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, 2004








Commission
File Number 0-7704


****


**REFAC**





Delaware
    13-1681234(State
      or other jurisdiction of
    (I.R.S.
      Employerincorporation
      or organization)
    Identification
      No.)





One
      Bridge Plaza, Suite 550Fort
      Lee, New Jersey 07024-7102(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 o





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. x











Indicate by
check mark whether the registrant is an accelerated filer (as defined in
Exchange Act Rule 12b-2).   Yes oNo x





The aggregate
market value of the voting stock held by non-affiliates of the registrant, based
upon the closing sale price of the registrant’s common stock on June 30, 2004,
the last day of the registrant’s most recently completed second fiscal
quarter**,**was
$3,114,403.





The number of
shares outstanding of the registrant’s Common Stock, par value $.001 per share,
as of **March
25, 2005** was
6,993,393.











**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 continued under the name Refac and its 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 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.





Since January
27, 2004, the Company has focused its acquisition efforts on opportunities in
the asset management sector of the financial services industry. On March 21,
2005, the Company’s Board of Directors (the "Board") decided to broaden
the scope of the acquisition search to include other industries.








**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 six 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.











1





The Company’s
contract with Patlex Corporation (“ Patlex ”)
accounted for approximately 76% of its total revenues from continuing operations
in 2004. I ts income
under this contract is based upon revenues derived by Patlex from the licensing
of two laser patents, the most significant of which (U.S. Patent No. 4,704,583)
expired in November 2004. The remaining patent (U.S. Patent No. 4,746,201)
expires in May 2005. Based upon conversations with the management of Patlex, the
Company currently estimates that its revenues from this contract will be
significantly reduced in 2005 as the licensing program winds down. The
Company does not believe that the loss or termination of any other contract it
has with its clients or licensees would have a material adverse effect on its
business.


**


*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, 2004, 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, 2004 is set
forth in Note 9 of the Notes to the Company’s Consolidated Financial Statements, included
herein .





**Item
2. Properties**





The Company
occupies approximately 4,751 square feet at One Bridge Plaza, Fort Lee, New
Jersey 07024 under a lease which expires on June 30, 2009.





The Company
also leases 24,654 square feet located at The Hudson River Pier, 115 River Road,
Edgewater, New Jersey 07020 under a sublease which expires on November 15, 2009.
These premises had previously been used by the Company for its corporate
headquarters and the creative studios for its product development and graphic
design business segments, which were sold in 2002. As of the date of this
report, 9,574, 3,492 and 11,588 square feet have been subleased through October
31, 2009, November 14, 2009 and May 31, 2005, respectively.





**Item
3. Legal Proceedings**





None.





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





None.




**PART
II**





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








Not
applicable.





2





**Item
6. Selected Financial Data**








**REFAC
      AND SUBSIDIARIES**
      ******SELECTED
      FINANCIAL INFORMATION****Year
      Ended December 31,**(in
      thousands, except per share amounts)
    
    **2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000**Revenues
    
    $
    1,779
    
    $
    1,804
    
    $
    6,415
    
    $
    4,840
    
    $
    9,004Net
      income (loss) from continuing operations
    
    $
    (239
    )
    $
    (1,534
    )
    $
    2,511
    
    $
    2,764
    
    $
    4,571Income
      (loss) from discontinued operations - net of taxes
    
    $
    14
    
    $
    38
    
    $
    (1,697
    )
    $
    (1,680
    )
    $
    1,642Loss
      from cumulative effect of change in accounting principle - net of
      taxes
    
    
    -
    
    
    -
    
    $
    (2,083
    )
    
    -Net
      income (loss)
    
    $
    (225
    )
    $
    (1,496
    )
    $
    (1,269
    )
    $
    1,084
    
    $
    2,929Income
      (loss) per common share from continuing operations - basic
    
    $
    (0.03
    )
    $
    (0.27
    )
    $
    0.66
    
    $
    0.73
    
    $
    1.20Income
      (loss) per common share from discontinued operations -
    basic
    
    
    -
    
    $
    0.01
    
    $
    (0.44
    )
    $
    (0.44
    )
    $
    (0.43
    )Loss
      per common share from cumulative effect of change in accounting principle
      - basic
    
    
    -
    
    
    -
    
    $
    (0.55
    )
    
    -
    
    
    -Income
      (loss) per common share on net income - basic
    
    $
    (0.03
    )
    $
    (0.26
    )
    $
    (0.33
    )
    $
    0.29
    
    $
    0.77Income
      (loss) per common share from continuing operations -
    diluted
    
    $
    (0.03
    )
    $
    (0.27
    )
    $
    0.66
    
    $
    0.73
    
    $
    1.20Income
      (loss) per common share from discontinued operations -
    diluted
    
    
    -
    
    $
    0.01
    
    $
    (0.44
    )
    $
    (0.44
    )
    $
    (0.43
    )Loss
      per common share from cumulative effect of change in accounting principle
      - diluted
    
    
    -
    
    
    -
    
    $
    (0.55
    )
    
    -
    
    
    -Income
      (loss) per common share on net income - diluted
    
    $
    (0.03
    )
    $
    (0.26
    )
    $
    (0.33
    )
    $
    0.29
    
    $
    0.77Total
      assets
    
    $
    38,768
    
    $
    39,023
    
    $
    24,292
    
    $
    24,387
    
    $
    24,903Dividends
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Stockholders’
      Equity
    
    $
    31,197
    
    $
    31,898
    
    $
    21,340
    
    $
    22,592
    
    $
    22,754







3


****


****


**Item
7. Management’s Discussion and Analysis of Financial Condition and Results
of** **** **Operation**





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 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.




Since January
27, 2004, the Company focused its acquisition efforts on opportunities in the
asset management sector of the financial services industry. On that date, the
Company 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. A second search firm was
engaged in October 2004. Although this search is ongoing, no assurance can be
given that the Company will be successful in its recruitment efforts, or if it
is, that it will be able to build a profitable asset management business.
Accordingly, the reported financial information is not indicative of the
Company’s future operating results or financial condition. On March 21, 2005,
the Board decided to broaden the scope of the acquisition search to include
other industries.





The Company’s
fiscal year ends on the last day of December in each year. As used in this Item
7, references to 2004, 2003 and 2002 shall mean the Company’s fiscal year ended
on December 31 of such year.





**Results
of Continuing Operations**





Revenues from
continuing operations for 2004 were $1,779,000 as compared to $1,804,000 for the
same period in 2003. Revenues from licensing-related activities decreased by
$165,000 during 2004, mostly related to the termination of the Company’s
agreement with OXO International (“ OXO ”) (see
Note 15C to the condensed financial statements), offset by an increase in
revenues from its agreement with Patlex Corporation (“ Patlex ”). OXO
accounted for $360,000 of the Company’s licensing-related revenue during 2003.
Offsetting the decline in licensing-related revenues were revenues from related
party consulting which increased by $140,000.





Revenues from
continuing operations for 2003 were $1,804,000 as compared to $6,415,000 for the
same period in 2002. The $4,611,000 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 partially offset by consulting income of $30,000.





Revenues from
continuing operations are summarized as follows:




**For
      the Years Ended December 31,****Description**
    
    **2004**
    
    **2003**
    
    **2002**Revenues
      from licensing-related activities
    
    
    90
    %
    
    98
    %
    
    32
    %Gains
      on sale of licensing rights
    
    
    -
    
    
    -
    
    
    68
    %Consulting
      income
    
    
    10
    %
    
    2
    %
    
    -Total
    
    
    100
    %
    
    100
    %
    
    100
    %





4





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 larger revenue
producing of the two patents licensed by Patlex Corporation is the Gas Discharge
Laser Patent (U.S. Patent No. 4,704,583), which expired on November 3, 2004. The
other patent is the Brewster’s Angle Patent (U.S. Patent No. 4,746,201) which
expires on May 24, 2005. As a result of the expiration of the Gas Discharge
Patent and the subsequent expiration of the Brewster’s Angle Patent on May 24,
2005, the Patlex income will be significantly lower in 2005 as compared to 2004.
Other license agreements are expected to provide gross revenues of approximately
$220,000 in 2005, 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
increased by $5,000 in 2004 as compared to 2003 and decreased by $154,000 in
2003 as compared to 2002. As a percentage of licensing revenues, these expenses
were 8%, 7% and 13% in 2004, 2003 and 2002, respectively. The decreases in
expenses in 2003 as compared to 2002 is 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.


**


*Selling,
General and Administrative (“SG&A”) Expenses* - These
expenses decreased by $1,610,000 in 2004 as compared to 2003. This reduction is
primarily the result of the absence in 2004 of certain non-recurring expenses
that were incurred in 2003, such as merger-related costs of $484,000 and
accelerated depreciation of leasehold improvements associated with a reduction
of the Company’s leased premises in Edgewater, New Jersey of $273,000, and
decreases in management incentive compensation of $1,136,000 and professional
fees of $208,000 offset by the amortization of $350,000 in executive search firm
retainer fees and amounts payable under the Retirement Agreement with the
Company’s founder and former chief executive officer of $100,000. SG&A
expenses increased by $1,850,000 in the year ended December 31, 2003 as compared
to 2002. The increase was primarily due to an increase of management incentive
compensation of $1,428,000, accelerated depreciation of leasehold improvements
that are no longer in use of $273,000 offset by a decrease in non-recurring
expenses associated with the repositioning of the Company of $420,000. The
balance of the increase ($568,000) was principally attributable to the fact that
the Company allocated a portion of its general and administrative expenses to
discontinued operations in 2002.


**


*Dividends,
Interest and Other Income* -
Dividend and interest income for 2004 was $477,000 as compared to $323,000 for
the same period in 2003. Dividend and interest income increased by $154,000
during 2004, mostly related to rising interest rates. Additionally, in 2004, the
Company had $105,000 in other income which consisted of income from a settlement
with one of its subtenants, (see Note 15D to the condensed financial statements)
offset by an estimated loss on its leasehold in Edgewater, New Jersey (see Note
5A to the condensed financial statements).





Dividend and
interest income for 2003 was $323,000 as compared to $147,000 for the same
period in 2002. The $176,000 increase was due primarily to the additional cash
available for investing from the realization of income tax refunds due to the
Company and Palisade’s investment of approximately $17 million in the Company in
May 2003.


**


*Income
Taxes* - In
2004, the Company had a loss before taxes from continuing operations of $369,000
and a net tax benefit of $130,000 or approximately 35% of such loss. The
effective income tax rate on continuing operations in 2004 differs from the
federal statutory rate of 34% principally due to the dividend received
exclusion. In 2003 and 2002, the effective tax rate on continuing operations was
31% and 36%, respectively. The effective tax rate for 2003 was affected by
expenses, principally merger related, that were expensed for financial reporting
purposes but are not deductible for income tax purposes.








5





During 2004,
the Company received a federal income tax refund of $579,000 resulting from
carrying back a net operating loss incurred in 2003. During 2003, the Company
received federal income tax refunds of $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. Currently, in accordance with a requirement to examine refund
claims over $2,000,000, the IRS is reviewing the Company’s tax refunds received
in 2003. While the IRS has advised the Company that its review does not
constitute an audit, it can change the scope of its review at any time and can
initiate an examination on all open tax years. In connection with the pending
review and the outcome of any audit that IRS may initiate, the Company has
established a reserve of approximately $275,000 as of December 31, 2004. While
the Company believes that this reserve is adequate, since the IRS has not
completed its review and the statute of limitations has not passed, no
assurances can be given as to the sufficiency of this reserve.





The Company’s
income tax receivable of $23,000 as of December 31, 2004 is based upon its
ability to carry back its 2001 foreign tax credit for federal income tax
purposes to a prior tax year.





As of
December 31, 2004, the Company had deferred tax assets relating to the State of
New Jersey aggregating $287,000 of which $168,000 is attributable to New Jersey
net operating loss carryforwards of $953,000 and $1,882,000 in 2004 and 2003,
respectively, which can be applied against any New Jersey taxable income the
Company might earn during the seven year period after the year in which such
carryforward was recognized for tax purposes. The Company cannot determine
whether it will generate any New Jersey taxable income. Due to such uncertainty,
the Company has estimated that none of its New Jersey related deferred taxes
assets will be realized and has established a full valuation allowance. The need
for a valuation allowance will continue to be reviewed periodically and adjusted
as necessary.




As of
December 31, 2004, the Company had federal deferred tax assets aggregating
$1,027,000 of which $312,000 is attributable to federal net operating loss
carryforwards of $912,000 and $5,000 in 2004 and 2003, respectively, which can
be used during the twenty year period after the year in which such carryforward
was recognized for tax purposes. 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 and 2004 were principally attributable to the receipt of
variable purchase price payments in connection with the sale of the Company’s
Product Design Group.




*Subsequent
Event -* In the
first quarter of 2005, the Company received $1,500,000 from the former president
of its trademark licensing subsidiary as its interest in a litigation brought by
a former client against Taco Bell. See Note 10 to the Notes to the Consolidated
Financial Statements.






6


****


**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 2004, 2003 and
2002:








**Description**
    
    **2004**
    
    **2003**
    
    **2002**Cash
      and cash equivalents
    
    $
    457,000
    
    $
    799,000
    
    $
    3,330,000Available
      for sale securities
    
    
    1,000,000
    
    
    1,000,000
    
    
    -Investments
      being held to maturity
    
    
    29,342,000
    
    
    28,682,000
    
    
    11,714,000Total
    
    $
    30,799,000
    
    $
    30,481,000
    
    $
    15,044,000








The principal
source of net cash flows from operating activities for the years ended December
31, 2004 and 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.





