**UNITED
              STATES**
 **SECURITIES
              AND EXCHANGE COMMISSION**
 **WASHINGTON,
              D.C. 20549**
 
 **FORM
                10-Q/A**
 Amendment
                No. 1
 
 (Mark
                One)
  **xQUARTERLY
              REPORT
              PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
              1934**
  For
              the quarterly
              period ended June 30, 2006
 or
  **o TRANSITION
              REPORT
              PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
              1934**
 
 For
              the transition period from _____ to _____
 
 Commission
                File Number:  000-50587
 
 **NATIONAL
              PATENT DEVELOPMENT CORPORATION**
 (Exact
              Name of Registrant as Specified in its Charter)
 
 **Delaware**
                        
                        **13-4005439**(State
                            or other jurisdiction of
                          incorporation
                            or organization
                        
                        (I.R.S.
                            Employer
                          Identification
                            No.)
 **10
                              East 40th Street, Suite 3110, New York, NY**
                          **10016**(Address
                              of principal executive offices)
                          (Zip
                              code)
 **(646)
                              742-1600**(Registrant’s
                              telephone number, including area
                              code)
 Indicate
            by check mark whether the registrant: (1) has filed all reports required
            to be
            filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
            the
            preceding 12 months (or for such shorter period that the registrant was
            required
            to file such reports), and (2) has been subject to such filing requirements
            for
            the past 90 days. Yes x No
o
 
 Indicate
              by check mark whether the registrant is a large accelerated filer,
              an
              accelerated filer, or a non-accelerated filer. See definition of accelerated
              filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
              (Check
              one):
  Large
            accelerated filer o Accelerated
            filer o Non-accelerated
            filer o
  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
              15, 2006, there were 17,809,791 shares of the registrant’s common stock, $0.01
              par value, outstanding.
   
  **EXPLANATORY
              NOTE**
 
 This
              amendment on Form 10-Q/A (this “Form 10-Q/A”) to the Quarterly Report on Form
              10-Q for the quarterly period ended June 30, 2006 (the “2006 Second Quarter”),
              originally filed by National Patent Development Corporation (the “Company”) with
              the Securities and Exchange Commission (the “SEC”) on August 14, 2006 (the “Form
              10-Q”), is being filed with the SEC due to the amendment and restatement
              of the
              Company’s interim financial statements and other financial information for
              the
              three and six months ended June 30, 2006. On May 15, 2007, the Company
              filed
              with the SEC an amendment to its Quarterly Report on Form 10-Q for
              the three
              month period ended March 31, 2006, and will also be filing with the
              SEC an
              amendment to its Quarterly Report on Form 10-Q for the three and nine
              month
              periods ended September 30, 2006. The changes reflected in the Company’s
              Condensed Consolidated Financial Statements for the first three quarters
              of 2006
              were previously disclosed in
              Note
              20 to the Company’s Notes to Consolidated Financial Statements included in the
              Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed
              with the SEC on April 3, 2007 (the “2006 Form 10-K”).
  As
              more
              fully stated in Note 10 to the Company’s Notes to Condensed Consolidated
              Financial Statements included in this Form 10-Q/A:
  ·
                    The
                        financial statements and other information contained in this
                        Form 10-Q/A
                        have been amended and restatedto
                        reflect the impact of a change in the financial statements
                        relating to the
                        recordation of shares of stock of Valera Pharmaceuticals,
                        Inc. (“Valera”)
                        owned by the Company through its wholly owned subsidiary,
                        MXL Industries,
                        Inc., and classified as available for sale during the period
                        (the “Valera
                        Shares”). In the fourth quarter of 2006, the Company charged*Investment
                        and other income (loss)*,
                        and credited*Accumulated
                        other comprehensive income*,
                        $180,000, representing unrealized gain for the period from
                        January 1, 2006
                        through September 30, 2006 on the Valera Shares, which unrealized
                        gain is
                        payable to related parties (as discussed in Note 7 to the
                        Company’s Notes
                        to Condensed Consolidated Financial Statements included in
                        this Form
                        10-Q/A).
  ·
                    As
                        a result of the implementation of SAB 108 in December 2006,
                        previously
                        issued interim financial information consisting of costs
                        of goods sold,
                        gross margin and net loss for the first three quarters of
                        the year ended
                        December 31, 2006 has been revised to correct
                        errors.
   
  Financial
              data for the six months ended June 30, 2006 has been restated by increasing
              net
              loss and net loss per share as follows:
  **Unaudited**
                    
                    **Six
                        Months Ended**
                      **June
                        30, 2006**
                      **(Previously
                        Reported)**
                    
                    **Adjustment**
                    
                    **Six
                        Months Ended**
                      **June
                        30, 2006**
                      **(As
                        Restated)**(in
                        thousands, except per share data)Net
                        loss
                    
                    
                    **(
                        265**
                    **)**
                    
                    **(
                        290**
                    **)**
                    
                    **(
                        555**
                    **)**Net
                        loss per share
                    
                    
                    **(
                        .02**
                    **)**
                    
                    **(
                        .01**
                    **)**
                    
                    **(
                        .03**
                    **)**
  Financial
              data for the 2006 Second Quarter has been restated by increasing net
              loss and
              net loss per share as follows:
  **Unaudited**
                    
                    **Three
                        Months Ended**
                      **June
                        30, 2006**
                      **(Previously
                        Reported)**
                    
                    **Adjustment**
                    
                    **Three
                        Months Ended**
                      **June
                        30, 2006**
                      **(As
                        Restated)**(in
                        thousands, except per share data)Net
                        loss
                    
                    
                    **(
                        116**
                    **)**
                    
                    **(
                        2**
                    **)**
                    
                    **(
                        118**
                    **)**Net
                        loss per share
                    
                    
                    **(
                        .01**
                    **)**
                    
                    **(
                        .00**
                    **)**
                    
                    **(
                        .01**
                    **)**
  This
              amendment also revises Part I, Item 2. “Management’s Discussion and Analysis of
              Financial Condition and Results of Operations” to reflect the impact of the
              changes in the interim financial statements thereon, and Part I, Item
              4.
“Controls and Procedures” to identify the material deficiencies in the Company’s
              internal controls and procedures as of June 30, 2006 and the manner
              in which the
              Company is addressing such deficiencies.
  As
              a
              result of this amendment, the certifications, pursuant to Section 302
              and
              Section 906 of the Sarbanes-Oxley Act of 2002, filed and furnished,
              respectively, as exhibits to the Form 10-Q have been re-executed and
              re-filed as
              of the date of this Form 10-Q/A, as reflected in Part II, Item 6.
“Exhibits”.
  Except
              as
              described above, no other changes have been made to the Form 10-Q.
              This Form
              10-Q/A does not amend or update any other information set forth in
              the Form
              10-Q.
   
  
 **NATIONAL
            PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 
 **TABLE
            OF CONTENTS**
 
 
 Page
                            No.Part
                            I.Financial
                            InformationItem
                            1.
                        
                        Financial
                            StatementsCondensed
                            Consolidated Statements of Operations-Three
                            Months and Six Months EndedJune
                            30, 2006 (Restated) and 2005 (Unaudited)
                        
                        1Condensed
                            Consolidated Statements of Comprehensive Loss-Three
                            Months and Six Months EndedJune
                            30, 2006 (Restated) and 2005 (Unaudited)
                        
                        2Condensed
                            Consolidated Balance Sheets -June
                            30, 2006 (Restated and Unaudited) and December 31, 2005
                        
                        3Condensed
                            Consolidated Statements of Cash Flows -Six
                            Months Ended June 30, 2006 (Restated) and 2005 (Unaudited)
                        
                        4Notes
                            to Condensed Consolidated Financial Statements
                        
                        5Item
                            2.
                        
                        Management's
                            Discussion and Analysis of FinancialCondition
                            and Results of Operations
                        
                        17Item
                            3.
                        
                        Quantitative
                            and Qualitative Disclosure about Market Risk
                        
                        29Item
                            4.
                        
                        Controls
                            and Procedures
                        
                        
                        
                        29Part
                            II. Other InformationItem
                            6.
                        
                        Exhibits
                        
                        
                        
                        31Signatures
                        
                        
                        
                        32
 
 **PART
            I. FINANCIAL INFORMATION**
 
 **NATIONAL
            PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
            CONSOLIDATED STATEMENTS OF OPERATIONS**
 **(Unaudited)**
 **(in
            thousands, except per share data)**
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2006**
                  
                  2005
                  
                  **2006**
                  
                  2005**Restated-**
                    **See
                      Note 10**
                  
                  
                  
                  **Restated-**
                    **See
                      Note 10**Sales
                  
                  **$**
                  **31,161**
                  
                  $
                  31,669
                  
                  **$**
                  **62,366**
                  
                  $
                  61,746Cost
                      of sales
                  
                  
                  **25,627**
                  
                  
                  25,792
                  
                  
                  **51,619**
                  
                  
                  51,545Gross
                      margin
                  
                  
                  **5,534**
                  
                  
                  5,877
                  
                  
                  **10,747**
                  
                  
                  10,201Selling,
                      general and administrativeexpenses
                  
                  
                  **(5,073**
                  **)**
                  
                  (5,313
                  )
                  
                  **(9,795**
                  **)**
                  
                  (10,198
                  )Loss
                    on write-down of Illinois
                    property
                  
                  
                  
                  
                  
                  (134
                  )
                  
                  
                  
                  
                  (134
                  )Operating
                      profit (loss)
                  
                  
                  **461**
                  
                  
                  430
                  
                  
                  **952**
                  
                  
                  (131
                  )Interest
                      expense
                  
                  
                  **(464**
                  **)**
                  
                  (455
                  )
                  
                  **(843**
                  **)**
                  
                  (827
                  )Investment
                      and other income (loss)
                  
                  
                  **55**
                  
                  
                  108
                  
                  
                  **(182**
                  **)**
                  
                  271Income
                      (loss) before income tax expense and minority interest
                  
                  
                  **52**
                  
                  
                  83
                  
                  
                  **(73**
                  **)**
                  
                  (687
                  )Income
                      tax expense
                  
                  
                  **(125**
                  **)**
                  
                  (328
                  )
                  
                  **(346**
                  **)**
                  
                  (371
                  )Loss
                      before minority interest
                  
                  
                  **(73**
                  **)**
                  
                  (245
                  )
                  
                  **(419**
                  **)**
                  
                  (1,058
                  )Minority
                      interest
                  
                  
                  **(
                      45**
                  **)**
                  
                  (150
                  )
                  
                  **(136**
                  **)**
                  
                  (157
                  )Net
                      loss
                  
                  **$**
                  **(118**
                  **)**
                  $
                  (395
                  )
                  **$**
                  **(555**
                  **)**
                  $
                  (1,215
                  )Net
                      loss per shareBasic
                      and diluted
                  
