# UNITED
STATESSECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549

# FORM 10-KSB

|[X] | Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
               1934 For the fiscal year ended December 31, 2006;
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

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(Name of small business issuer in its charter)

|                                                               |                                     
|-------------------------------------------------------------- | ------------------------------------
|Wisconsin                                                      | 39-1364345                          
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.)
|1050 Walnut Ridge Drive                                       
|Hartland, Wisconsin                                            | 53029-8303                          
|(Address of principal executive offices)                       | (Zip Code)                          

Issuers telephone
number: (262) 369-8163

Securities registered
under Section 12(b) of the Exchange Act:
                                                                 None

Securities registered
under Section 12(g) of the Exchange Act:

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

Check
whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [   ]

Check
if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B
contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [   ]

Indicate
 by check mark  whether  the  registrant  is a shell  company  (as  defined in Rule 12b-2
of the  Exchange  Act.) Yes [   ]   No   [X]

The
issuers revenues for its most recent fiscal year were $15,651,765.

The aggregate
market value of voting and non-voting common equity held by non-affiliates of the
registrant at June 30, 2006 was $1,863,795. The number of shares of common stock
outstanding at March 22, 2007 was 3,727,589.

DOCUMENTS
INCORPORATED BY REFERENCE:

Portions of the The Middleton Doll
Company Proxy Statement for the 2007 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 fiscal year) are, upon such filing, to be incorporated by reference
into Part III.

Transitional
Small Business Disclosure Format (Check one):     Yes   [   ]   No   [X]

---

# THE MIDDLETON DOLL
COMPANY Index to Annual Report on Form 10-KSBFor the Year Ended December 31, 2006

|PART I   |          |                                                                         | 3 
|-------- | -------- | ----------------------------------------------------------------------- | --
|         | Item 1.  | Description of Business                                                 | 3 
|         | Item 2.  | Description of Property                                                 | 7 
|         | Item 3.  | Legal Proceedings                                                       | 8 
|         | Item 4.  | Submission of Matters to a Vote of Security Holders                     | 8 
|PART II  |          |                                                                         | 8 
|         | Item 5.  | Market for Common Equity, Related Stockholder Matters and              
|         |          | Small Business Issuer Purchases of Equity Securities                    | 8 
|         | Item 6.  | Managements Discussion and Analysis for Plan of Operation              | 9 
|         | Item 7.  | Consolidated Financial Statements                                       | 20
|         | Item 8.  | Changes In and Disagreements With Accountants on                       
|         |          | Accounting and Financial Disclosure                                     | 53
|         | Item 8A. | Controls and Procedures                                                 | 53
|         | Item 8B. | Other Information                                                       | 53
|PART III |          |                                                                         | 54
|         | Item 9.  | Directors, Executive Officers, Promoters, Control Persons and Corporate
|         |          | Governance; Compliance With Section 16(a) of Exchange Act               | 54
|         | Item 10. | Executive Compensation                                                  | 54
|         | Item 11. | Security Ownership of Certain Beneficial Owners and Management and     
|         |          | Related Stockholder Matters                                             | 54
|         | Item 12. | Certain Relationships, Related Transactions, and Director Independence  | 54
|         | Item 13. | Exhibits                                                                | 54
|         | Item 14. | Principal Accountant Fees and Services                                  | 54

2

---

# Part I

|Item 1. | Description
of Business
|------- | -----------------------

The
Middleton Doll Company (the Company) was incorporated in 1980 and presently
consists of two business segments, the consumer products business segment and the
financial services business segment. The Company, when referred to singularly and not with
its subsidiaries, is referred to herein as the Parent.

The
consumer products business segment is a component of Lee Middleton Original Dolls, Inc.
(LMOD), which was incorporated in 1993, and its wholly-owned subsidiary
License Products, Inc. (LPI), which was incorporated in 1990. LMOD is a
designer and distributor of lifelike collectible and play dolls. LPI is a designer and
distributor of clocks and home décor products.

Prior
to January 1, 2006, the financial services business segment 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
business segment began selling substantially all of its loans, loan participations and
leased real estate properties (the Financial Services Assets). Substantially
all of the Financial Services Assets were sold during the year ended December 31, 2006.
The net proceeds from the sale of the Financial Services Assets were used to pay off
indebtedness, to fund operations, and to partially redeem outstanding preferred stock. The
Company does not intend to continue in the financial services business segment after the
remaining assets of the segment are sold.

3

---

For
the year ended December 31, 2005, the Parent and BMSBLC were operated as a tax-exempt real
estate investment trust (REIT) pursuant to the provisions of Section 856 of
the Internal Revenue Code of 1986, as amended (the Code). To retain its tax
exempt status, a REIT must be in compliance with certain tests concerning the nature of
its assets and its income. In addition, a REIT must distribute substantially all of its
taxable income each year in dividends to its shareholders. LMOD and LPI are each operated
as C Corporations under the Code and are subject to corporate income tax rates. As a
result of BMSBLCs merger with and into LMOD, BMSBLC no longer qualifies as a REIT.
Therefore for the year ended December 31, 2006, the Company (consisting of the Parent,
LMOD and LPI) operated as a C Corporation under the Code and intend to file a consolidated
federal income tax return.

