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, 2005

                                       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 of Incorporation)                    (I.R.S. Employer Identification No.)

777 Westchester Avenue                                    10604
(Address of principal executive offices)                (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 __X__

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 __X__

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X__ No____ -

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. X

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_X__

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

The aggregate market value of the outstanding shares of the Registrant's Common
Stock, par value $.01 per share held by non-affiliates as of June 30, 2005 was
approximately $2,122,226 based on the closing price of the Common Stock on the
OTC Bulletin Board, which is operated by NASDAQ Stock Market.

The number of shares outstanding of the registrant's Common Stock as of March
15, 2006:


       Class                                                    Outstanding

Common Stock, par value $.01 per share                       14,396,077 shares

DOCUMENTS INCORPORATED BY REFERENCE         None


<PAGE>


<TABLE>
<CAPTION>
                                TABLE OF CONTENTS
PART I                                                                                         Page
<S>           <C>                                                                               <C>
         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.................................................8

         Item 6. Selected Financial Data.......................................................10

         Item 7.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations.........................................11

         Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................17

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

         Item 9.  Changes in and Disagreements with
         Accountants on Accounting and Financial Disclosure....................................37

         Item 9A. Controls and Procedures......................................................37

PART III
         Item 10. Directors and Executive Officers of the Registrant...........................38

         Item 11. Executive Compensation.......................................................40

         Item 12. Security Ownership of Certain Beneficial
         Owners and Management. and Related Stockholder Matters................................45

         Item 13. Certain Relationships and Related Transactions...............................46

         Item 14. Principal Accounting Fees and Services.......................................49

PART IV
         Item 15. Exhibits, Financial Statement Schedules......................................50

         Signatures        ....................................................................51

</TABLE>

<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 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. 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" 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
operates two state -of -the -art warehouse facilities, located in Newington, CT
and East Hanover, NJ. All operations are coordinated from Five Star's New Jersey
headquarters. At December 31, 2005 Five Star 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


                                       1
<PAGE>

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 National Patent Development Corporation ("NPDC"). On
November 24, 2004, GPS completed the spin-off to its shareholders of the common
stock of NPDC (the "Spin-Off"). . The Note, as amended, bore interest at 8%,
payable quarterly, and matured on June 30, 2005. On June 30, 2005 the Company
and NPDC agreed to extend the Note for a one-year term maturing on June 30,
2006. In consideration for 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%.

         NPDC provided legal, tax, business development, insurance and employee
benefit administration services to the Company pursuant to a management services
agreement for a fee of up to $10,000 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.
The management fee increased to $25,000 per month effective October 1, 2004. In
addition the Company agreed to reimburse NPDC for $16,666 per month for Mr.
Feldman's (NPDC's Chief Executive Officer) for service to the Company effective
October 1, 2004. The agreement was renewed for 2006. On January 1, 2006 the
management fee was reduced from $25,000 to $14,167. As a result of the spin-off
of NPDC, GPS transferred to NPDC the rights and obligations under this
Agreement.

         In the first quarter of 2000, the Company expanded its sales territory
with the addition of an established, dedicated sales force servicing the
Mid-Atlantic States, and as far south as North Carolina. This addition to the
sales force generates revenues of approximately $9 million annually. The Company
services this new territory from its 236,000 square foot East Hanover, New
Jersey facility, from which it also services the Northeast, enabling the Company
to leverage its fixed costs over a broader revenue base.

         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. The Company
has enhanced the sophistication of its warehouse and office facilities to take
full advantage of economies of scale, speed the flow of orders and to compete as


                                       2
<PAGE>

a low cost distributor. 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.

         Management takes a proactive approach in coordinating all phases of the
Company's 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
computer designs a pattern for the orders to be picked. The orders are then
relayed to the appropriate location and typically picked in the evening. The
warehouse facilities are well-maintained and skillfully organized. A bar-coded
part number attached to the racking shelves identifies the location of each of
the approximately 23,000 stock keeping units (SKUs). The products are loaded
onto the Company's trucks in the evening in the order that they will be
unloaded, and are delivered directly to the customers locations the following
morning.

         Additional information about the Company may be found at
www.fivestargroup.com

Customers

         Five Star's largest customer accounted for approximately 4.0% of its
sales in 2005 and its 10 largest customers accounted for approximately 13.7% of
such sales. All such customers are unaffiliated and Five Star does not have a
long-term contractual relationship with any of them.

Management Information System

         All of Five Star's inventory control, purchasing, accounts payable and
accounts receivable are fully automated on an IBM AS/400 computer system. In
addition, Five Star's software alerts buyers to purchasing needs, and monitors
payables and receivables. This system allows senior management to control
closely all phases of Five Star's operations. Five Star also maintains 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

         Five Star relies heavily upon its purchasing capabilities to gain a
competitive advantage relative to its competitors. Five Star's 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 Five Star's success.

         Since retail outlets depend upon their distributor's ability to supply
products quickly upon demand, inventory is the primary working capital


                                       3
<PAGE>

investment for most distribution companies, including Five Star. Through its
strategic purchasing decisions, Five Star carries large quantities of inventory
relative to its competitors and thus can boast 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 Five Star's activities. In addition to senior
management's active involvement, regional sales managers play an extremely
critical role in this day-to-day process.

         Five Star has 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 Five Star to
introduce new products to market. Furthermore, suppliers have grown to trust
Five Star's ability to penetrate the market. As a result, Five Star is often
called on first by manufacturers to introduce new products into the marketplace.
For example, Minwax, Bestt Liebco and Cabot Stain have utilized Five Star to
introduce and distribute some of their new product innovations.

Marketing

         The do-it-yourself industry relies on distributors to link
manufacturer's products to the various retail networks. The do-it-yourself
market operates on this two-step distribution process, i.e., 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 Five Star's 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 Five
Star's customers, are the most integral part of Five Star's 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 by Five
Star.

         Five Star's size, solid reputation for service, large inventory and
attractive financing terms provide sales representatives with tremendous
advantages relative to competing sales representatives from other distributors.
In addition, the representatives' efforts are strengthened by company-sponsored


                                       4
<PAGE>

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.

         Five Star has a history of enhancing its growth through complementary
acquisitions which have allowed it to preempt much of its competition as a
high-quality, competitively priced distributor.

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 $270 billion in 2005 and are
projected to grow at a 5.75% compound rate through 2009.

         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. The principal means of competition for Five Star are 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 leading share in its principal
market, the Northeast. This growth-oriented acquisition strategy of acquiring
complementary distributors has allowed Five Star to compete against a
substantial number of its competitors. While other paint sundry items
distributors sell to the same retail networks as Five Star, they are at a
distinct disadvantage due to Five Star's experience, sophistication and size.


                                       5
<PAGE>

         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.

Employees

         The Company employs approximately 245 people. Management-employee
relations are considered good at both of Five Star's warehouse facilities. The
Teamsters union represents approximately 94 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 and elsewhere in this report and in other documents the
Company files with the Securities and Exchange Commission 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.

Expiration of Leases for Warehouse Facilities

         The Company's leases for its Connecticut and New Jersey facilities
expire in the first quarter of 2007. At this time the Company is exploring its
options, but has not yet renewed the current facility leases, nor entered into
leases for new facilities. Our inability to enter into leases under favorable
terms could have a material 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


                                       6
<PAGE>

competes principally 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.

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, 2006 NPDC owned approximately 64% 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.

Item 1B. Unresolved Staff Comments

         None

Item 2.           Properties

         Five Star leases 236,000 square feet in New Jersey, 111,000 square feet
in Connecticut, 1,300 square feet of sales offices in New York and 800 square
feet in Maryland. Five Star's operating lease for the New Jersey facility
expires in March, 2007, and the annual rent is $1,187,000. Five Star's lease for
the Connecticut facility expires in February, 2007, and its annual rent is
$402,000. The New York sales office pays $19,000 per year in rent and the
Maryland office pays $11,000. The Company's White Plains, New York office space
is provided by GPS pursuant to the Agreement.

         The leases for the Company's Connecticut and New Jersey warehouse
facilities expire in the first quarter of 2007. The Company is exploring
alternatives. See "Risk Factors - Expiration of Leases for Warehouse
Facilities".

         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

         The following table presents the high and low prices for the Common
Stock for 2005 and 2004. The Company's Common Stock, $.01 par value, is quoted
on the OTC Bulletin Board, which is operated by the NASDAQ Stock Market.

<TABLE>
<CAPTION>

                             Quarter                              High                        Low

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

2004                         First                                $0.30                         $0.13
                             Second                               $0.32                         $0.21
                             Third                                $0.30                         $0.14
                             Fourth                               $0.45                         $0.19

</TABLE>

         The number of shareholders of record of the Common Stock as of March
15, 2006 was 3,130 and the closing price of the Common Stock on the OTC Bulletin
Board on that date was $0.19. The Company has not declared any cash dividends in
2005 and 2004. 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>




Equity Compensation Plan Information as of December 31, 2005.
<TABLE>


<CAPTION>
------------------------------- ---------------------------- ------------------------- ---------------------------------
Plan category                   Number of securities         Weighted-average          Number of securities
                                to be issued upon            exercise price of         remaining available for
Non-Qualified                   exercise of                  outstanding options       future issuance under
  Stock Option Plan             outstanding options                                    equity compensation
                                (a)                          (b)                       plans (excluding securities
                                                                                       reflected in column(a))
                                                                                       (c)
------------------------------- ---------------------------- ------------------------- ---------------------------------
------------------------------- ---------------------------- ------------------------- ---------------------------------
Equity compensation
<S>                                      <C>                          <C>                         <C>
plans not approved by                    1,100,000                    $0.14                       1,500,000
security holders
------------------------------- ---------------------------- ------------------------- ---------------------------------
------------------------------- ---------------------------- ------------------------- ---------------------------------
Total                                    1,100,000                    $0.14                       1,500,000
------------------------------- ---------------------------- ------------------------- ---------------------------------
</TABLE>

         For a description of the material terms of the Company's Non-Qualified
Stock Option Plan, see Note 8 in the Notes to the Consolidated Financial
Statements.