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, 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 $5,416,000 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 short-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, 2004, the price of the Payment
Right was estimated to be $8.10 per share and the closing price of Common Stock
was $4.25 per share. The calculation of the Payment Right includes the
$1,500,000 that the Company received in February 2005 from the former president
of its trademark licensing subsidiary as its interest in a litigation brought by
a former client against Taco Bell. Any Contingent Fund amounts that are related
to Payment Rights that are not properly exercised within ninety days after the
date that instructions are mailed will become unrestricted.




7


****


**Contractual
Obligations**




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 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 are being
expensed.




The following
table represents the Company’s future material, long-term contractual
obligations as of December 31, 2004:







Payments Due By PeriodContractualObligations(in
      thousands)
    
    
    Total
    
    
    Less
      than one year
    
    
    1
      - 3
      years
    
    
    3
      - 5
      years
    
    
    More
      than
      5
      yearsOperating lease
      obligations
    
    $
    2,946,000
    
    
    592,000
    
    
    1,222,000
    
    
    1,132,000
    
    
    -Management
      Incentive Compensation(see
      Note 5B)
    
    $
    1,239,000
    
    
    1,239,000
    
    
    -
    
    
    -
    
    
    -





The
obligation table above does not reflect income from sublease agreements.




**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 December
2004, the Financial Accounting Standards Board issued SFAS No. 123(R) -
Share-Based Payment, which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of
Cash Flows. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on the fair value of the instruments issued. As originally
issued in 1995, Statement 123 established as preferable the fair-value-based
method of accounting for share-based payment transactions with employees.
However, that Statement permitted entities the option of continuing to apply the
guidance in Opinion 25, as long as the footnotes to the financial statements
disclosed what net income would have been had the preferable fair-value-based
method been used.





Statement
123(R) allows for two alternative transition methods. The first method is the
modified prospective application whereby compensation cost for the portion of
awards for which the requisite service has not yet been rendered that are
outstanding as of the adoption date will be recognized over the remaining
service period. The compensation cost for that portion of awards will be based
on the grant-date fair value of those awards as calculated for pro forma
disclosures under Statement 123, as originally issued. All new awards and awards
that are modified, repurchased, or cancelled after the adoption date will be
accounted for under the provisions of Statement 123(R). The second method is the
modified retrospective application, which requires that the Company restates
prior period financial statements. The modified retrospective application may be
applied either to all prior periods or only to prior interim periods in the year
of adoption of this statement. The new standard will be effective for the
Company in the first interim reporting period beginning after June 15, 2005. The
Company is still evaluating the impact the adoption of this standard will have
on its financial statements.


****





8





**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 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:





Ÿ
    the
      inability to identify suitable acquisition opportunities in the asset
      management sector of the financial services industry and/or teams within
      the industry to join the Company and build a profitable
      business;Ÿ
    the
      outcome of a current IRS review of the Company’s tax refunds aggregating
      $4,254,000 and the possibility that IRS can elect to change the scope of
      the review and/or audit
      other open tax years and determine that all or a material part of the
      refunds received in 2003 were erroneously refunded;Ÿ
    the
      ability of the Company to sublease its Edgewater, New Jersey
      premises;Ÿ
    the
      rules of the American Stock Exchange (“AMEX”) allow the exchange to delist
      securities if the AMEX determines that a company's securities fail to meet
      guidelines with respect to corporate net worth, public float, number of
      shareholders, the aggregate market value of shares, or price per share.
      The Company cannot assure purchasers of its common stock that the Company
      will continue to meet the requirements of the AMEX. If the Company is
      unable to continue to satisfy these criteria, the AMEX may begin
      procedures to remove its common stock from the exchange. If the Company’s
      common stock is delisted, a trading market may no longer exist, and the
      ability of shareholders to buy and sell the Company’s common stock may be
      materially impaired;Ÿ
    changes
      in the interest rate environment;Ÿ
    general
      economic conditions may be less favorable than expected; andŸ
    changes
      may occur in the securities markets.








9





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.


****


10


****


**Item
7A. Quantitative and Qualitative Disclosures About Market
Risk**




As of
December 31, 2004, the Company had investments held to maturity (including
restricted investments held to maturity) of $34,758,000 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, 2004, 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.


****
 ****
 11
 ****
 ****
 **Item
8. Financial Statements and Supplementary Data**




**Refac**
      **Balance
      Sheets**
      **(Amounts
      in thousands, except share and per share data)****December
      31,****2004**
    
    **2003****ASSETS**Current
      AssetsCash and cash equivalents
    
    $
    457
    
    $
    799Royalties and accounts receivable
    
    
    286
    
    
    478Notes receivable - current portion
    
    
    64
    
    
    302Investments being held to maturity
    
    
    29,342
    
    
    28,682Income taxes receivable
    
    
    23
    
    
    636Prepaid expenses, deferred income taxes and other current
      assets
    
    
    803
    
    
    899Restricted investments being held to maturity
    
    
    5,416
    
    
    -Total current assets
    
    
    36,391
    
    
    31,796Property
      and equipment - net
    
    
    747
    
    
    777Available
      for sale securities
    
    
    1,000
    
    
    1,000Notes
      receivable
    
    
    141
    
    
    205Deferred
      incentive compensation
    
    
    -
    
    
    34Deferred
      income taxes and other assets
    
    
    489
    
    
    468Restricted
      investments being held to maturity
    
    
    -
    
    
    4,743Total Assets
    
    $
    38,768
    
    $
    39,023**LIABILITIES
      AND STOCKHOLDERS’ EQUITY**Current
      LiabilitiesAccounts payable and accrued expenses
    
    $
    685
    
    $
    693Deferred revenue
    
    
    142
    
    
    145Deferred incentive compensation
    
    
    1,239
    
    
    400Other liabilities
    
    
    89
    
    
    198Total current liabilities
    
    
    2,155
    
    
    1,436Deferred
      incentive compensation
    
    
    
    
    
    946Commitments
      and ContingenciesTemporary
      Equity
    
    
    5,416
    
    
    4,743Stockholders’
      EquityCommon
      stock, $.001 par value; authorized 20,000,000 shares; issued 7,016,049 as
      of December 31, 2004 and 7,006,049 as of December 31, 2003
    
    
    7
    
    
    7Additional
      paid-in capital
    
    
    22,238
    
    
    22,742Retained
      earnings
    
    
    9,448
    
    
    9,673Treasury
      stock, at cost, 22,656 shares of common stock, $.001 par value
    
    
    (159
    )
    
    (159
    )Receivable
      from issuance of common stock
    
    
    (337
    )
    
    (365
    )Total
      stockholders’ equity
    
    
    31,197
    
    
    31,898Total
      Liabilities and Stockholders’ Equity
    
    $
    38,768
    
    $
    39,023





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






12







**Refac
      and Subsidiaries**
      **Consolidated
      Statements of Operations**
      **(Amounts
      in thousands, except share and per share data)****Years
      Ended December 31,****2004**
    
    **2003**
    
    **2002****Revenues**Licensing-related activities
    
    $
    1,609
    
    $
    1,774
    
    $
    2,041Gain
      on sale of licenses
    
    
    -
    
    
    -
    
    
    4,374Related
      party consulting services
    
    
    170
    
    
    30
    
    
    -Total revenues
    
    
    1,779
    
    
    1,804
    
    
    6,415**Costs
      and Expenses**Licensing-related
      activities
    
    
    124
    
    
    119
    
    
    273Selling,
      general and administrative expenses
    
    
    2,606
    
    
    4,216
    
    
    2,366Total
      costs and expenses
    
    
    2,730
    
    
    4,335
    
    
    2,639**Other
      Income and Expenses**Dividends, interest and other income
    
    
    582
    
    
    323
    
    
    147Total other income and expenses
    
    
    582
    
    
    323
    
    
    147**Income
      (loss) before provision for taxes on income**
    
    
    (369
    )
    
    (2,208
    )
    
    3,923Provision
      (benefit) for taxes on income
    
    
    (130
    )
    
    (674
    )
    
    1,412**Net
      income (loss) from continuing operations**
    
    
    (239
    )
    
    (1,534
    )
    
    2,511Gain
      (loss) from discontinued operations - net of provision (benefit) for taxes
      of $15, $21 and($5,017),
      respectively
    
    
    14
    
    
    38
    
    
    (1,697
    )Cumulative
      effect of change in accounting principle - net of $1,073 tax
      benefit
    
    
    -
    
    
    -
    
    
    (2,083
    )**Net
      loss**
    
    $
    (225
    )
    $
    (1,496
    )
    $
    (1,269
    )**Basic
      earnings (loss) per share:**From continuing operations
    
    $
    (0.03
    )
    $
    (0.27
    )
    $
    0.66From discontinued operations
    
    
    -
    
    $
    0.01
    
    $
    (0.44
    )From cumulative effect in change in accounting principle
    
    
    -
    
    
    -
    
    $
    (0.55
    )Total
    
    $
    (0.03
    )
    $
    (0.26
    )
    $
    (0.33
    )**Basic
      weighted average shares outstanding**
    
    
    6,992,105
    
    
    5,717,128
    
    
    3,796,429**Diluted
      earnings (loss) per share:**From continuing operations
    
    $
    (0.03
    )
    $
    (0.27
    )
    $
    0.66From discontinued operations
    
    
    -
    
    $
    0.01
    
    $
    (0.44
    )From cumulative effect in change in accounting principle
    
    
    -
    
    
    -
    
    $
    (0.55
    )Total
    
    $
    (0.03
    )
    $
    (0.26
    )
    $
    (0.33
    )**Diluted
      weighted average shares outstanding**
    
    
    6,992,105
    
    
    5,717,128
    
    
    3,812,302





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






13





**Refac
      and Subsidiaries**
      **Consolidated
      Statements of Cash Flows**
      **(Amounts
      in thousands)****Years
      ended December 31,****2004**
    
    **2003**
    
    **2002****Cash
      Flows from Operating Activities**Net
      loss
    
    $
    (225
    )
    $
    (1,496
    )
    $
    (1,269
    )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
    
    
    169
    
    
    422
    
    
    207Loss
      on settlement agreement
    
    
    13
    
    
    -
    
    
    -Loss
      on disposal of assets
    
    
    -
    
    
    -
    
    
    1,003Cumulative
      effect of changing method of accounting for goodwill
    
    
    -
    
    
    -
    
    
    3,156Additional
      impairment of goodwill
    
    
    -
    
    
    -
    
    
    2,811Impairment
      of long-lived assets
    
    
    -
    
    
    -
    
    
    115Deferred
      income taxes and other assets
    
    
    (171
    )
    
    149
    
    
    (238
    )Compensation
      expense related to director options
    
    
    -
    
    
    48
    
    
    -Loss
      on sale of assets
    
    
    2
    
    
    6
    
    
    -Loss
      associated with appraisal rights settlement
    
    
    -
    
    
    29
    
    
    -Income
      tax benefit on stock option exercise
    
    
    24
    
    
    -
    
    
    -(Increase)
      decrease in assets:Royalties
      and accounts receivable
    
    
    192
    
    
    189
    
    
    2,977Prepaid
      expenses and other current assets
    
    
    (41
    )
    
    (414
    )
    
    (96
    )Inventory
    
    
    -
    
    
    -
    
    
    2,140Security
      deposit
    
    
    (10
    )
    
    -
    
    
    -Income
      taxes receivable
    
    
    613
    
    
    3,273
    
    
    (3,909
    )Deferred
      incentive compensation
    
    
    331
    
    
    1,632
    
    
    (1,666
    )Increase
      (decrease) in liabilities:Accounts
      payable and accrued expenses
    
    
    (8
    )
    
    495
    
    
    (588
    )Deferred
      revenue
    
    
    (3
    )
    
    10
    
    
    (180
    )Deferred
      incentive compensation
    
    
    (107
    )
    
    (1,054
    )
    
    2,000Other
      liabilities
    
    
    (109
    )
    
    (21
    )
    
    (75
    )Net
      cash provided by operating activities
    
    
    670
    
    
    3,268
    
    
    6,388**Cash
      Flows from Investing Activities**Proceeds
      from (purchase of) investments being held to maturity
    
    
    (1,332
    )
    
    (21,711
    )
    
    (11,069
    )Purchase
      of available for sale securities
    
    
    -
    
    
    (1,000
    )
    
    -Proceeds
      from (issuance of) Notes receivable
    
    
    289
    
    
    213
    
    
    (720
    )Proceeds
      on disposal of assets
    
    
    -
    
    
    2
    
    
    72Additions
      to property and equipment
    
    
    (141
    )
    
    (24
    )
    
    (48
    )Net
      cash used in investing activities
    
    
    (1,184
    )
    
    (22,520
    )
    
    (11,765
    )**Cash
      Flows from Financing Activities**Proceeds
      from sale of common stock
    
    
    -
    
    
    16,869
    
    
    -Appraisal
      rights settlement cost
    
    
    -
    
    
    (187
    )
    
    -Proceeds
      from repayment of officer loan
    
    
    28
    
    
    -
    
    
    10Proceeds
      from exercise of stock options
    
    
    144
    
    
    39
    
    
    7Net
      cash provided by financing activities
    
    
    172
    
    
    16,721
    
    
    17**Net
      increase (decrease) in cash and cash equivalents**
    
    
    (342
    )
    
    (2,531
    )
    
    (5,360
    )**Cash
      and cash equivalents at beginning of year**
    
    
    799
    
    
    3,330
    
    
    8,690**Cash
      and cash equivalents at end of year**
    
    $
    457
    
    $
    799
    
    $
    3,330**Income
      taxes paid**
    
    
    -
    
    
    -
    
    $
    83For
      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.







