10-K 1 rfi1k2006.txt RESEARCH FRONTIERS 2006 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, 2006 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, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer[] Accelerated filer[] Non-accelerated filer[X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] As of March 22, 2007 there were 15,318,601 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 $67,624,682 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, 2006 which was $5.18. 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. 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") was incorporated in New York in 1965 and reincorporated in Delaware in 1989. Research Frontiers' business is to develop and license our suspended particle technology for controlling the amount of light passing through a device. Such suspended particle devices are often referred to as "SPDs," "light valves," or "SPD-Smart " products. SPDs use microscopic light-absorbing particles that are either in a liquid suspension or a film. The microscopic particles align when an electrical voltage is applied. This permits light to pass through the device, and allows the amount of light to be controlled. The first light valve of this type was invented by Dr. Edwin Land, founder of Polaroid Corporation, in the 1930s. Since 1965, Research Frontiers has been actively working to develop and license its own 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 approximately 470 patents and pending patent applications throughout the world protecting its technology. As a result of our efforts over the years, Research Frontiers Incorporated has become the world's leader in suspended- particle-device development and research, and licenses its light- control technology to other companies. Currently, our 34 licensees are categorized into three main areas: materials for making films (emulsions); film; and end-products. Our emulsion makers produce and combine the necessary materials (i.e. SPD particles and various liquids and special polymers) from which SPD films are made. The film makers use a thin layer of emulsion, which is coated between two sheets of plastic film coated with a transparent conductive coating, which emulsion is then partly solidified to form an SPD film that allows users to control the amount of light passing through such film. The end- product licensees then incorporate such SPD light-control film into a variety of SPD-Smart products or make electronic systems to control such SPD-Smart products. The past several years have been important for Research Frontiers as we moved from being a company with a technology under development to a company with products using our technology being sold by our licensees. The technology has also received some prestigious awards, including the Best of What's New Award for home technology products for 2002 from Popular Science. It was also named one of the top new technologies for 2002 by the Society of Automotive Engineers and received the 2007 North American Frost & Sullivan Award for Excellence in Technology. SPD-Smart windows have been installed in business and commercial aircraft, as well as in architectural, automotive and appliance glass projects. SPD technology is an "enabling" technology cutting across many industries which has wide commercial applications in many types of products 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, televisions, telephones, PDAs and other electronic instruments. Various licensees of Research Frontiers have developed SPD-Smart windows and other products. Several of our licensees have already sold aircraft, architectural, marine and automotive windows, skylights and doors, as well as glass doors for appliances using SPD technology. Also, prototypes of 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 need additional product design, engineering or testing before commercial products are introduced. Some of our licensees consider the exact stage of development, product introduction strategies and timetables, and other plans to be proprietary or secret, and as such cannot be disclosed by the Company until such licensees make their own public announcements or product launches. Since 2002, marketing campaigns and product launches by our licensees have been announced under the indicated trademarks for their SPD-Smart products: Licensee Trademark Cricursa Cristales Curvados,SA Cri-Regulite Dainippon Ink and Chemicals Confoview Innovative Glass Corporation E-Glass InspecTech Aero Service, Inc. SPD-Equipped,I-Shade, SPD-Shade,e-Shade Isoclima S.p.A. ChromaLite Kerros Limited IntelliTint SPD Control Systems Corp. The Systems Behind the Glass, Changing the Way You View Windows SPD Technologies, Inc. InfiniTint,New-View, Smart-Shade SPD Systems Inc. Health Smart SPD Window, VectorLux,InstaTint, PowerTint ThermoView Industries Alter-Lite In addition, Research Frontiers introduced various marketing programs under the following trademarks: SPD-Smart, SPD-SmartGlass, VaryFast, SmartGlass, The View of the Future - Everywhere you Look, Powered by SPD, and Visit SmartGlass.com - to change your view of the world. Our licensee InspecTech Aero Service Inc. reported that it has received FAA certification for, and has already installed SPD-Smart windows on, various aircraft. InspecTech reports having installed or currently engineered SPD-Smart windows for the following aircraft: - Airbus A319, A320 and other aircraft - Boeing 737,747, 757, BBJ and other aircraft - Bombardier Challenger 601, 604 - Bombardier Global Ex - Bombardier Learjet 24, 25, 31, 35, 36, 45, 55,60 - Cessna Citation I, II, III - Cessna Conquest I, II - Cessna Citations 525,525A, 550, Excel, 5 and CX - Dassault Falcon 10, 50 - EADS Eurocopter EC 155 - Gulfstream (all models) - Piaggio P180 Avanti, and Pilatus PC-12 - Raytheon Beechjet - Raytheon Hawker 700, 800 - Raytheon King Air 90, 100, 200, 350 - Sikorsky S-92 Helicopter - Bell 430 Helicopter Starting in 2003, the number of aircraft incorporating window shades using SPD-Smart technology increased, and the number of additional aircraft for which SPD-Smart electronic window shades have been designed and engineered also increased. In addition, several of the world's largest jet manufacturers have announced their interest to include electronic smart window shades in their aircraft. These electronic window shades may use SPD technology, or may use other technologies such as electrochromic technology or electro- mechanical window shades. Project architects and developers have begun to specify more SPD-Smart glass in their projects, and both the number and size of these projects is increasing. Also, starting in late 2003, certain automakers have begun to incorporate SPD-Smart glass in production and concept vehicles, with some of these concept vehicles being exhibited at major auto shows. There is a growing trend towards using more glass in architectural and automotive applications, including the introduction of panoramic roof systems and larger sunroofs for transportation vehicles. SPD-Smart technology can provide effective shading, glare control and heat management solutions for these larger glass areas. SPD-Smart windows have also begun to be used in yachts as well. The Company has also seen the adoption rate in terms of number of licensees, as well as the size of the organizations becoming licensees, increase. Also, 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, they each should have a beneficial effect on future fee income for the Company. In April 2004, SPD Inc., which was at that time, 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. Therefore, sales of SPD- Smart products by licensees of the Company during most of 2004, 2005 and 2006 were curtailed as these licensees filled customer orders out of 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 improved performance characteristics. 