                                       9
<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>
                                                         2005          2004          2003          2002         2001
                                                         ----          ----          ----          ----         ----

Statement of Operations Data:

<S>                                                   <C>           <C>           <C>           <C>          <C>
Revenue                                               $106,451      $101,982      $95,085       $94,074      $94,908
Cost of goods sold                                      88,804        82,592       77,366        77,461       78,854
Selling, general and administrative
 Expenses                                               16,447        16,329       15,743        14,313       13,576
Net income(loss)                                          (287)         1,140         598           391          417

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


</TABLE>

<TABLE>
                                                                     Years Ended December 31,

                                                   --------------------------------------------------------------
                                                   ----------- ------------ ----------- ----------- -------------

<CAPTION>
                                                         2005        2004         2003        2002        2001
                                                         ----        ----         ----        ----        ----

Balance Sheet Data:

<S>                                                   <C>         <C>          <C>         <C>         <C>
Current assets                                        $34,864     $39,296      $35,719     $34,214     $35,045
Current liabilities                                    31,365      35,538       29,651      27,585      28,762
Non-current liabilities                                    20          19        2,800       4,500       5,000
Working capital                                         3,499       3,758        6,068       6,629       6,283
Total assets                                           36,184      40,475       36,896      35,366      36,184
Total stockholders' equity                              4,799       4,918        4,445       3,281       2,422


</TABLE>


                                       10
<PAGE>



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

                              Results of Operations
Overview

  Five Star is a publicly held company that is a leading distributor in the
United States of home decorating, hardware, and finishing products. Five Star
offers products from leading manufacturers in the home improvement industry and
distributes those products to retail dealers, which include lumber yards, "do-it
yourself" centers, hardware stores and paint stores. Five Star has grown to be
one of the largest independent distributors in the Northeast United 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 the lowest 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.

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 5.75% for the next several years. Nonetheless,
Five Star faces intense competition from large national distributors, smaller
regional distributors, and manufacturers that bypass the distributor and sell
directly to the retail outlet. The principal means of competition for Five Star
are its strategically placed distribution centers and its extensive inventory of
quality, name-brand products. In addition, Five Star's customers face stiff
competition from Home Depot and Lowe's, which purchase directly from
manufacturers. As a result of such competition, while the Home Improvement
market has expanded significantly in recent years, Five Star's revenue has not


                                       11
<PAGE>

increased at the same rate, and such revenue would have declined if Five Star
had not entered into new geographic sales territories as described below. In
spite of this, the independent retailers that are Five Star's customers remain a
viable alternative to Home Depot and Lowe's, due to the shopping preferences of
and the retailer's geographic convenience for some consumers.

Five Star has continued to expand its sales territory with an addition of a
sales force servicing the Mid-Atlantic States, as far south as North Carolina,
which has generated additional annual revenues of approximately $10.4 million
since 2000. 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, 2005 compared to Year Ended December 31, 2004

The Company recognized a loss before income taxes of $ 0.4 million for the year
ended December 31, 2005 as compared to income before income taxes of $2 million
for the year ended December 31, 2004. The decrease in profitability of $2.4
million is primarily due to decreased gross margin of $1.7 million, an increase
of .8 million in interest expense and management fees offset by a reduction in
selling, general and administrative expenses of $0.1 million.

Sales. Sales increased by $4.4 million from $102 million in 2004 to $106 million
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 $17.6 million or 16.6% of sales, in 2005 decreased
by $1.7 million or 9.0% when compared to gross margin of $19.4 million, or 19.0%
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 $0.1 million or less than 1% primarily due to increases in
delivery expenses, salesmen commissions and management fees of $ 0.3 million
offset by a reduction in general and administrative expenses of $ 0.2 million.

Interest expense. The increase in interest expense in 2005 of $0.5 million 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.



                                       12
<PAGE>

Income taxes. The company recognized an income tax benefit in 2005 of $ 0.1
million, and income tax expense of $0.8 million in 2004 at an effective tax rate
of 25% in 2005 and 42% in 2004.

Results of Operations

Year Ended December 31, 2004 compared to Year Ended December 31, 2003

The Company recognized income before income taxes of $2 million for the year
ended December 31, 2004 as compared to income before income taxes of $1 million
for the year ended December 31, 2003. The increase in profitability of $1
million is primarily due to increased gross margin of $1.7 million, mainly
offset by an increase in selling, general and administrative expenses of $ 0.5
million

Sales. Sales increased by $6.9 million from $95.1 million in 2003 to $102
million in 2004. The increase was primarily a result of increased sales to the
Company's existing customer base. Sales to existing customers have increased
mainly due to Five Star offering more product lines for the retailers to stock,
as well as Five Star conducting small local trade shows for its customers to
create additional sales. Revenue was favorably affected by clement weather in
the Northeast during 2004, causing an increase in home improvement projects.

Gross margin. Gross margin of $19.4 million or 19% of sales, in 2004 increased
by $1.7 million or 9.4%, when compared to gross margin of $17.7 million, or
18.6% of sales, in 2003. The increase in gross margin dollars was primarily the
result of increased sales. The increase in gross margin percentages from 2003 to
2004 were primarily a result of improved purchasing efficiencies and product mix
sold, partially offset by increased warehousing costs. The Company includes
warehousing costs in Cost of Goods Sold.

Selling, general and administrative. Selling, general and administrative
expenses increased by $0.6 million or 3% primarily due to increased delivery
expenses, salesmen commissions, medical expenses and legal and professional
fees.

Interest expense. The increase in interest expense in 2004 of $0.1 million 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 income tax expense of $0.8 million in 2004
and $0.4 in 2003, at an effective income tax rate of 42% for both years.

Liquidity and Capital Resources

At December 31, 2005, the Company had cash of $3,000 and working capital of
$3,497,000, compared to cash of $4,000 and working capital of $3,758,000 as of
December 31, 2004 respectively. The Company believes that cash generated from
operations and borrowing availability under existing credit agreements will be
sufficient to fund the Company's working capital requirements for at least the
next twelve months.



                                       13
<PAGE>

The decrease in cash of $1,000 for the year ended December 31, 2005 resulted
from cash used by operations of $1,355,000 primarily consisting of an increase
in accounts receivable of $ 972,000, and a decrease in accounts payable and
accrued expenses of $ 5,703,000 offset by a decrease in inventory of $ 6,000,000
and cash used for additions to property plant and equipment of $ 175,000, offset
by cash provided by short term borrowings of $ 1,529,000.

The increase in accounts receivable, which caused a decrease in operating cash
flows, is a result of: slightly stronger sales during the fourth quarter of 2005
and the payments of accounts receivable. The decrease in accounts payable and
accrued expenses, which caused a decrease in operating cash flows, is primarily
a result of payments made to the Company's trade vendors. The decrease in
inventory, which caused an increase in operating cash flows, is the result of
the Company selling through its inventory, while minimizing the level of new
purchases. The increase in short-term borrowings, which caused an increase in
financing cash flows, is the result of the Company borrowing under its Loan and
Security Agreement to finance the shortfall in operating cash flows.

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% (6.64% at December 31,
2005) for borrowings not to exceed $15,000,000 and the prime rate (8.0% at
December 31, 2005) 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, 2005
and December 31, 2004, approximately $19,764,000 and $18,234,000 was outstanding
under the Loan Agreement and approximately $1,451,000 and $434,000 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. For the year
ended December 31, 2005 the Company was not in compliance with the covenant that
required a certain minimum net income/fixed charge coverage ratios, however, for
the period, the Company received a waiver of default from the Lender through
December 31, 2005.

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
$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%.



                                       14
<PAGE>

The fair value of the interest rate swap amounted to $ 395,000 at December 31,
2005 and $105,000 at December 31, 2004, 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, 2005 amount to
approximately $20,000, which has been charged to earnings during the year ended
December 31, 2005.

The Company's wholly-owned subsidiary, Five Star Group, Inc., has an unsecured
note payable (the "Note") to JL Distributors, Inc., a wholly-owned subsidiary of
NPDC following the spin-off of NPDC from GPS on November 24, 2004. The Note, as
amended, bore interest at 8%, payable quarterly, and matured on June 30, 2005.
On June 30, 2005 the Company and NPDC agreed to extend the Note for a one-year
term maturing on June 30, 2006. In consideration for 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%.

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, 2005.