                  **$**
                  **(0.01**
                  **)**
                  $
                  (0.02
                  )
                  **$**
                  **(0.03**
                  **)**
                  $
                  (0.07
                  )
 
 See
            accompanying notes to consolidated financial statements.
  1
  **NATIONAL
            PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
            CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS**
 **(Unaudited)**
 **(in
            thousands)**
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2006**
                  
                  2005
                  
                  **2006**
                  
                  2005**Restated-**
                    **See
                      Note 10**
                  
                  
                  
                  **Restated-**
                    **See
                      Note 10**Net
                      loss
                  
                  **$**
                  **(118**
                  **)**
                  $
                  (395
                  )
                  **$**
                  **(555**
                  **)**
                  $
                  (1,215
                  )Other
                      comprehensive income (loss), before tax:Net
                      unrealized gain (loss) on available-for-sale-securities
                  
                  
                  **286**
                  
                  
                  (206
                  )
                  
                  **4,582**
                  
                  
                  563Reclassification
                      adjustment for gain on securities sold included in net
                      loss
                  
                  
                  **-**
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (152
                  )Net
                      unrealized gain (loss) on interest rate swap,
                    net
                      of minority interest
                  
                  
                  **21**
                  
                  
                  (93
                  )
                  
                  **66**
                  
                  
                  58Comprehensive
                      income (loss) before tax
                  
                  
                  **189**
                  
                  
                  (694
                  )
                  
                  **4,093**
                  
                  
                  (746
                  )Income
                      tax (expense) benefit related to items of other comprehensive
                      income
                      (loss)
                  
                  
                  **(8**
                  **)**
                  
                  38
                  
                  
                  **(26**
                  **)**
                  
                  (25
                  )Comprehensive
                      income (loss)
                  
                  **$**
                  **181**
                  
                  $
                  (656
                  )
                  **$**
                  **4,067**
                  
                  $
                  (771
                  )
  See
            accompanying notes to consolidated financial statements.
  2
  **NATIONAL
            PATENT DEVELOPMENT CORPORATION**
 **CONDENSED
            CONSOLIDATED BALANCE SHEETS**
 **(in
            thousands)**
 
 **June
                      30,**
                  
                  **December
                      31,****2006**
                  
                  **2005****Restated-**
                    **See
                      Note 10****(unaudited)****Assets****Current
                      assets**Cash
                      and cash equivalents
                  
                  **$**
                  **4,683**
                  
                  $
                  5,115Accounts
                      receivable, less allowancefor
                      doubtful accounts of $533 and $480
                  
                  
                  **18,053**
                  
                  
                  12,083Receivable
                      from GP Strategies Corporation
                  
                  
                  **725**
                  
                  
                  1,142Inventories
                  
                  
                  **22,814**
                  
                  
                  24,021Prepaid
                      expenses and other current assets
                  
                  
                  **777**
                  
                  
                  997Deferred
                      tax asset
                  
                  
                  **359**
                  
                  
                  352**Total
                      current assets**
                  
                  
                  **47,411**
                  
                  
                  43,170Marketable
                      securities available for sale
                  
                  
                  **522**
                  
                  
                  477Property,
                      plant and equipment, net
                  
                  
                  **2,994**
                  
                  
                  3,085Investment
                      in Valera, including availablefor
                      sale securities of $4,996 in 2006
                  
                  
                  **6,128**
                  
                  
                  1,590Other
                      assets
                  
                  
                  **3,466**
                  
                  
                  3,360**Total
                      assets**
                  
                  **$**
                  **60,521**
                  
                  $
                  52,222**Liabilities
                      and stockholder’s equity****Current
                      liabilities**Current
                      maturities of long-term debt
                  
                  **$**
                  **163**
                  
                  $
                  291Short
                      term borrowings
                  
                  
                  **23,537**
                  
                  
                  20,764Accounts
                      payable and accrued expenses
                  
                  
                  **11,052**
                  
                  
                  9,566**Total
                      current liabilities**
                  
                  
                  **34,752**
                  
                  
                  30,621Long-term
                      debt less current maturities
                  
                  
                  **1,055**
                  
                  
                  1,106Deferred
                      tax liability
                  
                  
                  **279**
                  
                  
                  279Other
                      liabilities
                  
                  
                  **295**
                  
                  
                  20Minority
                      interest
                  
                  
                  **1,768**
                  
                  
                  1,727**Stockholder’s
                      equity**Common
                      Stock
                  
                  
                  **178**
                  
                  
                  178Additional
                      paid-in capital
                  
                  
                  **25,965**
                  
                  
                  25,921Accumulated
                      deficit
                  
                  
                  **(8,525**
                  **)**
                  
                  (7,762
                  )Accumulated
                      other comprehensive income
                  
                  
                  **4,754**
                  
                  
                  132**Total
                      stockholder’s equity**
                  
                  
                  **22,372**
                  
                  
                  18,469**Total
                      liabilities and stockholder’s equity**
                  
                  **$**
                  **60,521**
                  
                  $
                  52,222
 
 See
            accompanying notes to consolidated financial statements.
  3
  **NATIONAL
            PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 **CONDENSED
            CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(Unaudited)**
 **(in
            thousands)**
 
 **Six
                      Months Ended****June
                      30,****2006**
                  
                  2005**Restated-**
                    **See
                      Note 10****Cash
                      flows from operations:**Net
                      loss
                  
                  **$**
                  **(555**
                  **)**
                  $
                  (1,215
                  )Adjustments
                      to reconcile net loss tonet
                      cash used in operating activities:Depreciation
                      and amortization
                  
                  
                  **388**
                  
                  
                  338Minority
                      interest
                  
                  
                  **136**
                  
                  
                  157Expenses
                      paid in common stock
                  
                  
                  **44**Deferred
                      income taxes
                  
                  
                  **(7**
                  **)**Net
                      (gain) loss on marketable securities
                  
                  
                  
                  
                  
                  (152
                  )Loss
                      on sale of fixed assets
                  
                  
                  
                  
                  
                  76Loss
                      on write-down of Illinois property
                  
                  
                  
                  
                  
                  134Changes
                      in other operating items
                  
                  
                  **(3,152**
                  **)**
                  
                  (6,203
                  )**Net
                      cash used in operations**
                  
                  
                  **(3,146**
                  **)**
                  
                  (6,865
                  )**Cash
                      flows from investing activities:**Additions
                      to property, plant and equipment, net
                  
                  
                  **(297**
                  **)**
                  
                  (862
                  )Proceeds
                      from sale of investments
                  
                  
                  
                  
                  
                  1,002Proceeds
                      from sale of fixed assets
                  
                  
                  
                  
                  
                  48Repayment
                      of receivable from GP Strategies
                  
                  
                  **417**
                  
                  
                  -**Net
                      cash provided by investing activities**
                  
                  
                  **120**
                  
                  
                  188**Cash
                      flows from financing activities:**Distribution
                      to GP Strategies
                  
                  
                  
                  
                  
                  (91
                  )Contribution
                      from GP Strategies
                  
                  
                  
                  
                  
                  5,000Proceeds
                      from short-term borrowings
                  
                  
                  **2,773**
                  
                  
                  7,460Repayment
                      of long-term debt
                  
                  
                  **(179**
                  **)**
                  
                  (1,793
                  )**Net
                      cash provided by financing activities**
                  
                  
                  **2,594**
                  
                  
                  10,576Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  **(432**
                  **)**
                  
                  3,899Cash
                      and cash equivalents at beginning of period
                  
                  
                  **5,115**
                  
                  
                  2,087**Cash
                      and cash equivalents at end of period**
                  
                  **$**
                  **4,683**
                  
                  $
                  5,986
 
 
 See
            accompanying notes to the condensed consolidated financial
            statements.
 
 4
 **NATIONAL
                PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                to
                Condensed Consolidated Financial Statements
 Three
                and
                six months ended June 30, 2006 and 2005
 (Unaudited)
  **1.**  **Basis
            of presentation and summary of significant accounting
            policies**
 
 *Basis
            of presentation*
 
 The
            accompanying Condensed Consolidated Balance Sheet as of June 30, 2006
            and the
            Condensed Consolidated Statements of Operations and Cash Flows for the
            three
            months and six months ended June 30, 2006 and 2005 have not been audited,
            but
            have been prepared in conformity with accounting principles generally
            accepted
            in the United States for interim financial information and with the instructions
            to Form 10-Q and Article 10 of Regulation S-X. These financial statements
            should
            be read in conjunction with the audited consolidated financial statements
            and
            notes thereto for the year ended December 31, 2005 as presented in our
            Annual
            Report on Form 10-K. In the opinion of management, this interim information
            includes all material adjustments, which are of a normal and recurring
            nature,
            necessary for a fair presentation. The results for the 2006 interim periods
            are
            not necessarily indicative of results to be expected for the entire
            year.
 
 *Description
            of business.*National
            Patent Development Corporation (the “Company” or “National Patent Development
“), through its wholly owned subsidiary, MXL Industries, Inc. (“MXL”),
            manufactures polycarbonate parts requiring strict adherence to optical
            quality
            specifications, and in the application of abrasion and fog resistant
            coating to
            these parts. Products include shields and face masks and non-optical
            plastic
            products.
 
 The
            Company’s 64% owned subsidiary, Five Star Products, Inc. (“Five Star”), is
            engaged in the wholesale distribution of home decorating, hardware and
            finishing
            products. It serves over 3,500 independent retail dealers in twelve states
            in
            the Northeast. Products distributed include paint sundry items, interior
            and
            exterior stains, brushes, rollers, caulking compounds and hardware products.
            On
            May 9, 2006 the Company announced that both it and Five Star had signed
            a
            non-binding letter of intent with FLJ Partners, LLC (“FLJ”) providing for the
            sale by the Company to FLJ of its interest in Five Star for $2,950,000,
            or
            $.3230 per share, plus the repayment of the $2,800,000 note. The Company
            and
            Five Star had agreed to negotiate exclusively with FLJ with respect to
            Five Star
            until May 31, 2006. On
            June
            26, 2006 the Company termina t ed
            discussions with FLJ with respect to the sale of its interest in Five
            Star
            Products, Inc., as a result of the inability of the parties to agree
            to proceed
            with the transaction.
 