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. On February 9, 2007, Raytheon Aircraft Company announced that it was offering SPD-Smart electronic window shades manufactured by InspecTech Aero Service on Raytheon's Beechcraft King Air aircraft. The following table summarizes Research Frontiers' existing license agreements and lists the year these agreements were entered into: Licensee Products Covered Territory Air Products and SPD emulsions and films for other licensees (2003) Worldwide Chemicals, Inc. 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.)) 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) 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 Int'l SPD film for other licensees and Worldwide prospective licensees (2001) Glaverbel, S.A. Automotive vehicle rear-view mirrors, Worldwide transportation vehicle sunvisors, and (except Korea architectural and automotive windows(1996) for windows) Global Mirror GmbH Rear-view mirrors and sunvisors (1999) Worldwide 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 N.V. Bekaert S.A (acquired Architectural and automotive windows, Worldwide from Material Sciences Corp.)SPD film for other licensees, prospective licensees and architectural and automotive window companies (1997) Nippon Sheet Glass Co., Ltd SPD film for other licensee (2004) Worldwide Pilkington plc SPD film lamination for other licensee (2004)Worldwide Polaroid Corporation SPD emulsions and films for other Worldwide licensees (2000) Prelco Inc. Architectural windows,train and bus windows US,Canada, (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) 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 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 other reasons, the Company does not believe that Polaroid, Kerros, ThermoView, SmartGlass Ireland, BRG, and SPD Technologies are pursuing any business activities with respect to SPD technology. Some of the Company's other licensees are currently inactive with respect to SPD technology, but may hereafter become active again. Global Mirror's license restricts new licenses from being granted in the truck mirror original equipment market for a period of time if certain sales milestones are met with respect to commercial vehicles in Classes 5 through 8 with gross vehicle weights in excess of 16,000 pounds. 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 the extent that 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 light valve technology by entering into additional license and other agreements with end-product manufacturers such as manufacturers of flat glass, flat panel displays, 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 SPD light valve technology and the provision of additional technological and marketing assistance to its licensees to develop commercially viable products using SPD technology 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 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 22, 2007 the Company had eleven full-time employees, four of whom are technical personnel, and the rest of whom perform legal, marketing, investor relations, and administrative functions. Of these employees, one has obtained a doctorate in chemistry, one has a masters 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 on, among other things, the services of its senior management, the loss of whose services could have a material adverse effect upon the prospects of the Company. The Company believes that its SPD light valve technology has certain performance advantages over other technologies for so-called "smart windows," windows which electrically vary the amount of light passing through them, and automatically self- dimmable automotive rear-view mirrors. 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 technology permits the user to adjust the amount of light passing through the viewing area of the device rather than merely reacting to external radiation. In addition, the reaction time necessary to change from light to dark with SPDs can be almost instantaneous, as compared to the much slower reaction time for photochromic devices. Unlike SPD technology, photochromic technology switches very slowly and 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. The active, user-controllable technologies are sometimes referred to as "smart" technologies. These active technologies are far more useful because they can be controlled electrically by a user with a manual adjustment or automatically when coupled with a timer or sensing device such as a photocell, motion detector or thermostat. 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: When compared to electrochromic windows and rear-view mirrors, which 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, SPDs have numerous potential performance, manufacturing and cost advantages. In comparing the Company's SPD light valves to electrochromic technologies, SPDs are expected to have some or all of the following advantages: -faster response time -consistent switching speed regardless of size of viewing area -lower estimated costs -more reliable performance over a wider temperature range -capability of achieving darker off-states -default state (state requiring no power) is dark, maximizing solar heat gain benefits -lower 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 -ability to be able to "tune" intermediate light-transmission states -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, Asahi Glass, Gentex Corp., Pilkington, PPG Industries, Saint-Gobain Glass and other large corporations have pursued or are pursuing projects in the electrochromic area. 