**k**
 **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 June 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  No o
 
 Indicate
          by check mark whether the registrant is a large accelerated filer, an
          accelerated filer, or a non-accelerated filer. See definition of accelerated
          filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
          one):
  Large
          accelerated filer  o  Accelerated
          filer  o 
Non-accelerated
          filer  x
  Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange Act). Yes o No  x
 As
      of
      August 10, 2007, there were 17,884,969 shares of the registrant’s common stock,
      $0.01 par value, outstanding.
  
 **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 six months endedJune 30, 2007 and 2006 (unaudited)
              1Condensed
                  Consolidated Statements of Comprehensive Loss-Three months and six months endedJune 30, 2007 and 2006 (unaudited)
              2Condensed
                  Consolidated Balance Sheets -June 30, 2007 (unaudited) and December 31, 2006
              3Condensed
                  Consolidated Statements of Cash Flows -Six months ended June 30, 2007 and 2006 (unaudited)
              4Notes
                  to Condensed Consolidated Financial Statements
              5Item
                  2.
              Management's
                  Discussion and Analysis of FinancialCondition and Results of Operations
              21Item
                  3.
              Quantitative
                  and Qualitative Disclosure about Market Risk
              34Item
                  4.
              Controls
                  and Procedures
              
              34Part
                  II. Other InformationItem
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              35Item
                  6.
              Exhibits
              
              35Signatures
              
              36
  
  **PART
      I.  FINANCIAL INFORMATION**
 **Item
      1. Financial Statements**
 
 **NATIONAL
      PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(unaudited)**
 **(in
      thousands, except per share data)**
 
 **Three
                months ended**
            
            
            **Six
                months ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006Sales
            
            **$**
            **38,134**
            
            
            $
            31,161
            
            
            **$**
            **70,065**
            
            
            $
            62,366Cost
                of sales
            
            ****
            **31,344**
            
            
            
            25,627
            
            
            ****
            **58,185**
            
            
            
            51,619Gross
                margin
            
            ****
            **6,790**
            
            
            
            5,534
            
            
            ****
            **11,880**
            
            
            
            10,747Selling,
                general and administrative
              expenses
            
            ****
            **(6,269**
            **)**
            
            
            (5,073
            )
            
            ****
            **(10,971**
            **)**
            
            
            (9,795
            )Operating  profit
            
            ****
            **521**
            
            
            
            461
            
            
            ****
            **909**
            
            
            
            952Interest
                expense
            
            ****
            **(506**
            **)**
            
            
            (464
            )
            
            ****
            **(832**
            **)**
            
            
            (843
            )Gain
                on exchange of Valera forIndevus shares
            
            ****
            **17,031**
            
            
            
            
            
            
            ****
            **17,031**Investment
                and other income (loss)
            
            ****
            **(835**
            **)**
            
            
            55
            
            
            ****
            **(769**
            **)**
            
            
            (182
            )Income
                (loss) before income taxexpense and  minority
                interest
            
            ****
            **16,211**
            
            
            
            52
            
            
            ****
            **16,339**
            
            
            
            (73
            )Income
                tax expense
            
            ****
            **(355**
            **)**
            
            
            (125
            )
            
            ****
            **(715**
            **)**
            
            
            (346
            )Income
                (loss)  before minority interest
            
            ****
            **15,856**
            
            
            
            (73
            )
            
            ****
            **15,624**
            
            
            
            (419
            )Minority
                interest
            
            ****
            **(241**
            **)**
            
            
            (45
            )
            
            ****
            **(436**
            **)**
            
            
            (136
            )Net
                income (loss)
            
            **$**
            **15,615**
            
            
            $
            (118
            )
            
            **$**
            **15,188**
            
            
            $
            (555
            )Net
                income (loss) per shareBasic
            
            **$**
            **0.87**
            
            
            $
            (0.01
            )
            
            $
            **0.85**
            
            
            $
            (0.03
            )Diluted
            
            **$**
            **0.87**
            
            
            $
            (0.01
            )
            
            **$**
            **0.85**
            
            
            $
            (0.03
            )
 
 
 See
      accompanying notes to condensed consolidated financial
      statements.
  1
  **NATIONAL
      PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
      CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS**
 **(unaudited)**
 **(in
      thousands)**
 
 **Three
                months ended**
            
            
            **Six
                months ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006Net
                income (loss)
            
            **$**
            **15,615**
            
            
            $
            (118
            )
            
            **$**
            **15,188**
            
            
            $
            (555
            )Other
                comprehensive income (loss), before tax:Net
                unrealized gain (loss) onavailable-for-sale-securities
                (a)
            
            ****
            **(796**
            **)**
            
            
            286
            
            
            ****
            **(618**
            **)**
            
            
            4,582Reclassification
                adjustmentprincipally for gain on exchange ofValera securities
                recognized inmerger included in net income
            
            ****
            **(4,614**
            **)**
            
            
            -
            
            
            ****
            **(4,614**
            **)**
            
            
            -Net
                unrealized gain (loss) on interest rate swap,
              net
                of minority interest
            
            ****
            **2**
            
            
            
            21
            
            
            ****
            **(46**
            **)**
            
            
            66Comprehensive
                income before tax
            
            ****
            **10,207**
            
            
            
            189
            
            
            ****
            **9,910**
            
            
            
            4,093Income
                tax (expense) benefitrelated to items of othercomprehensive income
                (loss)
            
            ****
            **3**
            
            
            
            (8
            )
            
            ****
            **18**
            
            
            
            (26
            )Comprehensive
                income
            
            **$**
            **10,210**
            
            
            $
            181
            
            
            **$**
            **9,928**
            
            
            $
            4,067
  (a)  Includes
      gains of $65 for the three months ended June 30, 2007 and $231 for the six
      months ended June 30, 2007 of Valera to date of merger and loss of $763 for
      the
      three and six months ended June 30, 2007 of Indevus from date of
      merger.
  See
      accompanying notes to condensed consolidated financial
      statements.
  2
  **NATIONAL
      PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
      CONSOLIDATED BALANCE SHEETS**
 **(in
      thousands)**
 **June
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006****Assets**
            
