UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)
 ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2006

 TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
 1934

               For the transition period from ________ to _______

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

[X] Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act
of 1934 For the fiscal year ended December 31, 2006
                                       or
[ ] 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 333-78252

                            FIVE STAR PRODUCTS, INC.
             (Exact Name of Registrant as Specified in Its Charter)

                   Delaware                                    13-3729186
         (State or Other Jurisdiction of             IRS Employer Identification
         Incorporation or Organization)                         Number)

                 777 Westchester Avenue, White Plains, NY 10604
             (Address of Principal Executive Offices, including Zip
                                      Code)

                                 (914) 249-9700
              (Registrant's telephone number, including area code)


Securities registered pursuant to Section 12(b) of the Act:               None

Securities registered pursuant to Section 12(g) of the Act:
                                                    Common Stock, $.01 Par Value
                                                         (Title of Class)

     Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes      No

     Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act.   Yes       No


<PAGE>

     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           No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.

     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 Accelerated filer Non-accelerated filer

     Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).      Yes           No


     The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant, computed by reference to the price at which
the common stock was last sold, or the average bid and asked price of such
common stock, as of the last business day of the registrant's most recently
completed second quarter, is $983,470.

     As of March 16, 2007, 14,309,577 shares of the registrant's common stock
were outstanding.

     Portions of the registrant's definitive Proxy Statement for its 2007 Annual
Meeting of Shareholders are incorporated by reference into Part III of this
report.



<PAGE>


                                TABLE OF CONTENTS
PART I                                                                     Page
         Item 1. Business  ...................................................1

         Item 1A. Risk Factors................................................6

         Item 1B. Unresolved Staff Comments...................................7

         Item 2. Properties...................................................7

         Item 3. Legal Proceedings............................................8

         Item 4. Submission of Matters to a Vote of Security Holders..........8

PART II

         Item 5. Market for the Registrant's Common Equity, and Related
                 Stockholder Matters and Issuer Purchases of Equity
                 Securities...................................................8

         Item 6. Selected Financial Data......................................9

         Item 7. Management's Discussion and Analysis of
                 Financial Condition and Results of Operations...............10

         Item 7A.Quantitative and Qualitative Disclosures About Market
                 Risk........................................................18

         Item 8. Financial Statements and Supplementary Data.................20

         Item 9.  Changes in and Disagreements with
         Accountants on Accounting and Financial Disclosure..................42

         Item 9A. Controls and Procedures....................................42

         Item 9B. Other Information..........................................42

PART III
         Item 10. Directors, and Executive Officers of the Registrant and
                  Corporate Governance.......................................43

         Item 11. Executive Compensation.....................................43

         Item 12. Security Ownership of Certain Beneficial
         Owners and Management. and Related Stockholder Matters..............43

         Item 13. Certain Relationships, and Related Transactions and
                  Director Independence..................................... 43

         Item 14. Principal Accounting Fees and Services.....................43

PART IV
         Item 15. Exhibits, Financial Statement Schedules....................44

         Signatures..........................................................45


<PAGE>



Cautionary Statement Regarding Forward-Looking Statements

This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Private Securities
Litigation Reform Act of 1995 provides a "safe harbor" for forward looking
statements. Forward-looking statements are not statements of historical facts,
but rather reflect our current expectations concerning future events and
results. We use words such as "expects", "intends", "believes", "may", "will"
and "anticipates" to indicate forward-looking statements. Because these
forward-looking statements involve risks and uncertainties, there are important
factors that could cause actual results to differ materially from those
expressed or implied by these forward-looking statements, including, but not
limited to, those factors set forth under Item 1A - Risk Factors and those other
risks and uncertainties detailed in the Company's periodic reports and
registration statements filed with the Securities and Exchange Commission (the
"SEC"). We caution that these risk factors may not be exhaustive. We operate in
a continually changing business environment, and new risk factors emerge from
time to time. We cannot predict these new risk factors, nor can we assess the
effect, if any, of the new risk factors on our business or the extent to which
any factor or combination of factors may cause actual results to differ from
those expressed or implied by these forward-looking statements.

If any one or more of these expectations and assumptions proves incorrect,
actual results will likely differ materially from those contemplated by the
forward-looking statements. Even if all of the foregoing assumptions and
expectations prove correct, actual results may still differ materially from
those expressed in the forward-looking statements as a result of factors we may
not anticipate or that may be beyond our control. While we cannot assess the
future impact that any of these differences could have on our business,
financial condition, results of operations and cash flows or the market price of
shares of our common stock, the differences could be significant. We do not
undertake to update any forward-looking statements made by us, whether as a
result of new information, future events or otherwise. You are cautioned not to
unduly rely on such forward-looking statements when evaluating the information
presented in this report.

                                     PART I

Item 1:  Business

General Development of Business

         Five Star Products Inc. (the "Company", "we", "our", or "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,
making Five Star one of the largest distributors of its kind in the Northeast.
Five Star also services the Mid- Atlantic states, as far south as North
Carolina. Five Star operates two distribution centers, located in Newington, CT
and East Hanover, NJ. All operations are coordinated from Five Star's New Jersey
headquarters. At December 31, 2006 Five Star is a majority owned subsidiary of
National Patent Development Corporation ("NPDC"), which as of March 2, 2007
actually owns 64% and beneficially owns approximately 70% of the Company's
common stock assuming conversion of a convertible note of the Company held by a
wholly-owned subsidiary of NPDC noted below.

                                       1
<PAGE>

         The Company currently has a $2,800,000 unsecured promissory note (the
"Promissory Note") with NPDC. The Promissory Note bore interest at 8%, payable
quarterly, and matured on June 30, 2005. On June 30, 2005 the Company and NPDC
agreed to extend the Promissory Note for a one-year term maturing on June 30,
2006. In consideration for NPDC extending the Promissory Note, the Company paid
NPDC a fee of one percent of the Promissory Note's outstanding balance or
$28,000. In addition, the interest rate on the Promissory Note was increased to
9%. On July 28, 2006 the Company and NPDC agreed to extend the Promissory Note
for a one-year term maturing on June 30, 2007. In consideration for NPDC
extending the Promissory Note, the Company paid NPDC a fee of one percent of the
Promissory Note's outstanding balance or $28,000 during July 2006. The interest
rate on the Promissory Note remained at 9% .

          March 2, 2007 we entered into an amendment to the Promissory Note with
NPDC. Under the terms of the amended Promissory Note, the term of the Promissory
Note has been extended from June 30, 2007 to June 30, 2009 at an interest rate
of 9% per annum. In addition, the Promissory Note and any unpaid accrued
interest is convertible, in whole or in part, at NPDC's option into shares of
our common stock at a price of $.40 per share, subject to adjustment for stock
splits, stock dividends, combinations, reorganization and other similar
recapitalizations. We no longer have the right to prepay the Promissory Note
prior to maturity.

         NPDC provides legal, tax, business development, insurance and employee
benefit administration services to the Company pursuant to a management services
agreement for fees which have ranged from $10,000 to $25,000 per month and which
are currently capped at $14,167 per month. The agreement is automatically
renewable for successive one-year terms unless one of the parties notifies the
other in writing at least six months prior to the end of any renewal thereof. In
addition the Company agreed to reimburse NPDC for $16,666 per month for Mr.
Feldman's (NPDC's Chief Executive Officer) service to the Company effective
October 1, 2004. The agreement was renewed for 2006.

         The Company offers products from leading manufacturers such as
Valspar/Cabot Stain, William Zinsser & Company, DAP, General Electric
Corporation, Newell/Irwin, USG, Stanley Tools, Minwax and 3M Company. The
Company distributes its products to retail dealers, which include lumber yards,
"do-it yourself" centers, hardware stores and paint stores principally in the
northeast region. It carries an extensive inventory of the products it
distributes and provides delivery, generally within 24 to 72 hours. The Company
has grown to be one of the largest independent distributors in the Northeast by
providing a complete line of competitively priced products, timely delivery and
attractive pricing and financing terms to its customers. Much of the Company's
success can be attributed to a continued commitment to provide customers with
the highest quality service at reasonable prices.

         As one of the largest distributors of paint sundry items in the
Northeast, the Company enjoys cost advantages and favorable supply arrangements
over the smaller distributors in the industry. This enables the Company to
compete as a "low cost" provider. The Company uses a fully computerized
warehouse system to track all facets of its distribution operations. Nearly all
phases of the selling process from inventory management to receivable collection
are automated and tracked; all operations are overseen by senior management at
the New Jersey facility. The Company is able to capitalize on manufacturer
discounts by strategically timing purchases involving large quantities.

                                       2
<PAGE>

         Our management takes a proactive approach in coordinating all phases of
our operations. For example, sales managers require all sales representatives to
call on customers once every week. Each salesperson transmits his or her orders
through the Company's automated sales system, to the IBM AS/400 computer located
at the New Jersey facility. The salesperson system combines the ability to scan
product codes in the customers' stores and download the information to a hand
held device computer for final transmission. Based on the floor plan of each
warehouse and the location of products therein, the warehouse management system
designs a pattern for the orders to be picked. The orders are then relayed to
the appropriate location and typically picked in the evening. A bar-coded part
number attached to the racking shelves identifies the location of each of the
approximately 19,000 stock keeping units (SKUs). The products are loaded onto
trucks in the evening in the order that they will be unloaded, and are delivered
directly to the customers locations the following morning.

Customers

         Our largest customer accounted for approximately 4.3% of our sales in
2006 and our 10 largest customers accounted for approximately 17.4% of sales.
All such customers are unaffiliated and we do not have a long-term contractual
relationship with any of them.

Management Information System

         All of our inventory control, purchasing, accounts payable and accounts
receivable are fully automated on an IBM AS/400 computer system. In addition,
our software alerts buyers to purchasing needs, and monitors payables and
receivables. This system allows senior management to control closely all phases
of our operations. We also maintain a salesperson-order-entry system, which
allows the salesperson to scan product information and then download the
information to a hand held device. The hand held device contains all product and
customer information and interacts with the AS/400.

Purchasing

         We rely heavily upon our purchasing capabilities to gain a competitive
advantage relative to our competitors. Our capacity to stock the necessary
products in sufficient volume and its ability to deliver them promptly upon
demand is one of the strongest components of service in the distribution
business, and is a major factor in our success.

         Since retail outlets depend upon their distributor's ability to supply
products quickly upon demand, inventory is the primary working capital
investment for most distribution companies, including Five Star. Through our
strategic purchasing decisions, we carry large quantities of inventory that
support fill ratios of approximately 95%.

         All purchasing decisions based on current inventory levels, sales
projections, manufacturer discounts and recommendations from sales
representatives, are made by the merchandising group, located in New Jersey, in
order to effectively coordinate our activities. In addition to senior
management's active involvement, regional sales managers play an extremely
critical role in this day-to-day process.



                                       3
<PAGE>

         We have developed strong, long-term relationships with the leading
suppliers since its predecessor company, J. Leven, was founded in 1912. As a
major distributor of paint sundry items, suppliers rely on us to introduce new
products to market. Furthermore, suppliers have grown to trust our ability to
penetrate the market. As a result, we are often called on first by manufacturers
to introduce new products into the marketplace.

Marketing

         The do-it-yourself industry relies on distributors to link
manufacturers'products to the various retail networks. The do-it-yourself market
operates on this two-step distribution process, , manufacturers deal through
distributors who in turn service retailers. This occurs principally because most
retailers are not equipped to carry sufficient inventory in order to be cost
effective in their purchases from manufacturers. Thus, distributors add
significant value by effectively coordinating and transporting products to
retail outlets on a timely basis. Five Star distributes and markets products
from hundreds of manufacturers to all of the various types of retailers from
regional paint stores, to lumber yards, to independent paint and hardware
stores.

         The marketing efforts are directed by regional sales managers. These
individuals are responsible for designing, implementing and coordinating
marketing policies. They work closely with senior management to coordinate
company-wide marketing plans as well as to service our major multi-state
customers. In addition, each regional sales manager is responsible for
overseeing the efforts of his sales representatives.

         The sales representatives, by virtue of frequent contact with
customers, are the most integral part of our marketing strategy. It is their
responsibility to generate revenue, ensure customer satisfaction and expand the
customer base. Each representative covers an assigned geographic area. The
representatives are compensated based solely on commission. Five Star has
experienced low turnover in its sales force; most representatives have a minimum
of five years' experience with Five Star. Many sales representatives had retail
experience in the paint or hardware industry when they were hired.

