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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

OR

Commission File Number: 0-22663

THE MIDDLETON DOLL COMPANY
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code: (262) 523-4300

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

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

        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 periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  [X]  No  [_]

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

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  [_]  No  [X]

        The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant at March 15, 2005 was $7,160,711.

        The number of shares of common stock outstanding at March 15, 2005 was 3,727,589.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the The Middleton Doll Company Proxy Statement for the 2005 Annual Meeting of Shareholders (to be filed with the Securities and Exchange Commission under Regulation 14A within 120 days after the end of the Registrant’s year) are, upon such filing, to be incorporated by reference into Part III.

THE MIDDLETON DOLL COMPANY

Index to Annual Report on Form 10-K
For the Year Ended December 31, 2004

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Part I

Item 1.    Business

Introduction

        The Middleton Doll Company was incorporated in February, 1980 to provide long-term collateralized loans to small businesses. The Middleton Doll Company and its subsidiaries are referred to herein as the “Company”. At present the Company consists of two business segments, the Financial Services Business and the Consumer Products Business. The Middleton Doll Company, when referred to singularly and not with its subsidiaries is referred to herein as the “Parent”.

        The Financial Services Business segment consists of the Parent and its wholly-owned subsidiary Bando McGlocklin Small Business Lending Corporation (“BMSBLC”). The principal business of the segment is to manage its existing loans and to lease buildings to small businesses. This segment also participates in loans with third party loan originators. Both the Parent and BMSBLC are operated as a real estate investment trust (“REIT”) pursuant to the provisions of Section 856 of the Internal Revenue Code of 1986, as amended. The REIT does not pay any corporate income taxes because it has a tax exempt status. To achieve the tax exempt status, a REIT must be in compliance with tests concerning the nature of the assets of the REIT and the income earned. In addition, a REIT must distribute substantially all of its taxable income each year in dividends to its shareholders.

        The Consumer Products Business segment consists of a 99% interest in Lee Middleton Original Dolls, Inc. (“LMOD”). George R. Schonath, President and Chief Executive Officer, and his family, own the remaining 1% of the stock of LMOD. LMOD is a designer and distributor of collectible vinyl dolls and vinyl play dolls. LMOD has a wholly-owned subsidiary, License Products, Inc. (“LPI”), that designs, develops and markets a line of proprietary time pieces. Prior to 2002, LMOD owned a 51% interest in LPI. On January 1, 2002, LMOD acquired the remaining outstanding 49% interest in LPI. During 2002, LMOD disposed of its 51% interest in Middleton (HK) Limited (“MHK”), a Hong Kong corporation that provided LMOD with raw material and finished goods from Asia. Neither of these transactions had a material impact upon the financial statements.

        In order to qualify as a REIT under the Internal Revenue Code, the Parent cannot hold more than 10% of the outstanding voting securities of any one issuer except for “Taxable Real Estate Investment Trust Subsidiaries” (“TRSs”). LMOD and LPI became TRSs as of January 1, 2001, which allowed the Company on June 25, 2001, to exchange its non-voting stock in LMOD for voting stock. Both LMOD and LPI are operated as C-Corporations under the Internal Revenue Code and are subject to corporate income tax rates.

        On September 3, 1997, the Company capitalized InvestorsBancorp, Inc., a bank holding company, for approximately $6.2 million and then distributed all of the outstanding shares of InvestorsBancorp, Inc. to the Company’s shareholders. The Company and InvestorsBancorp, Inc., together with its wholly-owned subsidiary, InvestorsBank (the “Bank”), share common offices and personnel. Expenses are shared between the two entities in accordance with a Management Services and Allocation of Expenses Agreement (the “Management Agreement”). See “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Overview.

        In June of 2004, the Board of Directors of the Company approved a plan to convert loans and leased properties of BMSBLC to cash as loans mature and leased properties are sold. The proceeds will be used to reduce outstanding debt and to redeem preferred stock at maturity. Under this policy, BMSBLC does not intend to make new loans or purchase new properties to lease, with only limited exceptions for participations with InvestorsBank. This reduction in assets will reduce the income available for common stock dividends in each of the next four years. As a result, the Board of Directors has changed the common stock dividend policy from the payment of quarterly dividends to an annual dividend, which would be payable in January for the preceding year.

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Financial Services Business

        Loans

        The Company, through its Financial Services Business, (i) manages its loan portfolio comprised primarily of loans to small business entities collateralized by first or second mortgages, (ii) purchases loan participations from the Bank, and (iii) owns industrial and commercial real estate for lease to small businesses.

        The loan and leased property portfolio is managed by the Bank for an annual fee, payable monthly, equal to 0.25% of the total dollar amount of loans under management and 6% of the rents from leased properties. Operating expenses are also shared between the Bank and BMSBLC, as well as certain expenses of employees providing accounting, reporting and related services to the Company.

        The loan portfolio is primarily comprised of long-term, variable rate, collateralized loans to small business entities. The borrowers include manufacturers, wholesalers, retailers, professionals and service providers. The loans are primarily collateralized by first mortgages on real estate, although some loans are collateralized by second mortgages. The Company’s exposure to loss in the event of nonperformance by borrowers is represented by the outstanding principal amount of loans of $32.84 million at December 31, 2004. Approximately 63% of the loan portfolio consists of loan participations, primarily with the Bank. Borrowers located in the State of Wisconsin represent approximately 99% of loans by dollar volume. Substantially all of the loan portfolio is held by BMSBLC. The Parent and BMSBLC fund their lending operations through their equity capital, bank and institutional borrowings, commercial paper sales and the sale of loan participations.

        Diversification across industries is a means of managing market risk by decreasing loan concentrations. The following table provides information regarding the outstanding principal amount of loans by industry.

        The following table categorizes the outstanding principal amount of loans by fixed rate loans and variable rate loans.

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        Further detail regarding the fixed rate loans is provided in the following table.

        A loan is placed on non-accrual status when, based on current information and events, management does not expect to collect all amounts due according to the contractual terms of the loan agreement in the normal course of business. A loan is not placed on non-accrual status during a period of delay in payment if management expects to collect all amounts due including accrued interest at the contractual interest rate for the period of the delay. Non-accrual loans totaled $0.98 million and $0.25 million at December 31, 2004 and 2003, respectively. Interest income of $0.05 million would have been recorded during 2004 had the non-accruing loans been current in accordance with their original terms.

        Real Estate

        At December 31, 2004 BMSBLC owned 19 buildings and had entered into long-term lease agreements on 14 of the properties. Three of the properties have tenants on a month-to-month basis and the remaining two properties are vacant. During 2004 BMSBLC sold three leased properties. The total cost of BMSBLC’s properties at December 31, 2004, was $25.06 million and the depreciated carrying value was $22.23 million.

        BMSBLC anticipates that its rental properties will either be industrial real estate (i.e. used for manufacturing purposes), or commercial real estate properties, such as office buildings and retail stores, and that substantially all of its properties will be located in Wisconsin. The following table sets forth additional information regarding BMSBLC’s leased properties.

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        Competition

        BMSBLC, in managing its loan portfolio, competes primarily with commercial banks and commercial finance companies, many of which have substantially more assets and capital than BMSBLC. Banks, in particular, have been active in seeking to refinance outstanding loans.

        In owning and leasing real estate, BMSBLC competes primarily with other REITs and other investors such as insurance companies and a variety of investment companies which seek to own and lease real estate. In addition, BMSBLC competes with banks and other financial institutions, which seek to lend money to potential tenants of BMSBLC in order to allow the potential tenants to construct and own their own building rather than to lease a building owned by BMSBLC.

        Employees

        On December 31, 2004, the Company employed only its President and Vice President. All other duties are performed by Bank employees pursuant to the Management Agreement.

        Credit Concentration

        At BMSBLC on December 31, 2004, there were not any customers whose loans exceeded 10% of total loans outstanding.

Consumer Products Business

        Lee Middleton Original Dolls, Inc.

        Lee Middleton Original Dolls, Inc. (“LMOD”), headquartered in Westerville, Ohio, is a 99% owned subsidiary of the Company. The President of the Company, George Schonath, and his family, own the remaining 1% minority interest in LMOD. LMOD designs and distributes collectible vinyl dolls and vinyl play dolls. LMOD distributes its collectible doll lines through a network of independent, specialty retail stores throughout the United States. Vinyl play dolls are sold through selected retail stores including Newborn Nursery® boutique adoption centers located in department stores owned by the Saks Department Store Group. Eight boutiques are currently open with fifteen additional boutiques scheduled to open in the spring of 2005. An additional twenty-five boutiques are scheduled to open during the remainder of 2005. In addition, LMOD has two outlet stores and a mall-based retail location, which showcases the Newborn Nursery® adoption concept that was developed at the factory outlet retail store. The Newborn Nursery® boutiques provide an opportunity for children to experience the “adoption” of their very own lifelike baby doll in a simulated hospital nursery while encouraging the development of positive childhood memories.