            **(unaudited)****Current
                assets**Cash
                and cash equivalents
            
            **$**
            **4,062**
            
            
            $
            4,485Accounts
                receivable, less allowancefor
                doubtful accounts of  $497 and $566
            
            ****
            **22,974**
            
            
            
            11,939Receivable
                from GP Strategies Corporation
            
            
            
            
            
            
            251Inventories
            
            ****
            **27,655**
            
            
            
            22,535Prepaid
                expenses and other current assets
            
            ****
            **500**
            
            
            
            724Investment
                in marketable securities of Indevus, available for sale
            
            ****
            **15,799**Deferred
                tax asset
            
            ****
            **597**
            
            
            
            791**Total
                current assets**
            
            ****
            **71,587**
            
            
            
            40,725Property,
                plant and equipment, net
            
            ****
            **3,406**
            
            
            
            2,925Investment
                in Valera including available for sale securities of
                $4,823
            
            
            
            
            
            
            5,995Other
                marketable securities available for sale
            
            ****
            **244**
            
            
            
            343Deferred
                tax asset
            
            ****
            **193**Other
                assets
            
            ****
            **3,847**
            
            
            
            3,286**Total
                assets**
            
            **$**
            **79,277**
            
            
            $
            53,234**Liabilities
                and stockholder’s equity****Current
                liabilities**Current
                maturities of long-term debt
            
            **$**
            **257**
            
            
            $
            151Short
                term borrowings
            
            ****
            **25,012**
            
            
            
            18,414Accounts
                payable and accrued expenses
            
            ****
            **17,883**
            
            
            
            9,978Payable
                to GP Strategies Corporation
            
            ****
            **74****Total
                current liabilities**
            
            ****
            **43,226**
            
            
            
            28,543Long-term
                debt less current maturities
            
            ****
            **1,570**
            
            
            
            1,332Deferred
                tax liability
            
            ****
            **279**
            
            
            
            279Other
                liabilities
            
            ****
            **1**
            
            
            
            247Minority
                interest
              Common
                stock subject to exchange rights
            
            ****
            **2,770**
              **477**
            
            
            
            1,696**Stockholder’s
                equity**Common
                Stock
            
            ****
            **180**
            
            
            
            178Additional
                paid-in capital
            
            ****
            **26,097**
            
            
            
            25,990Retained
                earnings (deficit)
            
            ****
            **6,011**
            
            
            
            (9,177
            )Accumulated
                other comprehensive (loss) income
            
            ****
            **(926**
            **)**
            
            
            4,334Treasury
                stock
            
            ****
            **(408**
            **)**
            
            
            (188
            )**Total
                stockholder’s equity**
            
            ****
            **30,954**
            
            
            
            21,137**Total
                liabilities and stockholder’s equity**
            
            **$**
            **79,277**
            
            
            $
            53,234
  See
      accompanying notes to condensed consolidated financial
      statements.
  3
  **NATIONAL
      PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(unaudited)**
 **(in
      thousands)**
 
 **Six
                months ended****June
                30,****2007**
            
            
            2006**Cash
                flows from operations:**Net
                income (loss)
            
            **$**
            **15,188**
            
            
            $
            (555
            )Adjustments
                to reconcile net income (loss) tonet
                cash used in operating activities:Depreciation
                and amortization
            
            ****
            **368**
            
            
            
            388Minority
                interest
            
            ****
            **436**
            
            
            
            136Expenses
                paid in common stock
            
            ****
            **31**
            
            
            
            44Deferred
                income taxes
            
            ****
            **-**
            
            
            
            (7
            )Stock
                based compensation
            
            ****
            **248**Gain
                on issuance of stock by subsidiary
            
            
            **(1**
            **)**Gain
                on exchange of Valera for Indevus shares
            
            ****
            **(17,031**
            **)**Loss
                on sales of Indevus shares
            
            ****
            **236**Changes
                in other operating items, net of effect of  acquisition of
                Right-Way
            
            ****
            **(3,071**
            **)**
            
            
            (3,152
            )**Net
                cash used in operations**
            
            ****
            **(3,596**
            **)**
            
            
            (3,146
            )**Cash
                flows from investing activities:**Additions
                to property, plant and equipment, net
            
            ****
            **(849**
            **)**
            
            
            (297
            )Acquisition
                of additional interest in Five Star
            
            ****
            **(106**
            **)**Acquisition
                of Right-Way by Five Star
            
            ****
            **(3,399**
            **)**Repayment
                of receivable from GP Strategies
            
            ****
            **325**
            
            
            
            417**Net
                cash  (used in) provided by investing
                activities**
            
            ****
            **(4,029**
            **)**
            
            
            120**Cash
                flows from financing activities:**Proceeds
                from sale of common stock
            
            ****
            **480**Purchase
                of treasury stock
            
            ****
            **(220**
            **)**Proceeds
                from short-term borrowings
            
            ****
            **6,598**
            
            
            
            2,773Proceeds
                from (repayment of) long-term debt, net
            
            ****
            **344**
            
            
            
            (179
            )**Net
                cash provided by financing activities**
            
            ****
            **7,202**
            
            
            
            2,594Net
                decrease in cash and cash equivalents
            
            ****
            **(423**
            **)**
            
            
            (432
            )Cash
                and cash equivalents at beginning of period
            
            ****
            **4,485**
            
            
            
            5,115**Cash
                and cash equivalents at end of period**
            
            **$**
            **4,062**
            
            
            $
            4,683**Cash
                paid for:****Interest**
            
            **$**
            **897**
            
            
            $
            937**Taxes**
            
            **$**
            **18**
            
            
            $
            80**Non
                cash investing activities:**Acquisition
                of stock of Indevus in exchange for stock ofValera in a merger
                transaction
            
            **$**
            **14,960**
 
 See
      accompanying notes to the condensed consolidated financial
      statements.
  4
 **NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES** Notes
            to
            Condensed Consolidated Financial Statements Three
            and
            six months ended June 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 six months ended June 30, 2007 and 2006, the Condensed Consolidated
      Statements of Comprehensive Loss for the three months and six months ended
      June
      30, 2007 and 2006, the Condensed Consolidated Balance Sheet as of June 30,
      2007
      and the Condensed Consolidated Statements of Cash Flows for the six months
      ended
      June 30, 2007 and 2006 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 58% owned subsidiary, Five Star Products, Inc. (“Five Star”), is
      engaged in the wholesale distribution of home decorating, hardware and finishing
      products.  It serves over 3,000 independent retail dealers in the
      Northeast and Mid-Atlantic States. 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 13).
 
