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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2003

Commission File Number 0-7704

REFAC

One Bridge Plaza, Fort Lee, New Jersey    07024

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: (201) 585-0600

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.001 per share

(Title of Class)

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 an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes  ¨     No  x

The aggregate market value of the voting stock held by non-affiliates of the registrant as of March 23, 2004 was $3,114,403.

The number of shares outstanding of the registrant’s Common Stock, par value $.001 per share, as of March 23, 2004 was 6,993,393.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required in Part III of this Annual Report on Form 10-K is incorporated herein by reference to the registrant’s Proxy Statement for its 2004 Annual Meeting of Stockholders.

PART I

Item 1. Business

Refac was incorporated in the State of Delaware in 1952 and is referred to herein as the “Company” or “Registrant”. For most of its history, the Company was engaged in intellectual property licensing activities. During the period from 1997 to 2002, it was also engaged in the business of product development and graphic design and had invested these creative resources, together with its licensing skills, in certain product development ventures. On March 22, 2002, the Company announced plans to reposition itself for sale or liquidation and by the end of 2002, it had disposed of all of its operating segments with the exception of its licensing business and it has limited the operations of that segment to managing certain existing license agreements and related contracts.

On February 28, 2003, the Company completed a merger (the “Palisade Merger”) with a wholly-owned subsidiary of Palisade Concentrated Equity Partnership, L.P. (“Palisade”). The combined company has taken the name Refac and its new common stock trades on the American Stock Exchange under the ticker symbol “REF”. After the Palisade Merger, Palisade owned approximately 80% of the combined company’s outstanding shares. On March 28, 2003, the Company entered into a stock purchase agreement with Palisade, which closed on May 19, 2003. Pursuant thereto, Palisade acquired an additional 3,469,387 new shares of the Company’s common stock, at a price of $4.90 per share, or an aggregate price of approximately $17 million. Following the completion of the stock purchase transaction, Palisade now owns approximately 90% of the Company’s outstanding shares. Palisade intends to use the Company as a vehicle for making acquisitions and the purpose of the stock purchase transaction was to provide the Company with additional capital for making these acquisitions.

On January 27, 2004, the Company announced that it will focus its acquisition efforts on opportunities in the asset management sector of the financial services industry. The Company also announced that it has engaged a leading provider of executive search services to identify opportunities in this segment and to recruit individuals and/or teams within the industry to join the Company and build this business.

Financial Information About Segments

In furtherance of its plan to reposition itself for sale or liquidation, the Company sold its Creative Consulting Services and Manufacture and Marketing of Consumer Products groups in the third quarter of 2002. As a result, information regarding segments is not presented.

Intellectual Property Licensing

Since 1952, the Company has been performing patent and technology licensing, which includes the negotiation and administration of licenses and joint ventures involving patents, know-how and related trademarks. The Company has not undertaken any new technology licensing projects during its last five fiscal years, during which time it focused on managing established licensing relationships. In August 2002, the Company sold its Heli-Coil and Dodge licensing rights and Gough licensing property. Since then, the Company has limited its licensing activities to managing its remaining license agreements and related contracts.

Except for its contract with Patlex Corporation, which accounted for approximately 56% of the Company’s total revenues from continuing operations in 2003, the Company does not believe that the loss or termination of any contract it has with its clients or licensees would have a material adverse effect on its business. The Company’s income from its contract with Patlex is variable and is based upon revenues derived by Patlex from the licensing of two laser patents. The more significant of the two patents licensed by Patlex Corporation is the Gas Discharge Laser Patent (U.S. Patent No. 4,704,583), which expires in November 2004. The other patent is the Brewster’s Angle Patent (U.S. Patent No. 4,746,201) which expires in May 2005. While the amount of the income is uncertain and Patlex has not provided the Company with any projections, the Company currently

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estimates that it will have revenues of approximately $1,000,000 in 2004. Given the expiration of the Gas Discharge Patent in November 2004 and the Brewster’s Angle Patent in May 2005, the Patlex income will significantly decline in 2005 as this program winds down.

Patents and Trademarks.    The Company does not own any patents or trademarks that it deems important to its patent and technology licensing business.

Employees

As of December 31, 2003, the Company had a total of 4 full-time employees.

Financial Information About Foreign and Domestic Operations

The Company’s current licensing business is conducted entirely in the United States. Information concerning the aggregate of the Company’s foreign source revenues from domestic operations for the three years ended December 31, 2003 is set forth in Note 9 of the Notes to the Company’s Consolidated Financial Statements, included herein.