14





**Refac
and Subsidiaries**


**Consolidated
Statement of Changes in Stockholders’ Equity**


**(Amounts
in thousands, except share data)**





Common
      Stock
      Par
      Value $.10
    
    Common
      Stock
      Par
      Value $.001
    
    Additional
      Paid-In
      Capital
    
    Retained
      Earnings
    
    Treasury
      Stock
    
    Receivable
      from Issuance of Common StockShares
    
    Amount
    
    Shares
    
    Amount
    
    
    
    
    
    Shares
    
    AmountBalance,
      December 31, 2001
    
    
    5,450,887
    
    $
    545
    
    
    
    
    
    
    
    $
    9,984
    
    $26,312
    
    1,655,626
    
    $
    (13,874
    )
    $
    (375
    )Issuance
      of common stock upon exercise of stock options
    
    
    2,750
    
    
    -
    
    
    
    
    
    
    
    
    7Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,269)Repayment
      of note receivable from officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10Balance,
      December 31, 2002
    
    
    5,453,637
    
    $
    545
    
    
    -
    
    
    -
    
    $
    9,991
    
    $25,043
    
    1,655,626
    
    $
    (13,874
    )
    $
    (365
    )Issuance
      of common stock upon exercise of stock options
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    
    4Merger
    
    
    (5,455,137
    )
    
    (545
    )
    
    3,512,006
    
    
    4
    
    
    542
    
    (13,874)
    
    (1,655,626
    )
    
    13,874Modification
      of non-employee director stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48Appraisal
      rights settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    22,656
    
    
    (159
    )Issuance
      of common stock upon exercise of stock options
    
    
    
    
    
    
    
    
    2,000
    
    
    -
    
    
    35Stock
      issuance to Palisade
    
    
    
    
    
    
    
    
    3,469,387
    
    
    3
    
    
    16,878Net
      Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,496)Balance,
      December 31, 2003
    
    
    -
    
    
    -
    
    
    6,983,393
    
    $
    7
    
    $
    22,742
    
    $9,673
    
    22,656
    
    $
    (159
    )
    $
    (365
    )Issuance
      of common stock upon exercise of stock options
    
    
    
    
    
    
    
    
    10,000
    
    
    
    
    $
    144Tax
      benefit from exercise of stock option
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24Repayment
      of note receivable from officer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    28Temporary
      Equity
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (672
    )Net
      Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (225)Balance,
      December 31, 2004
    
    
    -
    
    
    -
    
    
    6,993,393
    
    $
    7
    
    $
    22,238
    
    $9,448
    
    22,656
    
    $
    (159
    )
    $
    (337
    )







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





15
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements**







**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 was also engaged in product development and graphic design and
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 statements 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 $17,000,000. 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 Statement of Financial Accounting Standards (“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
were sold in 2002 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
six fiscal years and, given the current focus of the Company, 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.


**


16
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**


**


*B.
Principles of Consolidation*





As of, and
subsequent to, December 31, 2002, the Company did not have any subsidiaries. The
accompanying consolidated statement of operations, consolidated statement of
cash flows, and consolidated statement of changes in stockholder’s equity for
2002 include the accounts of the Company and all of its then majority-owned
subsidiaries. All intercompany balances and transactions have been eliminated in
consolidation.




*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 and from
net operating loss carryforwards. 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 are likely to
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, 2004, 2003 and
2002 had it adopted the fair value method of accounting for stock-based
compensation under SFAS No. 123, “Accounting for Stock-Based
Compensation.”






17
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****




**2004**
    
    **2003**
    
    **2002**Net
      loss, as reported
    
    $
    (225,000
    )
    $
    (1,496,000
    )
    $
    (1,269,000
    )Less:
      Total stock-based employee and director compensation expense determined
      under fair value based on methods for awards granted, modified, or
      settled, net of related tax effects
    
    
    (103,000
    )
    
    (150,000
    )
    
    (220,000
    )Add:
      Additional compensation expense for modification of non-employee director
      stock options, netof
      related tax effect
    
    
    -
    
    
    48,000
    
    
    -Pro
      forma net loss
    
    $
    (328,000
    )
    $
    (1,598,000
    )
    $
    (1,489,000
    )Loss
      per share, as reportedBasic
    
    $
    (0.03
    )
    $
    (0.26
    )
    $
    (0.33
    )Diluted
    
    $
    (0.03
    )
    $
    (0.26
    )
    $
    (0.33
    )Pro
      forma loss per shareBasic
    
    $
    (0.05
    )
    $
    (0.28
    )
    $
    (0.39
    )Diluted
    
    $
    (0.05
    )
    $
    (0.28
    )
    $
    (0.39
    )











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 grants in 2004 and 2003,
respectively: no dividend yields; expected volatility of 48 and 56 percent;
risk-free interest rates of 4.0 and 2.5 percent; and expected lives of 4.7 and
4.5 years. The weighted-average fair value of options granted were $2.17 and
$2.20 per share for the years ended December 31, 2004 and 2003, respectively.




*F.
Earnings Per Share*





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




**2004**
    
    **2003**
    
    **2002**Basic
      shares
    
    
    6,992,105
    
    
    5,717,128
    
    
    3,796,429Dilution:
      Stock options and warrants
    
    
    -
    
    
    -
    
    
    15,873Diluted
      shares
    
    
    6,992,105
    
    
    5,717,128
    
    
    3,812,302





There are
217,750 and 139,500 options, respectively, excluded from the earnings per share
computation for the twelve month periods ended December 31, 2004 and 2003, since
their effect would be anti-dilutive. In 2002, options to purchase 152,500 shares
of common stock 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.






18
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****




*G.
Cash and Cash Equivalents*





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 licensing-related 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. As of December 31, 2004, the only intangible assets
on the Company’s books were patents with a net book value of
$3,000.





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 new standards require that all business
combinations initiated after June 30, 2001 be accounted for under the purchase
method. In addition, all intangible assets acquired through contractual or legal
right, or which are capable of being separately sold, transferred, licensed,
rented or exchanged must be recognized as an asset apart from goodwill. Goodwill
and intangibles with indefinite lives are no longer subject to amortization, but
are subject to at least an annual assessment for impairment by applying a fair
value based test. Accordingly, commencing January 1, 2002, the Company no longer
amortizes goodwill and as of June 30, 2002, it 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.




19
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****


*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.
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.
The Company’s available for sale securities are recorded at cost which
approximates fair value due to the nature of the instrument.




*N.
New Accounting Pronouncements*





In December
2004, the Financial Accounting Standards Board issued SFAS No. 123(R) -
Share-Based Payment, which is a revision of SFAS No. 123, Accounting for
Stock-Based Compensation. SFAS No. 123(R) supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and amends SFAS No. 95, Statement of
Cash Flows. SFAS No. 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income
statement based on the fair value of the instruments issued. As originally
issued in 1995, Statement 123 established as preferable the fair-value-based
method of accounting for share-based payment transactions with employees.
However, that Statement permitted entities the option of continuing to apply the
guidance in Opinion 25, as long as the footnotes to the financial statements
disclosed what net income would have been had the preferable fair-value-based
method been used.





Statement
123(R) allows for two alternative transition methods. The first method is the
modified prospective application whereby compensation cost for the portion of
awards for which the requisite service has not yet been rendered that are
outstanding as of the adoption date will be recognized over the remaining
service period. The compensation cost for that portion of awards will be based
on the grant-date fair value of those awards as calculated for pro forma
disclosures under Statement 123, as originally issued. All new awards and awards
that are modified, repurchased, or cancelled after the adoption date will be
accounted for under the provisions of Statement 123(R). The second method is the
modified retrospective application, which requires that the Company restates
prior period financial statements. The modified retrospective application may be
applied either to all prior periods or only to prior interim periods in the year
of adoption of this statement. The new standard will be effective for the
Company in the first interim reporting period beginning after June 15, 2005. The
Company is still evaluating the impact the adoption of this standard will have
on its financial statements.






20
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****




**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 ($8.10 per share as of December 31, 2004) 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 Palisade Merger Agreement) reserved to pay the Payment
Amount.  The
classification of these investments in the Balance Sheet is determined based on
the term of the collateral requirement and not the maturity date of the
underlying securities.





In April
2003, the Company settled a claim with dissenting stockholders which had
demanded appraisal rights in connection with the Palisade Merger. Under the
terms of the settlement, the Company purchased 113,280 shares of Old Refac
Common Stock held by such dissenting stockholders for $595,000 or $5.25 per
share. The Company then exchanged these shares for the merger consideration
consisting of $408,000 and 22,656 shares of Common Stock. No other stockholders
have appraisal rights with respect to the Palisade Merger.






21
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****




**Note
3 - Related Party Transactions**





Palisade
Capital Management, L.L.C. (“ PCM ”), the
investment adviser to Palisade, on behalf of itself and/or its portfolio
companies, requests, from time to time, that the Company provide certain
consulting services. In consideration for these services, PCM pays the Company a
basic monthly retainer of $5,000, subject to quarterly adjustment based upon the
services actually 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 earned $75,000 and $30,000, respectively, for services
rendered during 2004 and 2003.





As of
February 2004, the Company agreed to provide consulting services directly to
Neurologix, Inc., a public company in which PCM beneficially owns approximately
29% of the outstanding capital stock at a basic monthly retainer of $5,000,
subject to quarterly adjustment based upon the services actually 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 earned $95,000 for
services rendered during 2004.





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
occupied approximately 1,185 gross rentable square feet through June 21, 2004
(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
2004, the Company received a federal income tax refund of $579,000 resulting
from carrying back a net operating loss incurred in 2003. During 2003, the
Company received federal income tax refunds of $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. Currently, in accordance with a requirement to examine refund
claims over $2,000,000, the IRS is reviewing the Company’s tax refunds received
in 2003. While the IRS has advised the Company that its review does not
constitute an audit, it can change the scope of its review at any time and can
initiate an examination on all open tax years. In connection with the pending
review and the outcome of any audit that IRS may initiate, the Company has
established a reserve of approximately $275,000 as of December 31, 2004. While
the Company believes that this reserve is adequate, since the IRS has not
completed its review and the statute of limitations has not passed, no
assurances can be given as to the sufficiency of this reserve.


**


*Income
Taxes Receivable*  *-* The
Company’s income tax receivable as of December 31, 2004 is based upon its
ability to carry back a 2001 foreign tax credit 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, 2004, 2003 and 2002 were as follows:






22
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





**2004**
    
    **2003**
    
    **2002**Federal
    
    $
    34,000
    
    $
    (730,000
    )
    $
    2,167,000Deferred
    
    
    (164,000
    )
    
    96,000
    
    
    (847,000
    )State
      and local
    
    
    -
    
    
    (40,000
    )
    
    92,000$
    (130,000
    )
    $
    (674,000
    )
    $
    1,412,000








The provision
(benefit) for taxes on income from continuing operations for the years ended
December 31, 2004, 2003 and 2002 differed from the amount computed by applying
the statutory federal income tax rate of 34% as follows:




**2004**
    
    **2003**
    
    **2002**Statutory
      rate
    
    
    (34%
    )
    
    (34%
    )
    
    34%Permanent
      differences related to merger
    
    
    -
    
    
    5%
    
    
    -State
      and local
    
    
    -
    
    
    (2%
    )
    
    2%Dividend
      Received Exclusion
    
    
    (1%
    )
    
    -
    
    
    -Provision
      (benefit) for taxes on income
    
    
    (35%
    )
    
    (31%
    )
    
    36%


**


*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:






23
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****






**December
      31,****2004**
    
    **2003**Deferred
      tax assets:Assets
      transferred to the Company from former subsidiaries
    
    $
    201,000
    
    $
    512,000Management
      incentive compensation
    
    
    482,000
    
    
    391,000Federal
      and state net operating loss carryforwards
    
    
    480,000
    
    
    173,000Deferred
      rent and contingent loss on leasehold
    
    
    67,000
    
    
    75,000Depreciation,
      insurance policies and other
    
    
    84,000
    
    
    -Total
      deferred tax assets
    
    
    1,314,000
    
    
    1,151,000Less:
      Valuation allowance
    
    
    287,000
    
    
    297,000Net
      deferred tax assets
    
    $
    1,027,000
    
    $
    854,000





As of
December 31, 2004, the Company had deferred tax assets relating to the State of
New Jersey aggregating $287,000 of which $168,000 is attributable to New Jersey
net operating loss carryforwards of $953,000 and $1,882,000 in 2004 and 2003,
respectively, which can be applied against any New Jersey taxable income the
Company might earn during the seven year period after the year in which such
carryforward was recognized for tax purposes. The Company cannot determine
whether it will generate any New Jersey taxable income. Due to such uncertainty,
the Company has estimated that none of its New Jersey related deferred taxes
assets will be realized and has established a full valuation allowance. The need
for a valuation allowance will continue to be reviewed periodically and adjusted
as necessary.





As of
December 31, 2004, the Company had federal deferred tax assets aggregating
$1,027,000 of which $312,000 is attributable to federal net operating loss
carryforwards of $912,000 and $5,000 in 2004 and 2003, respectively, which can
be used during the twenty year period after the years in which such
carryforwards were recognized for tax purposes. 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.






24
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





**Note
5 - Commitments**





*A.
Leasehold Obligations*





In May 1999,
the Company relocated its corporate offices and creative studio to newly
constructed leased facilities in Edgewater, New Jersey pursuant to a lease that
expires on November 16, 2009. In October 2001, the Company subleased a portion
of these premises, together with furniture, for an annualized payment of
$270,000 through May 2005. This subtenant has informed the Company that it has
made arrangements for other space when the sublease terminates and therefore
will not be renewing the sublease. Accordingly, the Company is now seeking to
find another subtenant for these premises. In connection with the sale of the
Company’s Graphic Design Group, the Company also entered into a sublease with
the acquiring company for 3,492 square feet of commercial rentable space. The
sublease expires in mid-November 2009, which is co-terminus with the Company’s
master lease. In connection with the sale of the Company’s Product Design Group,
the Company entered into a sublease with the acquiring company for 9,574 square
feet of commercial rentable space, which sublease was terminated by mutual
agreement on October 5, 2004. See Note 15D for more information regarding such
settlement. In January 2005, the Company subleased this space to a new tenant
under a sublease which extends through October 31, 2009 with rental payments
commencing in June 2005.