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 Industies 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 and 3M (which has also reportedly discontinued its liquid crystal film making operations). These windows are expensive and 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 should: -be less expensive to produce -have less haze -operate over a wider temperature range -use less power -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 "on" or "off" like LC windows. In the flat panel display market, the Company also expects to compete against various display technologies that are currently being used commercially. In particular, the Company expects its SPD technology to compete on the basis of the performance characteristics with liquid crystal displays ("LCDs") and organic light emitting diodes ("OLEDs"). An LCD is generally similar in construction to an SPD display, but instead of a liquid or film suspension, it utilizes an organic material called a liquid crystal which, although comprised of molecules that flow like a liquid, has some of the characteristics of solid crystals. Like SPD displays, LCDs are "passive" devices which do not generate light, but merely reflect or modulate existing light. OLEDs emit light rather than transmit it, and unlike LCDs but similar to SPD displays, OLEDs promise to have wide viewing angles and low power consumption. However, several technological and manufacturing hurdles remain in the production of OLEDs including limited life expectancy, sensitivity to degradation from exposure to air and water, and cost. The market for flat panel displays was estimated by others to have been approximately $86 billion for 2006. Because of further development work to be done in this area, the Company cannot estimate when its licensees may begin to penetrate the flat panel display market. The Company believes that its SPD light valves and related technology have significant advantages over existing display devices and related technology. In comparison to existing twisted nematic type LCDs, the Company's SPD displays are believed to have: -higher contrast and brightness -a wider angle of view -lower estimated production costs -a less complex fabrication procedure -the ability to function over a wider temperature range -the ability to make displays without using sheet polarizers or alignment layers -lower light loss and a corresponding reduction in backlighting requirements. With respect to other types of displays which emit their own light, such as light-emitting diodes (LEDs) and cathode ray tubes (CRTs), the Company's SPD light valves should have the advantages of lower power consumption and make possible larger displays that are easier to read in bright light. 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, so long-term durability and performance of SPD light valves 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 light valves 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. 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 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. Research and Development As a result of the Company's research and development efforts, the Company believes that its SPD light valves are 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 light valves, 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. Based upon the current SPD-Smart products being prepared for sale by various of its licensees, the Company believes that the state of development of its technology is sufficiently advanced, but that further improvements will result in accelerated market penetration. The Company intends to continue its research and development efforts for the foreseeable future to improve its SPD light valve 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 has made significant advances relating to materials to enable (1) improved stability of SPD emulsions, (2) a wide 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 light valves and already has developed working prototypes of its SPD light valves for several different applications, with primary emphasis on smart windows for various applications. 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; and -obtaining data and developing improved materials regarding environmental stability and longevity. Research Frontiers incurred approximately $1,171,000, $1,392,000, and $1,683,000 during the years ended December 31, 2006, 2005, and 2004, respectively, for research and development. Research Frontiers plans to engage in substantial continuing research and development activities. Patents and Proprietary Information The Company has 32 United States patents in force, and six United States patent applications are pending. The Company's United States patents expire at various dates from 2008 through 2023. The Company has approximately 229 issued foreign patents and 205 foreign and international patent applications pending. The Company's foreign patents expire at various dates from 2008 through 2022. The Company believes that its SPD light valve 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. To a lesser extent, the Company 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. 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. To date, Research Frontiers has lost money, and we expect to lose money in the foreseeable future. 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, 2006, its total net loss was $62,236,531. Our net loss was $3,303,633, $3,747,532 and $4,262,741 in 2006, 2005, and 2004, respectively. 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. Without giving effect to the raising of additional capital in the future, the Company would have to raise additional capital no later than towards the end of 2009 if operations, including research and development and marketing, are to be maintained at current levels. 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 since 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 34 companies. Other companies are also evaluating the 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 technology to manufacturers of end products, films and emulsion. We expect that our licensees would be primarily responsible for marketing and manufacturing, but we are also engaging in market development activities. Products using SPD technology have only recently been 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. SPD technology is the only technology Research Frontiers works with, so that our success depends upon the viability of SPD technology which has yet to be 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. For example, SPD eyewear requiring batteries may need to use lower voltages than SPD windows used in homes or offices, yet may not need to last as long or be exposed to as harsh an environment. 