 *Revenue
      recognition.*  Revenue on product sales is recognized at the point
      in time when the product has been shipped, title and risk of loss has been
      transferred to the customer, and the following conditions are met: persuasive
      evidence of an arrangement exists, the price is fixed and determinable, and
      collectibility of the resulting receivable is reasonably
      assured.  Allowances for estimated returns and allowances are
      recognized when sales are recorded.
 
 *Shipping
      and handling costs.*Shipping and handling costs are included as
      a part of selling, general and administrative expense.   These
      cost amounted to $1,444,000, $2,743,000, $1,301,000 and $2,545,000, for the
      three months and six months ended June 30, 2007 and 2006,
      respectively.
  (Continued)
 5
 NATIONAL
          PATENT DEVELOPMENT CORPORATION AND
          SUBSIDIARIES Notes
            to
            Condensed Consolidated Financial Statements Three
            and
            six months ended June 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 six months ended June 30, 2007 the Company recognized a gain of $6,000
      and
      $5,000, respectively, and for the three and six months ended June 30, 2006
      the
      Company recognized a loss of $11,000 and $16,000, respectively, as part of
      other
      income, for the changes in the fair value of the interest rate
      collar.
 
 **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” (“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 afterDecember 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.  At June 30, 2007, the Company had
      repurchased 192,450 shares of its common stock for $408,000.
 (Continued)
 6
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 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 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 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 12(a) and (b)),
      of which 632,830 were granted under the terms of the 2003 Plan as presently
      approved by the Company’s shareholders 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)
 7
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  A
      summary
      of the Company’s stock option activity as of June 30, 2007, and changes during
      the six 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
            
            
            632,830
            
            
            $
            2.45ExercisedForfeited
                or expiredOutstanding
                at June 30, 2007
            
            
            632,830
            
            
            
            2.45
            
            
            
            3.3
            
            
            $
            221,000
            *Vested
                at June 30, 2007Exercisable
                at June 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.
  
 *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 shareholders 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 to
      4,000,000 shares reserved for issuance, subject to
      adjustment.  Options could be granted 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 are
      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 shareholders of Five Star.  Five Star expects to
      submit the 2007 Five Star Plan to its shareholders 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.
  (Continued)
 8
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  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.  Achievement of performance criteria was determined in
      probable in March 2007 and therefore compensation expense of $15,400 and
      $20,600 was recognized during the quarter and six months ended June 30,
      2007.
 
 On
      April
      5, 2007, in connection with an  employment agreement entered into
      with  the principal of Right-Way Dealer Warehouse, Inc. (see Note 13),
      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 for the three and
      six
      months ended June 30, 2007.
   (Continued)
 9
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  A
      summary
      of Five Star’s stock option activity as of June 30, 2007, and changes during the
      six 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
            
            
            450,000
            
            
            
            .47Exercised
            
            
            (50,000
            )
            
            
            .15
            
            
            
            
            
            $
            17,500
            *Forfeited
                or Expired
            
            
            (450,000
            )
            
            
            .16Outstanding
                at June 30, 2007
            
            
            1,000,000
            
            
            
            .42
            
            
            
            3.3
            
            
            
            219,000
            *Vested
                at June 30, 2007
            
            
            150,000
            
            
            
            .16
            
            
            
            .3Exercisable
                at June 30, 2007
            
            
            150,000
            
            
            
            .16
            
            
            
            .3
            
            
            
            72,500
            *
  *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 six month period ended June 30, 2007, 400,000 options outstanding as of
      January 1, 2006 were modified.
  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 $.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. In March
      2007, Five Star determined that achievement of the performance criteria was
      probable and therefore compensation expense of $31,000 and $42,000 was
      recognized during the quarter and six months ended June 30, 2007.
 (Continued)
 10
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  **5.           Per
      share data**
 
 Income
      (loss) per share for the three months and six months ended June 30, 2007 and
      2006 are calculated as follows (in thousands, except per share
      amounts):
  **Three
                  months ended**
              
              
              **Six
                  months ended****June
                  30,**
              
              
              **June
                  30,****2007**
              
              
              2006
              
              
              **2007**
              
              
              2006**Basic
                  EPS**Net
                  income (loss)
              
              **$**
              **15,615**
              
              
              $
              (118
              )
              
              **$**
              **15,188**
              
              
              $
              (555
              )Weighted
                  average sharesoutstanding
              
              ****
              **17,877**
              
              
              
              17,834
              
              
              ****
              **17,812**
              
              
              
              17,831Basic
                  earnings (loss) per share
              
              **$**
              **.87**
              
              
              $
              (.01
              )
              
              **$**
              **.85**
              
              
              $
              (.03
              )**Diluted
                EPS**Net
                  income (loss)
              
              **$**
              **15,615**
              
              
              $
              (118
              )
              
              **$**
              **15,188**
              
              
              $
              (555
              )Weighted
                  average
                shares
                  outstanding
              
              ****
              **17,877**
              
              
              
              17,834
              
              
              ****
              **17,811**
              
              
              
              17,831Dilutive
                  effect of stock options
              
              ****
              **67**
              
              
              
              
              
              
              ****
              **24**Diluted
                  weighted average shares outstanding
              
              ****
              **17,944**
              
              
              
              17,834
              
              
              ****
              **17,835**
              
              
              
