 2.5% above the one
                month
                LIBOR rate, or 0.25% above the bank’s prime lending rate, as
                applicable.  From November 2006 through May 2007, the Bank may
                disburse funds to MXL, and MXL will pay on a monthly basis, all accrued
                interest due the Bank.  In May 2007, the balance borrowed
                converted to a five year Term Loan, with monthly payments of principal
                and
                accrued interest through May 2012. The Term Loan is guaranteed by
                the
                Company and collateralized by MXL’s Lancaster, PA
                property.
  **7.           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%
      (6.88% at September 30, 2007) for borrowings not to exceed $15,000,000 and
      the
      prime rate (7.75% at September 30, 2007) 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, 2007 and December
      31, 2006, approximately $19,339,000 and $17,664,000 was outstanding under the
      Loan Agreement and approximately $7,587,000 and $2,929,000 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, 2007, Five Star was in compliance with all required
      covenants.
  (Continued)
 15
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (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
      credit spread under the new Loan Agreement is not included in, and will be
      paid
      in addition to this fixed interest rate of 3.38%.  The fair value of
      the interest rate swap amounted to $142,000 and $320,000 at September 30, 2007
      and December 31, 2006, respectively and is included in other assets in the
      accompanying balance sheets.
 
 On
      June
      17, 2004, Five Star also entered into a derivative interest rate collar
      transaction during the period from July 1, 2004 through June 30, 2008, on
      notional principal of $12,000,000.  The transaction consists of an
      interest rate floor of 2.25%, whereas if LIBOR is below 2.25%, the Lender will
      pay to Five Star the difference between LIBOR and 2.25%, on the same notional
      principal amount.  The transaction also consists of an interest rate
      cap of 5.75%, whereas if LIBOR is above 5.75%, Five Star will pay to the Lender
      the difference between LIBOR and 5.75%, on the same notional principal
      amount.
 
 *MXL
      short-term borrowings*
 
 On
      March
      1, 2005, MXL obtained a Line of Credit Loan (the “MXL Line”) from M&T Bank
      with a one year term, maturing on March 1, 2006, which has been extended to
      June
      30, 2008 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.
      On
      November 27, 2006 the MXL Line was amended to a $900,000 line of
      credit.  The interest rates under the MXL Line consist of LIBOR plus a
      credit spread of 2.5% or the prime rate.  The MXL Line is subject to
      an unused commitment fee of 0.125% of the average daily unused balance of the
      line payable quarterly.  The Company has guaranteed the MXL Line up to
      $785,000. At September 30, 2007 and December 31, 2006, $625,000 and $750,000,
      respectively, was outstanding under the MXL Line and $275,000 and $150,000,
      respectively, was available to be borrowed.  The MXL Line contains
      certain financial covenants which are calculated on an annual basis at December
      31.  As of December 31, 2006, MXL was in compliance with all required
      covenants.
  (Continued)
 16
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  8.           Inventories
  Inventories
      are comprised of the following (in thousands):
 
 **September
                30, 2007**
            
            
            **December
                31, 2006**Raw
                materials
            
            **$**
            **429**
            
            
            $
            393Work
                in process
            
            ****
            **195**
            
            
            
            149Finished
                goods
            
            ****
            **25,216**
            
            
            
            21,993**$**
            **25,840**
            
            
            $
            22,535
 
 **9.           Investment
      in Indevus Pharmaceuticals, Inc.  (“Indevus”)**
 
 Indevus
      Pharmaceuticals, Inc., a biopharmaceutical company, engages in the acquisition,
      development, and commercialization of products to treat urological,
      gynecological, and men's health conditions.
  Effective
      April 18, 2007 (the “Effective Time”), all of the outstanding common stock of
      Valera Pharmaceuticals, Inc. (“Valera”) was acquired by Indevus pursuant to the
      terms and conditions of an Agreement and Plan of Merger, dated as of December
      11, 2006 (the “Merger Agreement”).  Pursuant to the Merger Agreement,
      the Company, as a stockholder of Valera through MXL, received 1.1337 shares
      of
      Indevus common stock for each share of Valera common stock held by the Company
      immediately prior to the Effective Time. As a result, at the Effective Time,
      the
      2,070,670 shares of Valera common stock held by the Company were converted
      into
      an aggregate of 2,347,518 shares of Indevus common stock.  In April
      2007, the Company recognized a pre-tax gain of $14,961,000 on the exchange
      of
      shares. The merger was treated as a tax free merger under Internal Revenue
      Code
      Section 368.  In addition, for each share of Valera common stock held
      by the Company immediately prior to the Effective Time, the Company received
      one
      contingent stock right for each of three Valera product candidates in
      development - Supprelin-LA, a ureteral stent and VP003 (Octreotide implant)
      –convertible into $1.00, $1.00 and $1.50, respectively, worth of Indevus common
      stock to the extent of the achievement of specific milestones with respect
      to
      each product candidate are achieved. Thus, if all contingent milestones are
      achieved, the Company will receive $2,070,670, $2,070,670 and $3,106,005,
      respectively, worth of Indevus common stock on the date the milestone is met,
      at
      which date additional gain will be recognized. On May 3, 2007, Indevus announced
      that it had received FDA approval for Supprelin-LA.  Therefore, in May
      2007, the Company received the first $2,070,670 worth of Indevus common stock,
      consisting of 291,964 shares, and recognized an additional pre-tax gain of
      $2,070,670.   During the quarter and nine months ended September
      30, 2007, the Company sold 2,347,518 and 2,639,482 shares, respectively of
      Indevus on the open market, (which comprised all the Company’s shares of Indevus
      common stock at this time) for total net proceeds of $17,598,000 and recognized
      losses of   $787,000 and $1,023,000, respectively, which are
      included in Investment and other income (loss), net.
  (Continued)
 17
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  Two
        related parties, Bedford Oak Partners and Mr. Jerome I. Feldman, were entitled
        to receive 50% of any profit received from the sale on a pro-rata basis,
        of
        458,019 shares of Indevus common stock in excess of $3.47 per share, and
        50% of
        the proceeds from the sale on a pro-rata basis of 56,965 shares of Indevus
        common stock. The Company paid $922,000 to the related parties towards their
        profit share, upon sale of the Indevus of which $680,000 is included in
        Investment and other income (loss), net for the nine months ended September
        30, 2007 and $242,000 was charged to a liability accrued for the profit share
        at
        December 31, 2006.
  The
      original gain on exchange of Valera stock resulted from a tax free
      reorganization and accordingly was not subject to current federal income
      tax.  In addition, the deferred income tax liability attributable to
      the excess statement basis over tax basis in Indevus stock received in the
      exchange was offset by a reduction of the deferred tax asset valuation
      allowance.  The gain recognized for federal tax purposes on the sale
      of Indevus stock was offset by the Company’s net operating and capital loss
      carryforwards.  Accordingly, no provision for federal income tax is
      included in the accompanying Statements of Operations related to the gain on
      the
      exchange or the sale of the Indevus stock for the nine months ended September
      30, 2007.  During the nine months ended September 30, 2007, the
      Company recorded a provision for state income tax expense of $345,000 related
      to
      the gain on the exchange and the sale of the Indevus stock.
 