On
September 3, 1997, the Company capitalized InvestorsBancorp, Inc. (IBI), a
bank holding company, for approximately $6.2 million and subsequently distributed all of
the outstanding shares of IBI to the Companys shareholders. For the year ended
December 31, 2005, the Company and IBI, together with IBIs wholly-owned subsidiary,
InvestorsBank (the Bank), shared common office space and personnel. The
expenses shared between the Company and the Bank were allocated pursuant to a Second
Amended and Restated Management Services and Allocation of Expenses Agreement dated
January 1, 2004 (the Management Agreement). On January 4, 2006, LMOD entered
into an asset purchase agreement with the Bank pursuant to which it agreed to sell
substantially all of its loans and loan participations to the Bank for an aggregate total
purchase price of $15.58 million, plus accrued interest. The purchase price for the sale
of the loans and loan participations was the outstanding principal balance of all such
loans and loan participations. The Bank completed this transaction on September 8, 2006.
In addition, the Bank separately purchased $4.16 million of loans and loan participations
from LMOD under substantially similar terms.

As
of January 1, 2006, Salvatore L. Bando was appointed as the Companys President and
Chief Executive Officer and Craig R. Bald was appointed as the Companys Vice
President  Finance and Chief Financial Officer. Kenneth A. Werner, Jr., became a
director of the Company on January 1, 2006. Also as of January 1, 2006, Chief Executive
Officer, George R. Schonath, Vice President Jon McGlocklin and Vice President 
Finance, Susan Hauke, ceased to be officers and/or directors of the Company. Messrs.
Schonath and McGlocklin and Ms. Hauke remain as officers and/or directors of the Bank and
IBI. The Bank administered the loan and real estate portfolios of the Company from January
1, 2006 to June 30, 2006.

The
consumer products business segment has incurred net losses and negative cash flows from
operating activities over the past four years and the Company had an accumulated deficit
of $5.66 million at December 31, 2006. The sale of the Financial Services Assets during
2006 generated sufficient cash to allow the Company to pay off debt, to fund operations,
and to partially redeem shares of the Companys outstanding preferred stock. Absent any
adverse factors outside the control of the Company, management expects that the cash that
will be generated from additional asset sales and existing operations together with
existing cash balances and other potential sources of financing will be sufficient to
provide the necessary cash to meet operating and working capital requirements through June
30, 2008. The Company is required to redeem $10.37 million of preferred stock by July 1,
2008, to the extent the Company has legally available funds for the redemption and it is
otherwise permitted under Wisconsin law. (See Note 15 of the Notes to Consolidated
Financial Statements, in Item 7 Consolidated Financial Statements, herein.)
The Company is considering various financial alternatives in order to address all of its
financial obligations, including the required redemption of preferred stock.

The
following table sets forth (in thousands of dollars) revenues attributable to the
Companys principal product groups for each of the last two years.

|                     
|---------------------
|Revenues             
|Loan Portfolio       
|Real Estate Portfolio
|Dolls                
|Time Pieces          
|Other                
|                     
|Total                
|                     

4

---

Due
to the reduction in earning assets and the resulting decrease in income, in June, 2004 the
Board of Directors changed the common stock dividend policy from the payment of quarterly
dividends to the payment of a discretionary annual dividend payable in January for the preceding year.
However, for the years ended December 31, 2006 and 2005, no dividends were paid to the
common stock shareholders and the Company does not anticipate paying any dividends on the
common stock in the foreseeable future. The preferred stock dividend of $0.335 per share
per quarter ($1.34 annual dividend per preferred share) was paid during 2006 and 2005. See "Risk Factors."

# Consumer Products

LMOD
is headquartered in Columbus, Ohio, and designs and distributes lifelike collectible and
play dolls through a dealer network and through major national retailers. 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. In recent
years the demand for collectible dolls has decreased resulting in a significant decrease
in sales at LMOD as shown in the above table. Due to intense pricing competition, LMOD
transferred doll production to a contract manufacturer in China in 2004. In 2005, a new
management team at LMOD began to focus on reducing operating expenses, controlling
inventory levels and developing new products and marketing strategies. In August, 2006
LMOD announced the introduction of a new and comprehensive collection of play dolls, which
were available for the 2006 holiday season. The new 13-doll family of PlayBabies provides
a playmate for each stage of a young girls early development, from newborn through
age four. The series begins with three dolls for newborns, with additional dolls for the
six month, one year, 18 month, two, three and four-year age groups. Additional dolls,
clothing and accessories for the PlayBabies line is being introduced in 2007. The existing
Newborn Nursery® dolls continue to appeal to young girls from age five through the
pre-teen years. In 2007, the Newborn Nursery® concept will be expanded to include
mini-nurseries in selected locations. The Artist Studio Collection
(ASC) of artist-designed collectible dolls is being expanded in 2007 to
include new dolls from new designers.

LPI
is headquartered in Hartland, Wisconsin, and designs and distributes clocks and home
décor products through major national retailers. LPI imports finished goods from a
manufacturer in China and is in competition with various other clock and home décor
companies including Ingrahm, Infinity Instruments and Timewerks. Net sales at LPI have
also declined recently and management is presently engaged in the process of attempting to
expand LPIs customer base.