              17,831Diluted
                  earnings (loss)
                per
                  share
              
              **$**
              **.87**
              
              
              $
              (.01
              )
              
              **$**
              **.85**
              
              
              $
              (.03
              )
 
 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 12(d))
      was
      anti-dilutive and accordingly did not effect such computation.
 (Continued)
 11
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  **6.           Long-term
      debt**
 
 *Long-term
      debt*
 
 Long-term
      debt is comprised of the following (in thousands):
 
 **June
                30,**
            
            
            **December
                31,****2007**
            
            
            **2006**MXL
                Pennsylvania Mortgage (a)
            
            **$**
            **1,055**
            
            
            $
            1,105MXL
                term loan (b)
            
            ****
            **772**
            
            
            
            377Capital
                lease obligations
            
            ****
            **-**
            
            
            
            1****
            **1,827**
            
            
            
            1,483Less
                current maturities
            
            ****
            **(257**
            **)**
            
            
            (151
            )**$**
            **1,570**
            
            
            $
            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.
 
 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 .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%
      (6.87% at June 30, 2007) for borrowings not to exceed $15,000,000 and the prime
      rate (8.25% at June 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 June 30, 2007 and December 31, 2006, approximately
      $24,262,000 and $17,664,000 was outstanding under the Loan Agreement and
      approximately $6,054,000 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 June
      30, 2007, Five Star was in compliance with all required
      covenants.
  (Continued)
 12
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 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 $241,000 and $320,000 at June 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 June 30, 2007 and December 31, 2006, $750,000 was
      outstanding under the MXL Line and $150,000 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)
 13
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  **8.           Inventories**
 
 Inventories
      are comprised of the following (in thousands):
 
 **June
                30, 2007**
            
            
            **December
                31, 2006**Raw
                materials
            
            **$**
            **420**
            
            
            $
            393Work
                in process
            
            ****
            **370**
            
            
            
            149Finished
                goods
            
            ****
            **26,865**
            
            
            
            21,993**$**
            **27,655**
            
            
            $
            22,535
 
 **9.           Investment
      in Indevus Pharmaceuticals, Inc.**
 
 Indevus
      Pharmaceuticals, Inc., a Delaware corporation ("Indevus"), is 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. The shares are
      currently restricted pursuant to Rule 145 of the Securities Act of 1933, as
      amended ("Rule 145"). Such restrictions will generally lapse one year following
      the Effective Time.  In April 2007, the Company recognized a pre-tax
      gain of $14,960,000 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) – that will become convertible into $1.00, $1.00
      and $1.50, respectively, worth of Indevus common stock to the extent 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. The restrictions of
      Rule 145 will generally lapse with respect to the Indevus shares prior to June
      30, 2008; accordingly, all the Indevus shares are classified as available
      for sale securities and measured at fair value with the changes in such value
      subsequent to the merger recorded in other comprehensive
      income.  During the quarter and six months ended June 30, 2007, the
      Company sold 291,964 shares of Indevus on the open market, for net proceeds
      of
      $1,822,000 (settled in July 2007) and realized a loss of $236,000 in Investment
      and other income (loss) in the three months ended June 30,
      2007.
  (Continued)
 14
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  
 At
      June
      30, 2007, two related parties, Bedford Oak Partners and Mr. Jerome I. Feldman,
      are entitled to receive 50% of any profit received from the sale on a pro-rata
      basis, of 423,492 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 stock. The unrealized gain on Indevus shares available for sale at
      June
      30, 2007 which would be payable to the related parties upon sale totaled
      $845,000, which is included in Accounts payable and accrued expenses at June
      30,
      2007. In addition $79,000 is payable in connection the Indevus shares sold
      subsequent to the merger which is included  in Accounts payable and
      accrued expenses at June 30, 2007.  The increase in the liability
      which was $587,000 and $603,000 for quarter and six months ended June 30, 2007,
      respectively, is included in Investment and other income (loss) in the Statement
      of Operations.
 
 The
      gain
      on exchange of Valera stock resulted from tax free reorganization and
      accordingly was not subject to current 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.  Accordingly, no provision
      for income tax is included in the accompanying Statement of Operations related
      to the gain on the exchange.
 
 **10.           Business
      segments**
 
 The
      operations of the Company currently consist of the following two business
      segments, by which the Company is managed.
 
 The
      MXL
      Segment manufactures precision coated and molded optical plastic products.
      MXL
      is a specialist in the manufacture of polycarbonate parts requiring adherence
      to
      strict optical quality specifications, and in the application of abrasion and
      fog resistant coatings to those parts.
 
 The
      Five
      Star Segment distributes paint sundry items, interior and exterior stains,
      brushes, rollers, caulking compounds and hardware products on a regional
      basis.
 
 (Continued)
 15
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  The
      following tables set forth the sales and operating income (loss) of each of
      the
      Company's operating segments (in thousands):
 
 **Three
                months ended**
            
            
            **Six
                months ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006**Sales**Five
                Star
            
            **$**
            **35,927**
            
            
            $
            28,938
            
            
            **$**
            **65,788**
            
            
            $
            57,890MXL
            
            ****
            **2,207**
            
            
            
            2,223
            
            
            ****
            **4,277**
            
            
            
            4,476**$**
            **38,134**
            
            
            $
            31,161
            
            
            **$**
            **70,065**
            
            
            $
            62,366
 
 
 **Three
                months ended**
            
            
            **Six
                months ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006**Segment
                operating income (loss)**Five
                Star
            
            **$**
            **1,419**
            
            
            $
            754
            
            
            **$**
            **2,557**
            
            
            $
            1,631MXL
            
            ****
            **86**
            
            
            
            137
            
            
            ****
            **(43**
            **)**
            
            
            231**$**
            **1,505**
            
            
            **$**
            891
            
            
            **$**
            **2,514**
            
            
            $
            1,862
 
 A
      reconciliation of the segment operating income (loss) to
      income  (loss) before income tax (expense) benefit and minority
      interests in the condensed consolidated statements of operations is shown below
      (in thousands):
 
