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" contained in the Company's Annual Report on Form 10-K.

The Company has entered into a number of license agreements covering potential products using the Company's SPD 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.

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 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 for the Six Month Periods Ended June 30, 2009 and 2008

The Company's fee income from licensing activities for the first six months of 2009 was $328,484 as compared to $304,944 for the first six months of 2008. This difference in fee income was primarily due to 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. Fee income also includes earned royalties resulting from sales by certain licensees in the architectural and aircraft markets. In addition to product sales in the architectural and aircraft markets included in fee income as described above, during the first six months of 2009, one licensee reported product sales in the automotive market, although the fee income generated from such sales did not exceed the minimum annual royalties recorded for such licensee during the first six months of 2009, so no additional fee income was recorded with respect to such automotive sales. Certain license fees, which are paid to the Company in advance of the accounting period in which they are earned resulting in the recognition of deferred revenue for the current accounting period, will be recognized as fee income in future periods. Also licensees may offset some or all of their royalty payments on sales of licensed products for a given period by applying these advance payments towards such earned royalty payments. Because the Company's license agreements typically provide for the payment of royalties by a licensee on product sales within 45 days after the end of the quarter in which a sale of a licensed product occurs (with some of the Company's more recent license agreements providing for payments on a monthly basis), and because of the time period which typically will elapse between a customer order and the sale of the licensed product and installation in a home, office building, automobile, aircraft, boat, or any other product, there could be a delay between when economic activity between a licensee and its customer occurs and when the Company is paid its royalty resulting from such activity. Although fee income for the first six months of 2009 was higher than the same period last year, fee income recorded by the Company relating to an agreement with a licensee regarding payments for guaranteed access to certain improvements in the Company's technology was approximately $40,000 lower in the second quarter of 2009 compared to the same period a year earlier as the result of the expiration of this agreement regarding access to improvements in the Company's technology at the end of May 2009.

Operating expenses increased by $456,569 for the first six months of 2009 to $1,965,036 from $1,508,467 for the first six months of 2008. This increase was principally the result of increased non-cash charges to operating expenses ($275,000) resulting from grant of restricted shares to directors, employees and a consultant, as well as higher directors fees and expenses ($160,000) and higher patent costs ($68,000) and higher professional fees ($58,000), partially offset by lower investor relations/marketing costs ($32,000) as well as lower consulting costs ($65,000).

Research and development expenditures increased by $50,802 to $795,763 for the first six months of 2009 from $744,961 for the first six months of 2008. This increase was principally the result of higher payroll and stock compensation charges ($7,000) plus higher materials costs ($61,000), partially offset by lower allocated rent and building maintenance costs ($13,000).

The Company's net investment income for the first six months of 2009 was $10,106, as compared to net investment income of $100,496 for the first six months of 2008. This difference was primarily due to lower cash balances available to invest as well as lower interest rates.

As a consequence of the factors discussed above, the Company's net loss was $2,422,209 ($.15 per common share) for the first six months of 2009 as compared to $1,847,988 ($.12 per common share) for the first six months of 2008.

Results of Operations for the Three Month Periods Ended June 30, 2009 and 2008

The Company's fee income from licensing activities for the three months ended June 30, 2009 was $141,852 as compared to $134,751 for the three months ended June, 2008. This difference in fee income was primarily due to 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. Fee income also includes earned royalties resulting from sales by certain licensees in the architectural and aircraft markets. Certain license fees, which are paid to the Company in advance of the accounting period in which they are earned resulting in the recognition of deferred revenue for the current accounting period, will be recognized as fee income in future periods. Also licensees may offset some or all of their royalty payments on sales of licensed products for a given period by applying these advance payments towards such earned royalty payments. Because the Company's license agreements typically provide for the payment of royalties by a licensee on product sales within 45 days after the end of the quarter in which a sale of a licensed product occurs (with some of the Company's more recent license agreements providing for payments on a monthly basis), and because of the time period which typically will elapse between a customer order and the sale of the licensed product and installation in a home, office building, automobile, aircraft, boat, or any other product, there could be a delay between when economic activity between a licensee and its customer occurs and when the Company is paid its royalty resulting from such activity. Although fee income for the second quarter of 2009 was higher than the same period last year, fee income recorded by the Company relating to an agreement with a licensee regarding payments for guaranteed access to certain improvements in the Company's technology was approximately $40,000 lower in the second quarter of 2009 compared to the same period a year earlier as the result of the expiration of this agreement regarding access to improvements in the Company's technology at the end of May 2009.

Operating expenses decreased by $57,537 for the three months ended June 30, 2009 to $648,737 from $706,274 for the three months ended June 30, 2008. This decrease was principally the result of lower marketing and consulting costs ($63,000) as well as lower patent costs ($44,000) partially offset by higher non-cash charges resulting from grant of restricted shares to directors, employees and a consultant ($29,000) as well as lower allocated insurance costs ($9,000).

Research and development expenditures increased by $4,327 to $329,388 for the three months ended June 30, 2009 from $325,061 for the three months ended June 30, 2008. This increase was principally the result of material costs ($32,000) partially offset by lower payroll and stock compensation charges ($11,000) as well as lower allocated insurance ($8,000) and building occupancy costs ($10,000).

The Company's net investment income for the three months ended June 30, 2009 was $4,614, as compared to net investment income of $33,090 for the three months ended June 30, 2008. This difference was primarily due to lower cash balances available to invest as well as lower interest rates.

As a consequence of the factors discussed above, the Company's net loss was $831,659 ($.05 per common share) for the three months ended June 30, 2009 as compared to $863,894 ($.06 per common share) for the three months ended June 30, 2008.

Financial Condition, Liquidity and Capital Resources

During the first six months of 2009, the Company's cash and cash equivalent balance decreased by $821,066 principally as a result of cash used to fund the Company's operating activities of $2,099,031, partially offset by $1,299,756 in proceeds from the maturity of an investment in U.S. Treasury Securities. At June 30, 2009, the Company had working capital of $2,445,316 and its shareholders' equity was $2,800,965.

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 $138,269.

On August 3, 2009, the Company announced that a group of accredited investors has invested $2.85 million in the Company. The investors received 780,831 shares of Research Frontiers common stock at a price of $3.65 per share which was the closing market price of Research Frontiers stock on July 28, 2009, the day the transaction was priced. In addition, the investors in this stock offering received 156,161 five-year warrants to purchase Research Frontiers common stock at a price of $6.00 per share. These securities were sold pursuant to Research Frontiers' effective shelf-registration statement filed with the SEC.

The Company expects to use its cash to fund its research and development of SPD light valves and for other working capital purposes. The Company's working capital and capital requirements depend upon numerous factors, including the results of research and development activities, competitive and technological developments, the timing and cost of patent filings, the development of new licensees and changes in the Company's relationships with its existing licensees. The degree of dependence of the Company's working capital requirements on each of the foregoing factors cannot be quantified; increased research and development activities and related costs would increase such requirements; the addition of new licensees may provide additional working capital or working capital requirements, and changes in relationships with existing licensees would have a favorable or negative impact depending upon the nature of such changes. Based upon existing levels of cash expenditures, existing cash reserves and budgeted revenues, the Company believes that it would not require additional funding until the end of 2010. There can be no assurance that expenditures will not exceed the anticipated amounts or that additional financing, if required, will be available when needed or, if available, that its terms will be favorable or acceptable to the Company. Eventual success of the Company and generation of positive cash flow will be dependent upon the extent of commercialization of products using the Company's technology by the Company's licensees and payments of continuing royalties on account thereof.