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 2. PROPERTIES The Company currently occupies approximately 9,500 square feet of space at an annual rental which in 2006 was approximately $169,000 for its executive office and research facility 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 22, 2007, there were 15,318,601 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, 2005 5.00 6.59 June 30, 2005 2.76 5.75 September 30, 2005 2.55 3.50 December 31, 2005 3.18 7.00 March 31, 2006 3.59 6.32 June 30, 2006 3.71 6.49 September 30, 2006 4.00 5.25 December 31, 2006 4.05 6.82 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 22, 2007, there were 566 holders of record of the Company's common stock. The Company estimates that there are approximately 6,000 beneficial holders of the Company's common stock. (c) Dividends The Company did not pay dividends on its common stock in 2006 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, 2006 2005 2004 2003 2002 Statement of Operations Data: Fee income $ 162,639 $ 138,742 $ 201,321 $ 258,187 $ 217,519 Operating expenses 2,383,856 2,624,379 2,633,534 2,537,317 2,631,139 Research and development 1,170,503 1,391,657 1,682,624 1,908,753 1,859,030 Charge for reduction in value of investment in SPD Inc.(1) -- -- 165,501 615,200 -- 3,554,359 4,016,036 4,481,659 5,061,270 4,490,169 Operating loss 3,391,720)(3,877,294)(4,280,338)(4,803,083)(4,272,650) Net investment income (2) 88,087 129,762 17,597 30,775 321,534 Net loss (3,303,633)(3,747,532)(4,262,741)(4,772,308)(3,951,116) Basic and diluted net loss per common share (.24) (.27) (.33) (.38) (.33) Dividends per share -- -- -- -- -- As of December 31, 2006 2005 2004 2003 2002 Balance Sheet Data: Total current asset $ 3,126,381 $3,823,093 $2,716,964 $5,322,083$5,293,629 Total assets 3,251,637 3,957,205 2,860,673 5,690,270 6,267,051 Long-term debt, including accrued interest -- -- -- -- -- Total shareholders'equity 2,992,621 3,646,254 2,392,303 5,469,427 5,974,466 (1) Reflects a non-cash charge against income of $615,200 recorded by the Company in the first quarter of 2003 to reflect a reduction in the value of its investment in SPD Inc. determined based upon recent financing activity of SPD Inc. The Company also recorded a further non-cash charge against income of $209,704 during the first quarter of 2004. 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. (2) Net investment income for 2002 includes $64,608 of interest income received from officers of the Company upon payment of notes receivable. 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. Depending upon the difference between the exercise price and the market price of the Company's common stock on the date that such options or warrants vest, the amount of non-cash expenses that could be recorded as a result of the vesting of such options or warrants can be material. The Company applied the cost method of accounting for its minority equity interest in SPD Inc., a subsidiary of Hankuk Glass Industries, Inc. Because no public market existed for the common stock of SPD Inc., the Company reviewed the operating performance, financing and forecasts for such entity in assessing the net realizable value of this investment. During 2003, the Company recorded total non-cash accounting charges of $615,200 against income to reflect a reduction in the value of its investment in SPD Inc. These non-cash charges were determined as follows: During the first quarter of 2003, the Company recorded a non-cash charge against income of $255,200 to reflect a reduction in the value of its investment in SPD Inc. determined based upon recent financing activity of SPD Inc. The Company also recorded a further non-cash charge against income of $360,000 as of the end of 2003 to reflect a reduction in the value of its investment in SPD Inc. determined based upon its review of the financial position and results of operations of SPD Inc. as of and for the year ended December 31, 2003. On April 28, 2004, SPD Inc. informed the Company that it was planning to sell its equipment and other assets and cease its business activities. As a result, the Company wrote off its entire remaining investment in SPD Inc. of $209,704 in the first quarter of 2004. 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. 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, 2006 Compared to the Year ended December 31, 2005 The Company's fee income from licensing activities for 2006 was $162,639, as compared to $138,742 for 2005. This difference in fee income was primarily the result of 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 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. Operating expenses decreased by $240,523 for 2006 to $2,383,856 from $2,624,379 for 2005. This decrease was primarily the result of lower insurance (lower by approximately $71,500 primarily the result of a change in medical insurance carriers), consulting (decreased by approximately $96,5000, patent (lower by approximately $39,000) and depreciation expenses, and lower stock listing fees (reduced by approximately $61,000 as a result of the movement of the Company's listing from the Nasdaq National Market to the Nasdaq Capital Market). Research and development expenditures decreased by $221,154 to $1,170,503 for 2006 from $1,391,657 for 2005. This decrease was primarily the result of decreased payroll (lower by approximately $81,000 primarily the result of the net reduction in technical staff size by one employee), depreciation, materials (lower by approximately $87,500), consulting (decreased by approximately $12,000) and insurance expenses (lower by approximately $67,500 primarily the result of a change in medical insurance carriers). Investment income for 2006 was $88,087 as compared to a net gain from its investing activities of $129,762 for 2005. This difference was primarily due to lower cash balances available to invest, partially offset by higher interest rates during 2006. As a consequence of the factors discussed above, the Company's net loss was $3,303,633 ($0.24 per share) for 2006 as compared to $3,747,532 ($0.27 per share) for 2005. Year ended December 31, 2005 Compared to the Year ended December 31, 2004 The Company's fee income from licensing activities for 2005 was $138,742, as compared to $201,321 for 2004. This difference in fee income was primarily the result of 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 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. Operating expenses decreased by $9,155 for 2005 to $2,624,379 from $2,633,534 for 2004. This decrease was primarily the result of lower marketing, accounting, depreciation and insurance expenses, partially offset by higher payroll, consulting, and patent expenses, and higher stock listing fees and reserves for bad debts. Research and development expenditures decreased by $290,967 to $1,391,657 for 2005 from $1,682,624 for 2004. This decrease was primarily the result of decreased payroll (reduced by approximately $107,000 primarily the result of a reduction in salary of one employee and the net reduction in technical staff size by one employee), depreciation, and other allocated office expenses partially offset by higher materials expense (increased by approximately $66,000). Investment income for 2005 was $129,762 as compared to a net gain from its investing activities of $17,597 for 2004. This difference was primarily due to