 **10.           Investment
      and other income (loss), net**
 
 Investment
      and other income (loss), net
      is comprised of the following (in thousands):
 
 **Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006Loss
                on sale of Indevus
            
            **$**
            **(710**
            **)**
            
            $
            
            
            
            **$**
            **(1,023**
            **)**
            
            $Indevus
                profit sharing
            
            ****
            **(77**
            **)**
            
            
            79
            
            
            ****
            **(680**
            **)**
            
            
            (179
            )Impairment
                of Investment in
              Millenium
                Cell Inc.
            
            ****
            **(266**
            **)**
            
            
            
            
            
            ****
            **(266**
            **)**Interest
                income
            
            ****
            **56**
            
            
            
            29
            
            
            ****
            **109**
            
            
            
            84Other
            
            ****
            **34**
            
            
            
            72
            
            
            ****
            **128**
            
            
            
            93**$**
            **(963**
            **)**
            
            $
            180
            
            
            **$**
            **(1,732**
            **)**
            
            $
            (2
            )
   (Continued)
 18
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  **11.           Business
      segments**
 
 The
      following tables set forth the sales and operating income of each of the
      Company's operating segments (in thousands):
 
 **Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006**Sales**Five
                Star
            
            **$**
            **32,939**
            
            
            $
            27,666
            
            
            **$**
            **98,726**
            
            
            $
            85,556MXL
            
            ****
            **2,266**
            
            
            
            2,459
            
            
            ****
            **6,544**
            
            
            
            6,935**$**
            **35,205**
            
            
            $
            30,125
            
            
            **$**
            **105,270**
            
            
            $
            92,491
 
 **Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006**Segment
                operating income**Five
                Star
            
            **$**
            **1,001**
            
            
            $
            483
            
            
            **$**
            **3,558**
            
            
            $
            2,114MXL
            
            ****
            **111**
            
            
            
            119
            
            
            ****
            **68**
            
            
            
            324**$**
            **1,112**
            
            
            $
            602
            
            
            **$**
            **3,626**
            
            
            $
            2,438
 
 A
      reconciliation of the segment operating income to income (loss) before
      income tax expense and minority interests in the condensed consolidated
      statements of operations is shown below (in thousands):
 
 **Three
                Months Ended**
            
            
            **Nine
                Months Ended****September
                30,**
            
            
            **September
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006Segment
                operating income
            
            **$**
            **1,112**
            
            
            $
            602
            
            
            **$**
            **3,626**
            
            
            $
            2,438Corporate
                and other general and administrative expenses
            
            ****
            **(674**
            **)**
            
            
            (421
            )
            
            ****
            **(2,279**
            **)**
            
            
            (1,305
            )Interest
                expense
            
            ****
            **(448**
            **)**
            
            
            (391
            )
            
            ****
            **(1,280**
            **)**
            
            
            (1,234
            )Gain
                on exchange of Valera for Indevus shares
            
            
            
            
            
            
            
            
            
            
            1**7,031**Investment
                and other income (loss)
            
            ****
            **(963**
            **)**
            
            
            180
            
            
            ****
            **(1,732**
            **)**
            
            
            (2
            )Income
                (loss) before income taxexpense
                and minority interests
            
            **$**
            **(973**
            **)**
            
            $
            (30
            )
            
            **$**
            **15,366**
            
            
            $
            (103
            )
    (Continued)
 19
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  **12.           Related
        party transactions**
  a)           On
        November 12, 2004, the Company entered into an agreement to borrow approximately
        $1,022,000 from Bedford Oak Partners, which is controlled by Harvey P. Eisen,
        Chairman, Chief Executive Officer and a director of the Company, and
        approximately $568,000 from Jerome I. Feldman, who was at the time Chairman
        and
        Chief Executive Officer of the Company,
        which was utilized to exercise an option held by the Company to purchase
        Series
        B Convertible Preferred shares of Valera.  The loans bore interest at
        6% per annum, matured on October 31, 2009, and were secured by all shares
        of
        Valera owned by the Company, including the purchased
        shares.     On January 11, 2005, the Company prepaid
        the loans and all accrued interest in full. As further consideration for
        making
        these loans, Bedford Oak Partners and Mr. Feldman became entitled to a portion
        of the consideration received by the Company on the sale of certain Valera
        shares.  As a result of the acquisition of Valera by Indevus (see Note
        9) this obligation presently relates to the sale of Indevus shares by the
        Company. From June 2007 through and including September 12, 2007, the Company
        sold, in a series of open market transactions, all of the 2,639,482 shares
        of
        Indevus common stock held by the Company for an aggregate of approximately
        $17,598,000, net of commissions and brokerage fees.  The November 12, 2004
        agreement among the company, Bedford Oak Partners and Mr. Feldman provides
        for
        Bedford Oak Partners and Mr. Feldman to (i) receive 50% of any amount in
        excess
        of $3.47 per share which is received by the Company upon the sale of Indevus
        common stock and (ii) participate in 50% of the profits earned on 19.51%
        of
        shares of Indevus common stock received by the Company upon conversion of
        the
        contingent stock rights, described below, if any, at such time as such shares
        are sold by the Company.  The aggregate amount paid towards the profit
        sharing was $922,000.
  The Company continues to hold contingent stock rights for certain products
      in
      development by Indevus that will become convertible into shares of Indevus
      common stock to the extent specific milestones with respect to each product
      are
      achieved.  If the remaining milestones are achieved, the Company will
      receive $2,070,670 and $3,106,005, respectively, worth of shares of Indevus
      common stock upon conversion of such contingent stock rights.  (See Note
      9).
  b)           Concurrently
      with its spin-off from GPS, the Company and GPS entered into a management
      agreement under which certain of the Company’s executive officers who were also
      executive officers of GPS were paid by GPS subject to reimbursement by the
      Company. Additionally, GPS provided support with respect to corporate federal
      and state income taxes, corporate legal services, corporate secretarial
      administrative support, and executive management consulting.  The term
      of the agreement extends through November 24, 2007.
 
 The
      fee
      paid by the Company under this agreement was $0 and $221,000 for the quarters
      ended September 30, 2007 and 2006, respectively, and $335,000 and $653,000
      for
      the nine months ended September 30, 2007 and 2006, respectively, which includes
      approximately 80% of the cost of the compensation and benefits required to
      be
      provided by GPS to Jerome Feldman, who served as the Company’s Chief Executive
      Officer until May 31, 2007 (see Note 13(a)). The Company is not, and does not
      anticipate receiving any further material services during the remaining term
      of
      this agreement.
 
