# U.S. SECURITIES AND
EXCHANGE COMMISSIONWashington, 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, 2005;                                                   
|    | 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.)

|                                         |           
|---------------------------------------- | ----------
|1050 Walnut Ridge Drive                  |           
|Hartland, Wisconsin                      | 53029-8303
|(Address of principal executive offices) | (Zip Code)

Registrants
telephone number, including area code: (262) 369-8163

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 if the  registrant  is a well-known  seasoned  issuer,  as defined in Rule
405 of the  Securities  Act.        Yes [_]    No [X]

Indicate
by check mark if the  registrant  is not  required  to file  reports  pursuant to Section
13 or Section  15(d) of the Act.    Yes [_]    No [X]

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. [X]

Indicate
by check mark whether the registrant is a large accelerated filer, accelerated filer or a
non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Act. (Check one):
        Large accelerated filer  [_]     Accelerated filer  [_]      Non-accelerated filer  [X]

Indicate
by check mark whether the registrant is a shell company (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 June 30, 2005 was $3,744,592.

The
number of shares of common stock outstanding at March 20, 2006 was 3,727,589.

DOCUMENTS
INCORPORATED BY REFERENCE:

Portions of the The Middleton Doll
Company Proxy Statement for the 2006 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, 2005

|PART I   |                                                                            | 3 
|-------- | -------------------------------------------------------------------------- | --
|Item 1.  | Business                                                                   | 3 
|Item 1A. | Risk Factors                                                               | 9 
|Item 1B. | Unresolved Staff Comments                                                  | 9 
|Item 2.  | Properties                                                                 | 10
|Item 3.  | Legal Proceedings                                                          | 10
|Item 4.  | Submission of Matters to a Vote of Security Holders                        | 10
|PART II  |                                                                            | 10
|Item 5.  | Market for Registrant's Common Equity, Related Stockholder Matters and    
|         | Issuer Purchases of Equity Securities                                      | 10
|Item 6.  | Selected Financial Data (In thousands, except per share data)              | 11
|Item 7.  | Management's Discussion and Analysis of Financial Condition and Results of
|         | Operations (for the years ended December 31, 2005, 2004 and 2003)          | 11
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                 | 26
|Item 8.  | Financial Statements and Supplementary Data                                | 27
|Item 9.  | Changes in and Disagreements with Accountants on                          
|         | Accounting and Financial Disclosure                                        | 63
|Item 9A. | Controls and Procedures                                                    | 63
|Item 9B. | Other Information                                                          | 63
|PART III |                                                                            | 63
|Item 10. | Directors and Executive Officers of the Registrant                         | 63
|Item 11. | Executive Compensation                                                     | 63
|Item 12. | Security Ownership of Certain Beneficial Owners and Management            
|         | and Related Stockholder Matters                                            | 64
|Item 13. | Certain Relationships and Related Transactions                             | 64
|Item 14. | Principal Accountant Fees and Services                                     | 64
|PART IV  |                                                                            | 64
|Item 15. | Exhibits and Financial Statement Schedules                                 | 64

2

---

# Part I

|Item 1. | Business
|------- | --------

# Introduction

The
 Middleton  Doll Company (the  "Company")  presently  consists of two business  segments,
 the Consumer  Products Business and the Financial  Services Business.  The Middleton
Doll Company,  when referred to singularly and not with its subsidiaries, is referred to
herein as the "Parent".

The
Consumer Products  Business segment consists of Lee Middleton  Original Dolls, Inc.
("LMOD") and its wholly-owned subsidiary License Products,  Inc. ("LPI").  LMOD is a
designer and distributor of lifelike  collectible and play dolls; while LPI is a designer
and distributor of clocks and home decor products.  On December 7, 2005,  George R.
Schonath,  the former  President and Chief Executive  Officer of the Company,  and his
family,  surrendered  their  ownership of 1% of the stock of LMOD,  resulting in LMOD
being wholly-owned by the Parent.

The
 Financial  Services  Business  segment  prior to January 1, 2006,  consisted of the
Parent and its  wholly-owned subsidiary Bando McGlocklin Small Business Lending
 Corporation  ("BMSBLC").  On January 1, 2006,  BMSBLC was merged with and into LMOD with
LMOD as the surviving  corporation.  Beginning on January 4, 2006, the financial services
segment began selling  substantially all of its loans, loan  participations and leased
real estate  properties.  The net proceeds from the sale of the assets will be applied to
payment  of  indebtedness.  The  Company  anticipates  that  substantially  all  of  its
 financial  service  segment  loans  and  loan participations  will be sold or will have
matured  prior to June 30,  2006.  In addition,  the Company  anticipates  selling all of
its leased real estate over time;  however,  as of March 31,  2006,  no  decision  has
been made with  respect to the sale of any  specific leased  properties.  Conditions in
the real estate market for industrial and  commercial  buildings  similar to that owned
by LMOD will affect the  availability  of  purchasers,  the prices at which the real
 estate can be sold and the timing of such  sales.  The Company does not intend to
continue in the financial services segment after its assets are sold.

For
the years  ended  December  31,  2005,  2004 and 2003,  the Parent  and BMSBLC  were
 operated  as a real  estate investment  trust  ("REIT")  pursuant to the  provisions of
Section 856 of the Internal  Revenue Code of 1986, as amended.  A 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.  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.  As of January 1, 2006,  BMSBLC  merged with and into LMOD and will no longer
qualify as a REIT.

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.  For the years ended
 December  31,  2005,  2004 and 2003,  the  Company  and  InvestorsBancorp,  Inc.,
 together  with its  wholly-owned  subsidiary, InvestorsBank  (the  "Bank"),  shared
common office space and  personnel.  Expenses were 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
 the  loans  and the  leased properties  of BMSBLC to cash.  As loans mature and leased
 properties  are sold,  the proceeds  are used to reduce  outstanding  debt. Under  this
 policy,  BMSBLC  did not make new loans or  purchase  new  properties  to lease,  with
only  limited  exceptions  for loan participations  with  InvestorsBank.  This reduction
in assets reduced the income  available for common stock  dividends.  As a result, the
Board of Directors in June,  2004,  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

---

As
of January 1, 2006,  BMSBLC  merged with and into LMOD and will no longer  qualify as a
REIT.  Therefore,  for the year ending  December 31, 2006,  the Company  (consisting of
the Parent,  LMOD and LPI) will be operating as a C Corporation  under the Internal
Revenue Code.  The Company intends to file a consolidated federal income tax return for
the year ended December 31, 2006.

As
of January 1, 2006,  the executive  officers of the Company  consisting  of George R.
 Schonath,  Chief  Executive Officer;  Jon McGlocklin,  Vice President,  and Susan Hauke,
 Vice President - Finance,  ceased to be officers and/or  directors of the Company,  but
remain as officers  and/or  directors of  InvestorsBank  and  InvestorsBancorp.  As of
January 1, 2006, the Company's new officers were Salvatore  Bando,  President and Chief
Executive  Officer and Craig R. Bald, Vice President - Finance and Chief Financial
Officer.  Kenneth A. Werner, Jr., became a director of the Company on January 1, 2006.

On
January 4, 2006,  LMOD entered into an asset purchase  agreement to sell  substantially
 all of the loans and loan participations  (previously  owned by BMSBLC) to
 InvestorsBank.  It is anticipated that the sale of the loans and loan  participations
will be completed  through a series of  transactions  beginning in January of 2006 and
ending no later than June 30, 2006. The purchase price  for the sale of the  loans  and
loan  participations  will be the  total of the  principal  balance  of all such  loans
and loan participations, with an aggregate total purchase price anticipated to be
approximately $15.7 million plus accrued interest.

# Consumer Products
Business

Lee
Middleton Original Dolls, Inc.

Lee
Middleton Original Dolls, Inc.  headquartered in Westerville,  Ohio, designs lifelike
 collectible and play dolls that are distributed through dealers and through major
national retailers.

License
Products, Inc.

License
 Products,  Inc. a wholly-owned  subsidiary of LMOD, is  headquartered  in Hartland,
 Wisconsin,  and designs clocks and home decor products that are distributed through
major national retailers.

Competition

LMOD
competes  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 doll production to a contract  manufacturer in China in 2004. LPI
competitors  consist of other clock companies  including Infiniti, Skytimer and Bulova,
all of which are larger and have greater resources.

Employees

The
consumer products segment employs  approximately 61 persons.  At LMOD,  approximately 19
employees are subject to a collective  bargaining  agreement,  which expires on April 30,
2006.  Negotiations for a new contract are expected to begin in April. If the current
contract would expire before the new contract is ratified it would not be material to
LMOD.

Large
Customers

Three
customers,  Kohl's Department Stores, Inc., Bed Bath and Beyond, and Parisian's accounted
for approximately 33% of total revenues for the consumer products segment during 2005.

Copyrights,
Patents and Trademarks

The
Company  believes  patents and trademarks are not material to its business,  however,
 the Company  considers the unique  designs of its  collectible  dolls to be material to
its  business.  The Company has engaged in  litigation  in recent years to prevent
competitors from infringing on its copyrighted designs.

4

---

Seasonality

A
sizeable portion of the revenues of the consumer  products  segment is realized in the
fourth quarter,  recognizing the importance of the Christmas season.  For the years ended
December 31, 2005 and 2004,  approximately 33% and 31%,  respectively,  of the consumer
products segment revenues occurred in the fourth quarter.

Raw
Materials

The
consumer  products  segment  imports its finished  goods from  suppliers in China and
 therefore  relies on these suppliers to procure  sufficient raw materials to be used in
production.  The Company has not experienced any significant  problems due to the lack of
availability of raw materials or of increased prices of raw materials.

Backlog

The
backlog of the consumer  products segment was  approximately  $0.02 million as of
December 31, 2005, all of which should be filled during 2006.

Product
Development

Product
 development and product  improvement  costs are reported as a separate  component of
operating  expenses and totaled $953,742, $879,173 and $793,502 for the years ended
December 31, 2005, 2004 and 2003, respectively.

# 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 and (ii) owns industrial and commercial real estate for lease to small
businesses.

On
January 4, 2006,  LMOD entered into an asset purchase  agreement to sell  substantially
 all of its loans and loan participations  (previously  owned by BMSBLC) to
 InvestorsBank.  It is anticipated that the sale of the loans and loan  participations
will be completed  through a series of  transactions  beginning in January of 2006 and
ending no later than June 30, 2006. The purchase price  for the sale of the  loans  and
loan  participations  will be the  total of the  principal  balance  of all such  loans
and loan participations,  with an aggregate total purchase price  anticipated to be
 approximately  $15.7 million plus accrued  interest.  As of March 15, 2006,
 InvestorsBank  had purchased  $10.7 million of these loans and loan  participations.  In
addition,  during 2006,  LMOD received  $4.00  million from the sale of three of its
leased  properties.  All proceeds from the sale of loans,  loan  participations, and
leased properties were applied to reduce indebtedness.

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.  For the years ended December 31, 2005, 2004 and 2003,
 operating  expenses  were 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,  all of  which  is  held by  BMSBLC,  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 $23.79  million at December 31, 2005 (which has been
reduced to $7.41 million as of March 23,  2006).  As of December 31, 2005,  approximately
 64% of the loan portfolio  consists of loan  participations,  primarily with the Bank.
As of that date,  borrowers  located in the State of Wisconsin  represent  approximately
 97% of loans by dollar  volume.  The financial  services segment  funded their  lending
 operations  through  their equity  capital,  bank and  institutional  borrowings,  and
the sale of loan participations.

5

---

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 held for  investment by industry as of December
31, 2005:

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

The
following table  categorizes the  outstanding  principal  amount of loans held for
investment by fixed rate loans and variable rate loans as of December 31, 2005:

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

Further
detail regarding the fixed rate loans held for investment is provided in the following
table:

|Expiration
Date | 6.0-6.9% | 7.0-7.9% | 8.0-8.9% | Total    
|--------------- | -------- | -------- | -------- | ---------
|Demand          |          |          | $        | 417,375  
|2006            |          |          |          | 70,210   
|2008            |          |          |          | 1,783,206
|                |          |          |          |          
|Total           |          |          | $        | 2,270,791
|                |          |          |          |          

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.  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
$0.41 million and $0.98  million at December 31, 2005 and 2004,  respectively.  Interest
 income of $0.03 million would have been recorded during 2005 had the non-accruing loans
been current in accordance with their original terms.