        LMOD must compete with various other doll manufacturers including Adora, Madam Alexander, Ashton Drake, Mattel’s American Girl and a variety of small artist-owned manufacturers. Intense pricing competition in recent years resulted in LMOD transferring production of its high quality, lifelike Artist Studio Collection (ASC) dolls to a contract manufacturer in China during 2004. Limited doll production will continue at LMOD facilities in Belpre, Ohio. LMOD is presently continuing to develop new products for the ASC line of dolls while continuing to emphasize high product quality.

        License Products, Inc.

        License Products, Inc. (“LPI”) is a wholly-owned subsidiary of LMOD. Prior to January 1, 2002, LMOD owned 51% of LPI. On January 1, 2002, LMOD acquired the remaining 49% of the common stock of LPI. LPI, located in Hartland, Wisconsin, designs, develops and markets a line of proprietary time pieces. LPI’s products are distributed nationwide through major retail account channels.

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        Employees

        The Consumer Products Business segment employs approximately 75 persons. At LMOD, approximately 14 employees are subject to a collective bargaining agreement, which expires on April 30, 2006.

        Large Customers

        Two customers at LPI with total sales of $4.62 million and one customer at LMOD with total sales of $1.55 million accounted for approximately 39% of the Consumer Products Business’ total revenues for 2004. Kohl’s Corporation accounted for 15% of consolidated revenues for 2004.

        Backlog

        The backlog of the Consumer Products Business was approximately $0.07 million as of December 31, 2004, all of which should be filled during 2005.

        Research and Development

        Research, development and product improvement costs are reported as a separate component of operating expenses and totaled $905,725, $738,997 and $868,100 for the years ended December 31, 2004, 2003 and 2002, respectively.

Revenues of Principal Product Groups

        The following table sets forth (in thousands of dollars), for each of the last three years, revenues attributable to the Company’s principal product groups:

Segment Information

        Financial information concerning the Company’s business segments is incorporated by reference from the consolidated financial statements on pages 28 to 31 herein.

Executive Officers

        George R. Schonath, 64, has served as Chief Executive Officer of the Company since 1983, as President since July, 1997, and as a director since May, 2001. Mr. Schonath has also served as President and Chief Executive Officer of InvestorsBancorp, Inc. and the Bank since they were established in 1997. From 1983 until July, 1997, he served as Chairman of the Board of the Company.

        Jon McGlocklin, 61, has served as a Vice President of the Company since November, 2001. From July, 1997, through November, 2001, he served as a Senior Vice President. Mr. McGlocklin has served as a director of InvestorsBancorp, Inc. since 1997. Until February 2001, Mr. McGlocklin had also served as Senior Vice President of InvestorsBancorp, Inc. and Senior Vice President of the Bank since they were established in 1997. He has also served as President of Healy Manufacturing, Inc., Menomonee Falls, Wisconsin, since 1997, and as an announcer for the Milwaukee Bucks, an NBA basketball team, since 1976. From 1980 through July, 1997, he served as a director of the Company and as President from 1991 through July, 1997.

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        Susan J. Hauke, 39, has been the Company’s Chief Financial Officer since 2002 and Vice President – Finance, Secretary and Treasurer since 1997. In 2002, Ms. Hauke was also appointed Chief Financial Officer of InvestorsBancorp. She is also the Vice President – Finance and Secretary of InvestorsBancorp, Inc. and Controller, Vice President-Finance, and Treasurer of the Bank. From 1991 until 1997, Ms. Hauke served as Controller for the Company and was a senior accountant at PricewaterhouseCoopers LLP before joining the Company.

Item 2.    Properties

        In October, 2002, the Company sold the building located at W239 N1700 Busse Road, Pewaukee, Wisconsin, to the Bank for $2.4 million, which represented its fair market value at the time of the sale as determined by an independent appraiser. The Company now leases 4,000 square feet of the building from the Bank.

        LMOD owns an approximately 51,000 square foot building at 1301 Washington Boulevard, Belpre, Ohio, that provides limited production facilities, retail space and warehouse space. During 1999, an additional leased retail outlet store was opened in West Virginia. A 44,100 square foot facility in Columbus, Ohio, was leased in June of 2000 and has been used for distribution and for storing raw materials and finished goods. Beginning in 2005, LMOD will attempt to sublet the Columbus warehouse space and will move its warehouse operations to Belpre, Ohio. The Columbus warehouse lease expires on August 15, 2006. LMOD’s headquarters in Westerville, Ohio, is in 18,800 square feet of office space which is leased until April 30, 2006.

        During the first eight months of 2004, LPI leased office and warehouse space from BMSBLC at 1050 Walnut Ridge Drive, Hartland, Wisconsin. In September, 2004, LPI purchased the building from BMSBLC for $3.66 million, which was the net book value of the building at the time of the sale. The building has approximately 17,000 square feet of office space and approximately 50,000 square feet of warehouse space

Item 3.    Legal Proceedings

        As of the date of this filing, neither the Parent nor any of its subsidiaries is a party to any legal proceedings, the adverse outcome of which, in management’s opinion, would have a material effect on the Company’s consolidated financial statements.

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

        No matters were submitted to a vote of security holders during the quarter ended December 31, 2004.

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Part II

Item 5.    Market for Registrant’s Common Equity, Related Shareholder Matters and IssuerPurchases of Equity Securities

        The common stock of the Company is traded on the OTC Bulletin Board under the symbol DOLL. The table below represents the high and low sales price for the Company’s common stock and the cash dividends paid per share for 2004 and 2003.

        As of March 1, 2005, there were approximately 750 shareholders of record of the Company’s common stock.

        On February 22, 2000, the Board of Directors of the Company authorized the repurchase of up to 325,000 shares of the Company’s common stock in the open market or by privately negotiated transactions. The program has no expiration date. The Company did not repurchase any shares under the program during the quarter ended December 31, 2004. As of December 31, 2004, the Company had the authority to repurchase 67,700 shares under that program.

Item 6.    Selected Financial Data (In thousands, except per share data)

        The following table sets forth certain Selected Consolidated Financial Data for the periods and as of the dates indicated:

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

        Amounts presented as of December 31, 2004, 2003 and 2002 include the consolidation of two segments. The financial services segment includes The Middleton Doll Company (the “Parent”) and Bando McGlocklin Small Business Lending Corporation (“BMSBLC”), a 100% owned subsidiary of the Company. The consumer products segment includes Lee Middleton Original Dolls, Inc. (“LMOD”), a 99% owned subsidiary of the Parent and License Products, Inc. (“LPI”), a 100% owned subsidiary of LMOD. In 2002, Middleton (HK) Limited, a former subsidiary of LMOD, was liquidated. The term “Company”, when used herein, refers to the Parent, BMSBLC, LMOD and LPI on a consolidated basis.

        The loan and real estate portfolios of the Parent and BMSBLC are administered and managed by InvestorsBank (the “Bank”), a wholly-owned subsidiary of InvestorsBancorp, Inc. under a “Second Amended and Restated Management and Services and Allocation of Expenses Agreement” dated January 1, 2004, (the “Management Agreement”). In addition, the Bank provides certain management services to LMOD. George R. Schonath, President and Chief Executive Officer of the Parent and BMSBLC, is also President and Chief Executive Officer of the Bank and InvestorsBancorp, Inc. George Schonath and members of his family own all of the outstanding stock of InvestorsBancorp, Inc.

        For the loan and real estate management services provided under the Management Agreement, the Bank receives an annual fee, payable monthly, equal to 0.25% of the total amount of loans under management and 6% of the rents from the real estate portfolio. The Management Agreement provides for the sharing of operating expenses between the Bank and BMSBLC, as well as certain expenses of employees of the Bank who provide accounting, reporting and related services to the Parent and BMSBLC. Additionally, for its services in providing ongoing credit analysis, loan and lease monitoring, workout services, and management services to LMOD, the Bank receives an annual fee of $365,000, payable monthly. The Parent and BMSBLC currently have only one paid employee, a Vice President of the Company and BMSBLC. George Schonath, the President and Chief Executive Officer, provides services to the Parent, BMSBLC and LMOD under the Management Agreement and is not separately compensated by any of those entities.