 Five
            Star
            Group, which is a wholly-owned subsidiary of Five Star, has an unsecured
            note
            payable (the “Note”) to JL Distributors, Inc., a wholly-owned subsidiary of the
            Company (JL Distributors) following the spin-off of the Company from
            GP
            Strategies (“GP Strategies”) on November 24, 2004. The Note, as amended, bore
            interest at 8% per annum payable quarterly, and matured on June 30, 2005.
            On
            June 30, 2005 the Company and Five Star agreed to extend the Note for
            a one-year
            term maturing on June 30, 2006. In consideration for the Company extending
            the
            Note, Five Star paid the Company a fee of one percent of the Note’s outstanding
            balance or $28,000. In addition, the interest rate on the Note was increased
            to
            9%. The Note is subordinated to the indebtedness under the Loan Agreement
            according to an Agreement of Subordination & Assignment (the “Subordination
            Agreement”) between Five Star Group, Inc. and JL Distributors, Inc. dated June
            20, 2003. The Subordination Agreement permits the annual repayment of
            principal
            under certain circumstances. On July 28, 2006 the Company and Five Star
            agreed
            to extend the Note for an additional one-year term maturing on June 30,
            2007. In
            consideration for the Company extending the Note, Five Star paid a fee
            of
            $28,000 which represented one percent of the Note’s outstanding balance. The
            interest rate on the Note remains at 9%.
  (Continued)
 5
  **NATIONAL
            PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
            to
            Condensed Consolidated Financial Statements
 Three
            and
            six months ended June 30, 2006 and 2005
 (Unaudited)
  *Revenue
            recognition.* Revenue
            on product sales is recognized at the point in time when the product
            has been
            shipped, title and risk of loss has been transferred to the customer,
            and the
            following conditions are met: persuasive evidence of an arrangement exists,
            the
            price is fixed and determinable, and collectibility of the resulting
            receivable
            is reasonably assured. Allowances for estimated returns and allowances
            are
            recognized when sales are recorded.
 
 *Shipping
            and handling costs.* Shipping
            and handling costs are included as a part of selling, general and administrative
            expense. These cost amounted to $1,301,000, $1,329,000, $2,545,000 and
            $2,557,000, for the three months and six months ended June 30, 2006 and
            2005,
            respectively.
 
 *Inventories.* Inventories are valued at the lower of cost or market, using the first-in,
            first-out method.
 
 *Derivatives
            and hedging activities.* The
            interest rate swap and interest rate collar entered into by the Five
            Star in
            connection with its Loan and Security Agreement (see Note 5) is being
            accounted
            for under SFAS No. 133, as amended, "Accounting for Derivative Instruments
            and
            Hedging Activities." SFAS No. 133 requires all derivatives to be recognized
            in
            the balance sheet at fair value. Derivatives that are not hedges must
            be
            adjusted to fair value through earnings. If the derivative is a cash
            flow hedge,
            changes in the fair value of the derivative are recognized in other
            comprehensive income until the hedged item is recognized in earnings.
            The
            ineffective portion of a derivative's change in fair value is immediately
            recognized in earnings. Changes in the fair value of the interest rate
            swap,
            which has been designated as a cash flow hedge, were recognized in other
            comprehensive income. Changes in the fair value of the interest rate
            collar are
            recognized in earnings. During
            the three and six months ended June 30, 2006 the Company recognized a
            loss of
            $11,000 and $16,000, respectively, as part of other income, for the changes
            in
            the fair value of the interest rate collar. During the three and six
            months
            ended June 30, 2005 the Company recognized a gain of $34,000 and $9,000,
            respectively, as part of other income, for the changes in the fair value
            of the
            interest rate collar.
 
 *Recent
            accounting pronouncements* *.*  In
            July
            2006, the Financial Accounting Standards Board (FASB) released FASB
            Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an
            interpretation of FASB Statement No. 109” (FIN 48).  FIN 48 clarifies the
            accounting and reporting for uncertainties in income tax law.  This
            Interpretation prescribes a comprehensive model for the financial statement
            recognition, measurement, presentation and disclosure of uncertain tax
            positions
            taken or expected to be taken in income tax returns.  The Company will
            adopt this Interpretation in the first quarter of 2007.  The cumulative
            effects, if any, of applying this Interpretation will be recorded as
            an
            adjustment to retained earnings as of the beginning of the period of
            adoption.  The Company has commenced the process of evaluating the expected
            effect of FIN 48 on its Consolidated Financial Statements and is currently
            not
            yet in a position to determine such effects.
  (Continued)
 6
  **NATIONAL
            PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
            to
            Condensed Consolidated Financial Statements
 Three
            and
            six months ended June 30, 2006 and 2005
 (Unaudited)
  **2.**  **Stock
            based compensation.**
  The
            Company and Five Star have stock-based compensation plans for employees
            and
            non-employee members of the Board of Directors. The plans provide for
            discretionary grants of stock options, restricted stock shares, and other
            stock-based awards. The plans are administered by the Compensation Committee
            of
            the Board of Directors, consisting of non-employee directors.
  Effective
            January 1, 2006, the Company and Five Star adopted Statement of Financial
            Accounting Standards No. 123 (revised 2004), “Share-Based Payment”, (“SFAS
            123R”), utilizing the modified prospective method whereby prior periods will
            not
            be restated for comparability. SFAS 123R requires recognition of stock-based
            compensation expense in the statement of operations over the vesting
            period
            based on the fair value of the award at the grant date. Previously, the
            Company
            used the intrinsic value method under Accounting Principles Board Opinion
            No.
            25, “Accounting for Stock Issued to Employees” (“APB 25”), as amended by related
            interpretations of the FASB. Under APB 25, no compensation cost was recognized
            for stock options because the quoted market price of the stock at the
            grant date
            was equal to the amount per share the employee had to pay to acquire
            the stock
            after fulfilling the vesting period. SFAS 123R supersedes APB 25 as well
            as
            Statement of Financial Accounting Standard 123 “Accounting for Stock-Based
            Compensation”, which permitted pro forma footnote disclosures to report the
            difference between the fair value method and the intrinsic value method.
            As of
            December 31, 2005 and June 30, 2006, no awards have been granted under
            the
            Company’s plan. In addition, during the six months ended June 30, 2006, Five
            Star did not grant any stock options or any other stock-based awards
            under its
            plan, and therefore the adoption of this pronouncement did not have any
            effect
            on the Company’s consolidated results of operations for the three and six month
            periods ended June 30, 2006.
  At
            June
            30, 2006, Five Star had 1,100,000 options outstanding all of which were
            exercisable under its stock option plan with an aggregate weighted average
            price
            of $0.14 per share and a contractual remaining life of 0.55 years. The
            aggregate
            intrinsic value of the options outstanding at June 30, 2006 was
            $40,000.
  The
            following table provides the pro forma effect on net earnings as if the
            fair-value-based measurement method had been applied to all stock-based
            compensation for the three months and six months ended June 30, 2005
            (in
            thousands, except per share amounts):
 
  (Continued)
 7
  **NATIONAL
              PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
              to
              Condensed Consolidated Financial Statements
 Three
              and
              six months ended June 30, 2006 and 2005
 (Unaudited)
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2005**
                  
                  
                  
                  **2005**Net
                      loss - As reported
                  
                  
                  
                  
                  **$**
                  **(395**
                  **)**
                  
                  
                  
                  **$**
                  **(1,215**
                  **)**Compensation
                      expense, net of taxFive
                      Star stock options (1)
                  
                  
                  
                  
                  
                  **(2**
                  **)**
                  
                  
                  
                  
                  **(3**
                  **)**Pro
                      forma net loss
                  
                  
                  
                  
                  
                  **(397**
                  **)**
                  
                  
                  
                  **$**
                  **(1,218**
                  **)**Basic
                      and diluted loss per shareAs
                      reported
                  
                  
                  
                  
                  **$**
                  **(.02**
                  **)**
                  
                  
                  
                  **$**
                  **(.07**
                  **)**Pro
                      forma net loss per share
                  
                  
                  
                  
                  **$**
                  **(.02**
                  **)**
                  
                  
                  
                  **$**
                  **(.07**
                  **)**
 
 (1)
            Expense relates to option grants made by Five Star prior to the acquisition
            of a
            controlling interest in Five Star by the Company.
 
 **3.**  **Per
            share data**
 
 Basic
            and
            diluted loss per share for the three and six months ended June 30, 2006
            and 2005
            are based upon the actual number of the Company’s shares outstanding for the
            period. Outstanding warrants to acquire 1,423,887 common shares issued
            in
            December 2004 were not included in the diluted computation, as their
            effect
            would be anti-dilutive.
 
 Loss
            per
            share for the three months and six months ended June 30, 2006 and 2005
            are as
            follows (in thousands, except per share amounts):
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005**Basic
                      and Diluted EPSNet
                      loss
                  
                  **$**
                  **(118**
                  **)**
                  **$**
                  **(395**
                  **)**
                  **$**
                  **(555**
                  **)**
                  **$**
                  **(1,215**
                  **)**Weighted
                      average sharesoutstanding,
                      basic and diluted
                  
                  
                  **17,834**
                  
                  
                  **17,803**
                  
                  
                  **17,831**
                  
                  
                  **17,801**Basic
                      and diluted loss per share
                  
                  **$**
                  **(.01**
                  **)**
                  **$**
                  **(.02**
                  **)**
                  **$**
                  **(.03**
                  **)**
                  **$**
                  **(.07**
                  **)**
 
  (Continued)
 8
  **NATIONAL
              PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
              to
              Condensed Consolidated Financial Statements
 Three
              and
              six months ended June 30, 2006 and 2005
 (Unaudited)
 
 **4.**  **Long-term
            debt**
 
 *Long-term
            debt*
 
 Long-term
            debt is comprised of the following (in thousands):
 
 **June
                      30,**
                  
                  **December
                      31,****2006**
                  
                  **2005**MXL
                      Pennsylvania Mortgage (a)
                  
                  **$**
                  **1,155**
                  
                  $
                  1,205Other
                      debt
                  
                  
                  **62**
                  
                  
                  186Capital
                      lease obligations
                  
                  
                  **1**
                  
                  
                  6**1,218**
                  
                  
                  1,397Less
                      current maturities
                  
                  
                  **(163**
                  **)**
                  
                  (291
                  )**$**
                  **1,055**
                  
                  $
                  1,106
 
 (a)  On
            March
            8, 2001, MXL mortgaged its real estate and fixtures on its property in
            Pennsylvania for $1,680,000. The loan requires monthly repayments of
            $8,333 plus
            interest at 2.5% above the one month LIBOR rate and matures on March
            8, 2011,
            when the remaining amount outstanding of approximately $680,000 is due
            in full.
            The loan is guaranteed by GP Strategies.
 