6

---

Real
Estate

At
December  31, 2005 the  financial  services  segment  owned 12  buildings  and had
entered  into  long-term  lease agreements on nine of the  properties.  Of the remaining
three  properties,  one building is vacant,  one building is partially  vacant with a
tenant occupying  warehouse space on a month-to-month  basis, and one building is leased
to a tenant on a month-to-month  basis. During 2005, BMSBLC sold seven leased properties.
 The total cost of the Financial  Services Business  properties at December 31, 2005, was
$15.57 million and the depreciated carrying value was $13.41 million.

The
financial  services  segment's rental  properties are either  industrial real estate
(i.e. used for manufacturing purposes),  or commercial real estate properties,  such as
office buildings and retail stores, and all of its properties are located in Wisconsin.
 The following table sets forth additional information regarding the financial services
segment's leased properties.

|Property
Type           | Location | Annual Lease
Rents | Carrying
Value | Cost                | Square
Footage
|----------------------- | -------- | ------------------ | -------------- | ------------------- | --------------
|
|Commercial              |          |                    |                | Menomonee Falls, WI |               
|Commercial              |          |                    |                | Pewaukee, WI        |               
|Commercial              |          |                    |                | Menomonee Falls, WI |               
|Commercial              |          |                    |                | Mequon, WI          |               
|Industrial              |          |                    |                | West Allis, WI      |               
|                        |          |                    |                |                     |               
|                        |          |                    |                |                     |               
|                        |          |                    |                |                     |               
|Leased Properties      
|Industrial              |          |                    |                | Berlin, WI          |               
|Commercial              |          |                    |                | Oconomowoc, WI      |               
|Industrial              |          |                    |                | Waukesha, WI        |               
|Commercial              |          |                    |                | Franklin, WI        |               
|Commercial              |          |                    |                | Lake Geneva, WI     |               
|Commercial              |          |                    |                | Menomonee Falls, WI |               
|Commercial              |          |                    |                | Milwaukee, WI       |               
|                        |          |                    |                |                     |               
|                        |          |                    |                |                     |               
|                        |          |                    |                |                     |               
|Total Leased Properties | $        | 1,505,878          |                | $                   | 13,412,459    
|                        |          |                    |                |                     |               

| | *
   Property not leased    ** Property only partially leased *** Property sold during the
first two months of 2006
| | -------------------------------------------------------------------------------------------------------------------

Competition

In
managing its loan  portfolio,  the  financial  services  segment  competed  primarily
 with  commercial  banks and commercial  finance  companies,  many of which had
substantially  more assets and capital than the Company.  Banks, in particular,  had been
active in seeking to refinance outstanding loans.

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

7

---

As
discussed  previously,  the financial  services  segment is not making any new loans or
purchasing any real estate for lease.  Therefore, the financial services segment is no
longer competing with these entities.

Employees

Effective
 January 1, 2006,  the financial  services  segment did not have any  employees.
 Accounting and management duties were  performed by employees of LPI.  Duties  involving
the  management  of the loans and leased  properties  were  performed by employees of
InvestorsBank pursuant to the Management Agreement.

Credit
Concentration

As
of December 31, 2005 and 2004,  respectively,  BMSBLC had loans outstanding to its
largest borrower totaling $2.34 million and $3.07 million, which represented
approximately 10% and 9% of the total loans outstanding, 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:

|                     
|---------------------
|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 29 to 32 herein.  The Company's
 segments  conducted  substantially  all of their business in the United States.

# Executive Officers

Salvatore
L. Bando, 62, was elected  President and Chief Executive  Officer of the Company
effective January 1, 2006. Mr. Bando was one of the original  founders of the Company,
 formerly  known as Bando  McGlocklin  Capital Corp. He has been a director of the
Company for 23 years,  from its  inception in 1980 to 1997,  and again from 1999 to the
 present.  Mr. Bando served as president of Bando  McGlocklin  Capital Corp.  from 1980
until 1991. He served the Milwaukee  Brewers  organization  as senior vice  president of
baseball  operations  from 1991 to 1999 and as a special  assistant to the president from
1999 to 2001. He also served as a director of InvestorsBancorp from 1997 to 1999.  He is
also a financial professional for AXA Advisors.

Craig
R. Bald, 32, was elected Vice President of Finance,  Chief  Financial  Officer,
 Secretary and Treasurer of the Company  effective  January 1, 2006.  Mr. Bald,  who is a
CPA,  joined the Company in 1999 as a controller  for LPI. He was promoted to chief
financial  officer of the Company's  consumer  products  segment in 2004. Mr. Bald was a
senior  accountant for BDO Seidman,  LLP before joining the Company.

8

---

|Item 1A. | Risk Factors
|-------- | ------------

In
addition to the other  information set forth or incorporated by reference in this 2005
Annual Report on Form 10-K, the risk factors  described below should be carefully
 considered.  If any of the risk factors actually occur, our financial  condition or
 results  of  operations  could be  materially  adversely  affected.  The  following
 list of risk  factors  may not be  exhaustive. Additional risk and  uncertainties  not
presently known or that we currently  believe to be immaterial may also adversely
affect us.

# Our consumer products
segment has experienced significant declining net sales during the last five years.

The demand for collectible dolls has
declined and we have experienced  intense  competition from
lower-priced collectible dolls manufactured in China, resulting in a significant decline
in net sales.

# Our consumer products
segment has realized losses from operations in each of the past five years.

We have not
been able to reduce fixed costs and operating  expenses  sufficiently  to offset the
decline in net sales.  We may continue to experience  losses
unless we are able to increase our net sales and/or further  reduce our fixed costs and/or
operating expenses.

# Our consumer products
segment does not have any external financing sources.

The consumer  products  segment
must, on its own,  generate  sufficient  cash to operate its  business.  In recent years,
 the consumer products  segment  financed its losses by borrowing from BMSBLC.  Unless
the consumer  products  segment can generate  sufficient  cash flow from operations,  or
is otherwise able to borrow from financial  institutions,  it would eventually encounter
significant problems in meeting its working capital requirements.

# Our outsourcing  of the
 manufacturing  of the products sold by the consumer  products  segment to Chinese
 manufacturers  could  adversely affect inventory levels.

Nearly all our products  sold by
the consumer  products  segment are  manufactured  in China.  The amount of product to be
purchased from Chinese  manufacturers  must be ordered several months in advance to allow
for  manufacturing  and shipping time. If the amount of product ordered exceeds the
future sales,  inventories will increase which will reduce profits and/or increase
 losses.  If sales would exceed the amount of product ordered, then inventory would be
insufficient to meet customer demand.

# Three customers provide
a significant portion of the sales for the consumer products segment.

Three customers,  Kohl's Department
 Stores,  Inc., Bed Bath and Beyond,  and Parisian's (a division of Saks Regional
 Department Store Group) accounted for  approximately  33% of total revenues for our
consumer  products segment during 2005. A loss of any one or more of these customers
could have a material adverse effect on our business.

# There is no assurance
that we will have sufficient funds available to completely redeem our outstanding preferred
stock by July 1, 2008.

We are required to redeem
$16.85  million of preferred  stock by July 1, 2008, to the extent  permitted  under
 Wisconsin  law. We have been using the proceeds from the sale of our leased
 properties and from the sale of loans and loan  participations  to reduce our
 indebtedness.  We anticipate that  substantially all of our loans and loan
 participations  will be sold or will have matured prior to June 30, 2006. In addition,
 we  anticipate  selling all of our leased real estate over time;  however, as
of March 31, 2006,  no decision has been made with respect to the sale of any specific
 leased  properties.  Conditions  in the real estate market for industrial and commercial
 buildings similar to those owned by us, will affect the availability of purchasers,
 the prices at which the real estate can be sold,  and the timing of such sales.  We
anticipate  that proceeds will be sufficient to pay off the existing  bank
debt.  However,  we do not expect to generate  sufficient  funds from the sale
of these assets to completely  redeem the preferred stock by July 1, 2008.  We will have  sufficient
 funds only if the consumer products segment can
generate earnings and/or raise funds from other sources.

|Item 1B. | Unresolved Staff Comments
|-------- | -------------------------

| | Not
Applicable.
| | ---------------

9

---

|Item  2. | Properties
|-------- | ----------

LMOD
owns a building that has  approximately  51,000 square feet at 1301  Washington
 Boulevard,  Belpre,  Ohio, that provides limited production  facilities,  retail space
and warehouse space. A 44,100 square foot warehouse facility in Columbus,  Ohio, was
leased to LMOD in June of 2000 and was used for  distribution  and for storing raw
 materials  and finished  goods until the second quarter of 2005.  Warehouse  operations
 were then moved to the Belpre  location.  The Columbus  warehouse  lease expires on
August 15, 2006.  LMOD's  headquarters  are located in Westerville,  Ohio. The
headquarters has 18,800 square feet of office space which is leased until  April 30,
 2006.  Beginning  May 1, 2006,  LMOD will lease 7,400  square  feet of office  space in
 Westerville,  Ohio,  for its headquarters.  A retail outlet store in West  Virginia is
leased on a  month-to-month  basis and a retail store in the Polaris  Fashion Mall in
Columbus, Ohio, is leased until August 31, 2008.

LPI
owns a building at 1050 Walnut Ridge Drive,  Hartland,  Wisconsin,  that 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, 2005.

# Part II

|Item 5. | Market for Registrant's Common Equity, Related Shareholder Matters and Issuer
                  Purchases 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 2005 and 2004.

|               | Common Stock | Cash Dividends
|-------------- | ------------ | --------------
|
|2005           |              |               
|First Quarter  | $   2.700    | $   1.700     
|Second Quarter | $   2.300    | $   1.010     
|Third Quarter  | $   1.600    | $   0.900     
|Fourth Quarter | $   1.020    | $   0.630     
|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     

As
of March 1, 2006, there were approximately 725 shareholders of record of the Company's
common stock.

10

---

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, 2005. As
of December 31, 2005, 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                           |                                 
|Income tax (expense) benefit             |                                 
|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 |                                 

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

# Overview

Amounts
 presented as of December 31, 2005, 2004 and 2003 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 Parent.  The consumer products business segment includes Lee
Middleton Original Dolls, Inc. ("LMOD"),  and License Products,  Inc. ("LPI"),  a 100%
owned subsidiary of LMOD. The term "Company",  when used herein,  refers to the Parent,
 BMSBLC,  LMOD and LPI on a  consolidated  basis.  As of January 1, 2006,  BMSBLC and
LMOD  merged  with LMOD as the  surviving corporation.  Throughout  Management's
 Discussion  and  Analysis of  Financial  Condition  and Results of  Operations,  BMSBLC
will be referred to as it was established prior to the merger.

Until
January 1, 2006, the loan and real estate  portfolios of the Parent and BMSBLC were
administered and managed by InvestorsBank  (the "Bank"),  a  wholly-owned  subsidiary of
 InvestorsBancorp,  Inc. The "Second  Amended and Restated  Management and Services and
Allocation of Expenses  Agreement" dated January 1, 2004, (the  "Management  Agreement")
was in effect for the years ended December 31, 2005 and 2004.  George R.  Schonath,
 President and Chief  Executive  Officer of the Parent and BMSBLC until  December 31,
2005,  remains as 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.

11

---

For
the loan and real estate  management  services  provided under the Management  Agreement
until December 31, 2005, the Bank received 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  provided for the sharing of operating
expenses between the Bank and BMSBLC, as well as certain  expenses of  employees  of the
Bank who  provided  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
received an annual fee of $365,000,  payable monthly.  George Schonath,  the President
and Chief Executive Officer,  provided services to the Parent,  BMSBLC and LMOD under the
Management  Agreement until December 31, 2005; however, he was not separately compensated
by any of those entities.

Effective
January 1, 2006, a new agreement was entered into between the Parent and  InvestorsBank.
 The Loan and Real Estate  Services  Agreement (the  "Agreement")  provides for loan and
real estate  management  services to be provided by the Bank on a month-to-month  basis.
 The Bank  receives a monthly  fee equal to 0.25% of the total  amount of loans under
 management  and 6% of the rents from the real estate portfolio.  In addition,  Ms.
Hauke,  Chief Financial  Officer of  InvestorsBank,  will provide a maximum of 140 hours
of accounting  services under the Agreement for a fee of $17,500.  Also under the
Agreement,  BMSBLC will pay InvestorsBank a monthly fee of $3,259 for rent,  real estate
taxes,  building  related and overhead  expenses.  No  additional  fees are paid under
the Agreement.