In February
2003, the Company and its landlord amended the master lease to reduce the
rentable square footage by 9,757 square feet and the aggregate rent payable over
the remaining term of the lease by $840,000. Taking this amendment into account,
the annual rent due under the lease in 2005 and thereafter is $457,000 subject
to a maximum cost of living increase of 2.5% per annum.




From May 1,
2003 through June 18, 2004, the Company occupied approximately 1,185 gross
rentable square feet in Fort Lee, New Jersey under a sublease with PCS, an
affiliate of PCM, at a monthly rent of $3,000. On June 19, 2004, the Company
relocated to new space in the same building encompassing 4,751 gross rentable
square feet under a direct lease with the landlord. This lease expires on June
30, 2009 and provides for a five-year renewal option. Under the lease, the
Company was required to pay $55,000 toward the construction of the premises. As
of December 31, 2004, the base rent for the balance of the initial term
aggregated $677,000, subject to escalations for increases in real estate taxes
and operating costs.




The following
table reflects the net rental expense (income) covering all Company facilities
for the years ended December 31, 2002, 2003 and 2004.





Year
    
    Rental
      Expense
    
    Sublease
      Income
    
    Net
      Rent Expense (Income)2002
    
    $
    617,000
    
    $
    360,000
    
    $
    257,0002003
    
    $
    508,000
    
    $
    592,000
    
    $
    (84,000
    )2004
    
    $
    525,000
    
    $
    548,000
    
    $
    (23,000
    )








25
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





The future
minimum rental payments required under operating leases for fiscal 2005 through
fiscal 2009 are $592,000 in 2005, $603,000 in 2006, $619,000 in 2007, $632,000
in 2008 and $500,000 in 2009 when all leases terminate. These future minimum
lease payments do not include future sublease rental income for fiscal 2005
through fiscal 2009 of $307,000 in 2005, $274,000 in 2006, $285,000 in 2007,
$291,000 in 2008, $252,000 in 2009 when all subleases terminate.




Based upon a
discounted cash flow analysis as of December 31, 2004, the Company determined
that the projected leasehold expenses of its leasehold in Edgewater, New Jersey
exceed the projected leasehold income by $96,000. Accordingly, it recorded a
contingent loss, and established a corresponding reserve that will be updated on
a quarterly basis as necessary.




*B.
Employment Agreements and Incentive Compensation*





The Company
is party to an employment contract with its President and Chief Executive
Officer, which became effective upon the completion of the Palisade Merger, and,
as amended and restated, has a term ending on March 31, 2005. During the term,
the officer is entitled to an annual base salary of $300,000. Upon completion of
the Palisade Merger, the officer received a signing bonus of $800,000 and the
entitlement to retention payments totaling $500,000. In addition, he is entitled
to incentive compensation equal to an aggregate of 16% of “GLDA”. “ GLDA ” is
defined in the employment agreement as the sum of the following:






·
    the
      liquid distributable assets of the Company as of June 30, 2005, as
      calculated under the Palisade Merger Agreement, plus·
    the
      signing bonus, retention and incentive compensation payments paid or
      payable to him and the signing bonus and incentive compensation payments
      paid or payable to the Company’s Vice President as a result of the
      Palisade Merger, less·
    the
      sum of $17,844,000.




In 1996, the
officer exercised options previously granted under the Company’s 1990 Stock
Option Plan to purchase 100,000 shares of Old Refac Common Stock. In connection
with such exercise, the Company provided the officer with a loan of $375,000
(which was reduced to $365,000 after the officer paid back $10,000). The note,
as modified in March 2002, bears interest at the rate of 6% per annum and is
payable in ten (10) equal annual installments commencing on December 31, 2004.
As of December 31, 2004, the note was current and the principal balance was
$337,000.





The Company
is also party to an employment contract with its Vice President and Chief
Financial Officer. As amended and restated, the officer’s current employment
agreement became effective upon the completion of the Palisade Merger, and has a
term ending on March 31, 2005. During the term, the officer is entitled to an
annual base salary of $175,000. Upon completion of the Palisade Merger, the
officer received a signing bonus of $314,000. In addition, he is entitled to the
payment of incentive compensation equal to an aggregate of 4% of “GLDA.” “GLDA”
is determined in the same manner as under the President and Chief Executive
Officer’s employment agreement.





26
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





As a result
of such amendments to the employment agreements, these officers received signing
bonuses aggregating $1,114,000 on February 28, 2003. Additionally, as of
December 31, 2004, the Company estimated that the management incentive
compensation payable could aggregate $1,140,000, inclusive of a $294,000
adjustment in December 2004 due to the Company’s receipt in February 2005 of
$1,500,000 from the former president of its trademark licensing subsidiary in
payment of its interest in a litigation brought by a former client against Taco
Bell (See Note 10). An amendment to the President and Chief Executive Officer’s
agreement in November 2003 extended the term from March 31, 2004 to March 31,
2005 and recast the payment schedule for the retention bonuses. Such retention
payments aggregating $500,000 which had been scheduled to be paid prior to March
31, 2004 were recast to be payable in fifteen (15) equal consecutive monthly
installments of $33,000 commencing on January 1, 2004. The officer received
$400,000 in such retention payments during 2004.





*C.
Deferred Compensation/Post-Retirement Benefits*





On December
13, 1996, the Company entered into a retirement agreement with its then Chairman
and Chief Executive Officer. For a period of three years, from July 1, 1997 to
June 30, 2000, the former chairman acted as a consultant to the Company. The
retirement agreement also provides for an annuity of $100,000 per annum during
his life; medical and health benefits for him and his spouse during their lives;
and office facilities, equipment and personnel support for two years following
his consulting services. In 1996, the Company expensed $445,000 for such
retirement benefits, which represented the present value of the expected
payments, following the consultancy period, based upon his then estimated life
expectancy and recorded the corresponding liability. The Company began making
payments during the second half of 2000 which had the effect of reducing the
liability to zero as of December 31, 2003. Starting in January 2004, payments
are being treated as a current charge in the year made.




**Note
6 - Investments Held to Maturity and Available for Sale Securities**





Investments
held to maturity at December 31, 2004 consist of U.S. Treasury Notes with an
amortized cost of $34,758,000. All U.S. Treasury Notes mature in 2005. Pursuant
to the Palisade Merger Agreement the Company has restricted $5,416,000 of its
investments being held to maturity to maintain the Contingent Fund (as defined
in the Palisade Merger Agreement). Investments held to maturity at December 31,
2003 consisted of U.S. Treasury Notes and corporate bonds with an amortized cost
of $33,425,000.





Available for
sale securities at December 31, 2004 consist of $1,000,000 of variable
cumulative preferred stock from a single issuer with a dividend rate which is
determined by an auction method every forty-nine days.




27
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****




**Note
7 - Property and Equipment**




Property and
equipment consists of the following:





**December
      31,****2004**
    
    **2003**Leasehold
      improvements
    
    $
    932,000
    
    $
    876,000Furniture
      and fixtures
    
    
    352,000
    
    
    289,000Computer
      software and equipment
    
    
    70,000
    
    
    61,000Office
      and other equipment
    
    
    23,000
    
    
    12,0001,377,000
    
    
    1,238,000Less:
      Accumulated depreciation
    
    
    (630,000
    )
    
    (461,000
    )$
    747,000
    
    $
    777,000





Depreciation
and amortization aggregated $169,000, $422,000 and $207,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.





**Note
8 - Stockholders’ Equity**




*Stock
Option Plans*





The Company
measures compensation using the intrinsic value approach under Accounting
Principles Board (APB) Opinion No. 25.





In May 1990,
stockholders approved the 1990 Stock Option and Incentive Plan (the
“ 1990
Plan ”) that
authorized the issuance of up to 300,000 shares of the Company’s pre-merger
common stock, par value $.10 per share (“ Old
Refac Common Stock ”), and,
in May 1997, the 1990 Plan was amended to provide for a 100,000 share increase
in the number of authorized shares. As of March 14, 2000, no further grants were
allowed under the 1990 Plan. Upon the closing of the Palisade Merger, the 1990
Plan was terminated.





In May 1998,
the stockholders approved the 1998 Stock Option and Incentive Plan (the
“ 1998
Plan ”) that
authorized the issuance of up to 300,000 shares of Old Refac Common Stock. On
January 23, 2003, the 1998 Plan was amended, effective as of the Palisade
Merger, to provide that in the event that the services of a non-employee
director terminate for any reason, all director options that are outstanding and
held by such non-employee director at the time of such termination shall remain
exercisable by such non-employee director for the remainder of the original term
of such director option. As a result of this amendment, the options held by
certain directors were remeasured and a compensation expense of approximately
$48,000 was recorded in the year ended December 31, 2003. Upon the closing of
the Palisade Merger, the 1998 Plan was terminated.








28
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





In addition
to the 1990 Plan and the 1998 Plan outlined above, in January 1998, the Company
granted an employee options to purchase 50,000 shares of Old Refac Common Stock
which were canceled in January 2002. Warrants to purchase 200,000 shares of Old
Refac Common Stock which were issued in 1997 expired in April 2002 and
non-qualified stock options to purchase 165,000 shares of Old Refac Common Stock
issued in 1997 have been forfeited or cancelled as of December 2004.




In January
2004, the Company also granted to the principal of one of the executive search
firms engaged in recruiting individuals and/or teams within the asset management
industry an option to purchase 25,000 shares of the Company’s common stock at a
per share exercise price of $5.02, which was equal to the fair market value of
the Company’s common stock on the date of grant (see Note 12). The option vests
upon the first anniversary date of the closing of the transaction contemplated
in the engagement agreement (the “ Closing ”) and
shall have a term of five years from the date of grant. The fair value of the
option will be measured using the Black-Scholes option-pricing model as of the
Closing (if any) and expensed in its entirety as of such date.




The table
below summarizes all option activity for the pre-merger options with respect to
the Old Refac Common Stock, excluding the warrant:





**2004**
    
    **Weighted
      Average Exercise Price**
    
    **2003**
    
    **Weighted
      Average Exercise Price**
    
    **2002**
    
    **Weighted
      Average Exercise Price**Outstanding
      at beginning of year
    
    
    232,500
    
    $
    6.47
    
    
    244,000
    
    $
    6.32
    
    
    485,750
    
    $
    6.88Options
      granted
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Options
      exercised
    
    
    (50,000
    )
    
    2.88
    
    
    (11,500
    )
    
    3.42
    
    
    (2,750
    )
    
    2.70Options
      forfeited
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (239,000
    )
    
    7.49Outstanding
      at end of year
    
    
    182,500
    
    $
    7.45
    
    
    232,500
    
    $
    6.47
    
    
    244,000
    
    $
    6.32Exercisable
      atend
      of year
    
    
    182,500
    
    $
    7.45
    
    
    232,500
    
    $
    6.47
    
    
    244,000
    
    $
    6.32








The following
table summarizes all option data for the pre-merger options with respect to the
Old Refac Common Stock as of December 31, 2004:






29
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****




**Price
      Range**
    
    **Outstanding
      at December 31, 2004**
    
    **Weighted
      Average Contract Life (Years)**
    
    **Weighted
      Average Exercise Price**
    
    **Exercisable
      at December 31, 2004**
    
    **Weighted
      Average Exercise Price****Minimum**
    
    **Maximum**$               
      2.50
    
    $
    3.50
    
    
    40,000
    
    
    1.22
    
    $
    2.50
    
    
    40,000
    
    $
    2.50$               
      3.51
    
    $
    4.70
    
    
    7,500
    
    
    4.96
    
    $
    3.81
    
    
    7,500
    
    $
    3.81$                4.71
    
    $
    7.10
    
    
    10,000
    
    
    3.96
    
    $
    6.88
    
    
    10,000
    
    $
    6.88$               
      7.11
    
    $
    9.50
    
    
    125,000
    
    
    2.20
    
    $
    9.30
    
    
    125,000
    
    $
    9.30Total
    
    182,500
    
    
    2.20
    
    $
    7.45
    
    
    182,500
    
    $
    7.45





Pursuant
to the Palisade Merger Agreement, upon the exercise of any pre-merger options,
the optionee is entitled to receive the following: (i) if the option is
exercised on or prior to June 30, 2005, the Merger Consideration as defined in
the Palisade Merger Agreement or (ii) if the option is exercised after June 30,
2005, $3.60 in cash (from Palisade) and 0.2 shares of the Company’s post-merger
common stock, par value $.001 per share (“ Common
Stock ”).





In June
2003, the stockholders approved the 2003 Stock Option and Incentive Plan (the
“ 2003
Plan ”) that
authorizes the issuance of up to 500,000 shares of Common Stock. The 2003 Plan
authorizes the issuance of various incentives to employees (including officers
and directors) including stock options, stock appreciation rights, and
restricted performance stock awards. The 2003 Plan allows the Board to determine
type, shares and terms of the grants. The table below summarizes all option
activity for options granted to employees and directors under the 2003 Plan
after the Palisade Merger:




**2004**
    
    **Weighted
      Average Exercise Price**
    
    **2003**
    
    **Weighted
      Average Exercise Price**Outstanding
      at beginning of year
    
    
    150,000
    
    $
    4.64
    
    
    -
    
    
    -Options
      granted
    
    
    45,000
    
    
    4.72
    
    
    150,000
    
    
    4.64Options
      exercised
    
    
    -
    
    
    -
    
    
    -
    
    
    -Options
      forfeited
    
    
    -
    
    
    -
    
    
    -
    
    
    -Outstanding
      at end of year
    
    
    195,000
    
    $
    4.66
    
    
    150,000
    
    $
    4.64Exercisable
      at end of year
    
    
    115,001
    
    $
    4.65
    
    
    50,000
    
    $
    4.64











30
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****








The following
table summarizes the data, as of December 31, 2004, for options granted after
the Palisade Merger under the 2003 Plan:





**Price Range****Minimum**
    
    ****
      **Maximum**
    
    **Outstanding
      at December 31, 2004**
    
    **Weighted
      Average Contract Life (Years)**
    
    **Weighted
      Average Exercise Price**
    
    **Exercisable
      at December 31, 2004**
    
    **Weighted
      Average Exercise Price**$       4.20
    
    $
    4.70
    
    
    115,000
    
    
    8.24
    
    $
    4.49
    
    
    75,001
    
    $
    4.49$       4.71
    
    $
    5.02
    
    
    80,000
    
    
    6.60
    
    $
    4.90
    
    
    40,000
    
    $
    4.94Total
    
    195,000
    
    
    7.57
    
    $
    4.66
    
    
    115,001
    
    $
    4.65




The following
table sets forth **** information **** as of
December 31, 2004, adjusted to reflect the terms of the Merger, with respect to
compensation plans (including individual compensation arrangements) under which
equity securities of the Corporation are authorized for issuance.




