UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-Q
 
 (Mark
One)
  x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended March 31, 2008oro
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from _____ to _____
     Commission
File Number:000-50587
 
 NATIONAL
PATENT DEVELOPMENT CORPORATION
 (Exact
Name of Registrant as Specified in its Charter)
 
 
 Delaware
            
            13-4005439(State
      or other jurisdiction of
              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, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer
            o
            Accelerated
      filer
            oNon-accelerated
      filer
              (Do
      not check if a smaller reporting company)
            o
            Smaller
      reporting company
            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 May
10, 2008, there were 16,148,621 shares of the registrant’s common stock, $0.01
par value, outstanding.
  
  
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 
 TABLE OF CONTENTS
  
 Part
      I.  Financial Information
            Page
      No.Item 1.
            Financial StatementsConsolidated Condensed Statements of
      Operations-Three Months Ended March 31, 2008 and
      2007 (Unaudited)
            1Consolidated Condensed Statements of
      Comprehensive Loss-Three Months Ended March 31, 2008 and
      2007 (Unaudited)
            2Consolidated Condensed Balance Sheets
      -March 31, 2008 (Unaudited) and December
      31, 2007
            3Consolidated Condensed Statements of Cash Flows
      -Three Months Ended March 31, 2008 and
      2007 (Unaudited)
            4Consolidated Condensed Statement of Stockholders’
      Equity-March 31, 2008 (Unaudited)
            5Notes to Consolidated Condensed Financial
      Statements
            6Item 2.
            Management’s Discussion and Analysis of
      FinancialCondition and Results of
      Operations
            17Item 3.
            Quantitative and Qualitative Disclosure about Market
      Risk
            24Item 4.
            Controls and Procedures
            24Part
      II. Other InformationItem 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            24Item 6.
            Exhibits
            25SIGNATURES
            26
 
  Table
of Contents
  PART I.
FINANCIAL INFORMATION
 
 Item
1.                      Financial
Statements
 
 NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 (Unaudited)
 (in
thousands, except per share data)
 
 Three
      Months EndedMarch
      31,2008
            
            
            2007Sales
            
            $
            33,808
            
            
            $
            31,931Cost
      of sales
            
            
            (28,023
            )
            
            
            (26,841
            )Gross
      margin
            
            
            5,785
            
            
            
            5,090Selling,
      general and administrative expenses
            
            
            (5,825
            )
            
            
            (4,702
            )Charge
      related to resignation of Chairman of the Board of Five
    Star
            
            
            (1,096
            )Operating
      profit (loss)
            
            
            (1,136
            )
            
            
            388Interest
      expense
            
            
            (340
            )
            
            
            (326
            )Investment
      and other income
            
            
            100
            
            
            
            66Income
      (loss) before income taxes and minority interest
            
            
            (1,376
            )
            
            
            128Income
      tax expense
            
            
            (14
            )
            
            
            (360
            )Loss
      before minority interest
            
            
            (1,390
            )
            
            
            (232
            )Minority
      interest
            
            
            13
            
            
            
            (195
            )Net
      loss
            
            $
            (1,377
            )
            
            $
            (427
            )Net
      loss per shareBasic
      and diluted
            
            $
            (0.08
            )
            
            $
            (0.02
            )
 
 See
accompanying notes to consolidated condensed financial statements.
 1
 Table
of Contents
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
 (Unaudited)
 (in
thousands)
 
 Three
      Months Ended
              March
      31,2008
            
            
            2007Net
      loss
            
            $
            (1,377
            )
            
            $
            (427
            )Other
      comprehensive (loss) income, before tax:Net
      unrealized gain (loss) on available-for-sale-securities
            
            
            (66
            )
            
            
            178Net
      unrealized (loss) gain on interest rate swap, net of minority
      interest
            
            
            (70
            )
            
            
            (48
            )Comprehensive
      loss before tax
            
            
            (1,513
            )
            
            
            (297
            )Income
      tax benefit (expense) related to items of other comprehensive
      income
            
            
            32
            
            
            
            15Comprehensive loss
            
            $
            (1,481
            )
            
            $
            (282
            )
 
 See
accompanying notes to consolidated condensed financial statements.
 2
 Table
of Contents
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
CONDENSED BALANCE SHEETS
 (in
thousands)
 
 March
      31,
              2008
            
            
            December
      31,
              2007(unaudited)AssetsCurrent
      assetsCash
      and cash equivalents
            
            $
            12,366
            
            
            $
            15,698Accounts
      receivable, less allowancefor
      doubtful accounts of $216 and $412
            
            
            20,750
            
            
            
            12,755Inventories
            
            
            33,806
            
            
            
            27,720Prepaid
      expenses and other current assets
            
            
            805
            
            
            
            1,326Deferred
      tax asset
            
            
            470
            
            
            
            470Total
      current assets
            
            
            68,197
            
            
            
            57,969Marketable
      securities available for sale
            
            
            44
            
            
            
            109Property,
      plant and equipment, net
            
            
            3,522
            
            
            
            3,534Goodwill
            
            
            96Deferred
      tax asset
            
            
            190Other
      assets
            
            
            2,918
            
            
            
            3,293Total
      assets
            
            $
            74,967
            
            
            $
            64,905Liabilities
      and stockholders’ equityCurrent
      liabilitiesCurrent
      maturities of long-term debt
            
            $
            257
            
            
            $
            257Short
      term borrowings
            
            
            28,101
            
            
            
            19,928Accounts
      payable and accrued expenses
            
            
            18,914
            
            
            
            13,530Total
      current liabilities
            
            
            47,272
            
            
            
            33,715Long-term
      debt less current maturities
            
            
            1,377
            
            
            
            1,441Deferred
      tax liability
            
            
            279
            
            
            
            279Minority
      interest
            
            
            1,677
            
            
            
            2,902Common
      stock subject to exchange rights
            
            
            
            
            
            
            493Stockholders’
      equityCommon
      stock
            
            
            180
            
            
            
            180Additional
      paid-in capital
            
            
            27,322
            
            
            
            26,825Retained
      earnings
            
            
            1,168
            
            
            
            2,545Treasury
      stock, at cost
            
            
            (4,187
            )
            
            
            (3,458
            )Accumulated
      other comprehensive loss
            
            
            (121
            )
            
            
            (17
            )Total
      stockholders’ equity
            
            
            24,362
            
            
            
            26,075Total
      liabilities and stockholders’ equity
            
            $
            74,967
            
            
            $
            64,905
 
 See
accompanying notes to consolidated condensed financial statements.
 3
 Table
of Contents
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
 (Unaudited)
 (in
thousands)
 
 Three
      Months EndedMarch
      31,2008
            
            
            2007Cash
      flows from operations:Net
      loss
            
            $
            (1,377
            )
            
            $
            (427
            )Adjustments
      to reconcile net loss tonet cash used in operating activities:Depreciation
      and amortization
            
            
            179
            
            
            
            190Minority
      interest
            
            
            (13
            )
            
            
            195Gain
      on issuance of stock by a subsidiary
            
            
            
            
            
            
            (1
            )Expenses
      paid in common stock
            
            
            15
            
            
            
            13Deferred
      income taxes
            
            
            (190
            )
            
            
            (51
            )Stock
      based compensation
            
            
            985
            
            
            
            62Changes
      in other operating items:Accounts
      receivable
            
            
            (7,995
            )
            
            
            (7,576
            )Inventory
            
            
            (6,086
            )
            
            
            (3,031
            )Prepaid
      expenses an other assets
            
            
            316
            
            
            
            (598
            )Accounts
      payable and accrued expenses
            
            
            5,384
            
            
            
            9,907Net
      cash used in operations
            
            
            (8,782
            )
            
            
            (1,317
            )Cash
      flows from investing activities:Additions
      to property, plant and equipment, net
            
            
            (167
            )
            
            
            (845
            )Acquisition
      of additional interest in Five Star
            
            
            (1,523
            )
            
            
            (106
            )Repayment
      of receivable from GP Strategies
            
            
            
            
            
            
            185Net
      cash used in investing activities
            
            
            (1,690
            )
            