 **Three
                months ended**
            
            
            **Six
                months ended****June
                30,**
            
            
            **June
                30,****2007**
            
            
            2006
            
            
            **2007**
            
            
            2006Segment
                operating income
            
            **$**
            **1,505**
            
            
            $
            891
            
            
            **$**
            **2,514**
            
            
            $
            1,862Corporate
                and other general and administrative expenses
            
            ****
            **(984**
            **)**
            
            
            (429
            )
            
            ****
            **(1,604**
            **)**
            
            
            (910
            )Interest
                expense
            
            ****
            **(506**
            **)**
            
            
            (465
            )
            
            ****
            **(832**
            **)**
            
            
            (843
            )Gain
                on merger of Valera
            
            
            **17,031**
            
            
            
            
            
            
            
            **17,031**Investment
                and other income (loss)
            
            ****
            **(835**
            **)**
            
            
            55
            
            
            ****
            **(769**
            **)**
            
            
            (182
            )Income
                (loss) before income taxexpense
                and minority interests
            
            **$**
            **16,211**
            
            
            **$**
            52
            
            
            **$**
            **16,339**
            
            
            **$**
            (73
            )
 (Continued)
 16
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  **11.           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.  Upon such sale, Bedford Oak Partners
      and Mr. Feldman are entitled to receive 50% of any amount in excess of $3.47
      per
      share which is received by the Company upon the sale of 423,492 shares of
      Indevus common stock, and 50% of the total proceeds from the sale of an
      additional 56,965 shares of Indevus stock (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 $135,000 and $218,000 for the
      quarters ended June 30, 2007 and 2006, respectively, and $335,000 and $434,000
      for the six months ended June 30, 2007 and 2006, respectively, representing
      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 12(a)). The Company is not, and does not
      anticipate, receiving any further material services during the remaining term
      of
      this agreement.
  (Continued)
 17
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
 
 **12.           Stockholders
      equity**
 
 Changes
      in Stockholders’ equity for the six months ended June 30, 2007, are as follows
      (in thousands):
 
 **Balance,
                January 1, 2007**
            
            $
            21,137Net
                income
            
            
            15,188Proceeds
                from sale of common stock
            
            
            480Reclassification
                adjustment principally for gain on exchange of Valera securities
                recognized in merger included in net income
            
            
            (4,614
            )Net
                unrealized gain (loss) on available-for-sale-securities
            
            
            (618
            )Expenses
                paid in common stock
            
            
            31Common
                stock subject to exchange rights
            
            
            (477
            )Purchases
                of treasury stock
            
            
            (220
            )Equity
                based compensation expense
            
            
            75Decrease
                in value of interest rate swap, net of tax
            
            
            (28
            )**Balance,
                June 30, 2007**
            
            $
            30,954
 
 The
      following transactions occurred during the six month period ended June 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 subject to shareholder
                approval.
   (Continued)
 18
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
  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.
  Mr.
      Belknap was granted 1,000,000 restricted shares of Five Star Common Stock (see
      Note 4). In addition, 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 annual installments, commencing
      on
      December 1, 2007.  At March 31, 2007, the Company recognized options
      to buy 218,760 shares as granted and recognized a charge of $ 20,000 and $26,000
      during the quarter and six months ended June 30, 2007,
      respectively.  Options to buy 181,240 shares subject to shareholder
      approval will be valued on the day such approval is obtained.
 
 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%.
  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-Scholes formula and recognized as
      compensation expense by Five Star over the three year term of the FS Agreement.
      In addition, as the exchange rights if exercised would require the Company
      to
      effectively surrender net assets to redeem common stock, the Company accounted
      for the issuance of the 200,000 shares 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.
   (Continued)
 19
 NATIONAL
      PATENT DEVELOPMENT CORPORATION AND
      SUBSIDIARIES Notes
        to
        Condensed Consolidated Financial Statements Three
        and
        six months ended June 30, 2007 and 2006 (unaudited)
   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.
 
 **13.           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.
  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 an option covering 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 the 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)
  **Six months
                ended June 30,**
            
            
            **Three
                months ended****2007**
            
            
            **2006**
            
            
            **June
                30, 2006**Sales
            
            $
            74,399
            
            
            $
            84,550
            
            
            $
            42,847Net
                income (loss)
            
            
            14,458
            
            
            
            (456
            )
            
            
            99Earnings
                (loss) per share, basic and diluted
            
            $
            .81
            
            
            $
            (.03
            )
            
            $
            .01
 
 (Continued)
 20
 
 **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
      Reports on Form 10-K 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.
   21
  **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; an approximately 3% interest in a publicly held
      company, Indevus Pharmaceuticals, Inc. (see Note 9 to the Condensed Consolidated
      Financial Statements); 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 ended June 30, 2007 the Company sold 291,964
      shares of Indevus stock and has continued to sell shares (445,000) in the
      subsequent period.
  **MXL
      Overview**
  The
      primary business of MXL is the manufacture of polycarbonate parts requiring
      adherence to strict optical quality specifications, and the application of
      abrasion and fog resistant coatings to those parts.  MXL also designs
      and constructs injection molds for a variety of applications.  Some of
      the products that MXL produces include:
  ·
            facemasks
                and shields for recreation purposes and industrial safety
                companies,
  ·
            precision
                optical systems, including medical optics, military eye wear and
                custom
                molded and decorated products, and
  ·
            tools,
                including optical injection mold tools and standard injection mold
                tools.
  MXL’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:
  22
  ·
            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,
  ·
            sales
                of existing homes,
  23
  ·
            purchases
                from each vendor, and
  ·
            performance
                benchmarks used by Home Depot and Lowe’s, such as number of stores and
                square footage, as well as financial
                benchmarks.
  Five
      Star
      operates in the Home Improvement market, which has grown in recent years and
      for
      which the National Retail Hardware Association predicts average annual
      industry growth of approximately 5.7% for the next several
      years.  Nonetheless, Five Star faces intense competition from large
      national distributors, smaller regional distributors, and manufacturers that
      bypass the distributor and sell directly to the retail outlet.  The
      principal means of competition for Five Star are its strategically placed
      distribution centers and its extensive inventory of quality, name-brand
      products.  In addition, Five Star’s customers face stiff competition
      from Home Depot and Lowe’s, which purchase directly from manufacturers.
      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 beyond the funds
      presently available to Five Star.
   24
  **Operating
      Highlights**
 