         Our size, solid reputation for service, large inventory and attractive
financing terms provide sales representatives with advantages relative to
competing sales representatives from other distributors. In addition, the
representatives' efforts are supported by company-sponsored marketing events.
For example, each year in the first quarter, Five Star invites all of its
customers to special trade shows for Five Star's major suppliers, so that
suppliers may display their products and innovations. Five Star also
participates in advertising circular programs in the spring and the fall which
contain discount specials and information concerning new product innovations.




                                       4
<PAGE>



Industry Dynamics

The Do-It-Yourself Industry

         The paint sundry items distribution industry is closely related to the
do-it-yourself retail market, which has tended to exhibit elements of
counter-cyclicality. In times of recession, consumers tend to spend more on home
improvements if they cannot afford to trade up to bigger homes. In times of
economic strength, consumers tend to spend heavily in home improvements because
they believe they can afford to complete their home improvement projects.
According to the National Retail Hardware Association, total retail sales by
home improvement retailers are estimated to be $300 billion in 2006 and are
projected to grow at a 5.7% compound rate through 2010.

         Painting is the quintessential do-it-yourself project. Painting has to
be done more frequently than most remodeling jobs, and it is a relatively
inexpensive way to update the appearance of a home. For these reasons, the paint
and paint sundry items industry tends to be counter-cyclical and a solid growth
segment of the do-it-yourself market.

Competition

         Competition within the industry is intense. There are large national
distributors commonly associated with national franchises such as Ace and
TruServ as well as smaller regional distributors, all of whom offer similar
products and services. Five Star's customers face stiff competition from Home
Depot and Lowe's, which purchase directly from manufacturers and dealer-owned
distributors such as Ace and TruServ. Moreover, in some instances manufacturers
will bypass the distributor and choose to sell and ship their products directly
to the retail outlet. Five Star competes through its strategically placed
distribution centers and its extensive inventory of quality, name-brand
products. Five Star will continue to focus its efforts on supplying its products
to its customers at a competitive price and on a timely, consistent basis. In
the future, Five Star will attempt to acquire complementary distributors and to
expand the distribution of its line of private-label products sold under the
"Five Star" name. Through internal growth and acquisitions, Five Star has
already captured a significant share in its principal market, the Northeast.

         Hardware stores that are affiliated with the large, dealer-owned
distributors such as Ace also utilize Five Star's services because they are
uncomfortable with relying solely on their dealer network. Most cooperative-type
distributors lack the level of service and favorable credit terms that
independent hardware stores enjoy with Five Star. Five Star effectively competes
with the dealer-owned distributors because it provides more frequent sales
calls, faster deliveries, better financing terms and a full line of vendors and
products to choose from.

Patents, Trademarks and other Intellectual Property

         Except for our line of private-label products, we do not have any
material patents, trademarks or other intellectual property. We intend to expand
the distribution of our line of private-label products sold under the "Five
Star" name.



                                       5
<PAGE>

Environmental Matters and Governmental Regulations

         Our activities may subject us to federal, state and local environmental
laws and regulations and OSHA regulations. We believe that we are in compliance
in all material respects with such environmental laws and regulations.

Employees

         The Company employs approximately 219 people. Management-employee
relations are considered good at both of Five Star's warehouse facilities. The
Teamsters union represents approximately 86 union employees at the New Jersey
warehouse facility. The Connecticut warehouse facility is completely
non-unionized. Five Star has never experienced a labor strike at its facilities.
Five Star's contract with Local No. 11, affiliated with the International
Brotherhood of Teamsters expires on December 20, 2008.

Item 1A  Risk Factors

         Set forth below are risks and uncertainties that could cause the
Company's actual results to differ materially from the results contemplated by
the forward-looking statements contained in this report and other public
statements made by the Company. You are strongly urged to carefully consider the
cautionary language and risks set forth below.

Expiration of Leases for Warehouse Facilities

         The Company's leases for its Connecticut and New Jersey facilities
expire in the first quarter of 2009. The landlord at our Connecticut facility
has the option to cancel the lease if there is a signed contract to sell the
building upon six months written notice. Exercise by the landlord of the option
and our inability to enter into a new lease under favorable terms could have an
adverse impact on our business.

The loss of our key personnel, including our executive management team, could
harm our business.

         Our success is largely dependent upon the experience and continued
services of our executive management team and our other key personnel. The loss
of one or more of our key personnel and a failure to attract or promote suitable
replacements for them may adversely affect our business.

Competition Could Adversely Affect our Performance

         Competition within the do-it-yourself industry is intense. There are
large national distributors commonly associated with national franchises such as
Ace and TruServ as well as smaller regional distributors, all of whom offer
products and services similar to those offered by Five Star. Moreover, in some
instances, manufacturers will bypass distributors and choose to sell and ship
their products directly to retail outlets. In addition, Five Star's customers
face stiff competition from Home Depot, and Lowe's, which purchases directly
from manufacturers, and national franchises such as Ace and TruServ. Five Star
competes principally through its strategically placed distribution centers and


                                       6
<PAGE>

its extensive inventory of quality, name-brand products. Five Star will continue
to focus its efforts on supplying its products to its customers at a competitive
price and on a timely, consistent basis.

Changing economic conditions in the United States could harm our business.

         Our revenues and profitability are related to general levels of
economic activity and employment in the United States. As a result, any
significant economic downturn or recession could harm our business or financial
condition.

Control by NPDC

         The Company is controlled by the Company's principal stockholder, NPDC,
whose interest may not be aligned with those of the Company's other
stockholders. As of March 15, 2007, NPDC actually owned 64% and beneficially
owned approximately 70% of the Company's outstanding common stock. Accordingly,
NPDC will be able to influence our management and affairs and all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of ownership may have
the effect of delaying, discouraging or preventing a change in control and might
affect the market price of the Company's common stock. See Notes 3 and 6 to
Notes to Consolidated Financial Statements for a description of transactions
between the Company and NPDC. In addition, John C. Belknap, our President and
Chief Executive Officer, is a director and employee of NPDC.

Item 1B. Unresolved Staff Comments

         None

Item 2.           Properties

         Five Star leases 236,000 square feet in New Jersey, 98,000 square feet
in Connecticut, 1,300 square feet of sales offices in New York. GP Strategies
Corporation (GPS) has guaranteed the leases for our New Jersey and Connecticut
warehouses, having annual rentals of approximately $1,600,000 and expiring in
the first quarter of 2009. The landlord at our Connecticut facility has the
option to cancel the lease if there is a signed contract to sell the building
upon six months written notice. On September 20, 2006 we renegotiated the New
York sales office lease terms with the lessor. The terms are month to month with
a monthly base rent of $ 1,968 for the period October 2006 through March 2007
and a monthly base rent of $ 2,028 for the period April 2007 through March 2008.
Except as described above, the current facilities leased by the Company are
considered to be suitable and adequate for their intended uses and are
considered to be well maintained and in good condition.



                                       7
<PAGE>


Item 3.           Legal Proceedings

         The Company is from time to time subject to litigation or other legal
proceedings arising in the ordinary course of business. The Company is not a
party to any legal proceeding, the outcome of which is believed by management to
have a reasonable likelihood of having any material adverse effect upon the
financial condition and operating results of the Company.

Item 4.  Submission of Matters to a Vote of Security Holders

         No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.

                                     PART II

Item 5: Market for the Registrant's Common Equity, and Related Stockholder
        Matters and Issuer Purchase of Equity Securities


         . The following table presents the high and low bid and asked prices
for the Company's common stock for 2006 and 2005. The Company's common stock,
$0.1 par value, is quoted on the OTC Bulletin Board. Such quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions.

                  Quarter                   High                    Low

2006              First                     $0.22                  $0.18
                  Second                    $0.27                  $0.15
                  Third                     $0.25                  $0.16
                  Fourth                    $0.35                  $0.17

2005              First                     $0.33                  $0.22
                  Second                    $0.45                  $0.36
                  Third                     $0.45                  $0.38
                  Fourth                    $0.42                  $0.17

         The number of shareholders of record of the common stock as of March
16, 2007 was 3,060 and the closing price of the common stock on the OTC Bulletin
Board on that date was $0.54. The Company did not declare or pay any cash
dividends in 2006 and 2005. The current policy of the Company's Board of
Directors is to retain earnings, if any, to finance the operation of the
Company's business. The payment of cash dividends on the common stock in the
future will depend on the Company's earnings, financial condition and capital
needs and on other factors deemed pertinent by the Company's Board of Directors.



                                       8
<PAGE>





                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES

                      SELECTED CONSOLIDATED FINANCIAL DATA

                    (in thousands, except per share amounts)

Item 6.  Selected Financial Data

<TABLE>
                                                                        Years Ended December 31,
                                                    ------------------------------------------------------------------
                                                    ------------- ------------ ------------- ------------ ------------

<CAPTION>
                                                         2006          2005          2004           2003        2002
                                                         ----          ----          ----           ----        ----

Statement of Operations Data:

<S>                                                   <C>           <C>          <C>             <C>         <C>
Revenue                                               $108,088      $106,451     $101,982        $95,085     $94,074
Cost of goods sold                                      90,877        89,254       83,022         77,866      78,051
Selling, general and administrative
 Expenses                                               15,100        15,997       15,899         15,243      14,903
Net income / (loss)                                        285          (287)       1,140            598         391

Income per share:
Basic                                                    $.02        $(0.02)      $0.08            $0.04     $0.03
Diluted                                                  $.02        $(0.02)      $0.07            $0.04     $0.03


                                                                     Years Ended December 31,
                                                   --------------------------------------------------------------
                                                   ----------- ------------ ----------- ----------- -------------

                                                         2006        2005         2004        2003        2002
                                                         ----        ----         ----        ----        ----

Balance Sheet Data:

Current assets                                        $33,439     $34,864      $39,296     $35,719     $34,214
Current liabilities                                    29,777      31,365       35,538      29,651      27,585
Non-current liabilities                                     6          20           19       2,800       4,500
Working capital                                         3,662       3,499        3,758       6,068       6,629
Total assets                                           34,497      36,184       40,475      36,896      35,366
Total stockholders' equity                              4,714       4,799        4,918       4,445       3,281


</TABLE>


                                       9
<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

                              Results of Operations
Executive summary

The Company reported net income for the 12 months ended December 31, 2006 of
$285,000, an increase of $572,000 as compared to a net loss of $287,000 for the
year ended December 31, 2005. Basic and diluted net income per share was $0.02
for the year ended December 31, 2006 compared to $(0.02) reported for the year
ended December 31, 2005. The improvement in the results in 2006 was primarily
attributable to reduced selling expenses and increased marketing contribution
from vendors. Sales increased by $1,637,000 from $106,451,000 in 2005 to
$108,088,000 in 2006. This increase was a result of increased prices and reduced
sales discounts offered to existing customers.

Overview

  Five Star is a publicly held company that is a distributor in the United
States of home decorating, hardware, and finishing products. Five Star offers
products from leading manufacturers in the home improvement industry and
distributes those products to retail dealers, which include lumber yards, "do-it
yourself" centers, hardware stores and paint stores. Five Star has grown to be
one of the largest independent distributors in the Northeast United States by
providing a complete line of competitively priced products, timely delivery and
attractive pricing and financing terms to its customers.

The following key factors affect Five Star's financial and operation
performance:

     o its ability to negotiate low prices from its suppliers,

     o its ability to increase revenue by obtaining new customers, while
       maintaining a level fixed cost structure by utilizing its existing
       warehouses,

     o the housing market in general,

     o consumers' confidence in the economy,

     o consumers' willingness to invest in their homes, and

     o 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:

     o new U.S. housing starts,

     o sales of existing homes,

     o sales of high margin products to its customers,

     o purchases from each vendor, and

     o performance benchmarks used by Home Depot and Lowe's, such as number of
       stores and square footage, as well as financial benchmarks.



                                       10
<PAGE>

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 5.4% through 2011. Nonetheless, Five Star faces
intense competition from large national distributors, smaller regional
distributors, and manufacturers that bypass the distributor and sell directly to
the retail outlet. The principal means of competition for Five Star are its
strategically placed distribution centers and its extensive inventory of
quality, name-brand products. In addition, Five Star's customers face stiff
competition from Home Depot and Lowe's, which purchase directly from
manufacturers. As a result of such competition, while the Home Improvement
market has expanded significantly in recent years, Five Star's revenue has not
increased at the same rate, and such revenue would have declined if Five Star
had not entered into new geographic sales territories. 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 continued to expand its sales territory with an addition of a
sales force servicing the Mid-Atlantic States, as far south as North Carolina.
Five Star services this territory from its existing New Jersey warehouse,
enabling Five Star to leverage its fixed costs over a broader revenue base. To
further expand, Five Star will attempt to grow its revenue base in the
Mid-Atlantic States, to acquire complementary distributors and to expand the
distribution of its use of private-label products sold under the "Five Star"
name.