 **5.**  **Short
            term borrowings**
 
 *Five
            Star short-term borrowings*
 
 In
            2003,
            Five Star obtained a Loan and Security Agreement (the “Loan Agreement”) with
            Bank of America Business Capital (formerly Fleet Capital Corporation)
            (the
“Lender”). The Loan Agreement has a five-year term, with a maturity date of June
            30, 2008. The Loan Agreement, as amended on August 1, 2005, provides
            for a
            $35,000,000 revolving credit facility, which allows Five Star to borrow
            based
            upon a formula of up to 65% of eligible inventory and 85% of eligible
            accounts
            receivable, as defined therein. The interest rates under the Loan Agreement
            consist of LIBOR plus a credit spread of 1.5% (7.6% at June 30, 2006)
            for
            borrowings not to exceed $15,000,000 and the prime rate (8.0% at June
            30, 2006)
            for borrowings in excess of the above-mentioned LIBOR-based borrowings.
            The
            credit spreads can be reduced in the event that Five Star achieves and
            maintains
            certain performance benchmarks. At June 30, 2006 and December 31, 2005,
            approximately $22,586,000 and $19,764,000 was outstanding under the Loan
            Agreement and approximately $4,967,000 and $1,451,000 was available to
            be
            borrowed, respectively. Substantially all of Five Star’s assets are pledged as
            collateral for these borrowings. Under the Loan Agreement Five Star is
            subject
            to covenants requiring minimum net worth, limitations on losses, if any,
            and
            minimum or maximum values for certain financial ratios. As of June 30,
            2006,
            Five Star was in compliance with all required covenants.
  (Continued)
 9
  **NATIONAL
              PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
              to
              Condensed Consolidated Financial Statements
 Three
              and
              six months ended June 30, 2006 and 2005
 (Unaudited)
 In
            connection with the Loan Agreement, Five Star also entered into a derivative
            transaction with the Lender. The derivative transaction is an interest
            rate swap
            and has been designated as a cash flow hedge. Effective July 1, 2004
            through
            June 30, 2008, Five Star will pay a fixed interest rate of 3.38% to the
            Lender
            on notional principal of $12,000,000. In return, the Lender will pay
            to Five
            Star a floating rate, namely, LIBOR, on the same notional principal amount.
            The
            credit spread under the new Loan Agreement is not included in, and will
            be paid
            in addition to this fixed interest rate of 3.38%. The fair value of the
            interest
            rate swap amounted to $499,000 and $395,000 at June 30, 2006 and December
            31,
            2005, respectively and is included in other assets in the accompanying
            balance
            sheets.
 
 On
            June
            17, 2004, Five Star also entered into a derivative interest rate collar
            transaction during the period from July 1, 2004 through June 30, 2008
            on
            notional principal of $12,000,000. The transaction consists of an interest
            rate
            floor of 2.25%, whereas if LIBOR is below 2.25%, the Lender will pay
            to Five
            Star the difference between LIBOR and 2.25%, on the same notional principal
            amount. The transaction also consists of an interest rate cap of 5.75%,
            whereas
            if LIBOR is above 5.75%, Five Star will pay to the Lender the difference
            between
            LIBOR and 5.75%, on the same notional principal amount.
 
 *MXL
            short-term borrowings*
 
 On
            March
            1, 2005, MXL obtained a Line of Credit Loan (the “MXL Line”) from M&T Bank
            with a one year term, maturing on March 1, 2006, which has been extended
            to June
            30, 2007 on the same terms. The MXL Line provides for a $1,000,000 revolving
            credit facility, which is secured by MXL’s eligible accounts receivable,
            inventory and a secondary claim on the Lancaster, PA property. The interest
            rates under the MXL Line consist of LIBOR plus a credit spread of 3%
            or the
            prime rate plus a credit spread of 0.25%. The MXL Line is subject to
            an unused
            commitment fee of 0.25% of the average daily unused balance of the line
            payable
            quarterly. The Company has guaranteed the MXL Line. At June 30, 2006,
            $950,000
            was outstanding under the MXL Line and $50,000 was available to be borrowed.
            The
            MXL Line contains certain financial covenants, most significant being
            a cash
            flow coverage ratio of 1.25 to 1.00, which is calculated at December
            31 of each
            year.
 
 **6.**  **Inventories**
 
 Inventories
            are comprised of the following (in thousands):
 
 **June
                      30, 2006**
                  
                  **December
                      31, 2005**Raw
                      materials
                  
                  **$**
                  **413**
                  
                  $
                  386Work
                      in process
                  
                  
                  **264**
                  
                  
                  113Finished
                      goods
                  
                  
                  **22,137**
                  
                  
                  23,522**$**
                  **22,814**
                  
                  $
                  24,021
 
  (Continued)
 10
  **NATIONAL
              PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
              to
              Condensed Consolidated Financial Statements
 Three
              and
              six months ended June 30, 2006 and 2005
 (Unaudited)
 **7.**  **Investment
            in Valera Pharmaceuticals, Inc. (“Valera”)**
 
 Valera
            is
            a specialty pharmaceutical company engaged in the development and
            commercialization of prescription pharmaceuticals principally utilizing
            Valera’s
            patented Hydron drug delivery technology.
 
 Valera ’s
            lead
            product is a twelve-month implant that delivers histrelin, a synthetic
            nonapeptide agonist of luteinizing hormone-releasing hormone (LHRH).
            LHRH
            agonists have become a mainstay in treating locally advanced and metastatic
            prostate cancer. On October 13, 2004, Valera announced that the FDA approved
            the
            marketing of VantasTM, the name for Valera’s long-acting LHRH implant for
            treating prostate cancer. Prior to June 2000, Valera operated
            as a division of GP Strategies. In connection with an offering of GP
            Strategies
            6% Convertible Subordinated Exchangeable Notes due June 2003,
            Valera was
            incorporated as a separate company and became a wholly-owned subsidiary
            of GP
            Strategies through GP Strategies’ ownership of 100% of
            the common stock of Valera.
  In December
            2 001,
            Valera completed a $7 million private placement of Series A convertible preferred
            stock
            to certain institutional investors. As a condition of the private placement,
            GP
            Strategies contractually gave up operating control over Valera through
            an Investors Rights Agreement,  which
            gave GP Strategies the right to designate one director on Valera’s board of
            directors and gave the other stockholders the right to designate the
            other
            directors, and
            subsequent thereto accounted for the investment under the equity
            method .
            As a
            result of Valera’s operating losses, GP Strategies investment was written down
            to zero.
  In
            2003, Valera completed a private placement offering pursuant to which Valera raised
            approximately $13.5 million in gross proceeds from the sale of Series
            B
            convertible preferred stock. As part of such transaction, GP
            Strategies was granted
            an option until March 31, 2004, to purchase up to $5 million of the Series
            B
            convertible preferred stock at the offering price of $ 0.725 per
            share, which was
            subsequently verbally extended to June 30, 2004. On June 30, 2004, GP
            Strategies
            transferred a portion of its option to an institutional investor, who
            exercised
            such option and purchased from Valera 3,448,276 shares of Series B convertible
            preferred stock for $0.725 per share. The balance of the option expired
            unexercised. In consideration of such transfer ,
            such
            institutional investor granted the Company an option until October 28,
            2004 to
            purchase up to 2,068,966 shares of Series
            B
            convertible preferred stock owned by such institutional investor for
            prices
            ranging from $0.725 to $0.7685 per share. The
            Company exercised such option on October 28, 2004 at a price of $0.7685
            per
            share, for an aggregate exercise price of $1,590,000. On November 12,
            2004, the
            Company obtained the funds necessary to pay the exercise price (see Note
            9 (a)).
            On August 16, 2004, Valera sold 11,600,000 shares of Series C convertible
            preferred stock and received gross proceeds of $11.6 million. As of December
            31,
            2005 and 2004, the Company owned 10,000,000 shares of Valera common stock
            and
            2,068,966 shares of Valera series B convertible preferred stock. Assuming
            conversion of all of the outstanding shares of Series A, Series B and
            Series C
            convertible preferred stock and exercise of stock options held by employees
            of
            Valera at December 31, 2005, the Company
   (Continued)
 11
  **NATIONAL
              PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
              to
              Condensed Consolidated Financial Statements
 Three
              and
              six months ended June 30, 2006 and 2005
 (Unaudited)
  would
            own
            approximately 18% of Valera. On February 7, 2006 Valera completed an
            initial
            public offering of 3,862,500 shares of common stock at $9.00 per share.
            All the
            convertible preferred stock outstanding at the time of the offering,
            including
            accrued dividends, automatically converted into common stock. In addition,
            Valera effected a 1 for 6 reverse split of common stock. Subsequent to
            the
            public offering after giving effect to the conversion of the Series B
            preferred
            stock and the reverse split the Company owned 2,070,670 shares of Valera
            common
            stock or approximately 14% of the outstanding shares of common stock.
            The
            Company entered into a lock-up agreement with the underwriters of the
            public
            offering which restricts the Company from selling or otherwise disposing
            of its
            shares of Valera common stock until August 16, 2006.
  On
            October 17, 2003, MXL received from GP Strategies in partial payment
            of a note
            receivable the common shares of Valera and recorded such shares at zero
            representing their carrying amount to GP Strategies. As a result of the
            Investors Rights Agreement referred to above, the Company was accounting
            for its
            investment in Valera under the equity method. However as the Company
            had not
            guaranteed obligations of Valera and had not otherwise committed to provide
            further support for Valera, it had discontinued recognizing additional
            losses of
            Valera.
  As
            described above, the Company’s investment in voting stock of Valera has declined
            below 20%. In addition, at December 31, 2005 Valera’s board of directors
            consisted of nine directors only one of which has been designated by
            the
            Company. Accordingly the Company believes that it no longer has the ability
            to
            exercise significant influence over operating and financial policies
            of Valera
            and no longer accounts for its investment in Valera by the equity method.
            As a
            result thereof, as of December 31, 2005 the investment in Valera’s Series B
            convertible preferred stock is being accounted for at cost.
  As
            a
            result of the initial public offering, the Company’s investment in Valera’s
            common stock became a marketable security and accordingly, at June 30,
            2006, the
            investment, to the extent of shares available to be sold within a year
            at any
            balance sheet date under Rule 144 or an effective registration statement,
            has
            been classified as available for sale securities and measured at fair
            value with
            the adjustment to fair value and changes therein recorded in other comprehensive
            income. The remainder of the investment is considered restricted and
            will
            continue to be carried at cost. In addition, if it is determined that
            the
            Company is no longer an affiliate, the shares would become freely tradable
            after
            the initial six month lock-up period. The Valera shares available for
            sale over
            the next 12 months at June 30, 2006 totaled 595,422 and resulted in an
            unrealized gain of $4,279,000 being included in accumulated other comprehensive
            income as of such date. Two related parties, Bedford Oak Partners and
            Mr. Jerome
            I. Feldman, are entitled to receive 50% of any profit received from the
            sale, on
            a pro-rata basis, of 404,004 shares of Valera common stock in excess
            of $3.94
            per share (see Note 9(a)). The unrealized profit on Valera shares available
            for
            sale at June 30, 2006 which would be payable to the related parties upon
            sale
            totaled $259,000, which is included in Investment and other income (loss)
            for
            the six months ended June 30, 2006 and in and Other liabilities on the
            June 30,
            2006 balance sheet.
   (Continued)
 12
  **NATIONAL
            PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
            to
            Condensed Consolidated Financial Statements
 Three
            and
            six months ended June 30, 2006 and 2005
 (Unaudited)
  8.  Business
            segments
  The
            operations of the Company currently consist of the following two business
            segments, by which the Company is managed.
 