In May 1999, the Company relocated its corporate headquarters and creative studios to a newly-constructed leased facility located at The Hudson River Pier, 115 River Road, Edgewater, New Jersey, which encompasses approximately 29,850 usable square feet or approximately 34,400 rentable square feet. As of December 31, 2002, the Company had subleased all of the space to three subtenants except for approximately 9,757 rentable square feet, a portion of which it was using for its corporate offices. In February 2003, the Company and its landlord amended the real estate lease to reduce the leased premises by 9,757 rentable square feet effective May 1, 2003.

The Company relocated its corporate office on May 1, 2003 to One Bridge Plaza, Fort Lee, New Jersey 07024 where it is occupying approximately 1,185 gross rentable square feet under a sublease with Palisade Capital Securities, L.L.C. (“PCS”), an affiliate of Palisade. By lease, which became effective on January 21, 2004 and was amended on March 12, 2004, the Company entered into a direct lease with the landlord for larger space in this building encompassing 4,751 gross rentable square feet and expects to move into such premises when construction is completed in or about June 1, 2004. At such time, its sublease with PCS will terminate.

Item 3.    Legal Proceedings

None.

Item 4.    Submission of Matters to a Vote of Security Holders

None.

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PART II

Item 5.    Market for the Company’s Common Stock and Related Stockholder Matters

The Company had 459 stockholders of record as of March 23, 2004. The Company did not pay cash dividends during the three year period ended December 31, 2003 and does not intend to pay any cash dividends to stockholders in the foreseeable future.

During 2002 and until the closing of the Palisade Merger on February 28, 2003, the Company’s common stock, par value $.10 per share (the “Old Refac Common Stock”), was listed on the American Stock Exchange and traded under the symbol REF. Under the terms of the Palisade Merger, the Company’s stockholders received $3.60 in cash and 0.2 shares of the combined company’s post-merger common stock, par value $.001 (the “Common Stock”). Concurrent with the closing of the Palisade Merger, the Old Refac Common Stock was canceled and the Common Stock is now trading on the American Stock Exchange under the symbol REF. The following table reflects the high and low closing stock prices of the Common Stock by calendar quarter from February 28, 2003 through December 31 2003.

Closing Market Price of the Company’s Common Stock

The following table summarizes all equity compensation plan information as of December 31, 2003, adjusted to reflect the terms of the Palisade Merger with respect to the pre-merger options granted under the 1990 and 1998 Plans. All of the Company’s equity compensation plans have been approved by stockholders.

On May 19, 2003, the Company sold and issued 3,469,387 shares of its common stock to Palisade at a price of $4.90 per share, or an aggregate price of approximately $17 million, pursuant to the Stock Purchase Agreement, dated as of March 28, 2003, between the Company and Palisade. The purpose of the stock purchase transaction was to provide the Company with additional capital for making acquisitions. The shares sold to Palisade were not registered in reliance on the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”). In the Stock Purchase Agreement, Palisade made representations that: (i) it is an accredited investor within the meaning of Rule 501 of Regulation D promulgated under the Securities Act, (ii) Palisade acquired the shares for its own account for investment only and had no intention of selling or distributing any of such shares, (iii) Palisade reviewed all information which it deemed to be important in connection with the transaction, recognized that the transaction involves risk and did not rely on any representation or warranty of the Company other than as specified in the Stock Purchase Agreement and (iv) Palisade recognized that the Company is relying on such representations so that the transaction is exempt from registration under the Securities Act. The certificates representing the shares issued to Palisade pursuant to the Stock Purchase Agreement include a customary legend that the shares are not registered under the Securities Act.

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Item 6.    Selected Financial Data

REFAC AND SUBSIDIARIES

SELECTED FINANCIAL INFORMATION

On March 22, 2002, the Company announced plans to reposition itself for sale or liquidation. Since that date, the Company has disposed of all of its operating segments, with the exception of its licensing business, and it has limited the operations of that segment to managing certain existing license agreements and related contracts. On February 28, 2003, the Company completed the Palisade Merger. On March 28, 2003, the Company entered into a stock purchase agreement with Palisade, which closed on May 19, 2003. Following the completion of the stock purchase transaction, Palisade now owns approximately 90% of Refac’s outstanding shares. The purpose of the stock purchase transaction was to provide Refac with additional capital for making acquisitions.

On January 27, 2004, the Company announced that it will focus its acquisition efforts on opportunities in the asset management sector of the financial services industry. The Company also announced that it has engaged a leading provider of executive search services to identify opportunities in this segment and to recruit individuals and/or teams within the industry to join the Company and build this business. Accordingly, the reported financial information is not indicative of the Company’s future operating results or financial condition.