        During the past four years there has been a significant decrease in net sales of the consumer products segment. This decrease is primarily attributable to the decrease in demand for expensive collectible dolls and intense pricing competition from dolls produced in China. In June of 2004, LMOD transferred production of its high quality, lifelike Artist Studio Collection (ASC) dolls to a contract manufacturer in China to reduce manufacturing costs. The manufacturer in China that was selected to make ASC dolls was a current supplier at the time of its selection and has devoted a separate unit and staff exclusively to the manufacturing of these dolls. Limited doll production will continue at the LMOD facilities in Belpre, Ohio.

        Eight of LMOD’s Newborn Nursery® boutiques, developed by LMOD for department stores owned by the Saks Department Store Group, are now open. The boutiques are located in Parisian stores in Birmingham, Alabama; Atlanta, Georgia; and Rochester Hills, Michigan; Proffitt’s stores in Chattanooga, Tennessee, and Sanford, Florida; a Carson Pirie Scott store in Lombard, Illinois, a Boston Store in Milwaukee, Wisconsin, and a Younkers store in Des Moines, Iowa. The Newborn Nursery® boutiques are located in the children’s department and provide an opportunity for children to experience the “adoption” of their very own lifelike baby in a simulated hospital nursery while encouraging the development of positive childhood memories. LMOD’s goal is to expand the Newborn Nursery® concept to 100 boutiques within the Saks Department Store Group over a three-year period. Depending upon the success of the Newborn Nursery® boutiques, LMOD expects a total of 48 boutiques to be in operation by the end of 2005.

        LMOD anticipates increasing sales of play dolls through the Newborn Nursery® boutiques and will also continue to develop new products for the Artist Studio Collection line of dolls while emphasizing high product quality. During the past two years, operating expenses, particularly in the sales and marketing area, have been reduced. However, general and administrative expenses have not significantly decreased primarily due to long-term leases in effect until April 30, 2006, for the headquarters located in Westerville, Ohio, and until August 15, 2006, for the warehouse facilities in Columbus, Ohio. Management is attempting to achieve further reductions in operating expenses by continuing to focus on controlling expenses.

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        During the past four years there has also been a significant decrease in the loan portfolio of the financial products segment, resulting in a corresponding decrease in interest income on loans. The financial services segment is at a lending disadvantage with other institutions such as banks, due to its higher cost of funds. Also, the existing management agreement with InvestorsBank prevents it from making new loans to other than existing customers without the prior consent of InvestorsBank. As a result, the size of the loan and leased property portfolio of BMSLC has decreased and total revenues and earnings have also decreased.

        Due to the Parent’s required redemption of $16.85 million of outstanding preferred stock on July 1, 2008, BMSBLC expects to materially reduce its lending and real estate leasing activities over the next four years. During the second quarter of 2004, the Board of Directors of the Company approved a plan to convert loans and leased properties of BMSBLC to cash as loans mature and leased properties are sold. The proceeds will be used to reduce outstanding debt and to redeem preferred stock at maturity. Under this policy, BMSBLC does not intend to make new loans or purchase new properties to lease, with only limited exceptions for participations with InvestorsBank. This reduction in assets will reduce the income available for common stock dividends in each of the next four years. As a result, the Board of Directors has changed the common stock dividend policy from the payment of quarterly dividends to an annual dividend, which would be payable in January for the preceding year. During 2004, dividends totaling $0.20 per share were paid to common stock shareholders. The preferred stock dividend of $0.335 per share per quarter ($1.34 annual divided per preferred share) was paid during 2004 and management anticipates that the preferred stock dividend will continue to be paid on a quarterly basis.

        Effective July 14, 2004, the Company’s common stock (DOLL) and preferred stock (DOLLP) began trading on the OTC Bulletin Board. The Company voluntarily delisted from The Nasdaq National Market because the shareholders’ equity in the Company no longer met the minimum NASDAQ requirement of $10.0 million.

Critical Accounting Policies

        In preparing consolidated 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 amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following areas require management to make estimates that are susceptible to significant change in the near term.

Consumer Products

        Allowance for doubtful accounts. LMOD and LPI provide an allowance for doubtful accounts based on management’s estimate of uncollectible amounts. Management reviews the trade accounts receivable based on an aging of accounts, historical collection experience, and a specific review of certain accounts in order to evaluate the collectibility of the accounts receivable.

        Inventory and allowance for obsolete inventory. Inventories are valued at lower of cost or market using the first-in, first-out (FIFO) method. LMOD and LPI provide an allowance for obsolete inventory items based on management’s estimate. Management reviews all slow-moving or obsolete inventory items in order to determine the appropriate allowance for obsolete inventory. The inventory allowance reflects the estimated markdown necessary to liquidate the slow-moving inventory items.

        Amortization of goodwill. Goodwill is reviewed by management at least annually for impairment. An impairment review is designed to determine whether the fair value, and the related recorded goodwill, of a reporting unit is below its carrying value. Management estimates the fair value based upon the present value of future expected cash flows using management’s best estimates of assumptions for sales and expenses. Any goodwill impairment losses will be charged to operations.

        Deferred income tax assets and liabilities. Amounts provided for income tax expense are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable under tax laws. Deferred income tax assets and liabilities are computed for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. As changes in tax laws or rates are enacted, deferred income tax assets and liabilities are adjusted through the provision for income taxes. The differences relate principally to different methods used for depreciation for income tax purposes, vacation accruals, health insurance, deferred revenue, net operating losses, capitalization requirements of the Internal Revenue Code, allowances for doubtful accounts and obsolete inventory and charitable contribution carryforwards. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized.

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Financial Services

        Accrual of interest income. Interest income is accrued on the unpaid principal balance of loans. The accrual of interest income on loans is discontinued when, in the opinion of management, there is reasonable doubt as to whether the collateral securing the borrower’s obligation is sufficient to pay all principal, accrued interest and other expenses. Loans are returned to accrual status when the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

        Accrual of rental income. Rent is accrued on a monthly basis based on lease agreements. If it is determined by management that the lessee will not be able to make rent payments as required by the lease agreement, the accrual of rent is discontinued until management determines the rent to be collectible.

        Allowance for loan losses. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the amount of unpaid principal, reduced by the allowance for loan losses. Management reviews the value of the collateral securing each loan to determine if an allowance for loan losses is necessary. In this review, management evaluates past loan loss experience, the level of nonperforming loans, current economic conditions, loan volume, growth and composition of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of underlying collateral, and other relevant factors.

        Leased properties. Leased properties are recorded at cost and are depreciated using the straight-line method. The costs of normal repairs and maintenance are charged to expense as incurred.

        Nonperforming loans. A loan is considered nonperforming when the scheduled principal and/or interest payments are more than ninety days past due. Nonperforming loans are not automatically placed on non-accrual status. For a discussion of when loans are placed on non-accrual status, see “Accrual of interest income” above.

        Unfunded commitments. Unfunded commitments are recorded in the financial statements when they are funded or when related fees are incurred or received.

        Derivative Instruments. The Company designates all derivative instruments as either fair value hedges or cash flow hedges and records the hedge on the balance sheet at its fair market value. The net gain/loss on instruments classified as cash flow hedges are reported as changes in other comprehensive income. The net gain/loss on instruments classified as fair value hedges are reported as increases/decreases in current year earnings. All derivatives are marked to market on the consolidated balance sheet.

        Fair Value of Financial Instruments. Financial Accounting Standards Board Statement No. 107, “Disclosures About Fair Value of Financial Instruments”, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company (See Note 21 to the consolidated financial statements).

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Results of Operations

For the years ended December 31, 2004 and December 31, 2003

        The Company’s total net loss applicable to common shareholders for the year ended December 31, 2004 equaled ($3.76) million or ($1.01) per common share (diluted) as compared to ($0.66) million or ($0.18) per common share (diluted) for the year ended December 31, 2003.

The consumer products segment’s net loss before income taxes at December 31, 2004 was $1.47 million less than the net loss before income taxes at December 31, 2003, primarily due to reductions in operating expenses. For the year ended December 31, 2004, an income tax expense of $2.69 million was recorded at the consumer products segment as compared to a $1.37 million income tax benefit at December 31, 2003. Management determined for 2004, based on the level of the continuing losses of the consumer products segment, that it would provide a valuation allowance for the full amount of net operating loss carryforwards and other net deferred income tax assets, due to uncertainties of realization in the near term. If the consumer products segment becomes profitable, the existing net operating loss carryforwards should be available to be utilized against future taxable income.