                                       15
<PAGE>


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, 2005 (in thousands):

<TABLE>

<CAPTION>
                                                                          Payments due in
                                              2006          2007-2008        2009-2010       After 2010         Total
                                              ----          ---------        ---------       ----------         -----

<S>                                         <C>            <C>              <C>                 <C>             <C>
Note Payable                                $  2,800       $        -       $       -           $    -          $ 2,800
Operating lease commitments                    2,716            1,761              78                -            4,555
Consulting agreements                            150               13               -                -              163
                                             -------               ---    -----------          -------            -----

Total                                        $ 5,666          $ 1,774             $78          $     -           $7,518
</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.

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 3.2 % and 2.1% as of December 31, 2005 and December 31,
2004. This increase is reflective of increased credit losses projected from
several insolvent customers.



                                       16
<PAGE>

Recent Accounting Pronouncements

During December 2004, the Financial Accounting Standards Board ("FASB") issued a
new standard entitled Statement of Financial Accounting Standards ("SFAS") 123R,
Share-Based Payment, which would revise SFAS No. 123, Accounting for Stock Based
Compensation, and amend SFAS No. 95, Statement of Cash Flows. Among other items,
the new standard would require the expensing, in the financial statements, of
stock options issued by the Company. The new standard will be effective for the
Company January 1, 2006. As permitted under SFAS No. 123 the Company currently
accounts for share-based payments to employees using Accounting Principles Board
("APB") Opinion No. 25 intrinsic value method, and as such, recognizes no
compensation cost for employee stock options. Accordingly the adoption of SFAS
No. 123R fair value method could have a significant impact on the Company's
results of operations, although it will have no impact on the Company's overall
financial position.

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

As of December 31, 2005, the Company had approximately $7.8 million of variable
rate borrowings. The Company estimates that for every 1% fluctuation in general
interest rates, assuming debt levels at December 31, 2005, interest expense
would vary by $78,000.

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,
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.





                                       17
<PAGE>

8.                Financial Statements and Supplementary Data


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                         Page

Report of Independent Registered Public Accounting Firm                  20

Financial Statements:
    Consolidated Balance Sheets - December 31, 2005 and 2004             21

    Consolidated Statements of Operations and Comprehensive Income -
    Years ended December 31, 2005, 2004 and 2003                         22

    Consolidated Statements of Changes in Stockholders' Equity -
    Years ended December 31, 2005, 2004 and 2003                         23

    Consolidated Statements of Cash Flows -
    Years ended December 31, 2005, 2004 and 2003                         24

    Notes to Consolidated Financial Statements                           25


                                       18
<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, 2005 and 2004
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, 2005. 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, 2005 and 2004, and the consolidated
results of their operations and their cash flows for each of the years in the
three year period ended December 31, 2005, in conformity with accounting
principles generally accepted in the Unites States of America.



EISNER LLP
New York, New York
March 10, 2006









                                       19
<PAGE>

                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                 (in thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                               December 31,          December 31,
                                                                                    2005                 2004
                                                                                    ----

      Assets
Current assets
<S>                                                                           <C>                   <C>
Cash                                                                          $        3            $        4
Accounts receivable, less allowance
 for doubtful accounts of $480 and $306, respectively                             10,594                 9,622
Inventory                                                                         23,317                29,334
Deferred income taxes                                                                172                   164
Prepaid expenses and other current assets                                            778                   172
                                                                               ---------             ---------
Total current assets                                                              34,864                39,296
Machinery and equipment, net                                                         712                   855
Deferred income taxes                                                                166                   178
Other assets                                                                         442                   146
                                                                              ----------            ----------
Total Assets                                                                     $36,184               $40,475
                                                                                 =======               =======

      Liabilities and Stockholders' Equity
Current liabilities
Short-term borrowings                                                            $19,764               $18,234
Note payable to NPDC                                                               2,800                 2,800
Accounts payable and accrued expenses
  (including due to affiliates of $64 and $37, respectively)                       8,801                14,504
                                                                                   -----                ------
Total current liabilities                                                         31,365                35,538

Interest rate collar                                                                  20                    19
                                                                               ---------             ---------
Total Liabilities                                                                 31,385                35,557
                                                                                  ------                ------

Stockholders' equity
Common stock, authorized 30,000,000 shares,
 par value $.01 per share; 17,293,09 shares issued
 and 14,396,077 outstanding in 2005 and 17,293,098 shares
 issued and 14,310,077 outstanding in 2004                                          173                   173
Additional paid-in capital                                                         8,552                 8,552
Accumulated deficit                                                               (3,455)               (3,168)
Accumulated other comprehensive income                                               229                    61
Treasury stock, at cost                                                             (700)                 (700)
                                                                              -----------           -----------
Total stockholders' equity                                                         4,799                 4,918
                                                                               ---------             ---------
                                                                                $ 36,184              $ 40,475
                                                                                ========              ========
</TABLE>

        See accompanying notes to the consolidated financial statements.



                                       20
<PAGE>

                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES

         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

                      (in thousands, except per share data)

<TABLE>
                                                              Year Ended December 31,

<CAPTION>
                                                             2005              2004              2003
                                                             ----              ----              ----


<S>                                                        <C>               <C>               <C>
Sales                                                      $ 106,451         $ 101,982         $  95,085
Cost of goods sold (net of promotional
 discounts)                                                   88,804            82,592            77,366
                                                              ------            ------           -------
Gross margin                                                  17,647            19,390            17,719

Selling, general and
 administrative expenses                                     (16,447)          (16,329)          (15,743)
                                                             --------          --------          --------

Operating income                                               1,200             3,061             1,976

Other income                                                      41                16                45

Interest expense (including amounts
  to affiliates of $238, $224 and $312)                       (1,625)           (1,096)             (990)
                                                              -------           -------          --------

(Loss) Income before income taxes                               (384)            1,981             1,031

Income tax benefit (expense)                                      97              (841)             (433)
                                                              ------          ---------          --------

Net (loss) income                                            $  (287)         $  1,140           $   598

Other comprehensive income (loss), net of tax:
     Change in value of cash flow hedge                          290               (17)              122
     Tax (expense) benefit                                      (122)                7                51
                                                          -----------         --------         ---------

Comprehensive income                                          $ (119)          $ 1,130           $   669
                                                              =======          =======           =======

Net income per share
 Basic                                                        $(0.02)            $0.08          $   0.04
                                                              =======            =====          ========
 Diluted                                                      $(0.02)            $0.07          $   0.04
                                                              =======            =====          ========

</TABLE>

        See accompanying notes to the consolidated financial statements.



                                       21
<PAGE>




                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                  Years Ended December 31, 2005, 2004 and 2003
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                                                        Accumulated
                                                     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, 2002                            $153       $8,069      $(4,906)     $(35)             $0          $3,281
------------------------------------------------- ----------- ------------- ------------ ------------ ------------- ----------------
------------------------------------------------- ----------- ------------- ------------ ------------ ------------- ----------------
Net income                                                                         598                                       598
Purchase of 86,000 shares of treasury stock                                                   (8)                             (8)
Issuance of compensatory stock options                                  3                                                      3
Issuance of 2,000,000 shares of common stock
 in payment of indebtedness to GP Strategies              20          480                                                    500
Increase in market value of interest
 rate swap, net of tax                                                                                        71              71
------------------------------------------------- ----------- ------------- ------------ ------------ ------------- ----------------
------------------------------------------------- ----------- ------------- ------------ ------------ ------------- ----------------
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

------------------------------------------------- ----------- ------------- ------------ ------------ ------------- ----------------
------------------------------------------------- ----------- ------------- ------------ ------------ -------------------- ---------
</TABLE>

        See accompanying notes to the consolidated financial statements.


                                       22
<PAGE>




                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)
<TABLE>
                                                                                  Year Ended December 31,
                                                                      ------------------------------------------------
                                                                      ---------------- -------------- ----------------
<CAPTION>
                                                                           2005            2004            2003
                                                                           ----            ----            ----
Cash flows from operating activities:
<S>                                                                       <C>            <C>            <C>
Net (loss)  income                                                        $ (287)        $  1,140       $   598
Adjustments to reconcile net (loss) income
   to net cash used in  operating activities:
 Depreciation and amortization                                               317              293           287

 Deferred income taxes                                                      (109)             (86)          (55)
 Issuance of compensatory stock options                                        -                -             3
 Loss on interest rate collar                                                  1               19             -
Changes in other operating items:
    Accounts receivable                                                     (972)            (752)         (817)
    Inventory                                                              6,017           (2,907)       (2,763)
    Prepaid expenses and other current assets                               (621)             136            64
    Accounts payable and accrued expenses                                 (5,703)           1,538         1,298
                                                                          -------           -----       -------
Net cash used in  operating activities                                    (1,357)          $ (619)       (1,385)
                                                                          -------          -------      --------

Cash flows from investing activities:
Additions to machinery and equipment                                        (174)            (275)         (294)
                                                                            -----            -----      --------

Cash flows from financing activities:
Net proceeds from short-term borrowings                                    1,530            1,549         2,877
Repayments of note payable to GP Strategies                                    -                -        (1,200)
Purchase of treasury stock                                                     -             (657)           (8)
                                                                               -             -----    ----------
Net cash provided by
 financing activities                                                      1,530              892         1,669
                                                                           -----              ---        ------

Net decrease in cash                                                          (1)              (2)          (10)
Cash at beginning of period                                                    4                6            16
                                                                               -          -------      --------
Cash at end of period                                                         $3           $    4      $      6
                                                                              ==           ======      ========

Supplemental disclosures of cash flow information:
 Cash paid during the periods for:
 Interest                                                                 $1,613            $ 979        $  990
                                                                          ======            =====        ======
 Income tax                                                                 $898            $ 522        $  530
                                                                            ====            =====        ======
Non-cash financing activity:
Exchange of long-term debt to
GP Strategies for common stock                                               $-          $     -        $  500
                                                                             ==          =======        ======

</TABLE>


        See accompanying notes to the consolidated financial statements.



