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

# FORM 10-K

| | [X] | Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
               1934 For the year ended December 31, 2004;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

OR

| | [_] | Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
                                        For the Transition Period from __________ to
__________
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Commission File Number:
0-22663

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

|Wisconsin                                      | 39-1364345                          
|---------------------------------------------- | ------------------------------------
|(State or other jurisdiction of incorporation) | (I.R.S. Employer Identification No.)
|W239 N1700 Busse Road                         
|Waukesha, Wisconsin                            | 53188-1160                          
|(Address of principal executive offices)       | (Zip Code)                          

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:

|Title of Class                      | Title of Class                  
|----------------------------------- | --------------------------------
|Common Stock, 6-2/3 cents Par Value | Preferred Stock, $0.01 Par Value

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-KFor the Year Ended December 31, 2004

|PART I   |                                                                            | 3 
|-------- | -------------------------------------------------------------------------- | --
|Item 1.  | Business                                                                   | 3 
|Item 2.  | Properties                                                                 | 8 
|Item 3.  | Legal Proceedings                                                          | 8 
|Item 4.  | Submission of Matters to a Vote of Security Holders                        | 8 
|PART II  |                                                                            | 9 
|Item 5.  | Market for Registrant's Common Equity, Related Stockholder Matters and    
|         | Issuer Purchases of Equity Securities                                      | 9 
|Item 6.  | Selected Financial Data (In thousands, except per share data)              | 9 
|Item 7.  | Management's Discussion and Analysis of Financial Condition and Results of
|         | Operations (for the years ended December 31, 2004, 2003 and 2002)          | 10
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                 | 25
|Item 8.  | Financial Statements and Supplementary Data                                | 26
|Item 9.  | Changes in and Disagreements with Accountants on                          
|         | Accounting and Financial Disclosure                                        | 61
|Item 9A. | Controls and Procedures                                                    | 61
|Item 9B. | Other Information                                                          | 61
|PART III |                                                                            | 61
|Item 10. | Directors and Executive Officers of the Registrant                         | 61
|Item 11. | Executive Compensation                                                     | 61
|Item 12. | Security Ownership of Certain Beneficial Owners and Management            
|         | and Related Stockholder Matters                                            | 62
|Item 13. | Certain Relationships and Related Transactions                             | 62
|Item 14. | Principal Accountant Fees and Services                                     | 62
|PART IV  |                                                                            | 62
|Item 15. | Exhibits and Financial Statement Schedules                                 | 62

2

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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.

3

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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.

|Type of Business                    | Number
of Loans | Outstanding
Principal
Balance | Percent of
Total Loans
Outstanding
|----------------------------------- | --------------- | ----------------------------- | ----------------------------------
|Industrial Machinery                |                 |                               |                                   
|Wholesale Goods                     |                 |                               |                                   
|Construction                        |                 |                               |                                   
|Dies, Molds and Patterns            |                 |                               |                                   
|Retail                              |                 |                               |                                   
|Other Manufacturing                 |                 |                               |                                   
|Investment Property                 |                 |                               |                                   
|Metalworking Machinery              |                 |                               |                                   
|Commercial Printing                 |                 |                               |                                   
|Services                            |                 |                               |                                   
|Transportation                      |                 |                               |                                   
|Electronic and Electrical Equipment |                 |                               |                                   
|                                    |                 |                               |                                   
|Total                               |                 |                               |                                   
|                                    |                 |                               |                                   

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

|              | Outstanding
Balance | Percent of
Total Loans
Outstanding
|------------- | ------------------- | ----------------------------------
|Fixed rate    |                     |                                   
|Variable rate |                     |                                   
|              |                     |                                   
|Total         |                     |                                   
|              |                     |                                   

4

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

|Expiration
Date | 5.0-5.9% | 6.0-6.9% | 7.0-7.9% | 8.0-8.9%  | Total
|--------------- | -------- | -------- | -------- | --------- | -----
|Demand          |          |          | $        | --        |      
|2005            |          |          |          | 1,818,298 |      
|2006            |          |          |          | --        |      
|2007            |          |          |          | --        |      
|                |          |          |          |           |      
|Total           |          |          | $        | 1,818,298 |      
|                |          |          |          |           |      

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.

|Property
Type | Location | Annual Lease
Rents | Cost                | Square
Footage
|------------- | -------- | ------------------ | ------------------- | --------------
|Industrial    |          |                    | Germantown, WI      |               
|Commercial    |          |                    | Menomonee Falls, WI |               
|Commercial    |          |                    | Pewaukee, WI        |               
|Industrial    |          |                    | Berlin, WI          |               
|Commercial    |          |                    | Mequon, WI          |               
|Commercial    |          |                    | Oconomowoc, WI      |               
|Industrial    |          |                    | Menomonee Falls, WI |               
|Commercial    |          |                    | Menomonee Falls, WI |               
|Commercial    |          |                    | Mequon, WI          |               
|Industrial    |          |                    | Waukesha, WI        |               
|Commercial    |          |                    | Franklin, WI        |               
|Commercial    |          |                    | Lake Geneva, WI     |               
|Industrial    |          |                    | Cudahy, WI          |               
|Commercial    |          |                    | Menomonee Falls, WI |               
|Commercial    |          |                    | Menomonee Falls, WI |               
|Industrial    |          |                    | Cudahy, WI          |               
|Commercial    |          |                    | Milwaukee, WI       |               
|Industrial    |          |                    | West Allis, WI      |               
|Commercial    |          |                    | Menomonee Falls, WI |               
|              |          |                    |                     |               
|              |          |                    |                     |               
|              |          |                    |                     |               

| | *   Property
not leased    **   Property only partially leased#   Cost
reduced to estimated selling price
| | ---------------------------------------------------------------------------------------------------------

5

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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.

6

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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:

|                      | 12/31/04 | 12/31/03 | 12/31/02
|--------------------- | -------- | -------- | --------
|Revenues              |          |          |         
|Loan Portfolio        |          |          | $       
|Real Estate Portfolio |          |          |         
|Dolls                 |          |          |         
|Time Pieces           |          |          |         
|Other                 |          |          |         
|                      |          |          |         
|Total                 |          |          | $       
|                      |          |          |         

# 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.

7

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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.

8

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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.

|               | Common Stock | Cash Dividends
|-------------- | ------------ | --------------
|
|2004           |              |               
|First Quarter  | $    4.250   | $    3.820    
|Second Quarter | $    3.950   | $    1.300    
|Third Quarter  | $    2.190   | $    0.550    
|Fourth Quarter | $    2.350   | $    0.570    
|2003           |              |               
|First Quarter  | $    5.760   | $    4.000    
|Second Quarter | $    6.100   | $    4.200    
|Third Quarter  | $    5.880   | $    5.050    
|Fourth Quarter | $    5.400   | $    3.450    

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:

|                                         | For the years ended
December 31,
|---------------------------------------- | --------------------------------
|(In thousands, except per share data)   
|Total revenues                           |                                 
|Net income (loss) available              |                                 
|to common shareholders                   |                                 
|Total assets                             |                                 
|Long-term debt                           |                                 
|Total liabilities, other than redeemable |                                 
|preferred stock                          |                                 
|Redeemable preferred stock               |                                 
|Total liabilities                        |                                 
|Diluted (loss) earnings per common share |                                 
|Cash dividends declared per common share |                                 

9

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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.

10

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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.

11

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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).

12

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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.

|                                             | 12/31/2004      | 12/31/2003     
|-------------------------------------------- | --------------- | ---------------
|Consumer products segment net loss           | ($3.69) million | ($1.09) million
|Per common share (diluted)                   | ($0.99)         | ($0.29)        
|Financial services segment net (loss) income | ($0.07) million | $0.43 million  
|Per common share (diluted)                   | ($0.02)         | $0.11          

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.

13

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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

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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

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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

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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 taxableincome (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.

|                                            | 12/31/2003      | 12/31/2002   
|------------------------------------------- | --------------- | -------------
|Consumer products segment net (loss) income | ($1.09) million | $0.75 million
|Per common share (diluted)                  | ($0.29)         | $0.20        
|Financial services segment net income       | $0.43 million   | $2.45 million
|Per common share (diluted)                  | $0.11           | $0.66        

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

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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

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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

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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

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# 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.

21

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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.

22

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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.

|12/31/2004                 | 12/31/2003    
|-------------------------- | --------------
|Short-term debt            | $37.82 million
|Long-term debt             | $6.99 million 
|Redeemable preferred stock | $16.85 million

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.

23

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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.

|                              | Payments due by period
|----------------------------- | ----------------------
|
|Consumer products segment     |                       
|Operating Lease Obligations   |                       
|Financial services segment    |                       
|Long-term debt                |                       
|Loan participations *         |                       
|Preferred stock               |                       
|Total contractual obligations |                       

*  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.

24

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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.

25

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# Item 8.        Financial
Statements and Supplementary Data

# The Middleton Doll
Company

# Consolidated Financial
Statements

# Contents

|Report of Virchow,  Krause & Company, LLP, Independent  Registered Public Accounting Firm | 27
|----------------------------------------------------------------------------------------- | --
|Consolidated  Balance  Sheets as of December  31, 2004 and 2003                           | 28
|Consolidated Statements of Income                                                        
|For the years ended  December 31, 2004,  2003 and 2002                                    | 30
|Consolidated Statements of Changes in Shareholders' Equity                               
|For the years ended  December 31, 2004,  2003 and 2002                                    | 32
|Consolidated Statements of Cash Flows                                                    
|For the years ended  December 31, 2004,  2003 and 2002                                    | 33
|Notes to  Consolidated  Financial  Statements                                             | 35

# Financial Statement
Schedules

|Schedule I  | Condensed Financial Information of Registrant | 59
|----------- | --------------------------------------------- | --
|Schedule II | Valuation and Qualifying Accounts             | 59
|Schedule IV | Mortgage Loans on Real Estate                 | 60

26

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REPORT OF INDEPENDENT
REGISTEREDPUBLIC ACCOUNTING FIRM

Board of Directors and
ShareholdersThe Middleton Doll Company and SubsidiariesWaukesha, 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,
WisconsinFebruary 17, 2005

27

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE
SHEETS  December 31, 2004 and 2003

# ASSETS

|                                | 2004 | 2003
|------------------------------- | ---- | ----
|CONSUMER PRODUCTS               |      |     
|Current Assets:                 |      |     
|Cash and cash equivalents       |      |     
|Accounts receivable, net        |      |     
|Inventory, net                  |      |     
|Prepaid inventory               |      |     
|Other prepaid expenses          |      |     
|                                |      |     
|Total current assets            |      |     
|Property and equipment, net     |      |     
|Deferred income taxes           |      |     
|Goodwill                        |      |     
|                                |      |     
|Total Consumer Products Assets  |      |     
|                                |      |     
|FINANCIAL SERVICES              |      |     
|Cash and cash equivalents       |      |     
|Interest receivable             |      |     
|Rent receivable, net            |      |     
|Loans                           |      |     
|Leased properties, net          |      |     
|Property and equipment, net     |      |     
|Other assets                    |      |     
|                                |      |     
|Total Financial Services Assets |      |     
|                                |      |     
|TOTAL ASSETS                    |      |     
|                                |      |     

See accompanying notes
to consolidated financial statements.