        The consumer products segment’s income tax expense for the year ended December 31, 2004, resulted from a $2.69 million charge to the valuation allowance for deferred income tax assets due to uncertainties regarding realization in the near term. In evaluating the consumer product segment’s ability to realize the net deferred income tax assets, the Company considers all available evidence, both positive and negative, including past operating results, the existence of cumulative losses in the most recent fiscal years, tax planning strategies that are prudent and feasible, and the forecast of future taxable income. In considering this information, the Company is required to make certain assumptions and judgments based on plans and estimates. Any changes in the Company’s assumptions and/or estimates may materially impact the consumer products segment’s income tax expense. The $2.69 million of deferred income tax assets were recognized in years prior to 2004. For the year ended December 31, 2004, the consumer products segment provided a valuation allowance of $3.32 million which should be available to be utilized against future taxable income. A portion of the valuation allowance is a significant component of the reconciliation between the provision for income taxes computed at the Federal statutory rate versus the effective rate. See Note 19 in the accompanying consolidated financial statements for more information regarding the income tax provision and the deferred income tax asset.

        The financial services segment incurred a net loss of $0.07 million, after the payment of the preferred stock dividend of $0.91 million, for the year ended December 31, 2004, as compared to net income of $0.43 million for the year ended December 31, 2003. This decrease was in line with management’s expectations based on its plan for redeeming the preferred stock in 2008. Due to the Parent’s required redemption of $16.85 million of outstanding preferred stock on July 1, 2008, the financial services segment is materially curtailing its lending activities and is selling its leased properties over the next four years. During the second quarter of 2004, the Board of Directors of the Company approved a plan to convert the loans and leased properties of BMSBLC to cash as loans mature and leased properties are sold. The proceeds will be used to reduce outstanding debt and to redeem preferred stock at maturity. Under this policy, BMSBLC does not intend to make new loans or purchase new properties to lease, with only limited exceptions for participations with InvestorsBank. This reduction in assets will reduce the income available for common stock dividends in each of the next four years. As a result, the Board of Directors has changed the common stock dividend policy from the payment of quarterly dividends to an annual dividend, which would be payable in January for the preceding year. During the year ended December 31, 2004, common stock dividends of $0.20 per share were paid. The preferred stock dividend of $0.335 per share per quarter ($1.34 annual dividend per preferred share) will continue to be paid on a quarterly basis.

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Consumer Products

        Net sales from consumer products for the year ended December 31, 2004, decreased 9% to $16.00 million from $17.60 million for the year ended December 31, 2003. This was due to decreased sales of $1.40 million at LMOD and decreased sales of $0.20 million at LPI. Artist Studio Collection (ASC) dolls are primarily sold through the LMOD dealer network and play dolls are primarily sold through dealers and a few larger retailers. LMOD dealers have been ordering conservatively to minimize their inventory levels due to slower sales, resulting in a $1.25 million or 16% sales decrease in ASC dolls when comparing the year ended December 31, 2004 to 2003. Price competition remains a factor in ASC doll sales as numerous competitors have expanded into life-like baby doll category. The sales of play dolls to retailers, which include the Newborn Nursery® play dolls, decreased $0.22 million or 7%, when comparing the year ended December 31, 2004 to 2003. During the year ended December 31, 2004, sales to two new retail accounts accounted for 76% of play doll sales to retailers. LMOD is continuing to add new dealers and to introduce new dolls in order to stimulate demand for both lines of dolls. Saks Department Store Group has informed LMOD that it is planning to open an additional forty Newborn Nursery® locations by the end of 2005.

        Reflecting the decline in net sales, cost of goods sold decreased 8% to $10.57 million for the year ended December 31, 2004, compared to $11.45 million for the year ended December 31, 2003. LMOD’s cost of goods sold decreased to $7.04 million from $7.84 million while LPI’s cost of goods sold decreased to $3.53 million from $3.61 million. Total gross profit margin decreased to 34% from 35% in the prior year. In connection with transferring doll production to China, LMOD increased its allowance for inventory obsolescence by $0.19 million during 2004. LMOD’s gross profit margin remained at 34% (before the inventory obsolescence charge) for both years despite price reductions on the line of artist-designed collectible dolls. The price reduction was instituted in June of 2003 to stimulate sales and to meet increased competition; however, this decrease was partially offset by the transfer of doll production to China in July of 2004. During the second half of 2004, margins at LMOD did improve as a result of the transfer of production to China. LPI’s gross profit margin remained the same for both years.

        Total operating expenses of the consumer products segment for the year ended December 31, 2004, were $6.56 million compared to $8.65 million for the year ended December 31, 2003, a 24% decrease. LMOD’s total operating expenses decreased $2.26 million to $4.83 million for the year ended December 31, 2004. Sales and marketing expense decreased $2.00 million which included decreases of $0.34 million in personnel reductions and employee benefits. Advertising, trade shows, postage and catalog printing costs were reduced $0.36 million. The LMOD catalog is now available on-line at www.leemiddletondolls.com, which reduced the printing and mailing costs during 2004. The adjustment in the allowance for doubtful accounts resulted in a $0.59 million income statement change between 2004 and 2003. This reduction was due to the settlement of a $0.08 million claim with regard to the FAO, Inc. bankruptcy and the balance of the reduction was due to higher collection rates on outstanding receivables. Due to the expiration of the Lee Middleton licensing agreement expenses were reduced in 2004 by $0.17 million. The remaining reduction of $0.54 million was due to decreases in expenses for freight, samples, travel, commissions and royalties. New product development increased $0.10 million primarily due to an employee position transfer to new product development, employee contract provisions and employee benefits. LMOD’s general and administrative expenses decreased $0.36 million when comparing 2004 to 2003. Personnel reductions accounted for a $0.56 million reduction in expenses, which was offset by a $0.10 million increase in restructuring costs due to the transfer of doll production to China and a $.0.10 million increase in legal fees due to the copyright infringement lawsuits . LPI’s operating expenses increased $0.17 million to $1.73 million for the year ended December 31, 2004. Sales and marketing expenses increased $0.14 million primarily due to increases in shared advertising costs and sample costs. New product development remained the same between 2004 and 2003. General and administrative expenses increased $0.03 million due to additional depreciation.

        Interest expense increased $0.01 million when comparing the year ended December 31, 2004, to 2003. In July of 2004, InvestorsBank extended a $2.0 million line of credit to LMOD (with the Parent as a co-borrower) at prime rate. Other income increased $0.09 million when comparing the year ended December 31, 2004 to 2003 as a result of settlements with defendants regarding legal actions taken to prevent the sale of certain dolls that management believes infringe on LMOD’s copyrights and other intellectual property. In September of 2004, LPI purchased the building in which it was a tenant, from BMSBLC. BMSBLC financed the transaction and the purchase price of $3.67 million was determined by an independent appraiser and represented the fair market value of the building at the time of the sale. Other income also includes rental income of $.05 million that LPI receives from a tenant in its building.

14

        Interest expense and intercompany loans have been eliminated for consolidation purposes. At December 31, 2004, LMOD owed the Parent $4.2 million, consisting of a line of credit of $0.50 million and an unsecured note of $3.7 million. LMOD owed BMSBLC $2.02 million, secured by a first mortgage on real estate. The average interest rate on LMOD’s notes was 5.6% at December 31, 2004. At December 31, 2004, LPI owed BMSBLC $8.11 million consisting of a line of credit of $2.0 million, an unsecured note of $2.5 million, and a first mortgage on real estate of $3.61 million. The average interest rate on LPI’s notes was 5.7% at December 31, 2004. Before intercompany eliminations, interest expense for the consumer products segment and interest income to the financial services segment was $0.57 million for the year ended December 31, 2004. Intercompany eliminations also included $0.20 million in rent paid by LPI to BMSBLC through August of 2004. As of January, 2004, LMOD no longer paid management fees to BMSBLC, which increased working capital at LMOD, but reduced taxable income at BMSBLC.

        For the year ended December 31, 2004, income tax expense of $2.69 million was recorded at the consumer products segment as compared to a $1.37 million income tax benefit for the year ended December 31, 2003. Management determined for 2004, based on the level of the continuing losses of the consumer products segment, that it would provide a valuation allowance for the full amount of net operating loss carryforwards and other net deferred income tax assets, due to uncertainties of realization in the near term. If the consumer products segment becomes profitable, the existing net operating loss carryforwards should be available to be utilized against future taxable income. In assessing the recoverability of deferred income tax assets, including net operating loss carryforwards, management considers whether it is more likely than not, in the foreseeable future, that some portion or all of the deferred income tax assets will not be realized. The realization of deferred income tax assets in this instance is dependent upon the generation of future taxable income during the periods in which the net operating loss carryforwards would be available to offset the taxable income. At December 31, 2004, there were unused net operating loss carryforwards of approximately $6.8 million to be used to offset against future federal taxable income.

Financial Services

        Total revenues for the financial services segment decreased $1.89 million when comparing the year ended December 31, 2004 to December 31, 2003. The reduction in expenses for the same period of $1.12 million, and a reduction of $0.27 million in dividend payments in 2004 on the adjustable rate preferred stock, favorably affected the net income available to common shareholders.