 The
            MXL
            Segment 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**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005****Sales**Five
                      Star
                  
                  **$**
                  **28,938**
                  
                  **$**
                  **29,579**
                  
                  **$**
                  **57,890**
                  
                  **$**
                  **57,818**MXL
                  
                  
                  **2,223**
                  
                  
                  **2,090**
                  
                  
                  **4,476**
                  
                  
                  **3,928****$**
                  **31,161**
                  
                  **$**
                  **31,669**
                  
                  **$**
                  **62,366**
                  
                  **$**
                  **61,746**
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005****Segment
                      operating income (loss)**Five
                      Star
                  
                  **$**
                  **754**
                  
                  **$**
                  **1,181**
                  
                  **$**
                  **1,631**
                  
                  **$**
                  **1,659**MXL
                  
                  
                  **137**
                  
                  
                  **(202**
                  **)**
                  
                  **231**
                  
                  
                  **(706**
                  **)****$**
                  **891**
                  
                  **$**
                  **979**
                  
                  **$**
                  **1,862**
                  
                  **$**
                  **953**
 
 A
            reconciliation of the segment operating income (loss) to loss before
            income tax
            (expense) benefit and minority interests in the condensed consolidated
            statements of operations is shown below (in thousands):
  (Continued)
 13
  **NATIONAL
              PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
              to
              Condensed Consolidated Financial Statements
 Three
              and
              six months ended June 30, 2006 and 2005
 (Unaudited)
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30,**
                  
                  **June
                      30,****2006**
                  
                  **2005**
                  
                  **2006**
                  
                  **2005**Segment
                      operating income
                  
                  **$**
                  **891**
                  
                  **$**
                  **979**
                  
                  **$**
                  **1,862**
                  
                  **$**
                  **953**Corporate
                      and other general and administrative expenses
                  
                  
                  **(429**
                  **)**
                  
                  **(549**
                  **)**
                  
                  **(910**
                  **)**
                  
                  **(1,084**
                  **)**Interest
                      expense
                  
                  
                  **(465**
                  **)**
                  
                  **(455**
                  **)**
                  
                  **(843**
                  **)**
                  
                  **(827**
                  **)**Investment
                      and other income (loss)
                  
                  
                  **55**
                  
                  
                  **108**
                  
                  
                  **(182**
                  **)**
                  
                  **271**Income
                      (loss) before income taxexpense
                      and minority interests
                  
                  **$**
                  **52**
                  
                  **$**
                  **83**
                  
                  **$**
                  **(73**
                  **)**
                  **$**
                  **(687**
                  **)**
  **9.**  **Related
            party transactions**
 
 a)  On
            November 12, 2004, the Company entered into an agreement to borrow approximately
            $1,022,000 from Bedford Oak Partners, which is controlled by Harvey P.
            Eisen, a
            director of the Company, and approximately $568,000 from Jerome I. Feldman,
            who
            is Chairman and Chief Executive Officer of the Company, to exercise the
            option
            to purchase Series B Convertible Preferred shares of Valera. The loans
            bore
            interest at 6% per annum, matured on October 31, 2009, and were secured
            by all
            shares of Valera owned by the Company, including the purchased shares.
            Bedford
            Oak Partners and Jerome I. Feldman are entitled to receive 50% of any
            profit
            received by the Company from the sale on a pro-rata basis of the Valera
            purchased shares. On January 11, 2005, the Company prepaid the loans,
            including
            accrued interest of approximately $16,000, to Bedford Oak Partners and
            Jerome I.
            Feldman out of the proceeds from the claims relating to the Learning
            Technologies acquisition.
 
 b)  Certain
            of the Company’s executive officers are also executive officers of GP Strategies
            and will remain on GP Strategies’ payroll. The executive officers do not receive
            any salary from the Company; however, they provide the Company with management
            services under a management agreement between GP Strategies and the Company.
            Services under the agreement relate to corporate federal and state income
            taxes,
            corporate legal services, corporate secretarial administrative support,
            and
            executive management consulting. The term of the agreement extends for
            three
            years from the date of the spin-off, or through November 24, 2007, and
            may be
            terminated by either the Company or GP Strategies on or after July 30,
            2006 with
            180 days prior written notice. Prior to July 1, 2005 GP Strategies charged
            the
            Company a management fee to cover an allocable portion of the compensation
            of
            these officers, based on the time they spent providing services to the
            Company,
            in addition to an allocable portion of certain other corporate expenses.
            Such
            fees amounted to $39,000 and $82,000 for the three months and six months
            ended
            June 30, 2005.
   (Continued)
 14
  **NATIONAL
                PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                to
                Condensed Consolidated Financial Statements
 Three
                and
                six months ended June 30, 2006 and 2005
 (Unaudited)
 Effective
              July 1, 2005 GP Strategies and the Company amended the above referenced
              management agreement. Pursuant to the amendment, the Company will pay
              GP
              Strategies an annual fee of not less than $970,000 as compensation
              for these
              services, payable in equal monthly installments. The fee includes $698,000
              for
              the period July 1, 2005 through June 30, 2006, representing approximately
              80% of
              the cost of the compensation and benefits required to be provided by
              GP
              Strategies to Jerome Feldman, who serves as the Company’s Chief Executive
              Officer. Such fee shall be increased by 80% of any increase of the
              cost of the
              compensation and benefits required to be provided by GP Strategies
              to Mr.
              Feldman; in addition, the Company shall remain liable for paying to
              GP
              Strategies 80% of the cost of the compensation and benefits required
              to be
              provided by GP Strategies to Mr. Feldman if the management agreement
              expires, is
              terminated, or is otherwise not extended through May 31, 2007. The
              Company paid
              GP Strategies approximately $218,000 and $434,000 for the three months
              and six
              months ended June 30, 2006 as compensation for services. The Company
              also
              occupies a portion of corporate office space leased by GP Strategies.
              The
              Company compensates GP Strategies approximately an additional $205,000
              annually
              for use of this space. GP Strategies’ lease extends through December 31,
              2006.
  **10.**
                  **Restatement
                      of previously issued financial statements and SAB 108
                      Adjustment**
 
 In
            the
            fourth quarter of 2006, the Company charged Investment and other income
            (loss)
            for $180,000 and credited other comprehensive income representing unrealized
            gain for the period from January 1 through September 30, 2006 on Valera
            shares
            classified as available for sale which is payable to related parties
            (see Note
            7).
 
 In
            addition, as result of the implementation of SAB 108 in December 2006,
            previously issued interim financial information consisting of costs of
            goods
            sold, gross margin and net income for the first three quarters of the
            year ended
            December 31, 2006 has been revised. The net effect on net income for
            the
            previously issued quarter and six months ended June 30, 2006 was a decrease
            of
            $14,000 and $31,000, respectively. There was no effect on earning per
            share for
            the period.
 
 Reconciliation
            of net losses previously reported to net loss as restated for the quarter
            and
            six months ended June 30, 2006 (in thousands, except per share data)
            is as
            follows:
 
  (Continued)
 15
  **NATIONAL
                PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
 Notes
                to
                Condensed Consolidated Financial Statements
 Three
                and
                six months ended June 30, 2006 and 2005
 (Unaudited)
 
 Three
                      Months Ended
                  
                  Six
                      Months EndedJune
                      30, 2006Net
                      loss previously reported
                  
                  $
                  (116
                  )
                  $
                  (265
                  )**Increase(decrease)**Investment
                      and other income (loss)
                  
                  
                  12
                  
                  
                  (259
                  )SAB
                      108 adjustment
                  
                  
                  (14
                  )
                  
                  (31
                  )Net
                      loss, as restated
                  
                  $
                  (118
                  )
                  $
                  (555
                  )Net
                      loss per share, as reported
                  
                  $
                  (.01
                  )
                  $
                  (.02
                  )Increase
                      (decrease)
                  
                  
                  
                  
                  
                  (.01
                  )Net
                      loss per share, as restated
                  
                  $
                  (.01
                  )
                  $
                  (.03
                  )
 
 The
            following is a reconciliation of the balance sheet captions at June 30,
            2006
            from previously reported to restated:
 
 (in
                      thousands)
                  
                  Previously
                      reported
                  
                  Adjustments
                  
                  
                  
                  RestatedInventories
                  
                  $
                  23,434
                  
                  $
                  (620
                  )
                  
                  (b
                  )
                  $
                  22,814Deferred
                      taxes
                  
                  
                  112
                  
                  
                  247
                  
                  
                  (b
                  )
                  
                  359Accounts
                      payable and accrued expenses
                  
                  
                  11,311
                  
                  
                  (259
                  )
                  
                  (a
                  )
                  
                  11,052Other
                      liabilities
                  
                  
                  36
                  
                  
                  259
                  
                  
                  (a
                  )
                  
                  295Minority
                      interest
                  
                  
                  1,902
                  
                  
                  (134
                  )
                  
                  (b
                  )
                  
                  1,768Accumulated
                      deficit
                  
                  
                  (8,027
                  )
                  
                  (259
                  )
                  
                  (a
                  )
                  
                  (8,525
                  )(239
                  )
                  
                  (b
                  )Accumulated
                      other comprehensive income
                  
                  
                  4,495
                  
                  
                  259
                  
                  
                  (a
                  )
                  
                  4,754
 
 
 (a)
                  Investment
                      and other income adjustment
 (b)
                  SAB
                      108 adjustment
 
 (Continued)
 16
 
 **NATIONAL
            PATENT DEVELOPMENT CORPORATION AND SUBSIDIARIES**
  **Item
            2.**   **Management’s
            Discussion and Analysis of Financial Condition and Results of
            Operations**
 
 **General
            Overview**
 
 The
            Company operates in two segments: MXL and Five Star. The Company also
            owns
            certain other non-core assets, including investments in 2 publicly held
            companies, Millennium Cell and Valera Pharmaceuticals; and certain real
            estate.
            The Company monitors Millennium Cell for progress in the commercialization
            of
            Millennium Cell’s emerging technology and monitors Valera Pharmaceuticals for
            progress in the sales efforts related to their product.
 