  (Continued)
 20
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  **13.                
      Stockholders equity**
 
 The
      following transactions occurred during the nine month period ended September
      30,
      2007:
 
 a.
            On
              March 1, 2007, the Company’s Board of Directors determined that effective
              upon Jerome Feldman ceasing to serve as Chairman of the Board and
              Chief Executive Officer of the Company, Harvey P. Eisen, who at the
              time
              served only as a director of the Company, would serve as Chairman of
              the
              Board and Chief Executive Officer of the Company, and that effective
              upon
              the commencement of his service as Chairman of the Board and Chief
              Executive Officer of the Company, Mr. Eisen would receive an annual
              salary
              of $100,000. Mr. Feldman's employment agreement expired on May 31,
              2007.
              In addition, the Company’s Board of Directors granted to Mr. Eisen options
              to purchase an aggregate of 2,500,000 shares of the Company’s common
              stock, 2,250,000 of which are subject to shareholder approval of an
              amendment to the Company’s 2003 Plan, at an exercise price equal to $2.45
              per share, which was the average of the closing bid and asked prices
              of
              the Company’s common stock on March 1, 2007. The options are to vest in
              three equal annual installments, commencing on March 1, 2008 provided
              that
              Mr. Eisen continues to be an employee of the Company.   At
              March 31, 2007, the Company recognized 250,000 shares as granted and
              2,250,000 shares as granted subject to shareholder
              approval.  b.
            On
                March 1, 2007, John C. Belknap was elected as a director of Five
                Star.  Mr. Belknap was also elected to serve as President and
                Chief Executive Officer of Five Star. Mr. Belknap has served as a
                director
                of the Company since October 20, 2006 and has been an employee of
                the
                Company since December 1, 2006.
  On
      March
      2, 2007, Mr. Belknap was granted options to purchase an aggregate of 400,000
      shares of the Company’s common stock, 181,240 of which are subject to
      shareholder approval of an amendment to the Company’s 2003 Incentive Stock Plan,
      at an exercise price equal to $2.45 per share, which was the average of the
      closing bid and asked prices of the Company’s common stock on March 1,
      2007.  Contingent upon Mr. Belknap’s continued employment with the
      Company, the options will vest in three equal installments, commencing on
      December 1, 2007 and annually thereafter.  The Company recognized
      options to buy 218,760 shares as granted and recognized a charge of $15,000
      and
      $34,000 during the quarter and nine months ended September 30, 2007,
      respectively.  Options to buy 181,240 shares subject to shareholder
      approval will be valued on the day such approval is obtained.  In
      addition, on March 2, 2007, Mr. Belknap was granted 1,000,000 restricted shares
      of Five Star Common Stock (see Note 4).
 
 c.
            Mr.
                S. Leslie Flegel was named a director of the Company on March 2,
                2007 and
                on March 1, 2007 was appointed as Chairman and elected as a director
                of
                Five Star.  Effective March 2, 2007, Mr. Flegel entered into a
                three-year agreement with Five Star ending on March 1, 2010 (the
                "FS
                Agreement") which provides for an annual fee of $100,000 and reimbursement
                (i) for all travel expenses incurred in connection with his performance
                of
                services for Five Star and (ii) beginning in November 2007, for up
                to
                $125,000 per year of the cost of maintaining an office. In addition,
                pursuant to the FS Agreement, Mr. Flegel was issued 2,000,000 shares
                of
                Five Star common stock, all of which are fully vested and not subject
                to
                forfeiture.  The
                2,000,000 shares were valued at $720,000 based on the closing price
                of
                Five Star’s common stock on March 2, 2007. Such amount is to be charged to
                compensation expense over the term of the FS Agreement. In addition,
                the
                Company recognized a gain of $1,000 on the reduction in ownership
                interest
                of Five Star at the time of issuance.  The issuance of the Five
                Star shares reduced the Company’s ownership of Five Star from 66% to
                58%.
   (Continued)
 21
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  On
                  March 2, 2007, the Company and Mr. Flegel entered into an agreement
                  pursuant to which the Company sold Mr. Flegel 200,000 shares of
                  the
                  Company’s common stock at a price of $2.40 per share or $480,000. Mr.
                  Flegel has the right to exchange any or all of the 200,000 shares
                  of the
                  Company’s common stock into shares of Five Star common stock held by the
                  Company at the fixed rate of six shares of Five Star common stock
                  for each
                  share of the Company’s common stock. The value of the option to convert
                  the Company’s stock held by Mr. Flegel into shares of Five Star has been
                  valued using a Black Sholes formula and recognized as compensation
                  expense
                  by Five Star over the three year term of the FS Agreement. In addition,
                  as
                  the exchange rights if exercised would require the Company to effectively
                  surrender net assets to redeem common stock, the Company accounted
                  for the
                  issuance of the 200,000 shares as temporary equity at an amount
                  equivalent
                  to the carrying value of Five Star’s equity that could be acquired by the
                  holder of such shares.
  d.
            On
                March 2, 2007, the Company amended a $2,800,000 Promissory Note due
                from
                Five Star (eliminated in consolidation).  Under the terms of the
                amended Promissory Note, the term of the Promissory Note has been
                extended
                from June 30, 2007 to June 30, 2009 at an interest rate of 9% per
                annum.  In addition, the Promissory Note and any unpaid accrued
                interest is convertible, in whole or in part, at the Company’s
                option into shares of Five Star common stock at a price of $.40 per
                share, subject to anti-dilution adjustment.  Five Star does not
                have the right to prepay the Promissory Note prior to
                maturity.
 
 **14.           Acquisition
      of Right-Way Dealer Warehouse**
  On
      April
      5, 2007, Five Star acquired substantially all the assets (except "Excluded
      Assets" as defined) and assumed the Assumed Liabilities (as defined) of
      Right-Way Dealer Warehouse, Inc. ("Right-Way") pursuant to the terms of a
      definitive asset purchase agreement, dated as of March 13, 2007 (the
      "Agreement"), with Right-Way for approximately $3,200,000 in cash and the
      assumption of liabilities in the approximate amount of $50,000. Transaction
      costs of approximately $200,000 were incurred by Five Star. The assets consisted
      primarily of approximately $1,186,000 of accounts receivable at fair value
      and
      approximately $2,213,000 of inventory at fair value. The acquisition included
      all of Right-Way's Brooklyn Cash & Carry business and
      operations.  Five Star acquired the assets of Right-Way in order to
      increase its presence and market share in its current geographic
      area.
  (Continued)
 22
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
          to
          Condensed Consolidated Financial Statements Three
          and
          nine months ended September 30, 2007 and 2006 (Unaudited)
  Upon
        closing of the transaction, Five Star leased a warehouse at which the Brooklyn
        Cash & Carry business is conducted from an affiliate of the principal of
        Right-Way, with an option to purchase the warehouse, and a wholly-owned
        subsidiary of Five Star also entered into an employment agreement with Ronald
        Kampner, the principal of Right-Way to serve as Senior Vice President of
        Sales
        for Five Star.  The employment agreement provides for a three-year
        term (subject to earlier termination), the payment of a base salary of $200,000
        per annum, and cash incentive compensation as described in the employment
        agreement. In addition, Mr. Kampner was granted options to purchase 200,000
        shares of Five Star Products, Inc. common stock (see Note 4).
  The
      results of operations of Right-Way are included in the consolidated financial
      statements from the date of acquisition.  The following unaudited pro
      forma consolidated amounts give effect to the acquisition of Right-Way as if
      it
      had occurred on January 1, 2006. Right-Way had filed for reorganization under
      Chapter XI of the Bankruptcy Act prior to the acquisition by Five
      Star.  The pro forma results of operations have been prepared for
      comparative purposes only and are not necessarily indicative of the operating
      results that would have been achieved had the acquisitions been consummated
      as
      of the above date, nor are they necessarily indicative of future operating
      results.
  (in
      thousands, except per share data)
  Nine months
                ended September 30,
            