        Interest income on loans decreased 31% to $2.24 million for the year ended December 31, 2004, as compared to $3.26 million for the year ended December 31, 2003. This decrease was primarily due to a $19.29 million decrease in the average total loans outstanding when comparing the year ended December 31, 2004, to the year ended December 31, 2003. In the present competitive interest rate environment, BMSBLC is at a lending disadvantage with other institutions such as banks, due to its higher cost of funds. During the year ended December 31, 2004, competitive pressures resulted in a reduction in loans of $24.99 million due to payoffs and $3.38 million due to normal principal reductions. The Parent’s and BMSBLC’s management agreement with InvestorsBank prevents them from making new loans to other than existing customers without the prior consent of InvestorsBank. Also, due to the requirements to redeem $16.85 million of preferred stock on July 1, 2008, the Parent and BMSBLC will use the proceeds of loan maturities, payoffs, and sales of leased properties to reduce outstanding indebtedness and therefore they do not intend to make any new loans or purchase any new properties, except for the purchase of loan participations from InvestorsBank. During the year ended December 31, 2004, $8.93 million of new loan participations through InvestorsBank were added to the loan portfolio. Participations with InvestorsBank comprised approximately 63% of the loan portfolio at December 31, 2004. These factors are resulting in BMSBLC’s inability to maintain the size of its loan and leased property portfolio, and management anticipates the resulting decline will continue until July 1, 2008, at which time management expects that the loan and leased property portfolio will be reduced to the extent required to redeem the Company’s preferred stock.

15

        Net interest margin is determined by dividing the total of interest income on loans and rental income less interest expense by the total of average loans and leased properties. The net interest margin for the year ended December 31, 2004, was 4.25% compared to 3.65% for the year ended December 31, 2003. During 2004, average loans outstanding (net of intercompany loans) of $43.48 million generated $2.24 million in interest income and average leased properties (net of intercompany properties) of $29.03 million generated $3.00 million in rental income. During 2003, average loans outstanding (net of intercompany loans) of $62.80 million generated $3.26 million in interest income and average leased properties (net of intercompany properties) of $30.83 million generated $3.07 million in rental income. The average gross return for the years ended December 31, 2004 and 2003, was approximately 10% on rental properties and 5% on loans. The increase in the net interest margin between the two years is due to a reduction in interest expense.

        Rental income decreased 2% to $3.00 million for the year ended December 31, 2004, as compared to $3.07 million for the year ended December 31, 2003. Rental income in 2004 increased $0.04 million due to scheduled rent increases and decreased $0.11 million due to leased property sales and vacant buildings. Two leased properties were sold in the year ending December 31, 2004, resulting in a gain of $0.18 million, net of income taxes, compared to a gain of $0.34 million, net of income taxes, from the sale of two leased properties in the year ended December 31, 2003. All tenants were current in their rent payments at December 31, 2004.

        In September of 2004, LPI purchased the building in which it was a tenant, from BMSBLC. BMSBLC financed the transaction and the purchase price of $3.67 million was determined by an independent appraiser and represented the fair market value of the building at the time of the sale. The fair market value of the transaction approximated the carrying value to BMSBLC and no gain or loss was recognized on the transaction. At December 31, 2004, BMSBLC owned 19 properties with a net carrying value of $22.23 million of which $18.54 million was pledged as collateral to the debt facility. Two vacant rental properties with a net carrying value of $3.28 million were available for sale or lease at December 31, 2004.

        There were no outstanding interest rate swaps during the year ended December 31, 2004. The termination of interest rate swaps resulted in income of $0.48 million for the year ended December 31, 2003. BMSBLC may periodically use these derivative instruments for purposes of managing interest rate risk. However, there were no interest rate swap agreements in effect at December 31, 2004.

        Interest expense decreased 26% to $2.11 million for the year ended December 31, 2004, as compared to $2.87 million for the year ended December 31, 2003, primarily due to a decrease in the outstanding average debt balance. The average debt balance decreased $22.07 million when comparing 2004 to 2003 as a result of the decrease in loans as explained above. To decrease the effective interest rate paid by BMSBLC, approximately $6.15 million of higher rate debt was paid-off with proceeds from loan payoffs. Variable interest rates, which also affect BMSBLC’s cost of funds, were higher at the end of 2004 due to increases in the prime rate resulting in an average cost of funds of 3.39% for 2004 as compared to 3.18% for 2003.

        BMSBLC’s debt facility consists of commercial paper and drawn lines of credit backed by a $40 million line of credit that matures on June 24, 2005. BMSBLC expects to further reduce the facility by an additional $10 million by June 24, 2005. The reduction in the debt facility is part of the Company’s plan for the preferred stock redemption. The proceeds from loan payoffs and from the sale of leased properties will be used to reduce the outstanding indebtedness. Beginning in the third quarter of 2003, a substantial amount of commercial paper, which had matured, was not able to be replaced by sales of additional commercial paper, requiring BMSBLC to draw upon the back-up bank line of credit, which has a higher interest rate than commercial paper. This higher cost of funds lessens BMSBLC’s ability to compete with banks and other financial institutions for loans, resulting in a decreased ability to replace loans that are paid off. Additionally, the 2008 redemption requirements of $16.85 million of preferred stock require the Company to focus on asset quality while de-leveraging the balance sheet. For a summary of the current levels of bank debt and commercial paper, see “Liquidity and Capital – Financial Services”, herein.

        Other miscellaneous income decreased $0.11 million for the year ended December 31, 2004, compared to the year ended December 31, 2003, primarily due to decreases in late payment fees and prepayment penalties.

16

        Depreciation expense decreased $0.12 million due to leased property sales and vacancies when comparing the year ended December 31, 2004 to 2003. Management fees under the management fee agreement with InvestorsBank decreased $0.04 million due to the decrease in loans and leased properties under management when comparing the two years. An impairment loss of $0.18 million was recorded to reduce the carrying cost of a leased property. This leased property was sold in January of 2005 at the reduced carrying cost. Other operating expenses decreased $0.34 million, primarily due to a reduction in leased property expense due to the sale of certain leased property.

        The Parent and its qualified REIT subsidiary, BMSBLC, qualify as a real estate investment trust under the Internal Revenue Code. Accordingly, they are not subject to income tax on taxable income that is distributed to common shareholders. During 2004, 2003 and 2002, the Parent took advantage of a provision in the tax law that allows a REIT to retain any capital gains on the sale of real estate properties by paying income tax on the gains. The Parent retained $0.31 million in capital gains and paid $0.13 million in income taxes as of December 31, 2004, retained $0.52 million in capital gains and paid $0.18 million in income taxes as of December 31, 2003, and retained $1.19 million in capital gains and paid $0.41 million in taxes as of December 31, 2002.

        The accompanying financial statements are presented on a consolidated basis which eliminates all intercompany accounts and transactions. Common stock dividends are based on the financial services taxable income (which includes intercompany interest income and rental income). Intercompany interest income and rental income totaled $0.77 million for the year ended December 31, 2004, which allowed the financial services segment to pay common dividends of $0.20 per share in 2004.

        Interest expense on intercompany loans has been eliminated for consolidation purposes. At December 31, 2004, LMOD owed the Parent $4.2 million consisting of a line of credit of $0.50 million and an unsecured note of $3.7 million. LMOD owed BMSBLC $2.02 million secured by a first mortgage on real estate. The average interest rate on LMOD’s notes was 5.6% at December 31, 2004. At December 31, 2004, LPI owed BMSBLC $8.11 million consisting of a line of credit of $2.0 million, an unsecured note of $2.5 million, and a first mortgage on real estate of $3.61 million. The average interest rate on LPI’s notes was 5.7% at December 31, 2004. Before intercompany eliminations, interest expense for the consumer products segment and interest income to the financial services segment was $0.57 million for the year ended December 31, 2004. Intercompany eliminations also included $0.20 million in rent paid by LPI to BMSBLC through August of 2004. As of January, 2004, LMOD no longer paid management fees to BMSBLC, which increases working capital at LMOD, but reduced taxable income at BMSBLC. As of November 12, 2003, the Parent extended a guarantee to a supplier of LMOD in which the Parent has agreed to unconditionally guarantee all obligations of LMOD to the supplier. It is anticipated that the maximum amount of the guarantee will not exceed $0.60 million, however, the amount of the guarantee is unlimited and the amount of the obligation may increase in the future.

For the years ended December 31, 2003 and December 31, 2002

        The Company’s total net (loss) income available for common shareholders for the year ended December 31, 2003 equaled ($0.66) million or ($0.18) per common share (diluted) as compared to $3.20 million or $0.86 per common share (diluted) for the year ended December 31, 2002.