 **MXL
            Overview**
 
 The
            primary business of MXL is the manufacture of polycarbonate parts requiring
            adherence to strict optical quality specifications, and the application
            of
            abrasion and fog resistant coatings to those parts. MXL also designs
            and
            constructs injection molds for a variety of applications. Some of the
            products
            that MXL produces include:
 
 ·
                  facemasks
                      and shields for recreation purposes and industrial safety
                      companies,
 ·
                  precision
                      optical systems, including medical optics, military eye wear
                      and custom
                      molded and decorated products, and
 ·
                  tools,
                      including optical injection mold tools and standard injection
                      mold tools.
 
 MXL’s
            manufactures and sells its products to various commercial and government
            customers, who utilize MXL’s parts to manufacture products that will be
            ultimately delivered to the end-user. MXL’s government customers include various
            offices of the Department of Defense, while MXL’s commercial customers are
            primarily in the recreation, safety, and security industries. Some of
            MXL’s
            consumer based products are considered to be at the high-end of their
            respective
            markets. As a result, sales of MXL’s products may decline together with a
            decline in discretionary consumer spending; therefore a key performance
            indicator that the Company’s management uses to manage the business is the level
            of discretionary spending in key markets, specifically the United States
            and
            Japan. Other key performance measures used by the Company’s management to run
            the business include:
 
 ·
                  consumer
                      confidence indices in key markets,
 ·
                  sales
                      levels of complementary items in the recreational vehicle market,
                      such as
                      motorcycles, RV’s and snowmobiles,
 ·
                  levels
                      of defense spending, and
 ·
                  new
                      OSHA safety standards.
  17
 MXL
            believes that the principal strengths of its business are its state-of-the-art
            injection molding equipment, advanced production technology, high quality
            standards, and on time deliveries. However, due to the focused nature
            of the
            market, MXL has a limited customer base and tends to be adversely affected
            by a
            loss in business from its significant customers. To further grow, MXL
            not only
            intends to regain market share in its existing market, but to leverage
            its
            expertise as a molder and coater of optical quality products by expanding
            into
            other markets and products.
 
 **Five
            Star Overview**
 
 Five
            Star
            is a publicly held company that is a leading distributor in the United
            States of
            home decorating, hardware, and finishing products. Five Star offers products
            from leading manufacturers in the home improvement industry and distributes
            those products to retail dealers, which include lumber yards, “do-it yourself”
centers, hardware stores and paint stores. Five Star has grown to be
            one of the
            largest independent distributors in the Northeast United Stated by providing
            a
            complete line of competitively priced products, timely delivery and attractive
            pricing and financing terms to its customers.
 
 The
            following key factors affect Five Star’s financial and operation
            performance:
 
 ·
                  its
                      ability to negotiate the lowest prices from its
                      suppliers,
 ·
                  its
                      ability to increase revenue by obtaining new customers, while
                      maintaining
                      a level fixed cost structure by utilizing its existing
                      warehouses,
 ·
                  the
                      housing market in general,
 ·
                  consumers’
                      confidence in the economy,
 ·
                  consumers’
                      willingness to invest in their homes,
                      and
 ·
                  weather
                      conditions that are conducive to home improvement
                      projects.
 
 The
            following key performance measures are utilized by the Company’s management to
            run Five Star’s business:
 
 ·
                  new
                      U.S. housing starts,
 ·
                  sales
                      of existing homes,
 ·
                  sales
                      of high margin products to its
                      customers,
 ·
                  purchases
                      from each vendor, and
 ·
                  performance
                      benchmarks used by Home Depot and Lowe’s, such as number of stores and
                      square footage, as well as financial
                      benchmarks.
 
 Five
            Star
            operates in the Home Improvement market, which has grown in recent years
            and for
            which the Home Improvement Research Institute predicts average annual
            industry
            growth of nearly 5% for the next several years. Nonetheless, Five Star
            faces
            intense competition from large national distributors, smaller regional
            distributors, and manufacturers that bypass the distributor and sell
            directly to
            the retail outlet. The principal means of competition for Five Star are
            its
            strategically placed distribution
  18
  centers
            and its extensive inventory of quality, name-brand products. In addition,
            Five
            Star’s customers face stiff competition from Home Depot and Lowe’s, which
            purchase directly from manufacturers. As a result of such competition,
            while the
            Home Improvement market has expanded significantly in recent years, Five
            Star’s
            revenue has increased only incrementally, and such revenue would have
            declined
            if Five Star had not entered into new geographic sales territories as
            described
            below. In spite of this, the independent retailers that are Five Star’s
            customers remain a viable alternative to Home Depot and Lowe’s, due to the
            shopping preferences of and the retailer’s geographic convenience for some
            consumers.
 
 Five
            Star
            has also established a presence the Mid-Atlantic States, servicing customers
            as
            far south as North Carolina, which has generated additional annual revenues
            of
            approximately $10 million. Five Star services this territory from its
            existing
            New Jersey warehouse, enabling Five Star to leverage its fixed costs
            over a
            broader revenue base. To further expand, Five Star will attempt to grow
            its
            revenue base in the Mid-Atlantic States, to acquire complementary distributors
            and to expand the distribution of its use of private-label products sold
            under
            the “Five Star” name.
 
 **Operating
            Highlights**
 
 ***Three
            months ended June 30, 2006 compared to the three months ended June 30,
            2005***
 
 For
              the
              three months ended June 30, 2006, the Company had income before income
              tax
              expense and minority interest of $52,000 compared to income before
              income tax
              expense and minority interest of $83,000 for the three months ended
              June 30,
              2005. The decrease in pre-tax income is primarily the result of the
              following:
              (i) reduced segment operating income of $51,000, which is comprised
              of a
              $427,000 decrease in operating income for Five Star and a $339,000
              increase in
              operating income for MXL, (ii) reduced investment and other income
              of $53,000
              and (iii) a $134,000 write down of MXL’s Illinois property in the three months
              ended June 30, 2005.
 
 **Sales**
 
 **Three
                      months**
                    **ended
                      June 30,****2006**
                  
                  2005Five
                      Star
                  
                  **$**
                  **28,938,000**
                  
                  $
                  29,579,000MXL
                  
                  
                  **2,223,000**
                  
                  
                  2,090,000**$**
                  **31,161,000**
                  
                  $
                  31,669,000
 
 The
            decrease in Five Star sales of $641,000 was a result of a reduction in
            sales
            volume among Five Star’s existing customer base which was caused by weaker
            economic conditions, and an unfavorable shift in weather conditions within
            the
            Northeast.
 
 The
            increase in MXL sales of $133,000 was a result of increased sales volume
            and
            prices from existing customers resulting from a concerted effort to expand
            sales
            opportunities with existing customers.
  19
  **Gross
            margin**
 
 **Three
                        months ended****June
                        30,**2006
                    
                    %
                    
                    2005
                    
                    %Five
                        Star
                    
                    **$**
                    **4,915,000**
                    
                    
                    **17.0**
                    
                    $
                    5,379,000
                    
                    
                    18.2MXL
                    
                    
                    **619,000**
                    
                    
                    **27.8**
                    
                    
                    498,000
                    
                    
                    23.8**$**
                    **5,534,000**
                    
                    
                    **17.8**
                    
                    $
                    5,877,000
                    
                    
                    18.6
 
 Five
              Star’s gross margin of $4,915,000, or 17% of net sales, for the quarter
              ended
              June 30, 2006 decreased by $464,000, or 9%, when compared to $5,379,000,
              or
              18.2% of net sales, for the quarter ended June 30, 2005. The decrease
              in gross
              margin dollars and gross margin percentage for the quarter ended June
              30, 2006
              was a result of reduced sales and reduced promotional discounts from
              vendors as
              a result of Five Star’s decision to reduce inventory levels.
 
 MXL’s
            gross margin of $619,000, or 27.8% of sales, for the quarter ended June
            30, 2005
            increased by $121,000 or 24% when compared to gross profit of $498,000,
            or 23.8%
            of sales, for the quarter ended June 30, 2005, mainly due to the following;
            (i)
            increased margins in all product lines due to increased pricing, (ii)
            improved
            product mix and (iii) increased sales.
 
 **Selling,
            general, and administrative expenses**
 
 For
              the
              three months ended June 30, 2006, selling, general and administrative
              expenses
              decreased by $240,000 from $5,313,000 for the three months ended June
              30, 2005
              to $5,073,000 partially due to the following; (i) reduced general and
              administrative expenses of $88,000 at the Company corporate level,
              (ii) reduced
              selling, general and administrative expenses at Five Star of $68,000
              primarily
              attributable to an effort to reduce selling, general and administrative
              expenses
              and (iii ) reduced selling, general and administrative expenses of
              $84,000 at
              MXL primarily due to reduced facility costs related to closing of MXL’s
              Massachusetts facility in 2005 as well as increased operating efficiencies.
 
 **Loss
            on write-down of the Illinois facility**
 
 In
            the
            second quarter of 2005 the Company incurred an additional loss of $134,000
            to
            record the Illinois facility at fair value, based upon the expected net
            proceeds
            from the sale of the Illinois facility, revised for commissions, taxes
            and other
            closing costs.
  20
  **Investment
            and other income (loss), net**
 
 National
              Patent Development recognized investment and other income of $55,000
              for the
              three months ended June 30, 2006, compared to $108,000 for the three
              months
              ended June 30, 2005. Investment and other income, net includes interest
              income,
              investment income, and recognition of a gain or loss for the change
              in the fair
              value of the Five Star’s interest rate collar. The decrease of $53,000 is
              primarily attributable to the following: (i) the change in the fair
              value of
              Five Star’s interest rate collar , (ii) the unrealized loss of $12,000 which
              would be paid to related parties upon sale of Valera available for
              sale shares
              and (iii) reduced interest income.
 
 **Income
            taxes**
 
 For
              the
              three months ended June 30, 2006 and 2005, the Company recorded an
              income tax
              expense of $125,000, or an effective rate of 240% and an income tax
              expense of
              $328,000, or an effective tax rate of 395%, respectively, which represents
              the
              Company’s applicable federal, state and local tax expense for the periods.
              The
              provision for income taxes differs from the tax computed at the federal
              statutory income tax rate due primarily to recording income tax expense
              on the
              income of Five Star, a 64% owned subsidiary, which is not included
              in the
              Company’s consolidated return and not recording income tax benefit for the
              losses of National Patent and MXL.
 
 ***Six
            months ended June 30, 2006 compared to the six months ended June 30,
            2005***
 
 For
              the
              six months ended June 30, 2006, the Company had a loss before income
              tax expense
              and minority interest of $73,000 compared to a loss before income tax
              expense
              and minority interest of $687,000 for the six months ended June 30,
              2005. The
              increase in pre-tax income is primarily a result of the following:
              (i) increased
              operating income of $937,000 at MXL, (ii) reduced corporate and other
              general
              and administrative expenses of $171,000 and (iii) reduced Investment
              and other
              income of $453,000.
 