                                       23
<PAGE>



                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES

                   Notes to Consolidated Financial Statements

34                                              (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, 2005 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.

Shipping and handling costs. Shipping and handling costs are included as a part
of selling, general and administrative expenses. These costs amounted to
$4,981,000, $4,756,000 and $4,416,000 for the years ended December 31, 2005,
2004 and 2003, respectively.

Advertising costs. The Company expenses advertising costs as incurred.
Advertising expense was $33,000, $91,000 and $57,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.



                                       24
<PAGE>

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 short term borrowings
approximates estimated fair value because borrowings accrue interest which
fluctuates with changes in LIBOR. The estimated fair value for the Company's
$2,800,000 fixed rate note payable to NPDC approximated carrying values at
December 31, 2005 and 2004, respectively, using calculations based on market
rates. 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).

Recent Accounting Pronouncements. During December 2004, the Financial Accounting
Standards Board ("FASB") issued a new standard entitled Statement of Financial
Accounting Standards ("SFAS") 123R, Share-Based Payment, which would revise SFAS
No. 123, Accounting for Stock Based Compensation, and amend SFAS No. 95,
Statement of Cash Flows. Among other items, the new standard would require the
expensing, in the financial statements, of stock options issued by the Company.
The new standard will be effective for the Company on January 1, 2006. As
permitted under SFAS No. 123 the Company currently accounts for share-based


                                       25
<PAGE>

payments to employees using Accounting Principles Board ("APB") Opinion No. 25
intrinsic value method, and as such, recognizes no compensation cost for
employee stock options. Accordingly the adoption of SFAS No. 123R fair value
method could have a significant impact on the Company's results of operations,
although it will have no impact on the Company's overall financial position. The
impact of adoption of SFAS No. 123R cannot be predicted at this time, because it
will depend on levels of share-based payments in the future. However had the
Company adopted SFAS No. 123R in prior periods, the impact of that statement
would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net (loss) income and related earnings per share data
shown below under "Stock-based compensation"

Stock-based compensation. The Company has elected to continue to account for its
stock-based compensation plans using the intrinsic value method prescribed by
Accounting Principles Board. Opinion No. 25 ("APB No. 25"), "Accounting for
Stock Issued to Employees". Under the provisions of APB No. 25, employee
compensation is measured as the excess, if any, of the quoted market price of
the Company's common stock at the date of the grant over the amount an employee
must pay to acquire the stock.

Had the Company determined compensation cost based on the fair value method at
the grant date for its stock options under SFAS No. 123, the Company's net
(loss) income and per share amounts would have been changed to the pro forma
amounts indicated below (in thousands, except per share amounts):

                                                Year Ended December 31,
                                                -----------------------
                                          2005              2004       2003
                                          ----              ----       ----
Net (loss) income - as reported          $(287)           $1,140       $598
Compensation expense net of tax            (11)              (12)       (18)
                                           ----              ----      -----
Pro forma net income                     $(298)           $1,128       $580
                                         ======           ======       ====

Per share data
Basic - as reported                     $(0.02)            $0.08      $0.04
Basic - pro forma                       $(0.02)            $0.08      $0.04
Diluted - as reported                   $(0.02)            $0.07      $0.04
Diluted - pro forma                     $(0.02)            $0.07      $0.04

The Company did not grant any options during 2005, 2004 and 2003.

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 years ended December 31, 2005 and 2003 options
outstanding to purchase approximately 1,100,000 and 1,530,000 shares of common
stock, respectively, were not included in the diluted per share computation
because their effect would be anti-dilutive.


                                       26
<PAGE>




Earnings per share (EPS) for the years ended December 31, 2005, 2004 and 2003
are computed as follows (in thousands, except per share amounts):

<TABLE>
                                                                   Year ended December 31,
                                                         ---------------------------------------------
                                                         --------------- -------------- --------------
<CAPTION>
                                                              2005            2004           2003
                                                              ----            ----           ----
        Basic EPS
<S>                                                          <C>             <C>             <C>
        Net (loss) income                                    $ (287)         $ 1,140         $  598
                                                             -------         -------         ------

        Weighted average shares outstanding                  14,310           14,967         15,442
                                                             ------           ------         ------

        Basic (loss) earnings per share                    $ (0.02)            $0.08        $  0.04
                                                           --------            -----        -------

        Diluted EPS
        Net (loss) income                                    $ (287)         $ 1,140         $  598
                                                             -------         -------         ------

        Weighted average shares outstanding                  14,310           14,967         15,442

        Dilutive effect of stock options                                         395
                                                                ---

        Weighted average shares
         outstanding, diluted                                14,310           15,362         15,442
                                                             ------                          ------

        Diluted (loss) earnings per share                   $ (0.02)           $0.07        $  0.04
                                                            --------                        -------
</TABLE>


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% (6.64% at December 31,
2005) for borrowings not to exceed $15,000,000 and the prime rate (8.0% at
December 31, 2005) 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, 2005
and 2004, $19,764,000 and $18,234,000 was outstanding under the Loan Agreement
and approximately $1,451,000 and $434,000 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. For the year ended
December 31, 2005 the Company was not in compliance with the covenant that
required a certain minimum loss/fixed charge coverage ratios, however, for the


                                       27
<PAGE>

period ended December 31, 2005 the Company received a waiver of default from the
Lender through December 31, 2005.

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 $ 395,000 at December 31,
2005 and $105,000 at December 31, 2004, 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 an into 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. Changes in the fair value of the interest rate collar, which amounted to
approximately $1,000 and $19,000 during 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 $119,000, $123,000
and $125,000 for the years ended December 31, 2005, 2004, and 2003,
respectively.



                                       28
<PAGE>



5.       Machinery and equipment

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

<TABLE>
<CAPTION>

                                                     December 31,         Estimated
                                                  2005          2004     useful lives
                                                  ----          ----     ------------

<S>                                                <C>          <C>      <C>
Machinery and equipment                            440          $383     5-7 years
Furniture and fixtures                           1,214         1,196        5 years
Leasehold improvements                             971           872     3-9 years
                                                   ---        ------
                                                 2,625         2,451
Accumulated depreciation and amortization       (1,913)       (1,596)
                                                -------       -------
                                                  $712        $  855
                                                  ====        ======

</TABLE>

Depreciation and amortization expense for the years ended December 31, 2005,
2004, and 2003 was $317,000, $293,000 and $287,000, 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 a fee of up to $10,000 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.
The management fee increased to $25,000 per month effective October 1, 2004. In
addition the Company agreed to reimburse NPDC for $16,666 per month for Mr.
Feldman's (NPDC's Chief Executive Officer) for service to the Company effective
October 1, 2004. The agreement was renewed for 2006. On January 1, 2006 the
management fee was reduced from $25,000 to $14,167. As a result of the spin-off
of NPDC, GPS transferred to NPDC the rights and obligations under this
Agreement.

Fees incurred under the Agreement totaled $500,000, $215,000 and $100,000, for
the years ended December 31, 2005, 2004 and 2003, respectively, and are included
in selling, general and administrative expenses in the consolidated statements
of operations. At December 31, 2005 and 2004, the amount due to GPS under the
Agreement was $43,000 and $37,000, respectively.

In addition, GPS and NPDC incurred certain expenses on behalf of Five Star,
primarily involving insurance, legal and other professional expenses. Five Star
reimbursed GPS and NPDC for such expense, which amounted to approximately
$242,000, $239,000 and $338,000 for the years ended December 31, 2005, 2004 and
2003, respectively.



                                       29
<PAGE>




(b) Related party debt

The Company's wholly-owned subsidiary, Five Star Group, Inc., has an unsecured
note payable (the "Note") to JL Distributors, Inc., a wholly-owned subsidiary of
NPDC following the spin-off of NPDC from GPS on November 24, 2004. The Note, as
amended, bears interest at 8%, which is payable quarterly, and was scheduled to
mature on June 30, 2005.

On June 30, 2005, the Company and NPDC agreed to extend the Note for a one-year
term maturing on June 30, 2006. In consideration for 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%.

The Note is subordinated to the indebtedness under the Loan Agreement (see Note
3) 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. Pursuant to the provisions of the Subordination
Agreement, the Company made repayments to GPS in the aggregate amount of
$1,200,000 during 2003. In addition, in 2002 and 2003, GPS also exchanged
$500,000 principal amount ($1,000,000 in total) of the Note for 2,272,727 and
2,000,000 shares of the Company's common stock, respectively. In connection with
the 2003 exchange, in consideration for GPS agreeing to exchange at a price of
$0.25 per share, which was at a significant premium to the market price of the
Company's common stock on the day prior to the approval of the transaction, the
Company agreed to terminate a voting agreement and thereby GPS obtained a
controlling financial interest in the Company. The balance of the Note was
$2,800,000 as of December 31, 2005 and 2004.