For
a discussion of management's  plans to eventually sell  substantially all of the assets
of the financial services segment and then to exit that business see Item 1 "Business -
Introduction"  herein.  After the financial  services  segment assets are sold, the
Company expects to be solely engaged in the consumer products segment as described in
Item 1.

During
the past five years there has been a  significant  decrease in LMOD's net sales within
the  consumer  products segment due to a decrease in demand for  collectible  dolls.  In
order to increase the demand for  collectible  dolls,  the collectible doll industry is
attempting to raise consumer's  awareness of collectible  dolls through  marketing
 efforts.  On August 5, 2005, a new management  team at LMOD began to address  the sales
 decline.  Sales to dealers  have  begun to  improve  due to  increased  marketing
efforts which include package incentives, more favorable terms and personal contact.

Intense
pricing  competition  from dolls produced in China also  contributed to the decline in
sales.  Therefore,  in June of  2004,  LMOD  transferred  production  of its high
 quality,  lifelike  Artist  Studio  Collection  (ASC)  dolls to a  contract manufacturer
 in China in order 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.
 However, limited doll production continues at the LMOD facilities in Belpre, Ohio.

Thirty-three
 Newborn Nursery(R)boutiques are now open at major  department  store retailers
 including Saks Regional Department  Store Group and Belk, Inc.  stores.  LMOD is
continuing to develop and release new Artist Studio  Collection  ("ASC") dolls through
its dealers and through  selected  retail  locations.  Both LMOD and LPI are working on
developing  new business  relationships and continue to develop products which emphasize
quality and innovation.

During
 the past five  years  there has also been a  significant  decrease  in the loan
 portfolio  of the  financial services  segment,  resulting in a corresponding  decrease
in interest income on loans.  The financial  services  segment has been at a lending
 disadvantage  with other  institutions  such as banks,  due to its higher cost of funds.
 Also, the management  agreement with InvestorsBank  prevented 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 BMSBLC  decreased  and
total  revenues and  earnings  also  decreased throughout the five year period.

The
 Company  is using  the  proceeds  from the sale of its  leased  properties  and from the
sale of loans  and loan participations  to reduce its  indebtedness.  These sales cause a
reduction  in the earning  assets of the  Company.  As a result,  the income  available
 for common stock  dividends is reduced.  The Board of Directors  in June,  2004,
 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.  For the
year ended  December 31, 2005, no dividends  were paid to the common stock  shareholders.
 The preferred  stock  dividend of $0.335 per share per quarter ($1.34 annual dividend
per preferred share) was paid during 2005.

12

---

The
Company  anticipates that substantially all of
its financial service segment loans and loan  participations  will be sold or will have
matured prior to June 30, 2006. In addition,  the Company  anticipates  selling all of
its leased real estate over time;  however as of March 31, 2006 no decisions have been
made with respect to the sale of any specific  leased  property.  Conditions in the real
estate  market for  industrial  and  commercial  buildings  similar to that owned by LMOD
will affect the  availability  of purchasers,  the prices at which the real estate can be
sold,  and the timing of such  sales.  The Company  anticipates  that  proceeds will be
 sufficient  to pay off the  existing  bank  debt.  However,  the  amount  of  proceeds
 available  after  the  payment  of the indebtedness cannot be estimated at the present
time.

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.

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.

13

---

Financial Services

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 during the
period of rental using the straight-line method.  The costs of normal repairs and
maintenance are charged to expense as incurred.

Leased
 properties  listed for sale or under contract to be sold. Leased properties are
classified as listed for sale or under  contract  to be sold,  when a property  is listed
for sale and/or  under  contract to be sold within the next twelve  months. Leased
properties are valued at the lower of depreciated cost (carrying value) or estimated net
realizable value.

Impairment
 of leased  properties.  The  carrying  value of leased  properties  is  reviewed by
 management  at least annually  for  impairment.  An  impairment  review is designed to
 determine  whether the fair value of a leased  property is below its carrying  value.
 Management  estimates the fair value based upon available  information  using
 appraisals,  real estate tax bills and recent sales.

# Results of Operations

# For the years ended
December 31, 2005 and December 31, 2004

The
Company's  total net loss available to common  shareholders  for the year ended December
31, 2005 equaled ($1.55) million or ($0.42) per common share  (diluted) as compared to
($3.76)  million or ($1.01) per common share (diluted) for the year ended December 31,
2004.

|                                             | 12/31/2005      | 12/31/2004     
|-------------------------------------------- | --------------- | ---------------
|Consumer products segment net loss           | ($1.91 million) | ($3.69 million)
|Per common share (diluted)                   | ($0.51)         | ($0.99)        
|Financial services segment net income (loss) | $0.36 million   | ($0.07 million)
|Per common share (diluted)                   | $0.09           | ($0.02)        

The
consumer  products  segment's net loss decreased $1.78 million when comparing the year
ended December 31, 2005 to December 31, 2004.  For the year ended  December 31,  2004,
 an income tax expense of $2.69  million was recorded to write-off  certain deferred
 income tax assets while for the year ended  December 31, 2005, no income tax expense
 (benefit) was  recognized for financial reporting  purposes  due to an increase in the
 deferred  income tax  valuation  allowance.  Net sales  decreased  $1.62  million  when
comparing  the two years  primarily  due to a $1.58  million  holiday  shipment  of play
dolls in 2004  which did not  reoccur in 2005. Although  the total gross  profit
 percentage  remained  the same for both years,  gross  profits  decreased  $0.65
 million due to the decrease in sales.  Operating  expenses  increased  $0.39 million
 while other income  increased  $0.14 million when  comparing the two years.

The
financial  services  segment's net income increased $0.43 million when comparing the year
ended December 31, 2005 to December 31,  2004,  primarily  due to the sale of seven
 leased  properties  resulting  in a gain of $1.23  million,  net of income taxes.
 However,  rental income and loan income  decreased  when comparing the two years as a
result of a decline in both the number of leased properties and in the principal balances
of loans outstanding.

14

---

Consumer Products

Net
sales from consumer  products for the year ended  December 31, 2005,  decreased 10% to
$14.33 million from $15.95 million for the year ended  December 31, 2004.  LMOD
 accounted for 64% of the net sales in 2005 and 69% of the net sales in 2004.  The third
quarter of 2004 included a $1.58 million  holiday  shipment of play dolls to a large
 retailer  which did not reoccur in 2005 and accounted  for most of the  decrease  in
play doll  sales.  Sales to  dealers  of Artist  Studio  Collection  dolls were also down
when comparing  the two  years  as  dealers  continue  to order  conservatively.  Newborn
 Nursery(R)play  dolls  and  accessories  improved substantially  when  comparing  2005
to 2004 due to the  opening  of  twenty-five  new  locations  in 2005.  LPI's net sales
 increased slightly when comparing the two periods.

Reflecting
 the decline in net sales,  cost of goods sold  decreased 10% to $9.23 million for the
year ended December 31,  2005,  compared to $10.20  million for the year ended  December
 31,  2004.  Total gross  profit  margin  remained at 36% for both years.  LMOD's
 freight  costs,  which are included in cost of goods sold,  increased  slightly  when
 comparing the two periods due to special freight incentives which were offered in 2005
in order to reduce inventory levels.

Total
operating  expenses of the consumer  products  segment for the year ended December 31,
2005, were $7.26 million compared to $6.87 million for the year ended  December 31, 2004,
a 6% increase.  Sales and marketing  expense  increased  $0.31 million primarily due to
increases in salaries,  commissions,  catalog expenses and advertising  fees. At LPI the
increase of $0.04 million was due primarily to the addition of a new sales person and the
payment of  commissions to outside sales  representatives.  The increase of $0.27
 million at LMOD was  primarily due to one-time  start-up  costs  associated  with the
opening of Newborn  Nursery(R)boutiques in 2005. New product  development  increased
$0.05 million at LPI due to the addition of a new designer and the $0.03 million
 increase at LMOD due to increases in sample costs and travel  expenses.  General and
 administrative  expenses  increased  $0.12 million at LPI and decreased  $0.12  million
at LMOD.  The increase at LPI was due to increased  depreciation  relating to the
purchase of its building as well as increased  building  maintenance  expenses.  At LMOD
general and  administrative  expenses  increased  due to a charge of $0.35 million
 relating to a lease  obligation for a warehouse  facility in Columbus,  Ohio, which was
vacated in the second quarter of 2005. Bad debt expense in 2004 was reduced by $0.19
million due to a reduction in LMOD's allowance for doubtful  accounts  receivable,  which
did not reoccur in 2005.  Offsetting  these expense  increases were a reduction in
 restructuring  expenses,  a refund of $0.10 million relating to personal  property
taxes, a reduction of $0.07 million in current personal  property tax expense,  and an
increase of $0.16 million between 2005 and 2004 from settlement proceeds in relation to
copyright infringement lawsuits.

Interest
expense  decreased $0.02 million when comparing the year ended December 31, 2005, to
2004.  During 2005, the consumer products  segment's  financing was done through
 intercompany loans while in 2004 the financing was provided by InvestorsBank. Other
income  increased $0.14 million when comparing the year ended December 31, 2005 to 2004,
 primarily due to rental income that LPI receives from a tenant in its building.  In
September of 2004, LPI purchased the building in which it was a tenant from BMSBLC.

Interest
expense and intercompany loans have been eliminated for consolidation  purposes.  At
December 31, 2005, 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  $4.93
 million,  consisting  of a line of credit of $2.95  million and a first  mortgage on
real  estate of $1.98  million.  At December 31, 2005,  LPI owed BMSBLC $7.81 million
 consisting of a line of credit of $2.0 million,  an unsecured note of $2.35 million, and
a first mortgage on real estate of $3.46 million.  Before  intercompany  eliminations,
 interest expense for the consumer  products segment and interest  income to the
 financial  services  segment was $1.05  million for the year ended  December  31, 2005.
 After the merger of BMSBLC into LMOD on January 1, 2006, all  intercompany  loans were
 eliminated on the books of the Parent,  BMSBLC,  LMOD and LPI.

15

---

For
the year ended  December 31,  2005,  no income
tax expense  (benefit)  was  recognized  due to an increase in the deferred  income tax
valuation  allowance.  For the year ended  December 31, 2004,  income tax expense of
$2.69 million was recorded at the consumer  products  segment.  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.  The loss carryforwards  expire at various
 dates  through  2025.  At December  31, 2005 no income tax expense was recorded  and
there were unused net  operating  loss carryforwards of approximately $8.6 million to be
used to offset against future federal taxable income.

Financial Services

The
financial  services  segment net income after the  preferred  stock  dividend  payment of
$0.91 million was $0.36 million for the year ended December 31, 2005, compared to a net
loss of $0.07 million for the year ended December 31, 2004.

Interest
 income on loans  decreased 23% to $1.72 million for the year ended  December 31, 2005,
as compared to $2.24 million for the year ended  December 31, 2004.  The  decrease in
interest  income was  primarily  due to a $16.15  million  decrease in average  total
 loans  outstanding  when  comparing  the two years.  During the year ended  December
 31,  2005,  $5.90  million of new participations were entered into with InvestorsBank,
 while normal principal  reductions amounted to $2.0 million and loan payoffs were $12.95
 million.  Participations  with  InvestorsBank  comprised  approximately  64% of the loan
 portfolio at December  31, 2005.  The proceeds from the reduction in the loans were used
to reduce outstanding debt.

On
January 4, 2006,  LMOD entered into an asset purchase  agreement to sell  substantially
 all of its loans and loan participations  (previously  owned by BMSBLC) to
 InvestorsBank.  It is anticipated that the sale of the loans and loan  participations
will be completed  through a series of  transactions  beginning in January of 2006 and
ending no later than June 30, 2006. The purchase price  for the sale of the  loans  and
loan  participations  will be the  total of the  principal  balance  of all such  loans
and loan participations,  with an aggregate  total  purchase  price  anticipated  to be
 approximately  $15.7  million  plus  accrued  interest. Management  anticipates  that
the  proceeds  from the sale of the loans and loan  participations  will be used to
 further  reduce  any outstanding debt.