**Plan
      category**
    ****
    **Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights**
      **(a)**
    ****
    **Weighted
      average exercise price of outstanding options, warrants and rights**
      **(b)**
    ****
    **Number
      of securities remaining available for future
issuance**
      **(c)**Equity
      compensation plans approved by security holders
    
    
    231,500
    
    $
    5.10
    
    
    305,000Equity
      compensation plans not approved by security holders
    
    
    25,000
    
    $
    5.02
    
    
    -Total
    
    
    256,500
    
    $
    5.09
    
    
    305,000





*Preferred
Stock*





The Company
has 1,000,000 shares of preferred stock, $.001 par value per share, authorized,
none of which have been issued.





**Note
9 - Concentrations and Foreign Source Income**





The Company
has a contract with Patlex which accounted for approximately 76%, 56% and 20% of
the Company’s total revenues from continuing operations for 2004, 2003 and 2002,
respectively. 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, which expired in November 2004. The other
patent expires in May 2005. As a result of the expiration of these patents, the
Patlex income will be significantly lower in 2005 as compared to
2004.





31
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





The Company
did not have any foreign source revenues from its domestic licensing-related
activities in 2003 or 2004. In 2002, it had foreign source revenues of $290,000
and $56,000 from Europe and Asia, respectively.





**Note
10 - Wrench versus Taco Bell Litigation**





By Agreement,
dated as of January 31, 2002, the Company and Ms. Arlene Scanlan, who was then
President of Refac Licensing, Inc. (“ RL ”),
agreed to a termination of her employment agreement and stock options and to a
conveyance of her 19% interest in RL to the Company. This termination agreement
requires Ms. Scanlan to pay the Company 50% of the first $3,000,000 that she, or
any entity controlled by her, may receive relating to a certain lawsuit brought
by a former client of RL against Taco Bell Corp. On January 27, 2005, the
lawsuit was settled and the Company received payment of $1,500,000, representing
the Company’s share of the settlement, on February 4, 2005. This amount will be
recorded as revenue from licensing-related activities in the fiscal quarter
ended March 31, 2005.





**Note
11 - Accounts Payable and Accrued Expenses**





Accounts
payable and accrued expenses consist of the following:





**Years
      Ended December 31,****2004**
    
    **2003**Accounts
      payable
    
    $
    10,000
    
    $
    11,000Amounts
      payable under service agreements
    
    
    71,000
    
    
    26,000Accounting
      and auditing
    
    
    91,000
    
    
    77,000Deferred
      rent
    
    
    72,000
    
    
    87,000Legal
    
    
    28,000
    
    
    46,000Payroll
    
    
    -
    
    
    100,000Tax
      reserve
    
    
    281,000
    
    
    275,000Reserve
      on rental loss
    
    
    96,000
    
    
    -Other
    
    
    36,000
    
    
    71,000Total
    
    $
    685,000
    
    $
    693,000





**Note
12 - Asset Management**





On January
27, 2004, the Company announced that it would focus its acquisition efforts on
opportunities in the asset management sector of the financial services industry.
In furtherance thereof, the Company has engaged two providers 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 8). One agreement provides for the payment of a
non-refundable retainer of $300,000, which was amortized over a five month
period beginning February 1, 2004, and the other agreement, which was signed on
October 11, 2004, provides for a non-refundable retainer of $100,000 that is
being amortized over a six month period commencing October 1, 2004. In both
instances, the retainer is creditable against a success-based fee based upon the
first year total cash compensation of the team members recruited. Although this
search in ongoing, no assurance can be given that the Company will be successful
in its recruitment efforts, or if it is, that it will be able to build a
profitable asset management business.








32
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





**Note
13 - Business Combinations and Intangible Assets - Accounting for
Goodwill**





In June 2001,
the Financial Accounting Standards Board approved the issuance of SFAS No. 141,
“Business Combinations” and in July 2001, SFAS 142, “Goodwill and Other
Intangible Assets.” The 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 through contractual or legal right,
or which 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 are no longer subject to amortization, but are
subject to at least an annual assessment for impairment by applying a fair value
based test. The Company adopted SFAS 142 as of January 1, 2002 and in compliance
with this standard discontinued the amortization of goodwill. With the sale of
the Company’s Creative Consulting Services and Manufacture and Marketing of
Consumer Products groups in the third quarter of 2002, the Company no longer has
goodwill on its balance sheet.




During the
quarter ended June 30, 2002, the Company completed the steps required to value
the carrying value of goodwill existing at January 1, 2002. As a result, a
non-cash charge of $2,083,000 net of tax, or ($0.55) per share was recorded as a
cumulative effect of change in accounting principle in the statement of
operations for the six months ended June 30, 2002. At June 30, 2002, the Company
designated the Creative Consulting Services and Manufacture and Marketing of
Consumer Products segments as Assets Held for Sale under provisions of SFAS 144.
Based on actual terms of the sale of the Graphic Design Group (see Note 15A),
which took place on August 5, 2002, and terms that were then being discussed
with Product Genesis, LLC (see Note 15D), the Company determined the fair value
of the reporting units were less than the book values and recorded a goodwill
impairment charge of $2,811,000. The Company has recorded this impairment
charge, net of tax benefits, in losses from discontinued operations in the
fiscal quarter ended June 30, 2002. The Company subsequently sold the Product
Design Group on September 20, 2002.








33
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





The following
pro forma table shows the effect of the cumulative effect of change in
accounting principle on the Company’s net loss recorded for the year ended
December 31, 2002, as follows:





Reported
      net loss
    
    $
    (1,269
    )Cumulative
      effect of change in accounting principle, net of tax
    
    
    (2,083
    )Adjusted
      net income
    
    $
    814Reported
      net loss per share - Basic and Diluted
    
    $
    (0.33
    )Adjustment
      for cumulative effect of change in accounting principle -Basic
      and Diluted
    
    $
    (0.55
    )Adjusted
      net income per share - Basic and Diluted
    
    $
    0.22





**Note
14 - Accounting for the Impairment or Disposal of Long-lived
Assets**





Prior to
January 1, 2002, the Company estimated the recoverability of its long-term
assets by consideration of the estimated future undiscounted cash flow from the
operations of the business segments to which those long-term assets relate. As
of January 1, 2002, the Company adopted the provisions of SFAS 144, and now
evaluates the recoverability of its long-term assets under the provisions
thereof. While such provisions retain the considerations the Company has
previously made in evaluating the recoverability of its long-term assets as
discussed above, SFAS 144 provides an additional triggering event to require an
impairment test --- a current expectation that, more likely than not, a
long-term asset or asset group will be sold or disposed of significantly before
the end of its previously estimated useful life. Assets that are considered to
be “held for sale” are measured at the lower of carrying amount or fair value,
less the costs to sell. Once an asset is determined to be “held for sale,”
depreciation on such asset ceases. Long-term assets to be disposed of by sale
may not be classified as held for sale, however, until the period in which all
of the following criteria are met:





·  management
commits to a plan to sell the asset or group,




·  the asset
or group is available for immediate sale in its present condition,




·  actions
to complete the plan to sell have been initiated,




·  it is
probable the sale will be completed within one year,




·  the asset
or group is being actively marketed at a reasonable price, and




·  it is
unlikely that significant change will be made to the plan or that it will be
withdrawn.





Based upon
the above criteria, the assets of the Creative Consulting Services and the
Manufacture and Marketing of Consumer Products Groups became considered held for
sale during the second quarter of 2002 and evaluated under SFAS 144. In such
valuation, the Company used the actual terms of the sale of the Graphic Design
Group (see Note 15D below) and the terms that were then being discussed with the
company that subsequently acquired the Product Design Group.






34
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





In connection
with SFAS 144, the following tables summarize the revenues and pretax loss of
the reported discontinued operations of the Assets Held for Sale for the year
ended December 31, 2002:





**Year
      Ended**
      **December
      31, 2002**
    
    **Graphic
      Design Group**
    
    **Product
      Design Group**
    
    **Consumer
      Products Group**
    
    **Total**
      **Discontinued
      Operations**Revenues
    
    $
    785,000
    
    $
    1,469,000
    
    $
    2,168,000
    
    $
    4,422,000Pretax
      loss
    
    
    (1,148,000
    )
    
    (3,639,000
    )
    
    (1,927,000
    )
    
    (6,714,000
    )





**Note
15 - Business and Asset Dispositions**





*A.*
    *Sale
      of the Graphic Design Group*





In
furtherance of its plan to reposition itself for sale or liquidation, on August
5, 2002, the Company sold certain assets, including certain accounts receivable,
furniture and equipment, customer lists and goodwill, subject to certain
liabilities, of the Graphic Design Group to a company formed by its president
and former owner. The transaction was effective as of August 1, 2002 and the
purchase price was $371,000 consisting of a lump-sum payment due on or before
August 31, 2002 of $54,000 and a 6% promissory note for $317,000, which is
payable in sixty (60) equal consecutive monthly installments of $6,000
commencing January 1, 2003. As of December 31, 2004, the unpaid principal
balance under this note was $205,000.





As part of
this transaction, the Company also entered into a sublease with the acquiring
company for 3,492 square feet of commercial rentable space. The sublease expires
in mid-November 2009, which is co-terminus with the Company’s master lease. As
of December 31, 2004, the rent for the remaining term of the sublease was
$440,000.





*B.*
    *Sale
      of Licensing-Related Assets*





On August 19,
2002, Refac International, Ltd. (“ RIL ”) sold
its Gough licensing property and royalties receivable to Gough Holdings
(Engineering), Ltd. (“ GHE ”) for
$450,000, payable in five semi-annual installments, without interest, commencing
September 30, 2002. GHE paid the first two installments aggregating $140,000 but
asked the Company for an accommodation on the $100,000 third installment which
was due on September 30, 2003. The Company agreed to accept payment of $30,000
in cash and GHE’s promissory note for the balance of $70,000. This note was
payable in seven (7) equal consecutive monthly installments of $10,000 each,
with interest at the rate of 10% per annum, with the first installment becoming
due on November 1, 2003. On April 14, 2004, the Company and GHE entered into a
discounted payment settlement agreement pursuant to which the Company received
$215,000 on April 15, 2004. In connection with this settlement, the Company
recorded a loss of $12,000 in the first quarter of 2004.






35
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





On August 19,
2002, RIL sold its Heli-Coil and Dodge licensing rights, related sublicense
agreements and monies due thereunder after June 30, 2002 to Newfrey LLC
(formerly Emhart LLC) for $4,000,000. The proceeds from this sale were received
in August 2002.





*C.*
    *OXO
      International*





On September
20, 2002, RIL amended its agreement with OXO International (“ OXO ”), a
division of World Kitchen, Inc. This amendment, which was approved by the court
overseeing OXO’s bankruptcy, provided for payments to the Company of $550,000 of
which $10,000 was for past due royalties; $180,000 for royalties for the six
month period ending December 31, 2002 and $360,000 for royalties for the year
ending December 31, 2003. In February 2004, OXO made the final payment due under
this obligation.





*D.*
    *Sale
      of the Product Design Group*





On September
20, 2002, RIL sold its Product Design Group to Product Genesis, LLC
(“ PG ”) for a
variable purchase price based upon 21⁄2% of net revenues up to an aggregate of
$300,000. Due to the uncertainties of collection of the purchase price, the
Company did not allocate any cost basis to this contract right and recorded the
$36,000 received in 2003 from PG as income from such discontinued operations. In
December 2003, PG notified the Company that it was discontinuing its product
design operations and, in January 2004, it advised the Company that it had
entered into an agreement with Factors NY, LLC, a company wholly-owned by a
former employee of PG, to purchase the goodwill and certain assets of PG.
Pursuant to an agreement, dated February 10, 2004, PG paid the Company the sum
payment of $30,000 in full settlement of the contingent balance of the variable
purchase price.





The Company
also entered into a sublease with PG for 9,574 square feet of commercial
rentable space with a termination date of November 15, 2009. On December 22,
2003, by lease amendment, the Company released its security interest in PG’s
machinery, equipment, furniture, fixtures and chattels located at the leased
premises in consideration of a cash security deposit in the sum of $75,000. PG’s
sale of the business referred to in the preceding paragraph did not include this
sublease.





On July 6,
2004, PG, through a turnaround consultant, notified the Company that due to
extreme financial hardship, neither PG, nor its affiliated companies, Product
Genesis, Inc. (“ PG-INC ”) and
Product Genesis Business Trust (“ PGBT ”), which
had guaranteed PG’s obligations under the sublease would be able to pay the rent
for July 2004, or any further rent or be further bound by the sublease. No
further rental payments were made after such notice.