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The Company’s fiscal year ends on the last day of December in each year. As used in this Item 7, references to 2003, 2002 and 2001 shall mean the Company’s fiscal year ended on December 31^st of such year.

Results of Continuing Operations

Revenues from continuing operations for 2003 were $2,127,000 as compared to $6,562,000 for the same period in 2002. The $4,435,000 revenue decrease was due primarily to the fact that the Company had a $4,374,000 non-recurring gain in 2002 from the sale of its Heli-Coil, Dodge and Gough licensing properties. In addition, the Company’s recurring license fees decreased by $267,000 in 2003 as compared to 2002, which decline was offset by increases in interest and dividends of $176,000 and consulting income of $30,000.

Revenues from continuing operations for 2002 were $6,562,000 as compared to $5,489,000 for 2001. The $1,073,000 revenue increase was due primarily to the fact that the Company had a $4,374,000 non-recurring gain in 2002 from the sale of the Company’s Heli-Coil, Dodge and Gough licensing properties, which was offset by declines in realized gains and dividends on licensing-related securities of $1,828,000, recurring license fees of $815,000, trademark agency fees of $156,000 and interest and dividends of $502,000. Since the Company completed its planned liquidation of licensing-related securities in the second quarter of 2001, it did not realize any gains or dividends on licensing-related securities in 2002.

Revenues from continuing operations are summarized as follows:

With the sale of the Heli-Coil, Dodge and Gough licensing properties in 2002 and the termination of its agreement with OXO International (“OXO”) in December 2003, the Company’s significant remaining licensing property is its agreement with Patlex Corporation (“Patlex”). The Company’s income from its contract with Patlex is variable and is based upon revenues derived by Patlex from the licensing of two laser patents. The more significant of the two patents licensed by Patlex Corporation is the Gas Discharge Laser Patent (U.S. Patent No. 4,704,583), which expires in November 2004. The other patent is the Brewster’s Angle Patent (U.S. Patent No. 4,746,201) which expires in May 2005. While the amount of the income is uncertain and Patlex has not provided the Company with any projections, the Company currently estimates that it will have revenues of approximately $1,000,000 in 2004. Given the expiration of the Gas Discharge Patent in November 2004 and the Brewster’s Angle Patent in May 2005, the Patlex income will significantly decline in 2005 as this program winds down. Other license agreements are expected to provide gross revenues of approximately $220,000 during each of 2004 and 2005, respectively, after which such gross revenues will decrease significantly.

Expenses from licensing-related activities consist principally of amounts paid to licensors at contractually-stipulated percentages of the Company’s specific patent and product revenues and, in addition, include expenses related to the administration of licensing relationships and contracts. These expenses decreased by $154,000 in 2003 as compared to 2002 and by $399,000 in 2002 as compared to 2001. As a percentage of licensing revenues, these expenses were 7%, 13% and 22% in 2003, 2002 and 2001, respectively. The decreases in expenses in 2003 as compared to 2002 and 2002 as compared to 2001 are principally due to the absence of license fees paid to the licensor of the Heli-Coil and Dodge licensing rights after such properties were sold in 2002 as well as a decrease in licensing-related salaries and benefits as the Company focused on managing existing relationships.

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Selling, General and Administrative Expenses—These expenses increased by $1,850,000 in the year ended December 31, 2003 as compared to 2002. The increase is primarily due to an increase of management incentive compensation ($1,428,000), accelerated depreciation of leasehold improvements that are no longer in use ($274,000) offset by a decrease in non-recurring expenses associated with the repositioning of the Company ($420,000). The balance of the increase ($568,000) is principally attributable to the fact that the Company allocated a portion of its general and administrative expenses to discontinued operations in 2002. These expenses increased by $1,777,000 in the year ended December 31, 2002 as compared to 2001. The increase is primarily due to expenses associated with the repositioning of the Company, which totaled approximately $813,000, management incentive compensation of $334,000 and the fact that a portion of the remaining selling, general and administrative expense was allocated to discontinued operations in 2001.

Income Taxes—In 2003, the Company had a loss before taxes from continuing operations of $2,208,000 and a net tax benefit of $674,000 or approximately 31% of such loss. This tax benefit consists of federal income tax refunds received ($84,000) and expected ($646,000), a decrease in deferred taxes of $96,000 and net state and local income tax refunds of $40,000. In 2002 and 2001, the effective tax rate on continuing operations was 36% and 35%, respectively. The effective tax rates for 2003 and 2002 were affected by expenses, principally merger related, that were deducted for financial reporting purposes but are not deductible for federal income tax purposes.