Rental
income  decreased 40% to $1.80 million for the year ended  December 31, 2005, as compared
to $3.00 million for the year ended December 31, 2004,  due to leased  property sales and
vacant  buildings.  Rental income in 2005 decreased  $1.12 million due to leased
 property sales and $0.13 million due to vacant  buildings while rent increases of $0.05
million  partially  offset these amounts.  Seven  properties were sold during 2005
resulting in a gain of $1.23 million,  net of income taxes.  All tenants were current in
their rent  payments at December  31,  2005.  At December  31, 2005,  leased  properties
 held for sale  consisted of a vacant and a partially  vacant rental  property with a
carrying value of $3.26 million and three leased  properties  that were sold in the first
two months of 2006 with a carrying  value of $3.55  million.  The remaining  seven leased
 properties had a carrying value of $6.61 million at December 31, 2005.

16

---

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, 2005, was 3.74% compared  to
4.26%  for the year  ended  December  31,  2004.  During  2005,  average  loans
 outstanding  of  $27.33  million  (net of intercompany  loans)  generated  $1.72 million
in interest  income and average  leased  properties of $18.72  million  generated  $1.80
million in rental  income.  The average  gross  return in 2005 on rental  properties  was
 approximately  9.6% while the average  gross return on loans was approximately  6.3%.
During 2004,  average loans outstanding of $43.48 (net of intercompany  loans) generated
$2.24 million in interest  income and average leased  properties of $29.03 million (net
of intercompany  properties)  generated $3.00 million in rental  income.  The average
gross return in 2004 on rental  properties  was  approximately  10.3% while the average
gross return on loans was  approximately  5.2%.  Although the average gross return on
loans  increased  during 2005 due to market rate  increases,  the increase was offset by
the reduction in rent  resulting  from the sale of leased  properties  which have a
higher  average gross return than loans.

Interest
 expense  decreased 16% to $1.77 million for the year ended  December 31, 2005, as
compared to $2.11 million for the year ended December 31, 2004,  primarily due to a
decrease in the  outstanding  average debt balance.  The average debt balance decreased
 $24.98  million when  comparing  2005 to 2004 as a result of applying  proceeds  from
loan  repayments  and from the sale of leased  properties.  However,  BMSBLC's  cost of
funds is based  primarily on variable  interest  rates.  The average cost of funds was
5.14% for 2005 as compared to 3.39% for 2004.  As a result,  BMSBLC's  cost of funds was
1.75% higher when  comparing  2005 to 2004 due to the increase in short-term  interest
 rates.  During 2004, 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.  During 2004, commercial  paper averaged
 approximately  42% of BMSBLC's debt structure.  At June 30, 2005,  commercial paper was
no longer available to BMSBLC.  Instead  BMSBLC's  bank line of credit  comprised 80% of
its debt  structure  with an average rate of 5.61% at December 31, 2005.  The cost of the
line of credit is approximately .40% to .50% higher than the cost of commercial paper.

BMSBLC's
debt facility  consists of a $30 million line of credit that matures on June 23, 2006.
BMSBLC expects to pay off the facility by the maturity date using proceeds from the sale
of loans and leased  properties.  Effective  January 1, 2006, BMSBLC voluntarily  reduced
the line of credit to a maximum  amount of $23  million.  At December 31, 2005,  BMSBLC
had  outstanding  unfunded commitments of $2.84 million.  Management  expects that due to
scheduled loan  maturities and sales of leased  properties,  BMSBLC will be able to fund
the outstanding commitments.

Other
 miscellaneous  income decreased $0.03 million for the year ended December 31, 2005,
compared to the year ended December 31, 2004,  primarily due to a reduction in prepayment
 penalties in 2005. Other miscellaneous  income is composed primarily of prepayment
penalties, letter of credit fees, and late payment fees.

Depreciation
 expense  decreased  $0.30 million due to leased  property  sales and vacancies  when
comparing the year ended December 31, 2005 to 2004.  Management  fees under the
management fee agreement with  InvestorsBank  decreased  $0.14 million due to the
decrease in loans under  management  and from the sale of leased  properties.  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.  Other operating  expenses  decreased $0.18 million when comparing 2005
to 2004.  Expenses in 2004 included $0.11 million of debt issue costs and $0.04 million
of bad debt expense  related to rents that did not reoccur in 2005.  There were also
 reductions of $0.03 million in  transfer  agent  costs and $0.05  million in carrying
 costs  related to leased  properties  when  comparing  2005 to 2004. Offsetting these
reductions was an increase of $0.07 million in legal fees relating to the restructuring
of the Company.

The
Parent and its REIT subsidiary,  BMSBLC,  qualified as a real estate  investment trust
under the Internal Revenue Code for the years ended  December  31,  2005 and 2004.
 Accordingly,  they were not  subject to income tax on taxable  income that was
distributed  to common  shareholders.  However,  the REIT may retain  capital  gains from
the sale of real estate and pay income tax on that gain.  The Parent  realized  $1.78
million in capital gains and accrued $0.55 million in income taxes for the year ended
 December 31, 2005, and realized $0.31 million in capital gains and accrued $0.13 million
in income taxes as of December 31, 2004.

17

---

Interest
expense and intercompany loans have been eliminated for consolidation  purposes.  At
December 31, 2005, 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  $4.93
 million,  consisting  of a line of credit of $2.95  million and a first  mortgage on
real  estate of $1.98  million.  At December 31, 2005,  LPI owed BMSBLC $7.81 million
 consisting of a line of credit of $2.0 million,  an unsecured note of $2.35 million, and
a first mortgage on real estate of $3.46 million.  Before  intercompany  eliminations,
 interest expense for the consumer  products segment and interest  income to the
 financial  services  segment was $1.05  million for the year ended  December  31, 2005.
 After the merger of BMSBLC into LMOD on January 1, 2006, all  intercompany  loans were
 eliminated on the books of the Parent,  BMSBLC,  LMOD and LPI.

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.  As of December 31, 2005, LMOD owed the
supplier $0.22 million.

# 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
$1.44 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.

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  including a $1.37 million of deferred  income tax
benefit  recognized  during the year ended  December 31, 2003.  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 20 in the  accompanying  consolidated  financial
 statements  for more information regarding the income tax provision and related deferred
income tax valuation allowance.

18

---

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.  Due to the Parent's  required  redemption of $16.85  million of  outstanding
 preferred  stock by 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.  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  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) was paid during 2004.

Consumer Products

Net
sales from consumer  products for the year ended  December 31, 2004,  decreased 10% to
$15.95 million from $17.66 million for the year ended  December 31, 2003.  This was due
to decreased  sales of $1.41 million at LMOD and decreased  sales of $0.30 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 the life-like
 baby doll category.  The sales of play dolls to retailers,  which include the Newborn
 Nursery(R)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.

Reflecting
 the decline in net sales,  cost of goods sold  decreased 7% to $10.20 million for the
year ended December 31, 2004,  compared to $10.96 million for the year ended  December
31, 2003.  LMOD's cost of goods sold decreased to $6.89 million from $7.59 million  while
LPI's cost of goods sold  decreased to $3.31 million from $3.37  million.  Total gross
profit margin  decreased to 36% from 38% 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 36%
(before the inventory  obsolescence  charge) for both years despite price  reductions on
the line of ASC 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 $6.87 million compared to $9.19  million for the year ended  December 31,
2003, a 25%  decrease.  LMOD's total  operating  expenses  decreased  $2.37 million to
$5.55 million for the year ended December 31, 2004.  Sales and marketing  expense
 decreased  $1.41 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 was made  available
 on-line at  www.leemiddletondolls.com,  which  reduced the printing and mailing costs
during 2004. 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  $0.09 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 $1.05
million when  comparing  2004 to 2003.  An  adjustment  to 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.

19

---

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  $0.05  million
to $1.33  million for the year ended  December 31, 2004. Sales and marketing  expenses
 increased  $0.02 million  primarily due to increases in samples for customers.  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. As a result of InvestorsBank  extending a $2.0 million line of credit to LMOD (with
the Parent as a co-borrower) at prime rate in July of 2004,  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  with the purchase price of
$3.67 million being  determined by an independent  appraiser and  representing  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.

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.

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.

20

---

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.

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  with the purchase price of $3.67 million
being  determined by an independent  appraiser and  representing  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.  A vacant and a  partially  vacant  rental property 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.

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.

21

---

Depreciation
 expense  decreased  $0.12 million due to leased  property  sales and vacancies  when
comparing the year ended December 31, 2004 to 2003 due to  depreciation  being
 discontinued  when a property  becomes  vacant.  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.  In addition,  certain  leased  properties were sold at a loss of $0.35 million
during 2003.  Other operating expenses in 2004 remained approximately the same as 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 2004 and 2003,
 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  realized  $0.31  million in capital  gains and accrued  $0.13 million
in income taxes as of December 31, 2004 and realized  $0.52  million in capital gains and
accrued $0.18 million in income taxes as of December 31, 2003.

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

# Liquidity and Capital

Consumer Products

The
consumer products segment's net loss before  intercompany  eliminations for the year
ended December 31, 2005, was $2.73 million, which was financed primarily by an
intercompany line of credit agreement.

Total
assets of the consumer  products  segment were $14.55 million as of December 31, 2005,
and $14.22 million as of December 31, 2004, a 2% increase.  Cash increased to $0.08
million at December 31, 2005, from $0.02 million at December 31, 2004.

Primarily
due to the offering of deferred  payment terms to customers and to stronger fourth
quarter sales,  accounts receivable,  net of the  allowance  for doubtful  accounts,
 increased to $2.83  million at December  31, 2005,  from $2.08  million at December 31,
2004. LPI's trade receivables  decreased $0.05 million and LMOD's trade receivables
 increased $0.77 million,  while other receivables increased by $0.03 million.

Inventory
and prepaid  inventory,  net of the allowance for obsolescence,  increased to $4.97
million at December 31, 2005,  compared to $4.72  million at December  31,  2004.  LMOD's
 inventory  increased  by $0.86  million due to an increase in future anticipated  sales
levels and LPI's  inventory  decreased by $0.43 million due to reductions in  overstocked
 inventory.  At LMOD,  the allowance for  obsolescence  was increased  $0.18 million
during 2005.  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,  decreased  by $0.64  million as of
December  31, 2005, compared to December 31, 2004, due to depreciation  and the disposal
of unused equipment at LMOD.  Property and equipment  increased by $0.23  million  while
 accumulated  depreciation  increased by $0.87  million.  Other  prepaid  expenses
 decreased  $0.09 million from December 31, 2004 to December 31, 2005.

At
December  31,  2005,  the  consumer  products  segment had unused  federal net  operating
 loss  carryforwards  of approximately  $8.6 million.  Management  determined that based
on the level of the continuing losses of the consumer products segment, it would
 continue to 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 net  operating  loss
carryforwards expire at various dates through 2025.  The deferred income tax assets are
reviewed on a quarterly basis.

22

---

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,  2005 and
2004,  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, 2005.

Other
 liabilities  increased $0.34 million to $1.71 million at December 31, 2005, from $1.37
million at December 31, 2004, due to increases in accounts payable, accrued royalties and
accrued advertising costs.

Financial Services

During
2005,  the financial  services  segment's  net income after  intercompany  transactions
 was $2.08 million and dividends of $0.91 million were paid to preferred stockholders.

Total
assets of the financial  services  segment were $37.79 million as of December 31, 2005
and $56.44 million as of December 31, 2004.  Cash decreased to $0.20 million at December
31, 2005 from $0.63 million at December 31, 2004.

Interest
 receivable  decreased to $0.11 million as of December 31, 2005, from $0.23 million at
December 31, 2004. At December 31, 2005, four  non-performing  loans totaling $0.41
million in principal were considered to be non-accrual  loans,  resulting in $0.03
 million  less of interest  income  which would have been  recorded  for the year had the
 non-accruing  loans been current in accordance with their original terms.

Total
loans  (excluding  intercompany  loans)  decreased by $9.05 million,  or 28%, to $23.79
million at December 31, 2005,  from $32.84  million at December 31, 2004.  The proceeds
from the reduction in the loans were used to reduce  outstanding  debt. As of December
 31,  2005 and 2004,  management  did not  provide an  allowance  for loan  losses due to
 management's  belief that the collateral  securing  nonperforming  loans was  adequate
to fully  secure the  debtors'  obligations  to BMSBLC.  At December 31, 2005, BMSBLC's
loan portfolio consisted of 40 loans, of which 19 were participated with InvestorsBank,
 five were intercompany loans and four were  non-performing  loans.  At December 31,
2004,  there were five  nonperforming  loans,  totaling  $1.17 million in  principal,  on
non-accrual status.  During February of 2005, one non-performing loan was paid in full
totaling $0.75 million in principal.