28

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE
SHEETS  December 31, 2004 and 2003

# LIABILITIES, MINORITY
INTEREST AND SHAREHOLDERS EQUITY

|                                                           | 2004 | 2003
|---------------------------------------------------------- | ---- | ----
|LIABILITIES                                                |      |     
|CONSUMER PRODUCTS                                          |      |     
|Short-term borrowings                                      |      |     
|Accounts payable                                           |      |     
|Accrued salaries                                           |      |     
|Accrued liabilities                                        |      |     
|                                                           |      |     
|Total Consumer Products Liabilities                        |      |     
|                                                           |      |     
|FINANCIAL SERVICES                                         |      |     
|Commercial paper                                           |      |     
|Lines of credit                                            |      |     
|Direct pay letter of credit obligation                     |      |     
|State of Wisconsin Investment Board notes payable          |      |     
|Loan participations with repurchase options                |      |     
|Other borrowings                                           |      |     
|Accrued liabilities                                        |      |     
|                                                           |      |     
|Total Financial Services Liabilities Excluding             |      |     
|Preferred Shares                                           |      |     
|Preferred shares subject to mandatory redemption, net      |      |     
|                                                           |      |     
|Total Financial Services Liabilities                       |      |     
|                                                           |      |     
|MINORITY INTEREST                                          |      |     
|Minority interest in subsidiaries                          |      |     
|SHAREHOLDERS' EQUITY                                       |      |     
|Common stock, $0.0667 cents par value,                     |      |     
|15,000,000 shares authorized, 4,401,599 shares issued,     |      |     
|3,727,589 shares outstanding at December 31, 2004 and 2003 |      |     
|Additional paid-in capital                                 |      |     
|Retained earnings (accumulated deficit)                    |      |     
|Treasury stock, 674,010 shares, at cost                    |      |     
|                                                           |      |     
|                                                           |      |     
|                                                           |      |     
|TOTAL LIABILITIES, MINORITY INTEREST                       |      |     
|AND SHAREHOLDERS' EQUITY                                   |      |     
|                                                           |      |     

See accompanying notes
to consolidated financial statements.

29

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF INCOMEYears Ended December 31, 2004, 2003 and 2002

|CONSUMER PRODUCTS                                    | 2004 | 2003 | 2002
|---------------------------------------------------- | ---- | ---- | ----
|NET SALES                                            |      |      | $   
|COST OF GOODS SOLD                                   |      |      |     
|                                                     |      |      |     
|Gross Profit                                         |      |      |     
|OPERATING EXPENSES                                   |      |     
|Sales and marketing                                  |      |      |     
|New product development                              |      |      |     
|General and administrative                           |      |      |     
|                                                     |      |      |     
|Total Operating Expenses                             |      |      |     
|Net operating loss                                   |      |      |     
|OTHER INCOME (EXPENSE)                               |      |     
|Interest expense                                     |      |      |     
|Other income, net                                    |      |      |     
|                                                     |      |      |     
|Net Other Income (Expense)                           |      |      |     
|Loss before income taxes, minority interest          |      |     
|and intercompany charges                             |      |      |     
|Less: Applicable income tax (expense) benefit        |      |      |     
|Minority interest in income (losses) of subsidiaries |      |      |     
|                                                     |      |      |     
|INCOME (LOSS) BEFORE INTERCOMPANY                    |      |     
|CHARGES - CONSUMER PRODUCTS                          |      |      |     
|                                                     |      |      |     
|FINANCIAL SERVICES                                   |      |     
|REVENUES                                             |      |     
|Interest on loans                                    |      |      |     
|Rental income                                        |      |      |     
|Gain on sale of leased properties                    |      |      |     
|Gain on termination of interest rate swaps           |      |      |     
|Other income                                         |      |      |     
|                                                     |      |      |     
|Total Revenues                                       |      |      |     
|                                                     |      |      |     
|EXPENSES                                             |      |     
|Interest expense                                     |      |      |     
|Depreciation expense                                 |      |      |     
|Management fee expense                               |      |      |     
|Impairment loss                                      |      |      |     
|Other operating expenses                             |      |      |     
|                                                     |      |      |     
|Total Expenses                                       |      |      |     
|                                                     |      |      |     
|Income before income taxes and                       |      |     
|intercompany revenue                                 |      |      |     
|Less: Applicable income tax expense                  |      |      |     
|                                                     |      |      |     
|INCOME BEFORE INTERCOMPANY                           |      |     
|REVENUE - FINANCIAL SERVICES                         |      |      | $   
|                                                     |      |      |     

See accompanying notes
to consolidated financial statements.

30

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

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

|                                                     | 2004 | 2003 | 2002
|---------------------------------------------------- | ---- | ---- | ----
|TOTAL COMPANY                                        |      |      |     
|Loss before income taxes, minority                   |      |     
|interest and intercompany activity                   |      |     
|Consumer products                                    |      |      | $   
|Financial services                                   |      |      |     
|                                                     |      |      |     
|Total Company                                        |      |      |     
|Income tax (expense) benefit                         |      |      |     
|Minority interest in (losses) income of subsidiaries |      |      |     
|                                                     |      |      |     
|NET (LOSS) INCOME                                    |      |      |     
|Preferred stock dividends                            |      |      |     
|                                                     |      |      |     
|NET (LOSS) INCOME AVAILABLE TO                       |      |     
|COMMON SHAREHOLDERS                                  |      |      | $   
|                                                     |      |      |     
|Basic (loss) earnings per common share               |      |      | $   
|                                                     |      |      |     
|Diluted (loss) earnings per common share             |      |      | $   
|                                                     |      |      |     
|Weighted average shares outstanding                  |      |      |     
|                                                     |      |      |     
|SEGMENT RECONCILIATION                               |      |     
|CONSUMER PRODUCTS                                    |      |     
|(Loss) income before intercompany charges            |      |      | $   
|Interest and rent expense to parent                  |      |      |     
|Management fees to parent                            |      |      |     
|Forgiveness of management fees to parent             |      |      |     
|Applicable income tax benefit related to             |      |     
|intercompany charges                                 |      |      |     
|                                                     |      |      |     
|Total Segment Net Loss                               |      |      |     
|FINANCIAL SERVICES                                   |      |     
|Income before intercompany revenue                   |      |      |     
|Interest and rent income from subsidiary             |      |      |     
|Management fees from subsidiary                      |      |      |     
|Forgiveness of management fees from                  |      |     
|subsidiary                                           |      |      |     
|                                                     |      |      |     
|Total Segment Net Income                             |      |      |     
|NET (LOSS) INCOME                                    |      |      | $   
|                                                     |      |      |     

See accompanying notes
to consolidated financial statements.

31

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

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

|                                    | Common
stock | Additional
paid-in
capital | Retained
earnings
(Accumulated
deficit) | Treasury
stock | Accumulated
other
comprehensive
income | Total
|----------------------------------- | ------------ | -------------------------- | --------------------------------------- | -------------- | -------------------------------------- | -----
|BALANCES - December 31, 2001        |              |                            | $                                       | 293,441        |                                        | $    
|                                    |              |                            |                                         |                |                                        |      
|Comprehensive income                |              |                           
|Net income - 2002                   |              |                            |                                         | --             |                                        |      
|Unrealized gains on cash flow       |              |                           
|hedges                              |              |                            |                                         | --             |                                        |      
|Reclassification adjustment for     |              |                           
|gains realized on termination       |              |                           
|of cash flow hedges included        |              |                           
|in net income                       |              |                            |                                         | --             |                                        |      
|Reclassification adjustment for     |              |                           
|cash flow hedging gains             |              |                           
|included in net income              |              |                            |                                         | --             |                                        |      
|                                    |              |                            |                                         |                |                                        |      
|Total Comprehensive Income          |              |                            |                                         |                |                                        |      
|                                    |              |                            |                                         |                |                                        |      
|Cash dividends on preferred stock - |              |                           
|8.53% dividend rate                 |              |                            |                                         | --             |                                        |      
|Cash dividends on common stock -    |              |                           
|$.65 per share                      |              |                            |                                         | --             |                                        |      
|                                    |              |                            |                                         |                |                                        |      
|BALANCES - December 31, 2002        |              |                            |                                         | 293,441        |                                        |      
|                                    |              |                            |                                         |                |                                        |      
|Comprehensive loss                  |              |                           
|Net income - 2003                   |              |                            |                                         | --             |                                        |      
|Unrealized losses on cash flow      |              |                           
|hedges                              |              |                            |                                         | --             |                                        |      
|Reclassification adjustment for     |              |                           
|gains realized on termination       |              |                           
|of cash flow hedges included        |              |                           
|in net income                       |              |                            |                                         | --             |                                        |      
|                                    |              |                            |                                         |                |                                        |      
|Total Comprehensive Loss            |              |                            |                                         |                |                                        |      
|                                    |              |                            |                                         |                |                                        |      
|Cash dividends on preferred stock - |              |                           
|8.53% dividend rate in January,     |              |                           
|April and July and 5.37%            |              |                           
|dividend rate in October            |              |                            |                                         | --             |                                        |      
|Cash dividends on common stock -    |              |                           
|$.40 per share                      |              |                            |                                         | --             |                                        |      
|                                    |              |                            |                                         |                |                                        |      
|BALANCES - December 31, 2003        |              |                            |                                         | 293,441        |                                        |      
|Comprehensive and net loss - 2004   |              |                            |                                         |                |                                        |      
|Cash dividends on preferred stock - |              |                           
|5.37% dividend rate                 |              |                            |                                         | --             |                                        |      
|Cash dividends on common stock -    |              |                           
|$.20 per share                      |              |                            |                                         | --             |                                        |      
|                                    |              |                            |                                         |                |                                        |      
|BALANCES - December 31, 2004        |              |                            | $                                       | 293,441        |                                        | $    
|                                    |              |                            |                                         |                |                                        |      

See accompanying notes
to consolidated financial statements.