 **Sales**
 
 **Six
                      months**
                    **ended
                      June 30,****2006**
                  
                  2005Five
                      Star
                  
                  **$**
                  **57,890,000**
                  
                  $
                  57,818,000MXL
                  
                  
                  **4,476,000**
                  
                  
                  3,928,000**$**
                  **62,366,000**
                  
                  $
                  61,746,000
 
 The
            increase in Five Star sales of $72,000 was a result of reduced unit sales
            among
            Five Star’s existing customer base which was caused by weaker economic
            conditions, and an unfavorable shift in weather conditions within the
            Northeast,
            offset by increased prices passed on to Five Star’s customers due to increased
            raw material costs for certain of the Company’s vendors.
  21
 
 The
            increase in MXL sales of $548,000 was primarily a result of increased
            sales
            volume and increase in prices to existing customers resulting from a
            concerted
            effort to expand sales opportunities with existing customers.
 
 **Gross
            margin**
 
 **Six
                        months ended****June
                        30,**2006
                    
                    %
                    
                    2005
                    
                    %Five
                        Star
                    
                    **$**
                    **9,520,000**
                    
                    
                    **16.4**
                    
                    $
                    9,558,000
                    
                    
                    16.5MXL
                    
                    
                    **1,227,000**
                    
                    
                    **27.4**
                    
                    
                    643,000
                    
                    
                    16.4**$**
                    **10,747,000**
                    
                    
                    **17.2**
                    
                    $
                    10,201,000
                    
                    
                    16.5
 
 Five
              Star’s gross margin of $9,520,000, or 16.4% of net sales, for the six months
              ended June 30, 2006 decreased by $38,000 when compared to $9,558,000,
              or 16.5%
              of net sales, for the six months ended June 30, 2005. The reduced gross
              margin
              amount and percentage for the six months ended June 30, 2006 was primarily
              the
              result of reduced promotional discounts from vendors as a result of
              Five Star’s
              decision to reduce inventory levels, partially offset by reduced warehousing
              expenses for the period.
 
 MXL’s
            gross margin of $1,227,000 or 27.4% of sales, for the six months ended
            June 30,
            2006 increased by $584,000 or 91% when compared to gross margin of $643,000,
            or
            16.4% of sales, for the six months ended June 30, 2005, mainly due to
            the
            following; (i) increased margins in all product lines due to increased
            pricing,
            (ii) improved product mix and, (iii) reduced costs due to exiting the
            Massachusetts facility and the consolidation of all MXL’s injection molding and
            precision coating operations at its Lancaster PA facility.
 
 **Selling,
            general, and administrative expenses**
 
 For
              the
              six months ended June 30, 2006, selling, general and administrative
              expenses
              decreased by $403,000 from $10,198,000 for the six months ended June
              30, 2005 to
              $9,795,000 due to the following:; (i) reduced general and administrative
              expenses of $174,000 at the Company’s corporate level, (ii) reduced selling,
              general and administrative expenses at Five Star of $10,000, primarily
              attributable to a $175,000 recovery of bad debts written-off in prior
              years,
              offset by reduced vendor marketing allowances received in the period
              and (iii)
              reduced selling, general and administrative expenses of $219,000 at
              MXL,
              primarily due to reduced facility costs related to closing of MXL’s
              Massachusetts facility in 2005, as well as increased operating efficiencies.
  22
  **Loss
            on write-down of the Illinois facility**
 
 In
            the
            second quarter of 2005, the Company incurred an additional loss of $134,000
            to
            record the Illinois facility at fair value, based upon the expected net
            proceeds
            from the sale of the Illinois facility, revised for commissions, taxes
            and other
            closing costs.
 
 **Investment
            and other income (loss), net.**
 
 The
              Company recognized investment and other income (loss) of ($182,000)
              for the six
              months ended June 30, 2006 as compared to income of $271,000 the six
              months
              ended June 30, 2005. The loss in 2006 is attributable to a $259,000
              expense
              representing the unrealized profit which would be paid to related parties
              upon
              sale of Valera available for sale shares during the six months ended
              June 30,
              2006 and a gain of $152,000 realized on the sale of Millennium Cell,
              Inc. common
              stock during the six months ended June 30, 2005.
 
 **Income
            taxes**
 
 For
              the
              six months ended June 30, 2006 and 2005, the Company recorded an income
              tax
              expense of $346,000, or an effective rate of 474% and an income tax
              expense of
              $371,000, or an effective tax rate of 54%, respectively, which represents
              the
              Company’s applicable federal, state and local tax expense for the periods.
              The
              provision for income taxes differs from the tax computed at the federal
              statutory income tax rate primarily due to (i) recording income tax
              expense on
              the income of Five Star, a 64% owned subsidiary, which is not included
              in the
              Company’s consolidated return and (ii) not recording income tax benefit for
              the
              losses of the Company and MXL.
 
 **Liquidity
            and capital resources**
 
 At
            June
            30, 2006, the Company had cash and cash equivalents of $4,683,000. The
            Company
            believes that cash anticipated to be generated from operations and borrowing
            availability under existing credit agreements will be sufficient to fund
            the
            Company’s working capital requirements for at least the next twelve
            months.
 
 For
              the
              six months ended June 30, 2006, the Company’s working capital increased by
              $110,000 to $12,659,000 from $12,549,000 as of December 31, 2005. The
              working
              capital increase was primarily a result of increased accounts receivable,
              partially offset by increased short term borrowings.
 
 The
            decrease in cash and cash equivalents of $432,000 for the six months
            ended June
            30, 2006 resulted from the following: (i) net cash used in operations
            of
            $3,146,000, due primarily to a net loss of $265,000, an increase in accounts
            receivable of $5,970,000, partially offset by an increase in accounts
            payable
            and accrued expenses of $1,486,000 and reduced inventory of $587,000;
            (ii) net
            cash provided by investing activities of $120,000 consisting of a repayment
            of a
            receivable from GP Strategies of $417,000, partially offset by additions
            to
            property, plant and equipment of $297,000; and (iii) net cash provided
            by
            financing activities of $2,594,000, consisting of proceeds of short term
            borrowings of $2,773,000, offset by repayments of long-term debt of
            $179,000.
  23
  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% (7.6% at June 30, 2006)
            for
            borrowings not to exceed $15,000,000 and the prime rate (8.0% at June
            30, 2006)
            for borrowings in excess of the above-mentioned LIBOR-based borrowings.
            The
            credit spreads can be reduced in the event that Five Star achieves and
            maintains
            certain performance benchmarks. At June 30, 2006 and December 31, 2005,
            approximately $22,586,000 and $19,764,000 was outstanding under the Loan
            Agreement and approximately $4,967,000 and $1,451,000 was available to
            be
            borrowed, respectively. Substantially all of Five Star’s assets are pledged as
            collateral for these borrowings. Under the Loan Agreement Five Star is
            subject
            to covenants requiring minimum net worth, limitations on losses, if any,
            and
            minimum or maximum values for certain financial ratios. As of June 30,
            2006 Five
            Star was in compliance with all required covenants. The following table
            sets
            forth the significant debt covenants at June 30, 2006:
 **Covenant**
                  **Required**
                  **Calculated**Minimum
                      tangible net worth
                  $6,000,000
                  $7,795,000Debt
                      to tangible net worth
                  <
                      6
                  2.90Fixed
                      charge coverage
                  >1.1
                  1.90Quarterly
                      income
                  No
                      loss in consecutive quarters
                  $278,000
                      -first quarter income $148,000- second quarter
                      income
 
 On
              March
              1, 2005, MXL obtained a Line of Credit Loan (the “MXL Line”) from M&T Bank
              with a one year term, maturing on March 1, 2006, which has been extended
              to June
              30, 2007 on the same terms. The MXL Line provides for a $1,000,000
              revolving
              credit facility, which is secured by MXL’s eligible accounts receivable,
              inventory and a secondary claim on the Lancaster, PA property. The
              interest
              rates under the MXL Line consist of LIBOR plus a credit spread of 3%
              or the
              prime rate plus a credit spread of 0.25%. The MXL Line is subject to
              an unused
              commitment fee of 0.25% of the average daily unused balance of the
              line payable
              quarterly. The Company has guaranteed the MXL Line. At June 30, 2006,
              $950,000
              was outstanding under the MXL Line and $50,000 was available to be
              borrowed. The
              MXL Line contains certain financial covenants, most significant being
              a cash
              flow coverage ratio of 1.25 to 1.00, which is calculated at December
              31 of each
              year.
  24
  **Management
            discussion of critical accounting policies**
 
 The
            preparation of our financial statements in conformity with accounting
            principles
            generally accepted in the United States of America requires us to make
            estimates
            and assumptions that affect the reported amounts of assets and liabilities
            and
            disclosure of contingent assets and liabilities at the date of the financial
            statements and the reported amounts of revenues and expenses during the
            reporting period. Our estimates, judgments and assumptions are continually
            evaluated based on available information and experience. Because of the
            use of
            estimates inherent in the financial reporting process, actual results
            could
            differ from those estimates.
 
 Certain
            of our accounting policies require higher degrees of judgment than others
            in
            their application. These include valuation of accounts receivable, accounting
            for investments, and impairment of long-lived assets which are summarized
            below.
 
 *Revenue
            recognition*
 
 Revenue
            on product sales is recognized at the point in time when the product
            has been
            shipped, title and risk of loss has been transferred to the customer,
            and the
            following conditions are met: persuasive evidence of an arrangement exists,
            the
            price is fixed and determinable, and collectibility of the resulting
            receivable
            is reasonably assured. Allowances for estimated returns and allowances
            are
            recognized when sales are recorded.
 
 *Valuation
            of accounts receivable*
 
 Provisions
            for allowance for doubtful accounts are made based on historical loss
            experience
            adjusted for specific credit risks. Measurement of such losses requires
            consideration of National Patent Development’s historical loss experience,
            judgments about customer credit risk, and the need to adjust for current
            economic conditions. The allowance for doubtful accounts as a percentage
            of
            total gross trade receivables was 2.87% and 4.2% at June 30, 2006 and
            December
            31, 2005, respectively.
 
 *Impairment
            of long-lived tangible assets*
 
 Impairment
            of long-lived tangible assets with finite lives results in a charge to
            operations whenever events or changes in circumstances indicate that
            the
            carrying amount of an asset may not be recoverable. Recoverability of
            long-lived
            tangible assets to be held and used is measured by a comparison of the
            carrying
            amount of the asset to future undiscounted net cash flows expected to
            be
            generated by the asset. If such assets are considered to be impaired,
            the
            impairment to be recognized is measured by determining the amount by
            which the
            carrying amount of the assets exceeds the fair value of the asset. Assets
            to be
            disposed of are reported at the lower of their carrying amount or fair
            value
            less cost of sale.
  25
  The
              measurement of the future net cash flows to be generated is subject
              to
              management’s reasonable expectations with respect to the Company’s future
              operations and future economic conditions which may affect those cash
              flows.
 