On
January 4, 2006,  LMOD entered into an asset  purchase  agreement to sell a  significant
 portion of its loans and loan  participations  (previously  owned by  BMSBLC)  to
 InvestorsBank.  It is  anticipated  that the sale of  certain  loans and loan
participations  will be  completed  through a series of  transactions  beginning  in
 January of 2006 and ending no later than June 30, 2006.  The purchase  price for the
sale of the loans and loan  participations  will be the total of the  principal  balance
of all such loans and loan  participations,  with an aggregate  total purchase price
 anticipated  to be  approximately  $15.7 million plus accrued interest.  These loans
have been classified as held for sale on the balance sheet as of December 31, 2005.

Leased
properties, net of accumulated depreciation,  decreased to $13.41 million as of December
31, 2005, compared to $22.23 million as of December 31, 2004,  primarily due to the sale
of seven leased  properties  with a net book value of $8.47 million. At December  31,
 2005,  leased  properties  held for sale  consisted of two vacant  rental  properties
 with a net book value of $3.26 million  and three  leased  properties  that were sold in
2006 with a net book value of $3.55  million.  Management  believes  that the carrying
 values of the  remaining  unsold  properties  were not impaired at December 31, 2005.
 All tenants were current in their rent payments at December 31, 2005.

23

---

Other
assets, including prepaid amounts,  decreased by $0.23 million primarily due to a
reduction of $0.18 million in prepaid items relating to leased properties.

The
financial services  segment's total consolidated  indebtedness at December 31, 2005
decreased $16.85 million from December 31, 2004,  primarily  as the result of the payment
of debt using the proceeds  from the payoff of loans in the loan  portfolio and from the
sale of leased properties.

|12/31/2005                 | 12/31/2004    
|-------------------------- | --------------
|Short-term debt            | $22.82 million
|Long-term debt             | $5.14 million 
|Redeemable preferred stock | $16.85 million

BMSBLC's
debt facility  consists of a $30 million line of credit that matures on June 23, 2006.
 Effective January 1, 2006,  BMSBLC  voluntarily  reduced the line of credit to a maximum
 amount of $23  million and expects to pay off the  facility by the maturity date using
 proceeds  from the sale of loans and leased  properties.  At December 31, 2005,  BMSBLC
had  outstanding  unfunded commitments of $2.84 million.  Management  expects that due to
scheduled loan  maturities and sales of leased  properties,  BMSBLC will be able to fund
the outstanding commitments.

Long-term
debt at December 31, 2005,  consists of a term note of $5.0 million which bears interest
at a fixed rate of 6.98%  through June 1, 2013,  and $0.14  million of loan
 participations  with  repurchase  options  which bear interest at 7.19% until repaid.
 In January of 2006,  the $0.14  million of loan  participations  were  repaid.  In
February of 2006,  the term note was repaid using proceeds from the bank line of credit
facility, which has a lower interest rate.

Accrued
 liabilities  decreased to $0.93  million at December 31, 2005,  as compared to $0.96
million at December 31, 2004,  primarily  due to the  payment of real estate  taxes on
leased  properties  and to  reductions  in  security  deposits on leased properties.

The
 Company  is using  the  proceeds  from the sale of its  leased  properties  and from the
sale of loans  and loan participations  to reduce its  indebtedness.  These sales cause a
reduction  in the earning  assets of the  Company.  As a result,  the income  available
 for common stock  dividends is reduced.  The Board of Directors  in June,  2004,
 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.  For the
year ended  December 31, 2005, no dividends  were paid to the common stock  shareholders.
 The preferred  stock  dividend of $0.335 per share per quarter ($1.34 annual dividend
per preferred share) was paid during 2005.

The
Company  anticipates that substantially all of its financial service segment loans and
loan  participations  will be sold or will have matured prior to June 30, 2006. In
addition,  the Company  anticipates  selling all of its leased real estate over time;
 however,  as of March  31,  2006,  no  decision  has been made  with  respect  to the
sale of any  specific  leased  properties. Conditions  in the real  estate  market  for
 industrial  and  commercial  buildings  similar  to that  owned by LMOD will  affect
 the availability  of  purchasers,  the prices at which the real estate can be sold, and
the timing of such sales.  The Company  anticipates that proceeds will be sufficient to
pay off the existing  bank debt.  However,  the amount of proceeds  available  after the
payment of the indebtedness cannot be estimated at the present time.

The
consumer  products  segment has incurred net losses and negative cash flows from
operating  activities over the past three years and the Company has an  accumulated
 deficit of $5.3 million at December 31, 2005.  The Company  believes that the cash that
will be generated  from  existing  operations  together  with  existing  cash  balances
 and other  potential  sources of financing  will be sufficient to provide the cash
 necessary to meet  operating and working  capital  requirements  during 2006 and into
2007. The Company anticipates that its bank lines of credit,  note payable and repurchase
 obligations  should be paid off by June 30, 2006 at which time it will have no
 collateralized  assets and should be able to obtain  outside  financing for its working
 capital  needs.  The Company is considering  various financing  alternatives;  however,
 the Company is required to redeem $16.85 million of preferred stock by July 1, 2008, to
the extent permitted under Wisconsin law.

24

---

# Off Balance Sheet
Arrangements

BMSBLC,
 in its ordinary  course of business,  had  undisbursed  loan  commitments and lines of
credit totaling $2.84 million and $4.14  million at December  31, 2005 and 2004,
 respectively.  There were no letters of credit  outstanding  as of December 31, 2005.

# 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, 2005.

|                              | Payments due by period
|----------------------------- | ----------------------
|
|Consumer products segment     |                       
|Operating lease obligations   |                       
|Financial services segment    |                       
|Short-term note *             |                       
|Long-term note *              |                       
|Loan participations **        |                       
|Preferred stock               |                       
|Total contractual obligations |                       

* Long-term note was repaid in
February of 2006 and includes a prepayment penalty of $0.29 million. ** Loan
participation payments are made when principal is paid on the corresponding notes.    All
loan participations were repaid in January of 2006.

# Recent Accounting
Pronouncements

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 supersedes  Accounting  Principles Board ("APB") Opinion No. 25,
 "Accounting for Stock Issued to  Employees".  SFAS 123R is  effective  for the  interim
 period  beginning  January 1, 2006.  The Company  believes  that the adoption  of SFAS
123R will not have a  significant  effect on its  consolidated  financial  statements
 due to the  limited  amount of non-vested outstanding options.

25

---

In May 2005, the FASB issued SFAS
No. 154,  "Accounting  Changes and Error  Corrections"  ("SFAS 154"). This statement is
effective for accounting  changes and  corrections of errors made after January 1, 2006.
 SFAS 154 generally  requires  retrospective  application of prior  periods'  financial
 statements of a voluntary  change in accounting  principle.  However,  this  statement
 does not change the transition  provisions of any existing  accounting  pronouncement,
 including those that are in a transition  phase as of the effective date of SFAS 154.

In December  2005,  the FASB issued
FSP SOP 94-6-1,  "Terms of Loan  Products  That May Give Rise to a  Concentration  of
Credit Risk". This FSP was issued to emphasize the  requirement  to assess the adequacy
of  disclosures  for all lending  products,  especially  loan products whose contractual
features may increase the exposure of the originator,  holder,  investor,  guarantor, or
servicer to risk of nonpayment or realization.  See Note 4 in Notes to Consolidated
Financial Statements.

# 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,  demand for the
 Company's consumer  products,  the degree of success of the  Company's  strategy  to
reduce  expenses  at LMOD,  the effect of not  reaching  the Company's goals of
continuing to expand the Newborn Nursery(R)boutiques with high volume  retailers,
 payment when due of principal and interest on loans made by the  Company,  payment of
rent by lessees on Company  properties,  the  necessity  to make  additions  to the
Company's  loan loss reserve,  the timing of sales of, and the selling  prices,  of the
Company's  leased real estate.  These risks and uncertainties  should  be  considered  in
 evaluating  forward-looking  statements  and  undue  reliance  should  not be placed on
such statements.

|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 variable rate debt. BMSBLC's  fixed rate loans and fixed rate leases are presently
 matched  against  variable rate debt.  Therefore,  an increase of 1% in the interest
rate paid on variable debt would decrease the Company's annual pre-tax profits in an
amount approximating $30,000.

26

---

|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 | 28
|Consolidated Balance Sheets as of December 31, 2005 and 2004                            | 29
|Consolidated Statements of Operations                                                   |   
|For the years ended December 31, 2005, 2004 and 2003                                    | 31
|Consolidated Statements of Shareholders' Equity                                         |   
|For the years ended December 31, 2005, 2004 and 2003                                    | 33
|Consolidated Statements of Cash Flows                                                   |   
|For the years ended December 31, 2005, 2004 and 2003                                    | 34
|Notes to Consolidated Financial Statements                                              | 36
|Financial Statement Schedules                                                          
|Schedule I        Condensed Financial Information of Registrant                         | 61
|Schedule II       Valuation and Qualifying Accounts                                     | 61
|Schedule IV      Mortgage Loans on Real Estate                                          | 62

27

---

REPORT OF INDEPENDENT
REGISTEREDPUBLIC ACCOUNTING FIRM

Board of Directors and
ShareholdersThe Middleton Doll Company

We have audited the accompanying
consolidated balance sheets of The Middleton Doll Company and subsidiaries (the
Company), as of December 31, 2005 and 2004, and the related consolidated
statements of operations, shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2005. We have also audited the financial statement
schedules listed in Item 8. These financial statements and financial statement schedules
are the responsibility of the Companys management. Our responsibility is to express
an opinion on these 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).
Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of The Middleton Doll Company and subsidiaries as of
December 31, 2005 and 2004, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2005, 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.

/s/ Virchow, Krause &
Company, LLP

Milwaukee, WisconsinFebruary
28, 2006

28

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE
SHEETSDecember 31, 2005 and 2004

ASSETS

|                                                 | 2005 | 2004
|------------------------------------------------ | ---- | ----
|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                      |      |     
|Goodwill                                         |      |     
|                                                 |      |     
|Total Consumer Products Assets                   |      |     
|                                                 |      |     
|FINANCIAL SERVICES                               |      |     
|Cash and cash equivalents                        |      |     
|Interest receivable                              |      |     
|Loans held for investment                        |      |     
|Loans held for sale                              |      |     
|Leased properties, net                           |      |     
|Leased properties, net, listed for sale or under |      |     
|contract to be sold                              |      |     
|Property and equipment, net                      |      |     
|Other assets                                     |      |     
|                                                 |      |     
|Total Financial Services Assets                  |      |     
|                                                 |      |     
|TOTAL ASSETS                                     |      |     
|                                                 |      |     

See accompanying Notes
to Consolidated Financial Statements.

29

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE
SHEETSDecember 31, 2005 and 2004

LIABILITIES, MINORITY INTEREST
AND SHAREHOLDERS EQUITY

|                                                           | 2005 | 2004
|---------------------------------------------------------- | ---- | ----
|LIABILITIES                                                |      |     
|CONSUMER PRODUCTS                                          |      |     
|Short-term borrowings                                      |      |     
|Accounts payable                                           |      |     
|Accrued salaries                                           |      |     
|Accrued liabilities                                        |      |     
|                                                           |      |     
|Total Consumer Products Liabilities                        |      |     
|                                                           |      |     
|FINANCIAL SERVICES                                         |      |     
|Commercial paper                                           |      |     
|Lines of credit                                            |      |     
|State of Wisconsin Investment Board notes payable          |      |     
|Loan participations with repurchase options                |      |     
|Accrued liabilities                                        |      |     
|                                                           |      |     
|Total Financial Services Liabilities Excluding             |      |     
|Preferred Shares                                           |      |     
|Preferred shares subject to mandatory redemption, net      |      |     
|                                                           |      |     
|Total Financial Services Liabilities                       |      |     
|                                                           |      |     
|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, 2005 and 2004 |      |     
|Additional paid-in capital                                 |      |     
|Accumulated deficit                                        |      |     
|Treasury stock, 674,010 shares, at December 31, 2005       |      |     
|and 2004, at cost                                          |      |     
|                                                           |      |     
|                                                           |      |     
|                                                           |      |     
|TOTAL LIABILITIES AND                                      |      |     
|SHAREHOLDERS EQUITY                                       |      |     
|                                                           |      |     

See accompanying Notes
to Consolidated Financial Statements.