On October 5,
2004, the Company entered into a settlement agreement with PG, PG-INC and PGBT
whereby it agreed to a termination of the sublease and a mutual release in
consideration of the application of the $75,000 security deposit to rent, the
payment of $150,000 in cash and $50,000 over a period of thirty-five months
commencing on November 1, 2004. PG paid the $50,000, which was evidenced by a
promissory note, in full in November 2004. In addition, under the settlement
agreement PG conveyed title to the Company to all of the furniture and equipment
it had left at the premises and waived a claim it had against the Company for
reimbursement of $20,000 in leasehold construction costs it had
incurred.






36
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements - (Continued)**
****





*E.*
    *Sale
      of Refac International, Ltd.*





On September
30, 2002, the Company completed the transfer of the assets and assumption of the
liabilities of its subsidiary, RIL, to the Company, excluding the capital stock
of Refac Consumer Products, Inc. (“ RCP ”), a
manufacturer of a line of consumer electronics products, and certain trademarks,
patents and a patent application relating to RCP’s business. After such
transfer, the Company sold RIL to RCP Products, LLC, a limited liability company
established by a former employee, for $50,000 plus a variable purchase price
based upon 21⁄2% of the revenues received in excess of $1,000,000 from the sale of
its consumer electronics products during the eight year period commencing
January 1, 2003, up to a maximum of $150,000 in any given year and a cumulative
total of $575,000. Due to the uncertainties of collection of the purchase price,
the Company has not allocated any cost basis to this contract right and will
record any monies that it may receive from RCP Products, LLC with respect
thereto as income from such discontinued operations. As of December 31, 2004,
the Company had not received any variable purchase price payments and based upon
information provided by the purchaser, it does not expect to receive any such
payments in the future.




**Note
16 - Unaudited Selected Quarterly Financial Data**





**2004****First
      Quarter**
    
    **Second
      Quarter**
    
    **Third
      Quarter**
    
    **Fourth
      Quarter**Total
      revenues
    
    $
    403,000
    
    $
    491,000
    
    $
    519,000
    
    $
    366,000Cost
      of revenues
    
    
    31,000
    
    
    30,000
    
    
    31,000
    
    
    32,000Net
      income (loss) from continuing operations
    
    
    (174,000
    )
    
    (39,000
    )
    
    126,000
    
    
    (152,000
    )Net
      income (loss)
    
    $
    (169,000
    )
    $
    (39,000
    )
    $
    131,000
    
    $
    (148,000
    )Net
      income (loss) from continuing operations per basicand
      diluted shares
    
    $
    (0.02
    )
    $
    (0.01
    )
    $
    0.02
    
    $
    (0.02
    )Net
      income (loss) per basic and diluted shares
    
    $
    (0.02
    )
    $
    (0.01
    )
    $
    0.02
    
    $
    (0.02
    )






37
 **Refac
and Subsidiaries**
**Notes
to Consolidated Financial Statements**
****





**2003****First
      Quarter**
    
    **Second
      Quarter**
    
    **Third
      Quarter**
    
    **Fourth
      Quarter**Total
      revenues
    
    $
    451,000
    
    $
    543,000
    
    $
    346,000
    
    $
    464,000Cost
      of revenues
    
    
    29,000
    
    
    28,000
    
    
    30,000
    
    
    32,000Net
      loss from continuing operations
    
    
    (1,256,000
    )
    
    (102,000
    )
    
    (96,000
    )
    
    (80,000
    )Net
      loss
    
    
    ($1,247,000
    )
    
    ($83,000
    )
    
    ($92,000
    )
    
    ($74,000
    )Net
      loss from continuing operations per basic and diluted
    shares
    
    
    ($0.34
    )
    
    ($0.02
    )
    
    ($0.01
    )
    
    ($0.01
    )Net
      loss per basic and diluted shares
    
    
    ($0.34
    )
    
    ($0.02
    )
    
    ($0.01
    )
    
    ($0.01
    )









38
 ****
****




**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











Board of
Directors and Stockholders of


**Refac**








We have
audited the accompanying balance sheets of Refac as of December 31, 2004 and
2003 and the related statements of operations, stockholders’ equity, and cash
flows for each of the two years in the period ended December 31, 2004, and the
related consolidated statement of operations, stockholders’ equity and cash
flows of Refac and Subsidiaries for the year ended December 31, 2002. These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements 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, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Refac as of December 31, 2004 and
2003, and the results of its operations and its cash flows for the each of the
two years in the period ended December 31, 2004, and the consolidated results of
operations and cash flows for Refac and Subsidiaries for the year ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America.




As
discussed in Notes 13 and 14 to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 142, ‘Goodwill and Other
Assets,” and Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment of Long-Lived Assets,” respectively, on January 1,
2002.





GRANT
THORNTON LLP








New York,
New York


March 15,
2005









39


****


**Item
9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure**




None.




**Item
9A. Controls and Procedures**




(a)
Disclosure Controls and Procedures. The Company's Chief Executive Officer and
Chief Financial Officer have evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective.





(b) Internal
Control Over Financial Reporting. There have not been any changes in the
Company's internal control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth fiscal
quarter of 2004 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial
reporting.








**Item
9B. Other Information**




None.






40





**PART
III**





**Item
10. Directors and Executive Officers of the Registrant**








Under the
by-laws of the Company, the Board is divided into three classes: Class 1
directors, Class 2 directors and Class 3 directors. The members of one of the
three classes of directors are elected each year for a three-year term or until
their successors have been elected and qualified, or until the earliest of their
death, resignation or retirement. The Board is currently comprised of eight
directors.





There are no
family relationships between any of the directors or executive officers of the
Registrant nor were there any special arrangements or understandings regarding
the selection of any director or executive officer.


**


*Class
1 Directors* *with
Terms Expiring at the 2006 Annual Meeting of Stockholders*





CLARK A.
JOHNSON - Mr. Johnson, age 73, has been a director of the Company since 2000. He
has been the Chairman of PSS World Medical, Inc., a national distributor of
medical equipment and supplies to physicians, hospitals, nursing homes, and
diagnostic imaging facilities since October 2000. Mr. Johnson served as Chairman
and Chief Executive Officer of Pier 1 Imports from March 1985 to June 1998 and
is former Executive Vice President and Director of the Wickes Companies, Inc. He
is a director of the following public companies: MetroMedia International Group,
Neurologix, Inc., OptiCare Health Systems, Inc., which is controlled by Palisade
Capital Management, L.L.C. (“ PCM ”), and
PSS World Medical, Inc.




MARK N.
KAPLAN - Mr. Kaplan, age 75, has been a director of the Company since 1967. He
is Of Counsel to Skadden, Arps, Slate, Meagher & Flom LLP and was a member
of such law firm from 1979 to 1998. Mr. Kaplan also serves as a director of the
following public companies: American Biltrite Inc., Autobytel, Inc., DRS
Technologies, Inc., Congoleum Corporation and Volt Information Sciences, Inc.





*Class
2 Directors* *with
Terms Expiring at the 2007 Annual Meeting of Stockholders*





EUGENE K.
BOLTON - Mr. Bolton, age 61, has been a director since the
Meeting of Stockholders held on May 7, 2004 . He was,
until his retirement on February 1, 2004, Executive Vice President - Domestic
Equities for GE Asset Management. Mr. Bolton joined the General Electric Company
in 1964 in the Medical Systems business and held a variety of line and staff
assignments with the company over a 39-year career. In 1984, he was named Chief
Financial Officer of what is now GE Asset Management. In 1991, he became
responsible for the entire U.S. Equity operation, which he managed until his
retirement.




MARK S.
NEWMAN - Mr. Newman, age 55, has been a director since the Meeting of
Stockholders held on May 7, 2004. He is the Chairman of the Board, President and
Chief Executive Officer of DRS Technologies, Inc. (“ DRS ”), a
publicly-traded company and a leading supplier of defense electronics systems to
government and commercial customers worldwide. He joined DRS in 1973, served
many years as its Chief Financial Officer, was named a Director in 1988, became
President and Chief Executive Officer in 1994, and was elected Chairman of the
Board in 1995. Mr. Newman is a past Chairman of the American Electronics
Association, the Vice Chairman of the New Jersey Technology Council and a member
of the Board of Governors of the Aerospace Industries Association of America. In
addition to serving as Chairman of the Board of DRS, he is a director and
chairman of the audit committee of the following public companies: OptiCare
Health Systems, Inc., which is controlled by PCM, and Congoleum Corporation.






41




ROBERT L.
TUCHMAN - Mr. Tuchman, age 62, has been a director of the Company since 1991. He
has been the Company’s President and Chief Executive Officer since 1997. He also
served as the Company’s Chairman from 1997 until March 26, 2003, when Melvin
Meskin was elected as the non-executive Chairman of the Board. Mr. Tuchman is
also the Company’s General Counsel and served as its President and Chief
Operating Officer from 1991 to 1997.





*Class
3 Directors*  *with
Terms Expiring at the 2005 Annual Meeting of Stockholders*





MELVIN MESKIN
- Mr. Meskin, age 60, became a director of the Company on February 28, 2003 and
non-executive Chairman of the Board on March 26, 2003. He was, until his
retirement on January 1, 2002, Vice President-Finance-National Operations for
Verizon, the combined Bell Atlantic/GTE telecommunications company. Mr. Meskin
joined New York Telephone in 1970 and held a variety of line and staff
assignments with the company over a 31-year career. In 1994, he was named Vice
President-Finance and Treasurer for NYNEX Telecommunications. When Bell Atlantic
and NYNEX merged, he was appointed Vice President-Finance and Comptroller of
Bell Atlantic. He is a director of, and during 2004 was also a consultant to,
OptiCare Health Systems, Inc., a public company which is controlled by
PCM.





JEFFREY D.
SERKES - Mr. Serkes, age 46, became a director of the Company on February 28,
2003. Since July 2003, he has been the Senior Vice President and Chief Financial
Officer of Allegheny Energy, Inc. From June 2002 until he joined Allegheny
Energy, Inc., he was principally engaged in real estate investment and
development. From August 1994 to May 2002, Mr. Serkes held a variety of
financial management positions for IBM, including: Vice President, Finance,
Sales & Distribution from June 1999 to May 2002, Vice President and
Treasurer from January 1995 to May 1999 and Assistant Treasurer from August 1994
to December 1994. Prior to joining IBM, Mr. Serkes held a variety of treasury
management positions with RJR Nabisco, Inc.





DENNISON T.
VERU - Mr. Veru, age 44, is being nominated for the first time to join the
Board. Since March 2000, he has been the Executive Vice President and
Co-Investment Officer of PCM, a private investment firm which is an affiliate of
Palisade. In July 2004, he became of member of PCM. From November 1992 until
December 1999, he served as President and Director of Research of Awad &
Associates, a money management division of Raymond James Financial.





MARK S.
HOFFMAN - Mr. Hoffman, age 44, became a director of the Company on February 28,
2003 as a result of the Palisade Merger. Since 1995, Mr. Hoffman has been a
Managing Director of PCM, a private investment firm which is an affiliate of
Palisade. He is also a director of the following public companies: Neurologix,
Inc. and OptiCare Health Systems, Inc., which is controlled by PCM. As part of a
realignment of responsibilities for PCM's private equity portfolio holdings, Mr.
Hoffman will not stand for re-election to the boards of the Company and OptiCare
Health Systems, Inc.






42


**


*Executive
Officers*





Information
with respect to the executive officers of the Company is set forth
below.





Name
    Age
    Served
      in Such Position or Office
      Continually
      Since
    Position
      (1)Robert
      L. Tuchman
    62
    1991
    President,
      Chief Executive Officer and General Counsel (2)Raymond
      A. Cardonne, Jr.
    38
    1997
    Vice
      President, Chief Financial Officer, Treasurer and Secretary
      (3)


__________





NOTES:





(1)
    Each
      executive officer’s term of office is until the next organizational
      meeting of the Board (traditionally held immediately after the Annual
      Meeting of Stockholders of the Company) and until the election and
      qualification of his or her successor. However, the Board has the
      discretion to replace officers at any time.





(2)
    Mr.
      Tuchman has served as the Company’s President since August 1, 1991. Mr.
      Tuchman succeeded Eugene M. Lang as Chief Executive Officer of the Company
      on January 6, 1997 and as Chairman of the Board on June 30, 1997. He also
      serves as General Counsel. From August 1, 1991 until January 6, 1997, Mr.
      Tuchman served as the Company’s Chief Operating Officer. From May 1994 to
      March 1997 he held the position of Treasurer of the Company. After the
      Palisade Merger, Mr. Meskin was elected as non-executive Chairman of the
      Board and Mr. Tuchman continues to serve as the Company’s President, Chief
      Executive Officer and General Counsel.





(3)
    Mr.
      Cardonne became Chief Financial Officer and Treasurer of the Company in
      August 2000. He has served as Secretary of the Company since November 1998
      and as Vice President responsible for the licensing and commercialization
      of technologies since December 1997. Prior to joining the Company, from
      December 1994 through November 1997, Mr. Cardonne was a Vice President at
      Technology Management & Funding, L.P.****From
      August 1993 to December 1994, he worked for NEPA Venture Funds, an
      early-stage venture capital firm, and the Lehigh Small Business
      Development Center. He previously worked at Ford Electronics &
      Refrigeration Corporation from January 1990 to July
  1993.





*Audit
Committee*





The Audit
Committee of the Board consists of Jeffrey D. Serkes (Chair), Eugene K.
Bolton and Mark S. Newman, each of whom is an independent director as defined by
the listing standards of the American Stock Exchange. The Committee meets
periodically with the Company’s independent auditors to review plans for the
audit of the Company’s financial statements and the audit results and
authorizes, in its sole discretion, the engagement or discharge of the
independent auditors and reviews financial statements, accounting policies, tax
and other matters for compliance with the requirements of the Financial
Accounting Standards Board and government regulatory agencies.







