UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 FORM
10-K/A
 (Amendment
No. 1)
 
 (Mark
One)
 x
            ANNUAL
      REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
      the fiscal  year ended December 31,
  2007
 
 o
            TRANSITION
      REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
      the transition period from ________ to
_______
 
 Commission
      File Number 333-78252
 
 FIVE
      STAR PRODUCTS, INC.(Exact
      Name of Registrant as Specified in Its
Charter)
  Delaware
            
            13-3729186(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            IRS
      Employer Identification Number)
 
 10
      East 40th Street, Suite 3110, New York, NY 10016(Address
      of Principal Executive Offices, including Zip Code)
 
 (646)
      742−1600(Registrant’s
      telephone number, including area code)
 
    Securities
      registered pursuant to Section 12(b) of the Act:
            
            NoneSecurities
      registered pursuant to Section 12(g) of the
Act:
            
            Common Stock,
      $0.01 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 o    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 o    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 xNo o
  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.   o
   
 
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer,” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer
            o
            Accelerated
      filer
            oNon-accelerated
      filer
              (Do
      not check if a smaller reporting company)
            o
            Smaller
      reporting company
            x
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes o    No
x
  The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to the price at which the common stock
was last sold, or the average bid and asked price of such common stock, as of
the last business day of the registrant’s most recently completed second
quarter, is $3,149,000
 
 As of
March 16, 2008, 16,509,577 shares of the registrant’s common stock were
outstanding.
  
  EXPLANATORY
NOTE
  Five
Star Products, Inc. (the “Company”) is filing this Amendment No. 1 to its Annual
Report on Form 10-K for the Company’s fiscal year ended December 31, 2007
pursuant to General Instruction G(3) to Form 10-K for the purpose of filing the
information required to be disclosed pursuant to Part III of Form
10-K.  In addition, the cover page and the list of exhibits in Part IV
of the Form 10-K have been updated and amended.  As a result of this
amendment, the Company is also filing as exhibits to this Form 10-K/A the
certifications required under Section 302 of the Sarbanes-Oxley Act of
2002.  Because no financial statements are contained within this Form
10-K/A, the Company is not including certifications pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.  Except for the amendments described
above, this Form 10-K/A does not modify or update the disclosures in, or
exhibits to, the Form 10-K for the Company’s fiscal year ended December 31,
2007.
   
  TABLE
OF CONTENTS
 PagePART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              1Item
      11.
              Executive
      Compensation
              3Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management andRelated
      Stockholder Matters
              17Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              20Item
      14.
              Principal
      Accountant Fees and Services
              25PART
      IVItem
      15.
              Exhibits
      and Financial Statement Schedules
              25SIGNATURES
              26
  
 
 PART
III
  ITEM
10.                                DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
  Directors
  Set
forth below are the names of, and certain biographical information regarding,
the directors of the Company.
  John C.
Belknap, age 61, has served as Chief Executive Officer, President and a
director of the Company since March 2007 and as Chairman since April
2008.  Mr. Belknap has served as a Vice President of NPDC since March
2007, an employee of NPDC since December 2006 and a director of NPDC since
October 2006.  Prior to joining the Company and NPDC, Mr. Belknap was
engaged in certain entrepreneurial activities and served as an independent
consultant to various private companies from 2000 until October
2006.  From 1997 to 1999, Mr. Belknap was Executive Vice President and
Chief Financial Officer of Richfood Holdings, Inc. a Fortune 500 integrated food
wholesaler and retailer.  From 1995 to 1997, he was Chief Financial
Officer for OfficeMax, Inc.  During the period from 1974 to 1995, he
was Chief Financial Officer for several other major retailers.
  Harvey P.
Eisen, age 65, has served as a director of the Company since November
2007.  Mr. Eisen has served as Chairman of the Board and Chief
Executive Officer of NPDC since June 2007 and also served as its President since
July 2007.  He has been a director of NPDC since 2004.  He
has served as Chairman and Managing Member of Bedford Oak Advisors, LLC, an
investment partnership, since 1998.  Prior thereto, Mr. Eisen served
as Senior Vice President of Travelers, Inc. and of Primerica, each a financial
services company, prior to its merger with Travelers in 1993.  Mr.
Eisen has over 30 years of asset management experience, is often consulted by
the national media for his views on all phases of the investment marketplace,
and is frequently quoted in The Wall Street Journal, The New York Times,
PensionWorld, U.S. News & World Report, Financial World and Business Week,
among other publications.  Mr. Eisen also has appeared and currently
appears regularly on such television networks as CNN and CNBC.  Mr.
Eisen is a trustee of the University of Missouri Business School, where he
established the first accredited course on the Warren Buffet Principles of
Investing.  Mr. Eisen has also been a director of GP Strategies
Corporation (“GPS”) since 2002.  For many years, he was a trustee of
Rippowam Cisqua School in Bedford, New York and the Northern Westchester
Hospital.
  Bruce
Sherman, age 55, has served as the Executive Vice President and as a
director of the Company since 2002.  Mr. Sherman has served as Chief
Executive Officer of Five Star Group, Inc. (“Five Star Group”), the Company’s
wholly owned subsidiary, since October 2006 and as a director of Five Star Group
since 1999.  Mr. Sherman has held various positions with Five Star Group
since he began working there in 1993, serving as Executive Vice President, Sales
from 2002 until October 2006 and as Vice President of Sales from 1993 until
2002.
  Carll
Tucker, age 55, has served as a director of the Company since August 2007
and also from 2002 until March 2007.  In 1986, he founded Trader
Publications, which published The Patent Trader newspaper and various local
magazines and programs for cultural institutions in New York and
Connecticut.  Mr. Tucker was President of Trader Publications until
1999, when it was sold to the Gannett Corporation.  Mr. Tucker was a
weekly columnist in The Patent Trader for seventeen years.  Prior to
that, he was a regular columnist for Saturday Review magazine and The Village
Voice in New York City.  Mr. Tucker served as a director of the Bank
of New York and trustee of Caramoor Center for Music and the Arts.  He
was a trustee of Northern Westchester Hospital Center and its Chairman of the
Board from 1999 through 2001.  He is currently Founding Chairman of
Northern Westchester Hospital Foundation and a director of the Milbank Memorial
Fund.  He is the author of The Bear Went Over the
Mountain, which was published in March 2008.
  1
  Executive Officers Who Are Not
Directors
  Set
forth below are the names of, and certain biographical information regarding,
executive officers of the Company who do not serve as directors of the
Company.
  Ira J.
Sobotko, age 51, has served as Senior Vice President, Finance, Secretary
and Treasurer of the Company since July 2007 and is its principal financial
officer and principal accounting officer.  Mr. Sobotko has served as
Vice President, Finance, Secretary and Treasurer of NPDC and its principal
financial officer since July 2007.  From April 2007 to July 2007, Mr.
Sobotko served as Vice President, Finance of NPDC.  From September
2005 through March 2007, Mr. Sobotko served as a financial consultant to various
publicly traded companies, including NPDC and the Company, and emerging
technologies companies.  From January 2004 through May 2005, Mr.
Sobotko served as Vice President and Chief Financial Officer of Campusfood.com,
a web-based network of restaurants for students and local
communities.  From August 2000 to January 2004, Mr. Sobotko served as
Executive Vice President, Finance at Arrowsight, Inc., a web-based application
service provider where Mr. Sobotko has also served as a director since November
2001.
  CORPORATE
GOVERNANCE
  The
Company’s Board of Directors actively reviews and evaluates the Company’s
corporate governance practices.  This review includes comparing the
Board’s current governance policies and practices with those suggested by
corporate governance authorities as well as the practices of other public
companies.  The Board has adopted those corporate governance policies
and practices that its evaluation suggests are the most appropriate for the
Company.
  Board Composition and Committee
Memberships
  The
Board of Directors is currently comprised of Messrs. Belknap, Eisen, Sherman and
Tucker.  The Board does not currently have a separately designated
Audit Committee, Compensation Committee or Nominating and Corporate Governance
Committee.
  Audit
Committee
  The
Company does not currently have a separately designated Audit Committee or an
Audit Committee charter.  The entire Board currently acts as the
Company’s Audit Committee.  The Board has determined that Mr. Belknap
qualifies as an “audit committee financial expert” under applicable SEC
regulations.  Mr. Belknap is not independent in accordance with
Nasdaq’s independence criteria.
  Section
16(a) Beneficial Ownership Reporting Compliance
  Section
16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s
executive officers and directors to file reports regarding ownership of the
Company’s common stock with the SEC, and to furnish the Company with copies of
all such reports.  Based on a review of these filings, the Company
believes that all such reports were timely filed, with the exception of the
following reports, which were not timely filed: two such reports filed by
National Patent Development Corporation (“NPDC”), namely a Form 3 reporting NPDC
as a 10% owner of the Company’s common stock and a Form 4 reporting the
acquisition in one transaction by NPDC of beneficial ownership of 7,000,000
shares of Company common stock that are issuable upon the conversion of a
convertible promissory note issued by the Company to JL Distributors, Inc., a
wholly-owned subsidiary of NPDC, which were not timely filed; a Form 3 reporting
JL Distributors, Inc. as a 10% owner of the Company’s common stock that was not
timely filed; a Form 3 reporting Mr. Collins as an officer of the Company that
was not timely filed; and a Form 3 reporting Carll Tucker as a director that was
not timely filed.  Each of the foregoing reports has since been filed
with the SEC.
  2
  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, and persons performing similar functions for the Company
and its subsidiaries.  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 in a filing on Form 8-K.  The
Company will also provide a copy of such Code of Ethics to any person, without
charge, upon written request made to the Company’s Secretary in writing to the
following address:  Five Star Products, Inc., Attn: Secretary, 10 East
40th Street, Suite 3110, New York, New York 10016.
  ITEM
      11.
            EXECUTIVE
      COMPENSATION
  The
Company has elected to use the SmallerReportingCompany rules
recently issued by the SEC regarding the disclosure of executive
compensation.  Under these rules, the Company provides a Summary
Compensation Table covering 2007 and 2006 compensation for the two individuals
who served as principal executive officer in 2007 and for two individuals who
are the most highly-compensated executive officers other than the individuals
who served as principal executive officer, to whom we refer collectively as our
“named executive officers”, an Outstanding Equity Awards at Year End Table and
certain narrative disclosures.
  3
 SUMMARY
COMPENSATION TABLE
  The
table below summarizes the total compensation paid to or earned by each of the
Company’s named executive officers for the fiscal years ended December 31, 2007
and 2006.
  Name and
      Principal
              Year
              Salary
              Bonus
              Stock
              Option
              Non-Equity
              All
      Other
              TotalPosition
              