(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 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.



                                       30
<PAGE>


7.       Income taxes

The components of income tax expense (benefit) are as follows (in thousands):
<TABLE>
<CAPTION>

----------------------------------------------- -------------- -------------- ---------------
Years ended December 31,                             2005           2004           2003
----------------------------------------------- -------------- -------------- ---------------
----------------------------------------------- -------------- -------------- ---------------
Current
<S>                                                    <C>          <C>            <C>
Federal                                                $0           $703           $372
State and local                                        12            224            116
                                                     ----          -----          -----
Total current expense                                  12            927            488
                                                     ----          -----          -----
Deferred
Federal                                               (84)           (67)           (43)
State and local                                       (25)           (19)           (12)
                                                   -------        -------        ------
Total deferred benefit                               (109)           (86)           (55)
                                                  --------        -------        ------
Total income tax (benefit) expense                   $(97)          $841           $433
                                                     -----          ----           ----
</TABLE>

As of December 31, 2005 and 2004, net deferred income taxes consist of the
following (in thousands):

                                                       December 31,
                                                  ---------------------------
                                                  ------------ --------------
Deferred tax assets (liabilities)                    2005         2004
                                                     ----         ----

    Allowance for doubtful accounts                 $ 154         $ 98
    Accrued compensation                                5            3
    Inventory                                          13           63
                                                     ----         ----
    Total current deferred tax assets                 172          164
    Net operating losses                               76
    Machinery and equipment                           240          214
    Interest rate collar                                8            8
    Deferred compensation                              36           39
    Interest rate swap                               (158)         (44)
                                                     -----         ----
    Total long-term deferred tax assets               202          217

    Valuation allowance                               (36)         (39)
                                                     -----        -----

    Net long-term deferred tax assets                 166          178
                                                      ---          ---

Net deferred tax assets                              $338         $342
                                                     ====         ====



                                       31
<PAGE>




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

---------------------------------- ------------------ --------- ----------------
Years ended December 31,                   2005          2004          2003
---------------------------------- ------------------ --------- ----------------
---------------------------------- ------------------ --------- ----------------
Tax at U.S. statutory rate                $(131)         $673          $350
State and local taxes net of
 Federal benefit                             (8)          135            69
Items not deductible                         29            25            23
Valuation allowance adjustment               (3)            -             -
Other                                        16             8            (9)
                                        -------        ------        ------
Income taxes                               $(97)         $841          $433
                                           =====         ====          ====

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
2004 and 2003.

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 the grant of the option 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, 2005, the Company had
1,500,000 shares of common stock reserved for future grants under the Stock
Option Plan.


                                       32
<PAGE>




Activity relating to stock options granted by the Company:

<TABLE>
<CAPTION>

                                                              Number of               Weighted-Average
                                                               Shares                  Exercise Price
<S>                   <C> <C>                                <C>                          <C>
  Balance at December 31, 2002                               2,930,000                    0.16
        Cancelled                                           (1,400,000)                   0.13
                                                            -----------
  Balance at December 31, 2003                               1,530,000                    0.19
        Cancelled                                             (430,000)                   0.33
                                                            -----------
  Balance at December 31, 2004 and 2005                      1,100,000                    0.14
                                                             =========
  Exercisable at December 31,2005                              980,000                    0.14
                                                               =======
</TABLE>

The following table summarizes information about the Plan's options at December
31, 2005:


<TABLE>

<CAPTION>
     Exercise              Number             Weighted-Average            Number            Weighted-Average
       Price            Outstanding            Years Remaining         Exercisable          Years Remaining
  ---------------- ----------------------- ------------------------ ------------------- -------------------------
  ---------------- ----------------------- ------------------------ ------------------- -------------------------
<S>      <C>                    <C>                      <C>                <C>                   <C>
         0.14                   900,000                  1.0                810,000               1.0
         0.15                    50,000                  1.3                 50,000               1.3
         0.16                   150,000                  1.6                120,000               1.6
  ---------------- ----------------------- ------------------------ ------------------- -------------------------
  ---------------- ----------------------- ------------------------ ------------------- -------------------------
         Total                1,100,000                  1.1                980,000               1.0
                              =========                                     =======
</TABLE>

9.       Commitments and contingencies

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

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
          ---------------------------------------------------------------
          ---------------------------------------------------------------

          2006                1,779                   937          2,716
          2007                  436                   930          1,366
          2008                    -                   395            395
          2009                    -                    78             78
          ---------------------------------------------------------------
          ---------------------------------------------------------------
          Total              $2,215                $2,340         $4,555
                             ======                ======          ======

  During 2005, 2004, and 2003, the Company incurred $3,058,000, $2,886,000 and
  $2,914,000, respectively, of rental expenses. GPS has guaranteed the leases
  for the Company's New Jersey and Connecticut warehouses, totaling
  approximately $1,589,000 per year through the first quarter of 2007.



                                       33
<PAGE>




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):

                                                  2005          2004      2003
                                                  ----          ----      ----
        Balance at beginning of year             $ 306          $702      $640
        Charged to expense                         147            91       107
        Uncollectible accounts written off,
          net of recoveries                         27          (487)      (45)
                                                    --        ------       ---
        Balance at end of year                   $ 480          $306      $702
                                                 =====          ====       ====


11.      Accounts payable and accrued expenses

Accounts payable and accrued expenses are comprised of the following at December
31, 2005 and 2004 (in thousands):

                                                    December 31,
                                                  2005         2004
        Accounts payable                         $6,290      $11,597
        Accrued expenses                          1,400        1,313
        Due to NPDC/GPS                              64           37
        Other                                     1,047        1,557
                                                  -----        -----
                                                 $8,801      $14,504




                                       34
<PAGE>



                    FIVE STAR PRODUCTS, INC. AND SUBSIDIARIES


35


                  Selected Quarterly Financial Data (unaudited)

The following is a summary of the quarterly results of operations for the years
ended December 31, 2005 and 2004 (in thousands, except per share data):

<TABLE>
                                                        March 31           June 30     September 30       December 31
<CAPTION>
                                                        --------           -------     ------------       -----------
2005:
<S>                                                     <C>               <C>               <C>                <C>
             Sales                                      $ 28,239          $ 29,579          $ 26,899           $ 21,734
             Cost of goods sold                           23,835            23,975            23,470             17,524
             Gross margin                                  4,404             5,604             3,429              4,210
             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

2004

             Sales                                      $ 26,991          $ 27,302          $ 26,678           $ 21,011
             Cost of goods sold                           22,522            22,362            21,934             15,774
             Gross margin                                  4,469             4,940             4,744              5,237
             Net income (loss)                               259               244               126                511
             Earnings (loss) per share:
                Basic                                      $0.02             $0.01             $0.01              $0.04
                Diluted                                    $0.02             $0.01             $0.01              $0.03



</TABLE>




                                       35
<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
Securities Exchange Act of 1934, as amended (the "Exchange Act") is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission'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, 2005. 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, 2005, 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.




                                       36
<PAGE>

                                    PART III

Item 10.        Directors and Executive Officers of the Registrant

         Jerome I. Feldman has been Chairman of the Board of the Company since
1994. In 1959 he founded GP Strategies Corporation ("GPS"), a global provider of
training and e-Learning solutions. He has been a director of GSE Systems, Inc.,
("GSE"), a real-time simulations company since 1994 and Chairman of the Board of
GSE since 1997, Chairman of the Board and Chief Executive Officer of NPDC since
August 2004 and a director of Valera Pharmaceuticals, Inc. since January 2005.
Mr. Feldman is also Chairman of the New England Colleges Fund and a Trustee of
the Northern Westchester Hospital Foundation. Age 77

         Charles Dawson has been President of the Company and of Five Star
Group, Inc. ("Five Star") since 2002 and Vice President and a director of the
Company since 1999. Since 1993 Mr. Dawson has held several managerial positions
with Five Star. Age 50

         Bruce Sherman has been Executive Vice President, Sales of the Company
and of Five Star since 2002, Vice President and a director of the Company since
1999 and Vice President of Sales of Five Star since 1993. He is a member of the
New York and New Jersey Paint and Decorating Association. Age 53

         Steven Schilit has been Executive Vice President, Chief Operating
Officer of the Company and of Five Star since 2002, Vice President and a
director of the Company since 1999 and since 1981 has held several executive
positions with Five Star. Age 59

         John Moran has been a director of the Company since 2002. He is Chief
Executive Officer of GSE and a director of GSE since November 2003 and had been
Vice President of GPS since 2001, President and Chief Executive Officer of GP
e-Learning Technologies, Inc. from 2000 to 2001 and from 1994 to 2000 he was
Group President, Training and Technologies Group of General Physics Corporation.
Age 55

         Carll Tucker has been a director of the Company since 2002. In 1986 he
founded Trader Publications and was its President until 1999, which published
The Patent Trader newspaper and various local magazines, newsletters and
programs for cultural institutions in Westchester, Putnam and Fairfield
counties. Trader Publications was sold to Gannett Corporation in 1999. Mr.
Tucker is the author of a weekly newspaper column in the Westchester Patent
Trader, "Looseleaves", since 1983. Mr. Tucker is also a Trustee of Northern
Westchester Hospital Center and was its Chairman of the Board from 1999-2001.
Age 53

Compliance with Section 16(a) of the Exchange Act

         Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who own more than 10% of a registered class of the


                                       37
<PAGE>

Company's securities, to file reports of ownership and changes in ownership with
the SEC and to furnish copies of such reports to the Company.