During 2003, the Company received federal income tax refunds totaling $4,254,000 resulting from carrying back a net capital loss incurred in 2002 with respect to its sale of Refac International, Ltd. (“RIL”) and its 2002 net operating loss. Even though the Company has received these tax refund payments, it remains subject to Internal Revenue Service (“IRS”) audit with respect thereto and, should there be an assessment for any amounts determined to have been erroneously refunded, interest would be payable on the amount assessed. While the Company believes that its tax return and refund claim are correct, the calculation of the Company’s tax basis in RIL is subject to complex IRS regulations and the Company has established a reserve of approximately $275,000 as of December 31, 2003 pending the passage of the statute of limitations or the outcome of any audit that the IRS may initiate.

The Company’s income tax receivable as of December 31, 2003 is based upon its ability to carry back its 2003 net operating loss for federal income tax purposes to a prior tax year.

As of December 31, 2003, the Company had deferred tax assets relating to the State of New Jersey aggregating $315,000 of which $169,000 is attributable to a New Jersey net operating loss carryforward of $1,881,000 which can be applied against any New Jersey taxable income the Company might earn during the seven year period ending December 31, 2010. The Company is currently focusing its acquisition efforts in the asset management sector of the financial services industry, and at this point, it cannot determine whether this business will generate any New Jersey taxable income. Due to such uncertainty, the Company has estimated that only $18,000 of its $315,000 New Jersey related deferred taxes assets will be realized and has established a valuation allowance to cover the $297,000 difference. The need for a valuation allowance will continue to be reviewed periodically and adjusted as necessary.

As of December 31, 2003, the Company had federal deferred tax assets aggregating $836,000 of which $4,000 is attributable to a federal net operating loss carryforward of $11,000 which can be used during the twenty year period ending 2023. No valuation allowance has been taken for the Company’s federal deferred tax assets. The need for a valuation allowance will continue to be reviewed periodically and adjusted as necessary.

Inflation—The Company’s income from licensing operations has not in the past been materially affected by inflation due to the variable nature of the majority of the payments received. Income from current licensing activities is derived from domestic sources only.

Results of Discontinued Operations—In furtherance of its plan to reposition itself for sale or liquidation, the Company sold its Creative Consulting Services and Manufacture and Marketing of Consumer Products groups in the third quarter of 2002. Income from discontinued operations in 2003 was principally attributable to the receipt of variable purchase price payments in connection with the sale of the Company’s Product Design Group.

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Liquidity and Capital Resources

The following table sets forth the Company’s cash and cash equivalents, available for sale securities and investments being held to maturity (exclusive of the restricted investments being held to maturity discussed below) for 2003, 2002 and 2001:

The principal source of net cash flows from operating activities for the year ended December 31, 2003 was the realization of income tax refunds due to the Company.

Net cash from financing activities was primarily from Palisade’s investment of approximately $17 million in the Company in May 2003.

Principal sources of net cash flows from operating activities for the year ended December 31, 2002 were the liquidation of assets such as accounts receivable and inventory and the sale of the Company’s Heli-Coil and Dodge licensing rights.

The cash proceeds from operations and financing activities were invested in held to maturity securities and available for sale securities.

The Company believes its liquidity position is adequate to meet all of its current operating needs and existing obligations. However, it is currently focusing its acquisition and business development efforts on opportunities in the asset management sector of the financial services industry and, at this stage, the Company cannot predict what acquisition or business development opportunities will become available to it and the amount of capital resources that may be required to take advantage of any such opportunities. The Company does not have any long-term debt and has not established any acquisition-related lines of credit.

The Company’s portfolio of investments being held to maturity consists primarily of U.S. Treasury Notes bought with an original maturity of six months or less. The portfolio is invested in short-term securities to minimize interest rate risk and facilitate rapid deployment in support of the Company’s acquisition plans. The Company’s available for sale securities consist of variable cumulative preferred stock from a single issuer with a dividend rate which is determined by an auction method every forty-nine days.

Pursuant to the Company’s merger agreement (the “Palisade Merger Agreement”) with Palisade, it has restricted $4,743,000 of its investments being held to maturity to maintain the Contingent Fund (as defined in the merger agreement). This amount is being shown as a long-term asset on the balance sheet as the Payment Right is not determinable and payable until after June 30, 2005. This right to sell the shares is limited to stockholders who held their shares at the completion of the Palisade Merger and continue to hold their shares until the amount of liquid distributable assets at June 30, 2005 is determined. Since the Company does not have direct access to stockholder trading information, the Company has not reduced the Contingent Fund. The Contingent Fund will be adjusted if the Company becomes aware of any actual sales of Common Stock issued in connection with the merger. As of December 31, 2003, the price of the Payment Right was estimated to be $7.03 per share and the closing price of Common Stock was $4.93 per share. Any Contingent Fund amounts which are not paid pursuant to the procedure in the Palisade Merger Agreement will become unrestricted on or about August 15, 2005.