The consumer products segment decrease in income was primarily due to lower sales as a result of the soft economy, pricing pressure from collectible dolls produced in China and lower margins due to price reductions. The financial services segment decrease was due to a decrease in both rental and loan income and smaller gains from the termination of interest rate swaps and from the sale of leased properties.

17

Consumer Products

        Net sales from consumer products for the year ended December 31, 2003, decreased 25% to $17.60 million from $23.46 million for the year ended December 31, 2002. This was due to decreased sales of $5.24 million at LMOD and decreased sales of $0.62 million at LPI. At LMOD, sales of artist-designed collectible dolls have been materially and adversely affected by foreign produced dolls which have been selling at a substantial discount from LMOD’s dolls. To meet this challenge, LMOD lowered prices in June, 2003 on its line of artist-designed collectible dolls in order to stimulate sales. Since the price reduction, unit sales have increased 17% over the comparable period one year ago. Although this pricing strategy has had a short-term impact on performance, management believes it has the potential to generate improvement over the long term. LMOD is also continuing to pursue legal action to prevent the sale of certain dolls that management believes infringe on LMOD’s copyrights and other intellectual property. LMOD has settled with several defendants and is continuing to pursue remedies in all pending lawsuits.

        LMOD is focusing its efforts on reemphasizing the name recognition and high product quality of LMOD in the collectible doll market as well as continuing to develop new products for the artist studio collection line of dolls. At the American International Toy Fair in New York City in 2004, LMOD introduced “Breath of Life Babies”. In addition, LMOD is pursuing a limited expansion of its “Newborn Nursery® Adoption Centers” that provide customers with the experience of “adopting” their new baby doll. Both of these new lines are featured on the LMOD website. To improve LMOD’s competitive position in the marketplace, LMOD is evaluating other new products and additional strategies to reduce costs.

        Reflecting the decline in net sales, cost of goods sold decreased 18% to $11.45 million for the year ended December 31, 2003, compared to $13.91 million for the year ended December 31, 2002. LMOD’s cost of goods sold decreased to $7.84 million from $9.84 million while LPI’s cost of goods sold decreased to $3.61 million from $4.07 million. Total gross profit margin decreased to 35% from 41% in the prior year. LMOD’s gross profit margin decreased to 34% from 42% due mainly to price reductions on the line of artist-designed collectible dolls. LMOD lowered prices an average of 31% on its line of artist-designed collectible dolls in order to stimulate sales and to meet the increased competition from offshore dolls. The liquidation of slow-moving inventory also contributed to LMOD’s reduced margin. LPI’s gross profit margin increased to 37% from 36% due to a slightly different product mix.

        Total operating expenses of the consumer products segment for the year ended December 31, 2003, were $8.65 million compared to $9.76 million for the year ended December 31, 2002, an 11% decrease. LMOD’s total operating expenses decreased $1.25 million to $7.09 million for the year ended December 31, 2003. Sales and marketing expense decreased $1.42 million of which staff reductions accounted for $0.30 million, advertising and promotion accounted for $0.31 million, bad debt expense accounted for a reduction of $0.20 million, and licensing fees were reduced $0.33 million due to the expiration of the Lee Middleton licensing agreement. The remaining reduction of $0.28 million was due to decreases in expenses for freight, samples, supplies, travel, commissions and royalties. New product development decreased $0.09 million and general and administrative expenses increased $0.26 million. General and administrative expenses increased due to a $0.09 million increase in legal fees relating to the pending lawsuits and $0.08 million in severance pay. LPI’s operating expenses increased $0.14 million primarily due to increased insurance costs.

        Interest expense decreased $0.16 million from December 31, 2002, to December 31, 2003, due to the payoff of debt between LMOD and InvestorsBank. The debt was replaced with intercompany loans from the Company to LMOD and from BMSBLC to LPI. Interest expense on these intercompany loans has been eliminated for consolidation purposes. At December 31, 2003, LMOD owed the Company $6.92 million, which consisted of a first mortgage on real estate of $2.12 million, a line of credit of $1.1 million, and an unsecured note of $3.7 million. The interest rate on these notes averaged 4.3% at December 31, 2003. At December 31, 2003, LPI owed BMSBLC $4.50 million consisting of a line of credit of $2.0 million and an unsecured note of $2.5 million. The interest rate on these notes was 4.0% at December 31, 2003. Before intercompany eliminations, interest expense to the consumer products segment and interest income to the financial services segment were $0.47 million for the year ended December 31, 2003. Intercompany eliminations also included $0.28 million in rent paid by LPI to BMSBLC and $0.45 million in management fees paid by LMOD to BMSBLC.

18

        Consumer products’ income tax benefit, based on net losses before intercompany charges, was $0.89 million for the year ended December 31, 2003 and $0.83 million for the year ended December 31, 2002. At December 31, 2003, there were unused net operating loss carryforwards of approximately $5.6 million to be used to offset against future federal taxable income.

Financial Services

        The financial services segment decrease in net income for the year ended December 31, 2003, compared to the year ended December 31, 2002, was due to a decrease in the net interest income on loans of $0.76 million, a decrease in rental income of $0.57 million, a decrease in the net gain from the sale of leased properties of $0.44 million, and a decrease in the gain from termination of interest rate swaps of $0.27 million.

        Interest income on loans decreased 33% to $3.26 million for the year ended December 31, 2003, as compared to $4.85 million for the year ended December 31, 2002. This decrease was primarily due to a $22.51 million decrease in the average total loans outstanding when comparing the year ended December 31, 2003, to the year ended December 31, 2002. In addition, interest income from variable rate loans decreased due to the decrease in the average prime rate when comparing 2003 to 2002. The average prime rate was 4.16% for the year ended December 31, 2003, compared to 4.68% for the year ended December 31, 2002. In the present competitive interest rate environment, BMSBLC is at a lending disadvantage with other institutions such as banks, due to its higher cost of funds. During 2003, competitive pressures resulted in a reduction of $16.6 million in loans due to pay-offs, and the recent difficult economy resulted in $5.0 million of loans being paid off due to business closings, with the remaining decrease in loans due to normal principal reductions. During 2003, $6.95 million of new loans and $2.17 million of intercompany loans were added to the loan portfolio. The Parent’s and BMSBLC’s management agreement with InvestorsBank prevents it from making new loans to other than existing customers without the prior consent of InvestorsBank. Because of this restriction, it is anticipated that the majority of new loans will consist of loan participations with InvestorsBank. Participations with InvestorsBank comprised approximately 48% of the loan portfolio at December 31, 2003. These two factors, in addition to the difficult business economy in 2003, resulted in BMSBLC’s inability to maintain the size of its loan portfolio.

        Rental income decreased 16% to $3.07 million for the year ended December 31, 2003, as compared to $3.64 million for the year ended December 31, 2002. Rental income decreased $0.51 million due to the sale of two leased properties during 2002 and two leased properties during 2003. One property under construction at December 31, 2002, was completed and placed in service in May, 2003, resulting in $0.17 million in new rental income for 2003 while scheduled rent increases added $0.01 million. During 2003, one tenant was placed on non-accrual resulting in a decrease of $0.24 million of rental income, which would have been recorded in 2003 had the tenant been current in accordance with the lease.

        Net interest margin is determined by dividing the total of interest income on loans and rental income less interest expense by the total of average loans and leased properties. The interest margin for the year ended December 31, 2003 was 3.65% compared to 3.99% for the year ended December 31, 2002. During 2003, average loans outstanding (net of intercompany loans) of $62.80 million generated $3.26 million in interest income and average leased properties (net of intercompany properties) of $30.83 million generated $3.07 million in rental income. The average gross return in 2003 on rental properties was approximately 10% while the average gross return on loans was approximately 5%. During 2002, average loans outstanding (net of intercompany loans) of $85.31 million generated $4.85 million in interest income and average leased properties (net of intercompany properties) of $33.15 million generated $3.64 million in rental income. The average gross return in 2002 on rental properties was approximately 11% while the average gross return on loans was approximately 5.5%.

        During the year ended December 31, 2003, two leased properties were sold, resulting in a net gain of $0.34 million (net of income taxes). During the year ended December 31, 2002, the net gain from the sale of two leased properties (net of income taxes) was $0.78 million. At December 31, 2003, BMSBLC owned 22 properties with a net carrying value of $30.81 million. One vacant rental property with a net carrying value of $1.40 million was available for lease at December 31, 2003, and two rental properties with a net carrying value of $3.57 million were on non-accrual status.

19

        The termination of interest rate swaps resulted in income of $0.48 million for the year ended December 31, 2003, and $0.75 million for the year ended December 31, 2002. BMSBLC may periodically use these derivative instruments for purposes of managing interest rate risk. However, there were no interest rate swap agreements in effect at December 31, 2003.