            
            (766
            )Cash
      flows from financing activities:Proceeds
      from sale of common stock
            
            
            
            
            
            
            480Purchases
      of treasury stock
            
            
            (729
            )
            
            
            (220
            )Settlement
      of option
            
            
            (240
            )Proceeds
      from short-term borrowings
            
            
            8,173
            
            
            
            1,184Proceeds
      from long-term debt
            
            
            
            
            
            
            273Repayment
      of long-term debt
            
            
            (64
            )
            
            
            (25
            )Net
      cash provided by financing activities
            
            
            7,140
            
            
            
            1,692Net
      increase (decrease) in cash and cash equivalents
            
            
            (3,332
            )
            
            
            (391
            )Cash
      and cash equivalents at beginning of period
            
            
            15,698
            
            
            
            4,485Cash
      and cash equivalents at end of period
            
            $
            12,366
            
            
            $
            4,094
 
 See
accompanying notes to the consolidated condensed financial
statements.
 4
 Table
of Contents
  NATIONAL
PATENT DEVELOPMENT CORPORATION
 CONSOLIDATED
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
 THREE
MONTHS ENDED MARCH 31, 2008
 (Unaudited)
 (in
thousands, except shares and per share data)
   Common
              Stock
              $(0.01
      par
              value)
            
            
            Additional
              paid-in
              capital
            
            
            Retained
              earnings
            
            
            Treasury
              stock,
      at cost
            
            
            Accumulated
              other
      comprehensive income (loss)
            
            
            Total
              stockholders’
              equityBalance
      at December 31, 2007
            
            $
            180
            
            
            $
            26,825
            
            
            $
            2,545
            
            
            $
            (3,458
            )
            
            $
            (17
            )
            
            $
            26,075Net
      unrealized loss on available
              for
      sale securities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (66
            )
            
            
            (66
            )Net
      unrealized loss on interest  rate swap, net of tax and minority
      interest
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (38
            )
            
            
            (38
            )Net
      loss
            
            
            
            
            
            
            
            
            
            
            (1,377
            )
            
            
            
            
            
            
            
            
            
            
            (1,377
            )Equity
      based compensation expense
            
            
            
            
            
            
            229
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            229Settlement
      of option to acquire shares of Five Star
            
            
            
            
            
            
            (240
            )
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (240
            )Purchase
      of 300,000 shares of
              treasury
      Stock
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (729
            )
            
            
            
            
            
            
            (729
            )Reclassification
      of common stock subject to exchange rights
            
            
            
            
            
            
            493
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            493Issuance
      of 3,866 shares of common stock to MXL  Retirement and Savings
      Plan
            
            
            
            
            
            
            9
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            9Issuance
      of 2,557 shares of   common stock to
    directors
            
            
            
            
            
            
            6
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            6Balance
      at March 31, 2008
            
            $
            180
            
            
            $
            27,322
            
            
            $
            1,168
            
            
            $
            (4,187
            )
            
            $
            (121
            )
            
            $
            24,362
 
 See
accompanying notes to the consolidated condensed financial
statements.
 5
 Table
of Contents
  NATIONAL
PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATEDCONDENSED FINANCIAL
STATEMENTS
 (Unaudited)
 
 1.                      Basis of presentation anddescription of
business
  Basis
of presentation
  The
accompanying Consolidated Condensed Balance Sheet as of March 31, 2008 and the
Consolidated Condensed Statements of Operations and Cash Flows for the three
months ended March 31, 2008 and 2007 have not been audited, but have been
prepared in conformity with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 8 of Regulation S-X.  The Consolidated Condensed
Balance Sheet as of December 31, 2007 has been derived from audited financial
statements. These financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto for the year ended
December 31, 2007 as presented in our Annual Report on Form 10-K. In the opinion
of management, this interim information includes all material adjustments, which
except for the compensation charge referred to in Note 13 to the Consolidated
Condensed Financial Statements,are of a normal and recurring nature, necessary for a fair presentation.
The results for the 2008 interim period 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 75% owned subsidiary, Five Star Products, Inc.
(“Five Star”), is engaged in the wholesale distribution of home decorating,
hardware and finishing products. Five Star serves independent retail dealers in
12 states in the Northeast. Products distributed include paint sundry items,
interior and exterior stains, brushes, rollers, caulking compounds and hardware
products.
  Recent
Accounting Pronouncements
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework for measurement of fair value
and expands disclosures about fair value measurements. SFAS No. 157 clarifies
that fair value should be based on assumptions that market participants will use
when pricing an asset or liability and establishes a fair value hierarchy of
three levels that  prioritize the information used to develop those
assumptions. The provisions of SFAS No. 157 became effective for the Company
beginning January 1, 2008. Generally, the provisions of this statement are to be
applied prospectively. The Company adopted SFAS No. 157 in the first quarter of
2008. The adoption of SFAS No. 157 did not have a material effect on the
Company’s consolidated financial statements.
  In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”.  This statement provides
companies with an option to report selected financial assets and liabilities at
fair value. Although, this statement became effective for the Company beginning
January 1, 2008, the Company did not elect to value any financial assets and
liabilities at fair value.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of Accounting Research
Bulletin (“ARB”) No. 51” (“SFAS 160”).  SFAS 160 requires that
ownership interests in subsidiaries held by parties other than the parent, and
the amount of consolidated net income, be clearly identified, labeled, and
presented in the consolidated financial statements within equity, but separate
from the parent’s equity. It also requires once a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value. Sufficient disclosures are required to clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners.  SFAS No. 160 is effective for fiscal
years beginning after December 15, 2008, and is to be applied retrospectively
for all periods presented.  Accordingly, upon the adoption of SFAS No.
160, the Company’s financial statements will be reclassified to reflect the
minority interest in Five Star in accordance with this statement.
 6
 Table
of Contents
  In December 2007, the FASB
issued SFAS No. 141 (Revised 2007),“Business
Combinations”.
SFAS No. 141(R), replaces SFAS No. 141,“Business Combinations”, and establishes principles andrequirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any noncontrolling interest in the
acquiree, and any goodwill acquired in a business combination.
SFAS No. 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of a business combination.
SFAS No. 141(R) is to be applied prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.  The
impact that the adoption of SFAS No. 141(R) will have on the Company’s financial
statements is not presently determinable, since it is dependant on future
acquisitions, if any.
  In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 161 (“SFAS No. 161”), “Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133”. SFAS No. 161 gives financial statement users better information about
the reporting entity's hedges by providing for qualitative disclosures about the
objectives and strategies for using derivatives, quantitative data about the
fair value of and gains and losses on derivative contracts, and details of
credit-risk-related contingent features in their hedged positions. The standard
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged,
but not required. The Company does not anticipate that the adoption of SFAS No.
161 will have a material effect on the Company’s consolidated financial
statements.
  Use of estimates. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates.
  Concentrations of credit
risk. Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
investments, and accounts receivable from customers. The Company places its cash
investments with high quality financial institutions and limits the amount
of credit exposure to any one institution.
  2.                    
 Per share
data
  Basic and
diluted net loss per share for the three months ended March 31, 2008 and
2007 is based upon the weighted average number of the Company’s shares
outstanding during the periods. Outstanding warrants to acquire 1,423,887 shares
of common stock issued in December 2004 and options to acquire 3,350,000 shares
of common stock issued by the Company in 2007 were not included in the March 31,
2008 and 2007 diluted computation since their effect will be
anti-dilutive.  In addition, the effect on the fully diluted
computation of outstanding options of Five Star was anti-dilutive and
accordingly did not effect the March 31, 2008 and 2007 diluted
computation.
  Loss per
share for the three months ended March 31, 2008 and 2007 are as follows (in
thousands, except per share amounts):
  Three
      months endedMarch
      31,2008
            
            2007Basic
      and Diluted EPSNet
      loss
            
            $
            (1,377
            )
            
            $
            (427
            )Weighted
      average sharesoutstanding, basic and diluted
            
            
            16,461
            
            
            
            17,758Basic
      and diluted loss per share
            
            $
            (0.08
            )
            