              
              
              Awards
              Awards
              Incentive
      Plan
              CompensationCompensation($)
              ($)
              ($)
              ($)(1)
              ($)
              ($)
              ($)John C. BelknapPresident and
      CEO ofthe Company
      (2)
              2007
              0
              (3)
              0
              
              105,556
              (4)
              0
              
              0
              0
              
              105,556Charles DawsonFormer
      President ofthe Company;
      currentExecutive
      VicePresident of
      Five StarGroup
      (2)
              2007
              249,174
              
              162,780
              (5)
              0
              
              9,896
              (7)
              0
              7,964
              (6)
              429,8142006
              281,767
              
              50,000
              (5)
              0
              
              0
              
              0
              11,694
              (6)
              343,461S. Leslie FlegelChairman of
      theBoard of
      Directors (2)
              2007
              0
              
              0
              
              200,000
              (8)
              73,333
              (8)
              0
              83,333
              (9)
              356,666Bruce ShermanExecutive
      VicePresident of
      theCompany;
      ChiefExecutive
      Officer ofFive Star
      Group
              2007
              260,418
              
              406,950
              (5)
              0
              
              31,667
              (11)
              0
              12,798
              (10)
              711,8332006
              270,548
              
              75,000
              (5)
              0
              
              0
              
              0
              26,854
              (10)
              372,402
  ___________________
 (1)
            The
      amounts in this column reflect the dollar amount recognized for financial
      statement reporting purposes, calculated in accordance with FAS 123R
      (excluding the impact of forfeitures related to service-based vesting
      conditions).  A discussion of the assumptions used in
      calculating these values may be found in Note 8 to our audited financial
      statements in the Form 10-K for the fiscal year ended December 31,
      2007.
  (2)
            Mr.
      Dawson resigned as President and principal executive officer of the
      Company on March 1, 2007.  He continues to serve as Executive
      Vice President of Five Star Group.  Mr. Belknap became the
      Company’s President and Chief Executive Officer on March 1,
      2007.  Mr. Flegel became Chairman of the Board of Directors on
      March 2, 2007 and resigned on March 25,
  2008.
  (3)
            Mr.
      Belknap’s salary of $300,000 is paid by NPDC, of which $155,000, including
      benefits and taxes, was charged to the Company in 2007 and was reimbursed
      to NPDC by the Company.  Mr. Belknap’s full base salary is
      reported as compensation to him in the Summary Compensation Table of
      NPDC’s 2008 proxy statement filed with the SEC on April 29,
      2008.
  (4)
            This
      amount represents the dollar amount recognized for financial statement
      reporting purposes calculated in accordance with FAS 123R in fiscal 2007
      in connection with the grant to Mr. Belknap of 1,000,000 shares of
      restricted Company common stock on March 2, 2007. Pursuant to the terms of
      his Restricted Stock Agreement, 333,000 shares of this grant vested in
      March 2008 based upon the achievement of the EBITDA performance targets
      for fiscal 2007.  The vesting of the remaining shares is
      contingent upon the Company meeting certain EBITDA targets in fiscal 2008
      and 2009 and upon Mr. Belknap’s continued employment with the Company or
      NPDC. The 1,000,000 shares were valued at $0.38 per share ($380,000). Such
      amount is being charged to compensation expense over the 36 month term of
      the agreement, subject to satisfaction of the conditions set forth
      above.  See “Agreement with John C. Belknap”
      below.
  4
  (5)
            These
      amounts reflect the dollar value of the bonus earned by Messrs. Dawson and
      Sherman in fiscal 2007 (paid by the Company in fiscal 2008) and fiscal
      2006 (paid by the Company in fiscal
2007).
  (6)
            For
      Mr. Dawson, the amount reflected under “All Other Compensation” includes
      $2,529 and $9,452 for a Company-provided car and $5,435 and $2,242 in
      insurance premiums paid by the Company for life insurance for the benefit
      of Mr. Dawson in 2007 and 2006,
  respectively.
  (7)
            On
      March 1, 2007, Mr. Dawson was granted options to purchase 125,000 shares
      of the Company’s common stock at an exercise price equal to $0.38 per
      share (the average of the closing bid and asked prices of the Company’s
      common stock on March 1, 2007) under the Five Star Products, Inc. 2007
      Incentive Stock Plan.  See Agreement with Charles Dawson
      below.
  (8)
            This
      amount represents the dollar amount recognized for financial statement
      reporting purposes calculated in accordance with FAS 123R in fiscal 2007
      in connection with the grant of 2,000,000 shares of Company common stock
      to Mr. Flegel on March 2, 2007, all of which are fully vested and not
      subject to forfeiture.  The 2,000,000 shares were valued at
      $720,000 based on the 0.36 per share closing price of the Company’s common
      stock on March 2, 2007. Such amount is being charged to compensation
      expense over the 36 month term of the agreement.  The charge for
      the year ended December 31, 2007 was $200,000.  In addition, on
      March 2, 2007, NPDC and Mr. Flegel entered into an agreement pursuant to
      which NPDC sold him 200,000 shares of its common stock at a price of $2.40
      per share, or $480,000 in the aggregate.  He had the right to
      exchange any or all of the 200,000 shares of NPDC common stock for Company
      common stock held by NPDC at the rate of six shares of Company common
      stock for each share of NPDC common stock.  The value of the
      option to convert the NPDC stock held by him into shares of the Company
      which amounted to $264,000 is being recognized as compensation expense by
      the Company over the 36 month term of the agreement. For the year ended
      December 31, 2007, the Company recognized a compensation expense of
      approximately $73,333 in connection with the option.  See Agreement
      with S. Leslie Flegel below.
  (9)
            For
      Mr. Flegel, the amount reflected under “All Other Compensation” includes
      the pro-rated portion of his annual consulting fee of $100,000 per year.
      See Agreement with S. Leslie Flegel
below.
  (10)
            For
      Mr. Sherman, the amount reflected under “All Other Compensation” includes:
      $1,895 and $9,452 for a Company-provided car; $5,841 and $14,245 for
      Company contributions to the Company’s 401(k) plan; and $5,062 and $3,157
      in insurance premiums paid by the Company for life insurance for the
      benefit of Mr. Sherman in 2007 and 2006,
  respectively.
  (11)
            On
      March 1, 2007, Mr. Sherman was granted options to purchase 400,000 shares
      of the Company’s common stock at an exercise price equal to $0.38 per
      share (the average of the closing bid and asked prices of the Company’s
      common stock on March 1, 2007) under the Five Star Products, Inc. 2007
      Incentive Stock Plan.  See “Agreement with Bruce Sherman”
      below.
  Overview
of Material Agreements with our Named Executive Officers and Other
Officers
  The
following is a summary of the material terms of material agreements pursuant to
which compensation is paid to our named executive officers for their service
with the Company and Five Star Group.  Each of the agreements
described below was entered into 2007, except that this summary also includes a
description of the material terms of an agreement entered into with Mr. Flegel,
who resigned as Chairman and a director of the Company effective March 25,
2008.
  5
  Agreement with
John C. Belknap
  Mr.
Belknap, who serves as a director of the Company and NPDC, the President and
Chief Executive Officer of the Company and is an employee of NPDC, receives a
salary of $300,000 from NPDC, of which, based on the amount of time Mr. Belknap
spends working for the Company, $206,250, including benefits and taxes, was
charged to the Company in 2007 and was reimbursed to NPDC by the
Company.  In addition, Mr. Belknap was granted options to purchase an
aggregate of 400,000 shares of NPDC common stock at an exercise price equal to
$2.45 per share, which was the average of the closing bid and asked prices of
NPDC common stock on March 1, 2007.  Contingent upon Mr. Belknap’s
continued employment with NPDC, the options will vest in three equal annual
installments, the first of which vested on December 1, 2007.
  In
addition, pursuant to the Restricted Stock Agreement, dated as of March 2, 2007,
between the Company and Mr. Belknap (the “Restricted Stock Agreement”), Mr.
Belknap was granted 1,000,000 restricted shares of the Company’s common stock,
vesting as described below:
  ·
            333,000