32

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

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

|                                                    | 2004 | 2003 | 2002
|--------------------------------------------------- | ---- | ---- | ----
|CONSUMER PRODUCTS                                   |      |      |     
|CASH FLOWS FROM OPERATING ACTIVITIES                |      |     
|Segment net loss                                    |      |      | $   
|Adjustments to reconcile segment net loss to        |      |     
|net cash flows from operating activities            |      |     
|Depreciation and amortization                       |      |      |     
|Provision for losses on accounts receivable         |      |      |     
|Gain on disposal of leased property                 |      |      |     
|Provision for inventory reserve                     |      |      |     
|Provision for deferred income tax expense (benefit) |      |      |     
|Change in minority interest in subsidiaries         |      |      |     
|Net change in:                                      |      |     
|Accounts receivable                                 |      |      |     
|Inventory, net                                      |      |      |     
|Other assets                                        |      |      |     
|Accounts payable                                    |      |      |     
|Other liabilities                                   |      |      |     
|                                                    |      |      |     
|Net Cash Flows from Operating Activities            |      |      |     
|                                                    |      |      |     
|CASH FLOWS FROM INVESTING ACTIVITIES                |      |     
|Property and equipment expenditures                 |      |      |     
|Repayment of loans                                  |      |      |     
|                                                    |      |      |     
|Net Cash Flows from Investing Activities            |      |      |     
|                                                    |      |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES                |      |     
|Net increase (decrease) in short term borrowings    |      |      |     
|Net decrease in other notes payable                 |      |      |     
|Net intercompany transactions                       |      |      |     
|                                                    |      |      |     
|Net Cash Flows from Financing Activities            |      |      |     
|                                                    |      |      |     
|Net Change in Cash and Cash Equivalents             |      |      |     
|CASH AND CASH EQUIVALENTS - BEGINNING               |      |     
|OF YEAR                                             |      |      |     
|                                                    |      |      |     
|CASH AND CASH EQUIVALENTS - END OF YEAR             |      |      | $   
|                                                    |      |      |     
|SUPPLEMENTAL CASH FLOW DISCLOSURES                  |      |     
|Cash paid for interest                              |      |      | $   
|Cash paid (received) for income taxes               |      |      |     
|NONCASH INVESTING AND FINANCING ACTIVITIES          |      |     
|Purchase of land and building                       |      |      | $   

See accompanying notes
to consolidated financial statements.

33

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

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

|                                                         | 2004 | 2003 | 2002
|-------------------------------------------------------- | ---- | ---- | ----
|FINANCIAL SERVICES                                       |      |      |     
|CASH FLOWS FROM OPERATING ACTIVITIES                     |      |     
|Segment net income                                       |      |      | $   
|Adjustments to reconcile segment net income to           |      |     
|net cash flows from operating activities                 |      |     
|Depreciation                                             |      |      |     
|Loss on disposal of leased property                      |      |      |     
|Provision for impairment of leased property              |      |      |     
|Gain on sale of leased properties                        |      |      |     
|Net change in:                                           |      |     
|Interest receivable                                      |      |      |     
|Rent receivable                                          |      |      |     
|Other assets                                             |      |      |     
|Accrued liabilities                                      |      |      |     
|                                                         |      |      |     
|Net Cash Flows from Operating Activities                 |      |      |     
|                                                         |      |      |     
|CASH FLOWS FROM INVESTING ACTIVITIES                     |      |     
|Net loan repayments received                             |      |      |     
|Proceeds from sale of leased properties                  |      |      |     
|Proceeds from sale of stock                              |      |      |     
|Purchase or construction of leased property              |      |      |     
|Net intercompany transactions                            |      |      |     
|                                                         |      |      |     
|Net Cash Flows from Investing Activities                 |      |      |     
|                                                         |      |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES                     |      |     
|Net change in commercial paper                           |      |      |     
|Net change in lines of credit                            |      |      |     
|Net payments on letter of credit                         |      |      |     
|Repayment of SWIB notes                                  |      |      |     
|Repayment of loan participations with repurchase options |      |      |     
|Net repayment of other long-term debt                    |      |      |     
|Preferred stock dividends paid                           |      |      |     
|Common stock dividends paid                              |      |      |     
|                                                         |      |      |     
|Net Cash Flows from Financing Activities                 |      |      |     
|                                                         |      |      |     
|Net Change in Cash and Cash Equivalents                  |      |      |     
|CASH AND CASH EQUIVALENTS - BEGINNING                    |      |     
|OF YEAR                                                  |      |      |     
|                                                         |      |      |     
|CASH AND CASH EQUIVALENTS - END OF YEAR                  |      |      | $   
|                                                         |      |      |     
|SUPPLEMENTAL CASH FLOW DISCLOSURES                       |      |     
|Cash paid for interest                                   |      |      | $   
|NONCASH INVESTING AND FINANCING ACTIVITIES               |      |     
|Sale of land and building                                |      |      | $   

See accompanying notes
to consolidated financial statements.

34

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 1  Summary of
Significant Accounting Policies

Consolidation

The consolidated financial statements
of The Middleton Doll Company and Subsidiaries (the Company) include the accounts of The
Middleton Doll Company (the Parent), Bando McGlocklin Small Business Lending Corporation
(BMSBLC) and Lee Middleton Original Dolls, Inc. (LMOD). LMOD includes the accounts of its
wholly owned subsidiary License Products, Inc. (LPI). The consolidated financial
statements have been prepared in conformity with accounting principles generally accepted
in the United States of America. All significant intercompany accounts and transactions
have been eliminated in the consolidated financial statements.

Nature of Business

The Middleton Doll Company and
Subsidiaries were incorporated in February, 1980, to provide long-term secured loans to
small businesses. At the present time, the Company consists of two business segments, the
financial services segment and the consumer products segment.

The financial services segment
consists of the Parent and its wholly-owned subsidiary BMSBLC. Both the Parent and BMSBLC
operate as a real estate investment trust (REIT) pursuant to the provisions of Section 856
of the Internal Revenue Code of 1986, as amended. The principal business of the segment is
to manage its existing loans and to lease buildings to small businesses. The segment has
participated in loans with third party loan originators.

The consumer products segment
consists of a 99% interest in LMOD and a 100% interest in LPI. On January 1, 2002, LMOD
acquired the remaining 49% interest in LPI. In 2002, LMODs 51% interest in Middleton
(HK) Limited was liquidated. LMOD is a designer and distributor of collectible vinyl dolls
and vinyl play dolls. LPI designs, develops and markets a line of proprietary time pieces.

Use of Estimates

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. Material estimates that are particularly susceptible to
significant change in the near term related to the determination of allowances for loan
and lease losses and doubtful accounts and the valuation of inventories and deferred
income tax assets.

Segment Information

The Company is reporting segment
assets, liabilities, sales and operating income and expenses, in the same format reviewed
by the Companys management. As discussed above, the Company has two reportable
segments: consumer products (which includes LMOD and LPI) and financial services (which
includes the Parent and BMSBLC). Segment information required to be disclosed is included
in the accompanying consolidated financial statements. Intersegment charges are reflected
in the segment reconciliation on the consolidated statements of income and on the
consolidated statements of cash flows.

Cash and Cash Equivalents

For purposes of reporting cash flows,
cash and cash equivalents are defined as those financial assets with an original maturity
of three months or less. The Company may at times maintain balances at financial
institutions that exceed federally insured limits. The Company has not experienced any
losses in such accounts.

35

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 1  Summary of
Significant Accounting Policies (continued)

Loans

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. Interest income is accrued on the unpaid principal
balance. The accrual of interest income on impaired loans is discontinued when, in the
opinion of management, there is reasonable doubt as to the borrowers ability to meet
payment of interest or principal when they become due. Loans are returned to accrual
status when the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.

Allowance for Loan Losses

A loan is considered on non-accrual
status when, based on current information and events, it is probable that the lender will
be unable to collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by management in
determining non-accrual status include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Non-accrual
status is measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loans effective
interest rate, the loans obtainable market price or the fair value of the collateral
if the loan is collateral dependent. Management reviews the value of the collateral on
each loan to determine if an allowance for loan losses is necessary. Management has
determined that no allowance for loan losses is necessary.

Rent Receivable

Rent receivable is accrued on a
monthly basis based on the lease agreement. If at any point it is determined that the
lessee will not make rent payments as dictated by the lease agreement, the accrual of rent
is discontinued until management determines the rent to be collectible.

Accounts Receivable

The Company provides an allowance for
doubtful accounts equal to the estimated uncollectible amounts. The Companys
estimate is based on historical collection experience and a review of the current status
of trade accounts receivable. It is reasonably possible that the Companys estimate
of the allowance for doubtful accounts will change. Accounts receivable are presented net
of an allowance for doubtful accounts of $154,833 and $555,738 at December 31, 2004 and
2003, respectively.

Interest Rate Swap
Agreements

The Company periodically enters into
interest rate agreements as a means of managing interest rate exposure. The differential
to be paid or received on all interest rate swap agreements is accrued as interest rates
change and is recognized over the life of the agreements. The swap agreements are recorded
at fair value on the consolidated balance sheet with the net adjustment recorded as other
comprehensive income. There were no interest rate swaps in effect at December 31, 2004 or
2003.

Inventory

Inventories of LMOD and LPI are
valued at lower of cost or market using the first-in, first-out (FIFO) method.

36

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2004, 2003 and 2002

# NOTE 1  Summary of
Significant Accounting Policies (continued)

Leased Properties

Leased properties are recorded at
their cost value. Depreciation is calculated using the straight-line method over 40 years
for book purposes and 39 years for tax purposes. The costs of normal repairs and
maintenance are charged to expense as incurred.

Property and Equipment

Property and equipment primarily
represent manufacturing property, plant and equipment of LMOD and LPI. Property and
equipment is stated at cost and depreciated using straight-line methods for financial
statement purposes and accelerated methods for income tax purposes. Maintenance and repair
costs are charged to expense as incurred, and renewals and improvements that extend the
useful life of the assets are added to the property and equipment accounts.

Impairment of Long-Lived
Assets

The Company evaluates the
recoverability of the carrying amount of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully recoverable.
The Company evaluates the recoverability of leased properties, property and equipment and
goodwill annually or more frequently if events or circumstances indicate that an asset
might be impaired. If an asset is considered to be impaired, the impairment to be
recognized is measured as the amount by which the carrying amount of the asset exceeds its
fair value. Assets to be disposed of are reported at the lower of the carrying amount or
fair value less cost to sell. Management determines fair value using discounted future
cash flow analysis or other accepted valuation techniques. Management believes that there
has not been any impairment of the Companys long-lived assets as of December 31,
2004.

Revenue Recognition

Revenue is recognized when products
are shipped.

Research and Development
Costs

The cost of research and development
and product improvement costs are charged to expense as they are incurred. Research,
development and product improvement costs are reported as a separate component of
operating expenses and totaled $835,839, $737,833 and $867,437 for the years ended
December 31, 2004, 2003 and 2002, respectively.