30

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF OPERATIONSYears Ended December 31, 2005, 2004 and 2003

|                                              | 2005 | 2004 | 2003
|--------------------------------------------- | ---- | ---- | ----
|CONSUMER PRODUCTS                             |      |      |     
|NET SALES                                     |      |      | $   
|COST OF GOODS SOLD                            |      |      |     
|                                              |      |      |     
|Gross Profit                                  |      |      |     
|OPERATING EXPENSES (INCOME)                   |      |     
|Sales and marketing                           |      |      |     
|New product development                       |      |      |     
|General and administrative                    |      |      |     
|Litigation settlements                        |      |      |     
|                                              |      |      |     
|Total Operating Expenses                      |      |      |     
|Net operating loss                            |      |      |     
|OTHER INCOME (EXPENSE)                        |      |     
|Interest expense                              |      |      |     
|Other income, net                             |      |      |     
|                                              |      |      |     
|Net Other Income                              |      |      |     
|Loss before income taxes, minority interest   |      |     
|and intercompany charges                      |      |      |     
|Less: Applicable income tax (expense) benefit |      |      |     
|Minority interest in losses of subsidiaries   |      |      |     
|                                              |      |      |     
|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                               |      |      |     
|Loss on disposal of leased properties         |      |      |     
|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.

31

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF OPERATIONS (Continued)Years Ended December 31, 2005, 2004 and 2003

|                                               | 2005 | 2004 | 2003
|---------------------------------------------- | ---- | ---- | ----
|TOTAL COMPANY                                  |      |      |     
|Income (loss) before income taxes, minority    |      |     
|interest and intercompany activity             |      |     
|Consumer products                              |      |      | $   
|Financial services                             |      |      |     
|                                               |      |      |     
|Total Company                                  |      |      |     
|Income tax (expense) benefit                   |      |      |     
|Minority interest in losses of subsidiaries    |      |      |     
|                                               |      |      |     
|NET (LOSS) INCOME                              |      |      |     
|Preferred stock dividends                      |      |      |     
|                                               |      |      |     
|NET LOSS AVAILABLE TO                          |      |     
|COMMON SHAREHOLDERS                            |      |      | $   
|                                               |      |      |     
|Basic loss per common share                    |      |      | $   
|                                               |      |      |     
|Diluted loss per common share                  |      |      | $   
|                                               |      |      |     
|Weighted average shares outstanding            |      |      |     
|                                               |      |      |     
|SEGMENT RECONCILIATION                         |      |     
|CONSUMER PRODUCTS                              |      |     
|Loss 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.

32

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF SHAREHOLDERS EQUITYYears Ended December 31, 2005, 2004 and 2003

|                                    | Common
stock | Additional
paid-in
capital | Retained
earnings
(Accumulated
deficit) | Treasury
stock | Accumulated
other
comprehensive
income | Total
|----------------------------------- | ------------ | -------------------------- | --------------------------------------- | -------------- | -------------------------------------- | -----
|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        |                                        |      
|Comprehensive and net loss - 2005   |              |                            |                                         |                |                                        |      
|Cash dividends on preferred stock - |              |                           
|5.37% dividend rate                 |              |                            |                                         | --             |                                        |      
|                                    |              |                            |                                         |                |                                        |      
|BALANCES - December 31, 2005        |              |                            | $                                       | 293,441        |                                        | $    
|                                    |              |                            |                                         |                |                                        |      

See accompanying Notes
to Consolidated Financial Statements.

33

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF CASH FLOWSYears Ended December 31, 2005, 2004 and 2003

|                                                              | 2005 | 2004 | 2003
|------------------------------------------------------------- | ---- | ---- | ----
|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                                 |      |      |     
|Gain on sale of property                                      |      |      |     
|Provision for losses on accounts receivable                   |      |      |     
|Provision for oboslete inventory                              |      |      |     
|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 (used in) Operating Activities            |      |      |     
|                                                              |      |      |     
|CASH FLOWS FROM INVESTING ACTIVITIES                          |      |     
|Property and equipment expenditures                           |      |      |     
|Proceeds from sale of equipment                               |      |      |     
|                                                              |      |      |     
|Net Cash Flows used in Investing Activities                   |      |      |     
|                                                              |      |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES                          |      |     
|Net increase (decrease) in short term borrowings              |      |      |     
|Net intercompany transactions                                 |      |      |     
|                                                              |      |      |     
|Net Cash Flows from (used in) 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 received for income taxes                                |      |      |     
|NONCASH INVESTING AND FINANCING ACTIVITIES                    |      |     
|Purchase of land and building from financial services segment |      |      | $   

See accompanying Notes
to Consolidated Financial Statements.

34

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF CASH FLOWS (Continued)Years Ended December 31, 2005, 2004 and 2003

|                                                             | 2005 | 2004 | 2003
|------------------------------------------------------------ | ---- | ---- | ----
|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 properties                        |      |      |     
|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 improvements to leased property                  |      |      |     
|Net intercompany transactions                                |      |      |     
|                                                             |      |      |     
|Net Cash Flows from Investing Activities                     |      |      |     
|                                                             |      |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES                         |      |     
|Net decrease in commercial paper borrowings                  |      |      |     
|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                                       |      |      | $   
|Cash paid for income taxes                                   |      |      | $   
|NONCASH INVESTING AND FINANCING ACTIVITIES                   |      |     
|Sale of land and building to consumer products segment       |      |      | $   
|Loans held for investment transferred to loans held for sale |      |      | $   

See accompanying Notes
to Consolidated Financial Statements.

35

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# 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
consumer products business segment and the financial services business segment.

The consumer products business
segment consists of Lee Middleton Original Dolls, Inc. and its wholly-owned subsidiary,
License Products, Inc. LMOD is a designer and distributor of lifelike collectible and play
dolls; while LPI is a designer and distributor of clocks and home décor products.

The financial services business
segment consists of the Parent and its wholly-owned subsidiary BMSBLC. For the years ended
December 31, 2005, 2004 and 2003, the Parent and BMSBLC operated as a real estate
investment trust (REIT) pursuant to the provisions of Section 856 of the Internal Revenue
Code of 1986, as amended. Prior to January, 2006, the principal business of the segment
was to manage its existing loans and to lease buildings to small businesses. The segment
has participated in loans with third party loan originators. As of January 1, 2006, BMSBLC
merged with and into LMOD with LMOD being the surviving corporation. The financial
services segment is currently in the process of selling a significant portion of its
loans, loan participations and leased real estate properties. The net proceeds from the
sale of assets will be applied to payment of indebtedness. The intention of this segment
of the Company is to no longer participate in new business activities. The Companys
segments conducted substantially all of their business in the United States.

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 relate to the determination of allowances for loan and
lease losses, 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.

36

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# 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.

Loans Held for Sale

A loan is considered held for sale
when management has identified a purchaser for the loan and the purchase is scheduled to
occur during the next twelve months. Loans held for sale are carried at the lower of cost
or market.

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.

Allowance for Rental
Losses

The allowance for rental losses is
established as losses are expected to occur through a provision for losses charged to
earnings. Management reviews the entire rent receivable portfolio when determining the
necessary allowance. Management has determined that no allowance for rental losses is
necessary.

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 $155,000 and $154,833 at December 31, 2005 and
2004, 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, 2005 or
2004.

37

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

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

Inventory

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

Leased Properties

Leased properties are recorded at
cost. 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.

Leased Properties, Listed
for Sale or Under Contract to be Sold

Leased properties are classified as
listed for sale or under contract to be sold, when a property is listed for sale and/or
under contract to be sold within the next twelve months. The properties are carried at the
lower of depreciated cost or at net realizable value. The Company sold three of these
properties during the first two months of 2006 which resulted in a gain of $0.46 million
in 2006. The net carrying value of the properties that were sold was $3.55 million as of
December 31, 2005.

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,
2005.

Revenue Recognition

Revenue is recognized when legal
title passes to the purchaser, which is primarily upon shipment of the product.

Product Development Costs

The costs of product development and
product improvement 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 $953,742, $879,173 and $793,502 for the years ended December 31, 2005, 2004 and
2003, respectively.

38

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

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

Stock Based Compensation

At December 31, 2005, the Company has
a stock-based employee compensation plan which is described more fully in Note 19. 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.

|                                                        | 2005 | 2004 | 2003
|------------------------------------------------------- | ---- | ---- | ----
|Net loss available to common shareholders - as reported |      |      | $   
|                                                        |      |      |     
|Basic loss per common share - as reported               |      |      | $   
|                                                        |      |      |     
|Diluted loss per common share - as reported             |      |      | $   
|                                                        |      |      |     

Income Taxes

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.

At December 31, 2005, the Parent and
its qualified REIT subsidiary, BMSBLC, qualified as real estate investment trusts under
the Internal Revenue Code. Accordingly, they were not subject to income tax on taxable
income that is distributed to shareholders. During 2005, 2004 and 2003, 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.

39

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

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

Income Taxes (continued)

As of January 1, 2006, the Parent and
its subsidiary BMSBLC, merged into LMOD and will no longer qualify as a REIT. Therefore
for the year ending December 31, 2006, the Company (consisting of the Parent, LMOD and
LPI) will be operating as C Corporations under the Internal Revenue Code. The Company
intends to file a consolidated federal income tax return for the year ending December 31,
2006.

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 $542,985, $307,879 and $644,757 for the
years ended December 31, 2005, 2004 and 2003, respectively.

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 consolidated financial statements when they are
funded or related fees are incurred or received.

Derivative Financial
Instruments Designated As Hedges

The Company designates derivative
financial instruments as either fair value hedges or cash flow hedges and records the
hedges on the consolidated balance sheet at 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 during the years ended December 31, 2005 and 2004.

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.

40

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

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

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.

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 equivalentsAccounts receivableInterest
receivable Variable rate loans that reprice frequently where no significant change in
credit risk has occurredShort-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 aboveFixed 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
instrumentsLetters 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.

41

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

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

Recent Accounting
Pronouncements

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 supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees. SFAS 123R is effective for
the interim period beginning January 1, 2006. The Company believes that the adoption of
SFAS 123R will not have a significant effect on its consolidated financial statements due
to the limited amount of non-vested outstanding options.

In May 2005, the FASB issued SFAS No.
154, Accounting Changes and Error Corrections (SFAS 154). This
statement is effective for accounting changes and corrections of errors made after January
1, 2006. SFAS 154 generally requires retrospective application of prior periods
financial statements of a voluntary change in accounting principle. However, this
statement does not change the transition provisions of any existing accounting
pronouncement, including those that are in a transition phase as of the effective date of
SFAS 154.

In December 2005, the FASB issued FSP
SOP 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit
Risk. This FSP was issued to emphasize the requirement to assess the adequacy of
disclosures for all lending products, especially loan products whose contractual features
may increase the exposure of the originator, holder, investor, guarantor, or servicer to
risk of nonpayment or realization. See Note 5 in Notes to Consolidated Financial
Statements.

Reclassification

Certain 2003 and 2004 amounts have
been reclassified to conform with the 2005 presentation. The reclassifications have no
effect on reported amounts of net (loss) income or equity.

# NOTE 2  Liquidity
and Capital Resources

The consumer products segment has
incurred net losses and negative cash flows from operating activities over the past three
years and the Company has an accumulated deficit of $5.3 million at December 31, 2005. The
Company believes that the cash that will be generated from existing operations together
with existing cash balances and other potential sources of financing will be sufficient to
provide the cash necessary to meet operating and working capital requirements during 2006
and into 2007. The Company anticipates that its bank lines of credit, note payable and
repurchase obligations should be paid off by June 30, 2006 at which time it will have no
collateralized assets and should be able to obtain outside financing for its working capital
needs. The Company is considering various financing alternatives; however, the Company is
required to redeem $16.85 million of preferred stock by July 1, 2008, to the extent
permitted under Wisconsin law. (See Note 17.)

42

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 3  Related Entity

At December 31, 2005, the Company
shared common management with InvestorsBancorp, Inc., which owns InvestorsBank (the Bank).
The Company and the Bank had a Management Services and Allocation of Expenses Agreement
(the Agreement) which terminated on December 31, 2005. The Agreement required 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
$748,618, $891,434 and $931,082 for the years ended December 31, 2005, 2004 and 2003,
respectively. Overhead expenses were also shared between the two entities in accordance
with the Agreement. The Company also rented space from the Bank under a lease agreement
which also ended on December 31, 2005. Rent expense was $64,776, $57,996 and $57,996 for
the years ended December 31, 2005, 2004 and 2003, respectively.