 As
              of
              June 30, 2006, the Company holds undeveloped land in Pawling, New York
              with a
              carrying amount of approximately $2.5 million and in East Killingly,
              Connecticut
              with a carrying amount of approximately $0.4 million, which management
              believes
              is less than its fair value, less cost of sale.
 
 *Accounting
            for investments*
 
 The
            Company’s investment in marketable securities are classified as
            available-for-sale and recorded at their market value with unrealized
            gains and
            losses recorded as a separate component of stockholders’ equity. A decline in
            market value of any available-for-sale security below cost that is deemed
            to be
            other than temporary, results in an impairment loss, which is charged
            to
            earnings.
 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.
  On
            October 17, 2003, the Company received GP Strategies’ shares of Valera
            Pharmaceuticals pursuant to the Repayment and recorded such shares at
            zero
            representing their carrying amount to GP Strategies after reflecting
            Valera
            losses. On December 31, 2005, the Company owned 100% of Valera’s common stock
            and 2,068,966 shares of
            the
            Series B convertible preferred stock (a 17.7%
            ownership interest, assuming conversion of Valera outstanding preferred
            stock
            and exercise of stock options held by employees of Valera) but no longer
            had
            financial and operating control of Valera. As a condition of a private
            placement
            of preferred stock in December 2001, GP Strategies contractually gave
            up
            operating control over Valera through an Investors Rights Agreement.
            At December
            31, 2005 the Company accounted for its investment in Valera’s Series B
            convertible preferred stock under the cost method. On February 7, 2006
            Valera
            completed an initial public offering of 3,862,500 shares of common stock
            at
            $9.00 per share. After giving effect to the conversion of the preferred
            stock
            into common stock and a 1 for 6 reverse stock split of common stock effected
            by
            Valera in connection with the offering, the Company’s preferred shares were
            converted into common stock and the Company now owns 2,070,670 shares
            of common
            stock of Valera or approximately 14% of the currently outstanding shares
            of
            common stock as of June 30, 2006.
  26
  Subsequent
            to Valera’s initial public offering, the Company’s investment in Valera’s common
            stock became a marketable security and accordingly the investment, to
            the extent
            of shares available to be sold within a year at any balance sheet date
            under
            Rule 144 or an effective registration statement, is classified as available
            for
            sale securities and measured
            at fair value with the adjustment to fair value and changes therein to
            be
            retained by the Company recorded in other comprehensive income. The remainder
            of
            the investment is considered restricted and will continue to be carried
            at cost.
            In addition, if it is determined that the Company is no longer an affiliate,
            the
            shares would become freely tradable after the initial six month lock-up
            period.
            The Valera shares available for sale over the next 12 months at June
            30, 2006
            totaled 595,422. Two related parties, Bedford Oak Partners and Mr. Jerome
            I.
            Feldman, are entitled to receive 50% of any profit received from the
            sale, on a
            pro-rata basis, of 404,004 shares of Valera common stock in excess of
            $3.94 per
            share. The amounts payable to the related parties totaled $258,000 at
            June 30,
            2006 and has been recorded as a liability within Accounts payable and
            accrued
            expenses on the June 30, 2006 balance sheet.
  *Income
            taxes*
 
 To
            arrive
            at our income tax provision and other tax balances, significant judgment
            is
            required. In the ordinary course of our business, there are many transactions
            and calculations where the ultimate tax outcome is uncertain. Some of
            these
            uncertainties arise as a consequence of the treatment of capital assets,
            financing transactions and multistate taxation of operations. Although
            we
            believe that our estimates are reasonable, no assurance can be given
            that the
            final tax outcome of these matters will not be different than that which
            is
            reflected in our historical tax provisions and accruals. Such differences
            could
            have a material impact on our income tax provision, other tax accounts
            and net
            income in the period in which such determination is made.
 
 The
            Company records a valuation allowance against deferred income tax assets
            when
            management believes it is more likely than not that some portion or all
            of the
            deferred income tax assets will not be realized. Management considers
            factors
            such as reversal of deferred income tax liabilities, projected future
            taxable
            income, tax planning strategies, changes in tax law and other factors
            .A change
            to these factors could impact the estimated valuation allowance and income
            tax
            expense.
 
 Under
            SFAS No. 109, “Accounting for Income Taxes,” deferred tax assets and
            liabilities are determined based on differences between the financial
            reporting
            and tax basis of assets and liabilities, and are measured using enacted
            tax
            rates and laws that will be in effect when the differences are expected
            to
            reverse. SFAS No. 109 provides for the recognition of deferred tax
            assets if realization of such assets is more likely than not. Based on
            the
            weight of available evidence, we have provided a valuation allowance
            against
            certain deferred tax assets. The valuation allowance was based on the
            historical
            earnings patterns within individual tax jurisdictions that make it uncertain
            that we will have sufficient income in the appropriate jurisdictions
            to realize
            the full value of the assets. We will continue to evaluate the realizability
            of
            the deferred tax assets on a quarterly basis.
 
  27
 
 **Forward-looking
            statements**
 
 The
              forward-looking statements contained herein reflect the Company’s management’s
              current views with respect to future events and financial performance.
              These
              forward-looking statements are subject to certain risks and uncertainties
              that
              could cause actual results to differ materially from those in the
              forward-looking statements, all of which are difficult to predict and
              many of
              which are beyond the control of the Company, including, but not limited
              to the
              risks and uncertainties detailed in the Company’s periodic reports and
              registration statements filed with the Securities and Exchange
              Commission.
   
  28
  **Item
            3.**  **Quantitative
            and Qualitative Disclosure About Market Risk**
 
 We
            have
            no material changes to the disclosure on this matter made in our report
            on Form
            10-K for the fiscal year ended December 31, 2005.
 
 **Item
            4.**  **Controls
            and Procedures**
 
 The
              Company’s Chief Executive Officer and Chief Financial Officer completed an
              evaluation of the effectiveness of the design and operation of the
              Company’s
              disclosure controls and procedures (as such term is defined in Rules
              13a-15(e)
              and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
              for the
              quarterly period ended on June
              30,,
              2006 and concluded that the Company’s disclosure controls and procedures were
              effective as of the end of that period .
              Subsequently, information came to management’s attention regarding the Company’s
              recordation of certain financial information that caused the Chief
              Executive
              Officer and the Chief Financial Officer to reconsider the results of
              this
              evaluation and conclude that, as of the end of the fiscal period covered
              by the
              original Quarterly Report on Form 10-Q the Company's disclosure controls
              and
              procedures were not effective to assure that certain line items of
              our condensed
              consolidated financial statements were prepared in conformance with
              generally
              accepted accounting principles and that a material weakness existed
              as of June
              30, 2006. A material weakness is a control deficiency or combination
              of control
              deficiencies that results in more than a remote likelihood that a material
              misstatement of the annual or interim financial statements will not
              be prevented
              or detected.
  The
              Chief
              Executive Officer and Chief Financial Officer have determined that,
              for the
              quarterly periods ended on March
              31,
              2006 , June
              30,
              2006 and September 30, 2006, the
              Company did not maintain effective disclosure controls and procedures.
              Specifically, the Company did not maintain effective disclosure controls
              and
              procedures to ensure the proper recordation of unrealized gain for
              the
              period from January 1, 2006 through September 30, 2006 on shares of
              Valera
              common stock owned by a subsidiary of the Company and classified as
              available
              for sale, which unrealized gain is payable to related parties .
              This
              control deficiency resulted in the misstatement of four line items,
              namely,
              Investment and other income (loss), Net loss, Accumulated other comprehensive
              income and Net loss per share.
  The
              Company included a schedule of the effect of the restatement on quarterly
              data
              in the Notes to Consolidated Financial Statements included in its Annual
              Report
              on Form 10-K for the year ended December 31, 2006 filed with the SEC
              on April 3,
              2007.
  **Remediation
              Plan**
  As
              of the
              date of the filing of this Form 10-Q/A, the Company has taken the following
              steps to remediate the material weakness described above:
  ·
                    The
                        Company has taken a thorough review of the classification
                        requirements of
                        each component line item and the individual elements that
comprise
                        each line item of its Condensed Consolidated Statement of
                        Operations and
                        its Condensed Consolidated Balance Sheet in accordance with
                        Generally
                        Accepted Accounting
                        Principles.
  29
  ·
                    The
                        Company has engaged outside consultants to review the Company's
                        accounting
                        position where the accounting treatment is considered by
                        the Company to be
                        particularly complex or, under certain circumstances, to
                        involve
                        subjective decision making.
  The
              Company is in the process of identifying and targeting for hire additional
              internal accounting and finance personnel and anticipates hiring such
              persons by
              the end of the second quarter of 2007. The Company’s Chief Executive Officer and
              Chief Financial Officer have concluded that there was no change in
              the Company’s
              internal control over financial reporting (as such term is defined
              in Rule
              13a-15(f) under the Securities Exchange Act of 1934, as amended) that
              occurred
              during the quarter ended June 30, 2006 that has materially affected,
              or is
              reasonably likely to materially affect, the Company’s internal control over
              financial reporting.
  
 
 
 
  30
  **PART
              II. OTHER INFORMATION**
 **Item
            6.**  **Exhibits**
 
 Exhibit
                        No.
                    
                    Description10.1
                    
                    Form
                        of Indemnification Agreement (incorporated herein by reference
                        to Exhibit
                        10.1 to the Registrant's Current Report on Form 8-K filed
                        with the SEC on
                        May 15, 2006)31.1
                    *
                    Certification
                        of Chief Executive Officer of the Company, pursuant to Securities
                        Exchange
                        Act Rule 13a-14(a)31.2
                    *
                    Certification
                        of Chief Financial Officer of the Company, pursuant to Securities
                        Exchange
                        Act Rule 13a-14(a)32.1
                    *
                    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 Chief Executive
                        Officer of
                        the Company and the Chief Financial Officer of the Company
 
 ______________________
 *Filed
            herewith
 
  31
  **SIGNATURES**
 
 Pursuant
            to the requirements of the Securities Exchange Act of 1934, the registrant
            has
            duly caused this report to be signed in its behalf by the undersigned
            thereunto
            duly authorized.
   **NATIONAL
                            PATENT DEVELOPMENT****CORPORATION**DATE:
                            May 31, 2007
                        
                        /s/
                            JEROME I. FELDMANName:
                        Jerome
                            I. FeldmanTitle:
                        Chairman
                            of the Board andChief
                            Executive OfficerDATE:
                            May 31, 2007
                        
                        /s/
                            SCOTT N. GREENBERGName:
                        Scott
                            N. GreenbergTitle:
                        Chief
                            Financial Officer
  32