The
revenues for the consumer products business segment are highly dependent upon sales during
the Christmas holiday season. For the years ended December 31, 2006 and 2005,
approximately 39% and 33%, respectively, of the consumer products business segment
revenues occurred in the fourth quarter. Additionally, five large customers accounted for
approximately 49% of net sales for the consumer products business segment during 2006.
During 2005, three large customers accounted for approximately 33% of net sales for the
consumer products business segment. No individual customer accounted for more than 10% of
total sales in 2006 and 2005.

The
consumer products business segment imports substantially all of its finished goods from
two suppliers in China and relies on those 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 product. During 2006, finished goods prices increased due to
increases in labor costs and resin prices.

Patents
and trademarks are not material to the Companys business. However, the Company has
engaged in litigation in recent years to prevent competitors from infringing on the
unique, copyrighted designs of its collectible dolls. Additionally, LMOD pays royalties to
the designers of its dolls. The royalty arrangements vary among the designers and range
from 1% to 3% of sales of those dolls which were sculpted by the designer. LMODs
expense for royalties was approximately $205,000 for the year ended December 31, 2006, and
$212,000 for the year ended December 31, 2005. During the years ended December 31, 2006
and 2005, the royalty arrangement with LMODs primary designer required a minimum
annual guaranteed royalty payment of $200,000. The guaranteed minimum annual royalty
amount is not applicable for 2007 due to the expiration of the contract period.

5

---

The
consumer products business segment employs approximately 66 people of which 44 are
considered full-time employees. At LMOD, approximately nine full-time and eight part-time
employees are subject to a collective bargaining agreement, which expires on April 30,
2009. Management and accounting duties for the financial services business segment are
performed by employees of LPI.

The
consumer products business segment incurs new product development costs at LMOD and at
LPI. New product development costs for the year ended December 31, 2006, were
approximately $1.01 million and for the year ended December 31, 2005, were approximately
$0.95 million. These costs are not directly charged to customers.

# Financial Services

At
December 31, 2006, LMODs loan portfolio consisted of six loans totaling $463,575.
Management expects that one loan totaling $11,763 will be paid off in 2007 and one loan
totaling $56,062 will be paid off in 2008. The remaining loan balance of $395,750 is
comprised of four non-accrual loans to two borrowers. Two of the non-accrual loans
totaling $227,963 are presently in foreclosure proceedings. During the year ended December
31, 2006, management established a loan loss allowance of $250,000 against the non-accrual
loans. No interest income was accrued or received on these non-accrual loans during the
years ended December 31, 2006 and 2005.

During
2006, LMOD also sold eleven of the twelve leased properties it owned at December 31, 2005,
which resulted in a net gain of $2.24 million. During the third quarter of 2006, a
provision for impairment of leased properties of $98,812 was recorded on a vacant leased
property which was sold in the fourth quarter of 2006.

At
December 31, 2006, LMODs real estate portfolio consisted of one commercial leased
property, located in Oconomowoc, Wisconsin, with a carrying cost of $1.41 million. The
property is presently leased to an unrelated party through July 15, 2007. The lease
requires the lessee to pay all operating expenses including utilities, insurance and
taxes. In accordance with the terms of the lease, the lessee has given advance notice that
they will be vacating the property as of July 15, 2007. For federal tax purposes, the tax
basis of the building is $1.57 million, which is being depreciated by the straight line
method over thirty-nine years. The property is presently listed for sale for $2.0 million.

The
net proceeds from the sale of the Financial Services Assets were used to pay off
indebtedness, to fund operations, and to partially redeem shares of the Companys
outstanding preferred stock. The Company does not intend to continue the financial
services business segment after the remaining assets of the segment are sold.

# Risk Factors

In addition to the other information
set forth or incorporated by reference in this Annual Report of Form 10-KSB, 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 significantly 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.

6

---

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. 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.

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

Four customers accounted for
approximately 45% of net sales for our consumer products segment during 2006. 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, or pay dividends on our preferred stock.

We are required to redeem $10.37
million of preferred stock by July 1, 2008, to the extent permitted under Wisconsin law.
To the extent we have legally available funds for the redemption, we are obligated to
redeem the preferred stock at a price of $25 per share plus accrued dividends, but we do
not expect to generate sufficient funds from the sale of the remaining assets of our
financial services segment to fully redeem the preferred stock. We will only have
sufficient funds to redeem the preferred stock and to continue to pay dividends on the
preferred stock if our consumer products segment can generate sufficient earnings and/or
we are able to raise funds from other sources.

|Item 2. | Description
of Property
|------- | -----------------------

The
Companys headquarters are located at 1050 Walnut Ridge Drive, Hartland, Wisconsin,
in a commercial building owned by LPI. The building has approximately 17,000 square feet
of office space and approximately 50,000 square feet of warehouse space. A portion of the
office space is leased, on a month-to-month basis, to an unrelated party. The land and
building have a carrying cost of $3.46 million and are presently listed for sale at $4.4
million. For federal tax purposes, the tax basis of the building is $3.13 million, which
is being depreciated by the straight line method over thirty-nine years.