 ***Three
      months ended June 30, 2007 compared to the three months ended June 30,
      2006***
 
 For
      the
      three months ended June 30, 2007, the Company had income before income tax
      expense and minority interest of $16,211,000 compared to income before income
      tax expense and minority interest of $52,000 for the three months ended June
      30,
      2006.  The increase in pre-tax income is primarily the result of the
      following: (i) a net gain of $17,031,000 recognized on the merger of Valera
      and Indevus (see Note 9 to the Condensed Consolidated Financial Statements);
      (ii) increased  segment operating income of $614,000, which is
      comprised of a $665,000 increase in operating income for Five Star and a $51,000
      decrease in operating income for MXL; (iii) increased selling, general and
      administrative expenses at the corporate level of  $555,000; and (iv)
      a realized loss of $316,000 on the sale of 291,964 Indevus shares in June
      2007.
 
 **Sales**
 
 **Three
                months**
              **ended
                June 30,****2007**
            
            
            2006Five
                Star
            
            **$**
            **35,927,000**
            
            
            $
            28,938,000MXL
            
            ****
            **2,207,000**
            
            
            
            2,223,000**$**
            **38,134,000**
            
            
            $
            31,161,000
 
 The
      increase in Five Star sales of $6,989,000 was partially the result of $1,440,000
      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.
 
 **Gross
      margin**
 
 **Three
                months ended****June
                30,****2007**
            
            
            **%**
            
            
            2006
            
            
            %Five
                Star
            
            **$**
            **6,255,000**
            
            
            ****
            **17.4**
            
            
            $
            4,915,000
            
            
            
            17.0MXL
            
            ****
            **535,000**
            
            
            ****
            **24.2**
            
            
            
            619,000
            
            
            
            27.8**$**
            **6,790,000**
            
            
            ****
            **17.8**
            
            
            $
            5,534,000
            
            
            
            17.8
 
 Five
      Star’s gross margin of $6,255,000, or 17.4% of net sales, for the quarter ended
      June 30, 2007 increased by $1,340,000, when compared to $4,915,000, or 17%
      of
      net sales, for the quarter ended June 30, 2006. The increase in gross margin
      dollars for the quarter ended June 30, 2007 was a result of increased sales
      and
      the increased gross margin percentage.  The gross margin percentage
      increased due to increased vendor rebates earned in the period, partially offset
      by reduced margins earned on the sale of Cabot exterior stain
      products.
  25
  MXL’s
      gross margin of $535,000, or 24.2% of sales, for the quarter ended June 30,
      2005
      decreased by $84,000 when compared to gross profit of $619,000, or 27.8% of
      sales, for the quarter ended June 30, 2005, mainly due to the following: (i)
      reduced margin dollars 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 labor and the related benefits.
 
 **Selling,
      general, and administrative expenses**
 
 For
      the
      three months ended June 30, 2007, selling, general and administrative expenses
      increased by $1,197,000 from $5,073,000 for the three months ended June 30,
      2006
      to $6,269,000 partially due to the following: (i) increased general and
      administrative expenses of $555,000 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  $707,000
      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 corporate level will remain
      relatively constant through out the rest of 2007 based upon the current
      operations of the Company.
 
 **Gain
      on exchange of Valera for Indevus shares**
 
 For
      the
      quarter ended June 30, 2007 the Company recognized a gain of $17,031,000
      recognized 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 has an approximately 3% interest. The gain includes the
      receipt of the first of three contingent tranches of consideration, valued
      at
      $2,070,000 received in May 2007. 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**
 
 The
      Company recognized investment and other income (loss) of ($835,000) for the
      three months ended June 30, 2007, compared to $55,000 for the three months
      ended
      June 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
      loss is primarily attributable to a charge of $587,000 representing the
      unrealized profit which would be paid to related parties upon sale of Indevus
      available for sale shares in 2007, compared to a gain of $12,000 in 2006, as
      well as the change in the fair value of Five Star’s interest rate collar and the
      loss of $236,000 on the sale of approximately 11% (291,964 shares) of the
      Company’s Indevus common stock in June 2007.
  26
  **Income
      taxes**
 
 For
      the
      three months ended June 30, 2007 and 2006, the Company recorded an income tax
      expense of $355,000 and of $125,000, 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 58% owned subsidiary, which is not
      included in the Company’s consolidated return. The gain on exchange of Valera
      stock resulted from a tax free reorganization and accordingly was not
      subject to current 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.  Accordingly, no provision for income tax
      is included in the accompanying Statement of Operations related to the gain
      on
      the exchange.
 
 ***Six
      months ended June 30, 2007 compared to the six months ended June 30,
      2006***
 
 For
      the
      six months ended June 30, 2007 the Company had income before income tax expense
      and minority interest of $16,339,000 compared to a loss before income tax
      expense and minority interest of $73,000 for the six months ended June 30,
      2006.  The increase in pre-tax income is primarily a result of the
      following: (i) a net gain of $17,031,000 recognized on the merger
      of  Valera and Indevus (see Note 9 to the Condensed Consolidated
      Financial Statements); (ii) increased  segment operating income of
      $652,000 which is comprised of a $926,000 increase in operating income for
      Five
      Star and a $274,000 decrease in operating income (loss) for MXL; and (iii)
      increased selling , general and administrative expenses at the corporate level
      of  $694,000 and a realized loss of $316,000 on the sale of 291,964
      Indevus shares in June 2007.
 