higher interest rates during 2005 and higher cash balances due to the receipt of proceeds from the sale of common stock and warrants in February 2005. Investment income for 2004 was $30,097 prior to a write-down of $12,500 in the Company's investment in common stock of ThermoView Industries. During 2004, the Company recorded total non-cash accounting charges of $165,501 against income to reflect a reduction in the value of its investment in SPD Inc. As a consequence of the factors discussed above, the Company's net loss was $3,747,532 ($0.27 per share) for 2005 as compared to $4,262,741 ($0.33 per share) for 2004. Financial Condition, Liquidity and Capital Resources 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. At December 31, 2006, the Company had working capital of $2,867,365 and its shareholders' equity was $2,992,621. During 2005, the Company's cash and cash equivalent balance increased by $1,042,622 principally as a result of $5,000,000 of net proceeds received from the issuance of common stock and warrants, offset by cash used to fund the Company's operating activities of $3,920,835. At December 31, 2005, the Company had working capital of $3,512,142 and its shareholders' equity was $3,646,254. 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, 2006: Payments due by period <1 year 1-3 years 4-5 years >5 years Total Operating lease obligations 162,000 500,000 344,000 192,000 1,198,000 In February 2007, the Company raised $6,650,000 in net proceeds in connection with the registered sale to accredited investors of 682,102 shares of its common stock. In August 2006, the Company raised $2 million in capital ($1,950,000 in net proceeds after deducting expenses related to the offering) in connection with the registered sale to accredited investors of 515,462 shares of its common stock. In October 2006, the Company raised an additional $700,000 in net proceeds in connection with the registered sales to accredited investors of 179,487 shares of its common stock. In February 2005, the Company raised $5 million in net proceeds in connection with the registered sale to institutional investors of one million shares of its common stock and the issuance of five-year warrants to purchase 200,000 shares of common stock at an exercise price of $7.50 per share. 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 towards the end of 2009. 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. New Accounting Standards 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. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has completed its initial evaluation of the impact of the adoption of FIN 48 and determined that such adoption is not expected to have a material impact on the Company's financial position or results from operations. 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 two years or less. Although the rate of interest paid on such investments may fluctuate over time, each of the Company's investments, other than in money market funds whose interest yield varies, 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 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 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, 2006 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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, 2007, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 14, 2007. 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, 2007, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 14, 2007. 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, 2007, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 14, 2007. 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, 2007, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 14, 2007. 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, 2007, in connection with the Company's Annual Meeting of Stockholders scheduled to be held on June 14, 2007. 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 Report of Independent Registered Public Accounting Firm. . . F-2 Consolidated Financial Statements: Consolidated Balance Sheets, December 31, 2006 and 2005 . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations, Years ended December 31, 2006, 2005 and 2004 . . . . . . . F-4 Consolidated Statements of Shareholders' Equity, Years ended December 31, 2006, 2005 and 2004 . . . . . . . F-5 Consolidated Statements of Cash Flows, Years ended December 31, 2006, 2005 and 2004 . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . F-7 Schedule II - Valuation and Qualifying Accounts. . . . . . .F-19 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. 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. 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. 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. 23.1 Consent of BDO Seidman, LLP - Filed herewith. 23.2 Consent of KPMG 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 (Principal Executive Officer) /s/ Joseph M. Harary Joseph M. Harary, President and Treasurer (Principal Financial, and Accounting Officer) Dated: March 22, 2007 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 22, 2007 Robert M. Budin /s/Joseph M. Harary Director, President, March 22, 2007 Joseph M. Harary Treasurer /s/Victor F. Keen Director March 22, 2007 Victor F. Keen /s/Albert P. Malvino Director March 22, 2007 Albert P. Malvino /s/Robert L. Saxe Director, Chairman March 22, 2007 Robert L. Saxe Report of Independent Registered Public Accounting Firm The Shareholders and Board of Directors Research Frontiers Incorporated: We have audited the accompanying consolidated balance sheets of Research Frontiers Incorporated as of December 31, 2006 and 2005, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. Our audits also included the financial statement schedule for the years ended December 31, 2006 and 2005, as listed in Item 15(a). These 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 audits to obtain reasonable assurance about whether the financial statements and financial statement schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial statement 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, 2006 and 2005, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule presents fairly, in all material respects, the information set forth therein. /s/ BDO Seidman, LLP Melville, New York March 13, 2007 Report of Independent Registered Public Accounting Firm The Shareholders and Board of Directors Research Frontiers Incorporated: We have audited the accompanying consolidated statements of operations, shareholders' equity and cash flows of Research Frontiers Incorporated and subsidiary for the year ended December 31, 2004. In connection with our audit of the consolidated financial statements, we also have audited the information included in the financial statement schedule as listed in Item 15(a) for the year ended December 31, 2004. These consolidated financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Research