43





Each member
of the Audit Committee is “financially sophisticated”, in that such member has
past employment experience in finance or accounting, requisite professional
certification in accounting, or any other comparable experience or background
which results in the individual’s financial sophistication, including but not
limited to, being or having been a chief executive officer, chief financial
officer and/or other senior officer with financial oversight responsibilities.
The Board has determined that each of the Audit Committee members is financially
sophisticated within the meaning of the rules of the American Stock Exchange and
is a “financial expert”, as that term is defined under Item 401(h) of Regulation
S-K under the Securities Exchange Act of 1934, as amended.





*Section
16(A) Beneficial Ownership Reporting Compliance*





Based solely
on its review of Forms 3, 4 and 5 filed under Section 16(a) of the Securities
Exchange Act of 1934, as amended, and amendments thereto, the Company believes
that during fiscal 2004, all Section 16(a) filing requirements applicable to its
officers, directors and other principal stockholders of the Company were
complied with.





**CODE
OF ETHICS**





The Board has
adopted an Amended and Restated Code of Ethics for its Senior Financial Officers
and the Company’s Chief Executive Officer and Chief Financial Officer have
signed the code and will be held to the standards outlined. In addition, the
Board has adopted an Amended and Restated Code of Ethics and Conduct applicable
to all employees, officers and directors of the Company. Copies of both codes of
ethics are available at the Company’s website at http://www.refac.com . The
information contained on the Company’s website shall not be deemed to be
incorporated into this report.






44




**Item
11. Executive Compensation**





The following
table presents the aggregate compensation for services in all capacities paid by
the Company and its subsidiaries in respect of the years ended December 31,
2004, 2003 and 2002 to the Chief Executive Officer and the Company’s other
executive officer (collectively, the “ Named
Executives ”).





**Summary
Compensation Table**





Annual
      Compensation
    
    Securities
      Underlying OptionsName,
      Age and Position
    
    Year
    
    Salary
    
    Bonus
    
    (#)Robert
      L. Tuchman, age 62,
    
    
    2004
    
    $
    300,000
    
    $
    400,000
    
    
    —President,
      Chief Executive
    
    
    2003
    
    $
    300,000
    
    $
    800,000
    
    
    25,000Officer
      and General Counsel
    
    
    2002
    
    $
    300,000
    
    $
    18,938
    
    
    —Raymond
      A. Cardonne, Jr., age 38,
    
    
    2004
    
    $
    175,000
    
    
    —
    
    
    —Vice
      President, Secretary and
    
    
    2003
    
    $
    175,000
    
    $
    313,744
    
    
    15,000Chief
      Financial Officer
    
    
    2002
    
    $
    175,000
    
    
    —
    
    
    —








**Opti** **on
Grants and Exercises in Last Fiscal Year** **and Fiscal Year-End Option Values**





During 2004,
no executives were issued stock options. The Company has not issued any stock
appreciation rights.





As a result
of the Palisade Merger, each option to acquire one share of common stock of the
Company, par value $0.10 per share, existing immediately prior to the Palisade
Merger (the “ Old
Refac Common Stock ”) is now
exercisable for the Palisade Merger consideration equal to $3.60 in cash and 0.2
shares of the Common Stock, plus the right (the “ Payment
Right ”) to
sell such Common Stock to the Company for a price which will depend upon the
Company’s liquid distributable assets (“ LDA ”) as of
June 30 2005, provided that the Payment Right is not available with respect to
options exercised after June 30, 2005. On February 17, 2004, Mr. Tuchman, the
Company’s Chief Executive Officer, exercised an option to acquire 50,000 shares
of Old Refac Common Stock at the exercise price of $2.875 per share, or a total
exercise price of $143,750. Upon such exercise, pursuant to the Merger
Agreement, Mr. Tuchman received $180,000 in cash from Palisade plus 10,000
shares of Common Stock. The closing price of the Common Stock on the date of
exercise was $4.91. No other options were exercised by the Named Executives in
2004.





The following
table reflects the options exercised by Mr. Tuchman and the “in-the-money
options”, held by the Named Executives as of December 31, 2004.






45






Number
      of Securities
      Underlying
      Unexercised
      Options
      At
      Fiscal Year-End
    
    Value
      of Unexercised
      In-the-Money
      Options
      At
      Fiscal Year-EndName
    
    Shares
      acquired on Exercise
    
    Value
      Realized
    
    Exercisable
    
    Not
      Exercisable
    
    Exercisable
    
    Not
      ExercisableRobert
      L. Tuchman
    
    
    10,000
    
    $
    85,350
    
    
    36,667
    
    
    8,333
    
    
    -
    
    
    -Raymond
      A. Cardonne, Jr.
    
    
    -
    
    
    -
    
    
    18,500
    
    
    5,000
    
    $
    10,875
    
    
    -




**


*Directors’
Compensation*





The Board has
adopted a policy of paying a fixed annual retainer of $15,000, payable in
quarterly installments of $3,750, to each director who is not also an employee
of the Company or a member, partner or executive officer of PCM or Palisade. In
addition, the Company pays retainers of $30,000 to the Chairman of the Board and
$15,000 to the Chairman of Audit and Compensation Committees. Accordingly, in
2004, Melvin Meskin, Chairman, received total compensation of $45,000, Jeffrey
D. Serkes, Chairman of the Audit Committee and Compensation Committee received
total compensation of $30,000, Clark A. Johnson and Mark N. Kaplan each received
total compensation of $15,000.





Eugene K.
Bolton and Mark S. Newman, who joined the Board in May 2004, each received total
compensation of $8,750, representing a pro-rated portion of the $15,000
retainer. On May 7, 2004, the Board also granted to each of Messrs. Bolton and
Newman options to purchase 20,000 shares of Common Stock, at an exercise price
of $4.78 per share under its 2003 Stock Incentive Plan. One-third (1⁄3) of these
options vested on the date of grant, one-third (1⁄3) will vest on the first
anniversary date of the date of grant and the remaining one-third (1⁄3) will vest
on the second anniversary date of the date of the grant.





**Employment
Contracts**





*Tuchman
Employment Agreement* . The
Company is party to an employment contract with Mr. Tuchman (the “ Tuchman
Employment Agreement ”), which
became effective upon the completion of the Palisade Merger, and, as amended and
restated, terminates on March 31, 2005. Pursuant to such agreement, Mr. Tuchman
received an annual base salary of $300,000 and retention payments aggregating
$400,000 during 2004.





In addition
to these salary and retention payments, the Tuchman Employment Agreement
provides for the payment of incentive compensation based on Mr. Tuchman’s
success in the repositioning of the Company. Such incentive compensation is
payable when the Payment Amount under the Merger Agreement is determined. At the
time of such payment, Mr. Tuchman will be entitled to an aggregate of 16% of
“GLDA”. “ GLDA ” is
defined in the employment agreement as the sum of the following:





a)
    the
      liquid distributable assets of the Company as of June 30, 2005, as
      calculated under the Merger Agreement, plus





b)
    the
      signing bonus, retention and incentive compensation payments paid or
      payable to Mr. Tuchman and the signing bonus and incentive compensation
      payments paid or payable to Mr. Cardonne as a result of the Palisade
      Merger, less






46





c)
    the
      sum of $17,843,602.





As of
December 31, 2004, such incentive compensation was estimated at $912,000, which
Mr. Tuchman remains entitled to receive even though the Tuchman Employment
Agreement has terminated.





The Tuchman
Employment Agreement provides that for a period of two years following the
termination of his employment, Mr. Tuchman will not solicit the business of any
client or prospective client of the Company or the employment of any present or
future employee of the Company.





Under Mr.
Tuchman’s prior employment agreement, Mr. Tuchman was granted options to
purchase 100,000 shares of Old Refac Common Stock pursuant to the Company’s 1990
Stock Option Plan. In 1996, Mr. Tuchman exercised these previously granted
options to purchase 100,000 shares of Old Refac Common Stock. In connection with
such exercise, the Company provided Mr. Tuchman with a loan of $375,000 (which
was reduced to $365,000 after Mr. Tuchman paid back $10,000). The note, as
modified in March 2002, bears interest at the rate of 6% per annum and is
payable in ten (10) equal annual installments commencing on December 31, 2004.
As of December 31, 2004, the Note was current and the principal balance was
$337,000.





*Cardonne
Employment Agreement* *.* The
Company is also party to an employment contract with Mr. Cardonne (the
“ Cardonne
Employment Agreement ”). As
amended and restated, Mr. Cardonne’s current employment agreement became
effective upon the completion of the Palisade Merger and terminates on March 31,
2005. Pursuant to such agreement, Mr. Cardonne received an annual base salary of
$175,000 during 2004.





In addition,
the Cardonne Employment Agreement provides for the payment of incentive
compensation based on Mr. Cardonne’s success in the repositioning of the
Company. Such incentive compensation is payable when the Payment Amount is
determined. At the time of such payment, Mr. Cardonne will be entitled to an
aggregate of 4% of GLDA, which is determined in the same manner as the Tuchman
Employment Agreement (described above).





As of
December 31, 2004, such incentive compensation was estimated at $228,000, which
Mr. Cardonne remains entitled to receive even though the Cardonne Employment
Agreement has terminated.





The Cardonne
Employment Agreement provides that for a period of two years following his
termination of employment, Mr. Cardonne will not solicit the business of any
client or prospective client of the Company or the employment of any present or
future employee of the Company.





**Compensation
Committee Interlocks and Insider Participation**





During their
service as members of the Board in 2004, none of the Committee members received
any compensation from the Company other than their fees as directors of the
Company.







47


****


**Compensation
Committee Report On Executive Compensation**





During 2004,
the Compensation Committee of the Board (the “Committee”) consisted of Jeffrey
D. Serkes (Chair), Clark A. Johnson and Mark S. Hoffman. While the Committee
administered and decided upon executive compensation, stock option and benefit
plans and grants under such plans, the Company’s overall compensation strategy,
including a determination of compensation paid to the Chief Executive Officer of
the Company, Robert L. Tuchman, and the Vice President and Chief Financial
Officer, Raymond A. Cardonne, Jr., was ratified by the entire
Board.





*Objectives*





The
Committee’s primary objective is to retain its current executive officers and to
ensure that their compensation structure aligns their interests with those of
the stockholders of the Company. Mr. Tuchman and Mr. Cardonne were the only key
executives for whom the Committee was responsible for administering compensation
in 2004.





*Employment
Agreements*





During 2004,
the Company had employment agreements with Mr. Tuchman and Mr. Cardonne, both of
which expire on March 31, 2005. In considering the advisability of using
employment agreements, the Board determined that their use was in the best
interest of the Company because it facilitated the Company’s ability to retain
the services of its current executive officers and provided stability during the
period that the Company was completing its repositioning as well as pursuing its
acquisition strategy. Each executive officer’s employment agreement separately
reflects the terms that the Committee felt were necessary and appropriate to
retain the services of such officer.




*Components
of Executive Compensation*





The Company’s
executive compensation program consists of cash and equity compensation
components.





Cash
Compensation





Cash
compensation is comprised of base salaries, signing bonuses, retention payments
and cash incentive bonuses. During 2004, cash compensation levels for Messrs.
Tuchman and Cardonne were determined by the provisions of their respective
employment agreements with the Company. The terms and conditions of these
employment agreements are discussed in detail above under “Employment
Contracts”.





Messrs.
Tuchman and Cardonne are also entitled to additional cash compensation in the
form of incentive compensation based upon the amount of liquid distributable
assets (as defined in the Merger Agreement) as of June 30, 2005.





Equity
Compensation





The Company
did not provide any equity compensation to Messrs. Tuchman and Cardonne during
2004.








48





Chief
Executive Officer Compensation





Mr. Tuchman
has served as Chief Executive Officer of the Company since January 6, 1997. Mr.
Tuchman’s compensation has been governed by the terms of an employment contract
between Mr. Tuchman and the Company, entered into at the time he joined the
Company in 1991. The contract was amended in each of 1994, 1996, 1999, March
2002, August 2002, November 2002, January 2003 and November 2003 and expired on
March 31, 2005. The bonuses that were paid to Mr. Tuchman in the three most
recent completed fiscal years are disclosed above in the bonus column of the
Summary Compensation Table.





*Deductibility
of Compensation*





Section
162(m) of the Code generally limits to $1,000,000 the Company’s federal income
tax deduction for compensation paid in any year to each of its Chief Executive
Officer and the four other highest paid executive officers, to the extent such
compensation is not “performance-based” within the meaning of Section 162(m).
The Committee will, in general, seek to qualify compensation paid to its
executive officers for deductibility under Section 162(m), although the
Committee believes it is appropriate to retain the flexibility to authorize
payments of compensation that may not qualify for deductibility if, in the
Committee’s judgment, it is in the Company’s best interest to do
so.





The
Compensation Committee of the Board





Jeffrey
D. Serkes, Chair


Clark
A. Johnson


Mark
S. Hoffman











**Comparison
of Cumulative Total Stockholder Return** ****





The Common
Stock was first issued and registered with the Securities and Exchange
Commission (“ SEC ”) on
February 28, 2003, the closing date of the Palisade Merger. On such date, the
Old Refac Common Stock, existing prior to the Palisade Merger, was canceled and
de-registered. Since the Common Stock has been registered only since February
28, 2003, pursuant to Item 402(l)(2) of Regulation S-K the Company has provided
a comparison of stockholder return from and after such date.





The following
graph provides information on the cumulative total return, assuming reinvestment
of dividends (if any), for the period commencing on February 28, 2003, and
ending on December 31, 2004, of the Company’s Common Stock as compared to the
American Stock Exchange Index and a published industry index, referred to below
as the “Industry Index,” which includes companies in Standard Industrial
Classification Code 6794 (Patent Owners and Lessors), which is the Company’s
primary SIC reporting code.