Stock Based Compensation

At December 31, 2004, the Company has
a stock-based employee compensation plan which is described more fully in Note 18. The
Company accounts for this plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. No stock-based employee compensation cost is reflected in net loss, as
all options granted under this plan had an exercise price equal to the approximate market
value of the underlying common stock on the date of grant. The following table
illustrates, in accordance with SFAS No. 148 Accounting for Stock-Based Compensation
 Transition and Disclosure, the effect on (loss) earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.

37

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 1  Summary of
Significant Accounting Policies (continued)

|                                                     | 2004 | 2003 | 2002
|---------------------------------------------------- | ---- | ---- | ----
|Net (loss) income available to common shareholders - |      |      |     
|as reported                                          |      |      | $   
|                                                     |      |      |     
|Basic (loss) earnings per common share - as reported |      |      | $   
|                                                     |      |      |     
|Diluted (loss) earnings per common share -           |      |     
|as reported                                          |      |      | $   
|                                                     |      |      |     

Income Taxes

The Parent and its qualified REIT
subsidiary, BMSBLC, qualify as real estate investment trusts under the Internal Revenue
Code. Accordingly, they are not subject to income tax on taxable income that is
distributed to shareholders. During 2004, 2003 and 2002, the Company took advantage of a
provision in the tax law that allows a REIT to retain any capital gains on sale of real
estate properties and pay the corresponding tax on the gains.

In order to qualify as a REIT under
the Internal Revenue Code, the Parent, together with its qualified REIT subsidiary,
BMSBLC, among other requirements, must meet certain annual income and quarterly asset
diversification tests including not holding the securities of any one issuer valued at
more than 5% of total assets, and not holding more than 10% of the outstanding voting
securities of any one issuer, unless, in both cases, that issuer qualifies as a taxable
real estate investment trust subsidiary.

LMOD and LPI are taxed as
C-Corporations and file a consolidated federal income tax return and individual state
income tax returns, which are based on the determination of net income (loss) before the
elimination of intercompany expenses.

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 annually for differences between the financial statement and
tax bases 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, limitations on intercompany
interest deductions, and other carryforwards. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amount expected to be realized.

Shipping and Handling
Costs

Shipping and handling costs charged
to customers have been included in net sales. Shipping and handling costs incurred by the
Company have been included in cost of goods sold.

Advertising Costs

Advertising costs are charged to
operations when incurred. Advertising expense was $714,763, $762,779 and $920,361 for the
years ended December 31, 2004, 2003 and 2002, respectively.

38

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2004, 2003 and 2002

# NOTE 1  Summary of
Significant Accounting Policies (continued)

Off-Balance Sheet
Financial Instruments

In the ordinary course of business
BMSBLC has entered into off-balance-sheet financial instruments consisting of commitments
to extend credit, commercial letters of credit and standby letters of credit. Such
financial instruments are recorded in the financial statements when they are funded or
related fees are incurred or received.

Derivative Financial
Instruments Designated As Hedges

The Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities as amended by
SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of SFAS No. 133", and SFAS No. 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities. These statements
require the Company to designate all derivative instruments as either fair value hedges or
cash flow hedges and to record the hedge on the balance sheet at its fair 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.

The Company has used interest rate
swap agreements to hedge various exposures or to modify interest rate characteristics of
various balance sheet accounts. Derivatives that are used as part of the asset/liability
management process are linked to specific assets or liabilities and have high correlation
between the contract and the underlying item being hedged, both at inception and
throughout the hedge period. The interest component associated with the contract is
recognized over the life of the contract as an adjustment to interest expense.

Contracts that do not meet the
hedging criteria are classified as trading activities and are recorded at fair value with
changes in fair value recorded in earnings.

There were no interest rate swaps in
effect at December 31, 2004 or 2003.

Earnings Per Common Share

Earnings per common share are
computed based upon the weighted average number of common shares outstanding during each
year. In the computation of diluted earnings per common share, all dilutive stock options
are assumed to be exercised at the beginning of each year and the proceeds are used to
purchase shares of the Companys common stock at the average market price during the
year.

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 values 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.

39

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2004, 2003 and 2002

# NOTE 1  Summary of
Significant Accounting Policies (continued)

The following methods and assumptions
were used by the Company in estimating the fair value of its financial instruments.

| | Carrying
Amounts Approximate Fair Values for the Following Instruments
| | ----------------------------------------------------------------------

| | Cash
and cash equivalents      Accounts receivableInterest receivableRent receivable Variable rate
loans that reprice frequently where no significant change in credit risk has occurred
  Short-term borrowingsAccounts payableVariable rate long-term debt
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Quoted
Market Prices
| | --------------------

Where
available, or if not available, based on quoted market prices of comparable instruments
for the following instruments:

| | Mandatorily
redeemable preferred stock
| | --------------------------------------

| | Discounted
Cash Flows
| | ---------------------

Using interest
rates currently being offered on instruments with similar terms and with similar credit
quality:

| | All
loans except variable rate loans described above Fixed rate long-term debt
| | ------------------------------------------------------------------------------

| | Quoted
fees currently being charged for similar instruments
| | -----------------------------------------------------------

Taking
into account the remaining terms of the agreements and the counterparties credit
standing:

| | Off-balance-sheet
instruments
| | -----------------------------

| | Letters
of creditLending commitments
| | ------------------------------------

Since
the majority of the Companys off-balance-sheet instruments consist of
non-fee-producing, variable rate commitments, the Company has determined these do not have
a distinguishable fair value.

Recent Accounting
Pronouncement

On December 16, 2004, the Financial
Accounting Standards Board (FASB) issued Statement No. 123R, Share-Based
Payment (SFAS 123R), which requires compensation costs related to
share-based payment transactions to be recognized in the financial statements. With
limited exceptions, the amount of the compensation cost will be measured based on the
grant-date fair value of the equity or liability instruments issued. In addition,
liability awards will be remeasured each reporting period. Compensation cost will be
recognized over the period that an employee provides service in exchange for the award.
SFAS 123R replaced FASB Statement No. 123, Accounting for Stock Based
Compensation and supercedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS 123R is effective for
all interim periods beginning after June 15, 2005. Retroactive application of the
provisions of SFAS 123R to the beginning of the fiscal year that includes the effective
date is permitted, but not required. The Company has not adopted this pronouncement and is
currently evaluating the impact that the adoption of SFAS 123R will have on its
consolidated financial statements.

40

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2004, 2003 and 2002

# NOTE 1  Summary of
Significant Accounting Policies (continued)

Reclassification

Certain 2002 and 2003 amounts have
been reclassified to conform with the 2004 presentation. The reclassifications have no
effect on reported amounts of net income or equity.

# NOTE 2  Related
Entity

The Company shares common ownership
and management with InvestorsBancorp, Inc., which owns InvestorsBank (the Bank). The
Company and the Bank have a Management Services and Allocation of Expenses Agreement (the
Agreement). The Agreement allows the employees of the Bank to provide loan management,
leasing and accounting services to the Company for a fee, payable monthly. Management fee
expense relating to the Agreement was $891,434, $931,082 and $985,720 for the years ended
December 31, 2004, 2003 and 2002, respectively. Overhead expenses are also shared between
the two entities in accordance with the Agreement. The Company also rents space from the
Bank under a lease agreement which ends on November 1, 2007. Rent expense was $57,996,
$57,996 and $9,666 for the years ended December 31, 2004, 2003 and 2002, respectively.

# NOTE 3 
Concentrations

The consumer products segments
customers are not concentrated in any specific geographic region. For the year ended
December 31, 2004, the consumer products segment had three customers, two customers at LPI
and one customer at LMOD, that accounted for $6.17 million or 39%, of their total revenue.
At December 31, 2004, the two LPI customers accounted for 43% of the consumer products
segments outstanding receivables. The Company establishes an allowance for doubtful
accounts based upon the factors surrounding its credit risk of specific customers,
historical trends and other information. The Company routinely assesses the financial
strength of its customers, and, as a consequence, believes that its trade accounts
receivable credit risk exposure is limited.

Approximately 23% of LMODs
labor force is subject to a collective bargaining agreement. The agreements
expiration date is April 30, 2006.

The financial services segment grants
loans and leases properties to small and medium-sized businesses primarily in southeastern
Wisconsin. As of December 31, 2004 and 2003, respectively, the Company had loans
outstanding to its largest borrower totaling $3.07 million and $10.7 million, which
represented approximately 9% and 20% of the total loans outstanding, respectively.

# NOTE 4  Allowance
for Rental Losses

The allowance for rental losses is
established as losses are estimated to occur through a provision for losses charged to
earnings. Management reviews the entire rent receivable portfolio when determining the
necessary allowance. There was no allowance for rental losses at December 31, 2004. As of
December 31, 2003, the allowance was $150,000.

41

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 5  Loans

Approximately 74% of the
Companys loan portfolio consists of variable-rate loans with terms of one to ten
years. Substantially all loans are collateralized by first or second mortgages on
commercial real estate.

Non-accrual loans were $983,290 and
$245,829 at December 31, 2004 and 2003, respectively. The average recorded amount of
non-accrual loans during 2004 and 2003 was $611,082 and $688,493, respectively. The
interest accrued on the non-accrual loans was $121,814 and $20,936 at December 31, 2004
and 2003, respectively. There was no allowance for loan loss related to these loans at
December 31, 2004 and 2003. Interest income on non-accrual loans of $45,960, $0 and
$34,405 was recognized in the years ended December 31, 2004, 2003 and 2002, respectively.

Undisbursed loan commitments and
lines of credit totaled $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.

# NOTE 6  Loans Sold

The Company has the ability to sell
loans with the option to repurchase them at a later date. During 2004 and 2003, the
Company sold no loans to third parties with repurchase options. As of December 31, 2004
and 2003, the balance of loan participations sold with repurchase options was $1,322,807
and $6,289,827, respectively. These loan participations mature as the corresponding notes
mature with the maturities ranging from one to four years. Under the terms of the
repurchase agreements, the Company retains servicing rights for the entire loan. As
servicer and provider of recourse, certain agreements require the Company to comply with
various covenants, including the maintenance of net worth. As of December 31, 2004, the
Company was in compliance with these covenants.

For loans sold with no recourse, the
Company is susceptible to loss on the loans up to the percentage of the retained interest
to the extent the underlying collateral is insufficient in the event of nonperformance by
the borrower. The Companys retained interest is subordinated to the portion sold.
The Company has not sold any loans without recourse. For loans sold with full recourse,
the Company is susceptible to loss equal to the total principal balance of the loan to the
extent the underlying collateral is insufficient in the event of nonperformance. No
associated loss reserve has been established as of December 31, 2004, 2003 and 2002, for
loans which have been sold.