# NOTE 4 
Concentrations

The consumer products segments
customers are not concentrated in any specific geographic region. For the year ended
December 31, 2005, the consumer products segment had three customers that accounted for
$4.67 million or 33%, of their total revenue. At December 31, 2005, these customers
accounted for 42% 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.

The consumer products segment
utilizes two main vendors to supply a significant amount of its product.

Approximately 40% 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
granted loans and leased properties to small and medium-sized businesses primarily in
southeastern Wisconsin. As of December 31, 2005 and 2004, respectively, the Company had
loans outstanding to its largest borrower totaling $2.34 million and $3.07 million, which
represented approximately 10% and 9% of the total loans outstanding, respectively.

# NOTE 5  Loans Held
for Investment and Loans Held for Sale

On January 4, 2006, LMOD entered into
an asset purchase agreement to sell substantially all of the loans and loan participations
(previously owned by BMSBLC) to InvestorsBank. It is anticipated that the sale of the
loans and loan participations will be completed through a series of transactions beginning
in January of 2006 and ending no later than June 30, 2006. The purchase price for the sale
of the loans and loan participations will be the total of the principal balance of all
such loans and loan participations, with an aggregate total purchase price anticipated to
be approximately $15.7 million plus accrued interest. As of March 15, 2006, InvestorsBank
had purchased $10.7 million of these loans and loan participations. These loans have been
classified as held for sale loans on the balance sheet as of December 31, 2005. The
Company also anticipates that substantially all other remaining loans will be refinanced
by borrowers at other financial institutions by June 30, 2006.

43

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 5  Loans Held
for Investment and Loans Held for Sale (continued)

Approximately 66% of the
Companys total loans consist of variable-rate loans with terms of one to ten years.
Approximately 22.7% of the Companys loans held for investment consist of variable
rate loans with terms of demand to nine years. At December 31, 2005, the Company did not
have any loans with below market interest rates. Substantially all loans are
collateralized by first or second mortgages on commercial real estate. Commercial real
estate loans are evaluated for the adequacy of repayment sources at the time of the loan
approval and are regularly reviewed for any possible deterioration in the ability of the
borrower to repay the loan. The Company evaluates the credit worthiness of each commercial
customer on an individual basis.

Non-accrual loans were $408,976 and
$983,290 at December 31, 2005 and 2004, respectively. The average recorded amount of
non-accrual loans during 2005 and 2004 was approximately $415,801 and $611,082,
respectively. The interest accrued on the non-accrual loans was $0 and $121,814 at
December 31, 2005 and 2004, respectively. There was no allowance for loan loss related to
these loans at December 31, 2005 and 2004. Interest income on non-accrual loans of $0,
$45,960 and $0 was recognized in the years ended December 31, 2005, 2004 and 2003,
respectively.

Undisbursed loan commitments and
lines of credit totaled $2.84 million and $4.14 million at December 31, 2005 and 2004,
respectively. There were no letters of credit outstanding as of December 31, 2005.

# NOTE 6  Loans Sold

The Company has the ability to sell
loans with the option to repurchase them at a later date. During 2005 and 2004, the
Company sold no loans to third parties with repurchase options. As of December 31, 2005
and 2004, the balance of loan participations sold with repurchase options was $135,254 and
$1,322,807, respectively. These loan participations mature as the corresponding notes
mature. As of January 31, 2006, all loan participations had been repurchased. 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,
2005, the Company was in compliance with these covenants.

# NOTE 7  Inventory

Inventory consists of the following
at December 31:

|                                 | 2005 | 2004
|-------------------------------- | ---- | ----
|Raw materials                    |      |     
|Work in process                  |      |     
|Finished goods                   |      |     
|                                 |      |     
|                                 |      |     
|Allowance for obsolete inventory |      |     
|                                 |      |     
|                                 |      |     
|                                 |      |     

44

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 8  Leased
Properties

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

|Leased Properties, Listed for Sale or Under Contract to be Sold
|---------------------------------------------------------------
|
|Land                                                           
|Buildings                                                      
|                                                               
|Total                                                          
|Less:  accumulated depreciation                                
|                                                               
|Net                                                            
|                                                               
|Leased Properties                                              
|Land                                                           
|Buildings                                                      
|                                                               
|Total                                                          
|Less:  accumulated depreciation                                
|                                                               
|Net                                                            
|                                                               

Depreciation expense on leased properties
was $349,111, $638,666 and $713,576 for the years ended December 31, 2005, 2004 and 2003,
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. All lessees were current with rent payments as
of December 31, 2005 and 2004.

During the first two months of 2006,
the Company sold three leased properties to the current lessees of the buildings. The net
book value of the properties at the time of the sales was $3.54 million and a related gain
of approximately $0.46 million will be recognized in 2006 on such sales.

The following table shows minimum
future rental income by year. It is based on lease agreements in effect at December 31,
2005; however, it excludes three leased properties that were sold during the first two
months of 2006.

|Leased Properties
|-----------------
|Year             
|2006             
|2007             
|2008             
|2009             
|2010             
|                 
|                 
|                 

45

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 9  Property
and Equipment

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

|                               | 2005 | 2004
|------------------------------ | ---- | ----
|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 $870,179, $920,219 and $881,302 and for financial services was $4,502,
$11,027 and $57,875 for the years ended December 31, 2005, 2004 and 2003, 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, 2005 and 2004 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 2005, $0 in 2004 and $166,666 in 2003.

# NOTE 11  Accrued
Liabilities

Accrued liabilities of the consumer
products segment consist of the following at December 31:

|                       | 2005 | 2004
|---------------------- | ---- | ----
|Accrued advertising    |      |     
|Vendor rebates         |      |     
|Other accrued expenses |      |     
|                       |      |     
|                       |      |     
|                       |      |     

46

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 12 
Short-Term Borrowings

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

|                            | 2005 | 2004
|--------------------------- | ---- | ----
|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 was payable upon demand and was
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.

Financial Services:

As of December 31, 2005, BMSBLC has a
line of credit with three participating banks. The line of credit agreement provides for a
maximum line of credit of $30,000,000 less the outstanding principal amount of the 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
23, 2006. 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 $22,820,000 and $30,750,000 at December 31, 2005 and 2004, respectively. Effective
January 1, 2006, BMSBLC voluntarily reduced the line of credit to a maximum amount of
$23,000,000.

The financial services line of
credit is collateralized by a pool of loans with an outstanding balance of $20.5 million
and $31.8 million and leased properties with net carrying value of approximately $13.4
million and $22.2 million as of December 31, 2005 and 2004, respectively.

The line of credit agreements and the
State of Wisconsin Investment Board (SWIB) agreements described in Note 13
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,
2005, BMSBLC was in compliance with all such requirements.

47

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 13  Long-Term
Debt

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

|                                                  | 2005 | 2004
|------------------------------------------------- | ---- | ----
|Financial Services:                               |      |     
|State of Wisconsin Investment Board notes payable |      |     
|Loan participations with repurchase options       |      |     
|(See Note 6)                                      |      |     
|                                                  |      |     
|Total long-term borrowings                        |      |     
|                                                  |      |     

State of Wisconsin
Investment Board

BMSBLC has a term note with SWIB
which bears interest at a fixed rate of 6.98% per year through its maturity and is
collateralized by specific loans with an outstanding balance of $5.53 million and $6.78
million as of December 31, 2005 and 2004, 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, 2005 and 2004, the outstanding principal balance was $5,000,000 and
$5,666,667, respectively. In January of 2006, the loan participation was repurchased and
in February of 2006, the term note was paid in full with proceeds from short-term
borrowings. The prepayment of the term note required a prepayment penalty of $0.29 million
which was expensed in 2006.

# NOTE 14  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 $993,000, $806,000 and $681,000 in 2005, 2004 and 2003,
respectively.

At December 31, 2005, the future
minimum lease payments for each of the remaining years are as follows:

|     | 
|---- | 
|2006 | 
|2007 | 
|2008 | 
|2009 | 
|     | 
|     | 
|     | 

During the second quarter of 2005,
the consumer products segment incurred a charge of $0.35 million related to the remaining
lease payments for a warehouse facility in Columbus, Ohio, which was vacated in the second
quarter of 2005. This charge is included in General and Administrative expenses in the
Statement of Operations. LMOD is currently attempting to sublease the warehouse; however,
efforts to date have been unsuccessful. At December 31, 2005, the balance sheet for the
consumer products segment reflects an obligation for $0.25 million consisting of seven and
one-half months of lease payments of $21,173 per month through August 15, 2006, and four
and one-half months of past due lease payments from 2005.

48

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 15  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 during the years ended December 31, 2005 and 2004.

As a result of hedge arrangements,
the Company recognized a gain of $484,304 on the termination of interest rate swaps during
2003.

# NOTE 16 
Commitments and Contingencies

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.

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 17  Mandatory
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.

49

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004
and 2003

# NOTE 17  Mandatory
Redeemable Preferred Stock (continued)

Mandatorily redeemable preferred
stock consists of the following as of December 31, 2005 and 2004:

|                                                   | 
|-------------------------------------------------- | 
|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                 | 
|                                                   | 

# NOTE 18 
Retirement Plans

LPI and LMOD have 401(k) contribution
plans for eligible employees. Employer contributions to the plans were $19,645, $16,910
and $19,469 for the years ended December 31, 2005, 2004 and 2003, respectively.

The Company provided a supplemental
retirement benefit for an executive officer which is included in the management fee
expense, totaling $130,610 for each of the years ended December 31, 2005, 2004 and 2003,
respectively. These payments were made under the Management Agreement which was approved
by the independent members of the Board of Directors of the Company.

# NOTE 19 
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:

|                                       | 2005                   | 2004   | 2003                  
|-------------------------------------- | ---------------------- | ------ | ----------------------
|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                  |                        |        |                       

50

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 19 
Stockholders Equity (continued)

The following table summarizes
information about Plan awards outstanding at December 31, 2005:

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

The Company applies APB Opinion 25
and related interpretations in accounting for the Plans. 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 Plans been determined based upon the fair value
at the grant dates as prescribed by SFAS No. 123, the Companys pro forma net loss
and loss per share would have been as follows:

|                                   | 2005 | 2004 | 2003
|---------------------------------- | ---- | ---- | ----
|Net loss                           |      |      |     
|As reported                        |      |      | $   
|                                   |      |      |     
|Pro forma                          |      |      | $   
|                                   |      |      |     
|Loss per share (basic and diluted) |      |     
|As reported                        |      |      | $   
|                                   |      |      |     
|Pro forma                          |      |      | $   
|                                   |      |      |     

There were no options granted during
2005 or 2004. The weighted average fair value at date of grant for options granted during
2003 was $0.36. The fair value of options, at date of grant, for options granted in 2003
was estimated using the Black-Scholes option-pricing model with the following assumptions:

|                        | 2003    
|----------------------- | --------
|Expected life (years)   | 10 years
|Risk-free interest rate | 3.44%   
|Expected volatility     | 22.5%   
|Expected dividend yield | 7%      

51

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 19 
Stockholders Equity (continued)

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

|                         | Loss | Shares | Per Share
Amount
|------------------------ | ---- | ------ | ----------------
|2005                     |      |        |                 
|Loss                     |      |        | $               
|                         |      |        |                 
|Effect of options        |      |        |                 
|                         |      |        |                 
|Loss - assuming dilution |      |        | $               
|                         |      |        |                 
|2004                     |      |        |                 
|Loss                     |      |        | $               
|                         |      |        |                 
|Effect of options        |      |        |                 
|                         |      |        |                 
|Loss - assuming dilution |      |        | $               
|                         |      |        |                 
|2003                     |      |        |                 
|Loss                     |      |        | $               
|                         |      |        |                 
|Effect of options        |      |        |                 
|                         |      |        |                 
|Loss - assuming dilution |      |        | $               
|                         |      |        |                 

# NOTE 20  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:

|                                           | 2005 | 2004 | 2003
|------------------------------------------ | ---- | ---- | ----
|Current Expense (Benefit)                  |      |      |     
|Federal                                    |      |      | $   
|                                           |      |      |     
|State                                      |      |      |     
|                                           |      |      |     
|Deferred Expense (Benefit)                 |      |     
|Federal                                    |      |      |     
|State                                      |      |      |     
|                                           |      |      |     
|                                           |      |      |     
|                                           |      |      |     
|Total Provision for Income Taxes (Benefit) |      |      | $   
|                                           |      |      |     

52

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 20  Income Taxes
(continued)

There was no income tax benefit
recognized for the year ended December 31, 2005, due to an increase in the valuation
allowance. 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 year ended December 31, 2003 was the result of the recognition of deferred income
tax benefits of $1,368,698, which resulted primarily from the recognition of certain net
operating losses and other tax carryforwards expected to be utilized for financial
reporting purposes.