            
            Three
                months ended2007
            
            
            2006
            
            
            September
                30, 2006Sales
            
            $
            109,604
            
            
            $
            125,112
            
            
            $
            40,561Net
                income (loss)
            
            
            12,682
            
            
            
            (579
            )
            
            
            (123
            )Earnings
                (loss) per shareBasic
            
            $
            0.72
            
            
            $
            (0.03
            )
            
            $
            (0.01
            )Fully
                diluted
            
            $
            0.72
            
            
            
            --
            
            
            
            --
  (Continued)
 23
  **NATIONAL
      PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
  **Item
                2.**
            **Management’s
                Discussion and Analysis of Financial Condition and Results of
                Operations**
  **Cautionary
      Statement Regarding Forward-Looking Statements**
  This
      report contains forward-looking statements within the meaning of Section 27A
      of
      the Securities Act of 1933, as amended, and Section 21E of the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”).  The Private
      Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward
      looking statements. Forward-looking statements are not statements of historical
      facts, but rather reflect our current expectations concerning future events
      and
      results. We use words such as “expects”, “intends”, “believes”, “may”, “will”
and “anticipates” to indicate forward-looking statements.
  Factors
      that may cause actual results to differ from those results expressed or implied,
      include, but are not limited to, those listed under “Risk Factors” in our Annual
      Reports on Form 10-K filed with the Securities and Exchange Commission (the
      “SEC”); an unexpected decline in revenue and/or net income derived by the
      Company’s wholly-owned subsidiary, MXL Industries, Inc. (“MXL”), or by our
      majority-owned subsidiary, Five Star Products, Inc. (“Five Star”), due to the
      loss of business from significant customers or otherwise. In addition, MXL
      is
      dependant on the availability and pricing of plastic resin, principally
      polycarbonate, and Five Star is subject to the intense competition in the do-it
      -yourself industry.
  Because
      these forward-looking statements involve risks and uncertainties, there are
      important factors that could cause actual results to differ materially from
      those expressed or implied by these forward-looking statements, including,
      but
      not limited to, those factors set forth under “Risk Factors” in our Annual
      Report on Form 10-K for the year ended December 31,2006, as amended and those
      other risks and uncertainties detailed in other periodic reports and
      registration statements that we file with the SEC from time to time. We caution
      that these risk factors may not be exhaustive. We operate in a continually
      changing business environment, and new risk factors emerge from time to time.
      We
      cannot predict these new risk factors, nor can we assess the effect, if any,
      of
      the new risk factors on our business or the extent to which any factor or
      combination of factors may cause actual results to differ from those expressed
      or implied by these forward-looking statements.
  If
      any
      one or more of these expectations and assumptions proves incorrect, actual
      results will likely differ materially from those contemplated by the
      forward-looking statements. Even if all of the foregoing assumptions and
      expectations prove correct, actual results may still differ materially from
      those expressed in the forward-looking statements as a result of factors we
      may
      not anticipate or that may be beyond our control. While we cannot assess the
      future impact that any of these differences could have on our business,
      financial condition, results of operations and cash flows or the market price
      of
      shares of our common stock, the differences could be significant. We do not
      undertake to update any forward-looking statements made by us, whether as a
      result of new information, future events or otherwise. You are cautioned not
      to
      unduly rely on such forward-looking statements when evaluating the information
      presented in this report.
  24
 
 **General
      Overview**
  The
      Company was incorporated on March 10, 1998 as a wholly-owned subsidiary of
      GP
      Strategies Corporation.  On February 12, 2004, the Company was
      recapitalized whereby the authorized capital was changed to 10,000,000 shares
      of
      preferred stock and 30,000,000 shares of common stock.  On July 30,
      2004, GP Strategies transferred to the Company its optical plastics business
      through its wholly-owned subsidiary, MXL; the home improvement distribution
      business through its partially owned subsidiary Five Star; and certain other
      non-core assets.  The separation of these businesses was accomplished
      through a pro-rata distribution (the “Distribution” or “Spin-off”) of 100% of
      the outstanding common stock of the Company to the stockholders of GP Strategies
      on November 18, 2004, the record date for the Distribution.  On
      November 24, 2004, holders of record received one share of the Company’s common
      stock for each share of GP Strategies common stock or Class B capital stock
      owned.
 
 The
      Company operates in two segments: MXL and Five Star.  The Company also
      owns certain other non-core assets, including an investment in a publicly held
      company, Millennium Cell and certain real estate in Pawling, NY and Killingly,
      CT.  The Company monitors Millennium Cell for progress in the
      commercialization of Millennium Cell’s emerging technology and monitors Indevus
      for progress in achieving certain milestones and their marketing
      efforts.  In the quarter and nine months ended September 30, 2007 the
      Company sold 2,347,518 and 2,639,482 shares, respectively of Indevus stock
      (see
      Note 9 to the Condensed Consolidated Financial Statements), which represents
      all
      of the shares of Indevus common stock held by the Company in the nine months
      ended September 30, 2007.   The Company may receive two
      contingent tranches of Indevus common stock, to the extent certain milestones
      with respect to specific product candidates are achieved. If each of the
      contingent milestone is achieved, the Company will receive $2,070,670 and
      $3,106,005, respectively, worth of Indevus common stock on the date each
      milestone is met, at which date additional gain will be recognized (see Note
      9
      to the Condensed Consolidated Financial Statements).
  **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.
  25
  MXL’s
        manufactures and sells its products to various commercial and government
        customers, who utilize MXL’s parts to manufacture products that will be
        ultimately delivered to the end-user.  MXL’s government customers
        include various offices of the Department of Defense, while MXL’s commercial
        customers are primarily in the recreation, safety, and security industries.
        Some
        of MXL’s consumer based products are considered to be at the high-end of their
        respective markets.   As a result, sales of MXL’s products may
        decline together with a decline in discretionary consumer spending; therefore
        a
        key performance indicator that the Company’s management uses to manage the
        business is the level of discretionary spending in key markets, specifically
        the
        United States and Japan.  Other key performance measures used by the
        Company’s management to run the business include:
  ·
            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.
  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.
  **Five
      Star Overview**
  Five
      Star
      is a publicly held company that is a distributor in the United States of home
      decorating, hardware, and finishing products.  Five Star offers
      products from leading manufacturers in the home improvement industry and
      distributes those products to retail dealers, which include lumber yards, “do-it
      yourself” centers, hardware stores and paint stores.  Five Star has
      grown to be one of the largest independent distributors in the Northeast United
      States by providing a complete line of competitively priced products, timely
      delivery and attractive pricing and financing terms to its
      customers.
 