Results of Operations

Year Ended December 31, 2006 compared to Year Ended December 31, 2005

The Company recognized income before income taxes of $ 546,000 for the year
ended December 31, 2006 as compared to a loss before income taxes of $384,000
for the year ended December 31, 2005. The change in pre-tax income of $930,000
is primarily due to reduced selling, general and administrative expense of $
897,000 inclusive of a reduction in management fees charged by NPDC of $130,000

Sales. Sales increased by $1,637,000 from $106,451,000 in 2005 to $108,088,000
in 2006. This increase was a result of increased prices and reduced sales
discounts offered to existing customers.

Gross margin. Gross margin of $17,211,000 or 15.9% of sales, in 2006 was
consistent with gross margin of $17,197,000, or 16.2% of sales in 2005. The
increase in gross margin was the result of increased sales, offset by reduced
gross margin percentage due to reduced vendor discounts recognized in 2006. The
Company includes warehousing expenses as part of cost of goods sold.

Selling, general and administrative. Selling, general and administrative
expenses decreased by $897,000 from $15,997,000 in 2005 to $15,100,000 in 2006
primarily attributable to the following factors; (i) a $175,000 reduction of
allowance for doubtful accounts, (ii) $130,000 reduction in the management fee
paid to NPDC, (iii) reduced sales commissions of .23% of net sales


                                       11
<PAGE>

(approximately $200,000), (iv) increased marketing allowances received from
vendors of $553,000 and offset by (v) a $300,000 accrual for severance and
related expenses for a terminated executive accrued in 2006.

Interest expense. Interest expense was $1,627,000 in 2006 as compared to
$1,625,000 in 2005. The small increase was the result of increased interest
rates offset by reduced average borrowing in 2006.

Income taxes. The company recognized income tax expense in 2006 of $ 261,000,
and an income tax benefit of $ 97,000 in 2005 at an effective tax rate of 48% in
2006 and 25% in 2005.

Results of Operations

Year Ended December 31, 2005 compared to Year Ended December 31, 2004

The Company recognized a loss before income taxes of $384,000 for the year ended
December 31, 2005 as compared to income before income taxes of $1,981,000 for
the year ended December 31, 2004. The decrease in profitability of $2,365,000 is
primarily due to decreased gross margin of $1,763,000, an increase of $529,000
in interest expense and management fees and an increase in selling, general and
administrative expenses of $98,000.

Sales. Sales increased by $4,469,000 from $101,982,000 in 2004 to $106,451,000
in 2005. This increase was a result of rising prices due to increased raw
material costs for certain of the Company's vendors, as well as increased sales
volume generated from the Company's annual trade shows. In addition Five Star
conducts small local trade shows for its customer base to create additional
incremental revenue.

Gross margin. Gross margin of $17,197,000 or 16.2% of sales, in 2005 decreased
by $1,763,000 or 9.3% when compared to gross margin of $18,960,000, or 18.6% of
sales in 2004. The decrease in gross margin percentages from 2004 to 2005 was
the result of unfavorable shift in the product mix sold, increased price based
competition , an increase in vendor pricing in particular for petroleum based
products as well as a resistance to price increases from customers.

Selling, general and administrative. Selling, general and administrative
expenses increased by $98,000 or less than 1% primarily due to increases in
delivery expenses, salesmen commissions and management fees of approximately
$300,000 offset by a reduction in general and administrative expenses of
approximately $200,000.

Interest expense. The increase in interest expense in 2005 of $529,000 is the
result of an increase in average borrowings related to the Company's Loan
Agreement, offset by a decrease in average borrowings related to the Note.

Income taxes. The company recognized an income tax benefit in 2005 of $ 97,000,
and an income tax expense of $ 841,000 in 2004, at an effective tax rate of 25%
in 2005 and 42% in 2004.




                                       12
<PAGE>

Liquidity and Capital Resources

At December 31, 2006 the company had cash of $ 3,000 and working capital of $
3,662,000 compared to cash of $ 3,000 and working capital of $ 3,499,000 as of
December 31, 2005. The Company believes that the cash generated from operating
activities will be sufficient to fund the Company's working capital requirements
for at least the next twelve months. For the twelve months ended December 31,
2006 the working capital increased $ 163,000. from $3,499.000 in 2005 to $
3,662,000 in 2006, which was primarily due to an increase in deferred income
taxes, decrease in short term borrowings, offset by a reduction in inventory,
prepaid expenses and an increase in accounts payable and accrued expenses. For
the twelve months ended December 31, 2006 net cash provided by operating
activities amounted to $ 2,239,000 which was attributed by the impact of a
decrease in inventory, prepaid expenses, increase in accounts payable offset by
an increase in deferred income taxes. During the twelve months ended December
31, 2006 cash flow provided by operating activities of $ 2,239,000 funded
repayment of short term borrowings under the current credit facility of $
2,100,000.

In 2003, the Company's wholly-owned subsidiary, Five Star Group, Inc., 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 Group, Inc. 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, as
amended, consist of LIBOR plus a credit spread of 1.5% (6.85% at December 31,
2006) for borrowings not to exceed $15,000,000 and the prime rate (8.25% at
December 31, 2006) for borrowings in excess of the above-mentioned LIBOR-based
borrowings. The credit spreads can be reduced in the event that Five Star Group,
Inc. achieves and maintains certain performance benchmarks. At December 31, 2006
and December 31, 2005, approximately $17,664,000 and $19,764,000 was outstanding
under the Loan Agreement and approximately $2,929,000 and $1,451,000 was
available to be borrowed, respectively. Substantially all of the Company's
assets are pledged as collateral for these borrowings. Under the Loan Agreement
the Company is subject to covenants requiring minimum net worth, limitations on
losses, if any, and minimum or maximum values for certain financial ratios. . As
of December 31, 2006 the Company was in compliance with all required covenants.
The following table sets forth the significant debt covenants at December 31,
2006:

<TABLE>
<CAPTION>

Covenant                            Required                               Calculated
--------                            --------                               ----------
<S>                                 <C>                                    <C>
Minimum tangible net worth          $6,000,000                             $7,329,000
Debt to tangible net worth          < 6                                    2.41
Fixed charge coverage               >1.1                                   1.43
Quarterly income (loss)             No loss in consecutive quarters        $51,000    -third    quarter   income
                                                                                $(192,000)-fourth quarter loss
</TABLE>


In connection with the Loan Agreement, Five Star Group, Inc. also entered into a
derivative transaction with the Lender on June 20, 2003. 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 Group, Inc. will
pay a fixed interest rate of 3.38% to the Lender on notional principal of


                                       13
<PAGE>

$12,000,000. In return, the Lender will pay to Five Star Group, Inc. 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 $ 320,000 at December 31,
2006 and $395,000 at December 31, 2005, and is included in other assets in the
accompanying balance sheets.

On June 17, 2004, Five Star Group, Inc. has 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 Group, Inc. 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 Group, Inc. will
pay to the Lender the difference between LIBOR and 5.75%, on the same notional
principal amount.

The interest rate swap and interest rate collar entered into by the Company in
connection with the Loan Agreement are 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 from June 17, 2004 through December 31, 2006 amount to
approximately $6,000, which has been charged to earnings during the year ended
December 31, 2006.

On March 2, 2007 NPDC amended its $2,800,000 Promissory Note with Five Star.
Under the terms of the amended Promissory Note, the term of the Promissory Note
has been extended from June 30, 2007 to June 30, 2009 at an interest rate of 9%
per annum. In addition, the Promissory Note and any unpaid accrued interest is
convertible, in whole or in part, at NPDC's option. The Promissory Note and
accrued interest are convertible into shares of Five Star common stock at a
price of $.40 per share, subject to adjustment for stock splits, stock
dividends, combinations, reorganization and other similar recapitalizations.
Five Star no longer has the right to prepay the Promissory Note prior to
maturity.

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. The balance of the Note was $2,800,000 as of December 31, 2006.

Leslie Flegel was named Chairman and a Director of the Company on March 2, 2007.
In addition, in connection with his appointment as Chairman of Five Star, on


                                       14
<PAGE>

March 2, 2007, Mr. Flegel entered into a three-year agreement with Five Star
ending on March 1, 2010 (the "FS Agreement"). Under the FS Agreement, Mr. Flegel
will receive an annual fee of $100,000 and will be reimbursed (i) for all travel
expenses incurred in connection with his performance of services to Five Star
and (ii) beginning in November 2007, for up to $125,000 per year of the cost of
maintaining an office. In addition, pursuant to the FS Agreement, Mr. Flegel was
issued 2,000,000 shares of Five Star common stock, all of which are fully vested
and not subject to forfeiture. The Agreement also provides that if the fair
market value of the 2,000,000 shares of Five Star common stock that Mr. Flegel
received pursuant to his agreement with Five Star described below is less than
$280,000 on the last day of the term of such agreement with Five Star, Mr.
Flegel may require NPDC to repurchase the shares of Five Star common stock for
$280,000. The 2,000,000 shares were valued at $720,000 based on the closing
price of Five Star's common stock on March 2, 2007. Such amount is to be charged
to compensation expense over the term of the FS Agreement.

On March 1, 2007, the Board of Directors of Five Star adopted the Five Star
Products, Inc. 2007 Incentive Stock Plan (the "2007 Plan"), subject to the
approval of the shareholders of Five Star. Five Star may grant awards of
non-qualified stock options, incentive stock options (if the 2007 Plan is
submitted to and approved by stockholders of Five Star prior to February 28,
2008), restricted stock, stock units, performance shares, performance units, and
other incentives payable in cash or in shares of Five Star's common stock to
officers, employees or members of the Board of Directors of Five Star and its
subsidiaries. Five Star is authorized to grant an aggregate of 2,500,000 shares
of FS common stock under the 2007 Plan. Five Star may issue new shares or use
shares held in treasury to deliver shares for equity grants or upon exercise of
non-qualified stock options.

On March 1, 2007, John C. Belknap was elected as a director of Five Star. Mr.
Belknap was also elected to serve as President and Chief Executive Officer of
Five Star. Mr. Belknap has served as a director of NPDC since October 20, 2006
and has been an employee of NPDC and unpaid consultant to Five Star since
December 1, 2006. Pursuant to the Restricted Stock Agreement, Mr. Belknap was
granted 1,000,000 restricted shares of Five Star common stock. The shares will
vest if Five Star meets certain EBITDA targets over the next three years and
upon Mr. Belknap's continued employment with Five Star or NPDC. Five Star has
granted Mr. Belknap certain demand and piggy-back registration rights beginning
March 2, 2010 pursuant to the Belknap Five Star Registration Rights Agreement.

On March 2, 2007, Five Star and Bruce Sherman entered into an Amended and
Restated Employment Agreement (the "Amended and Restated Employment Agreement"),
for a period commencing on March 2, 2007 and terminating on December 31, 2010
pursuant to which Mr. Sherman will serve as Chief Executive Officer of Five Star
Group. The Amended and Restated Employment Agreement amends and restates the
Employment Agreement (the "Employment Agreement") between Five Star Group and
Mr. Sherman dated October 18, 2006, pursuant to which Mr. Sherman served as
Chief Executive Officer of Five Star Group. In accordance with the Employment
Agreement Mr. Sherman was granted options to purchase 400,000 shares of the FS
common stock at an exercise price equal to $0.18, the average of the closing bid
and asked prices of Five Star common stock on October 18, 2006. The options will
vest if Five Star meets certain EBITDA targets over the next three years and
upon Mr. Sherman's continued employment with Five Star Group as well as


                                       15
<PAGE>

shareholder approval of the 2007 Plan. The Company determined the estimated
aggregate fair value of these options on the date of grant to be $66,000 based
on the Black-Scholes valuation model using the following assumptions: expected
volatility of 166%, dividend yield of 0%, risk free interest of 5% and an
expected life of 4 years. Achievement of performance criteria was determined as
less then probable at December 31, 2006 and therefore no compensation expense
was recognized. The EBITDA targets and exercise price were subsequently modified
by he Amended and Restated Employment Agreement related options agreement, which
is filed as an exhibit hereto and is incorporated herein by reference.