# NOTE 7  Inventory

Inventory consists of the following
at December 31:

|                                 | 2004 | 2003
|-------------------------------- | ---- | ----
|Raw materials                    |      |     
|Work in process                  |      |     
|Finished goods                   |      |     
|                                 |      |     
|                                 |      |     
|Allowance for obsolete inventory |      |     
|                                 |      |     
|                                 |      |     
|                                 |      |     

42

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 8  Leased
Properties

The major categories of leased
properties at December 31 are summarized as follows:

|                               | 2004 | 2003
|------------------------------ | ---- | ----
|Land                           |      |     
|Buildings                      |      |     
|                               |      |     
|Total                          |      |     
|                               |      |     
|Less: accumulated depreciation |      |     
|                               |      |     
|Net                            |      |     
|                               |      |     

Depreciation  expense on leased
 properties  was $638,666,  $713,576 and $757,308 for the years ended  December 31, 2004,
2003 and 2002, respectively.

The Company  normally  leases its
 properties  pursuant to a lease  agreement  with initial  lease terms  primarily ranging
 from five to  fifteen  years.  The  leases  require  the lessee to pay all  operating
 expenses  including utilities,  insurance and taxes. The lease agreements,  all of which
are operating leases,  expire at various dates through 2010 and provide the lessee with
renewal and purchase  options.  If it is  determined  that the lessee will not be able to
make all required lease  payments,  the lease is put on nonaccrual and no future amounts
of rent are accrued.  At such time that the  lessee  becomes  current on past  lease
 payments,  the  Company  will  resume the accrual of lease  payments.  Rent  receivable
 is shown net of an allowance of $0 and $150,000 at December 31, 2004 and 2003,
respectively.

The  following  table shows minimum
 future  rental  income by year.  It is based on lease  agreements in effect at December
31, 2004, however, it excludes two leased properties that were sold in January of 2005.

|Year         | Projected
Rental
Income
|------------ | -----------------------
|2005         |                        
|2006         |                        
|2007         |                        
|2008         |                        
|2009         |                        
|Future years |                        
|             |                        
|             |                        
|             |                        

During 2002, the Company leased half
of its office space to InvestorsBank, a related party. Rental income from the related
party for the year ended December 31, 2002, was $48,015. In November 2002, the building
was sold to InvestorsBank.

43

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 9  Property
and Equipment

The major categories of property and
equipment at December 31 are summarized as follows:

|                               | 2004 | 2003
|------------------------------ | ---- | ----
|Consumer Products:             |      |     
|Land                           |      |     
|Buildings                      |      |     
|Machinery and equipment        |      |     
|Furniture and fixtures         |      |     
|                               |      |     
|Total                          |      |     
|Less: accumulated depreciation |      |     
|                               |      |     
|Net                            |      |     
|                               |      |     
|Financial Services:            |      |     
|Furniture and fixtures         |      |     
|Less: accumulated depreciation |      |     
|                               |      |     
|Net                            |      |     
|                               |      |     

Depreciation expense for consumer
products was $920,219, $881,302 and $857,557 and for financial services was $11,027,
$57,875 and $67,936 for the years ended December 31, 2004, 2003 and 2002, respectively.

# NOTE 10  Goodwill
and Intangible Assets

The goodwill associated with the
acquisition of LMOD amounted to $619,753. The unamortized amount and current carrying
value of goodwill at December 31, 2004 and 2003 was $506,145.

The Company had a licensing agreement
with a third party giving it the right to produce certain dolls under a five year royalty
agreement with an original cost of $2,500,000. The licensing agreement, which expired in
April of 2003, was amortized over five years. Amortization expense for the licensing
agreement amounted to $0 in 2004, $166,666 in 2003 and $500,000 in 2002. Accumulated
amortization for the licensing agreement amounted to $2,500,000 at December 31, 2003.

44

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 11 
Short-Term Borrowings

Short-term borrowings consist of the
following at December 31:

|                            | 2004 | 2003
|--------------------------- | ---- | ----
|Consumer Products:          |      |     
|Short-term borrowings       |      |     
|Financial Services:         |      |     
|Commercial paper            |      |     
|Lines of credit             |      |     
|                            |      |     
|Total short-term borrowings |      |     
|                            |      |     

Consumer Products:

In 2004, LMOD entered into a loan
agreement with InvestorsBank, a related party, providing for a line of credit of
$2,000,000 bearing interest at prime rate. The note is payable upon demand and is
collateralized by receivables and inventory of LMOD and LPI and guaranteed by the Parent.
At December 31, 2004, the outstanding principal balance was $220,000. The note was paid in
full in January, 2005. 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.

Financial Services:

Commercial paper is issued for
working capital purposes and matures within 90 days of the issuance date. The average
yield on commercial paper outstanding at December 31, 2004 and 2003 was 2.49% and 1.41%,
respectively.

As of December 31, 2004, BMSBLC has a
line of credit with three participating banks. The line of credit agreement provides for a
maximum line of credit of $50,000,000 less the outstanding principal amount of the
commercial paper and direct pay letter of credit obligation The agreement bears interest
at prime rate or at the 30, 60 or 90 day LIBOR rate plus 1.375%. The interest rate index
is determined by BMSBLC at the time funds are drawn. Interest is payable monthly and the
agreement expires on June 24, 2005. BMSBLC is also required to pay a commitment fee equal
to one-half of one percent per year on the unused amount of the loan commitment. The
outstanding principal balance was $30,750,000 and $18,200,000 at December 31, 2004 and
2003, respectively. Effective January 1, 2005, BMSBLC voluntarily reduced the line of
credit to a maximum amount of $40,000,000.

The financial services
commercial paper and lines of credit are collateralized by a pool of loans with an
outstanding balance of $31.8 million and $36.2 million and leased properties with net
carrying value of approximately $22.2 million and $29.1 million as of December 31, 2004
and 2003, respectively.

The Parent had a loan agreement with
InvestorsBank, a related party, providing for a line of credit of $1,411,000 bearing
interest at prime rate. The note was payable upon demand and was paid in full in 2004. At
December 31, 2003, the outstanding balance was $1,025,000.

The line of credit agreements and the
SWIB agreements described in Note 12 contain restrictions on BMSBLCs new
indebtedness, acquisition of its common stock, return of capital dividends, past due
loans, and realized losses on loans, and requires maintenance of collateral, minimum
equity and loan to debt ratios. As of December 31, 2004, BMSBLC was in compliance with all
such requirements.

45

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 12  Long-Term
Debt

Long-term borrowings consist of the
following at December 31:

|                                                  | 2004 | 2003
|------------------------------------------------- | ---- | ----
|Financial Services:                               |      |     
|Direct pay letter of credit obligation            |      |     
|State of Wisconsin Investment Board notes payable |      |     
|Other borrowings                                  |      |     
|                                                  |      |     
|                                                  |      |     
|Loan participations with repurchase options       |      |     
|(See Note 6)                                      |      |     
|                                                  |      |     
|Total long-term borrowings                        |      |     
|                                                  |      |     

Letter of Credit

BMSBLC had a Letter of Credit
Agreement with one of its correspondent banks to support the issuance, reissuance and
remarketing of industrial revenue bonds. The letter of credit expired in October, 2004,
and was paid in full at that time with short-term borrowings. The letter of credit was
collateralized with promissory notes of the underlying obligors which are classified as
loans on the Companys balance sheet. The outstanding principal balance of the letter
of credit was $2,600,000 and the interest rate was 1.53% at December 31, 2003.

BMSBLC had a Loan and Trust Agreement
with the City of Franklin, Wisconsin and a correspondent bank to provide a letter of
credit in support of the issuance of industrial development revenue bonds secured by real
estate. The letter of credit was paid in full in 2004 with the proceeds from the sale of
the real estate. The outstanding balance of the letter of credit was $1,320,000 and the
interest rate was 1.25% at December 31, 2003.

State of Wisconsin
Investment Board

BMSBLC had a term note with the State
of Wisconsin Investment Board (SWIB) which was collateralized by specific loans and had a
fixed interest rate of 9.05% per year through its maturity in 2006. The term note was paid
in full in 2004 with the proceeds from loan payoffs. At December 31, 2003, the outstanding
principal balance was $2,000,000.

BMSBLC has a term note with SWIB
which bears interest at a fixed rate of 6.98% per year through its maturity and is secured
by specific loans with an outstanding balance of $6.78 million and $7.1 million as of
December 31, 2004 and 2003, respectively. The note is payable in equal quarterly
installments of $166,667 with a final payment of unpaid principal due on June 1, 2013. At
December 31, 2004 and 2003, the outstanding principal balance was $5,666,667 and
$6,333,333, respectively.

The SWIB agreements and the line of
credit agreements described in Note 11 contain restrictions on BMSBLCs new
indebtedness, acquisition of its common stock, return of capital dividends, past due
loans, and realized losses on loans, and requires maintenance of collateral, minimum
equity and loan to debt ratios. As of December 31, 2004, BMSBLC is in compliance with all
such requirements.

46

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 12  Long-Term
Debt (continued)

Expected annual maturities of
long-term debt as of December 31, 2004, are as follows:

|           | 
|---------- | 
|2005       | 
|2006       | 
|2007       | 
|2008       | 
|2009       | 
|Thereafter | 
|           | 
|           | 
|           | 

# NOTE 13  Operating
Leases

The consumer products segment leases
various buildings from third parties. The leases are classified as operating leases and
the buildings are used as offices, warehouses and outlet stores for the storage,
distribution and sale of LMOD merchandise as well as for a variety of equipment. Lease
expenses were approximately $806,000, $681,000 and $746,000 in 2004, 2003 and 2002,
respectively.

At December 31, 2004, the future
minimum lease payments for each of the four remaining years are as follows:

|     | 
|---- | 
|2005 | 
|2006 | 
|2007 | 
|2008 | 
|     | 
|     | 
|     | 

# NOTE 14  Interest
Rate Swaps

The Company periodically utilizes
derivative instruments for purposes of asset liability management. These derivative
transactions involve both credit and market risk. The notional amounts are amounts on
which calculations and payments are based. Notional amounts do not represent direct credit
exposures as the exposure is limited to the net difference between the calculated amounts
to be received and paid by the financial institutions participating in the interest rate
swap.

Interest rate swaps are contracts in
which a series of interest rate flows are exchanged over a prescribed period. Most
interest rate swaps involve the exchange of fixed and floating interest rates. An example
of a situation in which the Company would utilize an interest rate swap would be to
convert its fixed-rate debt to a variable rate. By entering into the swap, the principal
amount of the debt would remain unchanged but the interest payment streams would change.

There were no interest rate swap
agreements in effect at either December 31, 2004 or December 31, 2003.