        Interest expense decreased 22% to $2.87 million for the year ended December 31, 2003, as compared to $3.70 million for the year ended December 31, 2002, primarily due to a decrease in the outstanding average debt balance and lower interest rates. The average debt balance decreased $21.97 million when comparing 2003 to 2002 as a result of the decrease in loans as explained above. BMSBLC’s cost of funds is based primarily on variable interest rates, which were lower in 2003. BMSBLC was able to reduce certain higher fixed rate debt in 2003 with proceeds from loan payoffs, resulting in an average cost of funds of 3.51% in 2003 as compared to 3.57% during 2002. In 2002, interest rate expense was reduced by $0.54 million in income from interest rate swaps.

        BMSBLC’s debt facility consists of commercial paper and drawn letters of credit backed by a $65 million line of credit that matures on June 25, 2004. At December 31, 2003, BMSBLC had $10.17 million in lending capability with outstanding unfunded commitments of $1.77 million. During the first quarter of 2004, BMSBLC used this lending capability to add a new loan of $1.65 million and to pay off $5.58 million in long-term debt. BMSBLC expects that the remaining $1.17 million in lending capability will be used to fund other commitments during 2004.

        During 2003, commercial paper which had matured was not able to be replaced by sales of additional commercial paper, requiring BMSBLC to draw upon the back-up bank line of credit which has a higher interest rate than commercial paper. This higher cost of funds lessens BMSBLC’s ability to compete with banks and other financial institutions for loans, resulting in a decreased ability to replace loans that are paid-off. BMSBLC’s future growth rate will depend upon the BMSBLC’s ability to obtain additional sources of acceptable funding at reasonable interest rates. BMSBLC is continually reviewing various funding sources; however, to date, BMSBLC has not found any additional acceptable funding sources. Additionally, the 2008 redemption requirements of $16.9 million of preferred stock require the Company to focus on asset quality while de-leveraging the balance sheet. For further detail, see “Liquidity and Capital – Financial Services” on page 22 hereof.

        Other income for the year ended December 31, 2003 included $0.11 million in loan prepayment penalties, $0.02 million in late payment fees and $0.05 million in miscellaneous income. For the year ended December 31, 2002, other income included $0.13 million in loan prepayment penalties, $0.02 million in late payment fees and $0.06 million of miscellaneous income.

        Depreciation expense decreased $0.05 million due to the decrease in leased properties when comparing the year ended December 31, 2003 to 2002. Management fees under the management fee agreement with InvestorsBank decreased $0.05 million due to the decrease in loans under management when comparing 2003 to 2002. Other operating expenses increased $0.34 million due to a $0.27 million increase in expenses involving the leased property portfolio and an increase of $0.03 million was due to related legal expenses. Other legal expense increased $0.03 million due to additional professional fees associated with complying with the Sarbanes-Oxley Act of 2002. Due to the prepayment of certain loans, $0.02 million in debt issue costs also were expensed in 2003.

        The Parent and its qualified REIT subsidiary, BMSBLC, qualify as a real estate investment trust under the Internal Revenue Code. Accordingly, they are not subject to income tax on taxable income that is distributed to common shareholders. During 2003 and 2002, the Parent took advantage of a provision in the tax law that allows a REIT to retain any capital gains on the sale of real estate properties by paying income tax on the gains. The Parent retained $0.52 million in capital gains and paid $0.18 million in taxes as of December 31, 2003, and retained $1.19 million in capital gains and paid $0.41 million in taxes as of December 31, 2002.

        At December 31, 2003, LMOD owed the Parent and BMSBLC $6.92 million, which consisted of a first mortgage on real estate of $2.12 million, a line of credit of $1.1 million, and an unsecured note of $3.7 million. The interest rate on these notes averaged 4.3% at December 31, 2003. At December 31, 2003, LPI owed BMSBLC $4.50 million composed of a line of credit of $2.0 million and an unsecured note of $2.5 million. The interest rate on these notes was 4.0% at December 31, 2003. Before intercompany eliminations, the financial services segment included $0.47 million of interest income, $0.28 million of rental income from LPI to BMSBLC and $0.45 million in management fees paid by LMOD to BMSBLC. As of November 12, 2003, the Parent extended a guarantee to a supplier of LMOD in which the Parent has agreed to unconditionally guarantee all obligations of LMOD to the supplier. It is anticipated that the maximum amount of the guarantee will not exceed $0.60 million, however, the amount of the guarantee is unlimited and the amount of the obligation may increase in the future.

20

Liquidity and Capital

Consumer Products

        The consumer products segment’s net loss before intercompany eliminations for the year ended December 31, 2004, was $4.46 million, which was primarily a result of a $1.03 million reduction in net inventory levels, a $0.92 million depreciation charge, and a $2.69 million deferred income tax charge.

        Total assets of consumer products were $14.22 million as of December 31, 2004, and $15.62 million as of December 31, 2003, a 9% decrease. Cash decreased to $0.02 million at December 31, 2004, from $0.70 million at December 31, 2003.

        Primarily due to lower fourth quarter sales, accounts receivable, net of the allowance for doubtful accounts, decreased to $2.08 million at December 31, 2004, from $2.17 million at December 31, 2003. LPI’s receivables increased $0.06 million and LMOD’s receivables decreased $0.15 million. At December 31, 2003, LMOD had increased its allowance for doubtful accounts receivable by $0.24 million due to an outstanding receivable from FAO, Inc., which had declared bankruptcy. After selling the receivable to a third party, LMOD collected $0.08 million more than anticipated in the second quarter of 2004, resulting in a reduction in the allowance account.

        Inventory and prepaid inventory, net of the allowance for obsolescence, decreased to $4.72 million at December 31, 2004, compared to $5.56 million at December 31, 2003. LMOD’s inventory decreased by $1.18 million and LPI’s inventory increased by $0.34 million. LMOD’s inventories decreased due to the transfer of the production of ASC dolls to a contract manufacturer in China in 2004. Inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method.

        Property and equipment, net of accumulated depreciation, increased by $2.95 million as of December 31, 2004, compared to December 31, 2003. Property and equipment increased by $3.47 million while accumulated depreciation increased by $0.52 million. In September of 2004, LPI purchased the building in which it was a tenant, from BMSBLC. BMSBLC financed the transaction and the purchase price of $3.67 million was determined by an independent appraiser and represented the fair market and carrying value of the building at the time of the sale. Certain manufacturing equipment was written off at LMOD due to the transfer of ASC doll production to China. Other prepaid expenses decreased $0.02 million from December 31, 2003 to December 31, 2004.

        At December 31, 2004, the consumer products segment had unused federal net operating loss carryforwards of approximately $6.8 million. Management determined that based on the level of the continuing losses of the consumer products segment, that it would provide a valuation allowance for the full amount of net operating loss carryforwards and other net deferred income tax assets, due to uncertainties of realization in the near term. If the consumer products segment becomes profitable, the existing net operating loss carryforwards should be available to be utilized against future taxable income. In assessing the recoverability of deferred income tax assets, including net operating loss carryforwards, management considers whether it is more likely than not, in the foreseeable future, that some portion or all of the deferred income tax assets will not be realized. The realization of deferred income tax assets in this instance is dependent upon the generation of future taxable income during the periods in which the net operating loss carryforwards would be available to offset the taxable income. The deferred income tax assets are reviewed on a quarterly basis.

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        Goodwill was recorded when the Company purchased the remaining interest in the stock from the estate of Lee Middleton, the founder of LMOD, on April 30, 1998. The purchase price exceeded the carrying value by $0.62 million. As of December 31, 2004 and 2003, the balance of the goodwill, net of previous accumulated amortization, was $0.51 million. Management has concluded that the goodwill is not impaired as of December 31, 2004.

        Other liabilities decreased $0.12 million to $1.37 million at December 31, 2004, from $1.49 million at December 31, 2003, due to decreases in accrued employee benefits because of personnel reductions.

        Due to the losses suffered by the consumer products segment, it is unable to borrow money from outside financial sources and is dependent on the financial backing of the Parent and BMSBLC for its borrowing requirements. In July of 2004, InvestorsBank extended a $2.0 million line of credit to LMOD with the Parent as a co-borrower on the line. The outstanding balance on the line at December 31, 2004, was $0.22 million which was paid in full to InvestorsBank in January of 2005 with proceeds from a loan from BMSBLC.

Financial Services

        During 2004, the financial products segment’s net income after intercompany transactions was $1.61 million. Dividends of $0.91 million were paid to preferred stockholders and dividends of $0.76 million were paid to common stockholders.