The Company has commitments under leases covering its facilities (see Notes to the Consolidated Financial Statements) and under a 1996 Retirement Agreement with its founder and former chief executive officer, which provides an annuity of $100,000 per annum during his life as well as medical and health benefits for him and his spouse during their lives. Provision was made for amounts payable under the Retirement Agreement in the

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Company’s 1996 financial statements based upon his then life expectancy. As of December 31, 2003, such liability was fully amortized. Starting in 2004, such amounts payable will be expensed on a current basis in the year made.

The following table represents the Company’s future material, long-term contractual obligations as of December 31, 2003:

The obligation table above does not reflect income from sublease agreements or its lease which became effective on January 21, 2004 and was amended on March 12, 2004, for 4,751 gross rentable square feet at One Bridge Plaza, Fort Lee, New Jersey. At such time, its sublease with PCS, which is included in the above table, will terminate. The expected rent for the entire term of the new lease is $677,000, subject to escalations. In addition, the Company is required to pay $55,000 towards the construction of the premises.

Critical Accounting Policies

Pursuant to the terms of the Palisade Merger, the Company’s projected “Liquid Distributable Assets” (as defined in the Palisade Merger Agreement and referred to herein as “LDA”) is required for the calculation of the Payment Right, and the related Contingent Fund and temporary equity account as well as the management incentive compensation accrual. This calculation of LDA is dependent upon management’s judgments and estimates as to the amount of cash that the Company realizes by June 30, 2005 with respect to certain assets of the Company at the time of the Palisade Merger, the utilization of certain tax attributes and operating results from the time of the Palisade Merger through June 30, 2005. Management continually revises these estimates based on changes in actual results as they occur. The LDA is reviewed quarterly and adjusted to reflect any material changes in the estimate. Any changes in the LDA will also change the related Payment Right, Contingent Fund and management incentive compensation accrual.

New Accounting Pronouncements

In May 2003, the FASB issued SFAS 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 does not have a current effect on the Company’s financial statements.

FORWARD LOOKING STATEMENTS

This document includes certain statements of the Company that may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and which are made pursuant to the Private Securities Litigation Reform Act of 1995. These forward-looking statements and other information relating to the Company are based upon the beliefs of management and assumptions made by and information currently available to the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or

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performance, as well as underlying assumptions and statements that are other than statements of historical fact. When used in this document, the words “expects,” “anticipates,” “estimates,” “plans,” “intends,” “projects,” “predicts,” “believes,” “may” or “should,” and similar expressions, are intended to identify forward-looking statements. These statements reflect the current view of the Company’s management with respect to future events and are subject to numerous risks, uncertainties, and assumptions. Many factors could cause the actual results, performance or achievements of the Company to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements, including, among other things:

Other factors and assumptions not identified above could also cause the actual results to differ materially from those set forth in the forward-looking statements. Although the Company believes these assumptions are reasonable, no assurance can be given that they will prove correct. Accordingly, you should not rely upon forward-looking statements as a prediction of actual results. Further, the Company undertakes no obligation to update forward-looking statements after the date they are made or to conform the statements to actual results or changes in the Company’s expectations.

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

As of December 31, 2003, the Company had investments held to maturity (including restricted investments held to maturity) of $33,425,000 primarily consisting of U.S. Treasury Notes with original maturities at the date of purchase of six months or less. These highly liquid investments are subject to interest rate and interest income risk and will decrease in value if market interest rates increase. Because the Company has the positive intent and ability to hold these investments until maturity, it does not expect any decline in value of its investments caused by market interest rate changes. As of December 31, 2003, the Company also had $1,000,000 in variable cumulative preferred stock from a single issuer with a dividend rate which is determined by an auction method every forty-nine days. Given the nature of this security, the Company does not believe the principal amount of this investment is subject to material risk. Declines in interest rates over time will, however, reduce our interest or dividend income. The Company has no derivative instruments, debt, or foreign operations. We do not use derivative financial instruments in our investment portfolio.

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Item 8.    Financial Statements

REFAC

BALANCE SHEETS

(Amounts in thousands, except share and per share data)

The accompanying notes are an integral part of these financial statements.

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REFAC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except share and per share data)

The accompanying notes are an integral part of the consolidated financial statements.

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REFAC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Amounts in thousands)

The accompanying notes are an integral part of the consolidated financial statements.