On March 2, 2007, Charles Dawson, an Executive Vice President of Five Star
Group, was granted options to purchase 125,000 shares of FS common stock at an
exercise price equal to $0.38, the closing price on March 1, 2007. The shares
will vest if Five Star meets certain EBITDA targets over the next three years
and upon Mr. Dawson's continued employment with Five Star Group as well as
shareholder approval of the 2007 Plan.

Contractual Obligations and Commitments

The following table summarizes the note payable, capital lease commitments,
operating lease commitments, purchase commitments and a consulting agreement as
of December 31, 2006 (in thousands):

<TABLE>
<CAPTION>

                                                                          Payments due in
                                              2007          2008-2009        2010-2011       After 2011         Total
                                              ----          ---------        ---------       ----------         -----

<S>                                         <C>            <C>              <C>                 <C>             <C>
Note Payable                                $  2,800       $        -       $       -           $    -          $ 2,800
Operating lease commitments                    2,499            2,515               6                -            5,020
Consulting agreements                            117              125              21                -              263
                                             -------              ---     -----------          -------            -----

Total                                        $ 5,416          $ 2,640            $ 27          $     -          $ 8,083
                                             -------          -------            ----          -------          -------
</TABLE>

Application of Critical Accounting Policies

The Company's consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Certain accounting policies have a significant impact on amounts reported in the
financial statements. A summary of those significant accounting policies can be
found in Note 2 to the Company's financial statements included herein.

Among the significant judgments made by management in the preparation of the
Company's financial statements are the determination of the allowance for
doubtful accounts and adjustments of inventory valuations. These adjustments are
made each reporting period in the ordinary course of accounting. As the Company
carries finished goods which turn over several times a year, the Company does
not record a reserve for inventory obsolescence. The Company expenses defective
finished goods in the period the defect is discovered.





                                       16
<PAGE>

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 Five Star'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 4.94 % and 4.33% as of December 31, 2006 and December 31,
2005. This increase is reflective of increased credit losses projected from
several insolvent customers.

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.

Staff Accounting Bulletin No.108. During the fourth quarter of 2006, the Company
adopted the provisions of Staff Accounting Bulletin No. 108, "Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements" ("SAB 108"). SAB 108 addresses how the effects of
prior-year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB 108 requires an entity
to quantify misstatements using both a balance sheet and income statement
approach and to evaluate whether either approach results in quantifying an error
that is material in light of relevant quantitative and qualitative factors.

Prior to 2006, the Company identified prior years misstatements related to
accounting for vendors' allowances for product purchases, which did not reduce
the cost of inventory but instead were recognized as a reduction in cost of
goods sold in the years they arose. In the past the Company assessed the effect
for each of the years impacted by these misstatements, using the permitted
rollover method (or income statement approach), and determined that the effect
on the financial statements, taken as a whole, was not material. As the result
of implementation of SAB 108, the Company reevaluated the effect of prior year


                                       17
<PAGE>

misstatements on the previously issued financial statements using both methods
and determined that the misstatements related to vendors' allowances which
amounted to $540,000 at December 31, 2005, under the balance sheet method, would
have been material at December 31, 2005 had the Company applied such method. As
allowed by SAB 108 transition provisions, the Company elected to not restate
prior year financial statements but, increased the 2006 beginning balance of the
accumulated deficit by $325,000, increased deferred tax assets by $215,000 and
reduced inventory by $540,000. Stock -based compensation. Effective January 1,
2006, the Company 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. During the year ended December 31, 2006,
the Company did not grant any stock options or any other stock-based awards, and
therefore the adoption of this pronouncement did not have a material effect on
the Company's consolidated results of operations for such periods.

Item 7A.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is exposed to the impact of interest rate, market risks and currency
fluctuations. In the normal course of business, the Company employs internal
processes to manage its exposure to interest rate, market risks and currency
fluctuations. The Company's objective in managing its interest rate risk is to
limit the impact of interest rate changes on earnings and cash flows and to
lower its overall borrowing costs. The Company is exposed to the impact of
currency fluctuations because of its sales to customers in foreign countries.

As of December 31, 2006, the Company had approximately $5.7 million of variable
rate borrowings. The Company estimates that for every 1% fluctuation in general
interest rates, assuming debt levels at December 31, 2006, interest expense
would vary by $57,000.

The Company is a party to an interest rate swap agreement designated as a cash
flow hedge whereby changes in the cash flows of the swap will offset changes in
the interest rate payments on the Company's variable-rate revolving loan,
thereby reducing the Company's exposure to fluctuations in LIBOR. Changes in the
fair value of the interest rate swap are recognized in accumulated other
comprehensive income, net of income taxes.

Effective July 1, 2004 through June 30, 2008, Five Star Group, Inc. 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 Group, Inc. a floating rate, namely,


                                       18
<PAGE>

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%.

On June 17, 2004, Five Star Group has 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 Group, Inc. 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 Group, Inc. will pay to the
Lender the difference between LIBOR and 5.75%, on the same notional principal
amount.




                                       19
<PAGE>


8.                Financial Statements and Supplementary Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                         Page

Report of Independent Registered Public Accounting Firm                    21

Financial Statements:
         Consolidated Balance Sheets - December 31, 2006 and 2005          22

         Consolidated Statements of Operations and Comprehensive Income -
         Years ended December 31, 2006, 2005 and 2004                      23

         Consolidated Statements of Changes in Stockholders' Equity -
         Years ended December 31, 2006, 2005 and 2004                      24

         Consolidated Statements of Cash Flows -
         Years ended December 31, 2006, 2005 and 2004                      25

         Notes to Consolidated Financial Statements                        26



                                       20
<PAGE>




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


Board of Directors and Stockholders of
Five Star Products, Inc.:

We have audited the accompanying consolidated balance sheets of Five Star
Products Inc. and subsidiaries (the "Company") as of December 31, 2006 and 2005
and the related consolidated statements of operations and comprehensive income,
changes in stockholders' equity and cash flows for each of the years in the
three-year period ended December 31, 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Five Star Products
Inc. and subsidiaries as of December 31, 2006 and 2005, and the consolidated
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2006, in conformity with accounting
principles generally accepted in the Unites States of America.

As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2006, the Company adopted the provisions of Securities and Exchange
Commission Staff Accounting Bulletin No. 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in the Current Year Financial
Statements".


EISNER LLP
New York, New York
March 28, 2007




                                       21
<PAGE>





<PAGE>


                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                               December 31,          December 31,
                                                                                    2006                 2005
                                                                                    ----                 ----

      Assets
Current assets
<S>                                                                           <C>                   <C>
Cash                                                                          $        3            $        3
Accounts receivable, less allowance
 for doubtful accounts of $547 and $480, respectively                             10,520                10,594
Inventory                                                                         21,744                23,317
Deferred income taxes                                                                652                   172
Prepaid expenses and other current assets                                            520                   778
                                                                               ---------             ---------
Total current assets                                                              33,439                34,864
Machinery and equipment, net                                                         530                   712
Deferred income taxes                                                                166                   166
Other assets                                                                         362                   442
                                                                              ----------            ----------
Total Assets                                                                     $34,497               $36,184
                                                                                 =======               =======

      Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings                                                            $17,664               $19,764
Note payable to NPDC                                                               2,800                 2,800
Accounts payable and accrued expenses
  (including due to affiliates of $79 and $64, respectively)                       9,313                 8,801
                                                                                   -----                 -----
Total current liabilities                                                         29,777                31,365

Interest rate collar                                                                   6                    20
                                                                                --------             ---------
Total Liabilities                                                                 29,783                31,385
                                                                                  ------                ------

Stockholders' equity
Common stock, authorized 30,000,000 shares, par value $.01 per share; 17,293,098
  shares issued and 14,396,077 outstanding in 2006 and
  2005, respectively                                                                 173                   173
Additional paid-in capital                                                         8,552                 8,552
Accumulated deficit                                                               (3,495)               (3,455)
Accumulated other comprehensive income                                               184                   229
Treasury stock, at cost 2,983,521 shares                                            (700)                 (700)
                                                                              -----------           -----------
Total stockholders' equity                                                         4,714                 4,799
                                                                               ---------             ---------
                                                                                $ 34,497              $ 36,184
                                                                                ========              ========
        See accompanying notes to the consolidated financial statements.

</TABLE>

                                       22
<PAGE>


                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

                      (in thousands, except per share data)

<TABLE>

<CAPTION>
                                                              Year Ended December 31,

                                                             2006              2005              2004
                                                             ----              ----              ----

<S>                                                        <C>               <C>               <C>
Sales                                                      $ 108,088         $ 106,451         $ 101,982
Cost of goods sold (net of vendors allowances)
                                                              90,877            89,254            83,022
                                                              ------            ------            ------
Gross margin                                                  17,211            17,197            18,960

Selling, general and
 administrative expenses (net of vendors allowances)         (15,100)          (15,997)          (15,899)
                                                             --------          --------          --------

Operating income                                               2,111             1,200             3,061

Other income                                                      62                41                16

Interest expense (including amounts
  to affiliates of $252, $238 and $224)                       (1,627)           (1,625)           (1,096)
                                                              -------           -------           -------

Income / (loss) before income taxes                              546              (384)            1,981

Income tax (expense) / benefit                                  (261)               97              (841)
                                                            ---------           ------          ---------

Net income / (loss)                                           $  285           $  (287)         $  1,140

Other comprehensive income (loss), net of tax:
     Change in value of cash flow hedge                          (75)              290               (17)
     Tax benefit / (expense)                                      30              (122)                7
                                                            --------        -----------         --------

Comprehensive income                                           $ 240            $ (119)          $ 1,130
                                                               =====            =======          =======

Net income per share
 Basic                                                         $0.02            $(0.02)            $0.08
                                                               =====            =======            =====
 Diluted                                                       $0.02            $(0.02)            $0.07
                                                               =====            =======            =====


        See accompanying notes to the consolidated financial statements.

</TABLE>

                                       23
<PAGE>





                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  Years Ended December 31, 2006, 2005 and 2004
                                 (in thousands)

<TABLE>
                                                                                                       Accumulated
<CAPTION>
                                                 Common        Additional                 Treasury         Other            Total
                                                  Stock          Paid-in    Accumulated     Stock      Comprehensive   Stockholders'
                                                Par Value        Capital      Deficit      At Cost        Income          Equity
--------------------------------------------- -------------- ------------- --------------- ------------ ------------ ---------------
<S>                 <C> <C>                         <C>           <C>         <C>           <C>            <C>             <C>
Balance at December 31, 2003                        $173          $8,552      $(4,308)      $(43)          $71             $4,445
--------------------------------------------- -------------- ------------- ------------- ------------ ------------ -----------------
Net income                                                                      1,140                                     1,140
Purchase of 2,628,000 shares of treasury
stock                                                                                       (657)                          (657)
Decrease in market value of interest
rate swap, net of tax                                                                                      (10)               (10)
--------------------------------------------- -------------- ------------- ------------- ------------ ------------ -----------------
Balance at December 31, 2004                        $173          $8,552      $(3,168)     $(700)          $61             $4,918
Net loss                                                                         (287)                                     (287)

Increase in market value of interest rate
swap, net of tax                                                                                           168                168
--------------------------------------------- -------------- ------------- ------------- ------------ ------------ -----------------

Balance at December 31, 2005                        $173          $8,552      $(3,455)     $(700)         $229             $4,799
SAB 108 cumulative adjustment                       ____          ______      ___(325)     _____          ____             __(325)
                                                                              --------                                   -------
Adjusted balance at December 31, 2005               $173          $8,552      $(3,780)     $(700)         $229             $4,474
Net Income                                                                        285                                       285
Decrease in market value of interest
rate swap, net of tax                                                                                      (45)               (45)
--------------------------------------------- -------------- ------------- ------------- ------------ ------------ -----------------
Balance at December 31, 2006                        $173          $8,552      $(3,495)     $(700)         $184             $4,714
--------------------------------------------- -------------- ------------- ------------- ------------ ------------ -----------------

        See accompanying notes to the consolidated financial statements.