      of the shares vested upon the Company’s achievement of adjusted EBITDA (as
      defined in the Restricted Stock Agreement) of $5.0 million for the year
      ending December 31, 2007;
  ·
            Contingent
      upon Mr. Belknap’s continued employment with the Company or NPDC, 333,000
      of the shares will vest if the Company achieves adjusted EBITDA of $7.5
      million for the year ending December 31,
  2008;
  ·
            Contingent  upon
      Mr. Belknap’s continued employment with the Company or NPDC, 334,000 of
      the shares will vest if the Company achieves adjusted EBITDA of $11.25
      million for the year ending December 31, 2009;
  and
  ·
            Contingent
      upon Mr. Belknap’s continued employment with the Company or NPDC, to the
      extent that adjusted EBITDA equals or exceeds $23.75 million for the
      three-year period ending December 31, 2009, any previously unvested shares
      will vest.
  Upon
the occurrence of a change in control of the Company (as defined in the
Restricted Stock Agreement), all unvested shares also will become fully
vested.
  The
Company has granted Mr. Belknap certain demand and piggy-back registration
rights beginning March 2, 2010 pursuant to a registration rights agreement
between Mr. Belknap and Five Star Products.
  Agreement
with Bruce Sherman
  On
February 23, 2007, the Company’s subsidiary Five Star Group and Mr. Sherman
entered into an Amended and Restated Employment Agreement (the “Amended Sherman
Employment Agreement”), for a period commencing on February 23, 2007 and
terminating on December 31, 2010 (unless terminated sooner according to its
terms), pursuant to which Mr. Sherman serves as Chief Executive Officer of Five
Star Group.  The Amended Sherman Employment Agreement amends and
restates the employment agreement between Five Star Group and Mr. Sherman, dated
as of October 18, 2006, pursuant to which Mr. Sherman served as Chief Executive
Officer of Five Star Group (the “2006 Sherman Agreement”).
  Under
the 2006 Sherman Agreement, which had a term that commenced on October 18, 2006
and terminated on December 31, 2010 (unless terminated sooner according to its
terms):
  6
  ·
            Mr.
      Sherman’s base annual salary was $262,500, with annual increases of not
      less than the greater of three percent and the percentage increase in the
      consumer price index for the prior
year.
  ·
            Mr.
      Sherman’s annual cash incentive award for 2006 would have been $75,000,
      provided that there was an increase in EBITDA for 2006 over
      2005.
  ·
            For
      all other years, Mr. Sherman’s annual cash incentive award would have been
      equal to $500,000 multiplied by the actual percentage increase in EBITDA,
      if any, for the year in which the bonus was earned, over the prior year,
      based upon a baseline EBITDA of the greater of $1.6 million or actual, but
      in no event to exceed $250,000 per
year.
  ·
            Mr.
      Sherman would have also been eligible to receive an additional annual
      super-bonus cash incentive award in an amount not to exceed $250,000
      (assuming a 150% increase in
EBITDA).
  ·
            Five
      Star Group was required to provide Mr. Sherman with the use of an
      automobile.
  Under
the 2006 Sherman Agreement, Mr. Sherman was granted options (subject to
shareholder approval) to purchase up to 400,000 shares of Company common stock
at an exercise price equal to the closing price of the common stock of the
Company on October 18, 2006.  Contingent upon an annual increase in
Five Star Group’s EBITDA for each year over the prior year, calculated in
accordance with GAAP, the options were to be granted as
follows:
  ·
            A
      maximum of 140,000 shares in March
2008;
  ·
            A
      maximum of 130,000 shares in March 2009;
and
  ·
            A
      maximum of 130,000 shares in March
2010.
  The
actual number of shares granted for each year would have been pro-rated based
upon the actual percentage increase in EBITDA, based upon a baseline EBITDA of
the greater of $1.6 million or actual, but in no event to exceed the
above-stated maximum in a given year.  For example, a 50% increase in
EBITDA in 2007 over 2006 would have resulted in a March 2008 grant of 140,000
shares, a 25% increase in EBITDA would have resulted in a grant of 70,000 shares
and a 12.5% increase in EBITDA would have resulted in a grant of 35,000
shares.
  Five
Star Group could have terminated the 2006 Sherman Agreement for any of the
following reasons:
  ·
            a
      breach by Mr. Sherman of any of the terms of the
      agreement;
  ·
            gross
      neglect by Mr. Sherman of his
duties;
  ·
            the
      conviction of Mr. Sherman for any felony or crime involving moral
      turpitude;
  ·
            the
      conviction of Mr. Sherman of any crime involving the property of Five Star
      Group;
  ·
            the
      commission by Mr. Sherman of any act of fraud or dishonesty;
      or
  7
  ·
            the
      engagement by Mr. Sherman in misconduct resulting in serious injury to
      Five Star Group.
  If Mr.
Sherman was terminated for any of the six reasons listed immediately above, he
would not have been entitled to any compensation, including his annual cash
incentive award, after the date of termination.  If Mr. Sherman’s
employment was terminated by his death or disability, Five Star Group would have
been required to pay Mr. Sherman his base salary as then in effect for the month
during which termination occurred and four months thereafter and, if the month
in which the termination occurred was more than six months into the then-current
contract year, his bonus for that year pro-rated through the date of
termination.
  The
2006 Sherman Agreement also contained non-compete and non-solicitation
covenants.
  Under
the Amended Sherman Employment Agreement:
  ·
            Mr.
      Sherman’s base annual salary is $262,500, with annual increases of not
      less than the greater of three percent and the percentage increase in the
      consumer price index for the prior
year.
  ·
            Mr.
      Sherman’s annual cash incentive award for 2006 was $75,000 and for 2007
      was $406,950.
  ·
            For
      all other years, Mr. Sherman is entitled to receive an annual cash
      incentive award equal to $500,000 multiplied by the actual percentage
      increase in EBITDA, if any, for the year in which the bonus is earned,
      over the prior year, based upon a baseline EBITDA of $1.6 million or
      actual, whichever is greater, but in no event to exceed $250,000 per
      year.
  ·
            Mr.
      Sherman is also eligible to receive an additional annual super-bonus cash
      incentive award in an amount not to exceed $250,000 (assuming a 150%
      increase in EBITDA).
  ·
            Five
      Star Group is required to provide Mr. Sherman with the use of an
      automobile.
  In
accordance with the Amended Sherman Employment Agreement and pursuant to the
terms and conditions of the Stock Option Agreement, dated March 1, 2007, between
the Company and Mr. Sherman (the “Sherman Stock Option Agreement”), and in lieu
of the options granted under the 2006 Sherman Agreement, Mr. Sherman was granted
options to purchase 400,000 shares of the Company’s common stock at an exercise
price equal to $0.38 per share (the average of the closing bid and asked prices
of the Company’s common stock on March 1, 2007). Mr. Sherman was granted the
following options under the Five Star Products, Inc. 2007 Incentive Stock Plan
(the “2007 Incentive Stock Plan”):
  ·
            Options
      to purchase 133,200 shares of the Company’s common stock vested and became
      exercisable upon the Company’s achievement of adjusted EBITDA (as defined
      in the Sherman Stock Option Agreement) of $5.0 million for the year ending
      December 31, 2007;
  ·
            Contingent
      upon Mr. Sherman’s continued employment with Five Star Group, options to
      purchase 133,200 shares of the Company’s common stock will vest and become
      exercisable if the Company achieves adjusted EBITDA of $7.5 million for
      the year ending December 31,
2008;
  8
  ·
            Contingent
      upon Mr. Sherman’s continued employment with Five Star Group, options to
      purchase 133,600 shares of the Company’s common stock will vest and become
      exercisable if the Company achieves adjusted EBITDA of $11.25 million for
      the year ending December 31, 2009;
and
  ·
            Contingent
      upon Mr. Sherman’s continued employment with Five Star Group, to the
      extent that adjusted EBITDA equals or exceeds $23.75 million for the
      three-year period ending December 31, 2009, any previously unvested shares
      will vest and become
exercisable.
  Upon
the occurrence of a change in control (as defined in the Sherman Stock Option
Agreement) of the Company or NPDC, all unvested shares also will become fully
vested and exercisable.
  Five
Star Group may terminate the Amended Sherman Employment Agreement for any of the
following reasons:
  ·
            a
      breach by Mr. Sherman of any of the terms of the
      agreement;
  ·
            gross
      neglect by Mr. Sherman of his
duties;
  ·
            the
      conviction of Mr. Sherman for any felony or crime involving moral
      turpitude;
  ·
            the
      conviction of Mr. Sherman of any crime involving the property of Five Star
      Group;
  ·
            the
      commission by Mr. Sherman of any act of fraud or dishonesty;