            $
            (0.02
            )
 
 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 then outstanding
shares of common stock from time to time either in open market or privately
negotiated transactions. At March 31, 2008, the Company had repurchased
1,628,462 shares of its common stock for $3,706,000 under the repurchase plan
(excluding the purchase from Mr. Flegel in March 2008 which was not under such
plan; see Note 13 to the Consolidated Condensed Financial
Statements).
  7
 Table
of Contents
 
 4.                    
 Acquisition of Right-Way Dealer Warehouse
  On April
5, 2007, Five Star acquired substantially all the assets of Right-Way Dealer
Warehouse, Inc. (“Right-Way”) for approximately $3,200,000 in cash and the
assumption of liabilities in the approximate amount of $50,000. Transaction
costs of approximately $200,000 were incurred by Five Star in connection with
this transaction. The assets consisted primarily of approximately $1,186,000 of
accounts receivable at fair value and approximately $2,213,000 of inventory at
fair value. The acquisition included all of Right-Way’s Brooklyn Cash &
Carry business and operations.  Five Star acquired the assets of
Right-Way in order to increase its presence and market share in its current
geographic area.
  The
results of operations of Right-Way are included in the consolidated financial
statements from the date of acquisition.  The following unaudited pro
forma consolidated amounts give effect to the acquisition of Right-Way as if it
had occurred on January 1, 2007. Right-Way had filed for reorganization under
Chapter 11 of the United States Bankruptcy Code prior to the acquisition by Five
Star.  The pro forma results of operations have been prepared for
comparative purposes only and are not necessarily indicative of the operating
results that would have been achieved had the acquisition been consummated as of
the above date, nor are they necessarily indicative of future operating
results.
  
  (in
      thousands, except per share data)
            
            Three
      months ended
              March
      31,
              2007Sales
            
            $
            36,265Net
      loss
            
            
            (763
            )Earnings
      (loss) per shareBasic
      and fully diluted
            
            $
            (0.04
            )
 
 5.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 plans are administered by the Compensation
Committee of the Board of Directors, consisting solely of non-employee
directors, and the Five Star plans are administered by Five Star’s entire Board
of Directors.
  Company
Stock Option Plan
  On
November 3, 2003, GP Strategies, which at the time was the Company’s parent,
adopted an Incentive Stock Plan (the “2003 Plan”) under which 1,750,000 shares
of the Company’s common stock are available for grant to employees, directors
and outside service providers.  The 2003 Plan permits awards of
incentive stock options, nonqualified stock options, restricted stock, stock
units, performance shares, performance units and other incentives payable in
cash or in shares of the Company 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, 2007, the Company’s Board of Directors approved and adopted an amendment,
subject to stockholder approval (the “Amendment”), to the 2003 Plan increasing
the aggregate number of shares of Company common stock issuable under the 2003
Plan from 1,750,000 shares to 3,500,000 shares (subject to adjustment as
provided in the 2003 Plan), and increasing the per person annual limitation in
the 2003 Plan from 250,000 shares to 2,500,000 shares.  The Amendment was
approved in December 2007 at the Company’s 2007 Annual Stockholders
Meeting.
  8
 Table
of Contents
  In March 2007,
the Company granted an aggregate of 3,200,000 nonqualified stock options to
officers and directors under the 2003 Plan, of which 632,830 were granted under
the terms of the 2003 Plan as presently approved
by the Company’s stockholders and the remainder were granted subject to
stockholder approval of the amendment referred to above.  The Company
determined the estimated aggregate fair value of the 632,830 options which were
not subject to stockholder approval on the date of grant and  upon
stockholder approval , which under SFAS 123R is considered the date of grant,
determined the estimated aggregate fair value of the remaining 2,567,170
options. On July 30, 2007, the Company granted an aggregate of 150,000
non-qualified stock options under the 2003 Plan.
  On July
30, 2007, the Board of Directors adopted the National Patent Development
Corporation 2007 Incentive Stock Plan (the “2007 NPDC Plan”), subject to
stockholder approval.  The 2007 NPDC Plan was approved by the
Company’s stockholders in December 2007 at the Company’s 2007 Annual
Stockholders Meeting.  As of March 31, 2008, no awards have been
granted under the 2007 NPDC Plan.  The number of shares of common
stock reserved and available for awards under the 2007 NPDC Stock Plan (subject
to certain adjustments as provided therein) is 7,500,000.
  A summary
of the Company’s stock option activity as of March 31, 2008, and changes during
the quarter then ended, is presented below:
  Stock
              Options
            
            Weighted
              Average
              Exercise
              Price
            
            Weighted
              Average
              Contractual
              Term
            
            Aggregate
              Intrinsic
              ValueOptions
      outstanding at January 1, 2008
            
            3,350,000
            
            $
            2.49
            
            
            9.2
            
            $
            768,000*Options
      outstanding  at March 31, 2008
            
            3,350,000
            
            
            2.49
            
            
            9.0
            
            $
            0
      *Options
      exercisable at March 31, 2008
            
            1,067,000
            
            $
            2.45
            
            
            9.0
            
            $
            0
      *
 *
            The
      intrinsic value of a stock option is the amount by which the market value
      of the underlying stock exceeds the exercise price of the
      option.
  The
weighted average grant-date fair value of the options granted during 2007 was
$0.82 per share.
  As of
March 31, 2008, there was $1,749,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements. This cost is
expected to be recognized over the vesting periods of the options, which on a
weighted-average basis is approximately 1.9 years.
  Five
Star Stock Option Plans
  Five Star
has adopted the Five Star Products, Inc. 1994 Stock Option Plan, effective
August 5, 1994 (the “1994 Plan”). The 1994 Plan, which was amended on January 1,
2002, provides for 4,000,000 shares of common stock to be reserved for issuance,
subject to adjustment in the event of stock splits, stock dividends,
recapitalizations, reclassifications or other capital adjustments. Unless
designated as “incentive stock options” intended to qualify under Section 422 of
the Internal Revenue Code, options granted under the 1994 Plan are intended to
be nonqualified options. Although certain outstanding options have been granted
under the 1994 Plan, options may no longer be granted under the
plan.
  On March
1, 2007, the Board of Directors of Five Star adopted the Five Star Products,
Inc. 2007 Incentive Stock Plan (the “2007 FS Plan”), which was approved by the
stockholders of Five Star in December 2007. Under the 2007 FS Plan, Five Star
may grant awards of non-qualified stock options, incentive stock options,
restricted stock, stock units, performance shares, performance units, and other
incentives payable in cash or in shares of Five Star 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 FS 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.
 9
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  On March 2,
April 5 and July 17, 2007, Five Star granted options under the 2007 Plan to
purchase an aggregate of 250,000, 200,000 and 125,000 shares of Five Star common
stock with exercise prices of $0.38, $0.75 and $0.78 per share, respectively, to
certain executives of Five Star. The options vest if Five Star meets certain
EBITDA targets for each of the three consecutive years beginning with the fiscal
year ended December 31, 2007 or in
aggregate for the three year period ending December 31, 2010 and are contingent
upon continued employment with Five Star.  Additionally, on March 2,
2007 Five Star modified EBITDA target for 400,000 options granted  to
an executive officer of Five Star in October 2006, for which no compensation
expenses was recognized in the fiscal year ended December 31, 2006 as
achievement of performance criteria was determined to be less than probable.
Five Star estimated the aggregate fair value of these options to be $185,000,
$97,000 and $62,000, respectively, based on the Black-Scholes valuation model.
It was determined in March 2008 that the 2007 performance criteria was met for
the year ended December 31, 2007 and therefore aggregate compensation expense of
$24,000 was recognized with respect to these performance
based  options for the three months ended March 31, 2008. Five Star
and the Company estimates that achievement of 2008 performance target is less
then probable and therefore no compensation expenses were recognized with
respect to the portion of the above grants which will vest based on achievement
of the 2008 target.
  As of
March 31, 2008, there was $235,000 of total unrecognized compensation cost
related to non-vested share-based compensation arrangements of Five Star. This
cost is expected to be recognized over the vesting periods of the options, which
on a weighted-average basis is approximately 1.9 years.
  Activity
relating to stock options granted by Five Star:
  Number
      of
              Shares
            
            Weighted-
              Average
              Exercise
              Price
            
            Weighted-
              Average
              Remaining
              Contractual
              Terms
      (Years)
            
            Aggregate
              Intrinsic
              ValueOptions
      outstanding at January 1, 2008
            
            975,000
            
            $
            0.51
            
            
            9.2
            
            $
            201,500
            (*)Options
      outstanding at March 31, 2008
            
            975,000
            
            $
            0.51
            
            
            9.0
            
            $
            19,500Options
      vested and expected to vest
            
            325,000
            
            $
            0.51
            
            
            9.0
            
            $
            6,500Options
      exercisable at March 31, 2008
            
            325,000
            
            $
            0.51
            
            
            9.0
            
            $
            6,500
  *
            The
      intrinsic value of stock options is the amount by which the market value
      of the underlying stock exceeds the exercise price of the
      option.
  The total
intrinsic value of options exercised during the year ended December 31, 2007 was
$124,000.
  