As a result of hedge arrangements,
the Company recognized a reduction in interest expense of $0, $0 and $540,171 during the
years ended December 31, 2004, 2003, and 2002, respectively. In addition, the Company
recognized a gain of $484,304 and $747,000 on the termination of interest rate swaps
during 2003 and 2002, respectively. The impact on earnings due to ineffectiveness was
immaterial.

47

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 15 
Commitments and Contingencies

In the normal course of business, the
Company is involved in various legal proceedings. In the opinion of management, any
liability resulting from such proceedings would not have a material adverse effect on the
consolidated financial statements.

The Company is party to financial
instruments with off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include commitments to
extend credit, financial guarantees and standby letters of credit. They involve to varying
degrees, elements of credit and interest rate risk in excess of amounts recognized on the
consolidated balance sheets.

The Companys exposure to credit
loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The Company uses the same credit
policies in making commitments and issuing letters of credit as they do for
on-balance-sheet instruments.

The Company has extended a guarantee
to a supplier for LMOD in which the Company agrees to unconditionally guarantee all
obligations of LMOD to the supplier. It is anticipated that the maximum amount of the
guarantee should not exceed $600,000; however, the amount of the guarantee is unlimited
and the amount of the obligation may increase in the future.

# NOTE 16 
Mandatorily Redeemable Preferred Stock

The Company has issued 690,000 shares
of Adjustable Rate Cumulative Preferred Stock, Series A, in a public offering at $25 per
share less an underwriting discount of $1.0625 per share and other issuance costs
amounting to $295,221. The preferred stock is redeemable, in whole or in part at the
option of the Company, on any dividend payment date during the period from July 1, 2006,
to June 30, 2008, at $25 per share plus accrued and unpaid dividends. Any shares of
preferred stock not redeemed prior to July 1, 2008, are subject to mandatory redemption on
that date by the Company at a price of $25 plus accrued dividends. Dividends on the
preferred stock are paid quarterly at an annual rate of 5.37% for the dividend period
commencing July 1, 2003, and ending June 30, 2008.

Mandatorily redeemable preferred
stock consists of the following as of December 31, 2004 and 2003:

|                                                   | 
|-------------------------------------------------- | 
|Redeemable Preferred stock, 1 cent par value,      | 
|3,000,000 shares authorized, 690,000 shares issued | 
|Redeemable Preferred Treasury stock,               | 
|15,809 shares, at cost                             | 
|                                                   | 
|Mandatorily redeemable shares, net                 | 
|                                                   | 

48

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 17 
Retirement Plans

LMOD has a qualified defined
contribution plan for eligible employees. LMODs contribution to the plan is at the
discretion of LMODs Board of Directors. Contributions were $7,796, $9,598 and
$12,371 for the years ended December 31, 2004, 2003 and 2002, respectively.

The Company provided a supplemental
retirement benefit for an executive officer which is included in the management fee
expense, totaling $130,610, $130,610 and $94,677 for the years ended December 31, 2004,
2003 and 2002, respectively. These payments were made at the sole discretion of the
independent members of the Board of Directors of the Company.

# NOTE 18 
Stockholders Equity

The Company has two stock option
plans, the 1997 Stock Option Plan and the 2003 Stock Option Plan (the Plans). In
accordance with the Plans provisions, the exercise prices for stock options may not
be less than the fair market value of the optioned stock at the date of grant. The
exercise price of all options granted was equal to the market value of the stock on the
date of the grant. Options may be exercised based on the vesting schedule outlined in each
agreement. Options granted under the Plans are considered non-qualified stock
options as defined by the Internal Revenue Code. All options must be exercised
within ten years of the date of grant.

Activity is summarized in the
following table:

|                                       | 2004                   | 2003   | 2002                  
|-------------------------------------- | ---------------------- | ------ | ----------------------
|Shares                                 | Weighted
Average
Price | Shares | Weighted
Average
Price
|OUTSTANDING - Beginning of Year        |                        |        |                       
|Options                                |                        |       
|Granted                                |                        |        |                       
|Exercised                              |                        |        |                       
|Forfeited                              |                        |        |                       
|Expired                                |                        |        |                       
|                                       |                        |        |                       
|OUTSTANDING - End of Year              |                        |        |                       
|                                       |                        |        |                       
|Exercisable at year end                |                        |        |                       
|Available for future grant at year end |                        |        |                       
|Total reserved shares                  |                        |        |                       

49

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 18 
Stockholders Equity (continued)

The following table summarizes
information about Plan awards outstanding at December 31, 2004:

|              
|--------------
|Exercise Price
|$4.72 - 10.75 

The Company applies APB Opinion 25
and related interpretations in accounting for its Plan. Accordingly, no compensation cost
has been recognized for its stock option awards.

SFAS No. 123 encourages a fair
value based method of accounting for stock-based compensation plans. Had
compensation cost for the Companys plan been determined based upon the fair value at
the grant dates as prescribed by SFAS No. 123, the Companys proforma net income and
earnings per share would be the same as reported due to no options vesting in 2004, 2003
and 2002 and all proforma compensation being recognized in the year of granting.

A reconciliation of the numerators
and denominators of earnings (loss) per common share and earnings (loss) per common share
assuming dilution are:

|                             | Income | Shares | Per Share
Amount
|---------------------------- | ------ | ------ | ----------------
|2004                         |        |        |                 
|Loss                         |        |        | $               
|                             |        |        |                 
|Effect of options            |        |        |                 
|                             |        |        |                 
|Loss - assuming dilution     |        |        | $               
|                             |        |        |                 
|2003                         |        |        |                 
|Loss                         |        |        | $               
|                             |        |        |                 
|Effect of options            |        |        |                 
|                             |        |        |                 
|Loss - assuming dilution     |        |        | $               
|                             |        |        |                 
|2002                         |        |        |                 
|Earnings                     |        |        | $               
|                             |        |        |                 
|Effect of options            |        |        |                 
|                             |        |        |                 
|Earnings - assuming dilution |        |        | $               
|                             |        |        |                 

50

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 19  Income
Taxes

# Consumer Products:

The Company accounts for income taxes
using an asset and liability approach which generally requires the recognition of deferred
income tax assets and liabilities based on the expected future income tax consequences of
events that have previously been recognized in the Companys consolidated financial
statements or tax returns. In addition, a valuation allowance is recognized if it is more
likely than not that some or all of the deferred income tax assets will not be realized in
the foreseeable future.

The provision for income taxes
included in the accompanying consolidated financial statements consists of the following
components at December 31:

|                                           | 2004 | 2003 | 2002
|------------------------------------------ | ---- | ---- | ----
|Current Expense (Benefit)                  |      |      |     
|Federal                                    |      |      | $   
|State                                      |      |      |     
|                                           |      |      |     
|                                           |      |      |     
|                                           |      |      |     
|Deferred Expense (Benefit)                 |      |     
|Federal                                    |      |      |     
|State                                      |      |      |     
|                                           |      |      |     
|                                           |      |      |     
|                                           |      |      |     
|Total Provision for Income Taxes (Benefit) |      |      | $   
|                                           |      |      |     

The income tax expense for the year
ended December 31, 2004, resulted from a $2,685,224 additional charge to the valuation
allowance for deferred income tax assets due to uncertainties regarding the realization of
such assets in the near term. The deferred income tax assets were recognized in years
prior to 2004. The deferred income tax benefit for the years ended December 31, 2003, and
2002, was the result of the recognition of deferred income tax benefits of $1,368,698 and
$599,804, respectively, which resulted primarily from the recognition of certain net
operating losses and other tax carryforwards expected to be utilized for financial
reporting purposes. Included in the income tax benefit for the year ended December 31,
2002, was a benefit of $749,000 related to the reversal of a previously recognized
valuation allowance for net operating loss carryforwards incurred in years prior to 2002
and a $564,674 benefit related to certain net operating losses which were carried back for
a refund.

Tax expense is calculated on income
(loss) before the elimination of intercompany expenses. A reconciliation of the consumer
products segments loss before income taxes to the loss subject to income taxes is as
follows:

|                               | 2004 | 2003 | 2002
|------------------------------ | ---- | ---- | ----
|Loss before income taxes       |      |      | $   
|Less intercompany eliminations |      |      |     
|                               |      |      |     
|Loss subject to income taxes   |      |      | $   
|                               |      |      |     

51

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 19  Income
Taxes (continued)

A reconciliation of the federal
statutory income tax rate to the effective income tax rate for the consumer products
segment is as follows:

|                                                      | 2004 | 2003 | 2002
|----------------------------------------------------- | ---- | ---- | ----
|Federal income taxes at statutory rate                |      |      |     
|State income taxes, net of federal benefit            |      |      |     
|Overaccrual of income taxes                           |      |      |     
|Other                                                 |      |      |     
|Benefit of current year federal and state net         |      |     
|operating loss carryforwards and other                |      |     
|deferred income tax assets not recognized             |      |      |     
|                                                      |      |      |     
|Effective income tax rate before changes in valuation |      |     
|allowance                                             |      |      |     
|Provision for valuation allowance on deferred         |      |     
|income tax assets previously recognized               |      |      |     
|Reversal of previously recognized valuation allowance |      |      |     
|                                                      |      |      |     
|Effective Income Tax Expense (Benefit)                |      |      |     
|                                                      |      |      |     

Temporary differences that give rise
to deferred income tax assets and liabilities consisted of the following as of December
31:

|                                          | 2004 | 2003
|----------------------------------------- | ---- | ----
|Deferred income tax assets:               |      |     
|Accounts receivable allowances            |      |     
|Inventory allowances                      |      |     
|Accrued liabilities                       |      |     
|Federal net operating loss carryforwards  |      |     
|State net operating loss carryforwards    |      |     
|Deferred intercompany interest            |      |     
|expense carryforwards                     |      |     
|                                          |      |     
|Total deferred income tax assets          |      |     
|Deferred income tax liabilities:          |      |     
|Property and equipment depreciation       |      |     
|Other                                     |      |     
|                                          |      |     
|Total deferred income tax liabilities     |      |     
|                                          |      |     
|Deferred income tax assets - net          |      |     
|Valuation allowance                       |      |     
|                                          |      |     
|Net deferred income tax assets recognized |      |     
|in the consolidated balance sheets        |      |     
|                                          |      |     

52

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 19  Income
Taxes (continued)

In evaluating the consumer products
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. In 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.

As of December 31, 2004, LMOD and LPI
had unused net operating loss carryforwards of approximately $6,800,000 available to
offset against future federal taxable income and approximately $4,400,000 to offset
against future state taxable income. The use of the net operating loss carryforwards are
subject to limitations. The carryforwards expire as follows:

|       
|-------
|Federal
|2016   
|2017   
|2018   
|2019   
|2022   
|2023   
|2024   

As of December 31, 2004, LMOD and LPI
had deferred intercompany interest expense carryforwards of approximately $1,100,000
available to offset future federal and state taxable income. The carryforwards have no
expiration date.