Beginning
May 1, 2006, LMOD relocated its corporate headquarters to leased office space in Columbus,
Ohio, in order to reduce operating expenses. The current lease for 7,400 square feet of
office space expires August 31, 2008. Prior to May 1, 2006, LMODs headquarters were
located in Westerville, Ohio, in 18,800 square feet of leased office space. Additional
retail and warehouse space is presently located in Belpre, Ohio, in a 48,000 square foot
building owned by LMOD. The land and building have a carrying cost of $1.22 million. For
federal tax purposes, the tax basis of the building is $1.74 million, which is being
depreciated by the straight line method over thirty-one years.

7

---

From
June, 2000 until August, 2006, LMOD leased a 44,100 square foot warehouse facility in
Columbus, Ohio, which was used for distribution and for the storage of raw materials and
finished goods. Warehouse operations were moved to the Belpre location in June, 2005, in
order to reduce operating expenses. A retail outlet store in West Virginia was leased on a
month-to-month basis until December 31, 2006, when it was closed. A retail store in the
Polaris Fashion Mall in Columbus, Ohio, is leased until August 31, 2008.

|Item 3. | Legal
Proceedings
|------- | -----------------

As
of the date of this filing, LMOD (previously known as BMSBLC) is engaged in a foreclosure
proceeding with regard to two loans. On April 4, 2006, a foreclosure action was brought in
the State of Wisconsin, Milwaukee County Circuit Court, by LMOD against Benedict J. and
Grace T. Kosmatka. The suit is seeking a judgment in the amount of approximately $460,000.

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

No
matter was submitted to a vote of security holders during the quarter ended December 31,
2006.

# Part II

|Item 5. | Market
for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of
Equity Securities
|------- | --------------------------------------------------------------------------------------------------------------

The
common stock of the Company is traded on the OTC Bulletin Board under the symbol
DOLL. The following table provides the high and low sales price for the
Companys common stock and the cash dividends paid per share for 2006 and 2005:

|               | Common Stock | Cash Dividends
|-------------- | ------------ | --------------
|High           | Low         
|2006           |              |               
|First Quarter  | $    0.700   | $    0.530    
|Second Quarter | $    0.650   | $    0.350    
|Third Quarter  | $    0.500   | $    0.280    
|Fourth Quarter | $    0.350   | $    0.170    
|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    

As
of March 1, 2007, there were approximately 652 shareholders of record of the
Companys common stock.

For
the years ended December 31, 2006 and 2005, no dividends were paid to the common stock
shareholders. In June, 2004, the Board of Directors changed the common stock dividend
policy from the payment of quarterly dividends to the payment of an annual dividend
payable in January for the preceding year, at the discretion of the Board. The Company
does not anticipate paying any dividends on the common stock in the foreseeable future.

9

---

In
November, 2006, the Companys Board of Directors authorized, and the Company
commenced, a tender offer to redeem up to 246,154 shares of preferred stock (with a right
to redeem up to an additional 13,483 shares) at a price of $16.25 per share. Shareholders
tendered 348,538 shares of preferred stock and the Company redeemed 259,574 shares of
preferred stock at $16.25 per share in December, 2006. Shareholders who tendered their
preferred stock in this offering did not receive any dividend payment for the quarter
ended December 31, 2006.

The
following table discloses information regarding the shares of preferred stock redeemed in
the tender offer during the fourth quarter of fiscal 2006.

|Period                    | Total
Number
of Shares
Purchased |     | Average
Price
Paid Per
Share |     | Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs |     | Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans
or Programs |       
|------------------------- | -------------------------------- | --- | ---------------------------- | --- | -------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------------------ | ------
|October 1 to October 31   | --                               |     | --                           |     | --                                                                               |     | None                                                                           |       
|November 1 to November 30 | --                               |     | --                           |     | --                                                                               |     | None                                                                           |       
|December 1 to December 31 | 259,574                          | (1) | $16.25                       | (1) | 259,574                                                                          | (1) | None                                                                           | (1)(2)
|Total/Average             |                                  |     | $16.25                       |     | 259,574                                                                          |     | None                                                                           |       
|                         

(1)       
          On November 1, 2006, the Board of Directors of the Company authorized the
          repurchase of up to 246,154 shares of the Companys preferred stock through
          a tender offer, with the right to accept for purchase pursuant to the tender
          offer an additional 13,483 shares of the preferred stock, each at a price per
          share of $16.25 (a maximum of $4,219,101). The Company announced and commenced
          the tender offer on November 20, 2006. The tender offer expired on December 19,
          2006.

(2)       
          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 had no
          expiration date. The Company did not repurchase any shares under the program
          during 2006. As of December 31, 2005, the Company had the authority to
          repurchase 67,700 shares under the program. On August 17, 2006, the Board of
          Directors cancelled the authorization to repurchase the remaining 67,700 shares.

|Item 6. | Managements
Discussion and Analysis of Plan of Operation
|------- | ---------------------------------------------------------

# Overview

The
amounts presented in this Item 6 as of December 31, 2006 and December 31, 2005 include the
consolidation of the Companys consumer products and financial services business
segments. The term Company, when used in this Item 6, refers to the Parent,
LMOD and LPI on a consolidated basis.