  On March
2, 2007, Five Star granted to its President and Chief Executive Officer,
1,000,000 shares of Five Star restricted stock, valued at $0.38 per share
(representing an aggregate value of $380,000), vesting upon the achievement by
Five Star of certain EBITDA targets for the fiscal year ended December 31, 2007
and the following two successive years, contingent upon his continued employment
with the Company and Five Star.  In March 2008, Five Star determined
that achievement of the 2007 performance criterion was met; therefore
compensation expense of $21,000 was recognized by Five Star for the three months
ended March 31, 2008 and restrictions on 333,000 shares of Five Star restricted
stock lapsed. At March 31, 2008 $253,000 remains to be charged over the lesser
of the remaining 23 months or the term of employment, provided certain adjusted
EBITDA targets are met.  However at March 31, 2008, Five Star
determined that the achievement of 2008 performance target is less than probable
and therefore no compensation expense was recognized with respect to the portion
of the grant that vests based on the achievement of the 2008 performance
target.
  10
 Table
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  6.                     
Long-term
debt
  Long-term
debt
  Long-term
debt is comprised of the following (in thousands):
  March
      31,
              2008
            
            
            December
      31,
              2007MXL
      Pennsylvania Mortgage (a)
            
            $
            980
            
            
            $
            1,105MXL
      Term loan (b)
            
            
            654
            
            
            
            693Capital
      lease obligations
            
            
            
            
            
            
            11,634
            
            
            
            1,698Less
      current maturities
            
            
            (257
            )
            
            
            (257
            )$
            1,377
            
            
            $
            1,441
 
 (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”).
  (b)
            On
      November 27, 2006, MXL entered into a 5 year $785,000 Term Loan for the
      financing of machinery and equipment at 2.5% above the one month LIBOR
      rate, or 0.25% above the bank’s prime lending rate, as applicable. In May
      2007, the loan balance was 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 in August 1, 2005, and again in March
2008, provides for a $35,000,000 revolving credit facility, which allows Five
Star to borrow based upon a formula 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% (4.57% at March 31,
2008) for borrowings not to exceed $15,000,000 and the prime rate (5.25% at
March 31, 2008) 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 March 31, 2008 and
December 31, 2007, approximately $27,476,000 and $19,303,000 was outstanding
under the Loan Agreement and approximately $7,390,000 and $5,579,000 was
available to be borrowed, respectively. Substantially all of Five Star’s assets
are pledged as collateral for these borrowings. Under the 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. The Lender
amended the covenants related to the Loan Agreement in March 2008 to exclude
non-cash charges related to any equity instruments (common stock, options and
warrants) issued to any employee, director, or consultant from the covenant
calculations (see Note 13). As of March 31, 2008 Five Star was in
compliance with all required covenants.
  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 $(29,000) and $69,000 at March 31, 2008 and December 31,
2007, respectively, and is included in other assets in the accompanying balance
sheets.
  11
 Table
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  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%, whereby if LIBOR is below 2.25%, the Lender will pay to Five
Star the difference between LIBOR and 2.25%, on the same notional principal
amount. The transaction also consists of an interest rate cap of 5.75%, whereby
if LIBOR is above 5.75%, Five Star will pay to the Lender the difference between
LIBOR and 5.75%, on the same notional principal amount.
  MXL short-term
borrowings
  On March 1, 2005, MXL
obtained a Line of Credit Loan (the “MXL Line”) from M&T Bank with a one
year term, maturing on March 1, 2006, which has been extended to June 30, 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 March 31, 2008 and December 31, 2007, $625,000 was
outstanding under the MXL Line and $275,000 was available to be borrowed at
March 31, 2008. The MXL Line contains certain financial covenants which are
calculated on an annual basis at December 31. As of December 31, 2007, MXL was
in compliance with its covenants.
  8.                   
  Inventories
  Inventories
are comprised of the following (in thousands):
  March
      31, 2008
            
            
            December
      31, 2007Raw
      materials
            
            $
            444
            
            
            $
            410Work
      in process
            
            
            276
            
            
            
            141Finished
      goods
            
            
            33,086
            
            
            
            27,169$
            33,806
            
            
            $
            27,720
  9.                      Investment
in Valera Pharmaceuticals, Inc. (“Valera”)
  Indevus
Pharmaceuticals, Inc. (“Indevus”) is a biopharmaceutical company that engages in
the acquisition, development, and commercialization of products to treat
urological, gynecological, and men’s health conditions.
  Effective
April 18, 2007 (the “Effective Time”), all of the outstanding common stock of
Valera Pharmaceuticals, Inc. (“Valera”), a Delaware corporation in which the
Company had owned 2,070,670 shares of common stock at such time, was acquired by
Indevus pursuant to the terms and conditions of an Agreement and Plan of Merger,
dated as of December 11, 2006 (the “Merger Agreement”).  Pursuant to
the Merger Agreement, the Company 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, the 2,070,670 shares of Valera common stock
held by the Company were converted into an aggregate of 2,347,518 shares of
Indevus common stock.  In April 2007, the Company recognized a pre-tax
gain of $14,961,000 resulting from the exchange of shares.   In
addition, for each share of Valera common stock held by the Company immediately
prior to the Effective Time, the Company received one contingent stock right for
each of three Valera product candidates in development - Supprelin-LA, a
ureteral stent and VP003 (Octreotide implant) – convertible into $1.00, $1.00
and $1.50, respectively, worth of Indevus common stock to the extent 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 milestones are 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, 291,964
shares of Indevus common stock, and recognized an additional pre-tax gain of
$2,070,670.   During the year ended December 31, 2007, the
Company sold all 2,639,482 shares of Indevus common stock held by the Company on
the open market, for total net proceeds of $17,598,000.
  Two
related parties, Bedford Oak Partners and Mr. Jerome I. Feldman, were entitled
to receive 50% of any profit received from the sale on a pro-rata basis, of
458,019 shares of Indevus common stock in excess of $3.47 per share, and are
entitled to participate in 50% of the profits earned on 19.51% of shares of
Indevus common stock received by the Company upon conversion of the contingent
stock rights, described above, if any, at such time as such shares are sold by
the Company (see Note 11(a)). The Company paid $922,000 to the related parties
towards their profit share, upon sale of Indevus.  For the three
months ended March 31, 2007, the Company recognized a loss of
$16,000.
  12
 Table
of Contents
  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.
  The
following tables set forth the sales and operating income (loss) of each of the
Company’s operating segments (in thousands):
  Three
      months
              ended
      March 31,2008
            
            
            2007SalesFive
      Star
            
            $
            31,469
            
            
            $
            29,861MXL
            
            
            2,339
            
            
            
            2,070$
            33,808
            
            
            $
            31,931
 
 
 Three
      months
              ended
      March 31,2008
            
            2007Segment
      operating income (loss)Five
      Star
            
            $
            (351
            )
            
            $
            1,138MXL
            
            
            169
            
            
            
            (129
            )$
            (182
            )
            
            $
            1,009
 
 
 