      or
  ·
            the
      engagement by Mr. Sherman in misconduct resulting in serious injury to
      Five Star Group.
  If Mr.
Sherman is terminated for any of the six reasons listed immediately above, he
will not be entitled to any compensation, including his annual cash incentive
award, after the date of termination.  If Mr. Sherman’s employment is
terminated by his death or disability, Five Star Group is required to pay Mr.
Sherman his base salary as then in effect for the month during which termination
occurred and four months thereafter and, if the month in which the termination
occurred is more than six months into the then-current contract year, his bonus
for that year pro-rated through the date of termination.
  The
Amended Sherman Employment Agreement also contains non-compete and
non-solicitation covenants.
  Agreement with
Charles Dawson
  Pursuant
to the terms and conditions of the Stock Option Agreement, dated March 1, 2007,
between the Company and Mr. Dawson (the “Dawson Stock Option Agreement”), Mr.
Dawson, an Executive Vice President of Five Star Group, was granted options to
purchase 125,000 shares of Company common stock at an exercise price equal to
$0.38 per share, the closing price on March 1, 2007, and vesting as described
below:
  ·
            41,625
      shares vested and became exercisable upon the Company’s achievement of
      adjusted EBITDA (as defined in the Dawson Stock Option Agreement) of $5.0
      million for the year ending December 31,
  2007;
  9
  ·
            Contingent
      upon Mr. Dawson’s continued employment with Five Star Group, 41,625 shares
      will vest and become exercisable if the Company achieves adjusted EBITDA
      of $7.5 million for the year ending December 31,
  2008;
  ·
            Contingent
      upon Mr. Dawson’s continued employment with Five Star Group, 41,750 shares
      will vest and become exercisable if the Company achieves adjusted EBITDA
      of $11.25 million for the year ending December 31, 2009;
      and
  ·
            Contingent
      upon Mr. Dawson’s continued employment with Five Star Group, to the extent
      that adjusted EBITDA equals or exceeds $23.75 million for the three year
      period ending December 31, 2009, any previously unvested shares will vest
      and become exercisable.
  Upon
the occurrence of a change in control of the Company (as defined in the Dawson
Stock Option Agreement), all unvested shares also will become fully vested and
exercisable.
  Agreement with
S. Leslie Flegel
  In
connection with his appointment as Chairman of the Company on March 2, 2007, S.
Leslie Flegel entered into a three-year agreement with the Company ending on
March 1, 2010 (the “Flegel Agreement”).  Under the Flegel Agreement,
Mr. Flegel was to receive an annual fee of $100,000 and be reimbursed (i) for
all travel expenses incurred in connection with his performance of services to
the Company and (ii) beginning in November 2007, for up to $125,000 per year of
the cost of maintaining an office. In addition, pursuant to the Flegel
Agreement, Mr. Flegel was issued 2,000,000 shares of the Company’s common stock,
all of which are fully vested and not subject to forfeiture.
  During
the term of the Flegel Agreement, Mr. Flegel agreed not to serve in an operating
capacity as an executive officer with any other unaffiliated company. The Flegel
Agreement also contained non-compete and non-solicitation
covenants.
  The
Company was able to terminate the Flegel Agreement:
  ·
            upon
      Mr. Flegel’s death or
disability;
  ·
            if
      Mr. Flegel engaged in conduct that was materially monetarily injurious to
      the Company;
  ·
            if
      Mr. Flegel willfully and continually failed to perform his duties or
      obligation under the Flegel Agreement;
or
  ·
            upon
      a change of control (as defined in the Flegel Agreement) of the Company or
      the Company.
  If the
Flegel Agreement was terminated by the Company in accordance with the foregoing,
the Company would have been required to pay Mr. Flegel his fee accrued, and
reimburse him for any expense incurred only through the date the Flegel
Agreement was terminated.
  On the
same date, Mr. Flegel also entered into the “NPDC Agreement” with
NPDC.  Under the NPDC Agreement, Mr. Flegel purchased 200,000 shares
of NPDC’s common stock, which he had the right to exchange any or all of into
shares of Company common stock (which is held by NPDC) at the rate of six shares
of Company Common Stock for each share of NPDC common stock.
  10
  On
March 25, 2008,  Mr. Flegel resigned to pursue other interests; his
resignation was not due to any disagreement with Five Star or
NPDC.  Five Star’s Board of Directors has reduced the number of
directors from five to four.
  In
connection with Mr. Flegel’s resignation, Five Star, NPDC and Mr. Flegel entered
into an Agreement and Release, dated March 25, 2008, related to the purchase and
sale of shares of NPDC common stock, par value $0.01 per share and Five Star
common stock, par value $0.01 per share, which were originally sold or issued to
him by NPDC and Five Star when he joined Five Star and NPDC.  Pursuant
to the Agreement and Release, (1) the Company purchased 1,689,336 shares of
common stock of Five Star Products from Mr. Flegel and 301,664 shares of common
stock of Five Star Products from his family for $0.60 per share; and (2) the
Company repurchased the 200,000 shares of common stock of the Company for $3.60
per share (which equates to $0.60 per share of common stock of Five Star
Products had Mr. Flegel exercised his right to convert these shares of the
Company’s common stock into shares of the common stock of Five Star
Products).
  Five
Star will record a non-cash expense of approximately $1,100,000 in the first
quarter of 2008 related to the Agreement and Release and the Sale
Agreement.  The market value of Five Star Common Stock on March 25,
2008 was $0.38 per share.
  Pursuant
to the terms of the Agreement and Release, Mr. Flegel agreed to keep
confidential any information regarding NPDC or Five Star’s business or strategy
which is not publicly available that was acquired in the performance of his
duties for NPDC or Five Star.  Mr. Flegel will be subject to one-year
non-compete and non-solicitation covenants contained in the Agreement and
Release.  Mr. Flegel also agreed in the Agreement and Release to a
one-year standstill covenant, which generally prevents him, without the prior
approval of the NPDC Board of Directors, from buying securities issued by NPDC
or Five Star and from participating in a tender offer, proxy solicitation or
other transaction involving any merger, consolidation or reorganization
concerning NPDC, Five Star or either of their subsidiaries.
  Under
the Agreement and Release, NPDC and Five Star released Mr. Flegel, and Mr.
Flegel released NPDC and Five Star, from any possible claims or causes of
action, including any claims arising out of Mr. Flegel’s employment and/or
consulting relationship with NPDC or Five Star and his service as an officer or
director of either of NPDC or Five Star.  The parties did not agree to
release future claims or to release NPDC or Five Star from any obligation to
indemnify Mr. Flegel for his service as an officer or director of NPDC or Five
Star.  For separate consideration under the Agreement and Release, Mr.
Flegel agreed to release NPDC and Five Star from any and all claims under the
federal Age Discrimination in Employment Act of 1967, as amended (subject to a
seven-day revocation period that commenced at the time that Mr. Flegel signed
the Agreement and Release).
  11
  2007
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
  The
following table provides information concerning the current holdings of
unexercised and unvested stock options and unvested stock awards for each of our
named executive officers as of the fiscal year ended December 31,
2007.
  Option
      Awards
            Stock
      AwardsName
            Number
      of
              Securities
              Underlying
              Unexercised
              Options
              Exercisable
            Equity
              Incentive
              Plan
      Awards:
              Number
      of
              Securities
              Underlying
              Unexercised
              Unearned
              Options
            Option
              Exercise
              Price
            Option
              Expiration
              Date
            Number
      of
              Shares
      or
              Units
      of
              Stock
      That
              Have
      Not
              Vested
            Market
              Value
      of
              Shares
      or
              Units
      of
              Stock
              That
              Have
      Not
              Vested
            Equity
              Incentive
              Plan
              Awards:
              Number
              of
              Unearned
              Shares,
              Units
      or
              Other
              Rights
              That
              Have
      Not
              Vested
            Equity
              Incentive
              Plan
              Awards:
              Market
      or
              Payout
              Value
      of
              Unearned
              Shares,
              Units
      or
              Other
              Rights
              That
              Have
      Not
              Vested(#)
            (#)
            ($)
            