         Based solely on its review of copies of such reports for 2005, the
Company believes that during 2005, all reports applicable to its officers,
directors and greater than 10% beneficial owners were filed on a timely basis.

Audit Committee

         The Company has established an Audit Committee of the Board of
Directors consisting of Carll Tucker. The Board of Directors has determined that
Mr. Tucker qualifies as an "audit committee financial expert" under applicable
SEC regulations and satisfies the independence requirements of the SEC.

Code of Ethics

         The Company has adopted a Code of Ethics for directors, officers, and
employees of the Company and its subsidiaries, including but not limited to the
principal executive officer, the principal financial officer, the principal
accounting officer or controller, or persons performing similar functions for
the Company and its subsidiaries. The Code of Ethics and Conduct of Business
Policy is available on the Company's website at www.fivestargroup.com. A copy of
this Code of Business Conduct and Ethics is also incorporated by reference into
this report as Exhibit 14.1. If the Company makes any substantive amendment to
the Code of Ethics or grants any waiver from a provision of the Code of Ethics
for its executive officers or directors, the Company will disclose the nature of
such amendment or waiver on its website at www.fivestargroup.com. The Company
will also provide a copy of such Code of Ethics and Code of Business Policy to
any person upon written request made to the Company's Secretary in writing to
the following address: Five Star Products, Inc., Attn: Secretary, 777
Westchester Avenue, White Plains, NY 10604, with a copy to Five Star Products,
Inc., General Counsel at the same address.



                                       38
<PAGE>



Item 11. Executive Compensation

Executive Compensation

         The following table and notes present the aggregate compensation paid
by the Company's subsidiary, Five Star, to its President and to the Company's
other executive officers for services rendered to Five Star in 2005.

                           SUMMARY COMPENSATION TABLE


                                               Annual
                                            Compensation
                                          Salary          Bonus     All Other
Name and Principal Position      Year      ($)             ($)         ($)
---------------------------      ----      ---             ---         ---
Charles Dawson                   2005     265,460      120,000(1)    1,804((2))
President                        2004     251,933       55,000       1,170((2))
                                 2003     234,018       40,000         695((2))

Steven Schilit                   2005     236,080      120,000(1)    9,890((3))
Executive Vice President and     2004     211,140       55,000       8,181((3))
Chief Operating Officer          2003     212,027       40,000       5,968((3))

Bruce Sherman                    2005     259,584      120,000(1)    9,176((4))
Executive Vice President         2004     219,013       55,000       6,842((4))
Sales                            2003     232,173       40,000       5,748((4))

(1)  Bonus were accrued on December 31, 2004 and paid in 2005 pursuant to the
     term of the Employment Agreement.  See "Executive Compensation - Employment
     Agreements").

(2)  Consists of executive life insurance premiums.

(3)  Consists of $6,378, $5,200 and $4800 as matching contributions made by
     the Company to the 401(k) Savings Plan for 2005, 2004 and 2003,
     respectively, and $3,512, $2,981, and $1,168 for executive life
     insurance premiums for 2005, 2004 and 2003, respectively.

(4)  Consists of $6,737, $5,088 and $4,800 as matching contributions made by
     the Company to the 401(k) Savings Plan for 2005, 2004 and 2003
     respectively, and $2,438, $1,754 and $948 for executive life insurance
     premiums for 2005, 2004 and 2003, respectively.

Option Grants in 2005

No options were granted to the named executive officers in 2005.



                                       39
<PAGE>



                       Aggregate Option Exercises in 2005
                        And Fiscal Year-End Option Values

         The following table and note contain information concerning the
exercise of stock options under the Plan during 2005 and unexercised options
under the Plan held at the end of 2005 by the named executive officers. Unless
otherwise indicated, options are to purchase shares of Common Stock.

<TABLE>
<CAPTION>


                                                                           Number of                              Value of
                                                                          Securities                             Unexercised
                                                                          Underlying                            In-the-Money
                         Shares Acquired                                  Unexercised                            Options at
                                on              Value               Options at 12/31/2005                      12/31/2005 ($)
                                --              -----               ----------------------                     --------------
    Name                   Exercise ($)      Realized ($)       Exercisable       Unexercisable       Exercisable      Unexercisable
    ----                  ------------      ------------       -----------       -------------       -----------      -------------
<S>                               <C>              <C>            <C>                                     <C>
Charles Dawson                   -0-              -0-             150,000                  -              $6,000                  -
Steven Schilit                   -0-              -0-             150,000                  -              $6,000                  -
Bruce Sherman                    -0-              -0-             150,000                  -              $6,000                  -
                         ----------------- ----------------- ------------------ ------------------- --------------- ----------------
                         ----------------- ----------------- ------------------ ------------------- --------------- ----------------
                                 -0-              -0-             450,000                  -             $18,000                  -
                         ----------------- ----------------- ------------------ ------------------- --------------- ----------------

</TABLE>
(1)  Calculated  based on $0.18,  which the closing  price of the Common Stock
     as was quoted on the OTC Bulletin  Board on December 31, 2005, which is
     operated by the NASDAQ Stock Market.

Directors Compensation

         During 2005, directors who were not employees of the Company or its
subsidiaries received $1,500 for each meeting of the Board of Directors
attended, and generally do not receive any additional compensation for service
on the committees of the Board of Directors except for Carll Tucker who received
$25,000 for serving on the Audit Committee. Employees of the Company or its
subsidiaries do not receive additional compensation for serving as directors.

Employment Agreements

         Charles Dawson. As of November 28, 2001, Charles Dawson and Five Star
Group, Inc. entered into an employment agreement pursuant to which Mr. Dawson is
employed as President of the Company for a period commencing January 1, 2002
until December 31, 2005, (the "Employment Term"), unless sooner terminated. The
Employment Agreement expired on December 31, 2005.

         Commencing January 1, 2002, Mr. Dawson's base salary is $225,000, with
annual increases of at least 3% effective on the second year of the Employment
Term. Mr. Dawson will receive a target bonus of $100,000, calculated based upon
the following two components: (1) earnings growth of the Company, and (2) an
achievement of certain Company goals, weighted 75% and 25% respectively. Mr.
Dawson's target bonus for the years 2004 and 2005, was $120,000, and $130,000,


                                       40
<PAGE>

respectively, which was be determined by components and weighting factors based
upon the goals and objectives of the Company, mutually agreed upon. Pursuant to
the employment agreement, on November 28, 2001 the Company granted Mr. Dawson
under the Company's option plan, options to purchase 150,000 shares of the
Company's Common Stock at an exercise price of $0.14 per share. Such options
vest 20% immediately and 20% on each November 28, commencing November 28, 2001
and terminating on November 28, 2006. The Company is also required to provide
Mr. Dawson with an automobile.

         The Company may terminate the employment agreement for cause which is
defined as (i) breach by Mr. Dawson of any of the terms of the employment
agreement, provided that the Company has given fifteen days notice prior to
termination for any breach of any of the terms of the employment agreement which
are capable of cure, (ii) gross neglect by Mr. Dawson of his duties continuing
for 30 days after written warning issued to Mr. Dawson setting forth the conduct
constituting such gross neglect, (iii) conviction of Mr. Dawson for any felony
or any crime involving moral turpitude; (iv) the conviction of Mr. Dawson of any
offense involving the property of the Company or any of its affiliates; (v) the
commission by Mr. Dawson of any act of fraud or dishonesty; (vi) the engagement
by Mr. Dawson in misconduct resulting in serious injury to the Company, or (vii)
the physical or mental disability of Mr. Dawson, whether totally or partially,
if he is unable to perform substantially his duties for a period of (i) two
consecutive months or (ii) shorter periods aggregating three months during any
twelve month period, such termination to be effective thirty days after written
notice of such decision delivered to Mr. Dawson. If Mr. Dawson is terminated for
cause, he shall not be entitled to any compensation, including without
limitation, the bonus, if any, after the date of termination for the year in
which the termination takes place. If Mr. Dawson's employment is terminated by
his death or disability, the Company is required to pay Mr. Dawson his base
salary then in effect for the month during which termination occurred, and four
months thereafter. In the event that termination occurs more than six months
after the start of the then-current contract year, Mr. Dawson shall receive a
bonus for that year prorated through the date of termination.

         If the Company terminates the employment agreement for any reason,
other than those set forth in the employment agreement, the Company is obligated
to continue to pay Mr. Dawson's base salary as then in effect for the period
commencing from the date of termination and ending on the termination date of
the employment agreement and shall only be obligated to pay the Bonus, if any,
through the date of termination on a pro rata basis.

         Bruce Sherman As of November 28, 2001, Bruce Sherman and Five Star
Group, Inc. entered into an employment agreement pursuant to which Mr. Sherman
is employed as Executive Vice President, Sales of the Company for a period
commencing January 1, 2002 until December 31, 2005, (the "Employment Term"),
unless sooner terminated. The employment Agreement expired on December 31, 2005.