  A
reconciliation of the segment operating income (loss) to loss before income
taxes and minority interest in the consolidated condensed statements of
operations is shown below (in thousands):
  Three
      monthsended
      March 31,2008
            
            
            2007Segment
      operating income (loss)
            
            $
            (182
            )
            
            $
            1,009Corporate
      and other general and administrative expenses
            
            
            (954
            )
            
            
            (621
            )Interest
      expense
            
            
            (340
            )
            
            
            (326
            )Investment
      and other income (loss)
            
            
            (139
            )
            
            
            66Income
      (loss) before income taxesand
      minority interest
            
            $
            (1,615
            )
            
            $
            128
 13
 Table
of Contents
  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 to the Consolidated
Condensed Financial Statements) this obligation presently relates to the sale of
Indevus shares by the Company. From June 2007 through and including September
12, 2007, the Company sold, in a series of open market transactions, all of the
2,639,482 shares of Indevus common stock held by the Company for an aggregate of
approximately $17,598,000, net of commissions and brokerage fees.  The
November 12, 2004 agreement among the Company, Bedford Oak Partners and Mr.
Feldman provides for Bedford Oak Partners and Mr. Feldman to (i) receive 50% of
any amount in excess of $3.47 per share which is received by the Company upon
the sale of Indevus common stock and (ii) participate in 50% of the profits
earned on 19.51% of shares of Indevus common stock received by the Company upon
conversion of the contingent stock rights, described below, if any, at such time
as such shares are sold by the Company.  The aggregate amount paid in
2007 towards the profit sharing was $922,000.
  The
Company continues to hold contingent stock rights for certain products in
development by Indevus that will become convertible into shares of Indevus
common stock to the extent specific milestones with respect to each product are
achieved.  If the remaining milestones are achieved, the Company will
receive $2,070,670 and $3,106,005, respectively, worth of shares of Indevus
common stock upon conversion of such contingent stock rights.
  (b)           Concurrently
with its spin-off from GP Strategies, the Company and GP Strategies entered into
a management agreement under which certain of the Company’s executive officers
who were also executive officers of GP Strategies were paid by GP Strategies
subject to reimbursement by the Company. Additionally, GP Strategies provided
support with respect to corporate federal and state income taxes, corporate
legal services, corporate secretarial administrative support, and executive
management consulting.  The agreement terminated on November 24,
2007.
  Expenses
incurred by the Company under this agreement were $201,000 for the three months
ended March 31, 2007 which includes approximately 80% of the cost of the
compensation and benefits required to be provided by GP Strategies to Jerome
Feldman, who served as the Company’s Chief Executive Officer until May 31,
2007.
  12.                   
Contingent liabilities
  (a)           In
connection with its land investments, the Company has certain ownership
interests in several dams and related reservoirs located in the State of
Connecticut.  Under relevant Connecticut law, the Company is
responsible for maintaining the safety of these dams.  The Company has
been notified by certain landowners adjoining one of the reservoirs that the
water level in the reservoir has decreased; allegedly causing harm to such
landowners.  While the Company is currently investigating the cause of
the decline in the water level, it does not presently know the cause of the
decrease in water level or have any reasonable estimation of the cost of
repairs, if any, that may be required.  Further, the Company cannot
presently determine the extent of its legal liability, if any, with respect to
the landowners.  The Company has not received any claims with respect
to any of the other reservoirs.  The Company cannot reasonably
estimate at this time the costs which may be incurred with respect to this
matter and while these costs could be material to the Company’s results of
operations in the period incurred, based upon the present state of its
knowledge, the Company has no reason to believe that these costs will be
material to its financial position.  No amounts have been provided for
this matter in the accompanying financial statements.
  (b)           The Company and its
subsidiaries are from time to time involved in litigation arising out of the
ordinary course of business. It is the view of management that the ultimate
resolution of the only presently pending lawsuit (which is for a health related
claim based on the alleged use of a product claimed to be distributed by Five
Star) should not have a material adverse effect on the consolidated financial
position, results of operations or cash flows of the
Company.
  14
 Table
of Contents
  13.                   
Stockholders equity
  (a)           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 (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 was to
be charged to compensation expense over the term of the FS Agreement. At
December 31, 2007, the unrecognized compensation was $520,000 of which $240,000
was included in Prepaid expenses and other current assets and $280,000 was
included in Other assets. In addition, the Company recognized a gain of $1,000
on the reduction in ownership interest of Five Star at the time of
issuance.
  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 for
$480,000 ($2.40 per share).  The agreement gave Mr. Flegel the right
to exchange any or all of the 200,000 shares of the Company’s common stock into
shares of Five Star common stock held by the Company at the fixed rate of six
shares of Five Star common stock for each share of Company common stock. The
value of the option to convert the Company’s stock held by Mr. Flegel into
shares of Five Star  which amounted to $264,000, has been valued using
a Black Sholes formula and recognized as compensation expense by Five Star over
the three year term of the FS Agreement. In addition, as the exchange rights if
exercised would require the Company to effectively surrender net assets to
redeem common stock, the Company accounted for the issuance of the 200,000
shares as temporary equity at an amount equivalent to the carrying value of Five
Star’s equity that could be acquired by the holder of such shares ($493,000 at
December 31, 2007).
  On March
25, 2008, Mr. Flegel resigned as director and Chairman of the Board of Five
Star, and as a director of the Company, effective immediately. In connection
with Mr. Flegel’s resignation, Five Star, the Company and Mr. Flegel entered
into an agreement, dated March 25, 2008, pursuant to which Mr. Flegel sold to
the Company (i)  200,000 shares of the Company’s common stock, which
was exchangeable into 1,200,000 shares of Five Star common stock owned by the
Company, at $3.60 per share, which equates to $0.60 per share of Five Star
common stock had Mr. Flegel exercised his right to exchange these shares of the
Company’s common stock into shares of Five Star common stock and
(ii)  1,698,336, shares of Five Star’s common stock at $0.60 per
share.  In addition, Mr. Flegel’s children and grandchildren agreed to
sell to the Company an additional 301,664 shares Five Star’s Common Stock at
$0.60 per share. The market value of the Company’s common stock on March
25, 2008 was $2.40 per share.  The excess cash paid over the market
value of $1.20 per share on the 200,000 shares of Company common stock purchased
from Mr. Flegel, or $240,000, was deemed to be the settlement of the option
to exchange the Company’s common stock for Five Star stock and was charged to
Additional paid in capital. Five Star recorded a compensation charge of
$1,096,000 in the first quarter of 2008 (included in Charge related to the
resignation of the Chairman of the Board of Five Star) related to the above
transactions, including the unrecognized value of the 2,000,000 shares of Five
Star common stock issued and the option to convert the 200,000 shares of Company
common stock discussed above.  In addition, the expense included
$440,000, which represents the excess of the purchase price over the quoted
market price of the 2,000,000 shares of Five Star common stock on the date of
the agreement to acquire such shares. The Lender amended the covenants related
to the Loan Agreement in March 2008 to exclude non-cash charges related to any
equity instruments (common stock, options and warrants) issued to any employee,
director, or consultant from the covenant calculations (see Note 7 to the
Consolidated Condensed Financial Statements).
  The
agreement also contained one-year non-compete, standstill and non-solicitation
provisions. In addition, the three year FS Agreement was terminated upon his
resignation.
  (b)           As
of December 31, 2007, warrants were outstanding to acquire 1,423,887 shares of
the Company’s common stock at $3.57 per share. The warrants expire in August
2008.
  15
 Table
of Contents
 