 The
      following key factors affect Five
      Star’s financial and operational 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,
  26
  ·
            sales
                of existing homes,
  ·
            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.  Five Star faces intense
      competition from large national distributors, smaller regional distributors, and
      manufacturers that bypass the distributor and sell directly to the retail
      outlet.  The principal means of competition for Five Star are its
      strategically placed distribution centers and its extensive inventory of
      quality, name-brand products.  In addition, Five Star’s customers face
      stiff competition from Home Depot and Lowe’s, which purchase directly from
      manufacturers. Management of Five Star believes that, the independent retailers
      that are Five Star’s customers remain a viable alternative to Home Depot and
      Lowe’s, due to the shopping preferences of and the retailer’s geographic
      convenience for some consumers.
  On
      April
      5, 2007, Five Star acquired substantially all the assets (except "Excluded
      Assets" as defined) and assumed the Assumed Liabilities (as defined) of
      Right-Way Dealer Warehouse, Inc. ("Right-Way") pursuant to the terms of a
      definitive asset purchase agreement, dated as of March 13, 2007 (the
      "Agreement"), with Right-Way for approximately $3,200,000 in cash and the
      assumption of liabilities in the approximate amount of $50,000. The assets
      consisted primarily of approximately $1,186,000 of accounts receivable at fair
      value and approximately $2,213,000 of inventory at fair value. The acquisition
      included all of Right-Way's Brooklyn Cash & Carry business and operations
      which sells paint sundry and hardware supplies to local retail
      stores.
  Upon
      closing of the transaction, Five Star leased a warehouse at which the Brooklyn
      Cash & Carry business is conducted from an affiliate of the principal of
      Right-Way, with an option to purchase the warehouse, and a wholly-owned
      subsidiary of Five Star also entered into an employment agreement with Ronald
      Kampner, the principal of Right-Way to serve as Senior Vice President of Sales
      for Five Star Group.  The employment agreement provides for a
      three-year term (subject to earlier termination), the payment of a base salary
      of $200,000 per annum, and cash incentive compensation as described in the
      employment agreement. In addition, Mr. Kampner was granted an option for 200,000
      shares of Five Star Products, Inc. common stock under the 2007 Five Star Plan,
      which is subject to the approval of stockholders of Five Star. The options
      will
      vest if Five Star meets certain EBITDA targets over the next three years
      provided that Mr. Kampner continues to be employed by Five Star
      Group.
  To
      further expand, Five Star is considering strategies intended to grow its revenue
      base in the Northeast and Mid-Atlantic States through internal initiatives
      and
      to acquire complementary distributors outside its current geographic
      area.  There is no assurance that these growth plans can be executed
      and, if executed, will be successful from an operational or financial
      standpoint.  These plans could require capital in excess of the funds
      presently available to Five Star.
  27
  **Operating
      Highlights**
  ***Three
      months ended September 30, 2007 compared to the three months ended September
      30,
      2006***
 
 For
      the
      three months ended September 30, 2007, the Company had a loss before income
      tax
      expense and minority interest of $973,000 compared to a loss before income
      tax
      expense and minority interest of $30,000 for the three months ended September
      30, 2006.  The increased loss is primarily a result of the $710,000
      loss recognized on the sale of Indevus shares, an impairment charge of $266,000
      related to the Company’s investment in Millenium Cell , offset by significantly
      improved operating profits at Five Star, which increased by $518,000, as well
      as
      marginally increased profitability at MXL.  In addition, the Company
      had increased general and administrative expenses at the corporate level by
      $240,000.
 
 **Sales**
 
 **Three
                months**
              **ended
                September 30,****2007**
            
            
            2006Five
                Star
            
            **$**
            **32,939,000**
            
            
            $
            27,666,000MXL
            
            ****
            **2,266,000**
            
            
            
            2,459,000**$**
            **35,205,000**
            
            
            $
            30,125,000
 
 The
      increase in Five Star sales of $5,273,000 or 19%  for the three months
      ended September 30, 2007 as compared to the three months ended September 30,
      2006 was the result of $1,556,000 of sales attributed to the Right-Way Brooklyn
      Cash and Carry facility, as well as an overall increase in business within
      the
      Connecticut and New Jersey-New York regions due to the increase in business
      from
      Right-Way’s customer base as well as an overall increase in business from the
      traditional customer base for such period.
 
 The
      decrease in MXL sales of $193,000 to $2,266,000 for the third quarter of 2007
      from $2,459,000 for the third quarter of 2006 was a result of reduction in
      tool
      sales and sales to motor sport customers for the 2007 period.
  **Gross
      margin**
 
 **Three
                months ended****September
                30,****2007**
            
            
            **%**
            
            
            2006
            
            
            %Five
                Star
            
            **$**
            **5,984,000**
            
            
            ****
            **18.2**
            
            
            $
            4,284,000
            
            
            
            15.5MXL
            
            ****
            **530,000**
            
            
            ****
            **23.4**
            
            
            
            576,000
            
            
            
            23.4**$**
            **6,514,000**
            
            
            ****
            **18.5**
            
            
            $
            4,860,000
            
            
            
            16.1
 
 28
  Five
      Star’s gross margin of $5,984,000, or 18.2% of net sales, for the quarter ended
      September 30, 2007 increased by $1,700,000 when compared to $4,284,000, or
      15.5%
      of net sales, for the quarter ended September 30, 2006. The increase in gross
      margin and gross margin percentage for the quarter ended September 30, 2007
      was
      a result of  increased sales and increased vendor allowances
      recognized during the period related to estimated purchase volume for the year,
      which was partially offset by reduced margins earned on the sale of Cabot
      exterior stain products in the period.
 
 MXL’s
      gross margin of $530,000, or 23.4% of sales, for the quarter ended September
      30,
      2007 decreased by $46,000 when compared to gross profit of $576,000, or 23.4%
      of
      sales, for the quarter ended September 30, 2006, as a result of reduced
      sales.
 
 **Selling,
      general, and administrative expenses**
 
 For
      the
      three months ended September 30, 2007, selling, general and administrative
      expenses increased by $1,397,000 from $4,679,000 for the three months ended
      September 30, 2007 to $6,076,000 for the three months ended September 30, 2007
      partially due to the following;  (i) increased general and
      administrative expenses of $240,000 at the corporate level primarily due to
      increased professional fees and personnel expenses, and (ii) increased selling,
      general and administrative expenses at Five Star of  $1,128,000
      primarily attributable to the following: (a) increased delivery expense and
      sales commissions due to increased sales, (b) increased general and
      administrative expenses primarily related to the acquisition of Right-Way,
      (c)
      increased professional fees, and (d) partially offset by increased vendor
      marketing allowances recognized in the periods. The Company expects that
      selling, general and administrative expenses at the parent company level will
      remain relatively constant at the increased level through out the remainder
      of
      2007 based upon the current operations of the Company.
 