            (#)
            ($)
            (#)
            ($)John
      C. Belknap (1)
            0
            0
            0
            
            0
            0
            1,000,000
            690,000Charles
      Dawson (1)
            0
            125,000
            0.38
            March
      2, 2017
            0
            0
            0
            0S.
      Leslie Flegel
            0
            0
            0
            
            0
            0
            0
            0Bruce
      Sherman (1)
            0
            400,000
            0.38
            March
      2, 2017
            0
            0
            0
            0
 
 (1)
            If
      certain performance and service based conditions set forth under the
      executive’s agreement with the Company are satisfied, the option or
      restricted stock award reflected above may vest and become exercisable in
      installments over a period of three years, beginning in fiscal 2008, as
      shown in the table below.  In addition, any previously unvested
      shares may vest at the end of this three-year cycle if certain performance
      and service based conditions set forth under the executive’s agreement
      with the Company are satisfied.  Each executive’s unvested
      shares would immediately vest upon the occurrence of a change in control
      of the Company (as defined in each executive’s agreement with the
      Company). Based upon the Company’s achievement of adjusted EBITDA of
      $5,000,000 for the year ended December 31, 2007, the portion of each
      executive’s award that was subject to possible vesting in fiscal 2008,
      vested on March 31, 2008.
  Name
            Shares
      subject to possible
              vesting
      in fiscal 2008
            Shares
      subject to possible
              vesting
      in fiscal 2009
            Shares
      subject to possible
              vesting
      in fiscal 2010John
      C. Belknap
            333,000
            333,000
            334,000Charles
      Dawson
            41,625
            41,625
            41,750Bruce
      Sherman
            133,200
            133,200
            133,600
 
  Additional
details regarding the executives’ agreements with the Company are available in
the narrative following the Summary Compensation Table above under the headings:
“Agreement with John C. Belknap”, “Agreement with Charles Dawson” and “Agreement
with Bruce Sherman”.
  12
  The
following tables provide information concerning the holdings of unexercised and
unvested options to purchase common stock of NPDC and awards of NPDC restricted
stock for each of the named executive officers at the end of the 2007 fiscal
year.
  2007
NPDC STOCK OPTIONS
  Name
            Number
      of
              Shares
      of
              Common
              Stock
              Underlying
              Unexercised
              Options
              which
      are
              Exercisable
            Number
      of
              Shares
      of
              Common
              Stock
              Underlying
              Unexercised
              Options
              which
      are
              Unexercisable
            Option
              Exercise
              Price
      Per
              Share
      of
              Common
              Stock
            Option
      Expiration
              Date(#)
            (#)
            ($)John
      C. Belknap (1)
            133,000
            266,667
            2.45
            February
      28, 2017Charles
      Dawson
            0
            0
            0S.
      Leslie Flegel
            0
            0
            0Bruce
      Sherman
            0
            0
            0
 
 (1)
For a description of this award see “Agreement with John C.
Belknap”.
 
 13
  TERMINATION
OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
  As
discussed in the narrative following the Summary Compensation Table above, Mr.
Sherman has entered into an amended employment agreement with Five Star Group
since the beginning of fiscal 2007.  On December 31, 2007, Mr. Sherman
was our only named executive officer who would have been entitled to any
incremental payments or benefits from the Company upon the occurrence of certain
termination events or upon a change in control of the Company, as described
below.
  Potential Payments to Bruce
Sherman upon Termination or Change in Control
  Under
the Amended
Sherman EmploymentAgreement, Mr. Sherman would not be entitled to any
payments or benefits if he is terminated for the following
reasons:
  Ÿ
            a
      breach by Mr. Sherman of any of the terms of the employment agreement
      (provided that Five Star Group gives Mr. Sherman 15 days notice prior to
      termination if the breach is capable of
  cure);
  Ÿ
            the
      gross neglect by Mr. Sherman of his duties under the employment agreement
      (if such conduct continues for 30 days following written warning to Mr.
      Sherman);
  Ÿ
            a
      conviction of Mr. Sherman for any felony or any crime involving moral
      turpitude or any lesser crime or offense involving the property of Five
      Star Group or any of its
affiliates;
  Ÿ
            a
      commission by Mr. Sherman of any act of fraud or dishonesty;
      or
  Ÿ
            the
      engagement by Mr. Sherman in misconduct resulting in serious injury to
      Five Star Group.
  For
the purposes of the quantifications below, termination by the Five Star Group
for any of the reasons listed above would be considered termination for
“cause.”
  If Mr.
Sherman’s employment is terminated due to: (i) his death or (ii) any physical or
mental disability, then he would be entitled to receive his base salary as then
in effect for the month during which termination occurred plus his base salary
for the next four months.  He would be entitled to receive any annual
cash incentive award for that year, prorated through the date of termination, if
the termination event occurred more than six months into the
year.  Mr. Sherman would be entitled to receive a pro-rated amount
equal to the maximum amount that could have been earned by Mr. Sherman during
the relevant fiscal year.  Under the Amended
Sherman EmploymentAgreement, if Mr. Sherman’s employment had been
terminated due to his death or disability on December 31, 2007, he would have
been entitled to receive $497,775, which represents $90,825 for four months’
salary, and $406,950, which represents Mr. Sherman’s annual incentive award for
fiscal 2007.
  If Mr.
Sherman’s employment agreement is terminated other than due to death or
disability and other than for cause, he would be entitled to continue to receive
(in weekly installments) his 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.  Mr. Sherman also would be entitled to
receive his annual cash incentive award, if any had been earned under the terms
of his employment agreement, through the date of termination on a pro rata
basis.  Under the Amended Sherman Employment Agreement, if Mr.
Sherman’s employment had been terminated other than due to his death or
disability and other than for cause on December 31, 2007, he would have been
entitled to receive $1,224,374, which represents $817,424 in total salary
payments remaining under the Amended Sherman Employment Agreement, and $406,950,
which represents the annual incentive award Mr. Sherman earned in fiscal
2007.
  14
  Under
the Amended
Sherman EmploymentAgreement, if a “change in control” or “sale” of the
Company (as described below) occurs during the term of the employment agreement,
Mr. Sherman would be granted the unconditional, fully vested right to purchase
up to 400,000 shares of Company common stock at a per share exercise price equal
to the fair market value of a share of common stock on the date of the
event.  The number of options granted would represent: (i) the total
number of options that could have potentially vested and become exercisable
under the Amended Sherman Employment Agreement if certain conditions,
including the achievement of certain performance- and service-based vesting
conditions, were satisfied over fiscal years 2007 through 2010 minus (ii) the
number of options that had vested and become exercisable under the Amended
Sherman EmploymentAgreement upon satisfaction of those
conditions.  The options that could have potentially vested and become
exercisable under the Amended
Sherman EmploymentAgreement would terminate.  As of December
31, 2007, no options had vested or become exercisable under the Amended
Sherman EmploymentAgreement.  Mr. Sherman’s right to receive
and exercise the options to purchase these shares upon a change in control or
sale of the Company will survive the expiration of the term of the employment
agreement.  If a change in control or sale of the Company had occurred
on December 31, 2007, Mr. Sherman would have received a grant of fully-vested
options to purchase 400,000 shares of common stock at an exercise price equal to
the fair market value on December 31, 2007 (the last business day of the 2007
fiscal year).
  A
change in control would be deemed to have occurred for the purposes of the
employment agreement if any person who was not on October 1, 2006 the direct or
indirect “beneficial owner” (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of securities of the Company representing 15% or more of
the combined voting power of the Company’s outstanding securities became such
a beneficial owner of Company securities representing 25% or more of the
combined voting power of the Company’s outstanding securities.
  A
“sale” of the Company would be deemed to have occurred if:
  Ÿ
            the
      Company engages in any transaction(s) with another entity and following
      such transaction(s) the Company’s stockholders immediately prior to such
      transaction(s) do not hold at least 50% of the voting power of the Company
      or its successor;
  Ÿ
            NPDC
      and its affiliates cease to own more than 60% of the Company’s voting
      stock; or
  Ÿ
            all
      or substantially all of the assets of the Company are
      sold.
  Mr.
Sherman is subject to confidentiality, non-competition and non-solicitation
covenants under his employment agreement. The confidentiality covenant is not
limited in duration. Depending upon the numbers of years Mr. Sherman has served
prior to the termination event, the non-competition and non-solicitation
covenants will remain in effect for a period of 18 months to six months. If Mr.
Sherman violates the non-competition and non-solicitation covenants, the term of
each violated covenant would be automatically extended for an additional period
of time. In addition, the Company would have the right to require Mr. Sherman to
account for and pay over to the Company all profits or other benefits derived or
received by the Mr. Sherman as a result of any transactions constituting a
breach of each such covenant violated.
  15
  DIRECTOR
COMPENSATION (1),
(2)
  The
following table details the compensation paid to our non-employee directors for
the year ended December 31, 2007.
  Name
            Fees
      Earned or
              Paid
      in
              Cash
            Stock
      Awards
            Option
      Awards
            Total($)
            ($)
            ($)
            ($)Harvey
      P. Eisen (2)
            0
            0
            0
      (5)Carll
      Tucker (1)
            36,000(3)
            0
            0
      (5)
            36,000Jerome
      I. Feldman (4)
            0
            0
            0
      (5)John
      Moran (1)
            (3)
            0
            0
      (5)
 
 (1)
            Messrs.
      Feldman, Dawson, Moran and Tucker resigned from the Board effective March
      1, 2007.  Mr. Tucker rejoined the Board effective August 8,
      2007.
  (2)
            Messrs.
      Dawson, Sherman and Eisen did not receive any additional compensation for
      their services as Company directors because employees of the Company or
      its subsidiaries or of NPDC do not receive additional compensation for
      serving as directors.  Information regarding compensation paid
      to Messrs. Dawson and Sherman is located in the Summary Compensation Table
      above. Information regarding compensation paid to Mr. Eisen for his
      service as Chairman of the Board and Chief Executive Officer of NPDC is
      reported in full in the Summary Compensation Table contained in NPDC’s
      2008 proxy statement filed with the SEC on April 29,
    2008.
  (3)
            During
      2007, directors who were not officers or employees of the Company or its
      subsidiaries or of NPDC received $1,500 for each meeting of the Board of
      Directors attended, and generally did not receive any additional
      compensation for service on the committees of the Board of Directors,
      except for Mr. Tucker, who received $25,000 for serving as the sole member
      of a Special Committee.
  (4)
            Mr.
      Feldman did not receive any additional compensation for his services as a
      director or as Chairman of the Company’s Board during fiscal
      2006.  However, Mr. Feldman served as the Chairman and Chief
      Executive Officer of NPDC, the Company’s parent, through May 31,
      2007.  As discussed below under “Transactions with Related
      Persons, Promoters and Certain Control Persons”, the Company and NPDC
      entered into a management agreement through which the Company paid NPDC
      fees for services provided to the Company by employees of
      NPDC.  The Company estimates that the amount allocable under
      this management agreement for Mr. Feldman in fiscal 2007 was
      $50,000.  This amount was part of Mr. Feldman’s compensation as
      Chief Executive Officer of NPDC and is reported in full in the Summary
      Compensation Table contained in NPDC’s 2008 proxy statement filed with the
      SEC on April 29, 2008.
  (5)
            No
      equity awards were granted to Company directors in fiscal
      2007. However, certain directors had exercisable options awards
      outstanding at 2007 fiscal year end:  Mr. Feldman, 150,000
      options outstanding; Mr. Moran, 150,000 options outstanding; and Mr.
      Tucker, 50,000 options outstanding.  Mr. Tucker exercised his
      options in March 2007 and recognized $17,500 of income on the
      exercise.  The options held by Messrs. Feldman and Moran expired
      in January 2007.
  16
  ITEM
12.                      SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
  Security
Ownership of Directors and Executive Officers
  The
following table sets forth the beneficial ownership of the Company’s outstanding
common stock as of April 21, 2008 by each person who is a director or named
executive officer of the Company, naming each such person, and all persons who
are currently directors and executive officers of the Company as a
group.  There were 16,842,577 shares of Company common stock issued
and outstanding on April 21, 2008.
  Security
Ownership of Directors and Executive Officers
  Name
            Amount
      and Nature of Beneficial
              Ownership
            Percent
      of ClassJohn
      C. Belknap
            333,000
      (1)
            1.98%Charles
      Dawson
            41,625(2)
            *S.
      Leslie Flegel
            0
      (3)
            0Bruce
      Sherman
            133,200(4)
            *Harvey
      P. Eisen
            0
            0Carll
      Tucker
            0
            0Current
      directors and executive officers as a group (7 persons)
      (5)
            550,075
            3.27%
 
 * The
number of shares owned is less than one percent of the outstanding
shares.
 
 (1)
            Represents
      333,000 shares of restricted common stock of the Company, which have
      currently vested.
  (2)
            Represents
      options to purchase 41,625 shares of Company common stock, all of which
      are currently exercisable
  (3)
            Effective
      March 25, 2007, Mr. Flegel had sold all his shares of the Company’s common
      stock and was no longer a director or officer of the
      Company.
  (4)
            Represents
      options to purchase 133,200 shares of Company common stock, all of which
      are currently exercisable
  (5)
            Includes
      Messrs. Belknap, Dawson, Flegel and Sherman, each of whom is a named
      executive officer of the Company, Messrs. Eisen and Tucker, each of whom
      is a director of the Company, and Mr. Sobotko who is an executive officer
      of the Company.
  17
  Principal
Stockholders
  The
following table sets forth the number of shares of common stock beneficially
owned as of April 21, 2008 by each person who is known by the Company to own
beneficially more than five percent of the Company’s outstanding common stock
other than executive officers or directors of the Company, whose beneficial
ownership is reflected in the Security Ownership of Directors and Executive
Officers table below.
  Name
      and Address
              of
      Beneficial Owner
            Amount
      and Nature of
              Beneficial
      Ownership
            Percent
      of ClassNational
      Patent Development Corporation/
              JL
      Distributors, Inc.
              10
      East 40th
      Street, Suite 3110
              New
      York, NY 10016
            19,619,078
      (1)
            82.29%
 
 (1)
            Based
      on a Schedule 13D/A filed jointly by NPDC and JL Distributors, Inc. (“JL”)
      on April 4, 2008.  NPDC has sole voting power and sole
      dispositive power with respect to 12,619,078 shares.  NPDC and
      JL have shared voting power and shared distributive power with respect to
      7,000,000 shares.
  Ownership of Related
Companies
  Some
of our current directors and named executive officers, and a current executive
officer who is not a named executive officer, own equity securities of NPDC, our
parent.  The following table and footnotes set forth the beneficial
ownership, as of April 21, 2008, of the shares of common stock of NPDC held by
each person who by each person who is a director or named executive officer of
the Company, naming each such person, and all persons who are currently
directors and executive officers of the Company as a group.  There
were 16,780,467 shares of NPDC common stock issued and outstanding on April 21,
2008.  All information is taken from or based upon ownership filings
made by such individuals with the SEC or upon information provided by such
individuals.
  Ownership
of Related Companies
  Name
            Amount
      and Nature of Beneficial
              Ownership
            Percent
      of ClassJohn
      C. Belknap
            133,333
      (1)
            *Charles
      Dawson
            0
            0S.
      Leslie Flegel
            0
      (2)
            0Bruce
      Sherman
            0
            0Harvey
      P. Eisen
            4,030,586(3)
            23.74%Carll
      Tucker
            0
            *Directors
      and executive officers as a group
              (7
      persons) (6)
            4,197,252
      (4)
            24.56%
  
 * The
number of shares owned is less than one percent of the outstanding
shares.
 
 (1)
            Includes
      133,333 shares of NPDC common stock covered by options currently
      exercisable
  18
  (2)
            Effective
      March 25, 2007, Mr. Flegel had sold all his shares of NPDC’s common stock
      and was no longer a director of
NPDC.
  (3)
            Includes
      3,189,400 shares of NPDC common stock beneficially owned by Bedford Oak
      Advisors, LLC (“Bedford Oak”) 7,853 shares of NPDC common stock
      individually owned by Mr. Eisen and 833,333 shares of NPDC common stock
      covered by options currently exercisable.  Mr. Eisen is deemed
      to have beneficial ownership of such shares by virtue of his position as
      managing member of Bedford Oak, the investment manager of Bedford Oak
      Capital, L.P. (“Capital”), Bedford Oak
    Acorn.
  (4)
            Includes
      Messrs. Belknap, Dawson, Flegel and Sherman, each of whom is a named
      executive officer of the Company, Messrs. Eisen and Tucker, each of whom
      is a director of the Company, and Mr. Sobotko, who is an executive officer
      of the Company.
  Equity
Compensation Plan Information
  The
following table provides information about the Company’s common stock that may
be issued upon the exercise of options, warrants and rights under all of the
Company’s equity compensation plans as of December 31, 2007.
  Plan
      category
            Number
      of securities
              to
      be issued upon
              exercise
      of outstanding
              options,
      warrants and
              rights
              (a)
            Weighted-average
      exercise
              price
      of outstanding
              options,
      warrants and
              rights
              (b)
            Number
      of securities
              remaining
      available for
              future
      issuance under
              equity
      compensation plans
              (excluding
      securities
              reflected
      in column (a))
              (c)Equity
      compensation plans approved by security holders (1)
            1,642,000
            $0.51
            525,000
 