Frontiers Incorporated and subsidiary for the year ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein for the year ended December 31, 2004. /s/ KPMG LLP Melville, New York March 15, 2005 RESEARCH FRONTIERS INCORPORATED Consolidated Balance Sheets December 31, 2006 and 2005 Assets 2006 2005 Current assets: Cash and cash equivalents $ 3,000,521 3,644,685 Royalty receivables, net of reserves of $103,674 in 2006 and $78,674 in 2005 65,000 40,000 Prepaid expenses and other current assets 60,860 138,408 Total current assets 3,126,381 3,823,093 Fixed assets, net 102,651 111,507 Deposits 22,605 22,605 Total assets $ 3,251,637 3,957,205 Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 120,345 132,584 Deferred revenue 5,000 5,000 Accrued expenses and other 133,671 173,367 Total current liabilities 259,016 310,951 Commitments (note 9) Shareholders' equity: Common stock, par value $0.0001 per share; authorized 100,000,000 shares, issued and outstanding 14,507,507 and 13,812,559 shares for 2006 and 2005 1,451 1,381 Additional paid-in capital 65,227,701 62,577,771 Accumulated deficit (62,236,531) (58,932,898) Total shareholders' equity 2,992,621 3,646,254 Total liabilities and shareholders' equity $3,251,637 3,957,205 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Consolidated Statements of Operations Years ended December 31, 2006, 2005 and 2004 2006 2005 2004 Fee income $ 162,639 138,742 201,321 Operating expenses 2,383,856 2,624,379 2,633,534 Research and development 1,170,503 1,391,657 1,682,624 Charge for reduction in value of investment in SPD Inc. -- -- 165,501 3,554,359 4,016,036 4,481,659 Operating loss (3,391,720)(3,877,294)(4,280,338) Net investment income 88,087 129,762 17,597 Net loss $ (3,303,633)(3,747,532)(4,262,741) Basic and diluted net loss per common share $ (0.24) (0.27) (0.33) Weighted average number of common shares outstanding 14,028,509 13,692,011 12,792,091 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Statements of Shareholders' Equity Years ended December 31, 2006, 2005 and 2004 Additional Accumulated Common Stock Paid Accumulated Comprehensive Shares Amount in Capital Deficit Income(Loss) Total Balance,Dec.31,2003 12,683,413 $1,268 56,395,409 (50,922,625) (4,625)5,469,427 Issuance of common stock 127,417 13 1,162,589 -- -- 1,162,602 Comprehensive loss: Net loss -- -- -- (4,262,741) --(4,262,741) Unrealized loss on available- for-sale securities -- -- -- -- 4,625 4,625 Total Comprehensive Loss (4,258,116) Issuance of stock, options and warrants for services performed 1,729 -- 18,390 -- -- 18,390 Balance,Dec.31,2004 12,812,559 $1,281 57,576,388 (55,185,366) -- 2,392,303 Issuance of common stock 1,000,000 100 4,999,900 -- -- 5,000,000 Net loss -- -- -- (3,747,532) --(3,747,532) Issuance of options for services performed -- -- 1,483 -- -- 1,483 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 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Consolidated Statements of Cash Flows Years ended December 31, 2006, 2005 and 2004 2006 2005 2004 Cash flows from operating activities: Net loss $(3,303,633)(3,747,532)(4,262,741) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 37,662 46,140 82,736 Provision for uncollectible royalty receivables 25,000 (3,848) 32,522 Charge for reduction in value of investment in SPD Inc. -- -- 165,501 Expense relating to cashless exercise of stock options -- -- 15,707 Expense relating to issuance of stock, options and warrants for services performed -- 1,483 2,683 Impairment loss on marketable securities -- -- 12,500 Changes in assets and liabilities: Royalty receivables (50,000) 18,392 72,825 Prepaid expenses and other current assets77,548 (78,051) 21,670 Deferred revenue -- (5,000) (13,683) Accounts payable and accrued expenses (51,935) (152,419) 261,210 Net cash used in operating activities(3,265,358)(3,920,835)(3,609,070) Cash flows from investing activities: Purchases of fixed assets (28,806) (36,543) (67,962) Proceeds from liquidation of SPD Inc. -- -- 44,203 Net cash used in investing activities (28,806) (36,543) (23,759) Cash flows from financing activities: Proceeds from issuances of common stock and warrants 2,650,000 5,000,000 1,162,602 Net cash provided by financing activities 2,650,000 5,000,000 1,162,602 Net increase (decrease) in cash and cash equivalents (644,164) 1,042,622 (2,470,227) Cash and cash equivalents at beginning of year 3,644,685 2,602,063 5,072,290 Cash and cash equivalents at end of year $3,000,521 3,644,685 2,602,063 See accompanying notes to consolidated financial statements. RESEARCH FRONTIERS INCORPORATED Notes to Consolidated Financial Statements December 31, 2006, 2005 and 2004 (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 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 used in architectural, automotive, marine, aerospace and appliance applications. The Company has historically utilized its cash and the proceeds from maturities of 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, 2006 and 2005. (b) Royalties Receivable Royalties receivable are recorded at the amounts specified within the license agreements when the collectibility 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 collectibility. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. (c) 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. (d) Fee Income 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 2006, four licensees of the Company accounted for 34%, 31%, 12% and 12%, respectively of fee income recognized during the year. During fiscal 2005, four licensees of the Company accounted for 36%, 14%, 13% and 11%, respectively of fee income recognized during the year. During fiscal 2004, four licensees of the Company accounted for 25%, 19%, 13% and 12%, respectively of fee income recognized during the year. (e) 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, 2006 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 2,785,093, 3,075,593, and 2,628,400, for 2006, 2005, and 2004, respectively. (f) Research and Development Costs Research and development costs are charged to expense as incurred. (g) Patent Costs The Company expenses costs relating to the development or acquisition of patents due to the uncertainty of the recoverability of these items. (h) 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. Significant items subject to such estimates and assumptions include the valuation of deferred income tax assets. Actual results could differ from those estimates. (i) 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. (j) 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. (k) Stock-Based Compensation Prior to January 1, 2006, the Company accounted for stock-based employee compensation under the intrinsic value method as outlined in the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations while disclosing pro-forma net income and net income per share as if the fair value method had been applied in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Under the intrinsic value method, no compensation expense was recognized if the exercise price of the Company's employee stock options equaled or exceeded the market price of the underlying stock on the date of grant. Since the Company had issued all stock option grants with exercise prices equal to, or greater than, the market value of the common stock on the date of grant, through December 31, 2005 no compensation cost was recognized in the consolidated statements of the operations. 