# Financial Services:

The Parent and its 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
shareholders. During 2004, 2003 and 2002, the Company 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 and pay the corresponding tax on the gains. Gains on the sale of leased
properties totaled $309,718, $518,967 and $1,186,961 in 2004, 2003 and 2002, respectively,
and the corresponding tax paid by the Parent was $128,371, $183,695 and $406,173,
respectively.

53

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 20 
Distributions

For the years ended December 31,
2004, 2003 and 2002, the Companys Board of Directors declared the following common
stock distributions:

|                                                 | 2004 | 2003 | 2002
|------------------------------------------------ | ---- | ---- | ----
|Total common stock distributions                 |      |      | $   
|                                                 |      |      |     
|Common stock distributions per share (tax basis) |      |      | $   
|                                                 |      |      |     
|Distribution in cash                             |      |      | $   
|                                                 |      |      |     

# NOTE 21  Fair
Value of Financial Instruments

The estimated fair values of
financial instruments at December 31, 2004 and 2003 are as follows:

|                                   | 2004                 | 2003           
|---------------------------------- | -------------------- | ---------------
|Carrying
Amount                    | Estimated
Fair Value | Carrying
Amount
|FINANCIAL ASSETS                   |                      |                
|Cash and cash equivalents          |                      |                
|                                   |                      |                
|Accounts receivable                |                      |                
|                                   |                      |                
|Interest receivable                |                      |                
|                                   |                      |                
|Rent receivable                    |                      |                
|                                   |                      |                
|Variable rate loans                |                      |                
|                                   |                      |                
|Fixed rate loans                   |                      |                
|                                   |                      |                
|FINANCIAL LIABILITIES              |                      |                
|Short-term borrowings              |                      |                
|                                   |                      |                
|Accounts payable                   |                      |                
|                                   |                      |                
|Variable rate long-term debt       |                      |                
|                                   |                      |                
|Fixed rate long-term debt          |                      |                
|                                   |                      |                
|Practicable to estimate fair value |                      |                
|                                   |                      |                
|Not practicable                    |                      |                
|                                   |                      |                
|Redeemable preferred stock         |                      |                
|                                   |                      |                

54

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 21  Fair Value
of Financial Instruments (continued)

The estimated fair value of fee
income on letters of credit at December 31, 2004 and 2003 is insignificant. Loan
commitments on which the committed interest rate is less than the current market rate are
also insignificant at December 31, 2004 and 2003.

The Company assumes interest rate
risk (the risk that general interest rate levels will change) as a result of its normal
operations. As a result, fair values of the Companys financial instruments will
change when interest rate levels change and that change may be either favorable or
unfavorable to the Company. Management attempts to match maturities of assets and
liabilities to the extent believed necessary to minimize interest rate risk. However,
borrowers with fixed rate obligations are less likely to prepay in a rising rate
environment and more like to repay in a falling rate environment.

The Company has loan participations
with repurchase options. The underlying loans have various maturities and principal
reductions which makes it impracticable to measure the fair value.

# NOTE 22 Quarterly
Financial Information (Unaudited)

|                                        
|----------------------------------------
|
|Total revenues                          
|Net operating income (loss) before      
|income taxes and minority interest      
|Net income (loss) available to common   
|shareholders                            
|Basic earnings (loss) per common share  
|Diluted earnings (loss) per common share
|
|Total revenues                          
|Net operating income (loss) before      
|income taxes and minority interest      
|Net income (loss) available to common   
|shareholders                            
|Basic earnings (loss) per common share  
|Diluted earnings (loss) per common share

(1) Includes a $2,685 provision
(charge) to increase the deferred income tax valuation allowance for deferred income tax
assets recognized in years prior to 2004. (2) Does not include a provision (benefit) for
income taxes due to an increase in the deferred income tax valuation allowance.

55

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 23  The
Middleton Doll Company (Parent Company Only) Financial Information

# CONDENSED BALANCE
SHEETS

|                                                      | December 31,
|----------------------------------------------------- | ------------
|
|ASSETS                                                |             
|Cash and cash equivalents                             |             
|Loans                                                 |             
|Investment in BMSBLC                                  |             
|Investment in and advances to other subsidiary        |             
|Property and equipment                                |             
|Other assets                                          |             
|                                                      |             
|TOTAL ASSETS                                          |             
|                                                      |             
|LIABILITIES AND STOCKHOLDERS' EQUITY                  |             
|LIABILITIES                                           |             
|Note payable                                          |             
|Other liabilities                                     |             
|Preferred shares subject to mandatory redemption, net |             
|                                                      |             
|Total Liabilities                                     |             
|SHAREHOLDERS' EQUITY                                  |             
|                                                      |             
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY            |             
|                                                      |             

56

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 23  The
Middleton Doll Company (Parent Company Only) Financial Information (continued)

# CONDENSED STATEMENTS
OF INCOME

|                                              | Years Ended December 31,
|--------------------------------------------- | ------------------------
|
|REVENUES                                      |                         
|Interest on loans                             |                         
|Gain on termination of interest rate swaps    |                         
|Equity in income of BMSBLC                    |                         
|Equity in income of other subsidiary          |                         
|Other income                                  |                         
|                                              |                         
|Total Income                                  |                         
|                                              |                         
|EXPENSES                                      |                         
|Interest expense                              |                         
|Depreciation expense                          |                         
|Other operating expenses                      |                         
|Minority interest in loss of other subsidiary |                         
|                                              |                         
|Total Expenses                                |                         
|                                              |                         
|Net (loss) income                             |                         
|Preferred stock dividends                     |                         
|                                              |                         
|NET (LOSS) INCOME AVAILABLE FOR               |                         
|COMMON SHAREHOLDERS                           |                         
|                                              |                         

57

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2004, 2003 and 2002

# NOTE 23  The
Middleton Doll Company (Parent Company Only) Financial Information (continued)

# CONDENSED STATEMENTS
OF CASH FLOWS

|                                              | Years Ended December 31,
|--------------------------------------------- | ------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES          |                         
|Net (loss) income                             |                         
|Adjustments to reconcile net income available |                         
|from common shareholders to net cash flows    |                         
|from operating activities                     |                         
|Depreciation                                  |                         
|Equity in subsidiaries' earnings              |                         
|Dividends from subsidiaries                   |                         
|Net change in                                 |                         
|Interest receivable                           |                         
|Other assets                                  |                         
|Other liabilities                             |                         
|                                              |                         
|Net Cash Flows from Operating Activities      |                         
|                                              |                         
|CASH FLOWS FROM INVESTING ACTIVITIES          |                         
|Net principal payments received (loans made)  |                         
|Proceeds from sale of equipment               |                         
|                                              |                         
|Net Cash Flows from Investing Activities      |                         
|                                              |                         
|CASH FLOWS FROM FINANCING ACTIVITIES          |                         
|Payments on notes payable                     |                         
|Preferred stock dividend paid                 |                         
|Common stock dividend paid                    |                         
|                                              |                         
|Net Cash Flows from Financing Activities      |                         
|                                              |                         
|Net Change in Cash and Cash Equivalents       |                         
|CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR |                         
|                                              |                         
|CASH AND CASH EQUIVALENTS - END OF YEAR       |                         
|                                              |                         

58

---

Schedule I  Condensed
Financial Information of Registrant  (Refer to footnote 23 of the consolidated financial
statements)

# Schedule II  Valuation
and Qualifying Accounts

Changes in the reserves deducted from
assets in the consolidated balance sheets for each of the three years in the period ended
December 31, 2004, are as follows:

|                                          
|------------------------------------------
|Allowance for loan and lease losses:      
|Year ended:                               
|December 31, 2004                         
|December 31, 2003                         
|December 31, 2002                         
|Allowance for doubtful accounts:          
|Year ended:                               
|December 31, 2004                         
|December 31, 2003                         
|December 31, 2002                         
|Allowance for obsolete inventory:         
|Year ended:                               
|December 31, 2004                         
|December 31, 2003                         
|December 31, 2002                         
|Deferred income taxes valuation allowance:
|Year ended:                               
|December 31, 2004                         
|December 31, 2003                         
|December 31, 2002                         

59

---

# Schedule IVMortgage
Loans on Real Estate

|Description      | Interest
Rate | Final
Maturity
Date | Periodic
Payment
Terms | Prior
Liens | Face
Amount
of
Mortgages | Carrying
Amount
of
Mortgages
as of
12/31/2004 | Principal
amount
of loans
subject to
delinquent
Principal
or
Interest(1)
|---------------- | ------------- | ------------------- | ---------------------- | ----------- | ------------------------ | --------------------------------------------- | ------------------------------------------------------------------------
|Commercial       |               |                     |                        |             |                          |                                               |                                                                         
|First Mortgage   | 3.68% to      | 1/1/05 to           | N/A                    | N/A         | N/A                      | 31,539,179                                    | 938,755                                                                 
|                 | 8.50%         | 1/1/15              |                        |             |                          |                                               |                                                                         
|Second Mortgage  | 6.25%         | 1/1/05 to           | N/A                    | N/A         | N/A                      | 818,896                                       | 42,515                                                                  
|                 |               | 6/1/07             
|Third Mortgage   | 7.25%         | 10/1/08             | N/A                    | N/A         | N/A                      | 171,000                                       |                                                                         
|                 |               |                     |                        |             |                          |                                               |                                                                         
|Total Commercial |               |                     |                        |             |                          | 32,529,075                                    |                                                                         
|All others (2)   | N/A           | N/A                 | N/A                    | N/A         | N/A                      | 311,768                                       | 196,429                                                                 
|                 |               |                     |                        |             |                          |                                               |                                                                         
|Total loans      |               |                     |                        |             |                          | $32,840,843                                   |                                                                         
|                 |               |                     |                        |             |                          |                                               |                                                                         

(1)    
          Delinquent is defined as ninety days or more past due. (2)    This category
          includes all non-mortgage loans on the balance sheet.

|                             | For the Years Ended December 31,
|---------------------------- | --------------------------------
|
|Loans on balance sheet,      |                                 
|Beginning of period          |                                 
|Additions during the period  |                                 
|Loans made                   |                                 
|Loans purchased              |                                 
|Deductions during period     |                                 
|Principal collected on loans |                                 
|Principal charged off        |                                 
|                             |                                 
|Loans on balance sheet,      |                                 
|end of period                |                                 
|                             |                                 

60

---

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

None.

# Item 9A.    Controls and
Procedures

Based
on an evaluation performed by the Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the Companys disclosure controls and procedures, the Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and
procedures were effective as of December 31, 2004.