 **Sales**
 
 **Six
                months ended**
              **June
                30,****2007**
            
            
            2006Five
                Star
            
            **$**
            **65,788,000**
            
            
            $
            57,890,000MXL
            
            ****
            **4,277,000**
            
            
            
            4,476,000**$**
            **70,065,000**
            
            
            $
            62,366,000
 
 The
      increase in Five Star sales of $7,898,000 was partially a result of $1,440,000
      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 Five Star’s traditional customer
      base.
  27
  The
      decrease in MXL sales of $199,000 was primarily a result of the commencement
      of
      the closing of MXL’s tooling facility in Illinois at the beginning of
      2007.  MXL decided to close the facility due to losses incurred at the
      facility and the decision to outsource its tooling operation. The facility
      closed in April 2007.
 
 **Gross
      margin**
 
 **Six
                months ended****June
                30,****2007**
            
            
            **%**
            
            
            2006
            
            
            %Five
                Star
            
            **$**
            **10,983,000**
            
            
            ****
            **16.7**
            
            
            $
            9,520,000
            
            
            ****
            16.4MXL
            
            ****
            **897,000**
            
            
            ****
            **21.0**
            
            
            ****
            1,227,000
            
            
            ****
            27.4**$**
            **11,880,000**
            
            
            ****
            **17.0**
            
            
            **$**
            10,747,000
            
            
            ****
            17.2
 
 Five
      Star’s gross margin of $10,983,000, or 16.7% of net sales, for the six months
      ended June 30, 2007 increased by $1,463,000 when compared to $9,520,000, or
      16.4% of net sales, for the six months ended June 30, 2006. The increased gross
      margin amount for the six months ended June 30, 2007 was primarily the result
      of
      increased sales and the increased gross margin percentage.  The gross
      margin percentage increased due to increased vendor rebates earned in the
      period, partially offset by reduced margins earned on the sale of Cabot exterior
      stain products.
 
 MXL’s
      gross margin of $897,000 or 21% of sales, for the six months ended June 30,
      2007
      decreased by $330,000 when compared to gross margin of $1,227,000, or 27.4%
      of
      sales, for the six months ended June 30, 2006, mainly due to the
      following:  (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; and (iii) increased
      costs for labor and the related benefits.
 
 **Selling,
      general, and administrative expenses**
 
 For
      the
      six months ended June 30, 2007, selling, general and administrative expenses
      increased by $1,176,000 from $9,795,000 for the six months ended June 30, 2006
      to $10,971,000 due to the following: (i) increased selling, general and
      administrative expenses at Five Star of $634,000 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 $694,000 primarily
      due to increased professional fees and personnel related costs.  The
      Company expects that selling, general and administrative expenses at the
      corporate level will remain relatively constant through out
      the rest 0f 2007 based upon the current operations of the
      Company.
 28
  **Gain
      on exchange of Valera for Indevus shares**
 
 For
      the
      six months ended June 30, 2007 the Company recognized a gain of $17,031,000
      recognized 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 has an approximately 3% interest. The gain includes the
      receipt of the first of three contingent tranches of consideration, valued
      at
      $2,070,000 received in May 2007. 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**
 
 The
      Company recognized investment and other income (loss) of ($769,000) for the
      six
      months ended June 30, 2007 as compared to a loss of ($182,000) the six months
      ended June 30, 2065. The change in 2007 is attributable to a $259,000 expense
      representing the unrealized profit which would be paid to related parties upon
      sale of Valera (Indevus) available for sale shares during the six months ended
      June 30, 2006, as compared to a $603,000 expense in the six months ended June
      30, 2007 and a realized loss of $236,000 on the sale of 291,964 Indevus shares
      in June 2007.
 
 **Income
      taxes**
 
 For
      the
      six months ended June 30, 2007 and 2006, the Company recorded an income tax
      expense of $715,000, and $346,000, 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 58% owned subsidiary, which is not included in the
      Company’s consolidated return. The gain on exchange of Valera stock resulted
      from tax free reorganization and accordingly was not subject to current 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.  Accordingly, no provision for income tax is included in
      the accompanying Statement of Operations related to the gain on the
      exchange.
 
 **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,
      increased sales volume and seasonal fluctuations.
  29
  **Liquidity
      and capital resources**
 
 At
      June
      30, 2007, the Company had cash and cash equivalents of
      $4,062,000.  The Company believes that cash anticipated to be
      generated from operations and borrowing availability under existing credit
      agreements will be sufficient to fund the Company’s working capital requirements
      for at least the next twelve months.
 
 At
      June
      30, 2007, the Company had $3,984,000 of cash at the corporate
      level.  In addition, in the subsequent period, the Company received
      approximately $2,650,000 of cash related to the sales of Indevus stock, net
      of
      expenses and an additional approximately $2,850,000, net in the subsequent
      period. In addition, Five Star is restricted from either upstreaming cash to
      or
      receiving cash from the Company under the terms of their Loan and Security
      Agreement. As of June 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
      six months ended June 30, 2007, the Company’s working capital increased by
      $16,423,000 to $28,361,000 from $12,182,000 as of December 31,
      2006.  The working capital increase was primarily a result of the
      reclassification of the Company’s Investment in Indevus, which is $15,799,000 to
      Current assets, as well as increased accounts receivable and inventory,
      partially offset by increased short term borrowings and accounts
      payables.
 
 The
      decrease in cash and cash equivalents of $423,000 for the six months ended
      June
      30, 2007 resulted from the following: (i) net cash used in operations of
      $3,596,000, due primarily to an increase in inventory of  $5,195,000,
      an increase in accounts receivable of $10,227,000, partially offset by an
      increase in accounts payable and accrued expenses of $6,981,000; (ii) net cash
      used in  investing activities of $4,029,000 consisting of $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 $849,000 partially
      offset by repayment of a receivable from GP Strategies of $325,000, and (iii)
      net cash provided by financing activities of $7,202,000, consisting of proceeds
      of short term borrowings of $6,598,000, proceeds from long-term debt of
      $344,000, partially offset by purchases of treasury stock of
      $220,000.
 