        Total assets of financial services were $56.44 million as of December 31, 2004 and $86.59 million as of December 31, 2003. Cash decreased to $0.63 million at December 31, 2004 from $0.65 million at December 31, 2003.

        Interest receivable decreased to $0.23 million as of December 31, 2004, from $0.25 million at December 31, 2003. All tenants were current in their rent payments at December 31, 2004. During the year ended December 31, 2004, rent receivable totaling $0.19 million was written-off against the $0.15 million allowance for doubtful accounts resulting in a bad debt expense of $0.04 million for the year. At December 31, 2003, the rent receivable of $0.11 million is shown net of an allowance for doubtful accounts of $0.15 million. At December 31, 2004, five non-performing loans totaling $1.18 million in principal were on non-accrual, resulting in a decrease of $0.05 million of interest income which would have been recorded for the year had the non-accruing loans been current in accordance with their original terms. During February of 2005, one non-performing loan totaling $0.75 million in principal was collected.

        Total loans (excluding intercompany loans) decreased by $19.45 million, or 37%, to $32.84 million at December 31, 2003, from $52.29 million at December 31, 2003, with a corresponding decrease in liabilities. As of December 31, 2004 and 2003, management did not provide an allowance for loan losses due to management’s belief that the collateral which secured nonperforming loans was adequate to fully secure the debtors’ obligation to BMSBLC. At December 31, 2004, BMSBLC’s real estate loan portfolio consisted of 46 loans of which nineteen were participated with InvestorsBank and four were intercompany loans.

        Leased properties, net of accumulated depreciation, decreased to $22.23 million as of December 31, 2004, compared to $30.81 million as of December 31, 2003, primarily due to the sale of three leased properties. Two vacant rental properties with a net carrying value of $3.28 million were available for sale or lease at December 31, 2004. An impairment loss of $0.18 million was recorded in 2004 to reduce the carrying cost of a leased property. The leased property was sold in January of 2005 at the reduced carrying cost. Management believes that the carrying values of the remaining properties were not impaired at December 31, 2004.

        Property and equipment and other assets, including prepaid amounts, decreased by $1.96 million. At December 31, 2003, BMSBLC’s other assets included a $1.65 million receivable from the sale of a leased property. In January, 2004, this receivable was financed by BMSBLC as a loan causing other assets to decrease by that amount. The balance of the decrease was primarily due to reductions in prepaid items and the Parent’s redemption of $0.05 million of stock it held as an investment. Property and equipment decreased $0.01 million due to depreciation.

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        The financial services’ total consolidated indebtedness at December 31, 2004, decreased $26.96 million, primarily as the result of the payment of indebtedness using proceeds from loan payoffs, loan maturities, and sales of leased properties.

        BMSBLC’s debt facility consists of commercial paper and drawn lines of credit backed by a $40 million line of credit that matures on June 24, 2005. BMSBLC expects to further reduce the facility by an additional $10 million by June 24, 2005. Proceeds from loan payoffs, loan maturities, and from the sale of leased properties have been used to reduce the debt. At December 31, 2004, BMSBLC had $2.18 million in lending capability with outstanding unfunded commitments of $4.14 million. Management expects that due to scheduled loan maturities BMSBLC will be able to fund the outstanding commitments.

        At December 31, 2004, the outstanding commercial paper balance was $7.07 million. BMSBLC also had drawn $30.75 million against its bank line of credit to replace outstanding commercial paper that had matured and was unable to be replaced by sales of additional commercial paper. The bank line of credit has an interest rate which is approximately 40 basis points higher than that paid on commercial paper, resulting in a reduction of net income for 2004. At December 31, 2003, the outstanding commercial paper balance was $34.00 million and the outstanding balance on bank lines of credit was $19.23 million.

        At December 31, 2004, long-term debt consisted of $5.67 million of fixed rate (6.98%) debt and $1.32 million of fixed rate (7.19%) debt with the State of Wisconsin Investment Board (SWIB). BMSBLC reduced its long-term debt by $11.55 million in 2004 by using proceeds from loan payoffs and by using the bank line of credit which has a lower interest rate.

        Accrued liabilities decreased to $0.96 million at December 31, 2004, as compared to $1.13 million at December 31, 2003, due to reductions in real estate tax escrows and security deposits from the sale of leased properties.

        Due to the Parent’s required redemption of $16.85 million of outstanding preferred stock on July 1, 2008, BMSBLC expects to materially reduce its lending activities over the next four years. During the second quarter of 2004, the Board of Directors of the Company approved a plan to convert loans and leased properties of BMSBLC to cash as loans mature and leased properties are sold. The proceeds will be used to reduce outstanding debt and to redeem preferred stock at maturity. Under this policy, BMSBLC does not intend to make new loans or purchase new properties to lease, with only limited exceptions for participations with InvestorsBank. This reduction in assets will reduce the income available for common stock dividends in each of the next four years. As a result, the Board of Directors has changed the common stock dividend policy from the payment of quarterly dividends to an annual dividend which would be payable in January for the preceding year. During 2004, dividends totaling $0.20 per share were paid to common stock shareholders. The preferred stock dividend of $0.335 per share per quarter ($1.34 annual divided per preferred share) was paid during 2004 and management anticipates that the preferred stock dividend will continue to be paid on a quarterly basis.

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Off Balance Sheet Arrangements

        BMSBLC, in its ordinary course of business, had undisbursed loan commitments and lines of credit totaling $4.14 million and $1.77 million at December 31, 2004 and 2003, respectively. There were no letters of credit outstanding as of December 31, 2004.

Contractual Obligations

        The Company has obligations and commitments to make future payments under debt and operating leases. The following schedule details these obligations at December 31, 2004.

*  Loan participation payments are made when principal is paid on the corresponding notes.
    Therefore, the above estimates reflect expected principal payments on notes.

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

        This report contains certain 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. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words “may”, “will”, “could”, “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project”, or similar expressions. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Company and the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, including the condition of the local real estate market, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or real estate portfolios, competition, the accessibility of funding sources at competitive rates, demand for the Company’s consumer products, the degree of success of the Company’s strategy to reduce prices on its collectible dolls and reduce expenses, the effect of not reaching the Company’s goals to expand to 100 boutiques over a three year period, payment when due of principal and interest on loans made by the Company, payment of rent by lessees on Company properties and the necessity to make additions to the Company’s loan loss reserve. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.

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Item 7A.    Quantitative and Qualitative Disclosures About Market Risk

        The Parent and BMSBLC assume interest rate risk (the risk that general interest rate levels will change) as a normal component of its operations. As a result, fair values of the Parent’s and BMSBLC’s financial instruments will change when interest rate levels fluctuate and that change may be either favorable or unfavorable to the Company.

        The Parent and BMSBLC’s debt structure and interest rate risk are managed through the use of fixed and variable rate debt. Management attempts to match variable rate loans with variable rate debt and fixed rate loans with fixed rate debt to the extent believed necessary to minimize interest rate risk. The Parent and BMSBLC’s fixed rate loans are matched with fixed rate debt, which reduces market rate risk. Variable rate loans are also matched against variable rate debt.

        A significant portion of BMSBLC’s fixed rate loans and fixed rate leases are matched against fixed rate debt; however, the portfolio is not completely matched. A portion of BMSBLC’s fixed rate assets are funded with variable rate debt. In the present interest rate environment the mismatch of variable rate debt against fixed rate earning assets does not significantly impact BMSBLC. At December 31, 2004, an increase of 1% in the interest rate paid on the variable debt would increase the BMSBLC’s annual pre-tax profits in an amount approximating $50,000.

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Item 8.        Financial Statements and Supplementary Data

The Middleton Doll Company

Consolidated Financial Statements

Contents

Financial Statement Schedules

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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
The Middleton Doll Company and Subsidiaries
Waukesha, Wisconsin

We have audited the accompanying consolidated balance sheets of The Middleton Doll Company and Subsidiaries (collectively, the “Company”), as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. We have also audited the financial statement schedules listed in Item 8. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Middleton Doll Company and Subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules listed in Item 8, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

Virchow, Krause & Company, LLP

/s/ Virchow, Krause & Company, LLP

Milwaukee, Wisconsin
February 17, 2005

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THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003

ASSETS

See accompanying notes to consolidated financial statements.

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THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003

LIABILITIES, MINORITY INTEREST AND SHAREHOLDERS’ EQUITY

See accompanying notes to consolidated financial statements.

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THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2004, 2003 and 2002

See accompanying notes to consolidated financial statements.

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THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (Continued)
Years Ended December 31, 2004, 2003 and 2002

See accompanying notes to consolidated financial statements.

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THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2004, 2003 and 2002

See accompanying notes to consolidated financial statements.

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THE MIDDLETON DOLL COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004, 2003 and 2002