Consumer Products

During
the past five years the Company has experienced a significant decrease in net sales within
the consumer products business segment, as shown in the following table. LMODs net
sales decreased approximately $9.4 million and LPIs net sales decreased
approximately $2.0 million over the five year period. The consumer products business
segment must significantly increase net sales in order to generate a positive cash flow
from operations.

|          
|----------
|12/31/2006
|12/31/2005
|12/31/2004
|12/31/2003
|12/31/2002

9

---

At
LMOD, a new management team is focusing on reducing operating expenses, controlling
inventory levels and developing new products and marketing strategies that reflect
changing market conditions. In August, 2006, LMOD announced the introduction of a new and
comprehensive collection of play dolls. The new 13-doll family of PlayBabies provides a
playmate for each stage of a young girls early development, from newborn through age
four. The series begins with three dolls for newborns, with additional dolls for the six
month, one year, eighteen month, two, three and four-year age groups. Additional dolls,
clothing and accessories for the PlayBabies line is being introduced in 2007. The existing
Newborn Nursery® dolls continue to appeal to young girls from age five through the
pre-teen years. In 2007, the Newborn Nursery® concept will be expanded to include
mini-nurseries in selected locations. The ASC line of artist-designed
collectible dolls is being expanded in 2007 to include new dolls from new designers.

At
LPI, management has been reducing inventory levels and actively seeking to expand the
customer base. During the past year, LPI added several new customers and certain existing
customers have expanded the product lines that they carry.

Financial Services

As
discussed previously, during the year ended December 31, 2006, the Bank purchased $19.74
million of loans and loan participations from LMOD and $3.58 million of loans were paid
off by borrowers. Also during 2006, eleven leased properties were sold to unrelated
parties which resulted in net proceeds of $14.00 million. At December 31, 2006, the
financial services business segments remaining assets totaled $3.52 million and
consisted primarily of cash and one leased property. The Company does not intend to
continue in the financial services business segment after the segments assets are
sold.

The
proceeds from the sales of the Financial Services Assets were primarily used to pay off
$27.96 million of outstanding debt, to advance $1.85 million to the consumer products
business segment for use in funding the operations of the consumer products business
segment, to redeem shares of the preferred stock for an aggregate price of $4.22 million
and to pay $0.89 million in preferred stock dividends.

After
the merger of BMSBLC with and into LMOD on January 1, 2006, all intercompany loans were
eliminated on the books of the Parent, BMSBLC, LMOD and LPI. During the year ended
December 31, 2005, before intercompany eliminations, interest expense for the consumer
products business segment and interest income to the financial services business segment
was $1.05 million on intercompany loans.

Pursuant
to a Loan and Real Estate Services Agreement (the Loan Services Agreement),
the Bank administered the loan and real estate portfolios of the Company from January 1,
2006 to June 30, 2006. The Bank received a monthly management fee equal to (a) 1/12 of
0.25% multiplied by the total outstanding principal balance of loans under management, (b)
1/12 of 0.25% multiplied by the total cost of all of the properties originally acquired by
BMSBLC from Bando McGlocklin Real Estate Investment Corporation (the Bando
Investment Properties) and (c) 6% of the rents from the real estate portfolio other
than the Bando Investment Properties. For the year ended December 31, 2006, management
fees paid to the Bank totaled $45,139. Between January 1, 2006, and June 30, 2006, Ms.
Hauke, Chief Financial Officer of the Bank, was required to provide a maximum of 140 hours
of accounting services under the Loan Services Agreement for an aggregate fee of $17,500.
Also under the Loan Services Agreement for the six months ended June 30, 2006, LMOD paid
the Bank a fee of $19,554 for rent, real estate taxes, and building related and overhead
expenses. No additional fees were paid under the Loan Services Agreement. The Loan
Services Agreement was terminated effective June 30, 2006.

For
the year ended December 31, 2005, the loan and real estate portfolios of the financial
services business segment were administered and managed by the Bank under the Management
Agreement using the terms of (a), (b) and (c) above. The Management Agreement also
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 for the year
ended December 31, 2005 totaled $748,618. Overhead expenses were also shared between the
two entities in accordance with the Management Agreement. The Company also rented space
from the Bank under a lease agreement which ended on December 31, 2005. Rent expense for
the year ended December 31, 2005, was $64,776.

10

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George
R. Schonath, was the President and Chief Executive Officer of the Parent until December
31, 2005 and provided services to the financial services business segment under the
Management Agreement until December 31, 2005. However, Mr. Schonath was not separately
compensated by any of the Companys entities. The Bank is a wholly-owned subsidiary
of IBI, which is owned by George Schonath and members of his family.

# 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 and excess inventory. Inventories are valued at the 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 excess quantities, 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 are 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, 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.

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.

11

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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.

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, allowances for loan losses, and allowances for impairment of leased properties.

Results of Operations for the
years ended December 31, 2006 and December 31, 2005

The
Companys total net loss applicable to common stock shareholders for the year ended
December 31, 2006 was $0.38 million, or $0.10 per common share (diluted), as compared to
$1.55 million, or $0.42 per common share (diluted), for the year ended December 31, 2005.
The Company recorded a $2.27 million gain on the redemption of certain shares of the
Companys preferred stock in December, 2006.