 In
      2003,
      Five Star obtained a Loan and Security Agreement (the “Loan Agreement”) with
      Bank of America Business Capital (formerly Fleet Capital Corporation) (the
      “Lender”).  The Loan Agreement has a five-year term, with a maturity
      date of June 30, 2008.  The Loan Agreement, as amended in August 1,
      2005 provides for a $35,000,000 revolving credit facility, which allows Five
      Star to borrow based upon a formula of up to 65% of eligible inventory and
      85%
      of eligible accounts receivable, as defined therein.  The interest
      rates under the Loan Agreement consist of LIBOR plus a credit spread of 1.5%
      (6.87% at June 30, 2007) for borrowings not to exceed $15,000,000 and the prime
      rate (8.25% at June 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 June 30, 2007 and December 31, 2006, approximately
      $24,262,000 and $17,664,000 was outstanding under the Loan Agreement and
      approximately $6,054,000 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.
 
 30
  As
      of June 30, 2007 Five Star was in compliance with all
      required covenants. The following table sets forth the significant debt
      covenants at June 30, 2007:
  **Covenant**
              **Required**
              **Calculated**Minimum
                  tangible net worth
              $6,000,000
              $9,184,000Debt
                  to tangible net worth
              <
                  6
              2.64Fixed
                  charge coverage
              >1.1
              1.90Quarterly
                  income
              No
                  loss in consecutivequarters
              $423,000
                  –first quarterincome $556,000- secondquarter
                  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 the Lancaster, PA
      property.  The interest rates under the MXL Line consist of LIBOR plus
      a credit spread of 3% or the prime rate plus a credit spread of
      0.25%.  The MXL Line is subject to an unused commitment fee of 0.25%
      of the average daily unused balance of the line payable
      quarterly.  The Company has guaranteed the MXL
      Line.   At June 30, 2007, $750,000 was outstanding under the MXL
      Line and $150,000 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.
   31
  Certain
      of our accounting policies require higher degrees of judgment than others in
      their application.  These include valuation of accounts receivable,
      accounting for investments, and impairment of long-lived assets which are
      summarized below.
 
 *Revenue
      recognition*
 
 Revenue
      on product sales is recognized at the point in time when the product has been
      shipped, title and risk of loss has been transferred to the customer, and the
      following conditions are met: persuasive evidence of an arrangement exists,
      the
      price is fixed and determinable, and collectibility of the resulting receivable
      is reasonably assured.  Allowances for estimated returns and
      allowances are recognized when sales are recorded.
 
 *Valuation
      of accounts receivable*
 
 Provisions
      for allowance for doubtful accounts are made based on historical loss experience
      adjusted for specific credit risks.  Measurement of such losses
      requires consideration of National Patent Development’s historical loss
      experience, judgments about customer credit risk, and the need to adjust for
      current economic conditions.  The allowance for doubtful accounts as a
      percentage of total gross trade receivables was
 2.2%
      and
      4.5% at June 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
      June 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.
  32
  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 anyeffecton 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.
  33
  **Item
      3.     Quantitative and Qualitative Disclosure About Market
      Risk**
 
 We
      have
      no material changes to the disclosure on this matter made in our report on
      Form
      10-K for the fiscal year ended December 31, 2006.
 
 **Item
      4.      Controls and Procedures**
 
 The
      Company’s principal executive officer and principal financial officer, with the
      assistance of other members of the Company’s management, have evaluated the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
      the 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 principal executive officer and principal financial officer have
      concluded that the Company’s disclosure controls and procedures are effective as
      of the end of the period covered by this quarterly report.
 
 The
      Company’s principal executive officer and principal financial officer have also
      concluded that there was no change in the Company’s internal control over
      financial reporting (as such term is defined in Rule 13a-15(f) under the
      Securities Exchange Act of 1934, as amended)
      that occurred during the quarter ended June 30, 2007 that has materially
      affected, or is reasonably likely to materially affect, the Company’s internal
      control over financial reporting.
  34
  **PART
      II OTHER INFORMATION**
   **Item
        2.     Unregistered Sales of Equity Securities and Use of
        Proceeds**
 
 ***Issuer
        Issuances of Equity Securities***
 
 On
        April
        19, 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, 678 shares of
        Company common stock in payment of their quarterly directors
        fees.  The aggregate value of the 1,356 shares of common stock issued
        to Messrs. Schafran and Embry was approximately $3,800 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 there under.
 
 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.
 
 **Item
      6.                          Exhibits**
 
 Exhibit
                No.
            
            Description10.1
            
            Agreement
                of Lease, dated as of April 5, 2007, between Kampner Realty, LLC,
                as
                Landlord, and Five Star Products, Inc., as Tenant, for premises located
                at
                1202 Metropolitan Avenue, Brooklyn, NY (incorporated herein by reference
                to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with
                the SEC on April 11, 2007)10.2
            
            Employment
                Agreement, dated as of April 5, 2007, between Five Star Group, Inc.
                and
                Ronald Kampner (incorporated herein by reference to Exhibit 10.2
                to the
                Registrant’s Current Report on Form 8-K filed with the SEC on April 11,
                2007)10.3
            
            Amendment
                to Agreement of Lease between Kampner Realty, LLC, as Landlord, and
                Five
                Star Products, Inc., as Tenant, for premises located at 1202 Metropolitan
                Avenue, Brooklyn, New York, agreed upon and entered into on June
                11, 2007
                (incorporated herein by reference to Exhibit 10.1 to the Current
                Report on
                Form 8-K of Five Star Products, Inc. filed with the SEC on June 14,
                2007)31.1
            *
            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
 
  35
  **SIGNATURES**
 
 Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.
 **NATIONAL PATENT DEVELOPMENT****CORPORATION**DATE: August 14, 2007/s/HARVEY P. EISENName:Harvey P. EisenTitle:Chairman of the Board andChief Executive Officer
 DATE:
                August 14, 2007
            /s/
                IRA J. SOBOTKOName:
            Ira
              J. SobotkoTitle:
            Vice
              President, Finance
    36