         Commencing January 1, 2002, Mr. Sherman's base salary is $220,000, with
annual increases of at least 3% effective on the second year of the Employment
Term. Mr. Sherman will receive a target bonus of $100,000, calculated based upon
the following two components: (1) earnings growth of the Company, and (2) an
achievement of certain Company goals, weighted 75% and 25% respectively. Mr.
Sherman's target bonus for the years 2004 and 2005, was $120,000, and $130,000,


                                       41
<PAGE>

respectively, which was determined by components and weighting factors based
upon the goals and objectives of the Company, mutually agreed upon. Pursuant to
the employment agreement, on November 28, 2001 the Company granted Mr. Sherman
under the Company's option plan, options to purchase 150,000 shares of the
Company's Common Stock at an exercise price of $0.14 per share. Such options
vest 20% immediately and 20% on each November 28, commencing November 28, 2001
and terminating on November 28, 2006. The Company is also required to provide
Mr. Sherman with an automobile.

         The Company may terminate the employment agreement for cause which is
defined as (i) breach by Mr. Sherman of any of the terms of the employment
agreement, provided that the Company has given fifteen days notice prior to
termination for any breach of any of the terms of the employment agreement which
are capable of cure, (ii) gross neglect by Mr. Sherman of his duties continuing
for 30 days after written warning issued to Mr. Sherman setting forth the
conduct constituting such gross neglect, (iii) conviction of Mr. Sherman for any
felony or any crime involving moral turpitude; (iv) the conviction of Mr.
Sherman of any offense involving the property of the Company or any of its
affiliates; (v) the commission by Mr. Sherman of any act of fraud or dishonesty;
(vi) the engagement by Mr. Sherman in misconduct resulting in serious injury to
the Company, or (vii) the physical or mental disability of Mr. Sherman, whether
totally or partially, if he is unable to perform substantially his duties for a
period of (i) two consecutive months or (ii) shorter periods aggregating three
months during any twelve month period, such termination to be effective thirty
days after written notice of such decision delivered to Mr. Sherman. If Mr.
Sherman is terminated for cause, he shall not be entitled to any compensation,
including without limitation, the bonus, if any, after the date of termination
for the year in which the termination takes place. If Mr. Sherman's employment
is terminated by his death or disability, the Company is required to pay Mr.
Sherman his base salary then in effect for the month during which termination
occurred, and four months thereafter. In the event that termination occurs more
than six months after the start of the then-current contract year, Mr. Sherman
shall receive a bonus for that year prorated through the date of termination.

         If the Company terminates the employment agreement for any reason,
other than those set forth in the employment agreement, the Company is obligated
to continue to pay Mr. Sherman's base salary as then in effect for the period
commencing from the date of termination and ending on the termination date of
the employment agreement and shall only be obligated to pay the Bonus, if any,
through the date of termination on a pro rata basis.

         Steven Schilit As of November 28, 2001, Steven Schilit and Five Star
Group, Inc. entered into an employment agreement pursuant to which Mr. Schilit
is employed as Executive Vice President and Chief Operating Officer of the
Company for a period commencing January 1, 2002 until December 31, 2005, (the
"Employment Term"), unless sooner terminated. The employment Agreement expired
on December 31, 2005.

         Commencing January 1, 2002, Mr. Schilit's base salary is $200,000, with
annual increases of at least 3% effective on the second year of the Employment
Term. Mr. Schilit will receive a target bonus of $100,000, calculated based upon
the following two components: (1) earnings growth of the Company, and (2) an
achievement of certain Company goals, weighted 75% and 25% respectively. Mr.


                                       42
<PAGE>

Schilit's target bonus for the years 2004 and 2005, was be $120,000, and
$130,000, respectively, which was determined by components and weighting factors
based upon the goals and objectives of the Company, mutually agreed upon.
Pursuant to the employment agreement, on November 28, 2001 the Company granted
Mr. Schilit under the Company's option plan, options to purchase 150,000 shares
of the Company's Common Stock at an exercise price of $0.14 per share. Such
options vest 20% immediately and 20% on each November 28, commencing November
28, 2001 and terminating on November 28, 2005. The Company is required also to
provide Mr. Schilit with an automobile.

         The Company may terminate the employment agreement for cause which is
defined as (i) breach by Mr. Schilit of any of the terms of the employment
agreement, provided that the Company has given fifteen days notice prior to
termination for any breach of any of the terms of the employment agreement which
are capable of cure, (ii) gross neglect by Mr. Schilit of his duties continuing
for 30 days after written warning issued to Mr. Schilit setting forth the
conduct constituting such gross neglect, (iii) conviction of Mr. Schilit for any
felony or any crime involving moral turpitude; (iv) the conviction of Mr.
Schilit of any offense involving the property of the Company or any of its
affiliates; (v) the commission by Mr. Schilit of any act of fraud or dishonesty;
(vi) the engagement by Mr. Schilit in misconduct resulting in serious injury to
the Company, or (vii) the physical or mental disability of Mr. Schilit, whether
totally or partially, if he is unable to perform substantially his duties for a
period of (i) two consecutive months or (ii) shorter periods aggregating three
months during any twelve month period, such termination to be effective thirty
days after written notice of such decision delivered to Mr. Schilit. If Mr.
Schilit is terminated for cause, he shall not be entitled to any compensation,
including without limitation, the bonus, if any, after the date of termination
for the year in which the termination takes place. If Mr. Schilit's employment
is terminated by his death or disability, the Company is required to pay Mr.
Schilit his base salary then in effect for the month during which termination
occurred, and four months thereafter. In the event that termination occurs more
than six months after the start of the then-current contract year, Mr. Schilit
shall receive a bonus for that year prorated through the date of termination.

         If the Company terminates the employment agreement for any reason,
other than those set forth in the employment agreement, the Company is obligated
to continue to pay Mr. Schilit's base salary as then in effect for the period
commencing from the date of termination and ending on the termination date of
the employment agreement and shall only be obligated to pay the Bonus, if any,
through the date of termination on a pro rata basis.



                                       43
<PAGE>

Item 12. Security Ownership of Certain Beneficial Owners and Management

                             PRINCIPAL STOCKHOLDERS

         The following table sets forth certain information as of March 15,
2006, with respect to shares of Common Stock which are beneficially owned by (a)
each person who owns more than 5% of the Company's Common Stock, (b) each
director of the Company, (c) each of the persons named in the Summary
Compensation Table and (d) all executive officers and directors of the Company
as a group.

                                                 Beneficial Ownership

                                              Number of             Percentage
Name and Address                            Common Shares              of Class

National Patent Development Corporation       9,133,417(1)             63.8%
777 Westchester Avenue
White Plains, NY 10604

Jerome I. Feldman                               150,000(2)               *

Charles Dawson                                  150,000(2)               *

Bruce Sherman                                 150,000((2))               *

Steven Schilit                                150,000((2))               *

John Moran                                    150,000((2))               *

Carll Tucker                                   50,000((2))               *

All directors and executive officers
as a group (6 persons)                        800,000((2))              5.3%
--------------
* The number of shares owned is less than one percent of the outstanding shares
of Common Stock.

(1)      See "Certain Relationships and Related Transactions."

(2)      Includes 150,000 shares of Common Stock issuable upon exercise of
         currently exercisable stock options held by each of Messrs. Feldman,
         Dawson, Sherman, Schilit, Moran, and 50,000 shares of Common Stock
         issuable upon exercise of currently exercisable stock options held by
         Mr. Tucker, and 800,000 shares for all executives and officers as a
         group.



                                       44
<PAGE>

                      EQUITY COMPENSATION PLAN INFORMATION

         The following is information as of December 31, 2005 about shares of
Company Common Stock that may be issued upon exercise of options under the
Company's Non-Qualified Stock Option Plan. For a description of the material
terms of the Company's Non-Qualified Stock Option Plan, see Note 8 to the Notes
to the Consolidated Financial Statements included in the Company's Annual Report
for the year ended December 31, 2005.

<TABLE>
<CAPTION>
------------------------------- ---------------------------- ------------------------- ---------------------------------
Plan category                   Number of securities         Weighted-average          Number of securities
Non-Qualified                   to be issued upon            exercise price of         remaining available for
Stock Option Plan               exercise of                  outstanding options,      future issuance under
                                outstanding options,         warrants and rights       equity compensation
                                warrants and rights                                    plans (excluding securities
                                                                                       reflected in column(a)
                                (a)                          (b)                       (c)
------------------------------- ---------------------------- ------------------------- ---------------------------------
------------------------------- ---------------------------- ------------------------- ---------------------------------
Equity compensation             (outstanding options)        (weighted average         number of options left
plans not approved                                           price)
<S>                                      <C>                          <C>                         <C>
by security holders                      1,100,000                    $0.14                       1,500,000
------------------------------- ---------------------------- ------------------------- ---------------------------------
------------------------------- ---------------------------- ------------------------- ---------------------------------
Total                                    1,100,000                    $0.14                       1,500,000
------------------------------- ---------------------------- ------------------------- ---------------------------------
</TABLE>

Item 13. Certain Relationships and Related Transactions

         On September 30, 1998, the Company purchased its business from GP
Strategies Corporation ("GPS"), for approximately $16,500,000 in cash and a five
year, 8%, $5,000,000 unsecured promissory note (the "Note"). The maturity of the
Note was scheduled to mature on June 30, 2005 and was further extended until
June 30, 2006.