</TABLE>

                                       24
<PAGE>




                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)
<TABLE>

                                                                                  Year Ended December 31,
                                                                      ---------------- -------------- ----------------
<CAPTION>
                                                                           2006            2005            2004
                                                                           ----            ----            ----
Cash flows from operating activities:
<S>                                                                        <C>             <C>          <C>
Net income / (loss)                                                        $ 285           $ (287)      $  1,140
Adjustments to reconcile net income / (loss)
   to net cash provided by / (used in)  operating activities:
 Depreciation and amortization                                               322              317            293

 Deferred income tax benefit                                                (232)            (109)           (86)
 Loss / (gain)on interest rate collar                                        (14)               1             19
Changes in other operating items:
    Accounts receivable                                                       74             (972)          (752)
    Inventory                                                               1033            6,017         (2,907)
    Prepaid expenses and other current assets                                258             (621)           136
    Accounts payable and accrued expenses                                    513           (5,703)         1,538
                                                                             ---           -------         -----
Net cash provided by / (used in) operating activities                      2,239           (1,357)        $ (619)
                                                                           -----           -------        -------

Cash flows from investing activities:
Additions to machinery and equipment                                        (140)            (174)          (275)
                                                                            -----            -----          -----

Cash flows from financing activities:
Net (repayment of) / proceeds from short-term borrowings                  (2,100)           1,530          1,549

Purchase of treasury stock                                                     -                -           (657)
                                                                               -                -           -----
Net cash (used in) / provided by
 financing activities                                                     (2,100)           1,530            892
                                                                          -------           -----            ---

Net decrease in cash                                                           -               (1)            (2)
Cash at beginning of period                                                    3                4              6
                                                                               -                -        -------
Cash at end of period                                                         $3               $3         $    4
                                                                              ==               ==         ======

Supplemental disclosures of cash flow information:
 Cash paid during the periods for:
 Interest                                                                 $1,661           $1,613          $ 979
                                                                          ======           ======          =====
 Income tax                                                                  $32             $898          $ 522
                                                                             ===             ====          =====


                          See accompanying notes to the consolidated financial statements.


</TABLE>


                                       25
<PAGE>

                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

                                   (Continued)


1.       Business and relationship with National Patent Development Corporation

Five Star Products, Inc. (the "Company" or "Five Star") owns 100% of Five Star
Group, Inc. which is a wholesale distributor of home decorating, hardware and
finishing products in the northeastern United States. At December 31, 2006 the
Company is a majority owned subsidiary of National Patent Development
Corporation ("NPDC").

The Company, which was then 37.5% owned by GP Strategies Corporation ("GPS"),
purchased its business from GPS in 1998 in exchange for cash and a $5,000,000
unsecured 8% note payable ("the Note"). In 2002 and 2003, GPS converted
$1,000,000 principal amount of the Note into 4,272,727 shares of the Company's
common stock. In 2004, the Company, through a tender offer, repurchased
approximately 2,628,000 shares of its common stock. The conversion of the Note
and the tender offer increased GPS' ownership in the Company to approximately
64%. On July 30, 2004, GPS contributed its ownership interest in Five Star and
the Note to NPDC. On November 24, 2004, GPS completed the spin-off to its
shareholders of the common stock of NPDC.

2.       Summary of significant accounting policies

Principles of consolidation. The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.

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.

Inventory. Inventory is valued at the lower of cost, using the first-in,
first-out (FIFO) method, or market. Inventory consists solely of finished
products, and includes allocated warehousing costs.

Machinery and equipment. Fixed assets are carried at cost less accumulated
depreciation. Major additions and improvements are capitalized, while
maintenance and repairs that do not extend the lives of the assets are expensed.
Gain or loss, if any, on the disposition of fixed assets is recognized currently
in operations. Depreciation is calculated primarily on a straight-line basis
over estimated useful lives of the assets.

Vendor allowances. The Company accounts for vendor allowances under the guidance
provided by EITF Issue No. 02-16, "Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor," and EITF Issue No.
03-10, "Application of EITF Issue No. 02-16 by Resellers to Sales Incentives
Offered to Consumers by Manufacturers." Vendor allowances reduce the carrying
cost of inventory unless they are specifically identified as a reimbursement for
promotional programs and/or other services provided. Any such allowances
received in excess of the actual cost incurred also reduce the carrying cost of
inventory.


                                       26
<PAGE>

Shipping and handling costs. Shipping and handling costs are included as a part
of selling, general and administrative expenses. These costs amounted to
$4,909,000, $4,981,000 and $4,756,000 for the years ended December 31, 2006,
2005 and 2004, respectively.

Advertising costs. The Company expenses advertising costs as incurred.
Advertising expense was $40,000, $33,000 and $91,000 for the years ended
December 31, 2006, 2005 and 2004, respectively.

Income taxes. Income taxes are provided for based on the asset and liability
method of accounting pursuant to Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.

Use of estimates. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from these estimates.

Concentration of credit risk. Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist primarily of
accounts receivable. Sales are made principally to independently owned paint and
hardware stores in the northeast United States.

Fair value of financial instruments. The carrying value of cash and cash
equivalents, accounts receivable and accounts payable approximate estimated fair
values because of short maturities. The carrying value of the $2,800,000 fixed
rate note payable to NPDC approximates estimated fair value at December 31, 2006
because of the short maturity, and at December 31, 2005 based on the then
prevailing market rates. The carrying value of short term borrowings
approximates estimated fair value because borrowings accrue interest which
fluctuates with changes in LIBOR. Derivative instruments are carried at fair
value representing the amount the Company would receive or pay to terminate the
derivative.

Derivatives and hedging activities. SFAS No. 133, as amended, "Accounting for
Derivative Instruments and Hedging Activities" 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 (See Note 3).



                                       27
<PAGE>

Recent accounting pronouncements. In July 2006, the Financial Accounting
Standards Board (FASB) released FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No.109" ("FIN
48"). FIN 48 clarifies the accounting and reporting for uncertainties in income
tax law. This Interpretation prescribes a comprehensive model for the financial
statement recognition, measurement, presentation and disclosure of uncertain tax
positions taken or expected to be taken in income tax returns. The Company will
adopt this Interpretation in the first quarter of 2007. The cumulative effects,
if any, of applying this Interpretation will be recorded as an adjustment to
retained earnings as of the beginning of the period of adoption. The Company has
commenced the process of evaluating the expected effect of FIN 48 on its
Consolidated Financial Statements and is currently not yet in a position to
determine such effects.

In February, 2007, FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" including an amendment of FASB
Statement 115. This statement provides companies with an option to report
selected financial assets and liabilities at fair value. This statement is
effective for fiscal years beginning after November 15, 2007 with early adoption
permitted. We are assessing SFAS No. 159 and have not determined yet the impact
that the adoption of SFAS No. 159 will have on our results of operations or
financial position.

Staff Accounting Bulletin No.108. During the fourth quarter of 2006, the Company
adopted the provisions of Staff Accounting Bulletin No. 108, "Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements" ("SAB 108"). SAB 108 addresses how the effects of
prior-year uncorrected misstatements should be considered when quantifying
misstatements in current-year financial statements. SAB 108 requires an entity
to quantify misstatements using both a balance sheet and income statement
approach and to evaluate whether either approach results in quantifying an error
that is material in light of relevant quantitative and qualitative factors.

Prior to 2006, the Company identified prior years misstatements related to
accounting for vendors' allowances for product purchases, which did not reduce
the cost of inventory but instead were recognized as a reduction in cost of
goods sold in the years they arose. In the past the Company assessed the effect
for each of the years impacted by these misstatements, using the permitted
rollover method (or income statement approach), and determined that the effect
on the financial statements, taken as a whole, was not material. As the result
of implementation of SAB 108, the Company reevaluated the effect of prior year
misstatements on the previously issued financial statements using both methods
and determined that the misstatements related to vendors' allowances which
amounted to $540,000 at December 31, 2005, under the balance sheet method, would
have been material at December 31, 2005 had the Company applied such method. As
allowed by SAB 108 transition provisions, the Company elected to not restate
prior year financial statements but, increased the 2006 beginning balance of the
accumulated deficit by $325,000, net of deferred tax benefit of 215,000.

Stock -based compensation. Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment", ("SFAS 123R"), utilizing the modified prospective method whereby prior


                                       28
<PAGE>

periods will not be restated for comparability. Under such method, compensation
cost is recorded as earned (i) for all unvested stock options outstanding at the
beginning of the first fiscal year of adoptions of SFAS No. 123R based on the
grant date fair value estimated in accordance with the original provisions of
SFAS No. 123 and (ii) for all share-based payments granted subsequent to the
adoption, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123R. 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. During
the year ended December 31, 2006, the Company granted stock options all of which
were performance based. As achievement of performance criteria was determined as
less then probable at December 31, 2006 no compensation expense was recognized
for such options and therefore the adoption of this pronouncement did not have a
material effect on the Company's consolidated results of operations for such
period.

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 years ended December 31, 2005 and 2004 (in thousands,
except per share amounts):

                                                  Year Ended December 31,
                                                2005                   2004
                                                ----                   ----
Net (loss) / income - as reported              $(287)               $1,140
Compensation expense net of tax                  (11)                  (12)
                                                 ----                  ----
Pro forma net (loss) / income                  $(298)               $1,128
                                               ======               ======

Per share data
Basic - as reported                           $(0.02)                $0.08
Basic - pro forma                             $(0.02)                $0.08
Diluted - as reported                         $(0.02)                $0.07
Diluted - pro forma                           $(0.02)                $0.07

The Company did not grant any options during 2005 and 2004.

Earnings per share. Basic earnings per share (EPS) is based upon the weighted
average number of common shares outstanding during the period. Diluted EPS is
based upon the weighted average number of common shares outstanding during the
period assuming the issuance of common shares for all dilutive potential common
shares outstanding. For the year ended December 31, 2005 options outstanding to
purchase approximately 1,100,000 shares of common stock were not included in the
diluted per share computation because their effect would be anti-dilutive.



                                       29
<PAGE>




Earnings per share (EPS) for the years ended December 31, 2006, 2005 and 2004
are computed as follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                   Year ended December 31,
                                                         --------------- -------------- --------------
                                                              2006            2005           2004
                                                              ----            ----           ----
        Basic EPS
<S>                                                           <C>            <C>            <C>
        Net income / (loss)                                   $ 285          $ (287)        $ 1,140
                                                              -----          -------        -------

        Weighted average shares outstanding                  14,396          14,310          14,967
                                                             ------          ------          ------

        Basic earnings / (loss) per share                   $ 0.02         $ (0.02)          $ 0.08
                                                            ------         --------          ------

        Diluted EPS
        Net income / (loss)                                   $ 285          $ (287)        $ 1,140
                                                              -----          -------        -------

        Weighted average shares outstanding                  14,396          14,310          14,967

        Dilutive effect of stock options                        303                             395
                                                              ------          ---

        Weighted average shares
         outstanding, diluted                                14,699          14,310          15,362
                                                             ------          ------

        Diluted earnings / (loss) per share                  $ 0.02         $ (0.02)         $ 0.07
                                                             ------         --------         ------
</TABLE>

Financial statement reclassification. Certain amounts in the prior year
financial statements and quarterly information have been reclassified to conform
to the 2006 presentation.

3.       Short-term borrowings

In 2003, the Company's wholly-owned subsidiary, Five Star Group, Inc., entered
into a Loan and Security Agreement (the "Loan Agreement") with Bank of America
Business Capital (formerly Fleet Capital Corporation) (the "Lender"). The Loan
Agreement has a five-year term, with a maturity date of June 30, 2008. The Loan
Agreement, as amended on August 1, 2005, provides for a $35,000,000 revolving
credit facility, which allows Five Star Group, Inc. 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, as
amended, consist of LIBOR plus a credit spread of 1.5% (6.85% at December 31,
2006) for borrowings not to exceed $15,000,000 and the prime rate (8.25% at
December 31, 2006) for borrowings in excess of the above-mentioned LIBOR-based
borrowings. The credit spreads can be reduced in the event that Five Star Group,
Inc. achieves and maintains certain performance benchmarks. At December 31, 2006
and 2005, $17,664,000 and $19,764,000 was outstanding under the Loan Agreement
and approximately $2,929,000 and $1,451,000 was available to be borrowed,
respectively. Substantially all of the Company's assets are pledged as
collateral for these borrowings. Under the Loan Agreement the Company is subject
to covenants requiring minimum net worth, limitations on losses, if any, and
minimum or maximum values for certain financial ratios. As of December 31, 2006
the Company was in compliance with all covenant requirements.



                                       30
<PAGE>

In connection with the Loan Agreement, Five Star Group, Inc., on June 20, 2003
entered into an interest rate swap with the lender which has been designated as
a cash flow hedge. Effective July 1, 2004 through June 30, 2008, Five Star
Group, Inc. 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 Group,
Inc. a floating rate, namely, LIBOR, on the same notional principal amount. The
credit spread under the Loan Agreement is not included in, and will be paid in
addition to the 3.38%.