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 requires 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. Since all options outstanding as of December 31, 2005 were fully vested, and no new options were granted during 2006, there was no compensation expense recognized for those options in the consolidated statement of operations for 2006. In February 2007, the Company granted fully vested options to purchase 96,000 shares of common stock, resulting in an estimated non-cash compensation charge during the first quarter of 2007 of $690,950. SFAS 123(R) also requires that tax benefits related to stock option exercises be reflected as financing cash inflows instead of operating cash inflows. For the year ended December 31, 2006, this new treatment resulted in no change in cash flows from financing activities or cash flows from operating activities. Because there were no options granted during 2006, there was no impact on net loss for the year regardless of whether the Company had consistently measured the compensation cost of the Company's stock option grants under the fair value method adopted in fiscal 2006. The Company expects that the adoption of SFAS No. 123(R) could have a material effect on the Company's consolidated financial statements, depending upon the number and terms of stock options issued by the Company in the future. The adoption of SFAS No. 123(R) had no impact on previously granted options, since all options granted prior to January 1, 2006 are fully vested. 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. Prior to January 1, 2006, under the principles of APB Opinion No. 25, the Company did not recognize compensation expense associated with the grant of stock options. SFAS No. 123 requires the use of option valuation models to determine the fair value of options granted after 1995. Pro forma information regarding net loss and net loss per share shown below was determined as if the Company had accounted for its employee stock options and shares sold under its stock purchase plan under the fair value method set forth in SFAS No. 123. 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. The per share weighted average fair value of stock options granted during 2005 and 2004, was approximately $2.22, and $4.37, respectively, on the date of grant using the Black-Scholes option- pricing model with the following weighted average assumptions (no options were granted in 2006): Expected Risk-Free Expected Stock Expected Life Grant Date Dividend Yield Interest Rate Volatility in Years December 2005 0% 4.251% 68.910% 5.00 July 2005 0% 3.788% 70.800% 5.00 January 2004 0 % 3.225% 79.580% 4.53 December 2004 0 % 3.521% 70.650% 4.53 The following table illustrates the effect on net loss and earnings per share as if the fair value method had been applied: 2005 2004 Net loss, as reported $(3,747,532) $(4,262,741) Add: Stock-based employee compensation expense included in reported net loss 1,483 18,390 Deduct: Total stock-based employee compensation determined under fair- value based method for all awards(955,584) (693,943) Pro forma $(4,701,633) $ (4,938,294) Basic and diluted net loss per common share As reported $ (0.27) $ (0.33) Pro forma $ (0.34) $ (0.38) (l) Accumulated Other Comprehensive Income (loss) The change in accumulated other comprehensive income (loss) was a reclassification adjustment of $4,625 for the year-ended December 31, 2004 reflecting the write off of an equity investment for an other than temporary impairment. (m) Revenue Recognition 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. (n) 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. (3) Investment in SPD Inc. During the second quarter of 2001, the Company, through its wholly-owned subsidiary, SPD Enterprises, Inc., invested approximately $750,000 for a minority equity interest in SPD Inc., a subsidiary of Hankuk Glass Industries Inc., Korea's largest glass manufacturer, which was dedicated exclusively to the production of suspended particle device (SPD) light-control film and a wide variety of end-products using SPD film. In April 2003, the Company's wholly-owned subsidiary, SPD Enterprises, Inc., invested $74,902 in SPD Inc., raising its equity ownership from 6.67% to 6.91%. SPD Inc.'s parent company invested at the same time and at the same price, $748,931, raising its equity ownership in SPD Inc. from 66.67% to 69.09%. During 2003, the Company recorded total non-cash accounting charges of $615,200 against income to reflect a reduction in the value of its investment in SPD Inc. These non-cash charges were determined as follows: During the first quarter of 2003, the Company recorded a non-cash charge against income of $255,200 to reflect a reduction in the value of its investment in SPD Inc. determined based upon the April 2003 financing, and the Company recorded a further non-cash charge against income of $360,000 as of the end of 2003 to reflect a reduction in the value of its investment in SPD Inc. determined based upon its review of the financial position and results of operations of SPD Inc. as of and for the year ended December 31, 2003. On April 28, 2004, SPD Inc. informed the Company that it was planning to sell its equipment and other assets and cease its business activities. As a result, the Company wrote off its entire remaining investment in SPD Inc. of $209,704 in the first quarter of 2004. 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. The Company's license agreement with Hankuk Glass Industries provided for the payment of minimum annual royalties to the Company in 2002 and 2003. These amounts were all paid in full in 2004. (4) Fixed Assets Fixed assets and their estimated useful lives, are as follows: 2006 2005 Estimated useful life Equipment and furniture $ 1,206,492 1,181,824 5 years Leasehold improvements 335,827 331,689 Life of lease or estimated 1,542,319 1,513,513 Life if shorter Less accumulated depreciation and amortization 1,439,668 1,402,006 $ 102,651 111,507 (5) Accrued Expenses and Other Accrued expenses consist of the following at December 31, 2006 and 2005: 2006 2005 Payroll, bonuses and related benefits $64,505 83,253 Professional services 21,522 47,777 Deferred rent 24,946 19,006 Other 22,698 23,331 $133,671 173,367 (6) Income Taxes There was no income tax expense in 2006, 2005 and 2004 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, 2006 and 2005 are presented below. 