Based
on an evaluation performed by the Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, there were no changes
in the Companys internal control over financial reporting identified in such
evaluation that occurred during the quarter ended December 31, 2004 that has materially
affected, or is likely to materially affect, the Companys internal control over
financial reporting.

# Item 9B.    Other
Information

None.

# Part III

# Item 10.    Directors and
Executive Officers of the Registrant

The
information called for by Item 401 of Regulation S-K with respect to the directors of the
registrant and by Item 405 of Regulation S-K is incorporated herein by reference from the
registrants definitive Proxy Statement involving the election of directors filed or
to be filed pursuant to Regulation 14A not later than 120 days after December 31, 2004
(the Proxy Statement) under the headings Election of Directors and
Security Ownership of Certain Beneficial Owners and Management  Section 16(a)
Beneficial Ownership Reporting Compliance. In accordance with General Instructions
G(3) to Form 10-K, the information with respect to executive officers of the Company
required by Item 401 of Regulation S-K has been included in Part I hereof.

The
information concerning the audit committee financial expert and the identification of the
audit committee members required pursuant to Items 401(h) and 401(i) of Regulation S-K is
incorporated herein by reference from registrants Proxy Statement under the heading
The Board of Directors and Its Committees.

The
Company has adopted a Financial Officers Code of Ethics for its Chief Executive Officer,
its Chief Financial Officer and Controller (the Code of Ethics). The Company
has posted a copy of the Code of Ethics on the Companys website at
www.themiddletondollcompany.com. The Company intends to satisfy the disclosure
requirement of Item 10 of Form 8-K regarding amendments to, or waivers from the Code of
Ethics by posting such information on its website at www.themiddletondollcompany.com.

# Item 11.    Executive
Compensation

The
information called for by Item 11 is incorporated herein by reference from the
registrants Proxy Statement under the heading Executive Compensation,
provided, however, that the subsection entitled Compensation Committee Report
shall not be deemed to be incorporated by reference.

61

---

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

The
information called for in Item 201(d) of Regulation S-K is incorporated herein by
reference from the registrants Proxy Statement under the heading Executive
Compensation  Equity Compensation Plan Information and the information
required under Item 403 of Regulation S-K is incorporated herein by reference from the
registrants Proxy Statement under the heading Security Ownership of Certain
Beneficial Owners and Management.

# Item 13.    Certain
Relationships and Related Transactions

The
information called for by Item 13 is incorporated herein by reference from the
registrants Proxy Statement under the heading Related Party
Transactions.

# Item 14.    Principal
Accountant Fees and Services

The
information called for by Item 14 is incorporated herein by reference from the
registrants Proxy Statement under the heading Proposal No. 2 
Ratification of Appointment of Independent Auditors.

# Part IV

# Item 15.    Exhibits and
Financial Statement Schedules

| | 1. | Exhibits
| | -- | --------

| | Reference
is made to the separate exhibit index contained on pages 64 and 65 hereof.
| | ------------------------------------------------------------------------------------

| | 2. | Financial
Statements and Financial Statement Schedules
| | -- | ------------------------------------------------------

| | Reference
is made to the separate index in Item 8 of this Annual Report on From 10-K with respect
to the financial statements and schedules filed herewith.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

62

---

# SIGNATURES

In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized on March 18, 2005.

| | THE MIDDLETON DOLL COMPANY           
| | -------------------------------------
| | By:  /s/ George R. Schonath          
| | George R. Schonath,                  
| | President and Chief Executive Officer

In
accordance with the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities indicated on March
18, 2005.

|Signature                   | Title                                          
|--------------------------- | -----------------------------------------------
|/s/ George R. Schonath      | President and Chief Executive Officer, Director
|George R. Schonath          | (Principal Financial Officer)                  
|/s/ Susan J. Hauke          | Vice President Finance                         
|Susan J. Hauke              | (Principal Accounting Officer)                 
|/s/ Salvatore L. Bando      | Director                                       
|Salvatore L. Bando         
|/s/ Peter A. Fischer        | Director                                       
|Peter A. Fischer           
|/s/ David A. Geraldson, Sr. | Director                                       
|David A. Geraldson, Sr.    

63

---

# INDEX TO EXHIBITS

|Exhibit No. | Exhibit
Description
|----------- | -------------------

| | 2.1 | Articles
of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to the Companys
Form 10-Q for the quarterly period ended March 31, 1997).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.2 | Amendment
to Articles of Incorporation, changing name to The Middleton Doll Company (incorporated
by reference to Exhibit 3.1 to the Companys Form 10-Q for the quarterly period
ended June 30, 2001).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.3 | By-laws
(incorporated by reference to Exhibit 3.2 to the Companys Form 10-Q for the
quarterly period ended March 31, 1997).
| | --- | ----------------------------------------------------------------------------------------------------------------------------

| | 4.1 | Instruments
defining the Rights of Security Holders (incorporated by reference to Exhibit 3.1 to the
Companys Form 10-Q for the quarterly period ended March 31, 1997).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.2 | Amended
and Restated Credit Agreement dated April 30, 1999, by and among Bando McGlocklin Small
Business Lending Corporation, Firstar Bank Milwaukee, N.A., as agent, and the Financial
Institutions parties thereto (incorporated by reference to Exhibit 4.1 to the Companys
Form 10-Q for the quarterly period ended March 31, 1999).
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.3 | First
Amendment to Amended and Restated Credit Agreement between Bando McGlocklin Small
Business Lending Corporation and Firstar Bank, as agent for the Lenders, dated February
28, 2000 (incorporated by reference to Exhibit 4.3 to the Companys Form 10-K for
the year ended December 31, 2000).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.4 | Second
Amendment to Amended and Restated Credit Agreement between Bando McGlocklin Small
Business Lending Corporation and Firstar Bank, as agent for the Lenders, dated April 28,
2000 (incorporated by reference to Exhibit 4.3 to the Companys Form 10-Q for the
quarterly period ended June 30, 2000).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.5 | Third
Amendment to Amended and Restated Credit Agreement between Bando McGlocklin Small
Business Lending Corporation and Firstar Bank, as agent for the Lenders, dated June 30,
2000 (incorporated by reference to Exhibit 4.4 to the Companys Form 10-Q for the
quarterly period ended June 30, 2000).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.6 | Fourth
Amendment to Amended and Restated Credit Agreement among Bando McGlocklin Small Business
Lending Corporation, the financial institutions party thereto and Firstar Bank, N.A., as
agent for the Lenders, dated June 29, 2001 (incorporated by reference to Exhibit 4.2 to
the Companys Form 10-Q for the quarterly period ended June 30, 2001).
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.7 | Fifth
Amendment to Amended and Restated Credit Agreement among Bando McGlocklin Small Business
Lending Corporation, the financial institutions party thereto and US Bank National
Association (formerly Firstar Bank, N.A.), as agent for the Lenders, dated June 28, 2002
(incorporated by reference to Exhibit 4.2 to the Companys Form 10-Q for the
quarterly period ended June 30, 2002).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.8 | Sixth
Amendment to Amended and Restated Credit Agreement among Bando McGlocklin Small Business
Lending Corporation, the financial institutions party thereto and US Bank National
Association, as agent for the Lenders, dated February 24, 2003 (incorporated by reference
to Exhibit 4.8 to the Companys Form 10-K for the year ended December 31, 2002).
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

64

---

|Exhibit No. | Exhibit
Description
|----------- | -------------------

| | 4.9 | Seventh
Amendment to Amended and Restated Credit Agreement among Bando McGlocklin Small Business
Lending Corporation, the financial institutions party thereto and US Bank National
Association (formerly Firstar Bank, N.A.) dated June 27, 2003 (incorporated by reference
to Exhibit 4.1 to the Companys Form 10-Q for the quarterly period ended June 30,
2003).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.10 | Eighth
Amendment to Amended and Restated Credit Agreement among Bando McGlocklin Small Business
Lending Corporation, the financial institutions party thereto and US Bank National
Association (formerly Firstar Bank, N.A.) dated June 25, 2004 (incorporated by reference
to Exhibit 4.1 to the Companys Form 10-Q for the quarterly period ended June 30,
2004).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.11 | Master
Note Purchase Agreement dated January 1, 1997, between the State of Wisconsin Investment
Board, Bando McGlocklin Small Business Lending Corporation and Bando McGlocklin Capital
Corporation (incorporated by reference to Exhibit 4.7 to the Companys Form 10-Q for
the quarterly period ended March 31, 1997).
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.12 | First
Amendment to Master Note Purchase Agreement dated June 1, 1998, by and among the State of
Wisconsin Investment Board, Bando McGlocklin Small Business Lending Corporation and Bando
McGlocklin Capital Corporation (incorporated by reference to Exhibit 4.2 to the Companys
Form 10-Q for the quarterly period ended June 30, 1998).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.13 | Third
Amended and Restated Credit Agreement dated June 1, 1998, by and among State of Wisconsin
Investment Board, Bando McGlocklin Small Business Lending Corporation and Bando
McGlocklin Capital Corporation (incorporated by reference to Exhibit 4.1 to the Companys
Form 10-Q for the quarterly period ended June 30, 1998).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.1* | Bando
McGlocklin Capital Corporation 1997 Stock Option Plan (incorporated by reference to
Exhibit 10.4 to the Companys Form 10-Q for the quarterly period ended March 31,
1997).
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.2* | The
Middleton Doll Company 2003 Stock Option Plan (incorporated by reference to Appendix A to
the definitive Proxy Statement of The Middleton Doll Company dated April 4, 2003).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.3 | Second
Amended and Restated Management Services and Allocation of Expenses Agreement dated
January 1, 2004, by and between InvestorsBank, The Middleton Doll Company, Bando
McGlocklin Small Business Lending Corporation and Lee Middleton Original Dolls, Inc.
(incorporated by reference to Exhibit 10.1 to the Companys Form 10-Q for the
quarterly period ended March 31, 2004).
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 11 | Statement
Regarding Computation of Per Share Earnings
| | -- | -----------------------------------------------------

| | 21 | List
of subsidiaries of The Middleton Doll Company
| | -- | --------------------------------------------------

| | 31.1 | Certification
of Chief Executive officer
| | ---- | ----------------------------------------

| | 31.2 | Certification
of Chief Financial Officer
| | ---- | ----------------------------------------

| | 32.1 | Written
 Statement of the President and Chief  Executive  Officer of The Middleton  Doll
                           Company pursuant to 18 U.S.C. Section 1350.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 32.2 | Written
 Statement of the President and Chief  Financial  Officer of The Middleton  Doll
                           Company pursuant to 18 U.S.C. Section 1350.
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | * | Represents
a management compensatory plan or arrangement.
| | - | ---------------------------------------------------------

65