The
consumer products business segments net loss increased $1.49 million when comparing
the year ended December 31, 2006 to the year ended December 31, 2005. Net sales decreased
$2.29 million and gross profit decreased $1.96 million when comparing the two years. The
reduction in gross profit was offset by a reduction in operating expenses of $0.78
million, before litigation settlements. During the third quarter of 2005, LMOD received
$225,000 in proceeds from the settlement of a copyright infringement lawsuit which reduced
the 2005 operating expenses.

The
financial services business segments net income increased $0.39 million when
comparing the year ended December 31, 2006 to the year ended December 31, 2005, primarily
due to the sale of leased properties. Substantially all of the Financial Services Assets
were sold during the year ended December 31, 2006. The net proceeds from the sale of the
Financial Services Assets was used to pay off indebtedness and to partially redeem shares of
the Companys outstanding preferred stock. The Company does not intend to continue
the financial services business segment after the segments remaining assets are
sold.

Consumer Products

The
consumer products business segments net loss for the year ended December 31, 2006,
was $3.41 million. The cash required to finance this loss was partially provided by a
reduction in accounts receivable and by reductions in inventory levels. Also, during 2006,
the financial services business segment provided $1.85 million in cash to the consumer
products business segment.

Net
sales from the consumer products business segment for the year ended December 31, 2006,
decreased 16% to $12.04 million from $14.33 million for the year ended December 31, 2005.
Net sales at LMOD decreased $1.49 million and net sales at LPI decreased $0.80 million.
Sales to dealers of ASC dolls decreased $1.79 million and sales of play dolls decreased
$0.85 million. These sales decreases were offset by the introduction of the new PlayBabies
line at the end of 2006. The demand for the PlayBabies line exceeded managements
projections and additional PlayBabies product was shipped by air from China to meet the
fourth quarter demand. At the present time twenty-eight Newborn Nursery® boutiques
remain open which accounted for approximately 12% of net sales in 2006. The exclusivity
agreement for Newborn Nursery® boutiques with the Saks Department Store Group expires
December 1, 2007. LPIs sales decreased due to overall reductions in ordering levels
from existing customers.

12

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Cost
of goods sold decreased 3% to $8.92 million for the year ended December 31, 2006, compared
to $9.23 million for the year ended December 31, 2005. Total gross profit margin decreased
to 26% from 36% in the prior year. LMODs gross profit margin decreased to 27% from
38% primarily due to special incentive ordering packages for ASC dolls and play dolls,
which were offered to reduce inventory levels. Increased raw material costs from China
also contributed to the reduction in the gross profit margin. Due to the need to air ship
PlayBabies products in the fourth quarter of 2006, the PlayBabies line did not contribute
significantly to gross profit in 2006. LPIs gross profit margin decreased to 25%
from 32% due to price concessions on certain product lines.

Total
operating expenses of the consumer products business segment for the year ended December
31, 2006, were $6.70 million compared to $7.26 million for the year ended December 31,
2005, an 8% decrease. During the third quarter of 2005, LMOD received $225,000 in proceeds
from the settlement of a copyright infringement lawsuit which reduced the 2005 operating
expenses. Sales and marketing expense decreased $0.16 million at LMOD and $0.05 million at
LPI when comparing the year ended December 31, 2006 to 2005. LMOD increased spending for
dealer promotional materials, but this increase was offset by a reduction in expenses
related to the introduction of Newborn Nursery® boutiques in 2005. At LPI the decrease
in expense was primarily due to a reduction in outside sales commissions. New product
development costs increased $0.07 million when comparing the year ended December 31, 2006
to the year ended December 31, 2005 due to development costs related to the introduction
of the PlayBabies line. General and administrative expenses decreased $0.64 million when
comparing the two years. At LMOD the relocation of the office and warehouse space as well
as a reduction in personnel related costs and depreciation contributed to the reduction in
general and administrative expenses. LPIs general and administrative expenses
decreased slightly when comparing the two years primarily due to a decrease in warehouse
expense.

Other
income decreased $0.09 million when comparing the year ended December 31, 2006 to 2005.
During the year ended December 31, 2005, LMOD received income relating to special projects
which did not reoccur in 2006. LPIs other income decreased when comparing the two
years due to a reduction in rental income which LPI received from a tenant in its
building.

For
the years ended December 31, 2006 and December 31, 2005, no income tax expense (benefit)
was recognized due to changes in the deferred income tax valuation allowance. Management
determined in 2004, based on the level of the continuing losses of the consumer products
business 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 business 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 2026. At
December 31, 2006 no income tax expense was recorded and there were unused net operating
loss carryforwards of approximately $12.3 million to be used to offset against future
federal taxable income.

Financial Services

The
financial services business segments net income was $1.66 million for the year ended
December 31, 2006, compared to net income of $1.27 million for the year ended December 31,
2005.