         On August 2, 2002 the Company entered into a transaction to reduce its
long-term debt to GPS. The principal amount of the Note was reduced by $500,000
to $4,500,000. In connection with this debt reduction, GPS received 2,272,727
shares of the Company's common stock. The transaction valued the Company's
common stock at $0.22 per share, which was a premium to the open market value at
that time. As a result of this transaction, GPS' ownership of the Company
increased to approximately 48% from approximately 37% of the Company's
outstanding shares of common stock.

         On October 8, 2003, GPS exchanged $500,000 principal amount of the Note
for 2,000,000 shares of the Company's common stock, reducing the outstanding
principal amount of the Note to $3,000,000 (as described below) and increasing
GPS' ownership of the Company's common stock to approximately 54% of the then
outstanding shares. In consideration for GPS agreeing to exchange the debt for
common stock at a conversion price of $0.25 per share, which was more than twice
the $0.11 closing market price of the Company's common stock on the day prior to
approval of the transaction, the Company agreed to terminate the voting
agreement between the Company and GPS. The voting agreement, which by its terms
would in any case have terminated on June 30, 2004, provided that GPS (i) would
vote its shares of the Company's common stock so that not more than 50% of the
members of the Company's board of directors would be officers or directors of


                                       45
<PAGE>

the Company and (ii) would vote on matters other than the election of directors
in the same proportion as the Company's other shareholders. The transaction was
approved by a Special Committee of Company's board of directors; the Special
Committee consisted of an independent non-management director who is
unaffiliated with the Company.

         On June 20, 2003, GPS entered into an Agreement of Subordination and
Assignments (the "Subordination Agreement") with the Company and its lenders
that permits the annual repayment of principal on the Note. Pursuant to the
provisions of the Subordination Agreement, in 2004 GPS received partial
repayment from the Company in the amount of $1,200,000, which along with the
exchange transaction described above reduced the outstanding principal amount of
the Note from $4,500,000 to $2,800,000. On July 30, 2004, GPS contributed its
ownership interest in the Company and the Note to NPDC. On November 24, 2004,
GPS completed the spin-off of the common stock NPDC.

         The Note, as amended, bore interest at 8%, payable quarterly, and
matured on June 30, 2005. On June 30, 2005 the Company and NPDC agreed to extend
the Note for a one-year term maturing on June 30, 2006. In consideration for
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%.

         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, 2005.

         On February 6, 2004, the Company announced an issuer tender offer
through which it would repurchase up to 5,000,000 shares, or approximately 30%
of its common stock currently outstanding, at $0.21 per share, originally set to
expire on March 16, 2004. On March 17, 2004, the Company announced that it had
increased the price it was offering to pay for the shares in the tender offer to
$0.25 per share and extended the offer to March 31, 2004. Based on the final
tabulation by the depositary for the tender offer, approximately 2,628,000
shares of common stock were tendered and acquired by the Company. The effect of
the tender offer and the exchange transactions described above was to increase
GPS' ownership in the Company to approximately 64%.

         If, following the tender offer, GPS were to increase its ownership to
at least 80% of Five Star's common stock, Five Star would become, for federal
tax purposes, part of the affiliated group of which GPS is the common parent. As
a member of such affiliated group, Five Star would be included in GPS's
consolidated federal income tax returns, Five Star's income or loss would be
included as part of the income or loss of the affiliated group and any of Five
Star's income so included might be offset by the consolidated net operating
losses, if any, of the affiliated group. The agreement between GPS and Five Star
also provided that, if Five Star became a member of the affiliated group, GPS
and Five Star would enter into a tax sharing agreement pursuant to which Five
Star would make tax sharing payments to GPS equal to 80% of the amount of taxes
Five Star would pay if Five Star were to file separate consolidated tax returns
but did not pay as a result of being included in GPS affiliated group. As a


                                       46
<PAGE>

result of the spin-off of NPDC, which held GPS's interest in Five Star, NPDC
would enter into such tax sharing agreement in lieu of GPS.

         GPS has guaranteed the leases for Five Star's New Jersey and
Connecticut warehouses and leases for certain equipment, totaling approximately
$1,589,000 per year through the first quarter of 2007. GPS's guarantee of such
leases was in effect when the Company's business was conducted by a wholly-owned
subsidiary of GPS. In 1998, GPS sold substantially all of the operating assets
of the Five Star business to the predecessor corporation of the Company. As part
of this transaction, the landlord of the New Jersey and Connecticut facilities
and the lessor of the equipment did not consent to the release of GPS's
guarantee. GPS's guarantees have continued after the Spin-Off.

         Five Star's White Plains, New York office space is provided by GPS
pursuant to the Management Services Agreement described below.

         John Moran, the Chief Executive Officer of GSE and a former executive
of the GPS, is a director of the Company and Andrea D. Kantor, the Executive
Vice President and General Counsel of GPS, is also the General Counsel of the
Company.

         NPDC provided legal, tax, business development, insurance and employee
benefit administration services to the Company pursuant to a management services
agreement for a fee of up to $10,000 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.
The agreement was renewed for 2006. The management fee increased to $25,000 per
month effective October 1, 2004. In addition the Company agreed to reimburse
NPDC for $16,666 per month for Mr. Feldman's (NPDC's Chief Executive Officer)
for service to the Company effective October 1, 2004. On January 1, 2006 the
management fee was reduced from $25,000 to $14,167. As a result of the spin-off
of NPDC, GPS transferred to NPDC the rights and obligations under this
Agreement.

         Fees incurred under the Agreement totaled $500,000, $215,000 and
$100,000, for the years ended December 31, 2005, 2004 and 2003, respectively. At
December 31, 2004, the amount due to GPS under the Agreement which is included
in accounts payable and accrued expenses was $37,000. At December 31, 2005, the
amount due to NPDC under the Agreement was $43,000, which is included in
accounts payable and accrued expenses.

         In addition, GPS and NPDC incurred certain expenses on behalf of Five
Star, primarily involving insurance, legal and other professional expenses. Five
Star reimbursed GPS and NPDC for such expense, which amounted to approximately
$242,000, $239,000 and $338,000 for the years ended December 31, 2005, 2004 and
2003, respectively.



                                       47
<PAGE>




ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES

Independent Auditors Fees

         The following table sets forth the fees billed to the Company for the
fiscal years ended December 31, 2005 and 2004 for professional services rendered
by the Company's independent auditors, Eisner LLP:

                                            December 31,        December 31,
                                                2005                2004
                                                ----                ----
           Audit Fees(a)......................$107,000.           $100,000
           Audit-Related Fees(b)................$.0....           $ 10,000
           Tax Fees                               0                    0
           All other Fees.........................0...                 0
----------
(a)  Audit fees consisted principally of fees for the audit of the annual
     financial statements and reviews of the condensed consolidated financial
     statements included in the Company's quarterly reports on Form 10-Q and
     review of registration statements.

(b)  Audit-related fees consisted of the audit of the financial statements of
     the Company's employee benefit plan.

Policy on Pre-Approval of Services Provided by Independent Auditor

         Pursuant to the requirements of the Sarbanes-Oxley Act of 2002, the
terms of the engagement of Eisner LLP are subject to specific pre-approval
policies of the Audit Committee. All audit and permitted non-audit services to
be performed by Eisner LLP require pre-approval by the Audit Committee in
accordance with pre-approval policies established by the Audit Committee. The
procedures require all proposed engagements of Eisner LLP for services of any
kind be directed to the Company's General Counsel and then submitted for
approval to the Audit Committee prior to the beginning of any service.




                                       48
<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                      20

Financial Statements:

         Consolidated Balance Sheets - December 31, 2005 and 2004            21

         Consolidated Statements of Operations and Comprehensive Income -
         Years ended December 31, 2005, 2004 and 2003                        22

         Consolidated Statements of Changes in Stockholders' Equity -
         Years ended December 31, 2005, 2004 and 2003                        23

         Consolidated Statements of Cash Flows -
         Years ended December 31, 2005, 2004 and 2003                        24

         Notes to Consolidated Financial Statements                          25

(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




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                                    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.



                                                     Charles Dawson, President

Dated:   March 31, 2005

Signature                          Title


Charles Dawson             President, and Director
                           (Principal Executive and Operating Officer)



Jerome I. Feldman          Chairman of the Board



Bruce Sherman              Executive Vice President, Sales and Director



Steven Schilit             Executive Vice President, Chief Operating Officer
                           and Director



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


John Moran                  Director



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                                INDEX TO EXHIBITS

Exhibit No.                                 Document

 3.            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.

 3.1           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.

 10.           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.

 10.1          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.

 10.2          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.

 10.3          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.

 10.4          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.

 10.5          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.

 10.6          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.



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 10.7          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.

 10.8          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.

 10.9          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.

 10.10         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.

 10.11         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.

 10.12         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.

 10.13         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.

 10.14         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.*

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


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<PAGE>

 10.16         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.

 10.17         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.

 10.18         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.

 10.19         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.

 10.20         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.

 10.21         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.

 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 herewith




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