 14.           
        Income taxes
 
 As the
result of the resignation of S. Leslie Flegel, former director and Chairman of
the Board of Five Star (see Note 13(a)) a compensation expense of $1,096,000 was
recorded of which $704,000 did not result in a tax benefit. Such amount was
treated as a discrete item. The tax effect of the discrete items are reflected
in the periods in which they occur and not reflected in the estimated annual
effective tax rate which is used for interim period tax provisions. This
resulted in no tax benefit being recorded by Five Star for the three months
ended March 31, 2008.
  16
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of Contents
  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.
  We
caution that these risk factors may not be exhaustive. We operate in a
continually changing business environment, and new risk factors emerge from time
to time. We cannot predict these new risk factors, nor can we assess the effect,
if any, of the new risk factors on our business or the extent to which any
factor or combination of factors may cause actual results to differ from those
expressed or implied by these forward-looking statements.
  If any
one or more of these expectations and assumptions proves incorrect, actual
results will likely differ materially from those contemplated by the
forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us, whether as a
result of new information, future events or otherwise. You are cautioned not to
unduly rely on such forward-looking statements when evaluating the information
presented in this report.
  General
Overview
  The
Company operates in two segments: MXL and Five Star.  The Company also
owns certain other non-core assets, including an investment in a publicly held
company, Millennium Cell and certain real estate in Pawling, New York and
Killingly, Connecticut.  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 related to
contingent stock rights.  In the year ended December 31, 2007, the
Company sold 2,639,482 shares of Indevus stock, which represents all of the
shares of Indevus common stock held by the Company in 2007.   The
Company may receive two contingent tranches of Indevus common stock, to the
extent certain milestones with respect to specific product candidates are
achieved. If each of the contingent milestones is achieved, the Company will
receive $2,070,670 and $3,106,005, respectively, worth of Indevus common stock
on the date the milestone is met, at which date additional gain will be
recognized (see Notes 9 and 11(a) to the Consolidated Condensed Financial
Statements).
  MXL
Overview
  The
primary business of MXL is the manufacture of polycarbonate parts requiring
adherence to strict optical quality specifications, and the application of
abrasion and fog resistant coatings to those parts.  MXL also designs
and constructs injection molds for a variety of applications.  Some of
the products that MXL produces include:
  ·
            facemasks
      and shields for recreation purposes and industrial safety
      companies;
  ·
            precision
      optical systems, including medical optics, military eye wear and custom
      molded and decorated products; and
  ·
            tools,
      including optical injection mold tools and standard injection mold
      tools.
  17
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of Contents
  MXL
manufactures and sells its products to various commercial and government
customers, who utilize MXL’s parts to manufacture products that will be
ultimately delivered to the end-user.  MXL’s government customers
include various offices of the Department of Defense, while MXL’s commercial
customers are primarily in the recreation, safety, and security industries. Some
of MXL’s consumer based products are considered to be at the high-end of their
respective markets.   As a result, sales of MXL’s products may
decline together with a decline in discretionary consumer spending; therefore a
key performance indicator that the Company’s management uses to manage the
business is the level of discretionary spending in key markets, specifically the
United States and Japan.
  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.
  Five Star
operates in the Home Improvement market.  Five Star faces intense
competition from large national distributors, smaller regional distributors, and
manufacturers that bypass the distributor and sell directly to the retail
outlet.  The principal means of competition for Five Star are its
strategically placed distribution centers and its extensive inventory of
quality, name-brand products.  In addition, Five Star’s customers face
stiff competition from Home Depot and Lowe’s, which purchase directly from
manufacturers. Management of Five Star believes that, the independent retailers
that are Five Star’s customers remain a viable alternative to Home Depot and
Lowe’s, due to the shopping preferences of and the retailer’s geographic
convenience for some consumers.
  On April
5, 2007, Five Star acquired substantially all the assets (except “Excluded
Assets” as defined) and assumed the Assumed Liabilities (as defined) of
Right-Way Dealer Warehouse, Inc. (“Right-Way”) pursuant to the terms of a
definitive asset purchase agreement, dated as of March 13, 2007 (the
“Agreement”), with Right-Way for approximately $3,200,000 in cash and the
assumption of liabilities in the approximate amount of $50,000. Transaction
costs of $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 which sells
paint sundry and hardware supplies to local retail stores.
  Upon
closing of the transaction, Five Star leased a warehouse at which the Right-Way
Brooklyn Cash & Carry business is conducted from an affiliate of the
principal of Right-Way, with an option to purchase the warehouse.  See
Note 4 to the Consolidated Condensed Financial Statements.
  To
further expand, Five Star is considering strategies intended to grow its revenue
base in the Northeast and Mid-Atlantic States through internal initiatives and
to acquire complementary distributors outside its current geographic
area.  There is no assurance that these growth plans can be executed
and, if executed, will be successful from an operational or financial
standpoint.  These plans could require capital in excess of the funds
presently available to Five Star.
  18
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of Contents
 
 Management
discussion of critical accounting policies
  The
preparation of our financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Our estimates, judgments and assumptions are
continually evaluated based on available information and
experience.  Because of the use of estimates inherent in the financial
reporting process, actual results could differ from those
estimates.
  Certain
of our accounting policies require higher degrees of judgment than others in
their application.  These include valuation of accounts receivable,
accounting for investments, and impairment of long-lived assets which are
summarized below.
  Revenue
recognition
  Revenue
on product sales is recognized at the point in time when the product has been
shipped, title and risk of loss has been transferred to the customer, and the
following conditions are met: persuasive evidence of an arrangement exists, the
price is fixed and determinable, and collectability of the resulting receivable
is reasonably assured.  Allowances for estimated returns and
allowances are recognized when sales are recorded.
  Stock
based compensation
  The
Company accounts for stock based compensation pursuant to Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”). Under SFAS 123R, compensation cost is recognized over the vesting period
based on the fair value of the award at the grant date.
  Valuation
of accounts receivable
  Provisions
for allowance for doubtful accounts are made based on historical loss experience
adjusted for specific credit risks.  Measurement of such losses
requires consideration of the Company’s historical loss experience, judgments
about customer credit risk, and the need to adjust for current economic
conditions.
  Impairment
of long-lived tangible assets
  Impairment
of long-lived tangible assets with finite lives results in a charge to
operations whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.  Recoverability of
long-lived tangible assets to be held and used is measured by a comparison of
the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset.  If such assets are considered to be
impaired, the impairment to be recognized is measured by determining the amount
by which the carrying amount of the assets exceeds the fair value of the
asset.  Assets to be disposed of are reported at the lower of their
carrying amount or fair value less cost of sale.
  The
measurement of the future net cash flows to be generated is subject to
management’s reasonable expectations with respect to the Company’s future
operations and future economic conditions which may affect those cash
flows.
  The
Company holds the Pawling Property, which is undeveloped land in Pawling, New
York with a carrying amount of approximately $2.5, million which management
believes is less than its fair value, less cost of sale and property in East
Killingly, Connecticut with a carrying amount of approximately $0.4
million.
  Accounting for
investments
  The
Company’s investment in marketable securities are classified as
available-for-sale and recorded at their market value with unrealized gains and
losses recorded as a separate component of stockholders’ equity.  A
decline in market value of any available-for-sale security below cost that is
deemed to be other than temporary, results in an impairment loss, which is
charged to earnings.
  Determination
of whether an investment is impaired and whether an impairment is other than
temporary requires management to evaluate evidence as to whether an investment’s
carrying amount is recoverable within a reasonable period of time considering
factors which include the length of time that an investment’s market value is
below its carrying amount and the ability of the investee to sustain an earnings
capacity that would justify the carrying amount of the investment.
  19
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of Contents
  Vendor
allowances
  The
Company accounts for vendor allowances under the guidance provided by EITF
Issue No. 02-16, “Accounting by a Customer (Including a Reseller)
for Certain Consideration Received from a Vendor,” and EITF Issue No.
03-10, “Application of EITF Issue No. 02-16 by Resellers to Sales Incentives
Offered to Consumers by Manufacturers.” Vendor allowances reduce the
carrying cost of inventory unless they are specifically identified as a
reimbursement for promotional programs and/or other services provided. Any
such allowances received in excess of the actual cost incurred also reduce
the carrying cost of inventory.
  Income
taxes
  Income
taxes are provided for based on the asset and liability method of accounting
pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 109,
“Accounting for Income Taxes” and FASB Interpretation No. 48 Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109”.
Under SFAS No. 109, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
  Results
of Operations
  Three
months ended March 31, 2008 compared to the three months ended March 31,
2007
  Income
(loss) before income taxes and minority interest
  For the
three months ended March 31, 2008, the Company had a loss before income tax
expense and minority interests of $1,376,000 compared to income before income
tax expense and minority interests of $128,000 for the three months ended March
31, 2007. The decrease in Income (loss) before income taxes and minority
interest of $1,504,000 for the three months ended March 31, 2008 as compared to
the three months ended March 31, 2007, is primarily a result the
following: (i) reduced operating profit at Five Star of $1,489,000 due to
(a) a $1,096,000 compensation expense related to the termination
of  the Company’s agreement with S. Leslie Flegel and the effect of
the purchase by the Company of the 2,000,000 shares of  the Company’s
common stock owned by Mr. Flegel (see Note 13 to the Consolidated Condensed
Financial Statements), which is reflected in Charge related
to  resignation of Chairman of the Board of Five Star in the
Consolidated Condensed Statement of Operations, (b) increased general and
administrative expenses primarily due the acquisition of Right-Way in April
2007, (c) increased selling expenses due to increased sales, and (d) partially
offset by increased gross margin due to increased sales, and
(ii)  increased expenses at the corporate level.  This
decrease was partially offset by increased operating profit of $298,000 at MXL,
due to costs incurred in the first quarter of 2007 related to MXL’s closure of
its Illinois facility.
  Sales
  Three
      months
              ended
      March 31,2008
            