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REFAC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

For supplemental disclosure of non-cash investing and financing activities, see Notes to the Consolidated Financial Statements.

The accompanying notes are an integral part of the consolidated financial statements.

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REFAC AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

(Amounts in thousands, except share data)

The accompanying notes are an integral part of the consolidated financial statements.

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REFAC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, except for share and per share data)

Note 1—Business and Summary of Significant Accounting Policies

For most of its history, Refac (the “Company”) was engaged in intellectual property licensing activities. During the period from 1997 to 2002, it has also engaged in product development and graphic design and has invested these creative resources, together with its licensing skills, in certain product development ventures. The Company operates solely in the United States.

A.    Basis of Presentation

On March 22, 2002, the Company announced that it was repositioning itself for sale or liquidation. Since that date, the Company has disposed of its operating segments with the exception of its licensing business and it has limited the operations of that segment to managing certain existing license agreements and related contracts. The balance sheet and statement of operations for the periods reflect the restatement for discontinued operations.

On August 19, 2002, the Company entered into a merger agreement with Palisade Concentrated Equity Partnership, L.P. (“Palisade”), which provided for the merger (the “Palisade Merger”) of a Palisade subsidiary with the Company. On February 28, 2003, the Company’s stockholders adopted the merger agreement, as amended, (the “Palisade Merger Agreement”) and the Palisade Merger was consummated. See Note 2.

On March 28, 2003, the Company entered into a stock purchase agreement with Palisade, which closed on May 19, 2003. Pursuant thereto, Palisade acquired an additional 3,469,387 new shares of the Company’s common stock, at a price of $4.90 per share, or an aggregate price of approximately $17,000. Following the completion of the stock purchase transaction, Palisade’s ownership increased to approximately 90% of the Company’s outstanding shares. The purpose of the stock purchase transaction was to provide the Company with additional capital for making acquisitions.

In accordance with SFAS 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” the Creative Consulting Services and Manufacture and Marketing of Consumer Products groups are included in the statement of operations as discontinued operations, net of taxes, as they have been sold pursuant to the Company’s repositioning.

The Company’s operations in the licensing of intellectual property rights are not considered held for sale because of the Company’s intent to manage certain outstanding licensing-related agreements through their termination. While the Company’s licensing operations are still considered a continuing business, it has not undertaken any new technology licensing projects during the current or preceding five fiscal years and, given the Palisade Merger, it is highly unlikely that it will undertake any such projects in the future. The statement of operations reflects the results of the licensing of intellectual property rights in its results of continuing operations.

On January 27, 2004, the Company announced that it will focus its acquisition efforts on opportunities in the asset management sector of the financial services industry. The Company also announced that it has engaged a leading provider of executive search services to identify opportunities in this segment and to recruit individuals and/or teams within the industry to join the Company and build this business. See Note 12.

B.    Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. As of December 31, 2002, the Company did not have any subsidiaries.

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REFAC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollar amounts in thousands, except for share and per share data)

C.    Investments

The Company categorizes and accounts for its investment holdings as “Held to maturity securities” or “Available for sale securities.” Held to maturity securities are recorded at their amortized cost. This categorization is based upon the Company’s positive intent and ability to hold these securities to maturity. Available for sale securities are recorded at cost which approximates fair value due to the nature of the instrument. Dividends from such securities are reported in dividend and interest income.

D.    Income Taxes

The Company accounts for income taxes in accordance with SFAS 109, “Accounting for Income Taxes”. Deferred income taxes arise from temporary difference in the basis of assets and liabilities for financial reporting and income tax purposes. SFAS 109 requires that a valuation allowance be established when it is more likely than not that all or a portion of a deferred tax asset will not be realized. In forming a conclusion as to a valuation allowance, the Company reviews and considers all available positive and negative evidence, including the Company’s current and past performance, the market environment in which the company operates, length of carryback and carryforward periods and existing business or acquisitions that will result in future profits.

E.    Stock Based-Compensation

The Company has adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123.” The Statement requires prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock compensation awards under the intrinsic method of Accounting Principles Board (“APB”) Opinion No. 25 (see Note 8). Opinion No. 25 requires compensation cost to be recognized based on the excess, if any, between the quoted market price of the stock at the date of grant and the amount an employee must pay to acquire the stock. All options awarded under all of our plans are granted with an exercise price equal to the fair market value on the date of the grant. The following table presents the effect on the Company’s net earnings and earnings per share for the years ended December 31, 2003, 2002 and 2001 had it adopted the fair value method of accounting for stock-based compensation under SFAS No. 123, “Accounting for Stock-Based Compensation.”