49














YEAR
      ENDED DECEMBER 31,Description
    
    February
      28, 2003
    
    2003
    
    2004Refac
    
    
    100.00
    
    
    119.95
    
    
    103.41Industry
      Index (SIC Code 6794)
    
    
    100.00
    
    
    179.49
    
    
    207.32American
      Stock Exchange Index
    
    
    100.00
    
    
    135.31
    
    
    154.94


****


**Item
12.****Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters**





**Equ** **ity
Compensation Plan Information**




The following
table sets forth **** information **** as of
December 31, 2004, adjusted in 2003 to reflect the terms of the Palisade Merger,
with respect to compensation plans (including individual compensation
arrangements) under which equity securities of the Company are authorized for
issuance.






50






Plan
      category
    Number
      of securities to be issued upon exercise of outstanding options, warrants
      and rights
      (a)
    Weighted
      average exercise price of outstanding options, warrants and rights
      (b)
    Number
      of securities remaining available for future issuance
      (c)Equity
      compensation plans approved by security holders
    231,500
    $5.10
    305,000Equity
      compensation plans not approved by security holders
    25,000
    $5.02
    -Total
    256,500
    $5.09
    305,000





****


**SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The following
table shows: (i) the number of shares of Common Stock that each of the Company’s
directors and executive officers beneficially owned, or had the right to acquire
beneficial ownership of as of, or within sixty days after March 25, 2005 (ii)
persons known to the Company to own 5% or more of the outstanding Common Stock;
and (iii) the percentage of the outstanding shares of Common Stock that such
ownership constitutes.





**Name
      of Beneficial Owner**
    
    **Amount
      and Nature of Beneficial Ownership**
    
    
    
    **Percent
      of Class**Palisade
      Capital Management, LLC
    
    
    6,306,387
    
    
    (1
    )
    
    90.18
    %Eugene
      K. Bolton
    
    
    13,334
    
    
    (2
    )
    
    *Raymond
      A. Cardonne, Jr.
    
    
    19,083
    
    
    (3
    )
    
    *Clark
      A. Johnson
    
    
    22,000
    
    
    (4
    )
    
    *Mark
      S. Hoffman
    
    
    6,306,647
    
    
    (5
    )
    
    90.18
    %Mark
      N. Kaplan
    
    
    24,565
    
    
    (6
    )
    
    *Melvin
      Meskin
    
    
    40,000
    
    
    (7
    )
    
    *Mark
      S. Newman
    
    
    13,334
    
    
    (2
    )
    
    *Jeffrey
      D. Serkes
    
    
    30,000
    
    
    (8
    )
    
    *Robert
      L. Tuchman
    
    
    67,851
    
    
    (9
    )
    
    *Officers
      and Directors as a Group(9
      persons)
    
    
    6,536,813
    
    
    (10
    )
    
    90.95
    %


___________________________


*
    Represents
      less than 1% of the outstanding shares.





(1)
    As
      of March 25, 2005, Palisade Concentrated Equity Partnership, L.P.
      (“Palisade”)
      and Palisade Capital Management, LLC (“PCM”)
      beneficially owned in the aggregate 6,306,387 shares of Common Stock or
      90.18% of the Company’s outstanding shares. PCM and Palisade are both
      located at One Bridge Plaza, Suite 695, Fort Lee, New Jersey 07024.
      Palisade is a private equity partnership managed by PCM, an investment
      advisory firm.





(2)
    Includes
      13,334 shares of Common Stock which may be acquired upon the exercise of
      options which are exercisable immediately.






51





(3)
    Includes
      18,500 shares of Common Stock which may be acquired upon the exercise of
      options which are exercisable immediately.





(4)
    Includes
      20,000 shares of Common Stock which may be acquired upon the exercise of
      options which are exercisable immediately.





(5)
    Includes
      6,306,387 shares beneficially owned by PCM, of which Mr. Hoffman is a
      managing director. Mr. Hoffman disclaims ownership of such
      shares.





(6)
    Includes
      22,000 shares of Common Stock which may be acquired upon the exercise of
      options which are exercisable immediately.





(7)
    Includes
      40,000 shares of Common Stock which may be acquired upon the exercise of
      options which are exercisable immediately.





(8)
    Includes
      30,000 shares of Common Stock which may be acquired upon the exercise of
      options which are exercisable immediately.





(9)
    Includes
      36,667 shares of Common Stock which may be acquired upon the exercise of
      options which are exercisable immediately.





(10)
    Includes
      an aggregate of 193,835 shares of Common Stock which such persons may
      acquire upon the exercise of options, which are exercisable immediately or
      within sixty days of the Record Date, and 6,306,387 shares beneficially
      owned by PCM, of which Mr. Hoffman is a managing director. Mr. Hoffman
      disclaims beneficial ownership of such
shares.





**Item
13. Certain Relationships and Related Transactions**





Mark N.
Kaplan is Of Counsel to Skadden, Arps, Slate, Meagher & Flom LLP, which has
provided legal services to the Company since 1982 and also provides legal
services to PCM and its affiliates. In addition, Mr. Kaplan is the trustee for
certain trusts for the benefit of the children of one of the principals of
PCM.





PCM on behalf
of itself and/or its portfolio companies requests, from time to time, that the
Company provide certain consulting services. In consideration for these
services, PCM pays the Company a basic monthly retainer of $5,000, subject to
quarterly adjustment based upon the services actually rendered during such
quarter. Either party has the right to terminate this agreement at any time
without any prior notice. Under this arrangement, PCM paid the Company $75,000
with respect to services rendered during 2004.





The Company
provides consulting services directly to Neurologix, Inc., a public company of
which PCM beneficially owns approximately 29% of the outstanding capital stock
at a basic monthly retainer of $5,000, subject to quarterly adjustment based
upon the services actually rendered during such quarter. Either party has the
right to terminate this agreement at any time without any prior notice. Under
this arrangement, Neurologix, Inc. paid the Company $95,000 with respect to
services rendered during 2004.







52





Other related
party transactions include management indebtedness (see “Employment Contracts”
under Item 11), a subleasing arrangement with Palisade Capital Securities, LLC
(“ PCS ”), an
affiliate of Palisade and PCM, under which the Company occupied
approximately 1,185 gross rentable square feet through June 2004 and the
maintenance of brokerage accounts at PCS for the Company’s marketable securities
(principally, treasury notes being held to maturity) .





Except as
otherwise provided in this Annual Report on Form 10-K, since January 1, 2004,
there has not been at any time any relationship or related transaction which the
Company would be required to disclose under Item 404 of Regulation
S-K.





**Item
14. Principal Accounting Fees and Services**





The following
table sets forth the aggregate fees billed to the Company for the fiscal years
ended December 31, 2004 and 2003 by the Company’s principal accounting firm,
Grant Thornton LLP.





**Description**
    
    **2004**
    
    **2003**Audit
      fees
    
    $
    110,000
    
    $
    113,000Audit
      related fees
    
    
    -
    
    
    -Tax
      fees
    
    
    72,000
    
    
    133,000All
      other fees
    
    
    -
    
    
    -Total
    
    $
    182,000
    
    $
    246,000





*Audit Fees.* In fiscal
2003 and 2004, these services consists of fees billed for professional services
rendered for the audit of our financial statements and review of the interim
financial statements included in quarterly reports. In 2003, these services also
included a review of the Company’s Palisade Merger proxy statement, accounting
research on director stock options and a review of the Company’s registration
statement for its stock incentive plans.





*Tax Fees.* The tax
fees related to ** professional
services billed for tax compliance and tax advice and primarily consisted of
assistance in a pending Internal Revenue Service examination, preparation of
various tax returns and advice on other tax-related matters.





SEC rules
require all audit and non-audit engagements provided by our independent auditor,
Grant Thornton LLP, be approved by the Company’s Audit Committee or be entered
into pursuant to pre-approval policies and procedures established by the Audit
Committee. The Audit Committee considered all of such non-audit fees, and
determined that such fees are compatible with maintaining Grant Thornton LLP’s
independence.





The Audit
Committee has adopted a pre-approval policy that grants the Chairman of the
Audit Committee the sole authority to approve up to $10,000 in non-budgeted
services. All other services must be approved by the Audit Committee. None of
the services provided by the independent auditors was provided pursuant to the
exception to the pre-approval requirements set forth in paragraph (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X.


****





53


****


**PART
IV**





**Item
15. Exhibits and Financial Statement Schedules**





**(** **a)(1) Financial
Statements.**





Included
within.





**(a)(3) Exhibits.**





See (b)
below.





**(b) Exhibits.**





See the
Exhibit Index, which is incorporated by reference herein.







54


****


**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.





**Refac**








Dated:
March 31, 2005    By: /s/
Robert L. Tuchman


Robert L.
Tuchman, President, Chief


Executive
Officer and General Counsel





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 Company and in the
capacities and on the dates indicated.








Dated:
March 31, 2005     /s/
Robert L. Tuchman


Robert L.
Tuchman, President, Chief


Executive
Officer, General Counsel and Director


(Principal Executive Officer)





Dated:
March 31, 2005     /s/
Raymond A. Cardonne, Jr.


Raymond A.
Cardonne, Jr., Vice President,


Secretary, Chief Financial
Officer and Treasurer


(Principal
Financial Officer)








Dated:
March 31, 2005     /s/
Eugene K. Bolton


Eugene K.
Bolton, Director








Dated:
March 31, 2005     /s/
Mark S. Hoffman


Mark S.
Hoffman, Director








Dated:
March 31, 2005     /s/
Clark A. Johnson


Clark A.
Johnson, Director








Dated:
March 31, 2005     /s/
Mark N. Kaplan


Mark N.
Kaplan, Director








Dated:
March 31, 2005     /s/ Melvin
Meskin


Melvin
Meskin, Chairman





55





Dated:
March 31, 2005     /s/
Mark S. Newman


Mark S.
Newman, Director








Dated:
March 31, 2005     /s/
Jeffrey D. Serkes


Jeffrey
D. Serkes, Director





56





**EXHIBIT
INDEX**





Exhibit
No.      Exhibit








3
      (a)
    
    Restated
      Certificate of Incorporation of the Company. Incorporated by reference to
      Exhibit 1 to the Company’s Registration Statement on Form 8-A filed with
      the SEC on February 28, 2003, SEC file number
001-12776.





3
      (b)
    
    Amended
      and Restated By-laws of the Company. Incorporated by reference to Exhibit
      3.1 to the Company’s Current Report on Form 8-K filed with the SEC on May
      19, 2003, SEC file number 001-12776.





10
      (a)
    
    Agreement
      and Plan of Merger, dated as of August 19, 2002, by and among Palisade
      Concentrated Equity Partnership, L.P., Palisade Merger Corp. and Refac.Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed with the SEC on August 21, 2002, SEC file number
      001-12776.
 10 (b)
    
    Amendment
      No. 1 to the Agreement and Plan of Merger, dated as of October 21, 2002,
      by and among Palisade Concentrated Equity Partnership, L.P., Palisade
      Merger Corp. and Refac. Incorporated by reference to Exhibit 10.1 to the
      Company’s Current Report on Form 8-K filed with the SEC on October 24,
      2002, SEC file number 001-12776.
 10 (c)
    
    Amendment No. 2 to the Agreement and Plan of Merger,
      dated as of December 12, 2002, by and among Palisade Concentrated Equity
      Partnership, L.P., Palisade Merger Corp. and Refac. Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed with the SEC on December 16, 2002, SEC file number
      001-12776.
 
 10 (d)
    
    Amendment No. 3 to the Agreement and Plan of Merger,
      dated as of January 23, 2003, by and among Palisade Concentrated Equity
      Partnership, L.P., Palisade Merger Corp. and Refac. Incorporated
      by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K
      filed with the SEC on January 24, 2003, SEC file number
      001-12776.




10
      (e)
    
    Fifth
      Amended and Restated Employment Agreement between Robert L. Tuchman and
      Refac, dated as of November 7, 2003. Incorporated by reference to Exhibit
      10 (a) to the Company’s Quarterly Report on Form 10-Q filed with the SEC
      on November 12, 2003, SEC file number001-12776.*





10
      (f)
    
    Amended
      and Restated Employment Agreement between Raymond A. Cardonne, Jr. and
      Refac, dated as of November 7, 2003. Incorporated by reference to Exhibit
      10 (b) to the Company’s Quarterly Report on Form 10-Q filed with the SEC
      on November 12, 2004, SEC file number001-12776.*






57





10
      (g)
    
    2003
      Stock Incentive Plan. Incorporated by reference to Exhibit B to the
      Company’s Proxy Statement for its 2003 Annual Meeting of Stockholders,
      filed with the SEC on April 22, 2003, SEC file number
      001-12776.*





10
      (h)
    
    1998
      Stock Incentive Plan. Incorporated by reference to Exhibit A to the
      Company’s Proxy Statement for its 1998 Annual Meeting of Stockholders,
      filed with the SEC on March 31, 1998, SEC file number
      001-12776.*





10
      (i)
    
    First
      Amendment to the Refac Technology Development Corporation 1998 Stock
      Incentive Plan, dated as of January 23, 2003. Incorporated by reference to
      Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the
      SEC on January 24, 2003, SEC file number001-12776.*





10
      (j)
    
    1990
      Stock Option and Incentive Plan. Incorporated by reference to Exhibit A to
      the Company’s Proxy Statement for its 1990 Annual Meeting of Stockholders,
      filed with the SEC on April 23, 1990, SEC file number
    0-7704.*




23.1
    
    Consent
      of Grant Thornton LLP. **





31.1
    
    Rule
      13a-15(e)/15(d)-15(e) Certification, Chief Executive Officer.
      **
 
 31.2
    
    Rule
      13a-15(e)/15(d)-15(e) Certification, Chief Financial Officer.
      **
 
 32.1
    
    Section 1350 Certification, Chief Executive & Chief
      Financial Officers. **





_____________________


*
    Management
      or compensatory plan.


**
    Filed
      herewith