 (1)
            The
      Company’s 2007 Incentive Stock Plan (the “2007 Plan”) was approved and
      adopted by the Board of the Company on March 1, 2007 and the shareholders
      of the Company on December 20, 2007.  The 2007 Plan provides of
      nonqualified stock options, incentive stock options, restricted stock,
      stock appreciation rights, stock units, performance shares, performance
      units and other incentives payable in cash or in shares of the Company’s
      common stock as the Compensation Committee may determine.  Such
      grants may be made to officers, employees or members of the Board of
      Directors of the Company and its subsidiaries as well as the Company’s
      consultants, agents, advisors and independent contractors in exchange for
      bona fide services rendered.  The number of shares of common
      stock to be reserved and available for awards under the 2007 Stock Plan
      (subject to certain adjustments as provided therein) is
      2,500,000.The
      Company’s 1994 stock option plan, as amended, became effective on January
      1, 1994 (the “1994 Plan”).  The 1994 Plan was approved by the
      Board and the then-sole shareholder of the Company.  The 1994
      Plan was amended by the Board on January 1, 2002 to increase the number of
      shares of common stock available thereunder from 2 million to 4
      million.  The 1994 Plan provides for grants of non-qualified
      stock options, and prior to the 2002 amendment provided for incentive
      stock options, to employees and consultants of the Company and its
      subsidiaries.  After the 2002 amendment, the Company could not
      grant further incentive stock options under the 1994
      Plan.  After January 1, 2004, no options may be granted under
      the 1994 Plan.  All stock option grants have an exercise price
      per share of no less than the fair market value per share of common stock
      on the grant date and may have a term of no longer than 10 years after the
      grant date.
  19
  ITEM
13.                      CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS , AND DIRECTOR
INDEPENDENCE
  Transactions with Related Persons, Promoters and Certain Control
Persons
  Indevus
  On
November 12, 2004, NPDC entered into an agreement to borrow approximately
$1,022,000 from Bedford Oak Partners, which is controlled by Harvey P. Eisen, a
director of the Company and Chairman, Chief Executive Officer and a director of
NPDC, and approximately $568,000 from Jerome I. Feldman, who was at the time
Chairman and Chief Executive Officer of NPDC, which was utilized to exercise an
option held by NPDC to purchase Series B Convertible Preferred shares of
Valera.  The loans bore interest at 6% per annum, matured on October
31, 2009, and were secured by all shares of Valera owned by NPDC, including the
purchased shares.    On January 11, 2005, NPDC prepaid the
loans and all accrued interest in full. As further consideration for making
these loans, Bedford Oak Partners and Mr. Feldman became entitled to a portion
of the consideration received by NPDC on the sale of certain Valera
shares.
  As a
result of the acquisition of Valera by Indevus  this obligation
presently relates to the sale of Indevus shares by NPDC. From June 2007 through
and including September 12, 2007, NPDC sold, in a series of open market
transactions, all of the 2,639,482 shares of Indevus common stock held by NPDC
for an aggregate of approximately $17,598,000, net of commissions and brokerage
fees.  The November 12, 2004 agreement among NPDC, Bedford Oak Partners and
Mr. Feldman provides for Bedford Oak Partners and Mr. Feldman to (i) receive 50%
of any amount in excess of $3.47 per share which is received by NPDC upon the
sale of Indevus common stock and (ii) participate in 50% of the profits earned
on 19.51% of shares of Indevus common stock received by NPDC upon conversion of
the contingent stock rights, described below, if any, at such time as such
shares are sold by  NPDC.  The aggregate amount paid in 2007
towards the profit sharing was $922,000.
  NPDC
continues to hold contingent stock rights for certain products in development by
Indevus that will become convertible into shares of Indevus common stock to the
extent specific milestones with respect to each product are achieved.  If
the remaining milestones are achieved, NPDC will receive $2,070,670 and
$3,106,005, respectively, worth of shares of Indevus common stock upon
conversion of such contingent stock rights.
  Management
Services Agreement
  NPDC
provides legal, tax, business development, insurance and employee benefit
administration services to the Company pursuant to a management services
agreement, for a fee that was $40,000 per month from April 2007 through December
2007. The fee for the three months ended March 31, 2007 was approximately
$28,000 per month. For the year ended December 31, 2006, the fee was $30,800 per
month. The agreement is automatically renewable for successive one-year terms
unless one of the parties notifies the other in writing at least six months
prior to the end of any renewal thereof. In addition, the Company agreed to
reimburse NPDC for $16,666 per month for Mr. Feldman’s (NPDC’s former Chief
Executive Officer) service to the Company effective October 1, 2004 through May
31, 2007, the termination date of Mr. Feldman’s contract. The management
agreement was renewed for 2008.
  Fees
incurred under the agreement totaled $527,000 and $370,000, for the years ended
December 31, 2007 and 2006 and are included in selling, general and
administrative expenses in the consolidated statements of operations. At
December 31, 2007 and 2006, the amounts due to NPDC under the agreement were
$108,000 and $58,000, respectively.
  20
  In
addition, NPDC incurred certain expenses on behalf of Five Star, primarily
involving insurance, legal and other professional expenses. Five Star reimbursed
NPDC for such expense, which amounted to approximately, $561,000 and $234,000
for the years ended December 31, 2007 and 2006, respectively.
  Related
Person Debt
  The
Company’s wholly-owned subsidiary, Five Star Group, issued a $2,800,000
unsecured note (the “JL Note”) payable to JL Distributors, Inc. (“JL”), a
wholly-owned subsidiary of NPDC following the spin-off of NPDC from GPS, its
former parent, on November 24, 2004.  The JL Note bore interest at 8%,
payable quarterly, and matured on June 30, 2005.  On June 30, 2005,
NPDC and the Company agreed to extend the JL Note for a one-year term maturing
on June 30, 2006 through the issuance by the Company to JL of a new promissory
note on substantially the same terms as the original JL Note (the “Extended
Note”).  In consideration to NPDC for the Extended Note, the Company
paid NPDC a fee of $28,000, representing one percent of the JL Note’s
outstanding balance.  In addition, the interest rate on the Extended
Note was increased to 9%.  On July 28, 2006, the Company and NPDC
agreed to extend the Extended Note for a one-year term maturing on June 30,
2007.  In consideration to NPDC for the extension of the Extended
Note, the Company paid NPDC a fee of one percent of the Extended Note’s
outstanding balance, or $28,000, during July 2006.  The interest rate
on the Extended Note remained at 9%.
  On
March 2, 2007, the Company and JL amended the Extended Note (i) to extend the
maturity date from June 30, 2007 to June 30, 2009, (ii) to add a conversion
feature such that the holder of the Extended Note, at its option, may convert
the principal of the Extended Note, and any accrued interest, into shares of the
Company’s common stock at a fixed conversion price of $0.40 per share, and (iii)
to modify the Extended Note to eliminate the Company’s right to prepay the
Extended Note prior to maturity.  The Company also granted JL certain
registration rights with respect to the shares of the Company’s common stock
issuable upon exercise of the Extended Note pursuant to a Registration Rights
Agreement, dated as of March 2, 2007, between Five Star Products and
JL.
  The
Note is subordinated to Five Star Group’s indebtedness under its Loan and
Security Agreement with Bank of America Business Capital.  The Loan
Agreement has a five-year term, with a maturity date of June 30,
2008.
  Other
Related Person Transactions
  Agreement with Ira J.
Sobotko
  Pursuant
to the terms and conditions of the Stock Option Agreement, dated July 17, 2007,
between the Company and Mr. Sobotko (the “Sobotko Stock Option Agreement”), Mr.
Sobotko, who serves as Senior Vice President, Finance, Secretary and Treasurer
of the Company and as Vice President, Finance, Secretary and Treasurer of NPDC,
was granted options to purchase 125,000 shares of Company common stock at an
exercise price equal to $0.78 per share, the average of the closing bid and
asked prices of the Company common stock on July 17, 2007, under the Company’s
2007 Incentive Stock Plan, vesting as follows:
  ·
            Options
      to purchase 41,625 shares of Company common stock vested and became
      exercisable upon the Company’s achievement of adjusted EBITDA (as defined
      in the Sobotko Stock Option Agreement) of at least $5.0 million for the
      year ending December 31, 2007;
  21
  ·
            Contingent
      upon Mr. Sobotko’s continued employment with the Company, options to
      purchase 41,625 shares of Company common stock will vest and become
      exercisable if the Company achieves adjusted EBITDA of at least $7.5
      million for the year ending December 31, 2008;
  and
  ·
            Contingent
      upon Mr. Sobotko’s continued employment with the Company, options to
      purchase 41,750 shares of Company common stock will vest and become
      exercisable if the Company achieves adjusted EBITDA of at least $11.25
      million for the year ending December 31,
  2009.
  To the
extent that adjusted EBITDA equals or exceeds $23.75 million for the three-year
period ending December 31, 2009, any previously unvested shares will vest and
become exercisable.  Notwithstanding any contrary provision of the
stock option agreement, if Mr. Sobotko is employed by the Company as of December
31, 2008 or December 31, 2009, Mr. Sobotko shall be entitled to the vesting of
his options for that fiscal year, regardless of whether his employment
terminates prior to the formal determination of vesting (i.e., the adjusted
EBITDA calculations) for such fiscal year.  Upon the occurrence of a
change in control (as defined in the Sobotko Stock Option Agreement) of the
Company or NPDC, all unvested shares also will become fully vested and
exercisable.
  In
addition, pursuant to the terms and conditions of the Stock Option Agreement,
dated July 30, 2007, between NPDC and Mr. Sobotko (the “Sobotko NPDC Stock
Option Agreement”), Mr. Sobotko was granted options to purchase 100,000 shares
of NPDC common stock at an exercise price equal to $2.68 per share, the average
of the closing bid and asked prices of NPDC common stock on July 30, 2007, under
NPDC’s 2003 Incentive Stock Plan.  Contingent upon Mr. Sobotko’s
continued employment with NPDC:
  ·
            Options
      to purchase 33,333 shares of NPDC common stock will vest and become
      exercisable on July 30, 2008;
  ·
            Options
      to purchase 33,333 shares of NPDC common stock will vest and become
      exercisable on July 30, 2009;
and
  ·
            Options
      to purchase 33,334 shares of NPDC common stock will vest and become
      exercisable on July 30, 2010.
  Upon
the occurrence of a change in control of NPDC (as defined in the Sobotko NPDC
Stock Option Agreement), all unvested shares shall become fully vested and
exercisable.
  Mr.
Sobotko receives an annual salary of $200,000 from NPDC, of which $103,122 was
reimbursed by the Company to NPDC in 2007, based on the amount of time Mr.
Sobotko spent working for the Company.
  Agreement
with Harvey P. Eisen
  From and after June 1, 2007, Mr.
Eisen, who at such time served, and who currently serves, as a director of NPDC,
and is currently a director of the Company, commenced serving in the additional
positions as Chairman of the Board, President and Chief Executive Officer of
NPDC.  Effective upon the commencement of his service as Chairman of
the Board, President and Chief Executive Officer of NPDC, Mr. Eisen received an
annual salary of $100,000 from NPDC.
  22
  On March 1, 2007, in connection with
its decision to appoint Mr. Eisen to the executive positions described above,
the NPDC Board of Directors granted to Mr. Eisen options to purchase an
aggregate of 2,500,000 shares of NPDC common stock, pursuant to NPDC's 2003
Incentive Stock Plan (the “2003 Plan”), at an exercise price equal to $2.45 per
share, which was the average of the closing bid and asked prices of NPDC common
stock on March 1, 2007.  The options vest in three equal annual
installments, the first of which vested on March 1, 2008.  Upon the
occurrence of a change in control of NPDC (as defined in the contract relating
to the aforesaid options), all unvested options also will become fully
vested.
  Agreement
with Steven Schilit
  On
February 28, 2007, the Company entered into a Consulting and Severance Agreement
with Mr. Schilit, the former Executive Vice President, Chief Operating Officer
and director of the Company (the “Schilit Agreement”). Pursuant to the Schilit
Agreement, Mr. Schilit will provide consulting services to the Company for a
period of two years, commencing February 28, 2007, in exchange for a weekly
consulting fee of $2,403.85. In addition, Mr. Schilit will be entitled to
receive, for a period of five years, a commission of one half of one percent on
sales by certain of the Company’s employees. During the term of the Schilit
Agreement, Mr. Schilit will be entitled to continue to participate in the
Company’s benefit plans to the extent he remains eligible, on the same basis as
the Company’s management, and the Company will continue to make the lease
payments and pay for the insurance and maintenance on the car currently provided
to Mr. Schilit. Mr. Schilit also agreed not to compete with the Company or NPDC
or solicit any of their employees.
  On
March 14, 2007, the Schilit Agreement was amended to provide that, if Mr.
Schilit should die during the term thereof, the Company would (i) pay Mr.
Schilit’s spouse or estate the weekly consulting fee for the remainder of the
term of the agreement and (ii) continue to provide certain medical, life
insurance and disability benefits in accordance with the relevant benefit plan
or as required by law.  It was further amended to state that if Mr.
Schilit’s services under the agreement are terminated due to his incapacity, the
Company will continue to (A) pay him the weekly consulting fee for the remainder
of the term of the agreement, (B) provide certain life insurance and disability
benefits in accordance with the relevant benefit plan or as required by law and
(C) provide certain medical benefits for the remainder of the term of the
agreement. The amendment was effective as of February 28, 2007.  Mr.
Schilit was paid $58,926 in 2007 prior to March 14, 2007 and $139,354 in 2007
under the terms of the Schilit Agreement.
  Compensation
Arrangement with Neal Collins
  Mr. Collins served as Chief
Financial Officer of the Company through July 2007 and as Vice President through
April 2008.  Mr. Collins received salary and bonus of $108,114 and
$121,419 for 2007 and 2006, respectively.
  Other
Agreements
  For
details of agreements with Messrs. Belknap, Sherman, Flegel and Dawson, see the
summaries of such agreements in the narrative following the Summary Compensation
Table.
  Compensation Arrangements and
Agreements
  Summaries
of the compensation arrangements and agreements in which the Company and its
current and former executive officers and directors are participants and where
the amount involved exceeds $120,000, since the beginning of the Company’s 2007
fiscal year, and for the 2006 fiscal year, are included in the narrative
following the Summary Compensation Table above.
  23
  Majority
Shareholder
 