There were no options granted in 2002. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for

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REFAC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollar amounts in thousands, except for share and per share data)

grants in 2003 and 2001, respectively: no dividend yields; expected volatility of 56 and 60 percent; risk-free interest rates of 2.5 and 4.6 percent; and expected lives of 4.5 and 5 years. The weighted-average fair value of options granted were $2.20 and $1.39 per share for the years ended December 31, 2003 and 2001, respectively.

F.    Earnings Per Share

The following reconciles basic and diluted shares used in earnings per share computations:

There are 139,500 options excluded from the earnings per share computation for the twelve month period ended December 31, 2003, since their effect would be anti-dilutive. In 2002 and 2001, options to purchase 152,500 and 640,750 shares of common stock, respectively, were not included in the computation of diluted net income per share because the exercise prices of those options were greater than the average market price of the common stock.

G.    Consolidated Statement of Cash Flows

The Company considers all highly liquid investments and debt instruments purchased with an original maturity of three months or less to be cash equivalents.

H.    Revenue Recognition

Royalty revenue is recognized when the licensee sells the product or as otherwise provided for in the license agreement. Nonrecurring lump sum payments that represent settlements of patent infringement claims are recognized when the settlements occur and collectibility is reasonably assured. Consulting revenues are recognized as services are performed.

I.    Using Estimates in Financial Statements

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as revenues and expenses during the reporting period. Actual results could differ from those estimates.

J.    Intangibles

Patents are amortized on a straight-line basis over their statutory life or expected useful life, whichever is shorter. Goodwill was amortized on a straight-line basis over periods from 10 years to 25 years. The carrying values of the long-lived assets (including goodwill) are reviewed if the facts and circumstances, such as a current period operating loss combined with a history of such losses, suggest that such assets may be permanently impaired.

In June 2001, the Financial Accounting Standards Board approved the issuance of SFAS No. 141, “Business Combinations” and SFAS 142, “Goodwill and Other Intangible Assets” which were issued July 20, 2001. The

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REFAC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollar amounts in thousands, except for share and per share data)

new standards require that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method. In addition, all intangible assets acquired that are obtained through contractual or legal right, or are capable of being separately sold, transferred, licensed, rented or exchanged shall be recognized as an asset apart from goodwill. Goodwill and intangibles with indefinite lives will no longer be subject to amortization, but will be subject to at least an annual assessment for impairment by applying a fair value based test.

The Company amortized goodwill under its current method through December 31, 2001. Commencing January 1, 2002, it no longer amortized goodwill. In 2001, the goodwill annual and quarterly amortization amounted to $348 and $87, respectively. As of June 30, 2002, the Company performed a transitional fair value based impairment test and recorded an impairment loss at January 1, 2002, as a cumulative effect of a change in accounting principle. In addition, the Company recorded an impairment loss in the fiscal quarter ended June 30, 2002.

As of December 31, 2003, the only intangible assets on the Company’s books were patents with a net book value of $3.

K.    Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is provided for on a straight-line basis with the estimated useful lives ranging from three to seven years. Leasehold improvements are amortized over the lives of the respective leases.

L.    Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform them to the current presentation.

M.    Comprehensive Loss

Comprehensive loss consists of net income or loss for the period as well as income, expenses, gains and losses arising during the period that are included in separate components of equity. It includes the unrealized gains and losses on the Company’s licensing-related securities, net of taxes, and the reclassification of prior year unrealized gains and losses on securities that are sold in the subsequent year.

N.    Fair Value of Financial Instruments

The Company’s financial instruments principally consist of cash and cash equivalents, notes receivable and marketable securities. The carrying amount of cash and cash equivalents approximate fair value due to the short-term maturity of the instruments. Notes Receivable are recorded at fair value due to the interest rates on these notes approximating current market interest rates. Marketable securities include investments held to maturity and available for sale securities. Investments held to maturity are recorded at amortized cost, which approximates fair value, because their short-term maturity results in the interest rates on these securities approximating current market interest rates. Available for sale securities are recorded at cost which approximates fair value due to the nature of the instrument.

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REFAC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollar amounts in thousands, except for share and per share data)

Note 2—Palisade Merger

On February 28, 2003, the Company completed a merger with a wholly-owned subsidiary of Palisade which is referred to herein as the Palisade Merger. Under the terms of the Palisade Merger, for each share of the Company’s common stock, par value $.10 per share (“Old Refac Common Stock”), owned immediately prior to the effective time of the merger, stockholders (other than Palisade and stockholders who properly exercised appraisal rights) received or are expected to receive (i) $3.60 in cash, (ii) 0.2 shares of common stock, par value $.001 per share (“Common Stock”), and (iii) the non-transferable right (the “Payment Right”) to sell the shares of the Common Stock to the Company for a price (the “Payment Amount”) which depends upon the Company’s liquid distributable assets (“LDA”) as of June 30, 2005. This right to sell the shares is limited to stockholders who held their shares at the completion of the Palisade Merger and continue to hold their shares until the amount of liquid distributable assets at June 30, 2005 is determined.