2006 2005 Deferred tax assets: Depreciation $ 78,000 $ 93,000 Capital loss carryforward 312,000 66,000 Allowance for bad debts 42,000 32,000 Net operating loss carryforwards 19,233,000 18,307,000 Research and other credits 939,000 979,000 Other temporary differences 15,000 15,000 Total gross deferred tax assets 20,619,000 19,492,000 Less valuation allowance 20,619,000 19,492,000 $ -- $ -- 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, the Company believes that it is more likely than not that deferred tax assets will not be realized. Accordingly, the Company has recorded a full valuation allowance against the deferred tax assets, as they will not be realized unless the Company achieves profitable operations in the future. At December 31, 2006, the Company had a net operating loss carryforward for federal income tax purposes of $48,100,000, varying amounts of which will expire in each year from 2007 through 2026. Research and other credit carryforwards of $939,000 are available to the Company to reduce income taxes payable in future years principally through 2026. Net operating loss carryforwards of $1,397,000 and research and other credit carryforwards of $69,000 are scheduled to expire during fiscal 2007, if not utilized. (7) Shareholders' Equity During 2004, the Company received $1,162,602 of net cash proceeds from the issuance of (i) 104,917 shares of common stock issued upon the exercise of warrants resulting in net proceeds of $987,037; and (ii) 22,500 shares of common stock issued upon the exercise of options resulting in net proceeds of $175,565. In addition, 1,729 shares were issued through the cashless exercise of an option to purchase 17,500 shares. In connection therewith, the Company recorded a non-cash compensation expense of $15,707 in 2004. In February 2005, the Company raised $5 million in net proceeds in connection with the registered sale to institutional investors of one million shares of its common stock and the issuance of five-year warrants to purchase 200,000 shares of common stock at an exercise price of $7.50 per share. 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. (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, 2006, awards for 816,779 shares of common stock 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. When an employee exercises a stock option through the surrender of options held, rather than of cash for the option exercise price, compensation expense is recorded in accordance with APB Opinion No. 25. Accordingly, compensation expense is recorded for the difference between the quoted market value of the Company's common stock at the date of exchange and the exercise price of the option. During 2004, the Company recorded non-cash expenses of $15,707 related to the cashless exercises of options. 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, 2003 2,434,775 $ 12.22 Granted 148,750 $ 7.34 Cancelled (134,325)$ 9.16 Exercised (40,000)$ 7.97 Balance at December 31, 2004 2,409,200 $ 12.16 Granted 430,193 $ 7.42 Cancelled (148,400)$ 11.27 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 4.4 $ -- Exercisable at December 31, 2006 2,431,093 $ 11.72 4.4 $ -- Options covering 5,000 shares are not vested at December 31, 2006. The total intrinsic value of options exercised during the year ended December 31, 2004 was $41,000. No options were exercised during the years ended December 31, 2006 and 2005. During 2005 and 2004, the Company issued options to a consultant to purchase 500 and 750 shares of common stock at an exercise price of $5.60 and $6.175 per share, respectively. The Company recorded $1,483 and $2,683, of non-cash expense in connection with the issuance of these options. (ii) Warrants Activity in warrants is summarized below, excluding the effect of the warrants discussed in note 7(c)): Number of Shares Exercise Underlying Warrants Granted Price Balance at December 31, 2003 252,200 5.88-13.50 Exercised (5,500) 5.88 Terminated (27,500) 5.88-9.35 Issued -- -- Balance at December 31, 2004 219,200 5.88-13.50 Exercised -- -- Terminated (34,600) 7.31-13.50 Issued 200,000 7.50 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 Warrants generally expire from five to ten years from the date of issuance. At December 31, 2006, the number of warrants exercisable was 344,000 at a weighted average exercise price of $7.63 per share. (c) Class A and Class B Warrants In 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 expires on September 30, 2008. The Class B Warrant is 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. The Class B Warrant has not been exercised to date. Ailouros paid the Company $10,000 upon issuance of the Class A Warrant and the Class B Warrant. (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 will 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 $393,091 through December 31, 2007. 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 2006, 2005 or 2004. The Company occupies premises under an operating lease agreement which expires on January 31, 2014. At December 31, 2006, the approximate minimum annual future rental commitment under this lease for the next five years are as follows: 2007: $162,000 2008: $164,000 2009: $167,000 2010: $169,000 2011: $171,000 Thereafter:$365,000 Rent expense, including other occupancy related expenses, amounted to approximately $169,000, $175,000, and $168,000, for 2006, 2005, and 2004, 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 2006 First Second Third Fourth Fee income $26,250 $63,889 $36,250 $36,250 Operating loss (941,312)(856,973)(780,592)(812,843) Net loss (918,106)(831,699)(764,912)(788,916) Basic and diluted net loss per common share (1) (.07) (.06) (.05) (.06) 2005 First Second Third Fourth Fee income $41,250 $36,992 $26,750 $33,750 Operating loss (962,734)(999,180)(951,098)(964,282) Net loss (940,498)(962,104)(914,867)(930,063) Basic and diluted net loss per common share (1) (.07) (.07) (.07) (.07) (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. (12) Subsequent Event In February 2007, the Company raised $6,650,000 in net proceeds in connection with the registered sale to accredited investors of 682,102 shares of its common stock. In connection with this offering, a bonus equal to $133,000 was paid to management of the Company, and a fee of $10,500 was paid to a third party, and the Company will record these expenses in the first quarter of 2007. SCHEDULE II RESEARCH FRONTIERS INCORPORATED VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 2006, 2005, and 2004 Balance at Charged to Balance beginning costs and at end Description of period expenses Deductions of period Allowance for uncollectible royalty receivables: December 31, 2006 $ 78,764 $ 25,000 $ 0 $ 103,674 December 31, 2005 $ 82,522 $ 40,795 $44,643* $ 78,674 December 31, 2004 $ 50,000 $ 32,522 $ 0 $ 82,522 *Previously reserved receivables written off to the reserve.