 For
details regarding the percentage of voting securities owned, and the basis of
control, by NPDC, the majority shareholder of the Company, see the tabular
disclosure under the heading “Principal Stockholders” in Item 12. “Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.”
 
  Director
Independence
  Since
the adoption of the Sarbanes-Oxley Act in July 2002, there has been growing
public and regulatory focus on the independence of directors.  The
Company is not subject to the listing requirements of any securities exchange,
including The Nasdaq Stock Market (“Nasdaq”), because the common stock of the
Company is traded on the over-the-counter bulletin board.  In August
2007, however, the Board adopted the standards for independence for
Nasdaq-listed companies, and the independence determinations that follow are
based upon the criteria established by Nasdaq for determining director
independence and upon the criteria established by Nasdaq and the SEC for
determining Audit Committee member independence.
  The
Board determines the independence of its members through a broad consideration
of all relevant facts and circumstances, including an assessment of the
materiality of any relationship between the Company and a
director.  In making each of these independence determinations, the
Board considered and broadly assessed, from the standpoint of materiality and
independence, all of the information provided by each director in response to
detailed inquiries concerning his independence and any direct or indirect
business, family, employment, transactional or other relationship or affiliation
of such director with the Company.
  Using
the objective and subjective independence criteria enumerated in the Nasdaq
marketplace rules’ listing requirements and the SEC rules, the Board has
reviewed all relationships between each director and the Company and, based on
this review, the Board has also determined that Mr. Tucker currently qualifies
and in 2007 qualified as independent in accordance with Nasdaq’s independence
criteria.  Messrs. Belknap, Eisen and Sherman, each of whom is a
current director of the Company, and Mr. Flegel, who is a former director of the
Company, are not and were not in 2007 independent in accordance with Nasdaq
independence criteria or for purposes of Section 10A(m)(3) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), because each of them
currently is, or was in the case of Mr. Flegel, employed by the Company, NPDC or
Five Star Group.
  The
Board did not determine whether John Moran, Jerome I. Feldman or Charles Dawson,
each of whom served as a Company director in 2007, qualified as “independent”
under Nasdaq independence criteria because each resigned from the Board
effective March 1, 2007.
  24
  ITEM
14.                                PRINCIPAL ACCOUNTANT FEES AND
SERVICES
  The
fees billed for services rendered for 2007 and 2006 by Eisner LLP were as
follows:
  2007
            
            2006Audit
      Fees (1)
            $
            233,850
            $
            160,000Audit-Related
      Fees
            $
            0
            $
            0Tax
      Fees
            $
            0
            $
            0All
      Other Fees (2)
            $
            14,450
            $
            0Total
            $
            248,300
            $
            160,000
 
 (1)
            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.(2)
            Includes
      fees related to the audit of the Company’s 401(k)
    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.  In fiscal 2008, all audit services to be performed by
Eisner LLP require pre-approval by the Board in accordance with pre-approval
policies established by the Board.  The procedures require all
proposed engagements of Eisner LLP for services of any kind be directed to the
Board prior to the beginning of any service.
 
 All
services provided by the independent registered public accounting firm for 2007
were approved in advance by the Board of Directors.
  PART
IV
  ITEM
15.                      EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
  See
accompanying Index to Exhibits.
  25
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
  FIVE
      STAR PRODUCTS, INC.Date:  April
      29, 2008
              By:
              /s/
      JOHN C. BELKNAPJohn
      C. BelknapPresident
      and Chief Executive Officer(Principal
      Executive Officer)
   
 
 26
  INDEX
TO EXHIBITS
 
 Number
            
            Description31.1
            *
            Certification
      of Principal Executive Officer31.2
            *
            Certification
      of Principal Financial Officer
 
 
 *
            Filed
      herewith