 **Investment
      and other income, net**
 
 The
      Company recognized net Investment and other income (loss) of $(963,000) for
      the
      three months ended September 30, 2007, compared to $180,000 for the three months
      ended September 30, 2006.  Investment and other income, net includes
      interest income, investment income, and recognition of a gain or loss for the
      change in the fair value of the Five Star’s interest rate collar.  The
      decrease of $1,143,000 is primarily attributable to the following; (i) a loss
      of
      $710,000 on the sale of 2,347,518 shares of Indevus stock, (ii) an impairment
      charge of $266,000 related to the Company’s investment in Millenium Cell, and
      (iii) the change in the fair value of Five Star’s interest rate collar offset by
      increased interest income.
 
 **Income
      taxes**
 
 For
      the
      three months ended September 30, 2007 and 2006, the Company recorded an income
      tax expense of $236,000 and $54,000, respectively, which represents the
      Company’s applicable federal, state and local tax expense for the
      periods.  The provision for income taxes differs from the tax computed
      at the federal statutory income tax rate due primarily to recording income
      tax
      expense on the income of Five Star, a 57% owned subsidiary,
      which is not included in the Company’s consolidated return.  A federal
      tax provision was not recorded with respect to the gain recognized for tax
      purposes on the sale of Indevus stock since it was offset by the Company’s net
      operating and capital loss carryforwards.
 
 29
  ***Nine
      months ended September 30, 2007 compared to the nine months ended September
      30,
      2006***
 
 For
      the
      nine months ended September 30, 2007, the Company had income before income
      tax
      expense and minority interest of $15,366,000 compared to income before income
      tax expense and minority interest of $103,000 for the nine months ended
      September 30, 2006.  The change to pre-tax income is primarily a
      result of the following: (i) a gain of $17,031,000 recognized on the exchange
      of
      Valera shares for Indevus shares (see Note 9 to the Condensed Consolidated
      Financial Statements),  (ii) increased segment operating income
      of $1,188,000 which is comprised of a $1,444,000 increase in operating income
      for Five Star and a $256,000 decrease in operating income for MXL, (iii) a
      loss
      of $1,023,000 on the sale of 2,639,482 shares of Indevus stock, (iv) an
      impairment charge of $266,000 related to the Company’s investment in Millenium
      Cell and (v) increased selling, general and administrative expenses at the
      corporate level of  $974,000.
  **Sales**
  **Nine
                months**
              **ended
                September 30,****2007**
            
            
            2006Five
                Star
            
            **$**
            **98,726,000**
            
            
            $
            85,556,000MXL
            
            ****
            **6,544,000**
            
            
            
            6,935,000**$**
            **105,270,000**
            
            
            $
            92,491,000
 
 The
      increase in Five Star sales of $13,170,000 for the nine months ended September
      30, 2007, as compared to the nine months ended September 30, 2006 was primarily
      the result of $2,996,000 of sales attributed to the Right-Way Brooklyn Cash
      and
      Carry facility in the 2007 period, as well as an overall increase in business
      within the Connecticut and New Jersey-New York regions due to the increase
      in
      business from Right-Way’s customer base as well as its traditional customer base
      for such period.
 
 The
      decrease in MXL sales of $391,000 to $6,544,000 for the nine months ended
      September 30, 2007 from $6,935,000 for the nine months ended September 30,
      2006
      was primarily a result of reductions in tool sales and sales to motor sport
      customers.
  30
  **Gross
      margin**
 
 **Nine
                months ended****September
                30,****2007**
            
            
            **%**
            
            
            2006
            
            
            %Five
                Star
            
            **$**
            **16,968,000**
            
            
            ****
            **17.2**
            
            
            $
            13,804,000
            
            
            
            16.1MXL
            
            ****
            **1,426,000**
            
            
            ****
            **21.8**
            
            
            
            1,803,000
            
            
            
            26.0**$**
            **18,394,000**
            
            
            ****
            **16.9**
            
            
            $
            15,607,000
            
            
            
            16.9
 
 Five
      Star’s gross margin of $16,968,000, or 17.2% of net sales, for the nine months
      ended September 30, 2006 increased by $3,164,000 when compared to $13,804,000,
      or 16.1% of net sales, for the nine months ended September 30, 2006. The
      increase in gross margin dollars for the nine months ended September 30, 2007
      was a direct result of increased sales and the increased gross margin
      percentage. The increase in gross margin percentage for the nine months ended
      September 30, 2007 was due to increased vendor allowances recognized during
      the
      period related to estimated purchase volume for the year, which was partially
      offset by reduced margins earned on the sale of Cabot exterior stain products
      in
      pervious months.
 
 MXL’s
      gross margin of $1,426,000 or 21.8% of sales, for the nine months ended
      September 30, 2007 decreased by $377,000 when compared to gross margin of
      $1,803,000, or 26% of sales, for the nine months ended September 30, 2006,
      mainly due to the following changes in results in the 2007 period as compared
      to
      the 2006 period: (i) reduced margin dollars of approximately $170,000 and
      reduced gross margin percentage due to the completion of the closing of the
      Illinois facility during the quarter ended June 30, 2007; (ii) reduced gross
      margin percentage due to change in product mix, and (iii) increased costs for
      the labor and the related benefits.
 
 **Selling,
      general, and administrative expenses**
 
 For
      the
      nine months ended September 30, 2007, selling, general and administrative
      expenses increased by $2,573,000 from $14,474,000 for the nine months ended
      September 30, 2006 to $17,047,000 for the nine months ended September 30, 2007
      due to the following; (i) increased selling, general and administrative expenses
      at Five Star of $1,572,000 for the nine months ended September 30,
      2007  due to (a) increased delivery expense and sales commissions as a
      result of increased sales, (b) increased general and administrative expenses
      primarily related to the acquisition of Right-Way and (c) increased professional
      fees, (d) partially offset by increased vendor marketing allowances recognized
      in the periods, and (ii) increased general and administrative expenses at the
      corporate level of $974,000 primarily due to increased professional fees and
      personnel related costs.  The Company expects that selling, general
      and administrative expenses at the parent company level will remain relatively
      constant at the increased level through out the remainder of 2007 based upon
      the
      current operations of the Company.
  31
  **Gain
      on exchange of Valera shares for Indevus shares**
 