The fair value of the interest rate swap amounted to $ 320,000 at December 31,
2006 and $395,000 at December 31, 2005, and is included in other assets in the
accompanying balance sheets. Changes in the fair value of the interest rate swap
were recognized in other comprehensive income.

On June 17, 2004, Five Star Group, Inc. has also entered into interest rate
collar transaction during the period from July 1, 2004 through June 30, 2008 on
a 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 Group, Inc. 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 Group, Inc. will pay to the
Lender the difference between LIBOR and 5.75%, on the same notional principal
amount. Changes in the fair value of the interest rate collar, which amounted to
approximately $15,000. $1,000 and $19,000 during 2006, 2005 and 2004
respectively, have been charged to earnings during such years.

4.       401(k) plan

The Company maintains a 401(k) Savings Plan for employees who have completed one
year of service. The Savings Plan permits pre-tax contributions to the Savings
Plan of 2% to 50% of compensation by participants pursuant to Section 401(k) of
the Internal Revenue Code. The Company matches 40% of the participants' first 6%
of compensation contributed, not to exceed an amount equivalent to 2.4% of that
participant's compensation.

The Savings Plan is administered by a trustee appointed by the Board of
Directors of the Company and all contributions are held by the trustee and
invested at the participants' directions in various mutual funds. The Company's
expense associated with the Savings Plan was approximately $125,000, $119,000
and $123,000 for the years ended December 31, 2006, 2005, and 2004,
respectively.


                                       31
<PAGE>




5.       Machinery and equipment

Machinery and equipment consist of the following (in thousands):

                                                   December 31,      Estimated
                                                2006       2005     useful lives
                                                ----       ----     ------------

Machinery and equipment                          479        440     5-7 years
Furniture and fixtures                         1,304      1,214        5 years
Leasehold improvements                           982        971     3-9 years
                                                 ---        ---
                                               2,765      2,625
Accumulated depreciation and amortization     (2,235)    (1,913)
                                              -------    -------
                                                $530       $712
                                                ====       ====

Depreciation and amortization expense for the years ended December 31, 2006,
2005, and 2004 was $322,000, $317,000 and $293,000, respectively.

6.       Related party transactions

(a)  Management agreement

NPDC provided legal, tax, business development, insurance and employee benefit
administration services to the Company pursuant to a management services
agreement for fees of up to $10,000 which have ranged from $10,000 to $25,000
per month and are currently capped at $14,167 per month. The agreement is
automatically renewable for successive one-year terms unless one of the parties
notifies the other in writing at least six months prior to the end of any
renewal thereof. In addition, the Company agreed to reimburse NPDC for $16,666
per month for Mr. Feldman's (NPDC's Chief Executive Officer) service to the
Company effective October 1, 2004. The agreement was renewed for 2006.

Fees incurred under the Agreement totaled $370,000, $500,000 and $215,000, for
the years ended December 31, 2006, 2005 and 2004, respectively, and are included
in selling, general and administrative expenses in the consolidated statements
of operations. At December 31, 2006 and 2005, the amount due to NPDC under the
Agreement was $58,000 and $43,000, respectively.

In addition, NPDC incurred certain expenses on behalf of Five Star, primarily
involving insurance, legal and other professional expenses. Five Star reimbursed
NPDC for such expense, which amounted to approximately $234,000, $242,000 and
$239,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

(b) Related party debt

The Company's wholly-owned subsidiary, Five Star Group, Inc., has a $2,800,000
unsecured note payable (the "Note") to JL Distributors, Inc., a wholly-owned
subsidiary of NPDC. The Note, as amended, bore interest at 8%, which is payable
quarterly, and was scheduled to mature on June 30, 2005. On June 30, 2005, the


                                       32
<PAGE>

Company and NPDC agreed to extend the Note for a one-year term maturing on June
30, 2006. In consideration of NPDC extending the Note, the Company paid NPDC a
fee of one percent of the Note's outstanding balance or $28,000. In addition,
the interest rate on the Note has been increased to 9%. On July 28, 2006, the
Note's maturity terms were extended to June 30, 2007. In consideration of NPDC
extending the Note, the Company paid NPDC $28,000. See Note 12.

The Note is subordinated to the indebtedness under the Loan Agreement ( Note 3).

(c)  Other related party transactions

On February 8, 2002, the Company entered into a Consulting and Severance
Agreement (the "Agreement") with Richard Grad, the former President and Chief
Executive Officer of the Company. Pursuant to the Agreement, Mr. Grad will
receive $145,000 per year for consulting services to be rendered to the Company
and a severance fee at the rate of $5,000 per year, for a five-year period
ending February 8, 2007. In addition, in August, 2002, Mr. Grad was granted
options to purchase 150,000 shares of the Company's common stock at the quoted
market price on the date of grant, which options will vest annually over the
term of the Agreement in equal installments. Such options were valued at an
aggregate amount of $13,000. The Agreement also provided for the repurchase by
the Company of 192,308 shares of the Company's common stock held by Mr. Grad for
an aggregate purchase price of $25,000. During this five-year period, Mr. Grad
is also receiving certain benefits, including medical benefits, life insurance
and use of an automobile.

7.       Income taxes

The components of income tax expense (benefit) are as follows (in thousands):

-------------------------------------- -------------- -------------- -----------
Years ended December 31,                    2006           2005           2004
-------------------------------------- -------------- -------------- -----------
Current
Federal                                     $353             $0           $703
State and local                              147             12            224
                                           -----           ----          -----
Total current expense                        500             12            927
                                           -----           ----          -----
Deferred
Federal                                     (185)           (84)           (67)
State and local                              (54)           (25)           (19)
                                          -------        -------        -------
Total deferred benefit                      (239)          (109)           (86)
                                         --------       --------        -------
Total income tax expense / (benefit)        $261           $(97)          $841
                                            ----           -----          ----


                                       33
<PAGE>



As of December 31, 2006 and 2005, net deferred income taxes consist of the
following (in thousands):

                                                            December 31,
                                                       -------------------------
                                                       ------------ ------------
Deferred tax assets (liabilities)                         2006         2005
                                                          ----         ----

    Allowance for doubtful accounts                      $ 170        $ 154
    Accrued compensation                                   121            5
    Accrued expenses                                        32
                                                            --
    Inventory                                              329           13
                                                         -----         ----
    Total current deferred tax assets                      652          172
    Net operating losses                                                 76
    Machinery and equipment                                292          240
    Interest rate collar                                     2            8
    Deferred compensation                                   36           36
    Interest rate swap                                    (128)        (158)
                                                          -----        -----
    Total long-term deferred tax assets                    202          202

    Valuation allowance                                    (36)         (36)
                                                          -----        -----

    Net long-term deferred tax assets                      166          166
                                                           ---          ---

Net deferred tax assets                                   $818         $338
                                                          ====         ====




                                       34
<PAGE>

A reconciliation between the Company's tax provision and the U.S. statutory rate
follows (in thousands):

------------------------------------ ------------- --------------- -------------
Years ended December 31,                2006               2005           2004
------------------------------------ ------------- --------------- -------------
------------------------------------ ------------- --------------- -------------
Tax at U.S. statutory rate              $186              $(131)           $673
State and local taxes net of
 Federal benefit                          61                 (8)            135
Items not deductible                      16                 29              25
Valuation allowance adjustment             0                 (3)              -
Other                                     (2)                16               8
                                      -------           -------          ------
Income taxes                            $261               $(97)           $841
                                        ====               =====           ====

Under SFAS No. 109, a valuation allowance is provided when it is more likely
than not that some portion of deferred tax assets will not be realized. The
valuation allowance was decreased $3,000 during 2005 and was unchanged during
2006 and 2004.

8.       Stock options

On January 1, 1994, the Company's Board of Directors adopted the Five Star
Products, Inc. 1994 Stock Option Plan (the "Stock Option Plan"), which became
effective August 5, 1994. The Stock Option Plan, as amended provides for
4,000,000 shares of common stock to be reserved for issuance, subject to
adjustment in the event of stock splits, stock dividends, recapitalizations,
reclassifications or other capital adjustments. Unless designated as "incentive
stock options" intended to qualify under Section 422 of the Internal Revenue
Code, options granted under the Stock Option Plan are intended to be
nonqualified options. Options may be granted to any director, officer or other
key employee of the Company and its subsidiaries, and to consultants and other
individuals providing services to the Company.

The term of any option granted under the Stock Option Plan will not exceed ten
years from the date of grant and, in the case of incentive stock options granted
to a 10% or greater holder in the total voting stock of the Company, three years
from the date of grant. The exercise price of any option will not be less than
the fair market value of the common stock on the date of grant or, in the case
of incentive stock options granted to a 10% or greater holder in the total
voting stock, 110% of such fair market value.

Options granted vest 20% on date of grant with the balance vesting in equal
annual installments over four years. At December 31, 2006, the Company had
1,500,000 shares of common stock reserved for future grants under the Stock
Option Plan.


                                       35
<PAGE>

Activity relating to stock options granted by the Company:

<TABLE>

<CAPTION>

                                                                                                  Weighted-Average
                                                                                                  Remaining         Aggregate
                                                       Number of            Weighted-Average      Contractual       Intrinsic
                                                       Shares               Exercise Price        Terms (Years)     Value

<S>                             <C> <C>                <C>                  <C>
Options outstanding at December 31, 2003               1,530,000            0.19
      Cancelled                                          (430,000)          0.33
                                                       -----------
Options outstanding at December 31, 2004 and 2005      1,100,000            0.14
       Granted                                         400,000              0.18
       Expired                                         (450,000)            (0.14)
Options outstanding at December 31,2006                1,050,000            0.16                  1.2               $148,500
                                                       =========            ====                  ===               ========
Options exercisable at December 31,2006                650,000              0.15                  0.1               $100,500
                                                       =======              ====                  ===               ========

</TABLE>

At December 31, 2006, 650,000 option are vested.

On October 18, 2006 the Company granted options to purchase 400,000 shares of
the Company's common stock at an exercise price equal to $0.18, the average of
the closing bid and asked prices of the common stock on that date. The options
will vest if the Company meets certain EBITDA targets over the next three years
and upon employee's continued employment as well as shareholder approval of the
2007 Plan. Such approval is deemed to be essentially a formality as NPDC is the
majority shareholder and controls the Company's Board of Directors, which
adopted the 2007 Plan (Note 12a). The Company determined the estimated aggregate
fair value of these options on the date of grant to be $66,000 based on the
Black-Scholes valuation model using the following assumptions: expected
volatility of 166%, dividend yield of 0%, risk free interest of 5% and an
expected life of 4 years. Achievement of performance criteria was determined as
less then probable at December 31, 2006 and therefore no compensation expense
was recognized. The EDITDA target and exercise price were modified in March
2007.

9.       Commitments and contingencies

The Company has several non-cancelable leases which cover real property,
machinery and equipment. Such leases expire at various dates and some of them
have options to extend their terms.



                                       36
<PAGE>






Minimum rental obligations under long-term operating leases are indicated in the
table below (in thousands). Figures for real property include estimated amounts
of supplemental lease obligations, such as pro-rated assessments for property
taxes or common-area expenses.

                                              Machinery and
                         Real Property           equipment               Total
   --------------- ----------------------- --------------------- ---------------
   --------------- ----------------------- --------------------- ---------------

   2007                       1,609                   888                2,497
   2008                       1,623                   356                1,979
   2009                         381                   152                  533
   2010                                                 6                    6
   --------------- ----------------------- --------------------- ---------------
   --------------- ----------------------- --------------------- ---------------
   Total                     $3,613                $1,402               $5,015
                             ======                ======               ======

During 2006, 2005, and 2004, the Company incurred $3,026,000, $3,058,000 and
$2,886,000, respectively, of rental expenses. GPS has guaranteed the leases for
Five Star's New Jersey and Connecticut warehouses, having annual rentals of
approximately $1,600,000 and expiring in the first quarter of 2009. The landlord
at Five Star's Connecticut facility has the option to cancel the lease if there
is a signed contract to sell the building, upon six months written notice.