The Company has treated the Palisade Merger as a recapitalization for accounting purposes and has adjusted the difference in the par value of the Old Refac Common Stock and the Common Stock from common stock to additional paid-in capital. Pursuant to the Palisade Merger Agreement, the treasury stock owned by the Company at the effective time of the Palisade Merger has been cancelled with a corresponding decrease to the Company’s retained earnings.

As the Payment Right represents a non-transferable right of stockholders to sell to the Company their shares of Common Stock received in the Palisade Merger for cash, the estimated Payment Amount ($7.03 per share as of December 31, 2003) has been reflected on the balance sheet as temporary equity with a similar amount reducing additional paid-in capital. Subsequent changes in the estimated Payment Amount through June 30, 2005, computed on a quarterly basis, will increase or decrease the temporary equity amount with an offsetting increase or decrease in additional paid-in capital.

Pursuant to the Palisade Merger Agreement, the Company has restricted a portion of its investments being held to maturity to maintain the Contingent Fund (as defined in the merger agreement) reserved to pay the Payment Amount.

In April 2003, the Company settled a claim with dissenting stockholders who had demanded appraisal rights in connection with the Palisade Merger. Under the terms of the settlement, the Company purchased the 113,280 shares of Old Refac Common Stock held by such dissenting stockholders for $595 or $5.25 per share. The Company then exchanged these shares for the merger consideration consisting of $408 and 22,656 shares of Common Stock. No other stockholders have appraisal rights with respect to the Palisade Merger.

Note 3—Related Party Transactions

PCM on behalf of itself and/or its portfolio companies requests, from time to time, that the Corporation provide certain consulting services. In consideration for these services, PCM pays the Company a basic monthly retainer of $5, subject to quarterly adjustment, by mutual agreement, at the end of each calendar quarter to reflect the services rendered during such quarter. Either party has the right to terminate this agreement at any time without any prior notice. Under this arrangement, the Company has earned $30 with respect to services rendered during 2003 of which $5 is outstanding at December 31, 2003.

As of February 2004, the Corporation has agreed to provide consulting services directly to Neurologix, Inc., a public company in which PCM beneficially owns approximately 30% of the outstanding capital stock at a basic monthly retainer of $5. Either party has the right to terminate this agreement at any time without any prior notice.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollar amounts in thousands, except for share and per share data)

Other related party transactions include management indebtedness (see Note 5B), a subleasing arrangement with Palisade Capital Securities, LLC (“PCS”), an affiliate of Palisade and PCM, under which it is occupying approximately 1,185 gross rentable square feet (see Note 5A) and maintenance of brokerage accounts at PCS for the Company’s marketable securities (principally, treasury notes being held to maturity).

Note 4—Income Taxes

Tax Refund—During 2003, the Company received federal income tax refunds of $4,254 resulting from carrying back a net capital loss incurred in 2002 with respect to its sale of Refac International, Ltd. (“RIL”) and its 2002 net operating loss. Even though the Company has received these tax refund payments, it remains subject to Internal Revenue Service (“IRS”) audit with respect thereto and, should there be an assessment for any amounts determined to have been erroneously refunded, interest would be payable on the amount assessed. While the Company believes that its 2002 tax return and refund claim are correct, the calculation of the Company’s tax basis in RIL is subject to complex IRS regulations and the Company has established a reserve of approximately $275 as of December 31, 2003 pending the passage of the statute of limitations or the outcome of any audit that the IRS may initiate.

Income Taxes Receivable— The Company’s income tax receivable as of December 31, 2003 is based upon its ability to carry back its 2003 net operating loss for federal income tax purposes to a prior tax year.

Income Tax Provision—The provision (benefit) for taxes on income from continuing operations for the years ended December 31, 2003, 2002 and 2001 were as follows:

The provision (benefit) for taxes on income from continuing operations for the years ended December 31, 2003, 2002 and 2001 differed from the amount computed by applying the statutory federal income tax rate of 34% as follows:

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REFAC AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollar amounts in thousands, except for share and per share data)

Deferred Taxes—Deferred income taxes arise from temporary differences in the basis of assets and liabilities for financial reporting and income tax purposes. The tax effect of temporary differences that gave rise to deferred tax assets are as follows: