10-K 1 rfi10k08.txt RESEARCH FRONTIERS 2008 ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) of THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2008 Commission File Number 1-9399 RESEARCH FRONTIERS INCORPORATED (Exact name of registrant as specified in its charter) DELAWARE 11-2103466 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 240 CROSSWAYS PARK DRIVE WOODBURY, NEW YORK 11797-2033 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 364-1902 Securities registered pursuant to Section 12(b) of the Act: Name of Exchange Title of Class on Which Registered Common Stock, $0.0001 Par Value The NASDAQ Stock Market Securities registered pursuant to Section 12(g) of the Act: None (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 Section 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, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ] Smaller reporting company [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of March 10, 2009 there were 15,742,784 shares of Research Frontiers Incorporated common stock outstanding. The aggregate market value of the voting and non-voting common equity held by non-affiliates was $91,960,369 computed in accordance with the rules of the SEC by reference to the closing price of the Company's common stock as of June 30, 2008 which was $6.31. In making this computation, all shares known to be owned by directors and executive officers of the Company and all shares known to be owned by other persons holding in excess of 5% of the Company's common stock have been deemed held by "affiliates" of the Company, and awards of restricted stock subject to vesting are assumed to have been fully issued and outstanding. Nothing herein shall prejudice the right of the Company or any such person to deny that any such director, executive officer, or stockholder is an "affiliate." PART I ITEM 1. BUSINESS General Research Frontiers Incorporated ("Research Frontiers" or the "Company") develops and licenses its patented suspended particle device ("SPD-Smart") light-control technology to other companies that manufacture and market either the SPD-Smart chemical emulsion, light-control film made from the chemical emulsion, lamination services, electronics to power end- products incorporating the film, or the end-products themselves such as "smart" windows, skylights and sunroofs. Research Frontiers currently has 35 companies that, in the aggregate, are licensed to serve four major SPD-Smart application areas (aerospace, architectural, automotive and marine products) in every country of the world. Research Frontiers was incorporated in New York in 1965 to continue early work that Dr. Edwin Land, founder of Polaroid Corporation, and others had done in the area of light-control beginning in the 1930s. Research Frontiers was reincorporated in Delaware in 1989. Since 1965, Research Frontiers has actively worked to develop and license its own SPD technology, which it protects using patents, trade secrets and know-how. Although patent and trade secret protection is not a guarantee of commercial success, Research Frontiers currently has over 500 patents and pending patent applications throughout the world protecting its technology, positioning it as a leader of advanced light, glare and heat control for windows and other glazing products. SPD-Smart products use microscopic light-absorbing particles that are typically suspended in a film. These particles align when an electrical voltage is applied, thus permitting light to pass through the film. Adjustment of the voltage to the SPD film gives users the ability to instantly, precisely and consistently regulate the amount of light, glare and heat passing through the window, skylight, sunroof, window shade or other SPD-Smart end-product. SPD technology is an "enabling" or "transforming" technology that may have wide commercial applicability in many types of products and industries where variable light transmission is desired, such as: - "smart" windows, skylights, partitions, doors, and sunshades for the architectural, aircraft, marine, automotive and appliance industries; - variable light transmission sunglasses, goggles, visors and other eyewear; - self-dimmable automotive sunroofs, sunvisors and rear-view mirrors; and - flat panel information displays for use in billboards, scoreboards, point-of-purchase advertising displays, traffic signs, computers, telephones, PDAs and other electronic instruments. Research Frontiers considers the SPD industry to be in the initial phase of growth and sales of SPD-Smart products for aircraft windows, smart windows and skylights for homes and offices, sunroofs and side-and rear-windows for cars, boats, busses and other transportation vehicles. Some of these early sales and uses have been commercial installations and some have involved concept and test installations by licensees and their customers (see "Trends and Recent Developments" below). Some of our licensees consider the stage of development, product introduction strategies and timetables, and other plans to be proprietary or secret, and as such cannot be disclosed by Research Frontiers until such licensees, or their customers, make their own public announcements or product launches. In addition to the near-term product applications listed above, prototypes of SPD-Smart flat panel displays, eyewear, and self-dimming automotive rear-view mirrors have been developed. These prototypes demonstrate the feasibility and operation of the products they relate to, but in some cases may need additional product design, engineering or testing before commercial products can be introduced. Recent progress with regard to market development and commercialization activity has been the result of focused and active efforts by Research Frontiers and its key production and end-product licensees who have invested in product development and improvements, production facilities, increased production capacity, durability, performance testing, quality control and assurance, and marketing programs. Licensees supplying chemical emulsion or film to end-product licensees now are increasing production capacity to prepare for potentially large and developing markets for SPD-Smart products. Research Frontiers believes that with the normal progression of product and manufacturing improvements, and as licensees become more experienced at the lamination, fabrication and installation of SPD-Smart products for various applications, the adoption rates for SPD-Smart products will grow and accelerate, resulting in a growing stream of royalty income for the Company. As part of their marketing and branding programs, many of our licensees have developed their own trademarks for SPD- Smart emulsion, film, and end-products and these are listed in their respective press releases, product brochures, advertising and other promotional materials. Research Frontiers uses the following trademarks: SPD-Smart(tm), SPD-SmartGlass(tm), VaryFast(tm), SPD-CleanTech(tm), SPD Clean Technology(tm), SmartGlass(tm), The View of the Future - Everywhere you Look(tm), Powered by SPD(tm), Powered by SPD-CleanTech(tm), Powered by SPD Clean Technology(tm), SPD Green and Clean(tm), SPD On-Board(tm), Speed Matters(tm), and Visit SmartGlass.com - to change your view of the world(tm). In each of the last three fiscal years the Company has devoted substantially all of its time to the development of one class of products, namely SPD-Smart light-control technology, and therefore revenue analysis by class is not provided herein. The Company does not believe that future sales will be seasonal in any material respect. Due to the nature of the Company's business operations and the fact that the Company is not presently a manufacturer, there is no backlog of orders for the Company's products. The Company believes that compliance with federal, state and local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, will not have a material effect upon the capital expenditures, earnings and competitive position of the Company. The Company has no material capital expenditures for environmental control facilities planned for the remainder of its current fiscal year or its next succeeding fiscal year. Industry Trends While economic activity around the world is currently in a severe downturn, there are also favorable converging trends in the major near-term markets for SPD-Smart products. These trends are gaining momentum and strength. In both public and private sectors across the world, there are substantial efforts targeted toward the promotion and use of energy efficient materials, including those used in windows and other glazings for homes, buildings, automobiles, aircraft and boats. For example, as part of its sustainable design strategies, the architectural community is actively using "daylight harvesting" systems to more effectively capture and control natural light as part of energy reduction strategies to offset electricity used by artificial lighting. There also is a growing trend toward the use of more glass in all of the near-term SPD markets. In addition to design, aesthetic and other benefits, this expanded use of glass also supports a growing body of research which finds that the presence of natural light improves the well-being and productivity of individuals. Products using SPD-Smart light- control technology can play an important role in supporting these converging global trends. For architectural applications, a number of market forces are having an upward influence on demand for SPD-Smart glass. Many architects are specifying more glass in their designs to support building occupants' sense of connectedness to the outside environment. Also significant is the heightened attention to energy efficiency in both commercial and residential buildings. With buildings in the United States and Europe now accounting for an estimated 39-40% of total energy use and upwards of 70% of electricity consumption, many architects and building owners are striving for sustainable, "green" buildings that are highly energy-efficient, reduce environmental impact, and improve occupant health and well- being. In addition, the design community is increasingly interested in advanced daylighting systems in buildings that lower electrical lighting usage and reduce heating and cooling loads. Because of this, the ability to control light, glare and heat in these building applications is very important and advanced solutions often are needed to optimize operating efficiencies. SPD-Smart technology, especially when integrated with intelligent building systems, provides effective shading, glare control and heat management solutions for offices and homes. As a result, architects and developers are now specifying SPD- Smart products in their projects, and both the number and size of these projects are increasing. An example of a recently completed project is the substantial installation of SPD- SmartGlass at Indiana University's Health Information and Translational Sciences Building. In the automotive industry, global trends include the introduction of larger sunroofs and panoramic roof panels in transportation vehicles, and a higher percentage of these vehicles having a sunroof or using more glass in the roof. In addition, automobile manufacturers are beginning to introduce "cielo" glass systems where the windshield of the vehicle joins with the glass in the roof of the vehicle to form one continuous piece of curved glass. The SPD-Smart component of these cielo systems can start with the blue band on the top of the windshield (the rest of the windshield would not use any kind of dark tint because regulations require that the main part of the windshield not have less than 70% light transmission at all times) and extend back to encompass the entire glass roof. Some automakers have recently begun to incorporate SPD- SmartGlass in concept vehicles, with some of these concept vehicles being exhibited at major auto shows and are developing SPD-Smart glass products for production vehicles as well. SPD-SmartGlass has also been shown in armored automotive glass applications. In the aerospace industry there is also a trend towards larger windows, most notably in the "transport category" (commercial passenger aircraft) segment. The world's two largest aircraft manufacturers have announced their interest to include electronic smart window shades in their aircraft, and strong interest exists at other OEMs as well. Electronic aircraft window shades may use SPD technology, or may use other smart window technologies such as liquid crystal or electrochromic technology. For use in aircraft, SPD-Smart window shades are made of plastic instead of glass to save weight for a given window thickness, and to avoid breakage risks. The Company believes its SPD technology offers important performance advantages over other technologies including weight-savings and faster, more uniform response time. To date, SPD technology is also the only commercially available light-control smart window technology known to have passed the stringent safety and durability tests required by the aviation industry. Today SPD-Smart window shades are flying in various aircraft including those used in general aviation (private and business aircraft) and military aviation. SPD-Smart window shades are also beginning to be used in commercial passenger aircraft. In the marine application for SPD-Smart technology, to satisfy various objectives, many yacht manufacturers currently employ less than ideal glazing solutions. For example, some report having to use as many as five different types of glass in a typical yacht to satisfy diverse glazing needs. SPD-Smart window technology can reduce the number of different types of glass used in these yachts because of its increased functionality and superior performance and versatility. SPD-SmartGlass has appeared in glass designed for yachts and other marine vessels. Because boat operators experience substantial exposure to direct sunlight, SPD-Smart products provide an innovation that allows these operators to manage incoming light, glare and heat while achieving privacy or maintaining one's view as needed or desired. Products using SPD-Smart technology continue to be exhibited at trade shows, conferences, and industry events, with such products not only being exhibited by our licensees but also by their customers and by original equipment manufacturers. While there can be no assurance that these trends will continue, to the extent that they do continue, each should have a beneficial effect on future fee income for the Company. In June 2008, The Freedonia Group, a highly regarded independent market research firm serving the glass industry and others, announced the release of its 2008 Advanced Glass Study. In that study, Freedonia projected a compound annual growth rate in United States smart glass demand through 2017 of 10.2%, a level more than twenty times the rate for flat glass demand overall in the U.S. Further, in the narrative accompanying the release of this study, Freedonia shared these very positive comments about SPD technology: "[D]emand for smart glass is expected to finally have a significant impact outside of the electrochromic mirrors and liquid crystal display privacy glass that have been available for some years. The much-awaited commercial roll-out of suspended particle device (SPD) smart glass technologies is now expected to occur, sparking well above average growth for the category through 2012." Historical Background and Recent Developments In April 2004, SPD Inc., which at that time was the sole manufacturer of SPD-Smart light control film and a subsidiary of Hankuk Glass Industries, a former licensee of the Company, announced that it was ceasing its business activities. As a result, sales of SPD-Smart products by licensees of the Company during most of 2004, 2005 and 2006 were curtailed as these licensees filled certain customer orders out of limited existing inventory of SPD-Smart light control film made by SPD Inc. while awaiting production of the next-generation, emulsion- based SPD-Smart light control film with its improved performance characteristics. After this hiatus in SPD film availability, a number of significant events began in 2007 and continue through 2009 that have helped the development of the Company's business worldwide. On February 1, 2007, Hitachi Chemical Company jointly announced with Innovative Glass Corp. that Hitachi Chemical was shipping rolls of wide-width SPD-Smart film from its high- capacity coating lines in Ibaraki, Japan. This film involves next-generation SPD light-control film which has better optical properties, lower haze levels, and a wider range of light transmission than the film previously produced by SPD Inc. The new emulsion-based film uses extraordinarily low amounts of power to operate, further adding to its appeal. This next- generation film is expected to help penetrate markets for SPD- Smart light-control technology. Research Frontiers licensee InspecTech Aero Service Inc. reported that it received FAA certification for, and has installed SPD-Smart windows on, various aircraft. Initially, these installations involved aftermarket upgrades by select customers to existing aircraft. On February 9, 2007, Raytheon Aircraft Company (now known as the Hawker Beechcraft Corporation) announced that it is offering to its aftermarket customers SPD- Smart electronic window shades, manufactured by InspecTech Aero Service, on Raytheon's Beechcraft(r) King Air aircraft. A Supplemental Type Certificate (STC) was issued by the FAA in January 2007 to InspecTech for all models of King Air aircraft, and additional aircraft manufacturers and their airline customers are currently evaluating SPD-Smart window shades for their aircraft. InspecTech reports having engineered SPD- Smart windows for other aircraft in response to their work with various aircraft manufacturers. On October 1, 2007, Isoclima S.p.A. launched its marketing program for its CromaLite(tm) brand of SPD-Smart glass. Isoclima featured CromaLite at Vitrum 2007 from October 3-6 in Milan, Italy and at the 47th International Boat Show in Genoa, Italy from October 6-14. Vitrum 2007 is the international trade fair for machinery, equipment and systems for the processing of flat and hollow glass. Isoclima also exhibited SPD-Smart glass to the marine market at the 48th Genoa International Boat Show in Genoa, Italy in October 2008. These boat shows are some of the world's leading marine shows. Research Frontiers and its licensees are currently working with multiple automotive manufacturers to introduce SPD- Smart windows, sunroofs and roof systems on both concept and production vehicles. In September 2008, the automotive glass business of PPG Industries (now known as Pittsburgh Glass Works, LLC), was licensed to make SPD-Smart automotive glass products, including windows, sunroofs and roof glass systems. Pittsburg Glass Works is North America's largest automotive glass producer. With the addition of Pittsburgh Glass Works, the Company's large automotive glass licensees account for the vast majority of all glass produced for the automotive market throughout the world. At the 40th Tokyo Motor Show 2007, Hino Motors, Ltd., a subsidiary of Toyota Motor Corporation, featured a new concept S'elega Premium motorcoach with variable tint side windows using Research Frontiers' patented SPD-Smart light- control technology. The S'elega Premium on display at the Tokyo Motor Show had five large SPD-Smart side window panels with over 11 square meters of curved glass (more than 120 square feet). On October 30, 2007, Research Frontiers licensee American Glass Products (AGP) introduced its new SPD-Smart products at the SEMA show in Las Vegas. These new SPD- Smart products, introduced initially for the automotive aftermarket and offered under the brand name AGP Vario Plus- Sky, use Research Frontiers' patented SPD-Smart technology that enables users to instantly, precisely and consistently control the amount of light, glare and heat passing through glass or plastic. At the SEMA show, AGP announced that its Vario Plus side- and rear-windows were available for 22 vehicle models in the United States market, with an additional 4 models under development. For the smart sunroof application, AGP announced that its Vario Plus products are under development for over 50 vehicle models in the US market. Additionally, AGP indicated that its Vario Plus windows and sunroofs are also under development for many more vehicle models worldwide, and that AGP can custom manufacture these products for virtually any vehicle. At the SEMA show, AGP also announced the launch of a global marketing campaign for its Vario Plus products. In October 2008, AGP announced a strategic technology partnership with DiMora Motorcar, and its plans to provide its Vario Plus-Sky brand of SPD-SmartGlass(tm) for DiMora Motorcar's Natalia SLS 2 sport luxury sedan. Within the automotive market, a potentially significant submarket is the armored glass market. Armored glass (sometimes referred to as "transparent armor" and "bullet resistant glass") encompasses the military, non-military government, and civilian markets. While each of these submarkets have their own unique characteristics, some common characteristics include high price points, reduced price sensitivity, fast development cycles to incorporate new glass into vehicles, and the ability to incorporate SPD-Smart glass as an aftermarket upgrade. In addition, SPD-Smart technology in this market not only provides the usual benefits of light-control and UV blockage, but also adds enhanced security by introducing darker tints and privacy. A number of the Company's licensees such as American Glass Products, GKN Aerospace, Isoclima and Pittsburgh Glass Works are recognized industry leaders in the armored glass market and have developed and/or exhibited publicly armored SPD-Smart glass. Our market research suggests that about 20,000 to 25,000 non-military vehicles (utilizing between approximately 215,000 to 800, 000 square feet of glass) are built annually, either as specialty models by the automobile OEMs or by aftermarket converters, who account for the majority of sales of such vehicles. Given the relatively short development cycles (especially in the aftermarket segment), good price points, and in light of the ongoing work being done by our licensees in this field for specific government and civilian customers, armored vehicles have the potential to become an important source of near-term royalty revenue to Research Frontiers. In February 2008, GKN Aerospace Transparency Systems acquired a license covering SPD-Smart armored glass for vehicles. GKN is a world leader in armored transportation vehicles for both military and civilian vehicles. In October 2008, licensee Isoclima S.p.A. debuted at Security Essen 2008 and at Glasstec 2008 a Fiat Croma automobile outfitted by Isoclima with SPD-SmartGlass(tm). The Fiat Chroma featured five panels of Isoclima S.p.A.'s Cromalite(r) SPD-SmartGlass including two rear sidelites, two rear quarterlites and one backlite. The SPD-Smart glass for this vehicle uses remote control operation to instantly adjust light and glare coming through the windows. Isoclima also had a broader exhibit at these shows demonstrating a BMW Series 7 armored glass rear side window and other automotive products using its Cromalite(r) brand of SPD-Smart glass. There have been several recent milestones in the architectural application for SPD-Smart technology as well. In December 2007 AGC Flat Glass Europe (a wholly- owned subsidiary of Asahi Glass, the world's largest glass company) acquired a new license covering SPD-Smart architectural window applications. In September 2008, Research Frontiers licensee SmartGlass International launched its line of SPD-SmartGlass architectural window products at the 100% Detail show in London, England. The show focuses on the latest developments in sustainability, innovation and design for the building environment, and SmartGlass International exhibited four large SPD-SmartGlass panels that were used in the walls of a circular meeting room at their stand at the show. These panels used second-generation SPD-Smart film supplied by Hitachi Chemical Co., Ltd. with lamination done by SGI at their new and expanded manufacturing facility in Dublin, Ireland which houses the company's design, tempering, laminating and quality control operations, as well as its product showroom. SmartGlass International also announced the recent completion of a multi-panel SPD-Smart roof-lite project in London. At the 100% Details show, SmartGlass International's SPD-Smart products won the show's Most Innovative Building Product Award. In November 2008, SPD Control Systems Corporation, a licensee of Research Frontiers, was an exhibitor at the 2008 Advanced Energy Conference in Hauppauge, New York, and demonstrated its 8-window Roadrunner controller at the conference. This controller, which was specifically designed for SPD-Smart windows and initially designed for the automotive market, is also being adapted for use in the architectural, marine and aerospace industries. The Roadrunner controller allows for the control of single or multiple SPD-Smart windows by several methods including manual dimmer or slider controls, automatic control from on-board systems, and self-regulated control via sensors. Earlier in the year in February, SPD Control Systems announced that it was awarded a $580,000 matching funds contract from the New York State Energy Research and Development Authority (NYSERDA) for the development and demonstration of a control system for architectural SPD-Smart window products. SPD Control Systems' Wireless Building Control System include 8-window controllers (leveraging the company's controller designs for the automotive industry), advanced sensors, dynamic tinting algorithms and other distinctive operating features including an interface with other building services such as heating, ventilation and air conditioning (HVAC) and lighting. Activity in the SPD industry continued in 2009. In January 2009, Research Frontiers and its licensee SmartGlass International announced that they will feature SPD-SmartGlass at the Chameleon Materials exhibition hosted by the Technological Institute FCBA of Paris, France. The Chameleon Materials exhibition is open to the public from February through September 2009 and is arranged particularly for architects, designers, interior decorators and others serving the architectural market. In February 2009, Research Frontiers' licensee Innovative Glass Corp. announced the completion of the world's largest SPD-Smart glass project at Indiana University using next- generation SPD-Smart light control film. The project used almost 800 square feet of SPD-Smart glass in 59 interior and nine large exterior smart glass panels. In addition to supporting the efforts of its licensees, Research Frontiers also recognizes the need to develop the SPD industry as a whole. As such, the Company continues to plan and execute complementary programs that build awareness and interest in smart glass generally and demand for SPD-Smart technology specifically. These programs include presentations at various general industry conferences, participation in panel presentations and discussions hosted by academia, development of trade association educational materials, and presentations to architects, designers, and other influential specifiers. The Company's market development department has a number of other initiatives in place. To help guide and prioritize its technical and marketing investments, the Company has also retained outside strategic marketing and other consultants to help generate increased short and medium term market penetrations for each of the major markets for the Company's light-control technology, and to provide support and guidance to the Company's licensees worldwide. The Company also has emerged as the world's leading resource for market research information on the subject of smart glass. Summary results of several first-of-their-kind research studies have been shared with industry, posted to the Company's website for global dissemination and reference, and used as the basis for media coverage and bylined articles. Examples of the aforementioned activities over the past year include: (1) In April, the results of a first-of-its-kind market research study was presented at the 2008 Society of Vacuum Coaters Symposium on Cleantech Energy Conversion and Storage. In addition to summarizing trends in clean technology, Research Frontiers' presentation highlighted the expansion of smart glass into large-format applications, discussed daylighting applications for smart glass, and featured the results of a United States survey of architecture professionals on the subject of smart glass, daylighting and clean technology. (2) In June, Research Frontiers presented the results of a market research study at the Clean Technology 2008 conference in Boston, Massachusetts. The presentation discussed smart glass and its applicability as a clean technology for architectural daylighting. It further summarized the results of a first-of-its- kind nationwide study of architecture professionals on the subject of smart glass, daylighting and sustainability. At this conference, Research Frontiers also served as an industry panelist for a workshop on clean technologies for green buildings. (3) In October, Research Frontiers was invited to speak at the Fall Conference of the Fenestration Manufacturers Association in Marco Island, Florida. A presentation entitled "Smart Glass and Sustainable Buildings" was given. Research Frontiers also maintains an active role with various standards-setting organizations. These organizations include ASTM International and the National Fenestration Rating Council (NFRC), both of which have had or continue to have active committees developing standards for smart glass. As part of the mission to develop the industry and to support our licensees' acquiring specific SPD projects, in March of 2009 Research Frontiers announced the completion of the SPD-SmartGlass Design Center. Research Frontiers and its licensees have begun to host a series of events at this new facility. This center, which is also configured as an interactive and energy-efficient "smart" executive office and conference room, is located at the Company's corporate headquarters in Woodbury, New York. The SPD-SmartGlass Design Center features leading-edge SPD-Smart windows of different sizes (some floor-to-ceiling) and framing materials. It has a multi- functional electronic controller system for manual, remote, and automatic smart glass switching, and includes a large enclosed area where private meetings and video presentations can be held. Adjacent to the Design Center, an interactive exhibit is being designed to provide guests with a history of smart glass, and also to showcase early generations and state-of-the-art examples of SPD-Smart products. This interactive area will also contain other types of smart glass, such as those using liquid crystal and electrochromic technologies, allowing users to operate and experience first-hand the differences in performance characteristics of different types of smart glass. Licensees of Research Frontiers Currently, the Company's 35 licensees are categorized into four main areas: materials for making films (emulsions); film; lamination of film to glass or plastic, and end-products. Emulsion makers produce and combine the necessary materials (i.e. SPD particles and various liquids and special polymers) from which SPD-Smart films are made. The film makers coat a thin layer of emulsion between two sheets of plastic film, each of which has a transparent conductive coating. This emulsion is then partly solidified to form an SPD film that allows users to control the amount of light, glare and heat passing through this film. The end-product licensees then integrate this film into a variety of SPD-Smart products, or make electronic systems to control such SPD-Smart products. Some of these end-product licensees do their own lamination of the SPD light-control film to glass or plastic, and some outsource this lamination to other companies. The following table summarizes Research Frontiers' existing license agreements and lists the year into which these agreements were entered: Licensee Products Covered Territory American Glass Products Architectural and automotive windows (2002) Worldwide (except Korea) Asahi Glass Company SPD-Smart automotive windows and sunroofs(2006) Worldwide AGC Automotive Americas Sunroof glass for other licensees (2001) Worldwide (f/k/a AP Technoglass Co.) AGC Flat Glass Europe SA Architectural windows (2007) Worldwide (f/k/a Glaverbel SA) Avery Dennison Corp. SPD displays (2001) Worldwide BOS GmbH Variable light transmission SPD sunshades Worldwide and sunvisors. (2002) BRG Group, Ltd. Architectural and automotive windows (2002) Worldwide (except Korea) Craftsman Fabricated SPD film lamination for other licensees(2007) Worldwide Glass Cricursa Cristales Curvados Architectural and automotive windows(2002) Worldwide (except Korea) Custom Glass Corporation Windows and sunroofs for mass Worldwide transit trains/busses; SPD film (except Korea) lamination for other licensees (2003) Dainippon Ink and SPD emulsions (1999) and films (2006) Worldwide Chemicals Incorporated for other licensees E.I. DuPont de Nemours Architectural and automotive windows;SPD Worldwide emulsions and films for other licensees (2004) Film Technologies SPD film for other licensees and Worldwide International prospective licensees (2001) GKN Aerospace Transpar- Armored vehicle windows (2008) Worldwide ency Systems Inc. Global Mirror GmbH Rear-view mirrors and sunvisors (1999) Worldwide Hotel Technologies LLC SPD-Smart architectural window products Worldwide for the hotel industry (2004) Hitachi Chemical Co.,Ltd SPD emulsions and films for other Worldwide licensees (1999) Innovative Glass Corp. Architectural windows (2003) US,Canada, and Mexico InspecTech Aero Service Aircraft and marine windows and cabin Worldwide dividers (2001) (except Korea) Isoclima S.p.A. Architectural and automotive windows; SPD Worldwide emulsion and film for other (except Korea) licensees (2002) Kerros Limited Automotive windows and sunroofs (2003) Worldwide (except Korea) for aftermarket and UK only for OEMs Laminated Technologies Inc. SPD film lamination for other licensees (2002) Worldwide Leminur Limited Architectural windows (2003) Russia and countries of former Soviet Union Nippon Sheet Glass Co., Ltd SPD film for other licensee (2004) Worldwide Pilkington plc SPD film lamination for other licensee (2004) Worldwide Pittsburgh Glass Works,LLC SPD-Smart automotive windows Worldwide (f/k/a automotive glass business and sunroofs(2008) of PPG Industries, Inc.) Polaroid Corporation SPD emulsions and films for other Worldwide licensees (2000) Prelco Inc. Architectural windows,train and bus US,Canada, windows (2004) and Mexico Saint-Gobain Glass France Architectural windows, automotive and other Worldwide transportation vehicle windows (other than (except aircraft and spacecraft), kitchen and laundry Korea) home appliance windows, and automotive sunvisors and rear-view mirrors for cars, SUVs, light trucks and other transportation vehicles (other than as original equipment mirrors on heavy trucks, busses, construction vehicles, firetrucks and other vehicles in Class 5-8 or weighing over 16,000 pounds) (2003) SmartGlass International Ltd Architectural windows(2007) Ireland,United Kingdom SPD Control Systems Corp Electronics and building control systems(2005)Worldwide SPD Technologies, Inc. Architectural windows (2002) Worldwide (f/k/a Razor's Edge (except Korea) Technologies, Inc.) SPD Systems, Inc. Architectural, appliance and marine windows (2002)Worldwide (except Korea) ThermoView Industries, Inc. Architectural windows (2000) Worldwide (except Korea) Traco, Inc. Architectural windows (2003) Worldwide (except Korea) Licensees of Research Frontiers who incorporate SPD technology into end-products will pay Research Frontiers a royalty of 5-15% of net sales of licensed products under license agreements currently in effect, and may also be required to pay Research Frontiers fees and minimum annual royalties. Licensees who sell components (such as SPD emulsion or film) or lamination services to other licensees of Research Frontiers do not pay a royalty on such sale or service, and Research Frontiers will collect a royalty from the licensee incorporating these components into their own SPD-Smart end-products. Research Frontiers' license agreements typically allow the licensee to terminate the license after some period of time, and give Research Frontiers only limited rights to terminate before the license expires. The licenses granted by the Company are non-exclusive and generally last as long as our patents remain in effect. Due to their bankruptcy filings or other termination of their general business activities or for other reasons, the Company does not believe that Polaroid Corporation, Kerros Limited, ThermoView Industries, BRG Group, SPD Technologies and Film Technologies International are pursuing business activities with respect to SPD technology. Also the Company and licensee N.V. Bekaert, S.A mutually agreed to terminate their license agreement during 2008 for reasons unrelated to SPD technology. Some of the Company's other licensees are currently inactive with respect to SPD technology, but may hereafter become active again. To date, the Company has not generated sufficient revenue from its licensees to profitably fund its operations. Although the Company believes based upon the status of current negotiations that additional license agreements with third parties will be entered into, there can be no assurance that any such additional license agreements will be consummated, or of the extent to which any current or future licensee of the Company will produce or sell commercial products using the Company's technology or generate meaningful revenue from sales of such licensed products. The Company plans to continue to exploit its SPD-Smart light-control technology by entering into additional license and other agreements with end-product manufacturers such as manufacturers of flat glass, flat panel displays and automotive products, and with other interested companies who may wish to acquire rights to manufacture and sell the Company's proprietary emulsions and films. The Company's plans also call for further development of its technology and the provision of additional technological and marketing assistance to its licensees to develop commercially viable SPD-Smart products, and expand the markets for such products. The Company cannot predict when or if new license agreements will be entered into or the extent to which commercial products will result from its existing or future licensees because of general economic conditions and the risks inherent in the developmental process and because commercialization is dependent upon the efforts of its licensees as well as on the continuing research and development efforts of the Company. On March 10, 2009 the Company had twelve full-time employees, five of whom are technical personnel, and the rest of whom perform legal, marketing, investor relations, and administrative functions. Of these employees, two have obtained doctorates in chemistry, one has a masters degree in chemistry, one has extensive industrial experience in electronics and electrical engineering, and one has majored in physics. Three employees also have additional postgraduate degrees in business administration, including one doctorate in organization and management. Also the Company's suppliers and licensees have people on their teams with advanced degrees in a number of areas relevant to the commercial development of products using the Company's technology. The success of the Company is dependent upon, among other things, the services of its senior management, the loss of which could have a material adverse effect upon the prospects of the Company. Competitive Technologies The Company believes that its SPD light-control technology has certain performance advantages over other "smart glass" technologies which electrically vary the amount of light passing through windows and other smart products. Since the non-SPD technologies listed below do not have published consistent pricing or cost data that can be relied upon, the Company does not describe any relative cost advantages that SPD technology might have over these other technologies. Variable light transmission technologies can be classified into two basic types: "active" technologies that can be controlled electrically by the user either automatically or manually, and "passive" technologies that can only react to ambient environmental conditions such as changes in lighting or temperature. One type of passive variable light transmission technology is photochromic technology; such devices change their level of transparency in reaction to external ultra-violet radiation. As compared to photochromic technology, the Company's SPD technology permits the user to adjust the amount of light passing through the viewing area of the device, rather than the viewing area of the photochromic device merely reacting to external radiation. In addition, the reaction time necessary to change from light to dark with SPD-Smart technology can be almost instantaneous, as compared to the much slower reaction time for photochromic devices. Also, unlike SPD technology, photochromic technology does not function well at the high and low ends of the temperature range in which smart windows and other devices are normally expected to operate, nor does photochromic technology perform well in vehicles or other enclosed settings where existing glass are blocking incoming ultra-violet light which is required for photochromic devices to operate.. Active, user-controllable technologies, sometimes referred to as "smart" technologies, are generally more useful than passive technologies because they allow the user to actually control the state of the window. This control is achieved with a manual adjustment, or automatically when coupled with a timer or sensing device such as a photocell, motion detector, thermostat or other intelligent building system. There are three main types of active devices which are compared below: - Electrochromic devices (EC) - Liquid crystal devices (LC) - Suspended-particle devices (SPD) Electrochromic Technology: Electrochromic windows and rear- view mirrors use a direct current voltage to alter the molecular structure of electrochromic materials (which can be in the form of either a liquid, gel or solid film) causing the material to darken. When compared to electrochromic devices, SPD technology is expected to have numerous potential performance and manufacturing advantages, including some or all of the following: - faster response time - ability to precisely "tune" intermediate light-transmission states - consistent switching speed regardless of size of glazing area - more reliable performance over a wider temperature range - higher contrast ratios and the capability of achieving darker shaded states for large area product applications - default state (state requiring no power) is dark, maximizing solar heat gain benefits - lower electrical current drain - higher estimated battery life in applications where batteries are used - no "iris effect" (where light transmission changes first occur at the outer edges of a window or mirror and then work their way toward the center) when changing from clear to dark and back again - SPD technology is a film-based technology that can be applied to plastic as well as glass, and which can be applied to curved as well as flat surfaces. Many companies with substantially greater resources than Research Frontiers such as 3M, Gentex Corp., Pilkington, PPG Industries, Saint-Gobain Glass and other large corporations have pursued or are pursuing projects in the electrochromic area. While some of these companies have reportedly discontinued or substantially curtailed their work on electrochromics due to technical problems and issues relating to the expense of these technologies, at least four companies, Saint-Gobain Glass, Sage Electrochromics, Inc., Gentex Corp. and PPG Industries are currently actively working to commercialize electrochromic window products. Liquid Crystal Technology: To date, the main types of liquid crystal smart windows have been produced by Taliq Corp. (a subsidiary of Raychem Corp. which has since discontinued its liquid crystal operations and licensed its technology to others), Asahi Glass Co., Nippon Sheet Glass, Saint-Gobain Glass, Polytronix, Inc., DMDisplays, iGlass Projects Pty Limited, and 3M (which has also reportedly discontinued its liquid crystal film making operations). The first three companies listed above are also licensees of Research Frontiers Inc. for SPD-Smart technology. Liquid crystal windows only change from a cloudy, opaque milky-white to a clear state, are hazy when viewed at an angle and have no useful intermediate states. As compared to liquid crystal windows, SPD smart windows are expected to have some or all of the following advantages: - have less haze - operate over a wider temperature range - use less power - have higher contrast ratios - absorb and shade light, rather than simply scattering it - permit an infinite number of intermediate states between a transparent state and a dark blue state, rather than being just two states. - offer superior solar heat gain control In the flat panel display market, further development (such as the achievement of faster switching speeds sufficient for full- motion video applications) is required if the Company expects to compete against various display technologies that are currently being used commercially such as liquid crystal displays ("LCDs") and organic light-emitting diodes ("OLEDs"). Some of the advantages that SPD displays might have include the ability to make displays without using sheet polarizers or alignment layers, and lower light loss and a corresponding reduction in backlighting requirements. Because of further development work to be done in this area, the Company cannot estimate when, or if, its licensees may begin to penetrate the flat panel display market. LCDs and other types of displays, liquid crystal windows, as well as electrochromic self-dimmable rear-view mirrors, are already on the market, whereas products incorporating SPD technology (as well as electrochromic windows) have only begun to appear in the marketplace. Therefore, the long-term durability and performance of SPD-Smart displays have not yet been fully ascertained. The companies manufacturing LCD and other display devices, liquid crystal windows, and electrochromic self-dimmable rear-view mirrors and windows, have substantially greater financial resources and manufacturing experience than the Company. There is no assurance that comparable systems having the same advantages of the Company's SPD technology could not be developed by competitors at a lower cost or that other products could not be developed which would render the Company's products difficult to market or technologically or otherwise obsolete. Research and Development As a result of the Company's research and development efforts, the Company believes that its SPD technology is now, or with additional development will become, usable in a number of commercial products. Such products may include one or more of the following fields: "smart" windows, variable light transmission eyewear such as sunglasses and goggles, self- dimmable automotive sunroofs, sunvisors and mirrors, and instruments and other information displays that use digits, letters, graphic images, or other symbols to supply information, including scientific instruments, aviation instruments, automobile dashboard displays and, if certain improvements can be made in various features of the Company's SPD technology, portable computer displays and flat panel television displays. The Company believes that most of its research and development efforts have applicability to products that may incorporate the Company's technology. At its current state of development, the Company's technology has been judged sufficiently advanced by various of its licensees and their customers for them to proceed with the development, introduction and sale of SPD-Smart products. However, the Company is continuously investing in research and development because it believes that further improvements will result in accelerated and increased market penetration. The Company intends to continue its research and development efforts for the foreseeable future to improve its SPD light- control technology and thereby assist our licensees in the product development, sales and marketing of various existing and new SPD-Smart products. During the past year, the Company and/or its licensees have made significant advances relating to materials to enable (1) improved stability of SPD emulsions, (2) a wider range of light transmission, and (3) improved film adhesion and cohesion. The Company has devoted most of the resources it has heretofore expended to research and development activities with the goal of producing commercially viable SPD products and has developed working prototypes of SPD-Smart products for several different applications, with primary emphasis on smart windows for various industries. Research Frontiers' main goals in its research and development are: - developing wider ranges of light transmission and quicker switching speeds - developing different colored particles - reducing the voltage required to operate SPDs - obtaining data and developing improved materials regarding environmental stability and longevity - quantifying the degree of energy savings expected by users of the Company's technology including the degree that SPD technology can control heat and its contribution to energy savings directly and through daylight harvesting strategies in sustainable building designs. Excluding non-cash expenses associated with the grant of stock options to the Company's technical personnel, Research Frontiers incurred approximately $1,470,000, $1,293,000, and $1,171,000 during the years ended December 31, 2008, 2007, and 2006, respectively, for research and development. Research Frontiers plans to engage in substantial continuing research and development activities to invest in future improvements in SPD light-control technology and to expand for its licensees the capabilities of SPD-Smart technology and the markets for SPD- Smart products. Patents and Proprietary Information Research Frontiers continues to make substantial investments in improving SPD-Smart light-control technology and to expanding its intellectual property portfolio. The Company has 32 United States patents in force, and four United States patent applications are pending. The Company's United States patents expire at various dates from 2009 through 2025. The Company has approximately 235 issued foreign patents and 249 foreign and international patent applications pending. The Company's foreign patents expire at various dates from 2009 through 2022. The Company believes that its SPD light-control technology is adequately protected by its patent position and by its proprietary technological know-how. However, the validity of the Company's patents has never been contested in any litigation. The Company also possesses know-how and relies on trade secrets and nondisclosure agreements to protect its technology. The Company generally requires any employee, consultant, or licensee having access to its confidential information to execute an agreement whereby such person agrees to keep such information confidential. Research Frontiers' licensees have also directed the Company not to reveal aspects of their activities or those of their customers, which limits the Company's ability to disclose certain information. Rights Plan In February 2003, the Company's Board of Directors adopted a Stockholders' Rights Plan and declared a dividend distribution of one Right for each outstanding share of Company common stock to stockholders of record at the close of business on March 3, 2003. Subject to certain exceptions listed in the Rights Plan, if a person or group has acquired beneficial ownership of, or commences a tender or exchange offer for, 15% or more of the Company's common stock, unless redeemed by the Company's Board of Directors, each Right entitles the holder (other than the acquiring person) to purchase from the Company $120 worth of common stock for $60. If the Company is merged into, or 50% or more of its assets or earning power is sold to, the acquiring company, the Rights will also enable the holder (other than the acquiring person) to purchase $120 worth of common stock of the acquiring company for $60. The Rights will expire at the close of business on February 18, 2013, unless the Rights Plan is extended by the Company's Board of Directors or unless the Rights are earlier redeemed by the Company at a price of $.0001 per Right. The Rights are not exercisable during the time when they are redeemable by the Company. The above description highlights some of the features of the Company's Rights Plan and is not a complete description of the Rights Plan. A more detailed description and a copy of the Rights Plan is available from the Company upon request. ITEM 1A. RISK FACTORS In addition to the other information in this Annual Report on Form 10-K, you should carefully consider the following factors in evaluating us and our business. This Annual Report contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below, as well as those discussed elsewhere in this Annual Report, including the documents incorporated by reference. There are risks associated with investing in companies such as ours who are engaged in research and development. In addition to risks which could apply to any company or business, you should also consider the business we are in and the following: Research Frontiers has a history of operating losses, expects to incur additional losses in the future, and consequently will need additional funds in the future to continue its operations. Because we expect that our future revenues will consist primarily of license fees (which have not been significant to date), unless our licensees produce and sell products using our technology, Research Frontiers will not be profitable. There is no guarantee that we will ever be profitable. Since Research Frontiers was started in 1965 through December 31, 2008, its total net loss was $72,396,592. Our net loss was $2,594,843 in 2008, $7,565,218 in 2007 (which includes a non- cash accounting charge of $4,026,855 resulting from the expensing of stock options), and $3,303,633 in 2006. We have funded our operations by selling our common stock to investors. If we need additional money, there is no guarantee that it will be available when we need it, or on favorable terms. The Company would have to raise additional capital no later than the first quarter of 2010 if operations, including research and development and marketing, are to be maintained at current levels if its revenues do not increase before then. Eventual success of the Company and generation of positive cash flow will be dependent upon the extent of commercialization of products using the Company's technology by the Company's licensees and payments of continuing royalties on account thereof. Research Frontiers depends upon the activities of its licensees in order to be profitable. We do not directly manufacture or market products using SPD technology. Although a variety of products have been sold by our licensees, and because it is up to our licensees to decide when and if they will introduce products using SPD technology, we cannot predict when and if our licensees will generate substantial sales of such products. Research Frontiers' SPD technology is currently licensed to 35 companies. Other companies are also evaluating SPD technology for use in various products. In the past, some companies have evaluated our technology without proceeding further. Also, we do not intend to manufacture products using SPD technology. Instead we intend to continue to license our SPD technology to manufacturers of end products, films and emulsion. We expect that our licensees would be primarily responsible for manufacturing and marketing SPD-Smart products and components, but we are also engaging in market development activities to support our licensees and build the smart glass industry. Products using SPD technology have only recently begun to be introduced into the marketplace. Developing products using new technologies can be risky because problems, expenses and delays frequently occur. Research Frontiers cannot control whether or not its licensees will develop SPD products. Some of our licensees appear to be more active than others, some appear to be better capitalized than others, and some licensees appear to be inactive. There is no guarantee when or if our licensees will successfully produce any commercial product using SPD technology in sufficient quantities to make the Company profitable. Because SPD technology is the only technology Research Frontiers works with, our success depends upon the viability of SPD technology which has yet to be fully proven. We have not fully ascertained the performance and long-term reliability of our technology, and therefore there is no guarantee that our technology will successfully be incorporated into all of the products which we are targeting for use of SPD technology. We expect that different product applications for SPD technology will have different performance and reliability specifications. We expect that our licensees will primarily be responsible for reliability testing, but that we may also continue to do reliability testing so that we can more effectively focus our research and development efforts towards constantly improving the performance characteristics and reliability of products using SPD technology. ITEM 1B. UNRESOLVED STAFF COMMENTS None ITEM 2. PROPERTIES The Company currently occupies approximately 9,500 square feet of space at an annual rental which in 2008 was approximately $191,000 for its executive office, research facility and SPD-Smart Glass Design Center at 240 Crossways Park Drive, Woodbury, New York 11797 under a lease expiring January 31, 2014. The Company believes that its space, including its laboratory facilities, is adequate for its present needs. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings pending by or against the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCK HOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES (a) Market Information (1) The Company's common stock is traded on the NASDAQ Capital Market. As of March 10, 2009, there were 15,742,784 shares of common stock outstanding. (2) The following table sets forth the range of the high and low selling prices (as provided by the National Association of Securities Dealers) of the Company's common stock for each quarterly period within the past two fiscal years: Quarter Ended Low High March 31, 2007 4.93 12.33 June 30, 2007 9.55 14.29 September 30, 2007 10.00 15.64 December 31, 2007 7.90 17.40 March 31, 2008 4.75 10.32 June 30, 2008 4.76 7.99 September 30, 2008 3.90 6.21 December 31, 2008 1.55 4.48 These quotations may reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not necessarily represent actual transactions. (b) Approximate Number of Security Holders As of March 10, 2009, there were 505 holders of record of the Company's common stock. The Company estimates that there are approximately 7,700 beneficial holders of the Company's common stock. (c) Dividends The Company did not pay dividends on its common stock in 2008 and does not expect to pay any cash dividends in the foreseeable future. There are no restrictions on the payment of dividends. (d) Issuer Purchases of Equity Securities None. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected data regarding the Company's operating results and financial position. The data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto, all of which are contained in this Annual Report on Form 10-K. Year ended December 31, 2008 2007 2006 2005 2004 Statement of Operations Data: Fee income $1,679,919 $ 402,359 $ 162,639 $ 138,742 $ 201,321 Operating expenses (1) 2,959,576 5,774,027 2,383,856 2,624,379 2,633,534 Research and develop- pment (1) 1,469,760 2,529,576 1,170,503 1,391,657 1,682,624 Charge for reduction in value of investment in SPD Inc.(2) -- -- -- -- 165,501 4,429,336 8,303,603 3,554,359 4,016,036 4,481,659 Operating loss (2,749,417) (7,901,244) (3,391,720) (3,877,294) (4,280,338) Net invest- ment income 154,574 336,026 88,087 129,762 17,597 Net loss $(2,594,843) $(7,565,218) $(3,303,633) $(3,747,532) $(4,262,741) Basic and diluted net loss per common share $ (.17) $ (.50) $ (.24) $ (.27) $ (.33) Dividends per share -- -- -- -- -- Weighted average number of commonshares outstanding 15,441,789 5,278,796 14,028,509 13,692,011 12,792,091 As of December 31, 2008 2007 2006 2005 2004 Balance Sheet Data: Total current assets $4,937,531 $7,469,456 $3,126,381 $3,823,093 $2,716,964 Total assets 5,283,880 7,659,405 3,251,637 3,957,205 2,860,673 Long-term debt, including accrued interest -- -- -- -- -- Total shareholders'equity 4,872,185 7,330,808 2,992,621 3,646,254 2,392,303 ---------------------------------------- (1) Reflects a non-cash charge of $2,790,656 to operating expenses, and a non-cash charge of $1,236,199 to research and development expenses relating to the issuance of stock options in 2007, which increased the Company's net loss for 2007 by $4,026,855. (2) Reflects a non-cash charge against income of $209,704 recorded by the Company in the first quarter of 2004 to reflect a reduction in the value of its investment in SPD Inc. During the fourth quarter of 2004, the Company received a payment of $44,203 as part of a liquidation distribution made by SPD Inc. to its shareholders, resulting in a total net non-cash charge against income of $165,501 in 2004. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Critical Accounting Policies The following accounting policies are important to understanding our financial condition and results of operations and should be read as an integral part of the discussion and analysis of the results of our operations and financial position. For additional accounting policies, see note 2 to our consolidated financial statements, "Summary of Significant Accounting Policies." The Company has entered into a number of license agreements covering potential products using the Company's SPD technology. The Company receives fees and minimum annual royalties under certain license agreements and records fee income on a ratable basis each quarter. In instances when sales of licensed products by its licensees exceed minimum annual royalties, the Company recognizes fee income as the amounts have been earned. Certain of the fees are accrued by, or paid to, the Company in advance of the period in which they are earned resulting in deferred revenue. The Company expenses costs relating to the development or acquisition of patents due to the uncertainty of the recoverability of these items. All of our research and development costs are charged to operations as incurred. Our research and development expenses consist of costs incurred for internal and external research and development. These costs include direct and indirect overhead expenses. The Company has historically used the Black-Scholes option-pricing model to determine the estimated fair value of each option grant. The Black-Scholes model includes assumptions regarding dividend yields, expected volatility, expected lives, and risk-free interest rates. These assumptions reflect our best estimates, but these items involve uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used in the current period, stock-based compensation expense could have been materially impacted. Furthermore, if management uses different assumptions in future periods, stock-based compensation expense could be materially impacted in future years. On occasion, the Company may issue to consultants either options or warrants to purchase shares of common stock of the Company at specified share prices. These options or warrants may vest based upon specific services being performed or performance criteria being met. In accordance with Emerging Issues Task Force Issue 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, the Company would be required to record consulting expenses based upon the fair value of such options or warrants on the date that such options or warrants vest as determined using a Black-Scholes option pricing model. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. An example of a critical estimate is the full valuation allowance for deferred taxes that was recorded based on the uncertainty that such tax benefits will be realized in future periods. Results of Operations Year ended December 31, 2008 Compared to the Year ended December 31, 2007 The Company's fee income from licensing activities for 2008 was $1,679,919, as compared to $402,359 for 2007. This difference in fee income was primarily the result of the receipt of a one-time payment from a former licensee in full settlement of past due minimum annual royalties for several years and the Company entering into a new agreement with Hitachi Chemical regarding payments made by Hitachi Chemical to the Company for guaranteed access to future improvements in the Company's technology, the timing and amount of minimum annual royalties paid, and the date of receipt of such payment on certain license agreements, by end-product licensees. Certain license fees, which are paid to the Company in advance of the accounting period in which they are earned can result in the recognition of deferred revenue for the current accounting period, which will be recognized as fee income in future periods. Also, licensees may offset some or all of their royalty payments on sales of licensed products for a given period by applying these advance payments towards such earned royalty payments. Because the Company's license agreements typically provide for the payment of royalties by a licensee on product sales within 45 days after the end of the quarter in which a sale of a licensed product occurs (with some of the Company's more recent license agreements providing for payments on a monthly basis), and because of the time period which typically will elapse between a customer order and the sale of the licensed product and installation in a home, office building, automobile, aircraft, boat, or any other product, there could be a delay between when economic activity between a licensee and its customer occurs and when the Company gets paid its royalty resulting from such activity. Operating expenses decreased by $2,814,451 for 2008 to $2,959,576 from $5,774,027 for 2007. This decrease was principally the result of non-cash charges of $2,790,656 in 2007 relating to primarily fully vested stock options granted by the Company. Additional factors causing this decrease were lower payroll costs ($41,000), marketing costs ($81,000), and patent costs ($13,000) partially offset by increased reserves for uncollectable accounts ($40,000) and higher insurance costs ($29,000). Research and development expenditures decreased by $1,059,816 to $1,469,760 for 2008 from $2,529,576 for 2007. This decrease was principally the result of non-cash charges of $1,236,199 in 2007 relating to fully vested stock options granted by the Company. Offsetting this decrease were higher payroll costs ($132,000), and insurance costs ($29,000). Investment income for 2008 was $154,574 as compared to $336,026 for 2007. The difference was primarily due to lower cash balances available to invest, as well as lower interest rates during 2008. As a consequence of the factors discussed above, the Company's net loss was $2,594,843 ($0.17 per share) for 2008 as compared to $7,565,218 ($0.50 per share) for 2007. The difference is primarily due to non-cash accounting charges of $4,026,855 ($0.26 per share) in 2007 relating to the issuance of common stock options as well as $1,277,560 ($0.08 per share) in higher fee income in 2008. Year ended December 31, 2007 Compared to the Year ended December 31, 2006 The Company's fee income from licensing activities for 2007 was $402,359, as compared to $162,639 for 2006. This difference in fee income was primarily the result of the Company entering into a new agreement with Hitachi Chemical regarding payments made by Hitachi Chemical to the Company for guaranteed access to future improvements in the Company's technology, the timing and amount of minimum annual royalties paid, and the date of receipt of such payment on certain license agreements, by end-product licensees, and an amendment to an existing license agreement with American Glass Products ("AGP"), which, among other things, increased the percentage royalty due from AGP from 5% to 15%. Certain license fees, which are paid to the Company in advance of the accounting period in which they are earned resulting in the recognition of deferred revenue for the current accounting period, will be recognized as fee income in future periods. Also, licensees may offset some or all of their royalty payments on sales of licensed products for a given period by applying these advance payments towards such earned royalty payments. Because the Company's license agreements typically provide for the payment of royalties by a licensee on product sales within 45 days after the end of the quarter in which a sale of a licensed product occurs (with some of the Company's more recent license agreements providing for payments on a monthly basis), and because of the time period which typically will elapse between a customer order and the sale of the licensed product and installation in a home, office building, automobile, aircraft, boat or any other product, there could be a delay between when economic activity between a licensee and its customer occurs and when the Company gets paid its royalty resulting from such activity. Operating expenses increased by $3,390,171 for 2007 to $5,774,027 from $2,383,856 for 2006. This increase was primarily the result of non-cash charges of $2,790,656 relating to primarily fully vested stock options granted by the Company during the year. Additional factors causing this increase were higher payroll costs ($151,000), and marketing costs ($158,000), patent costs ($113,000) and insurance costs ($59,000). Research and development expenditures increased by $1,359,073 to $2,529,576 for 2007 from $1,170,503 for 2006. This increase was primarily the result of non-cash charges of $1,236,199 relating to fully vested stock options granted by the Company during the year. Additional factors causing this increase were higher payroll costs ($52,000), insurance ($55,000) and consulting costs ($25,000). Investment income for 2007 was $336,026 as compared to $88,087 for 2006. The difference was primarily due to higher cash balances available to invest, partially offset by lower interest rates during 2007. As a consequence of the factors discussed above, the Company's net loss was $7,565,218 ($0.50 per share) for 2007 as compared to $3,303,633 ($0.24 per share) for 2006. The difference is primarily due to non-cash accounting charges of $4,026,855 ($0.26 per common share) resulting from the issuance of stock options during 2007. Financial Condition, Liquidity and Capital Resources During 2008, the Company's cash and cash equivalents balance decreased $4,892,680 principally as a result of cash used to fund operations of $2,414,276 as well as net purchases of US Treasury Securities ($2,259,496), fixed assets ($76,220) and $112,500 invested in SPD Control Systems. At December 31, 2008, the Company had working capital of $4,525,836 and shareholders' equity of $4,872,185. During 2007, the Company's cash and cash equivalent balance increased by $4,259,671 principally as a result of net proceeds received from the issuance of common stock and on the exercise of options and warrants of $7,876,550 partially offset by cash used to fund operations of $3,517,185. During 2006, the Company's cash and cash equivalent balance decreased by $644,164 principally as a result of cash used to fund the Company's operating activities of $3,265,358 partially offset by $2,650,000 of net proceeds received from the issuance of common stock. The Company occupies premises under an operating lease agreement which expires on January 31, 2014 and requires minimum annual rent which rises over the term of the lease to approximately $176,669, plus tenant's share of applicable taxes. These lease obligations are summarized over time as of December 31, 2008: Payments due by period <1 year 1-3 years 4-5 years >5 years Total Operating lease obligations $167,000 $513,000 $192,000 $ -- $872,000 The Company expects to use its cash to fund its research and development of SPD light valves and for other working capital purposes. The Company's working capital and capital requirements depend upon numerous factors, including the results of research and development activities, competitive and technological developments, the timing and cost of patent filings, the development of new licensees and changes in the Company's relationships with its existing licensees. The degree of dependence of the Company's working capital requirements on each of the foregoing factors cannot be quantified; increased research and development activities and related costs would increase such requirements; the addition of new licensees may provide additional working capital or working capital requirements, and changes in relationships with existing licensees would have a favorable or negative impact depending upon the nature of such changes. Based upon existing levels of cash expenditures, existing cash reserves and budgeted revenues, the Company believes that it would not require additional funding until the first quarter of 2010. There can be no assurance that expenditures will not exceed the anticipated amounts or that additional financing, if required, will be available when needed or, if available, that its terms will be favorable or acceptable to the Company. Eventual success of the Company and generation of positive cash flow will be dependent upon the extent of commercialization of products using the Company's technology by the Company's licensees and payments of continuing royalties on account thereof. Inflation The Company does not believe that inflation has a significant impact on its business. Related Party Transactions None. Forward Looking Statements The information set forth in this Report and in all publicly disseminated information about the Company, including the narrative contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" above, includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and is subject to the safe harbor created by that section. Readers are cautioned not to place undue reliance on these forward-looking statements as they speak only as of the date hereof and are not guaranteed. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK At times, the Company invests available cash and cash equivalents in money market funds or in short-term U.S. treasury securities with maturities that are generally one year or less. Although the rate of interest paid on such investments in money market funds may fluctuate over time, each of the Company's investments in U.S. treasury securities is made at a fixed interest rate over the duration of the investment. Accordingly, the Company does not believe it is materially exposed to changes in interest rates as it generally holds these treasury securities until maturity. The Company has an agreement with a licensee that calls for monthly payments in Japanese yen. As a result, amounts realized under this agreement may fluctuate due to changes in exchange rates. Other than this, the Company does not have any sales, purchases, assets or liabilities determined in currencies other than the U.S. dollar, and as such, is not subject to foreign currency exchange risk. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements listed in Item 15(a)(1) and (2) are included in this Report beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the CEO and CFO, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company's Chairman, and its CEO and CFO concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company's periodic SEC filings. There were no changes in the Company's internal control over financial reporting during the quarterly period ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Management's Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Based on our evaluation under the COSO Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2008. The effectiveness of our internal control over financial reporting as of December 31, 2008 has been independently audited by BDO Seidman, LLP, an independent registered public accounting firm, and their attestation is included herein. Report of Independent Registered Public Accounting Firm The Shareholders and Board of Directors Research Frontiers Incorporated Woodbury, New York We have audited Research Frontiers Incorporated's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Research Frontiers Incorporated's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, "Management's Report on Internal Control Over Financial Reporting." Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Research Frontiers Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Research Frontiers Incorporated as of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2008 and our report dated March 5, 2009 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP Melville, New York March 5, 2009 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The Company has adopted a code of ethics applicable to its Chief Executive Officer, Chief Operating Officer, Treasurer and Chief Financial Officer, any Vice President and other employees of the Company with important roles in the financial reporting process. This Code of Ethics was adopted by the entire Board of Directors of the Company, including all of its Audit Committee members, in March 2004 in accordance with the requirements of the Sarbanes Oxley Act. The code of ethics is available on the Company's website at www.SmartGlass.com and was also filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2003. The Company intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding any amendment to, or waiver from, a provision of this code of ethics by posting such information on the website specified above. The other information required by this Item 10 is incorporated by reference to the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 2009, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 11, 2009. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is incorporated by reference to the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 2009, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 11, 2009. Notwithstanding anything to the contrary set forth herein or in any of the Company's past or future filings with the Securities and Exchange Commission that might incorporate by reference the Company's definitive Proxy Statement, in whole or in part, the report of the compensation committee and the stock price performance graph contained in such definitive Proxy Statement shall not be incorporated by reference into this Annual Report on Form 10-K or in any other such filings. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item 12 is incorporated by reference to the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 2009, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 11, 2009. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. The information required by this Item 13 is incorporated by reference to the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 2009, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 11, 2009. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required by this Item 14 is incorporated by reference to the Company's definitive Proxy Statement to be filed with the Commission on or before April 30, 2009, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 11, 2009. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) and (2) Financial Statements and Financial Statement Schedules The following consolidated financial statements of Research Frontiers Incorporated are filed under Item 8 of this Report. Page Report of Independent Registered Public Accounting Firm F-1 Consolidated Financial Statements: Consolidated Balance Sheets, December 31, 2008 and 2007 F-2 Consolidated Statements of Operations, Years ended December 31, 2008, 2007 and 2006 F-3 Consolidated Statements of Shareholders' Equity, Years ended December 31, 2008, 2007 and 2006 F-4 Consolidated Statements of Cash Flows, Years ended December 31, 2008, 2007 and 2006 F-5 Notes to Consolidated Financial Statements F-6 Schedule II - Valuation and Qualifying Accounts ............ F-20 All other schedules have been omitted because they are not applicable, or not required, or the required information is disclosed elsewhere in this Annual Report. (a)(3) Exhibits 3.1 Restated Certificate of Incorporation of the Company. Previously filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1994, and incorporated herein by reference. 3.2 Amended and Restated Bylaws of the Company. Filed herewith and incorporated herein by reference. 4.1 Form of Common Stock Certificate. Previously filed as an Exhibit to the Company's Registration Statement on Form S-18 (Reg. No. 33-5573NY), declared effective by the Commission on July 8, 1986, and incorporated herein by reference. 4.2.1 Rights Agreement dated as of February 16, 1993 between Research Frontiers Incorporated and Continental Stock Transfer & Trust Company, as Rights Agent, which includes as Exhibit A thereto the Form of Rights Certificate. Previously filed as an Exhibit to the Company's Registration Statement on Form 8-A dated February 16, 1993, and incorporated herein by reference. 4.2.2 Rights Agreement dated as of February 18, 2003 between Research Frontiers Incorporated and Continental Stock Transfer & Trust Company, as Rights Agent, which includes as Exhibit A thereto the Form of Rights Certificate. Previously filed as an Exhibit to the Company's Registration Statement on Form 8-A dated February 24, 2003, and incorporated herein by reference. 4.3 Subscription Agreement between Research Frontiers and Ailouros Ltd. dated as of October 1, 1998, and related Class A Warrant and Class B Warrant between Research Frontiers and Ailouros Ltd. dated as of October 1, 1998. Previously filed as an Exhibit to the Company's Registration Statement on Form S-3 (No. 333-65219) dated October 1, 1998, and incorporated herein by reference. 10.1* Amended and Restated Employment Contract effective January 1, 1989 between the Company and Robert L. Saxe. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference. 10.2* Amended and Restated 1992 Stock Option Plan. Previously filed as Exhibit 4 to the Company's Registration Statement on Form S-8 (Reg. No. 33-86910) filed with the Commission on November 30, 1994, and incorporated herein by reference. 10.3* 1998 Stock Option Plan, as amended. Previously filed as an Exhibit to the Company's Definitive Proxy Statement dated April 30, 1998 filed with the Commission on April 29, 1998, 1994, and incorporated herein by reference. 10.4* Form of Stock Option Agreement between the Company and recipients of stock options issued pursuant to the Company's Stock Option Plans. Previously filed as part of Exhibits 4.1, 4.2, and 4.3 to the Company's Registration Statement on Form S-8 (Reg. No. 33-53030) filed with the Commission on October 6, 1992, and incorporated herein by reference. 10.5 Lease Agreement dated November 7, 1986, between the Company and Industrial & Research Associates Co. Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1986 and incorporated herein by reference. 10.5.1 First Amendment to Lease dated November 26, 1991 between the Company and Industrial and Research Associates Co. Previously filed as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form S-1 (Reg. No. 33-43768) declared effective by the Commission on December 17, 1991, and incorporated herein by reference. 10.5.2 Second Amendment to Lease dated March 11, 1994 between the Company and Industrial and Research Associates Co. Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 and incorporated herein by reference. 10.5.3 Third Amendment to Lease dated July 14, 1998 between the Company and Industrial and Research Associates Co. Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 and incorporated herein by reference. 10.5.4 Fourth Amendment to Lease dated January 13, 2004 between the Company and Industrial and Research Associates Co. Previously filed as an exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference. 10.6 License Agreement effective as of August 2, 1995 between the Company and General Electric Company. Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated August 2, 1995 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.7 License Agreement effective as of April 29, 1996 between the Company and Glaverbel, S.A. Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.8 License Agreement effective as of January 18, 1997 between the Company and Material Sciences Corporation. Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated March 3, 1997 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.9 License Agreement effective as of March 31, 1997 between the Company and Hankuk Glass Industries, Inc. Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.10 License Agreement effective as of August 8, 1997 between the Company and Orcolite, a Unit of Monsanto Company. Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.11 License Agreement effective as of June 25, 1999 between the Company and Dainippon Ink and Chemicals, Incorporated. Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1999 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.12 License Agreement effective as of August 9, 1999 between the Company and Hitachi Chemical Co., Ltd. Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1999 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.13 License Agreement effective as of December 3, 1999 between the Company and Global Mirror GmbH & Co. KG. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.14 License Agreement effective as of December 13, 1999 between the Company and Global Mirror GmbH & Co. KG. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.15 License Agreement effective as of March 21, 2000 between the Company and ThermoView Industries, Inc. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.16 License Agreement effective as of May 23, 2000 between the Company and Polaroid Corporation. Previously filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2000 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.17 License Agreement effective as of February 16, 2001 between the Company and AP Technoglass Co. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.18 License Agreement effective as of March 21, 2001 between the Company and InspecTech Aero Service, Inc. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.19 License Agreement effective as of March 28, 2001 between the Company and Film Technologies International, Inc. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.20 License Agreement effective as of November 29, 2001 between the Company and Avery Dennison Corporation. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.21 License Agreement effective as of February 4, 2002 between the Company and BOS GmbH & Co. KG. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.22 License Agreement effective as of March 11, 2002 between the Company and Isoclima S.p.A. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.23 License Agreement effective as of July 2, 2002 between the Company and Isoclima S.p.A. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.24 License Agreement effective as of August 19, 2002 between the Company and Razor's Edge Technologies, Inc. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.25 License Agreement effective as of October 7, 2002 between the Company and American Glass Products (Glass Technology Investment Ltd.). Previously filed as an Exhibit to the Company's Annual Report on Form 10- K for the fiscal year ended December 31, 2002 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.26 License Agreement effective as of October 7, 2002 between the Company and SPD Systems, Inc. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.27 License Agreement effective as of October 24, 2002 between the Company and Cricursa Cristales Curvados S.A. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.28 License Agreement effective as of December 9, 2002 between the Company and BRG Group, Ltd. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.29 License Agreement effective as of December 13, 2002 between the Company and Laminated Technologies Inc. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.30 License Agreement effective as of April 17, 2003 between the Company and Custom Glass Corporation. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.31 License Agreement effective as of May 2, 2003 between the Company and Air Products and Chemicals, Inc. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.32 License Agreement effective as of May 30, 2003 between the Company and Kerros Limited. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.33 License Agreement effective as of June 6, 2003 between the Company and Traco, Inc. Previously filed as an Exhibit to the Company's Annual Report on Form 10- K/A for the fiscal year ended December 31, 2003 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.34 License Agreement effective as of June 16, 2003 between the Company and Saint-Gobain Glass France S.A. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.35 License Agreement effective as of August 1, 2003 between the Company and Vision (Environmental Innovation) Limited. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.36 License Agreement effective as of November 13, 2003 between the Company and Innovative Glass Corporation. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.37 License Agreement effective as of December 11, 2003 between the Company and Leminur Limited. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2003 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.38 License Agreement effective as of March 25, 2004 between the Company and Pilkington plc. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.39 License Agreement effective as of April 5, 2004 between the Company and SmartGlass Ireland Ltd. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.40 License Agreement effective as of April 8, 2004 between the Company and Prelco Inc. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.41 License Agreement effective as of April 13, 2004 between the Company and E. I. Dupont De Nemours and Company. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.42 License Agreement effective as of September 3, 2004 between the Company and Nippon Sheet Glass Co., Ltd. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.43 License Agreement effective as of October 25, 2005 between the Company and SPD Control Systems Corporation. Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated October 31, 2005 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.44 License Agreement effective as of March 30, 2006 between the Company and Dainippon Ink and Chemicals. Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated April 4, 2006 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.45 License Agreement effective as of May 11, 2006 between the Company and Asahi Glass Company. Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated May 15, 2006 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.46 License Agreement effective as of May 19, 2007 between the Company and SmartGlass International Ltd. Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated March 19, 2007 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.47 License Agreement effective as of October 16, 2007 between Research Frontiers Incorporated and Glass Wholesalers, Ltd. d/b/a Craftsman Fabricated Glass, Ltd. Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated October 18, 2007, and incorporated herein by reference. 10.48 License Agreement effective as of December 14, 2007 between Research Frontiers Incorporated and AGC Flat Glass Europe SA. Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated December 17, 2007 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.49 License Agreement effective as of February 21, 2008 between Research Frontiers Incorporated and GKN Aerospace Transparency Systems Inc. Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated March 5, 2008 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 10.50 License Agreement effective as of September 29, 2008 between Research Frontiers Incorporated and PPG Industries, Inc. (now known as Pittsburgh Glass Works, LLC). Previously filed as an Exhibit to the Company's Current Report on Form 8-K dated October 6, 2008 with portions omitted pursuant to the Registrant's request for confidential treatment and filed separately with the Securities and Exchange Commission, and incorporated herein by reference. 14 Code of Ethics of Research Frontiers Incorporated. Previously filed as an Exhibit to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2003, and incorporated herein by reference. 21 Subsidiaries of the Registrant - SPD Enterprises, Inc. 23 Consent of BDO Seidman, LLP - Filed herewith. 31.1 Rule 13a-14(a)/15d-14(a) Certification of Robert L. Saxe-Filed herewith. 31.2 Rule 13a-14(a)/15d-14(a) Certification of Joseph M. Harary-Filed herewith. 32.1 Section 1350 Certification of Robert L. Saxe-Filed herewith. 32.2 Section 1350 Certification of Joseph M. Harary-Filed herewith. -------------------------------------------------------------------- * Executive Compensation Plan or Arrangement. SIGNATURES 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. RESEARCH FRONTIERS INCORPORATED (Registrant) /s/ Robert L. Saxe Robert L. Saxe, Chairman of the Board /s/ Joseph M. Harary Joseph M. Harary, President and Treasurer (Principal Executive, Financial, and Accounting Officer) Dated: March 10, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Position Date /s/Robert M. Budin Director March 10, 2009 Robert M. Budin /s/M. Philip Guthrie Director March 10, 2009 M. Philip Guthrie /s/Joseph M. Harary Director, President, Treasurer March 10, 2009 Joseph M. Harary /s/Richard Hermon-Taylor Director March 10, 2009 Richard Hermon-Taylor /s/Victor F. Keen Director March 10, 2009 Victor F. Keen /s/Robert L. Saxe Director, Chairman March 10, 2009 Robert L. Saxe Report of Independent Registered Public Accounting Firm The Shareholders and Board of Directors Research Frontiers Incorporated Woodbury, New York We have audited the accompanying consolidated balance sheets of Research Frontiers Incorporated as of December 31, 2008 and 2007 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2008. In connection with our audits of the consolidated financial statements, we have also audited the schedule as listed in the accompanying index. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 and schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Research Frontiers Incorporated at December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Research Frontiers Incorporated's internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 5, 2009 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP Melville, New York March 5, 2009 RESEARCH FRONTIERS INCORPORATED Consolidated Balance Sheets December 31, 2008 and 2007 Assets 2008 2007 Current assets: Cash and cash equivalents $ 2,367,512 $ 7,260,192 Investments (US Treasury Securities) 2,299,496 -- Royalty receivables, net of reserves of $203,674 in 2008 and $163,674 in 2007 128,787 101,028 Prepaid expenses and other current assets 141,736 108,236 Total current assets 4,937,531 7,469,456 Fixed assets, net 159,900 127,419 Note receivable from SPD Control Systems 150,000 37,500 Deposits and other assets 36,449 25,030 Total assets $ 5,283,880 $ 7,659,405 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 104,680 $ 144,441 Accrued expenses and other 307,015 184,156 Total current liabilities 411,695 328,597 Commitments (note 9) Shareholders' equity: Common stock, par value $0.0001 per share; authorized 100,000,000 shares, issued and outstanding 15,442,834 and 15,440,434 shares for 2008 and 2007 1,544 1,544 Additional paid-in capital 77,267,233 77,131,013 Accumulated deficit (72,396,592) (69,801,749) Total shareholders' equity 4,872,185 7,330,808 Total liabilities and shareholders' equity $ 5,283,880 $ 7,659,405 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Consolidated Statements of Operations Years ended December 31, 2008, 2007 and 2006 2008 2007 2006 Fee income $ 1,679,919 $ 402,359 $ 162,639 Operating expenses 2,959,576 5,774,027 2,383,856 Research and development 1,469,760 2,529,576 1,170,503 4,429,336 8,303,603 3,554,359 Operating loss (2,749,417) (7,901,244) (3,391,720) Net investment income 154,574 336,026 88,087 Net loss $ (2,594,843) $ (7,565,218) $ (3,303,633) Basic and diluted net loss per common share $ (0.17) $ (0.50) $ (0.24) Weighted average number of common shares outstanding 15,441,789 15,278,796 14,028,509 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Consolidated Statements of Shareholders' Equity Years ended December 31, 2008, 2007 and 2006 Additional Common Stock Paid Accumulated Shares Amount in Capital Deficit Total Balance,Dec.31,2005 13,812,559 $1,381$62,577,771$(58,932,898)$3,646,254 Issuance of common stock 694,948 70 2,649,930 -- 2,650,000 Net loss -- -- -- (3,303,633)(3,303,633) Balance,Dec.31,2006 14,507,507 1,451 65,227,701 (62,236,531) 2,992,621 Issuance of common stock 932,927 93 7,876,457 -- 7,876,550 Issuance of options for services performed -- -- 4,026,855 -- 4,026,855 Net loss -- -- -- (7,565,218)(7,565,218) Balance,Dec.31,2007 15,440,434 1,544 77,131,013 (69,801,749) 7,330,808 Issuance of common stock 2,400 -- 17,175 -- 17,175 Issuance of options for services performed -- -- 126,408 -- 126,408 Class B Warrant exercise fee-- -- ( 7,363) -- ( 7,363) Net loss -- -- -- (2,594,843)(2,594,843) Balance,Dec.31,2008 15,442,834 $1,544$77,267,233$(72,396,592)$4,872,185 See accompanying notes to consolidated financial statements. RSEARCH FRONTIERS INCORPORATED Consolidated Statements of Cash Flows Years ended December 31, 2008, 2007 and 2006 2008 2007 2006 Cash flows from operating activities: Net Loss $(2,594,843)$(7,565,218)$(3,303,633) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 43,739 37,426 37,662 Stock based compensation 126,408 4,026,855 -- Provision for uncollectible royalty receivables 40,000 90,000 25,000 Change in assets and liabilities: Royalty receivables (67,759) (131,028) (50,000) Prepaid expenses and other current assets (33,500) (49,801) 77,548 Accounts payable and accrued expenses 83,098 74,581 (51,935) Deposits and other assets (11,419) -- -- Net cash used in operating activities (2,414,276( (3,517,185) (3,265,358) Cash flows from investing activities: Purchases of fixed assets (76,220) (62,194) (28,806) Note receivable from SPD Control Systems (112,500) (37,500) -- Purchase of investments (US Treasury Securities) (6,784,496) -- -- Proceeds from investments (US Treasury Securities) 4,485,000 -- -- Net cash used in investing activities (2,488,216) (99,694) (28,806) Cash flows from financing activities: Net proceeds from issuances of common stock and exercise of options and warrants 9,812 7,876,550 2,650,000 Net cash provided by financing activities 9,812 7,876,550 2,650,000 Net increase (decrease) in cash and cash equivalents (4,892,680) 4,259,671 (644,164) Cash and cash equivalents at beginning of year 7,260,192 3,000,521 3,644,685 Cash and cash equivalents at end of year $2,367,512 $7,260,192 $3,000,521 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Notes to Consolidated Financial Statements December 31, 2008, 2007 and 2006 (1)Business Research Frontiers Incorporated ("Research Frontiers" or the "Company") operates in a single business segment which is engaged in the development and marketing of technology and devices to control the flow of light. Such devices, often referred to as "light valves" or suspended particle devices (SPDs), use colloidal particles that are either incorporated within a liquid suspension or a film, which is usually enclosed between two sheets of glass or plastic having transparent, electrically conductive coatings on the facing surfaces thereof. At least one of the two sheets is transparent. SPD technology, made possible by a flexible light-control film invented by Research Frontiers, allows the user to instantly and precisely control the shading of glass/plastic manually or automatically. SPD technology has numerous product applications, including: SPD-Smart(tm) windows, sunshades, skylights and interior partitions for homes and buildings; automotive windows, sunroofs, sun-visors, sunshades, rear-view mirrors, instrument panels and navigation systems; aircraft windows; eyewear products; and flat panel displays for electronic products. SPD-Smart light control film is now being developed for, or used in, architectural, automotive, marine, aerospace and appliance applications. The Company has historically utilized its cash and the proceeds from its investments to fund its research and development of SPD light valves and for other working capital purposes. The Company's working capital and capital requirements depend upon numerous factors, including the results of research and development activities, competitive and technological developments, the timing and cost of patent filings, and the development of new licensees and changes in the Company's relationships with its existing licensees. The degree of dependence of the Company's working capital requirements on each of the foregoing factors cannot be quantified; increased research and development activities and related costs would increase such requirements; the addition of new licensees may provide additional working capital or working capital requirements, and changes in relationships with existing licensees would have a favorable or negative impact depending upon the nature of such changes. There can be no assurance that expenditures will not exceed the anticipated amounts or that additional financing, if required, will be available when needed or, if available, that its terms will be favorable or acceptable to the Company. Eventual success of the Company and generation of positive cash flow will be dependent upon the commercialization of products using the Company's technology by the Company's licensees and payments of continuing royalties on account thereof. To date, the Company has not generated sufficient revenue from its licensees to fund its operations. (2) Summary of Significant Accounting Policies (a) Cash and Cash Equivalents The Company considers securities purchased with original maturities of three months or less to be cash equivalents. Cash equivalents consist of short-term investments in money market accounts at December 31, 2008 and 2007. The Company maintains balances at financial institutions which may exceed Federal Deposit Insurance Corporation ("FDIC") insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in bank accounts (b) Investments The Company classifies investments in marketable securities as trading, available-for-sale or held-to-maturity at the time of purchase and periodically re-evaluates such classifications. Trading securities are carried at fair value, with unrealized holding gains and losses included in earnings. Held-to-maturity securities are recorded at cost and are adjusted for the amortization or accretion of premiums or discounts over the life of the related security. Unrealized holding gains and losses on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized. In determining realized gains and losses, the cost of securities sold is based on the specific identification method. Interest and dividends on the investments are accrued at the balance sheet date. At December 31, 2008, Investments consisted of $2.3 million in short term US Treasury Securities which are stated at cost, which approximates market value. (c) Royalties Receivable Royalties receivable are recorded at the amounts specified within the license agreements when the collectability of the receivable is reasonably assured. The receivables do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in the Company's existing royalties receivable. The Company determines the allowance based on historical write off experience. The Company reviews its allowance for doubtful accounts periodically. Past due accounts are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. (d) Fixed Assets Fixed assets are carried at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets. (e) Revenue Recognition/Fee Income The Company has entered into a number of license agreements covering its light control technology. The Company receives minimum annual royalties under certain license agreements and records fee income on a ratable basis each quarter. In instances when sales of licensed products by its licensees exceed minimum annual royalties, the Company recognizes fee income as the amounts have been earned. Certain of the fees are accrued by, or paid to, the Company in advance of the period in which they are earned resulting in deferred revenue. Such excess amounts are recorded as deferred revenue and recognized into income in future periods as earned. Fee income represents amounts earned by the Company under various license and other agreements (note 8) relating to technology developed by the Company. During fiscal 2008, one licensee accounted for 60% (based upon a one-time payment), and another licensee accounted for 29% of fee income recognized during the year. During fiscal 2007, one licensee of the Company accounted for 61% of fee income recognized during the year. During fiscal 2006, four licensees of the Company accounted for 34%, 31%, 12% and 12%, respectively of fee income recognized during the year. (f) Basic and Diluted Loss Per Common Share Basic earnings (loss) per share excludes any dilution. It is based upon the weighted average number of common shares outstanding during the period. Dilutive earnings (loss) per share reflects the potential dilution that would occur if securities or other contracts to issue common stock were exercised or converted into common stock. The Company's dilutive earnings (loss) per share equals basic earnings (loss) per share for each of the years in the three- year period ended December 31, 2008 because all common stock equivalents (i.e., options and warrants) were antidilutive in those periods. The number of options and warrants that were not included because their effect is antidilutive was 2,627,480, 2,992,630, and 2,785,093 for 2008, 2007, and 2006, respectively. (g) Research and Development Costs Research and development costs are charged to expense as incurred. (h) Patent Costs The Company expenses costs relating to the development or acquisition of patents due to the uncertainty of the recoverability of these items. (i) Use of Estimates The preparation of the Company's consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during this period. Actual results could differ from those estimates. (j) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to be recovered or settled. 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. In July 2006, FASB issued FAS Interpretation No. 48, "Accounting for Uncertainty in Income Taxes an interpretation of FAS No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on future changes, classification, interest and penalties, accounting in interim periods, disclosures and transition. We adopted FIN 48 as of January 1, 2007. Under FIN 48, tax benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon ultimate settlement. Unrecognized tax benefits are tax benefits claimed in tax returns that do not meet these recognition and measurement standards. The adoption had no effect on the Company's financial statements. As permitted by FIN 48, we also adopted an accounting policy to prospectively classify accrued interest and penalties related to any unrecognized tax benefits in our income tax provision. Previously, our policy was to classify interest and penalties as an operating expense in arriving at pre-tax income. At December 31, 2008 and 2007, we do not have accrued interest and penalties related to any unrecognized tax benefits. We do not believe we have any uncertain tax positions as of December 31, 2008. The tax years subject to examination by major tax jurisdictions include the years 2005 and forward by the U.S. Internal Revenue Service and certain states. The Company is not currently being audited by any tax jurisdiction. (k) Fair Value of Financial Instruments The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of all financial instruments classified as a current asset or current liability are deemed to approximate fair value because of the short maturity of those instruments. (l) Stock-Based Compensation Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share-based Payment." SFAS No. 123(R) replaces SFAS No. 123 and supersedes APB Opinion No. 25, SFAS 123(R) requires that all stock-based compensation be recognized as an expense in the financial statements and that such costs be measured at the fair value of the award. This statement was adopted using the modified prospective method, which required the Company to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based payment awards, expense is also recognized to reflect the remaining vesting period of awards that had been included in pro-forma disclosures in prior periods. All options outstanding as of December 31, 2005 were fully vested, and no new options were granted during 2006 or 2008. During 2007, the Company granted fully vested options to purchase 624,537 shares of common stock as well as options to purchase 30,000 shares of common stock that vest over the next two years. These grants resulted in an aggregate non cash compensation charge of $126,408 and $4,026,855 during 2008 and 2007, respectively. SFAS 123(R) also requires that tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. The exercise price for stock options granted are generally set at the average for the high and low trading prices of the Company's common stock on the trading date immediately prior to the date of grant, and the related number of shares granted are fixed at the date of grant. SFAS No. 123 requires the use of option valuation models to determine the fair value of options granted after 1995. In order to determine the fair value of stock options on the date of grant, the Company uses the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock- price volatility, option term, risk-free interest rate and dividend yield. While the risk-free interest rate and dividend yield are less subjective assumptions that are based on factual data derived from public sources, the expected stock-price volatility and option term assumptions require a greater level of judgment. (m) Impairment of Long-Lived Assets In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the Company reviews long-lived assets to determine whether an event or change in circumstances indicates the carrying value of the asset may not be recoverable. The Company bases its evaluation on such impairment indicators as the nature of the assets, the future economic benefit of the assets and any historical or future profitability measurements, as well as other external market conditions or factors that may be present. If such impairment indicators are present or other factors exist that indicate that the carrying amount of the asset may not be recoverable, the Company determines whether an impairment has occurred through the use of an undiscounted cash flows analysis at the lowest level for which identifiable cash flows exist. If impairment has occurred, the Company recognizes a loss for the difference between the carrying amount and the fair value of the asset. Fair value is the amount at which the asset could be bought or sold in a current transaction between a willing buyer and seller other than in a forced or liquidation sale and can be measured as the asset's quoted market price in an active market or, where an active market for the asset does not exist, the Company's best estimate of fair value based on discounted cash flow analysis. Assets to be disposed of by sale are measured at the lower of carrying amount or fair value less estimated costs to sell. The implementation of SFAS No. 144 had no impact on the Company's financial position or results of operations. (n) Recent Accounting Pronouncements FAS 160 requires that a noncontrolling interest in a subsidiary be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. The presentation provisions of FAS 160 are to be applied retrospectively, and FAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS No. 160 is not expected to have a material impact on our consolidated financial statements. In February 2008, the FASB issued FSP 157-2, Partial Deferral of the Effective Date of Statement 157" (FSP 157-2"). FSP 157-2 delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008. We are currently evaluating the impact of FSP 157-2 on nonfinancial assets and nonfinancial liabilities, but do not expect the adoption to have a material impact on our consolidated financial statements. In March 2008, the FASB issued FAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133" (FAS 161"). FAS 161 requires disclosures of the fair values of derivative instruments and their gains and losses in a tabular format. FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk- related contingent features in derivative agreements. FAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The adoption of FAS 161 is not expected to have a material impact on our consolidated financial statements. In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active." This FSP applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS 157. This FSP clarifies the application of SFAS 157 in determining the fair values of assets or liabilities in a market that is not active. This FSP is effective upon issuance, including prior periods for which financial statements have not been issued. The adoption of this FSP did not have a material impact on our consolidated financial statements. (o) Fair Value Measurements We adopted FAS 157 as of January 1, 2008, with the exception of the application of the statement to nonfinancial assets and nonfinancial liabilities. FAS 157 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices for similar assets or liabilities in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Financial assets accounted for at fair value on a recurring basis at December 31, 2008 include cash equivalents of approximately $2.4 million and US Treasury Securities of $2.3 million. These assets are carried at fair value based on quoted market prices for identical securities (Level 1 inputs). (3) Note Receivable from SPD Control Systems On May 9, 2007, the Company began participating in the funding of the ongoing development of automotive controllers by SPD Control Systems Corp., a licensee of the Company. This development work is to produce the electronic controllers to operate SPD-Smart automotive windows and glass roof systems for one or more of the top five automotive makers in the world. The Company's funding of this project is reflected in the form of a senior secured convertible promissory note (the "Note") of SPD Control Systems Corp. held by Research Frontiers' wholly-owned subsidiary, SPD Enterprises Inc. The Note, which is scheduled to mature on May 10, 2010, bears interest at 10% per annum, is secured by all of the assets (including intellectual property) of SPD Control Systems, and is convertible at the option of SPD Enterprises into common stock of SPD Control Systems at an initial conversion price of $0.50 per share. This conversion price is adjustable downward to result in the issuance of SPD Enterprises of additional shares of SPD Control Systems common stock under certain conditions. The Note provides for funding of up to $150,000 by SPD Enterprises based upon the achievement of certain development milestones by SPD Control Systems. As of December 31, 2008 and 2007, the principal amount outstanding under this Note was $150,000 and $37,500, respectively. Included in deposits and other assets is $13,844 and $2,425 of interest receivable on this note as of December 31, 2008 and 2007, respectively. (4) Fixed Assets Fixed assets and their estimated useful lives, are as follows: 2008 2007 Estimated useful life Equipment and furniture $1,265,911 $1,255,164 5 years Leasehold improvements 414,822 349,349 Life of lease or estimated life of asset if shorter 1,680,733 1,604,513 Less accumulated depre- cition and amortization 1,520,833 1,477,094 $ 159,900 $ 127,419 (5) Accrued Expenses and Other Accrued expenses consist of the following at December 31, 2008 and 2007: 2008 2007 Payroll, bonuses and related benefits $188,538 $104,292 Professional services 47,887 42,759 Deferred rent 29,697 28,509 Other 40,893 8,596 $307,015 $184,156 (6) Income Taxes There was no income tax expense in 2008, 2007 and 2006 due to losses incurred by the Company. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 2008 and 2007 are presented below. 2008 2007 Deferred tax assets: Depreciation $ 75,000 $ 70,000 Capital loss carryforward 312,000 312,000 Allowance for bad debts 82,000 68,000 Net operating loss carryforwards 20,625,000 20,356,000 Stock option expense 1,449,000 1,399,000 Research and other credits 1,004,000 972,000 Other temporary differences 15,000 15,000 Total gross deferred tax assets 23,562,000 23,192,000 Less valuation allowance 23,562,000 23,192,000 $ -- $ -- In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon future taxable income during the period in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon its historical operating losses, utilization of deferred tax assets cannot currently be determined. Accordingly, the Company has recorded a full valuation allowance against the deferred tax assets, as they will not be realized until the Company achieves profitable operations in the future. At December 31, 2008, the Company had a net operating loss carryforward for federal income tax purposes of $52,000,000, varying amounts of which will expire in each year from 2009 through 2028. Research and other credit carryforwards of $1,004,000 are available to the Company to reduce income taxes payable in future years principally through 2027. Net operating loss carryforwards of $1,600,000 and research and other credit carryforwards of $91,000 are scheduled to expire during fiscal 2009, if not utilized. (7) Shareholders' Equity During 2006, the Company received $2,650,000 of net cash proceeds from the issuance of two accredited investors of 694,948 shares of common stock. During 2007, the Company received $6,640,000 (net of expenses) in proceeds from the sale of 682,102 shares of its common stock. In addition, during 2007, the Company received $1,236,525 in proceeds from the exercise of 164,900 options and warrants. In addition, 85,925 shares were issued through the cashless exercise of certain options and warrants under which the number of shares issuable upon exercise of such options and warrants was reduced by 126,175 shares in payment of the exercise price of options and warrants to purchase 212,100 shares, plus the receipt of $25 in cash for fractional shares. During 2008, the Company received $17,175 in proceeds from the exercise of options. In addition, during 2008, the Company paid $7,363 of fees in connection with the exercise of Class B Warrants in 2007. (b) Options and Warrants (i) Options In 1992, the shareholders approved a stock option plan (1992 Stock Option Plan) which provides for the granting of both incentive stock options at the fair market value at the date of grant and nonqualified stock options at or below the fair market value at the date of grant to employees or non-employees who, in the determination of the Board of Directors, have made or may make significant contributions to the Company in the future. The Company initially reserved 468,750 shares of its common stock for issuance under this plan. In 1994 and 1996, the Company's shareholders approved an additional 300,000 shares and 450,000 shares, respectively, for issuance under this plan. As of December 31, 2001, no options were available for issuance under this Plan and this Plan expired during 2002. In 1998, the shareholders approved a stock option plan (1998 Stock Option Plan) which provides for the granting of both incentive stock options at the fair market value at the date of grant and nonqualified stock options at or below the fair market value at the date of grant to employees or non-employees who, in the determination of the Board of Directors, have made or may make significant contributions to the Company in the future. The Company may also award stock appreciation rights or restricted stock under this plan. The Company initially reserved 540,000 shares of its common stock for issuance under this plan. In 1999, the Company's shareholders approved an additional 545,000 shares for issuance under this Plan, and in each of 2000 and 2002, the Company's shareholders approved an additional 600,000 shares for issuance under this Plan. As of December 31, 2008, no options were available for issuance under this Plan and this Plan expired in December 2007. In 2008, the shareholders approved the Company's 2008 Equity Incentive Plan which provides for the granting of both incentive stock options at the fair market value at the date of grant and nonqualified stock options at the fair market value at the date of grant to employees or non-employees who, in the determination of the Board of Directors, have made or may make significant contributions to the Company in the future. The Company may also award stock appreciation rights, restricted stock, or restricted stock units under this plan. The Company initially reserved 750,000 shares of its common stock for issuance under this plan. As of December 31, 2008, no awards were issued under this plan and awards for 750,000 shares were available for issuance under this Plan. At the discretion of the Board of Directors, options expire in ten years or less from the date of grant and are generally fully exercisable upon grant but in some cases may be subject to vesting in the future. Full payment of the exercise price may be made in cash or in shares of common stock valued at the fair market value thereof on the date of exercise, or by agreeing with the Company to cancel a portion of the exercised options. The Company granted no options during 2006 or 2008. The Company granted options three times during 2007. The weighted average information about these grants is: Fair value on grant date $ 6.44 Expected dividend yield -- Expected volatility 63.99% Risk free interest rate 4.16% Expected term of the option 4.77 years Activity in stock options is summarized below: Weighted Average Number Weighted Remaining Of Shares Average Contractual Aggregate Subject Exercise Term Intrinsic to Option Price (Years) Value Balance at December 31, 2005 2,690,993 $ 11.45 Granted -- -- Cancelled (254,900) $ 8.80 Balance at December 31, 2006 2,436,093 $ 11.73 Granted 654,537 $ 11.85 Cancelled (70,000) $ 6.00 Exercised (248,250) $ 7.50 Balance at December 31, 2007 2,772,380 $ 12.28 Granted -- -- Cancelled (310,000) $ 7.27 Exercised ( 2,400) $ 7.16 Balance at December 31, 2008 2,459,980 $ 12.92 4.1 $ -- Exercisable at December 31, 2008 2,447,480 $ 12.92 4.1 $ -- Options covering 12,500 shares were not vested at December 31, 2008. The total unrecognized compensation cost related to non vested options as of December 31, 2008 was $63,204. This cost is expected to be recognized over a weighted average period of 0.5 years. The total intrinsic value of options exercised during the year ended December 31, 2007 was $1,155,568. No options were exercised during the year ended December 31, 2006. During 2007 the Company issued options to consultants to purchase 31,500 shares of common stock at a weighted average exercise price of $14.79 per share. The Company recorded $126,408 and $70,143 (included with expense of options granted to employees and directors) of non-cash expense in connection with the issuance of these options during 2008 and 2007, respectively. (ii) Warrants Activity in warrants is summarized below, including the effect of the warrants discussed in note 7(c)): Number of Shares Exercise Underlying Warrants Granted Price Balance at December 31, 2005 384,600 5.88-9.63 Exercised -- -- Terminated (35,600) 7.73 Issued -- -- Balance at December 31, 2006 349,000 $ 6.00-8.98 Exercised (128,750) $ 6.00-8.25 Terminated -- -- Issued -- -- Balance at December 31, 2007 220,250 $ 7.50-9.00 Exercised -- -- Terminated (52,750) $ 8.25 Issued -- -- Balance at December 31, 2008 167,500 $ 7.50-9.00 Warrants generally expire from five to ten years from the date of issuance. At December 31, 2008, the number of warrants exercisable was 162,500 at a weighted average exercise price of $7.75 per share. (c) Class A and Class B Warrants n connection with a financing in 1998, the Company issued Ailouros Ltd. a Class A Warrant (which was exercised in full as of February 2004), as well as a Class B Warrant which expired on September 30, 2008. The Class B Warrant was exercisable into 65,500 shares at an exercise price of $8.25 per share which represents 120% of average of the closing bid and ask price of the Company's common stock on the date of the Class B Warrant's issuance. During 2007, 12,750 of the Class B Warrants were exercised. (d) Restricted Stock Grant Effective January 1, 2009, the Company's Board of Directors approved the issuance of 299,950 shares of its common stock to directors, employees and a consultant of the Company. Of this grant, 100,000 shares were issued to the Company's outside directors and were fully vested on the date of grant. In addition, 198,500 shares were issued to employees and will vest ratably each month through December 31, 2011. The remaining 1,450 shares were issued to employees and a consultant and were fully vested at the date of grant. Total compensation expense associated with this stock grant is estimated to be approximately $642,000, of which approximately $425,000 will vest over 36 months. (8) License and Other Agreements The Company has entered into a number of license agreements covering various products using the Company's SPD technology. Licensees of Research Frontiers who incorporate SPD technology into end products pay Research Frontiers an earned royalty of 5-15% of net sales of licensed products under license agreements currently in effect, and may also be required to pay Research Frontiers fees and minimum annual royalties. To the extent that products have been sold resulting in earned royalties under these license agreements in excess of these minimum advance royalty payments, the Company has recorded additional royalty income. Licensees who sell products or components to other licensees of Research Frontiers do not pay a royalty on such sale and Research Frontiers will collect such royalty from the licensee incorporating such products or components into their own end-products. Research Frontiers' license agreements typically allow the licensee to terminate the license after some period of time, and give Research Frontiers only limited rights to terminate before the license expires. Most licenses are non-exclusive and generally last as long as our patents remain in effect. To date, revenues from license agreements have not been sufficient to fund the Company's costs of operation. (9) Commitments The Company has an employment agreement with one of its officers which provides for an annual base salary of $402,132 through December 31, 2009. The Company has a defined contribution profit sharing (401K) plan covering employees who have completed one year of service. Contributions are made at the discretion of the Company. The Company did not make any contributions to this plan for 2008, 2007 or 2006. The Company occupies premises under an operating lease agreement which expires on January 31, 2014. At December 31, 2008, the approximate minimum annual future rental commitment under this lease for the next five years are as follows: 2009: $167,000 2010: $169,000 2011: $171,000 2012: $173,000 2013: $192,000 Rent expense, including other occupancy related expenses, amounted to approximately $191,000, $177,000, and $169,000 for 2008, 2007, and 2006, respectively. (10) Rights Plan In February 2003, the Company's Board of Directors adopted a Stockholders' Rights Plan and declared a dividend distribution of one Right for each outstanding share of Company common stock to stockholders of record at the close of business on March 3, 2003. Subject to certain exceptions listed in the Rights Plan, if a person or group has acquired beneficial ownership of, or commences a tender or exchange offer for, 15% or more of the Company's common stock, unless redeemed by the Company's Board of Directors, each Right entitles the holder (other than the acquiring person) to purchase from the Company $120 worth of common stock for $60. If the Company is merged into, or 50% or more of its assets or earning power is sold to, the acquiring company, the Rights will also enable the holder (other than the acquiring person) to purchase $120 worth of common stock of the acquiring company for $60. The Rights will expire at the close of business on February 18, 2013, unless the Rights Plan is extended by the Company's Board of Directors or unless the Rights are earlier redeemed by the Company at a price of $.0001 per Right. The Rights are not exercisable during the time when they are redeemable by the Company. (11) Selected Quarterly Financial Data (Unaudited) Quarter 2008 First Second Third Fourth Fee income $ 170,193 $ 134,751 $1,171,187 $ 203,788 Operating loss (1,051,900) (896,584) 121,883 (922,816) Net income (loss) (984,494) (863,494) 156,655 (903,510) Basic and diluted net loss per common share (1) (.06) (.06) .01 (.06) 2007 First Second Third Fourth Fee income $ 9,792 $ 57,209 $ 150,809 $ 164,549 Operating loss (1,985,982) (829,061) (2,565,839) (2,520,362) Net loss (1,929,148) (734,971) (2,470,281) (2,430,818) Basic and diluted net loss per common share (1) (.13) (.05) (.16) (.16) ------------------------------------------ (1) Since per share information is computed independently for each quarter and the full year, based on the respective average number of common shares outstanding, the sum of the quarterly per share amounts does not necessarily equal the per share amounts for the year. 2) Fee income in the third quarter of 2008 was primarily due to the receipt of a one-time payment from a former licensee in full settlement of past due minimum annual royalties for several years. SCHEDULE II RESEARCH FRONTIERS INCORPORATED VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2008, 2007, and 2006 Balance at Charged to Balance beginning costs and at end Description of period expenses Deductions* of period Allowance for uncollectible royalty receivables: December 31, 2008 $ 163,674 $ 40,000 $ 0 $ 203,674 December 31, 2007 $ 103,674 $ 90,000 $30,000 $ 163,674 December 31, 2006 $ 78,764 $ 25,000 $ 0 $ 103,674 *Previously reserved receivables written off to the reserve.