10.      Valuation and Qualifying Accounts

The following is a summary of the allowance for doubtful accounts related to
accounts receivable for the years ended December 31 (in thousands):

                                                  2006          2005       2004
                                                  ----          ----       ----
        Balance at beginning of year             $ 480         $ 306       $702
        Charged to expense                          88           147         91
        Reduction of allowance                    (175)            -          -
        Uncollectible accounts written off,
          net of recoveries                        154            27       (487)
                                                   ---            --     ------
        Balance at end of year                   $ 547         $ 480       $306
                                                 =====         =====       ====


11.      Accounts payable and accrued expenses

Accounts payable and accrued expenses are comprised of the following at December
31, 2006 and 2005 (in thousands):

                                                              December 31,
                                                           2006         2005
        Accounts payable                                 $6,715       $6,290
        Accrued expenses                                  1,717        1,400
        Due to NPDC/GPS                                      79           64
        Other                                               802        1,047
                                                            ---        -----
                                                         $9,313       $8,801


                                       37
<PAGE>

12.           Subsequent events

     a.   On March 1, 2007, the Board of Directors of Five Star adopted the Five
          Star Products, Inc. 2007 Incentive Stock Plan (the "2007 Plan"),
          subject to the approval of the shareholders of Five Star. Five Star
          may grant awards of non-qualified stock options, incentive stock
          options (if the 2007 Plan is submitted to and approved by stockholders
          of Five Star prior to February 28, 2008), restricted stock, stock
          units, performance shares, performance units, and other incentives
          payable in cash or in shares of Five Star's common stock to officers,
          employees or members of the Board of Directors of Five Star and its
          subsidiaries. Five Star is authorized to grant an aggregate of
          2,500,000 shares of Five Star Common Stock under the 2007 Plan. Five
          Star may issue new shares or use shares held in treasury to deliver
          shares for equity grants or upon exercise of non-qualified stock
          options.


     b.   On March 1, 2007, John C. Belknap was elected to serve as President
          and Chief Executive Officer, and a director, of Five Star. Mr. Belknap
          has served as a director of NPDC since October 20, 2006 and has been
          an employee of NPDC and unpaid consultant to Five Star since December
          1, 2006. Mr. Belknap was granted options to purchase an aggregate of
          400,000 shares of NPDC common stock, 150,000 of which are subject to
          shareholder approval of an amendment to NPDC 2003 Incentive Stock
          Plan, at an exercise price equal to $2.45 per share, which was the
          average of the closing bid and asked prices of NPDC common stock on
          March 1, 2007. Contingent upon Mr. Belknap's continued employment, the
          options will vest in three equal annual installments, commencing on
          December 1, 2007. In addition, pursuant to a Restricted Stock
          Agreement, dated as of March 2, 2007, between Five Star and Mr.
          Belknap (the "Restricted Stock Agreement"), Mr. Belknap was also
          granted 1,000,000 restricted shares of Five Star common stock.
          Contingent upon Mr. Belknap's continued employment, (i) 333,333 of the
          shares will vest if Five Star achieves Adjusted EBITDA (as defined in
          the Restricted Stock Agreement) of $5.0 million for the year ending
          December 31, 2007; (ii) 333,333 of the shares will vest if Five Star
          achieves Adjusted EBITDA of $7.5 million for the year ending December
          31, 2008; (iii) 333,334 of the shares will vest if Five Star achieves
          Adjusted EBITDA of $11.25 million for the year ending December 31,
          2009; and (iv) to the extent that Adjusted EBITDA equals or exceeds
          $23.75 million for the three year period ending December 31, 2009, any
          previously unvested shares will vest.

     c.   On March 1, 2007, Charles Dawson, Jerome Feldman, John Moran and Carll
          Tucker resigned from Five Star's Board of Directors, effective
          immediately.

     d.   On March 2, 2007 the Company amended its $2,800,000 Promissory Note
          with NPDC (Note 6). Under the terms of the amended Promissory Note,
          the term of the Promissory Note has been extended from June 30, 2007
          to June 30, 2009 at an interest rate of 9% per annum. In addition, the
          Promissory Note and any unpaid accrued interest is convertible, in
          whole or in part, at NPDC's option. The Promissory Note and accrued
          interest are convertible into shares of Five Star common stock at a
          price of $.40 per share, subject to adjustment for stock splits, stock


                                       38
<PAGE>

          dividends, combinations, reorganization and other similar
          recapitalizations. Five Star no longer has the right to prepay the
          Promissory Note prior to maturity.

     e.   On March 2, 2007, NPDC sold Leslie Flegel 200,000 shares of NPDC's
          common stock at a price of $2.40 per share or $480,000. Mr. Flegel has
          the right to exchange any or all of the 200,000 shares of NPDC's
          common stock into Five Star common stock held by NPDC at the rate of
          six shares of Five Star common stock for each share of NPDC's common
          stock or an exercise price of $0.40 for each Five Star share. Mr.
          Flegel was named a Director of NPDC on March 2, 2007. In addition, in
          connection with his appointment as Chairman of Five Star on March 2,
          2007, Mr. Flegel entered into a three-year agreement with Five Star
          ending on March 1, 2010 (the "FS Agreement"). Under the FS Agreement,
          Mr. Flegel will receive an annual fee of $100,000 and will be
          reimbursed (i) for all travel expenses incurred in connection with his
          performance of services to Five Star and (ii) beginning in November
          2007, for up to $125,000 per year of the cost of maintaining an
          office. In addition, pursuant to the FS Agreement, Mr. Flegel was
          issued 2,000,000 shares of Five Star common stock, all of which are
          fully vested and not subject to forfeiture. The Agreement also
          provides that if the fair market value of the 2,000,000 shares of Five
          Star common stock that Mr. Flegel received pursuant to his agreement
          with Five Star is less than $280,000 on the last day of the term of
          such agreement with Five Star, Mr. Flegel may require NPDC to
          repurchase the shares of Five Star common stock for $280,000. The
          2,000,000 shares were valued at $720,000 based on the closing price of
          Five Star's common stock on March 2, 2007. Such amount is to be
          charged to compensation expenses over the term of the FS Agreement.

     f.   On March 2, 2007, Five Star and Bruce Sherman entered into an Amended
          and Restated Employment Agreement (the "Amended and Restated
          Employment Agreement"), for a period commencing on March 2, 2007 and
          terminating on December 31, 2010 pursuant to which Mr. Sherman will
          serve as Chief Executive Officer of Five Star Group. The Amended and
          Restated Employment Agreement amends and restates the Employment
          Agreement between Five Star Group and Mr. Sherman dated October 18,
          2006, pursuant to which Mr. Sherman served as Chief Executive Officer
          of Five Star Group g. On March 2, 2007, Charles Dawson, an Executive
          Vice President of Five Star Group, was granted options to purchase
          125,000 shares of Five Star common stock at an exercise price equal to
          $0.38, the closing price on March 1, 2007. The shares will vest if
          Five Star meets certain EBITDA targets over the next three years and
          upon Mr. Dawson's continued employment with Five Star Group as well as
          shareholder approval of the 2007 Plan.

     h.   On March 14, 2007 Five Star signed a definitive agreement with
          Right-Way Dealer Warehouse, Inc. to acquire substantially all of
          Right-Way's assets (with certain exclusions including cash) and the
          operations of its Brooklyn Cash & Carry business pursuant to Section
          363 of the Bankruptcy Code for an aggregate purchase price of
          approximately $5 million in cash subject to adjustment as provided in
          the definitive agreement. The transaction, which is subject to
          approval by the Bankruptcy Court for the District of Massachusetts and


                                       39
<PAGE>

          is subject to higher and better offers, is scheduled to close on April
          13, 2007. Both Five Star and Right-Way are distributors of paint
          sundries, home decorating and hardware products, primarily in the
          Northeast market. In addition to the agreement to acquire Right-Way's
          assets, at the closing of the asset purchase, Five Star will enter
          into a lease of (and a related option to purchase) a warehouse in
          Brooklyn, New York at which Right-Way conducts the Brooklyn Cash &
          Carry business. At the closing, Five Star will also enter into an
          employment agreement with Ron Kampner, the principal of Right-Way. Mr.
          Kampner will become Five Star's Senior Vice President of Sales.






                                       40
<PAGE>

                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES


                  Selected Quarterly Financial Data (unaudited)

The following is a summary of the quarterly results of operations for the year
ended December 31, 2006 as originally reported and adjusted per implementation
of SAB 108 (Note 2) and for the year ended December 31, 2005 (in thousands,
except per share data):

<TABLE>

<CAPTION>
                                                        March 31           June 30     September 30       December 31
                                                        --------           -------     ------------       -----------
2006: (a)
<S>                                                     <C>               <C>               <C>                <C>
             Sales                                      $ 28,952          $ 28,938          $ 27,666           $ 22,531
             Cost of goods sold                           24,347            24,023            23,382             19,105
             Gross margin                                  4,585             4,915             4,284              3,427
             Net income (loss)                               252               126                30               (123)
             Earnings (loss) per share:
                Basic                                      $0.02             $0.01             $0.00             $(0.01)
                Diluted                                    $0.02             $0.01             $0.00             $(0.01)

2005:

             Sales                                      $ 28,239          $ 29,579          $ 26,899           $ 21,734
             Cost of goods sold                           24,060            24,200            23,695             17,749
             Gross margin                                  4,179             5,379             3,204              3,985
             Net income (loss)                                19               419              (691)               (34)
             Earnings (loss) per share:
                Basic                                      $0.00             $0.03             $(0.05)            $0.00
                Diluted                                    $0.00             $0.03             $(0.05)            $0.00


</TABLE>


(a)As result of the implementation of SAB 108 (Note 2 to the Consolidated
Financial Statements) 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 quarters ended March 31, June 30 and September
30 was a decrease of $26,000, $22,000, and $21,000 respectively. There was no
effect on earning per share for the periods.



                                       41
<PAGE>




ITEM 9.         Changes in and Disagreements with Accountants on Accounting and
                Financial Disclosure

                None

ITEM 9A.        Controls and Procedures

         "Disclosure controls and procedures" are the controls and other
procedures of an issuer that are designed to ensure that information required to
be disclosed by the issuer in the reports filed or submitted by it under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms. These controls and procedures
are designed to ensure that information required to be disclosed by an issuer in
its Exchange Act reports is accumulated and communicated to the issuer's
management, including its principal executive and financial officers, as
appropriate, to allow timely decisions regarding required disclosure.

         Under the supervision and with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, the Company carried out an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(e)
as of December 31, 2006. Based upon the evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective as of the end of the period covered by this report.

         During the year ended December 31, 2006, there were no changes in the
Company's internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, the internal control
over financial reporting.

         Because the Company is not an "Accelerated Filer" as defined in Rule
12b-2 of the Exchange Act, the Company is not presently required to file
Management's annual report on internal control over financial reporting and the
Attestation report of the registered public accounting firm required by Item
308(a) and (b) of Regulation S-K promulgated under the Securities Act. Under
current rules, because the Company is neither a "large accelerated filer" nor an
"accelerated filer", the Company is not required to provide management's report
on internal control over financial reporting until the Company files its annual
report for 2007 and compliance with the auditor's attestation report requirement
is not required until the Company files its annual report for 2008. The Company
currently expects to comply with these requirements at such time as the Company
is required to do so.

ITEM 9B.        Other Information

                  None.



                                       42
<PAGE>





                                    PART III

Item 10.  Directors and Executive Officers of the Registrant

         The information required by this item is incorporated by reference to
the Company's Proxy Statement for its 2007 Annual Meeting of Shareholders under
the captions "Directors and Executive Officers", "Compliance with Section 16(a)
of the Exchange Act", "Code of Ethics" and "Audit Committee."

Item 11.  Executive Compensation

         The information required by this item is incorporated by reference to
the Company's Proxy Statement for its 2007 Annual Meeting of Shareholders under
the caption "Executive Compensation."

Item 12.  Security Ownership of Certain Beneficial Owners and Management and
          Related Shareholder Matters

         The information required by this item is incorporated by reference from
the Company's Proxy Statement for its 2007 Annual Meeting of Shareholders under
the captions "Stock Ownership of Management and Principal Shareholders" and
"Equity Compensation Plan Information."

Item 13.  Certain Relationships and Related Transactions

         This information required by this item is incorporated by reference
from the Company's Proxy Statement for its 2007 Annual Meeting of Shareholders
under the caption "Certain Transactions With Management."

Item 14. Principal Accountant Fees and Services

         The information regarding principal accounting fees and services and
the Company's pre-approval policies and procedures for audit and non-audit
services provided by the Company's independent accountants is incorporated by
reference to the Company's Proxy Statement for its 2007 Annual Meeting of
Shareholders under the caption "Principal Accountant Fees and Services."