 For
      the
      nine months ended September 30, 2007 the Company recognized a gain of
      $17,031,000 as a result of the merger of Valera Pharmaceuticals, Inc., in which
      the Company
      had an approximately 14% interest and Indevus Pharmaceuticals, Inc., in which
      the Company obtained an approximate 3% interest as a result of the merger.
      The
      gain includes the receipt of the first of three contingent tranches of
      consideration, which was valued at $2,070,000 received in May 2007. The Company
      continues to hold contingent stock rights for certain products in development
      by
      Indevus that will become convertible into shares of Indevus common stock to
      the
      extent specific milestones with respect to each product are achieved.  If
      all milestones are achieved, the Company will receive $2,070,670 and $3,106,005,
      respectively, worth of shares of Indevus common stock upon conversion of such
      contingent stock rights. The Merger Agreement between Valera and Indevus was
      treated as a tax free merger under Internal Revenue Code Section
      368.
  **Investment
      and other income (loss), net.**
 
 National
      Patent Development recognized Investment and other income (loss) of ($1,732,000)
      for the nine months ended September 30, 2007 as compared to a loss of ($2,000)
      for the nine months ended September 30, 2006.  The decreased
      Investment and other income (loss) is mainly due to the following; (i) the
      realized profit of $680,000 which was paid to related parties upon sale of
      all
      the Company’s Indevus shares in 2007, (ii) a loss of $1,023,,000 on the sale of
      2,639,482 shares of Indevus stock, and (iii) an impairment charge of $266,000
      related to the Company’s investment in Millenium Cell, partially offset by (iv)
      increased interest income for the nine months ended September 30, 2007. At
      September 30, 2007 the Company had sold all its shares of Indevus. The Company
      still has two additional contingent tranches of consideration (see Note
      9).
  **Income
      taxes**
 
 For
      the
      nine months ended September 30, 2007 and 2006, the Company recorded an income
      tax expense of $1,296,000, and $400,000, respectively, which represents the
      Company’s applicable federal, state and local tax expense for the
      periods.  The provision for income taxes differs from the tax computed
      at the federal statutory income tax rate primarily due to recording income
      tax
      expense on the income of Five Star, a 57% owned subsidiary, which is not
      included in the Company’s consolidated return, and state income taxes recorded
      on the sale of Indevus stock.  A federal tax provision was not
      recorded for the nine months ended September 30, 2007 with respect to the gain
      recognized on the exchange of Valera for Indevus shares or the subsequent gain
      recognized for tax purposes on the sale of Indevus shares since it was offset
      by
      the Company’s net operating and capital loss carryforwards.   The
      Company recorded a state income tax expense of $345,000 related to the Indevus
      transaction.
  **Financial
      condition**
 The
      increase in inventory, accounts receivables and accounts payable are the result
      of increases at Five Star as a result of the Right-Way cash and carry business
      acquired in the second quarter of 2007, as well as, increased sales volume
      and
      seasonal fluctuations.  At September 30, 2007, the Company had
      $17,026,000 of cash, which is primarily attributable to the net proceeds
      realized from the sales of Indevus shares.
  32
  **Liquidity
      and capital resources**
 
 At
      September 30, 2007, the Company had cash and cash equivalents of
      $17,026,000.  The Company believes that existing cash together with
      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.
 
 At
      September 30, 2007, the Company had $16,428,000 of cash at the corporate level,
      which is primarily attributable to the net proceeds realized from the sales
      of
      Indevus shares. In addition, Five Star is restricted from either
      up-streaming cash to or receiving cash from the Company under the terms of
      their
      Loan and Security Agreement. As of September 30, 2007, Five Star is permitted
      to
      pay dividends under the Loan Agreement in an orderly and regular manner and
      to the extent permitted by Delaware law.
  For
      the
      nine months ended September 30, 2007, the Company’s working capital increased by
      $13,039,000 to $25,221,000 from $12,182,000 as of December 31,
      2006.  The working capital increase was primarily a result of the
      increased cash and cash equivalents realized from the sale of Indevus common
      stock, as well as increased accounts receivable and inventory, partially offset
      by increased short term borrowings and accounts payables.
 
 The
      increase in cash and cash equivalents of $12,541,000 for the nine months ended
      September 30, 2007 resulted from the following: (i) net cash used in operations
      of $141,000, due primarily to an increase in inventory of  $1,092,000,
      an increase in accounts receivable of $4,544,000,  offset by an
      increase in accounts payable and accrued expenses of $5,853,000; (ii) net cash
      provided by investing activities of $13,383,000 consisting
      of  $17,598,000 of net proceeds from the sale of the Company’s shares
      of Indevus common stock, partially offset by $3,399,000 related to the purchase
      of substantially all the assets of Right-Way, as well as additions to
      property, plant and equipment of $1,035,000 partially offset by repayment of
      a
      receivable from GP Strategies of $325,000; and (iii) net cash used in financing
      activities of $701,000, resulting from purchases of treasury stock of
      $3,021,000, partially offset by proceeds of short term borrowings of $1,560,000
      and proceeds from long-term debt of $355,000 for such period.
 
 In
      2003,
      Five Star obtained a Loan and Security Agreement (the “Loan Agreement”) with
      Bank of America Business Capital (formerly Fleet Capital Corporation) (the
      “Lender”).  The Loan Agreement has a five-year term, with a maturity
      date of June 30, 2008.  The Loan Agreement, as amended in August 1,
      2005, provides for a $35,000,000 revolving credit facility, which allows Five
      Star to borrow based upon a formula of up to 65% of eligible inventory and
      85%
      of eligible accounts receivable, as defined therein.  The interest
      rates under the Loan Agreement consist of LIBOR plus a credit spread of 1.5%
      (6.88% at September 30, 2007) for borrowings not to exceed $15,000,000 and
      the
      prime rate (7.75% at September 30, 2007) 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, 2007 and December 31, 2006,
      approximately $19,339,000 and $17,664,000 was outstanding under the Loan
      Agreement and approximately $7,587,000 and $2,929,000 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, 2007 Five Star was in compliance with all required covenants.
      The following table sets forth the significant debt covenants at September
      30,
      2007:
  33
  **Covenant**
              **Required**
              **Calculated**Minimum
                  tangible net worth
              $6,000,000
              $9,605,000Debt
                  to tangible net worth
              <
                  6
              2.01Fixed
                  charge coverage
              >1.1
              2.10Quarterly
                  income
              No
                  loss in consecutive quarters
              $556,000-
                  second quarter income, $316,000 - 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, 2008 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 MXL’s Lancaster, PA
      property.  On November 27, 2006 the MXL Line was amended to a $900,000
      line of credit.  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, 2007, $625,000 was outstanding under the
      MXL Line and $275,000 was available to be borrowed.  The MXL Line
      contains certain financial covenants, most significant being a cash flow
      coverage ratio of 1.25 to 1.00, which is calculated at December 31 of each
      year.
      As of December 31, 2006, MXL was in compliance with its covenants.
 
 **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.
  34
 
 *Revenue
      recognition*
 
 Revenue
      on product sales is recognized at the point in time when the product has been
      shipped, title and risk of loss has been transferred to the customer, and the
      following conditions are met: persuasive evidence of an arrangement exists,
      the
      price is fixed and determinable, and collectibility of the resulting receivable
      is reasonably assured.  Allowances for estimated returns and
      allowances are recognized when sales are recorded.
 