            2007Five
      Star
            
            $
            31,469,000
            
            
            $
            29,861,000MXL
            
            
            2,339,000
            
            
            
            2,070,000$
            33,808,000
            
            
            $
            31,931,000
 
 The
increased Five Star sales of $1,608,000 were due to sales generated by Right-Way
Brooklyn (Five Star’s Cash and Carry facility purchased in April 2007), Cabot
drop ship sales that occurred in the second quarter of 2007 being shipped in the
first quarter of 2008 due to a change in the program by Cabot, offset by reduced
sales out of the New Jersey and Connecticut warehouses due to an overall
weakness in the marketplace.
  20
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 The
increase in MXL sales of $269,000 for the three months ended March 31, 2008 as
compared to the three months ended March 31, 2007 was the result of increased
sales from MXL’s existing base.
  Gross
margin
  Three
      months endedMarch
      31,2008
            
            %
            
            2007
            
            %Five
      Star
            
            $
            5,176,000
            
            16.4
            
            $
            4,728,000
            
            15.8MXL
            
            
            609,000
            
            26.0
            
            
            362,000
            
            17.5$
            5,785,000
            
            15.9
            
            $
            5,090,000
            
            15.9
 
 Five
Star’s increased gross margin of $448,000 and increased gross margin percentage
is due to the following: (i) increased sales of $1,608,000, and (ii) increased
gross margin percentage due to increased vendor allowances earned in the period,
which were offset by increased warehouse expenses due to an overall increase in
operating costs due to Right-Way and increased prices.
  MXL’s
increased gross margin of $247,000 and increased gross margin percentage for the
three months ended March 31, 2008 was due to the following: (i) increased costs
of approximately $167,000  for the quarter ended March 31, 2007 at
MXL’s  Illinois facility due to the increased costs incurred and
reduced revenue generated due to the commencement of closing of the facility
during the quarter ended March 31, 2007, (ii) increased sales in 2008 and (iii)
improved product mix for the three months ended March 31, 2008.
  Selling,
general, and administrative expenses
  For the
three months ended March 31, 2008, selling, general and administrative expenses
increased by $1,123,000 from $4,702,000 for the three months ended March 31,
2007 partially due to the following: (i) an increase in  SG&A
of $841,000 at Five Star due to; (a) increased selling expenses of $162,000 as a
result of increased commissions due to increases sales and other sales related
operating expenses and (b) increased general and administrative expenses of
$517,000 due to increased costs incurred due to Right-Way, as well as a general
increase in operating costs, (ii) reduced SG&A at MXL of $50,000 due to the
closing of MXL’s Illinois facility in 2007, and (iii) increased SG&A at the
corporate level primarily due to equity based compensation expense and increased
professional fees.
  Investment
and other income (loss), net
  The
Company recognized investment and other income of $100,000 for the three months
ended March 31, 2008 compared to income of  $66,000 for the three
months ended March 31, 2007.  The change of $34,000 was due to
increased interest income due to increased balances of cash and cash
equivalents.
  Income
taxes
  For the
three months ended March 31, 2008 and 2007, the Company recorded an income tax
expense of $14,000 and $360,000, 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 (loss) of Five Star, a 75% owned subsidiary, which is not included in the
Company’s consolidated return, and not recording an income tax benefit for the
losses of National Patent.  As the result of the resignation of S.
Leslie Flegel, former director and Chairman of the Board of Five Star (see Note
13) a  compensation expense of $1,096,000 was recorded by Five Star of
which $704,000 did not result in a tax benefit. Such amount was treated as a
discrete item. The tax effect of the discrete items are reflected in the periods
in which they occur and not reflected in the estimated annual effective tax rate
which is used for interim period tax provisions. This resulted in no tax benefit
being recorded by Five Star for the three months ended March 31,
2008.
 
  Financial
condition
  At March
31, 2008, the Company had $11,505,000 of cash and cash equivalents at the
corporate level, which is primarily attributable to the net proceeds realized
from the sale of Indevus shares.
  21
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of Contents
 
 Liquidity
and capital resources
  At March
31, 2008, the Company had cash and cash equivalents totaling of $12,366,000. The
Company believes that cash, investments on hand and borrowing availability under
existing credit agreements will be sufficient to fund the Company’s working
capital requirements for at least the next twelve months.
  For the
three months ended March 31, 2008, the Company’s working capital decreased by
$3,329,000 to $20,925,000 from $24,254,000 as of December 31, 2007.
  The
decrease in cash and cash equivalents of $3,332,000 for the three months ended
March 31, 2008 resulted from net cash used in operations of $8,782,000, due
primarily to a net loss of $1,377,000, an increase in accounts receivable of
$7,995,000, an increase in inventory of $6,086,000, partially offset by an
increase in accounts payable and accrued expenses of $5,384,000; net cash used
in investing activities of $1,690,000, primarily consisting of purchases of Five
Star common stock for $1,523,000, which was comprised of $763,000 in open market
purchases and $1,200,000 from S. Leslie Flegel, the former Chairman of Five
Star, of which $440,000 was charged to operations (see Note 13 to the
Consolidated Condensed Financial Statements); and net cash provided by financing
activities of $7,140,000, consisting of proceeds of short term borrowings of
$8,173,000,  offset by purchases of treasury stock of $729,000. The
significant changes in accounts receivables, inventory and accounts payable is
primarily due to the particulars of Five Star’s business in the first quarter,
including their trade show, spring dating programs and increased inventory
levels for the spring.
  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% (4.57% at March 31, 2008) for borrowings not to
exceed $15,000,000 and the prime rate (5.25% at March 31, 2008) 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 March 31, 2008 and December 31, 2007, approximately
$27,476,000 and $19,303,000 was outstanding under the Loan Agreement and
approximately $7,390,000 and $5,579,000 was available to be borrowed,
respectively. Substantially all of Five Star’s assets are pledged as collateral
for these borrowings.
  Under the
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 March 31, 2008 Five Star was in compliance with all
required covenants. The following table sets forth the significant debt
covenants at March 31, 2008:
  Covenant
            
            Required
            
            CalculatedMinimum
      tangible net worth
            
            $6,000,000
            
            $9,512,000Debt
      to tangible net worth
            
            <
      6
            
            2.89Fixed
      charge coverage
            
            >1.1
            
            1.78Quarterly
      income, as adjusted
            
            No
      loss in consecutive quarters
            
            $489,000 – first
      quarter profit (*)
 