Interest
income on loans decreased 81% to $0.32 million for the year ended December 31, 2006, as
compared to $1.72 million for the year ended December 31, 2005. The decrease in interest
income was due to loan payoffs and the sale of loans and loan participations. As discussed
previously, as of September 8, 2006, LMOD completed the sale of substantially all of its
loans and loan participations to the Bank. During the year ended December 31, 2006, the
Bank purchased $19.74 million of loans and loan participations and $3.58 million of loans
were paid off. At December 31, 2006, LMODs loan portfolio consisted of six loans
totaling $463,575. Four of these loans to two borrowers, totaling $395,751, are
non-accrual loans and two of the four loans are presently in  foreclosure proceedings. In the third
quarter of 2006, management established an allowance for loan losses of $250,000 against
the non-accrual loans.

13

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Rental
income decreased 57% to $0.77 million for the year ended December 31, 2006, as compared to
$1.80 million for the year ended December 31, 2005, due to leased property sales. Eleven
properties were sold during 2006 resulting in a gain of $2.24 million. During the third
quarter of 2006, a provision for impairment of leased properties of $98,812 was recorded
on a vacant leased property which was sold in the fourth quarter of 2006. At December 31,
2006, leased properties held for sale consisted of one commercial building with a carrying
cost of $1.41 million. In accordance with the terms of the lease, the lessee has given
advance notice that they will be vacating the property as of July 15, 2007. The property
is presently listed for sale for $2.0 million. The tenant was current in its rent payment
as of December 31, 2006.

Other
income for the year ended December 31, 2006, consisted primarily of $75,793 of interest
income and $34,633 of proceeds from the sale of fully depreciated furniture and equipment.
Other income for the year ended December 31, 2005, consisted primarily of prepayment
penalties, letter of credit fees and late payment fees.

Interest
expense decreased 82% to $0.32 million for the year ended December 31, 2006, as compared
to $1.77 million for the year ended December 31, 2005. As of December 31, 2006, the
Company no longer had a line of credit with any financial institution. The previous line
of credit agreement with US Bank was paid off in August, 2006 using proceeds from the sale
of loans, loan participations and leased properties.

The
financial services business segment had a term note which had a fixed rate of interest of
6.98% per year through its maturity on June 1, 2013, with the State of Wisconsin
Investment Board. In February, 2006, the note balance of $5.0 million was paid in full
with proceeds from the bank line of credit. The prepayment of the term note required a
prepayment penalty of $289,034 in the first quarter of 2006.

Depreciation
expense decreased $214,899 due to leased property sales and vacancies when comparing the
year ended December 31, 2006 to the year ended December 31, 2005. Management fees for
loans, loan participations and leased properties under the Management Agreement decreased
$703,479 due to the termination of the Management Agreement in June, 2006, as well as due
to the decrease in Financial Services Assets in the first six months of 2006. For the year
ended December 31, 2006, the compensation expense of $253,539 consisted of the amount paid
to the consumer products business segment for the services of employees. For the year
ended December 31, 2005, a similar expense of $550,096 was included in the management fee
expense paid to the Bank. Other operating expenses decreased $255,873 due to decreases in
directors fees, insurance costs, legal fees, leased property expenses, and fees paid to
the Bank for rent, real estate taxes, and building related and overhead expenses.

As
discussed previously, as of January 1, 2006, BMSBLC merged with and into LMOD and no
longer qualified as a REIT. Therefore for the year ended December 31, 2006, the Company
(consisting of the Parent, LMOD and LPI) operated as a C Corporation under the Code. The
Company intends to file a consolidated federal income tax return for the year ended
December 31, 2006. For the year ended December 31, 2005, the Parent and its REIT
subsidiary, BMSBLC, qualified as a real estate investment trust under the Code.
Accordingly, they were not subject to income tax on taxable income that was distributed to
common shareholders. However, the REIT retained capital gains from the sale of real estate
and paid 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.

Corporate

In
November, 2006, the Company commenced a tender offer to redeem up to 246,154 shares of
preferred stock (with a right to redeem up to an additional 13,483 shares) at a price of
$16.25 per share. Shareholders tendered 348,538 shares of preferred stock and the Company
redeemed 259,574 shares of preferred stock at $16.25 per share in December, 2006.
Shareholders who tendered their preferred stock in this offering did not receive a
dividend payment for the quarter ended December 31, 2006.

14

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The
following table provides detail regarding the gain on the redemption of the 259,574 shares
of preferred stock in December 2006.

|                                                                | 12/31/2006
|--------------------------------------------------------------- | ----------
|Payment for the redemption of 259,574 shares of preferred stock |           
|Carrying value of shares at redemption date ($25 per share)     |           
|Accrued fourth quarter dividends on shares redeemed             |           
|Expenses incurred in connection with redemption                 |           
|                                                                |           
|Gain on redemption of preferred stock                           |           
|                                                                |           

# Consolidated Balance
Sheets at December 31, 2006 and 2005

Consumer Products

The
consumer products business segments net loss for the year ended December 31, 2006,
was $3.41 million. The cash required to finance this loss was partially provided by a
reduction in accounts receivable and by reductions in inventory levels. Also, during 2006,
the financial services business segment provided $1.85 million in cash to the consumer
products business segment.

Total
assets of the consumer products business segment were $12.83 million as of December 31,
2006, and $14.55 million as of December 31, 2005, a 12% decrease. Cash increased to $0.96
million at December 31, 2006, from $0.08 million at December 31, 2005.