 *Valuation
      of accounts receivable*
 
 Provisions
      for allowance for doubtful accounts are made based on historical loss experience
      adjusted for specific credit risks.  Measurement of such losses
      requires consideration of National Patent Development’s historical loss
      experience, judgments about customer credit risk, and the need to adjust for
      current economic conditions.  The allowance for doubtful accounts as a
      percentage of total gross trade receivables was
 2.9%
      and
      4.5% at September 30, 2007 and December 31, 2006, respectively.
 
 *Impairment
      of long-lived tangible assets*
 
 Impairment
      of long-lived tangible assets with finite lives results in a charge to
      operations whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable.  Recoverability of
      long-lived tangible assets to be held and used is measured by a comparison
      of
      the carrying amount of the asset to future undiscounted net cash flows expected
      to be generated by the asset.  If such assets are considered to be
      impaired, the impairment to be recognized is measured by determining the amount
      by which the carrying amount of the assets exceeds the fair value of the
      asset.  Assets to be disposed of are reported at the lower of their
      carrying amount or fair value less cost of sale.
 
 The
      measurement of the future net cash flows to be generated is subject to
      management’s reasonable expectations with respect to the Company’s future
      operations and future economic conditions which may affect those cash
      flows.
 
 As
      of
      September 30, 2007, the Company 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.
  35
  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.
 
 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.
 
 In
      June
      2006, the Financial Accounting Standards Board issued FASB Interpretation No.
      48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB
      Statement No. 109” (hereinafter “FIN 48”), which prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax
      return.  FIN 48 also provides guidance on de-recognition,
      classification, interest and penalties, accounting in interim periods,
      disclosure and transition.  FIN 48 is effective for fiscal years
      beginning after December 15, 2006.  The adoption of FIN 48 in the
      first quarter of 2007 did not have any effect on the
      consolidated financial statements.The
      Company files income tax returns in
      the U.S. federal jurisdiction and various state jurisdictions. The statute
      of
      limitations for assessment of federal, state & local income taxes by the
      taxing authorities is open for years 2004 to 2006.  36
  **Item
      3.                  Quantitative
      and Qualitative Disclosure About Market Risk**
 
 The
      Company has no material changes to the disclosure on this matter contained
      in
      our Annual Report on Form 10-K for the fiscal year ended December 31,
      2006.
 
 **Item
      4.                  Controls
      and Procedures**
 
 The
      Company’s Chief Executive Officer and Chief Financial Officer, with the
      assistance of other members of the Company’s management, have evaluated the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
      the Securities Exchange Act of 1934, as amended) as of the end of the period
      covered by this quarterly report.  Based upon such evaluation, the
      Company’s Chief Executive Officer and Chief Financial Officer have concluded
      that the Company’s disclosure controls and procedures are effective as of the
      end of the period covered by this quarterly report.
 
 The
      Company’s Chief Executive Officer and Chief Financial Officer have also
      concluded that there was no change in the Company’s internal control over
      financial reporting (as such term is defined in Rule 13a-15(f) under the
      Securities Exchange Act of 1934, as amended) that occurred during the quarter
      ended September 30, 2007 that has materially affected, or is reasonably likely
      to materially affect, the Company’s internal control over financial
      reporting.
     37
 
 **PART
      II - OTHER INFORMATION**
  **Item
      2.                      Unregistered
      Sales of Equity Securities and Use of Proceeds**
 
 ***Issuer
      Issuances of Equity Securities***
 
 On
      July
      16, 2007, the Company issued without registration under the Securities Act
      of
      1933, as amended (the “Securities Act”), to each of Lawrence G. Schafran and
      Talton R. Embry, each of whom is a director of the Company, 447 shares of
      Company common stock in payment of their quarterly directors
      fees.  The aggregate value of the 894 shares of common stock issued to
      Messrs. Schafran and Embry was approximately $2,500 on the date of
      issuance.  These shares were issued pursuant to exemptions from
      registration set forth in Section 4(2) of the Securities Act and Regulation
      D
      promulgated thereunder.
 
 This
      issuance qualified for exemption from registration under the Securities Act
      because (i) each of Messrs. Schafran and Embry is an accredited investor, (ii)
      the Company did not engage in any general solicitation or advertising in
      connection with the issuance, and (iii) Messrs. Schafran and Embry received
      restricted securities.
 
 On
      December 15, 2006, the Company Board of Directors authorized the Company to
      repurchase up to 2,000,000 shares, or approximately 11%, of its outstanding
      shares of common stock on that date, from time to time either in open market
      or
      privately negotiated transactions. The Company undertook this repurchase program
      in an effort to increase shareholder value.  The following table
      provides common stock repurchases made by or on behalf of the Company during
      the
      third quarter ended September 30, 2007.
  **Issuer
      Purchases of Equity Securities (1)**
 **Period**
            
            **Total
                Number of Shares Purchased**
            
            
            **Average
                Price**
              **Paid
                Per Share**
            
            
            **Total
                Number of Shares**
              **Purchased
                As**
              **Part
                of PubliclyAnnouncedPlan or Program**
            
            
            **Maximum
                Number of Shares**
              **That
                May**
              **Yet
                be Purchased Under the Plan or
                Program**Beginning
            EndingJuly
                1, 2007
            July
                31, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,807,550August
                1, 2007
            August
                31, 2007
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,807,550September
                1, 2007
            September
                30, 2007
            
            
            1,231,275
            
            
            $
            2.27
            
            
            
            1,423,725
            
            
            
            576,275Total
            
            
            1,231,275
            
            
            $
            2.27
            
            
            
            1,423,725
            
            
            
            576,275
 _________________
 (1)
            The
                Company’s common stock repurchase program covers a maximum of 2,000,000
                shares of common stock of the Company, representing 11% of the outstanding
                common stock of the Company on December 15,
                2006.
  38
 
 **Item
              6.**
            **Exhibits**Exhibit
                No.
            
            Description10.1
            *
            Stock
                Option Agreement dated as of July 30, 2007 between the Company and
                Ira J.
                Sobotko10.2
            *
            Stock
                Option Agreement dated as of July 17, 2007 between Five Star Products,
                Inc. and Ira J. Sobotko31.1
            *
            Certification
                of principal executive officer of the Company, pursuant to Securities
                Exchange Act Rule 13a-14(a)31.2
            *
            Certification
                of principal financial officer of the Company, pursuant to Securities
                Exchange Act Rule 13a-14(a)32.1
            *
            Certifications
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                The Sarbanes-Oxley Act of 2002, signed by the principal executive
                officer of the Company and the principal financial officer of the
                Company
 
 *
      Filed
      herewith
 
  39
  **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:
                November 14,
                2007
            /s/HARVEY
                P. EISENName:
            Harvey
              P. EisenTitle:
            Chairman
              of the Board andChief
              Executive
              Officer  DATE:
                  November 14, 2007
              /s/
                  IRA J. SOBOTKOName:
              Ira
                J. SobotkoTitle:
              Vice
                President, Finance
 40