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:

|                               | 2005 | 2004 | 2003
|------------------------------ | ---- | ---- | ----
|Loss before income taxes       |      |      | $   
|Less intercompany eliminations |      |      |     
|                               |      |      |     
|Loss subject to income taxes   |      |      | $   
|                               |      |      |     

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

|                                                      | 2005    | 2004    | 2003   
|----------------------------------------------------- | ------- | ------- | -------
|Federal income taxes at statutory rate                | (34.0)% | (34.0)% | (34.0)%
|State income taxes, net of federal benefit            | (3.3)   | (3.3)   | (3.3)  
|Other                                                 | 0.1     | 0.1     | 0.1    
|Benefit of current year federal and state net        
|operating loss carryforwards and other               
|deferred income tax assets not recognized             | 37.2    | 37.2    | --     
|                                                      |         |         |        
|Effective income tax rate before changes in valuation
|allowance                                             | --      | --      | (37.2) 
|Provision for valuation allowance on deferred        
|income tax assets previously recognized               | --      | 148.6   | --     
|                                                      |         |         |        
|Effective Income Tax Expense (Benefit)                | --      | 148.6%  | (37.2)%
|                                                      |         |         |        

53

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 20  Income Taxes
(continued)

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

|                                          |  | 
|----------------------------------------- |  | 
|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        |  | 
|                                          |  | 

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 years ended December 31, 2005 and 2004, the consumer products segment
provided valuation allowances of $1.19 million and $3.32 million, respectively. 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.

54

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 20  Income Taxes
(continued)

As of December 31, 2005, LMOD and LPI
had unused net operating loss carryforwards of approximately $8.6 million available to
offset against future federal taxable income and approximately $5.35 million 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   
|2025   

As of December 31, 2005, LMOD and LPI
had deferred intercompany interest expense carryforwards of approximately $2.1 million
available to offset future federal and state taxable income. The carryforwards have no
expiration date.

# Financial Services:

At December 31, 2005, the Parent and
its subsidiary, BMSBLC, qualified as a real estate investment trust under the Internal
Revenue Code. Accordingly, they were not subject to income tax on taxable income that was
distributed to shareholders. During 2005, 2004 and 2003, 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 $1,779,964, $309,718 and $518,967 in 2005, 2004 and 2003,
respectively, and the corresponding tax paid by the Parent was $546,917, $128,371 and
$183,695, respectively.

# Consolidated:

Income tax (expense) benefit is
summarized as follows:

|                           | 2005 | 2004 | 2003
|-------------------------- | ---- | ---- | ----
|Consumer products segment  |      |      | $   
|Financial services segment |      |      |     
|                           |      |      |     
|                           |      |      | $   
|                           |      |      |     

As of January 1, 2006, the Parent and
its subsidiary BMSBLC, merged into LMOD and will no longer qualify as a REIT. Therefore
for the year ending December 31, 2006, the Company (consisting of the Parent, LMOD and
LPI) will be operating as C Corporations under the Internal Revenue Code. The Company
intends to file a consolidated federal income tax return for the year ending December 31,
2006.

55

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 21 
Distributions

For the years ended December 31,
2005, 2004 and 2003, the Companys Board of Directors declared the following common
stock distributions:

|                                                 | 2005 | 2004 | 2003
|------------------------------------------------ | ---- | ---- | ----
|Total common stock distributions                 |      |      | $   
|                                                 |      |      |     
|Common stock distributions per share (tax basis) |      |      | $   
|                                                 |      |      |     
|Distribution in cash                             |      |      | $   
|                                                 |      |      |     

# NOTE 22  Fair
Value of Financial Instruments

The estimated fair values of
financial instruments at December 31, 2005 and 2004 are as follows:

|                                   | 2005                 | 2004           
|---------------------------------- | -------------------- | ---------------
|Carrying
Amount                    | Estimated
Fair Value | Carrying
Amount
|FINANCIAL ASSETS                   |                      |                
|Cash and cash equivalents          |                      |                
|                                   |                      |                
|Accounts receivable                |                      |                
|                                   |                      |                
|Interest receivable                |                      |                
|                                   |                      |                
|Variable rate loans                |                      |                
|                                   |                      |                
|Fixed rate loans                   |                      |                
|                                   |                      |                
|FINANCIAL LIABILITIES              |                      |                
|Short-term borrowings              |                      |                
|                                   |                      |                
|Accounts payable                   |                      |                
|                                   |                      |                
|Fixed rate long-term debt          |                      |                
|Practicable to estimate fair value |                      |                
|                                   |                      |                
|Not practicable                    |                      |                
|                                   |                      |                
|Redeemable preferred stock         |                      |                
|                                   |                      |                

The estimated fair value of fee
income on letters of credit at December 31, 2005 and 2004 is insignificant. Loan
commitments on which the committed interest rate is less than the current market rate are
also insignificant at December 31, 2005 and 2004.

56

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 22  Fair
Value of Financial Instruments (continued)

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 likely to prepay 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 23 Quarterly
Financial Information (Unaudited)

|                                        
|----------------------------------------
|
|Total revenues                          
|Gross profit                            
|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                          
|Gross profit                            
|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) Gross profit of consumer
products segment only. (2) Due to rounding, the amounts listed in the table above do not
agree in total to annual amounts. (3) Does not include a provision (benefit) for income
taxes due to an increase in the deferred income tax valuation allowance. (4) 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.

57

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 24  The
Middleton Doll Company (Parent Company Only) Financial Information

CONDENSED BALANCE SHEETS

|                                                      | December 31,
|----------------------------------------------------- | ------------
|
|ASSETS                                                |             
|Cash and cash equivalents                             |             
|Investment in and advances to subsidiaries            |             
|Other assets                                          |             
|                                                      |             
|TOTAL ASSETS                                          |             
|                                                      |             
|LIABILITIES AND SHAREHOLDERS EQUITY                  |             
|LIABILITIES                                           |             
|Other liabilities                                     |             
|Preferred shares subject to mandatory redemption, net |             
|                                                      |             
|Total Liabilities                                     |             
|SHAREHOLDERS EQUITY                                  |             
|                                                      |             
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY            |             
|                                                      |             

58

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 24  The
Middleton Doll Company (Parent Company Only) Financial Information (continued)

CONDENSED STATEMENTS OF
OPERATIONS

|                                              | Years Ended December 31,
|--------------------------------------------- | ------------------------
|
|REVENUES                                      |                         
|Interest on loans                             |                         
|Gain on termination of interest rate swaps    |                         
|Equity in income of BMSBLC                    |                         
|Equity in loss 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 AVAILABLE TO                         |                         
|COMMON SHAREHOLDERS                           |                         
|                                              |                         

59

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2005, 2004 and 2003

# NOTE 24  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 (used in) Investing Activities |                         
|                                                   |                         
|CASH FLOWS FROM FINANCING ACTIVITIES               |                         
|Payments on notes payable                          |                         
|Preferred stock dividend paid                      |                         
|Common stock dividend paid                         |                         
|                                                   |                         
|Net Cash Flows used in Financing Activities        |                         
|                                                   |                         
|Net Change in Cash and Cash Equivalents            |                         
|CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR      |                         
|                                                   |                         
|CASH AND CASH EQUIVALENTS - END OF YEAR            |                         
|                                                   |                         

60

---

Schedule ICondensed
Financial Information of Registrant (Refer to footnote 24 of the consolidated financial
statements)

# Schedule IIValuation
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, 2005, are as follows:

|                                          
|------------------------------------------
|Allowance for loan and lease losses:      
|Year ended:                               
|December 31, 2005                         
|December 31, 2004                         
|December 31, 2003                         
|Allowance for doubtful accounts:          
|Year ended:                               
|December 31, 2005                         
|December 31, 2004                         
|December 31, 2003                         
|Allowance for obsolete inventory:         
|Year ended:                               
|December 31, 2005                         
|December 31, 2004                         
|December 31, 2003                         
|Deferred income taxes valuation allowance:
|Year ended:                               
|December 31, 2005                         
|December 31, 2004                         
|December 31, 2003                         

61

---

# 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
12/31/2005 | Principal
amount
of loans
subject to
delinquent
Principal
or
Interest
|---------------- | --- | ------------- | ------------------- | ---------------------- | ----------- | ------------------------ | --------------------------------------------- | ---------------------------------------------------------------------
|Commercial       |     |               |                     |                        |             |                          |                                               |                                                                      
|First Mortgage   |     | 5.69% to      | 1/1/06 to           | N/A                    | N/A         | N/A                      | $  22,552,088                                 | $  186,187                                                           
|                 |     | 8.50%         | 5/1/20              |                        |             |                          |                                               |                                                                      
|Second Mortgage  |     | 6.50% to      | 1/1/06 to           | N/A                    | N/A         | N/A                      | 847,745                                       | $    41,775                                                          
|                 |     | 8.25%         | 2/1/08              |                        |             |                          |                                               |                                                                      
|Third Mortgage   |     | 9.25%         | 10/1/08             | N/A                    | N/A         | N/A                      | 165,344                                       |                                                                      
|                 |     |               |                     |                        |             |                          |                                               |                                                                      
|Total Commercial |     |               |                     |                        |             |                          | 23,565,177                                    |                                                                      
|All others       | (1) | N/A           | N/A                 | N/A                    | N/A         | N/A                      | 224,444                                       | $  181,014                                                           
|                 |     |               |                     |                        |             |                          |                                               |                                                                      
|Total loans      |     |               |                     |                        |             |                          | $  23,789,621                                 |                                                                      
|                 |     |               |                     |                        |             |                          |                                               |                                                                      

|(1) | 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                   |                                 
|Deductions during period     |                                 
|Principal collected on loans |                                 
|                             |                                 
|Loans on balance sheet,      |                                 
|end of period                |                                 
|                             |                                 

62

---

|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, 2005.

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, 2005 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, 2005
(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.

63

---

|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 66, 67 and 68 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

64

---

# 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 31, 2006.

| |                                      
| | -------------------------------------
| | THE MIDDLETON DOLL COMPANY           
| | By:/s/ Salvatore L. Bando            
| | Salvatore L. Bando,                  
| | 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
31, 2006.

|                           |                                                   
|-------------------------- | --------------------------------------------------
|Signature                  | Title                                             
|/s/ Salvatore L. Bando     | President and Chief Executive Officer, Director   
|Salvatore L. Bando         |                                                   
|/s/ Craig R. Bald          | Vice President Finance and Chief Financial Officer
|Craig R. Bald              | (Principal Financial and Accounting Officer)      
|/s/ Kenneth A. Werner, Jr. | Director                                          
|Kenneth A. Werner, Jr      |                                                   
|/s/ Peter A. Fischer       | Director                                          
|Peter A. Fischer           |                                                   
|/s/ David A. Geraldson, Sr | Director                                          
|David A. Geraldson, Sr     |                                                   

65

---

# 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).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

66

---

|            |                    
|----------- | -------------------
|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 | Ninth
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 May 17, 2005 (incorporated by reference
to Exhibit 4.11 to the Companys Form 10-K for the year ended December 31, 2005).
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.12 | Tenth
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., successor by merger to Firstar Bank Milwaukee,
N.A.), as Agent, dated June 24, 2005 (incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K, dated June 24, 2005, as filed with the Securities and
Exchange Commission on July 22, 2005).
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.13 | 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).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.14 | 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).
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.15 | 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).
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

67

---

|10.4 | Loan
and Real Estate Services Agreement dated October 14, 2005, by and between InvestorsBank,
The Middleton Doll Company, and Bando McGlocklin Small Business Lending Corporation.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10.5 | Asset
Purchase Agreement dated January 4, 2006, by and between InvestorsBank, The Middleton
Doll Company, and Lee Middleton Original Dolls, Inc. (incorporated by reference to
Exhibit 2 to Current Report on Form 8-K, dated January 4, 2006, as filed with the
Securities and Exchange Commission on January 10, 2006).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|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.

68