                                       43
<PAGE>



                                     PART IV

Item 15. Exhibits, Financial Statement Schedules

(a)(1) The following financial statements are included in Part II, Item 8:

                                                                          Page

Report of Independent Registered Public Accounting Firm                     21

Financial Statements:

         Consolidated Balance Sheets - December 31, 2006 and 2005           22

         Consolidated Statements of Operations and Comprehensive Income -
         Years ended December 31, 2006, 2005 and 2004                       23

         Consolidated Statements of Changes in Stockholders' Equity -
         Years ended December 31, 2006, 2005 and 2004                       24

         Consolidated Statements of Cash Flows -
         Years ended December 31, 2006, 2005 and 2004                       25

         Notes to Consolidated Financial Statements                         26

(a)(2)   Schedules have been omitted because they are not required or are not
         applicable, or the required information has been
          included in the financial statements or the notes thereto.

(a)(3)   See accompanying Index to Exhibits





                                       44
<PAGE>




                                    SIGNATURE

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                   FIVE STAR PRODUCTS, INC.



                                                   John C. Belknap,
                                                   Chief Executive Officer
                                                   and Director

Dated:   March 30, 2007

Signature                                   Title


John Belknap                        Chief Executive Officer and Director
                                    (Principal Executive and Operating Officer)


Leslie Flegel                       Chairman of the Board


Bruce Sherman                       Executive Vice President and Director


Neal W. Collins                     Chief Financial Officer
                                    (Principal Financial and Accounting Officer)





                                       45
<PAGE>



                               INDEX TO EXHIBITS

Exhibit No.                                 Document

     3.1       Amended Certificate of Incorporation of the Registrant.
               (incorporated herein by reference to Exhibit 3 of the
               Registrant's Annual Report on Form 10-K for the year ended
               December 31, 1996.)

     3.2       Amended By-laws of the Registrant. (incorporated herein by
               reference to Exhibit 3.1 of the Registrant's Annual Report on
               Form 10-K/A for the year ended December 31, 2003)

     4.1       Registration Rights Agreement dated as of March 2, 2007 between
               Registrant and JL Distributors, Inc. (incorporated herein by
               reference to Exhibit 10.2 of Registrant's Current Report on Form
               8-K dated March 1, 2007)

     4.2       Registration Rights Agreement dated as of March 2, 2007 between
               Registrant and Leslie Flegel. (incorporated herein by reference
               to Exhibit 10.4 of Registrant's Current Report on Form 8-K dated
               March 1, 2007)

     4.3       Registration Rights Agreement dated as of March 2, 2007 between
               Registrant and National Patent Development Corporation.
               (incorporated herein by reference to Exhibit 10.6 of Registrant's
               Current Report on Form 8-K dated March 1, 2007)

     4.4       Registration Rights Agreement dated as of March 2, 2007 between
               Registrant and John C. Belknap. (incorporated herein by reference
               to Exhibit 10.7 of Registrant's Current Report on Form 8-K dated
               March 1, 2007)

     4.5       Registration Rights Agreement dated as of March [2], 2007 between
               Registrant and John C. Belknap. (incorporated herein by reference
               to Exhibit 10.8 of Registrant's Current Report on Form 8-K dated
               March 1, 2007)

     10.2      1994 Stock Option Plan of the Registrant as amended on January 1,
               2002. (incorporated herein by reference to Exhibit 10 of the
               Registrant's Annual Report on Form 10-K for the year ended
               December 31, 2001).

     10.3      Management Services Agreement, dated as of August 5, 1994,
               between GP Strategies Corporation and the Registrant.
               (incorporated herein by reference to Exhibit 10.3 of the
               Registrant's Registration Statement on Form S-1 filed on July 22,
               1994, Registration Statement No. 33-78252).

     10.4      Lease dated as of February 1, 1986 between Vernel Company and
               Five Star Group, Inc., as amended on July 25, 1994. (incorporated
               herein by reference to Exhibit 10.6 of the Registrant's Annual
               Report on Form 10-K for the year ended December 31, 1998).



                                       46
<PAGE>

     10.5      Lease dated as of May 4, 1983 between Vornado, Inc., and Five
               Star Group, Inc. (incorporated herein by reference to Exhibit
               10.7 of the Registrant's Annual Report on Form 10-K for the year
               ended December 31, 1998).

     10.6      Lease Modification and Extension Agreement dated July 6, 1996
               between Hanover Public Warehousing, Inc. and Five Star Group,
               Inc. (incorporated herein by reference to Exhibit 10.8 of the
               Registrant's Annual Report on Form 10-K for the year ended
               December 31, 1998).

     10.7      Agreement between Five Star Group and Local No. 11 affiliated
               with International Brotherhood of Teamsters dated December 12,
               2000. (incorporated herein by reference to Exhibit 10.7 to the
               Registrant's Annual Report on Form 10-K for the year ended
               December 31, 2000).

     10.8      Memorandum of Agreement by and between Five Star Group and
               Teamsters Local 11, affiliated with International Brotherhood of
               Teamsters dated December 12, 2003. (incorporated herein by
               reference to Exhibit 10.7 of the Registrant's Annual Report on
               Form 10-K for the year ended December 31, 2003).

     10.9      Loan and Security Agreement dated as of June 20, 2003 by and
               between the Registrant, as Borrower and Fleet Capital as Lender.
               (incorporated herein by reference to Exhibit 10.1 of the
               Registrant's Form 10-Q for the quarter ended June 30, 2003).

     10.10     Agreement of Subordination & Assignment dated as of June 20, 2003
               by JL Distributions, Inc., as Creditor in favor of Fleet Capital
               Corporation as Lender to Five Star Group, Inc. as Debtor.
               (incorporated herein by reference to Exhibit 10.2 of the
               Registrant's Form 10-Q for the quarter ended June 30, 2003).

     10.11     First Modification Agreement dated as of May 28, 2004 by and
               between Five Star Group, Inc. as borrower and Fleet Capital
               Corporation, as Lender. (incorporated herein by reference to
               Exhibit 10.11 of the Registrant's Form 10-K for the year ended
               December 31, 2004).

     10.12     Second Modification Agreement dated as of March 22, 2005 by and
               between Five Star Group, Inc. as borrower and Fleet Capital
               Corporation, as Lender. (incorporated herein by reference to
               Exhibit 10.12 of the Registrant's Form 10-K for the year ended
               December 31, 2004).

     10.13     Third Modification Agreement dated as of June 1, 2005 by and
               between Five Star Group, as borrower and fleet Capital
               Corporation, as Lender. (incorporated herein by reference to
               Exhibit 10.1 of the Registrant's Form 10-Q for the second quarter
               ended June 30, 2005).



                                       47
<PAGE>

     10.14     Fourth Modification Agreement dated September 26, 2005, but
               effective as of August 1, 2005 by and between Five Star Group,
               Inc. as borrower and Fleet Capital Corporation, as Lender.
               (incorporated herein by reference to Exhibit 10.1 of the
               Registrant's Form 10-Q for the third quarter ended September 30,
               2005).

     10.15     Fifth Modification Agreement dated November 14, 2005 -Waiver of
               minimum Fixed Charge Coverage Ratio requirement for the three
               months ended September 30, 2005 by and between Five Star Group,
               Inc. as borrower and Fleet Capital Corporation, as Lender.
               (incorporated herein by reference to Exhibit 10.2 of the
               Registrant's Form 10-Q for the third quarter ended September 30,
               2005).

     10.16     Sixth Modification Agreement dated March 23, 2006 - Waiver of
               Fixed Charge Coverage for the fiscal quarter and fiscal year
               ending December 31, 2005 by and between Five Star Group, Inc. as
               borrower and Fleet Capital Corporation, as Lender. (incorporated
               herein by reference to Exhibit 10 of the Registrant's Form 10-K
               for the year ended December 31, 2005)

     10.17     Amended Note in the amount of $2,800,000 dated June 30, 2005
               between the Registrant and National Patent Development
               Corporation. (incorporated herein by reference to Exhibit 10.2 of
               the Registrant's Form 10-Q for the second quarter ended June 30,
               2005).

     10.18     Consulting and Severance Agreement dated as of February 8, 2002
               between the Registrant and Richard Grad. (incorporated herein by
               reference to Exhibit 10.11 of the Registrant's Annual Report on
               Form 10-K for the year ended December 31, 2001).

     10.19     Employment Agreement dated as of November 28, 2001 between the
               Registrant and Charles Dawson. (incorporated herein by reference
               to Exhibit 10.12 of the Registrant's Annual Repot on Form 10-K
               for the year ended December 31, 2001).

     10.20     Employment Agreement dated as of November 28, 2001 between the
               Registrant and Bruce Sherman. (incorporated herein by reference
               to Exhibit 10.13 of the Registrant's Annual Report on Form 10-K
               for the year ended December 31, 2001).

     10.21     Employment Agreement dated as of November 28, 2001 between the
               Registrant and Steven Schilit. (incorporated herein by reference
               to Exhibit 10.14 of the Registrant's Annual Report on Form 10-K
               for the year ended December 31, 2001).

     10.22     Agreement dated as of January 22, 2004, between the Company and
               GP Strategies Corporation. (incorporated herein by reference to
               Exhibit 99(d) of the Registrant Schedule TO filed on February 6,
               2004).



                                       48
<PAGE>

     10.23     Tax Sharing Agreement dated as of February 1, 2004 between
               Registrant and GP Strategies Corporation. (incorporated herein by
               reference to Exhibit 10.19 of the Registrant's Annual Report on
               Form 10-K for the year ended December 31, 2003)

     10.24     Employment Agreement dated as of October 18, 2006 between the
               Registrant and Bruce Sherman. (incorporated herein by reference
               to Exhibit 10 of the Registrant's Current Report on Form 8-K
               dated October 18, 2006)

     10.25     Consulting and Severance Agreement dated as of February 20, 2007
               between Registrant and Steve Schilit. (incorporated herein by
               reference to Exhibit 99.1 of Registrant's Current Report on Form
               8-K dated February 20, 2007)

     10.26     Amended Note in the amount of $2,800,000 dated June 30, 2005
               between the Registrant and JL Distributors, Inc. (incorporated
               herein by reference to Exhibit 10.1 of Registrant's Current
               Report on Form 8-K dated March 1, 2007)

     10.27     Agreement dated as of March 2, 2007 between Registrant and Leslie
               Flegel. (incorporated herein by reference to Exhibit 10.3 of
               Registrant's Current Report on Form 8-K dated March 1, 2007)

     10.28     Purchase Agreement dated as of March 2, 2007 between National
               Patent Development Corporation and Leslie Flegel. (incorporated
               herein by reference to Exhibit 10.5 of Registrant's Current
               Report on Form 8-K dated March 1, 2007)

     10.29     Employment Agreement dated as of February 23, 2007 between
               Registrant and Bruce Sherman. (incorporated herein by reference
               to Exhibit 10.9 of Registrant's Current Report on Form 8-K dated
               March 1, 2007)

     10.30     Registrant's 2007 Incentive Stock Plan. (incorporated herein by
               reference to Exhibit 10.10 of Registrant's Current Report on Form
               8-K dated March 1, 2007)

     10.31     Stock Option Agreement dated as of March 1, 2007 between
               Registrant and Bruce Sherman. (incorporated herein by reference
               to Exhibit 10.11 of Registrant's Current Report on Form 8-K dated
               March 1, 2007)

     10.32     Stock Option Agreement dated as of March 1, 2007 between
               Registrant and Charles Dawson. (incorporated herein by reference
               to Exhibit 10.12 of Registrant's Current Report on Form 8-K dated
               March 1, 2007)

     10.33     Non-Qualified Stock Option Agreement dated as of March 1, 2007
               between the Registrant and National Patent Development
               Corporation. (incorporated herein by reference to Exhibit 10.13
               of Registrant's Current Report on Form 8-K dated March 1, 2007)



                                       49
<PAGE>

     10.34     Asset Purchase Agreement dated as of March 13, 2007 between
               Registrant and Right-Way Dealer Warehouse, Inc. (incorporated
               herein by reference to Exhibit 10 of Registrant's Current Report
               on Form 8-K dated March 13, 2007)

     14.1      Code of Ethics Policy. (incorporated herein by reference to
               Exhibit 14.1 of the Registrant's Annual Report on Form 10-K/A for
               the year ended December 31, 2003)

     21.       Subsidiaries*

     22.       N/A

     31.1      Certification of Chief Executive Officer*

     31.2      Certification of Chief Financial Officer*

     32.1      Certification Pursuant to 18 U.S.C. Section 1350*


*  Filed here within