 *
            The
      Lender amended the covenants related to the Loan Agreement in March 2008
      to exclude non-cash charges related to any equity instruments (common
      stock, options and warrants) issued to any employee, director, or
      consultant from the covenant calculations (see Note 7 to
      the Consolidated  Condensed Financial
      Statements).
  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, 2006 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 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 March 31, 2008,
$625,000 was outstanding under the MXL Line and $ 275,000 was available to be
borrowed. The MXL Line contains certain financial covenants, most significant
being a cash flow coverage ratio (as defined) of 1.25 to 1.00, which is
calculated at December 31.  At December 31, 2007, MXL was in
compliance with its covenants.
  22
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of Contents
  Contractual
Obligations and Commitments
  GP
Strategies has guaranteed the leases for Five Star’s New Jersey and Connecticut
warehouses, totaling approximately $1,600,000 per year through the first quarter
of 2009. GP Strategies’ guarantee of such leases was in effect when Five Star
was a wholly-owned subsidiary of GP Strategies. As part of the spin-off, the
landlord of the New Jersey and Connecticut facilities and the lessor of the
equipment did not consent to the release of GP Strategies’ guarantee.  In
February 2008, Five Star extended the lease for the New Jersey warehouse for 12
months to March 31, 2010.  In addition, the lease for the New Jersey
warehouse will no longer be guaranteed by GP Strategies, but will be guaranteed
by the Company.
  Recent
accounting pronouncements
  In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 161 (“SFAS No. 161”), “Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB Statement
No. 133”. SFAS No. 161 gives financial statement users better information about
the reporting entity's hedges by providing for qualitative disclosures about the
objectives and strategies for using derivatives, quantitative data about the
fair value of and gains and losses on derivative contracts, and details of
credit-risk-related contingent features in their hedged positions. The standard
is effective for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application encouraged,
but not required. The Company does not anticipate that the adoption of SFAS No.
161 will have a material effect on the Company’s consolidated financial
statements.
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”,
which defines fair value, establishes a framework for measurement fair value and
expands disclosures about fair value measurements. SFAS No. 157 clarifies that
fair value should be based on assumptions that market participants will sue when
pricing an assets or liability and establishes a fair value hierarchy of three
levels that  prioritize the information used to develop those
assumptions. The provisions of SFAS No. 157 will become effective for the
Company beginning January 1, 2008. Generally, the provisions of this statement
are to be applied prospectively. The Company adopted SFAS No. 157 in the first
quarter of 2008. The adoption of SFAS No. 157 did not have a material effect on
the Company’s consolidated financial statements.
  In
February, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities”.  This statement provides
companies with an option to report selected financial assets and liabilities at
fair value. This statement is effective for fiscal years beginning afterNovember
15, 2007with
early adoption permitted. SFAS No. 159 did not have any material effect on the
Company’s consolidated financial statements.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements — an amendment of Accounting Research
Bulletin (“ARB”) No. 51” (“SFAS 160”).  SFAS 160 requires that
ownership interests in subsidiaries held by parties other than the parent, and
the amount of consolidated net income, be clearly identified, labeled, and
presented in the consolidated financial statements within equity, but separate
from the parent’s equity. It also requires once a subsidiary is deconsolidated,
any retained noncontrolling equity investment in the former subsidiary be
initially measured at fair value. Sufficient disclosures are required to clearly
identify and distinguish between the interests of the parent and the interests
of the noncontrolling owners.  SFAS No. 160 is effective for fiscal
years beginning after December 15, 2008, and is not expected to have a
significant impact on the Company’s results of operations, financial condition
and liquidity.
  In
December 2007, the FASB issued SFAS No. 141
(Revised 2007),“Business Combinations”. SFAS No. 141(R), replaces
SFAS No. 141,“Business Combinations”, and establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree, and any goodwill acquired in a business combination.
SFAS No. 141(R) also establishes disclosure requirements to enable the
evaluation of the nature and financial effects of a business combination.
SFAS No. 141(R) is to be applied prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.  We
have not yet determined the impact that the adoption of SFAS No. 141(R) will
have on its result of operations or financial position.
  23
 Table
of Contents
  Item
3.            
Quantitative and Qualitative Disclosure About Market Risk
  Not
required.
  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 Exchange Act) as of the end of the period covered by this quarterly report.
Based upon such evaluation, the Company’s principal executive officer and
principal financial officer have concluded that the Company’s disclosure
controls and procedures are effective as of the end of the period covered by
this quarterly report.
  The
Company’s principal executive officer and principal financial officer have also
concluded that there was no change in the Company’s internal control over
financial reporting (as such term is defined in Rule 13a-15(f) under the
Exchange Act) that occurred during the quarter ended March 31, 2008 that has
materially affected, or is reasonably likely to materially affect, the Company’s
internal control over financial reporting.
  PART
II. OTHER INFORMATION
  Item
2.             Unregistered
Sales Of Equity Securities and Use of Proceeds.
  The
following table provides common stock repurchases made by or on behalf of the
Company during the first quarter ended March 31, 2008.
 
 Issuer
Purchases of Equity Securities (1)(2)
  Period
            
            Total
              Number
      of
              Shares
              Purchased
            
            
            Average
              Price
      Paid
              Per
      Share
            
            
            Total
      Number of
              Shares
      Purchased
              As
      Part of
              Publicly
              Announced
      Plan
              or
      Program
            
            
            Maximum
              Number
      of
              Shares
      That
              May
      Yet be
              Purchased
              Under
      the Plan
              or
      ProgramBeginning
            EndingJanuary
      1, 2008
            January
      31, 2008February
      1, 2008
            February
      29, 2008
            
            
            100,000
            
            
            $
            2.45
            
            
            
            100,000
            
            
            
            371,538March
      1, 2008
            March
      31, 2008
            
            
            200,000
            
            
            $
            3.60
            
            
            
            
            
            
            
            371,538Total
            
            
            300,000
            
            
            
            
            
            
            
            100,000
 
 (1)
            On
      December 15, 2006, the Company’s Board of Directors authorized the Company
      to repurchase up to 2,000,000 shares, or approximately 11%, of its
      outstanding shares of common stock on that date, from time to time either
      in open market or privately negotiated transactions. The Company undertook
      this repurchase program in an effort to increase shareholder
      value.
 
 (2)
            In
      connection with the resignation by Mr. Flegel as director of the Company,
      and as director and Chairman of the Board of Five Star, effective March
      25, 2008, the Company, Five Star and Mr. Flegel entered into an agreement,
      dated March 25, 2008, pursuant to which, among other things, Mr. Flegel
      sold to the Company 200,000 shares of Company common stock, which was
      exchangeable into 1,200,000 shares of Five Star common stock owned by the
      Company, at $3.60 per share (which equates to $0.60 per share of Five Star
      common stock had Mr. Flegel exercised his right to exchange these shares
      of Company common stock into shares of Five Star common
      stock).
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  Item
6.             Exhibits
 
 Exhibit
      No.
            
            Description10.1
            
            Agreement
      and Release, dated March 25, 2008, by and among Leslie Flegel, National
      Patent Development Corporation and Five Star Products, Inc. (incorporated
      by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by
      Five Star Products, Inc. with the Securities and Exchange Commission on
      March 27, 2008)10.2
            
            Sale
      Agreement, dated March 25, 2008, by and among National Patent Development
      Corporation, Five Star Products, Inc., Jason Flegel, Carole Flegel, Dylan
      Zachary Flegel UTMA – FL, Brooke Flegel UTMA – FL, Mark Flegel, Darryl
      Sagel, Lauren Sagel, Graham Spencer Sagel UTMA – NY and Alexa Danielle
      Sagel UTMA – NY (incorporated by reference to Exhibit 10.2 of the Current
      Report on Form 8-K filed by Five Star Products, Inc. with the Securities
      and Exchange Commission on March 27,
2008)
 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
 *Filed
herewith
   25
 Table
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  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed in its behalf by the undersigned thereunto
duly authorized.
  NATIONAL
      PATENT DEVELOPMENT CORPORATIONDate: May
      15, 2008
            
            /s/ HARVEY
      P. EISENName:
      Harvey P.EisenTitle:
      Chairman of the Board and Chief Executive OfficerDate: May
      15, 2008
            
            /s/ IRA
      J. SOBOTKOName:
      Ira J. SobotkoTitle:
      Vice President, Finance
  26