Accounts
receivable, net of the allowance for doubtful accounts, decreased to $2.20 million at
December 31, 2006, from $2.83 million at December 31, 2005, due to lower fourth quarter
sales in 2006. LPIs trade receivables decreased $0.16 million and LMODs trade
receivables decreased $0.44 million, while other receivables decreased by $0.03 million.

Inventory
and prepaid inventory, net of the allowance for obsolescence, decreased to $4.19 million
at December 31, 2006, compared to $4.97 million at December 31, 2005. The decrease in the
inventory level was accomplished using inventory control procedures and the sale of
overstocked items to align inventory levels to be consistent with reduced sales.
LMODs inventory level decreased $0.69 million to $2.46 million, and LPIs
inventory decreased $0.09 million to $1.73 million. 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 $0.60 million as of December
31, 2006, compared to December 31, 2005, primarily due to depreciation. Property and
equipment increased by a net of $0.12 million while accumulated depreciation increased by
$0.72 million. Other prepaid expenses decreased $0.09 million from December 31, 2005 to
December 31, 2006.

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, the balance of the
goodwill, net of previous accumulated amortization, was $506,145. For the year ended
December 31, 2006, management concluded that the goodwill was impaired and $506,145 was
charged to operations in 2006.

Other
liabilities decreased $0.29 million to $1.42 million at December 31, 2006, from $1.71
million at December 31, 2005, primarily due to decreases in accrued salaries and accrued
vendor rebates.

15

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Financial Services

Total
assets of the financial services business segment were $3.52 million as of December 31,
2006 and $37.79 million as of December 31, 2005. Cash increased to $1.74 million at
December 31, 2006 from $0.20 million at December 31, 2005.

Interest
receivable decreased to $423 as of December 31, 2006, from $113,854 at December 31, 2005,
due to the sale of loans and loan participations during 2006. The tenant advance decreased
$97,340 from December 31, 2005 due to scheduled repayments during 2006.

Total
loans decreased by $23.32 million to $463,575 at December 31, 2006, from $23.79 million at
December 31, 2005. As discussed previously, during 2006 the Bank purchased $19.74 million
of loans and loan participations from LMOD and $3.58 million of loans were paid off. At
December 31, 2006, LMODs loan portfolio consisted of six loans totaling $463,575.
Four of these loans to two borrowers totaling $395,750 are non-accrual loans. Two of the
four loans totaling $227,963 are in foreclosure. During the third quarter of 2006, LMOD
recorded a $250,000 provision for losses on loans. In 2005, there was no allowance for
loan losses.

Leased
properties, net of accumulated depreciation, decreased to $1.41 million as of December 31,
2006, compared to $13.41 million as of December 31, 2005, primarily due to the sale of
eleven leased properties which resulted in a net gain of $2.24 million. During the third
quarter of 2006, a provision for impairment of leased properties of $98,812 was recorded
on a vacant leased property which was sold in the fourth quarter of 2006. At December 31,
2006, leased properties held for sale consisted of one commercial building with a carrying
cost of $1.41 million. The property is presently listed for sale for $2.0 million. In
accordance with the terms of the lease, the lessee has given advance notice that they will
be vacating the property as of July 15, 2007. The tenant was current in its rent payment
at December 31, 2006. LMOD also has a tenant advance related to the leased property from
this tenant. The balance of the tenant advance at December 31, 2006, was $137,293. LMOD
expects that the advance will be paid off at the termination of the lease in July, 2007.

Other
assets at December 31, 2006 and December 31, 2005, consisted primarily of prepaid
insurance.

The
financial services business segments indebtedness decreased during 2006 as a result
of the payment of debt using the proceeds from the sale of the Financial Services Assets.

|12/31/2006              | 12/31/2005
|----------------------- | ----------
|Lines of credit         | --        
|SWIB note payable       | --        
|SWIB loan participation | --        

As
of December 31, 2006, the Company no longer had a line of credit with any financial
institution. As noted above, the previous line of credit agreement with US Bank was paid
off in August, 2006 using proceeds from the sale of the Financial Services Assets.

Long-term
debt at December 31, 2005, consisted of a term note of $5.0 million and $0.14 million of
loan participations with repurchase options. In January, 2006, the $0.14 million of loan
participations were repaid and in February of 2006, the term note was repaid using
proceeds from the bank line of credit facility.

Accrued
liabilities decreased to $56,333 at December 31, 2006, as compared to $930,681 at December
31, 2005, primarily due to the payment in January, 2006 of $546,917 in accrued income
taxes from the sale of leased properties during 2005. Accrued liabilities were also
reduced due to decreases in accrued real estate taxes and security deposits as leased
properties were sold.

16

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|                                    | 12/31/2006     | 12/31/2005    
|----------------------------------- | -------------- | --------------
|Redeemable preferred stock, at cost |                |               
|414,617 shares at 12/31/2006, and  
|674,191 shares at 12/31/2005        | $10.37 million | $16.85 million

As
discussed previously, in November, 2006, the Company commenced a tender offer to redeem up
to 246,154 shares of preferred stock (with a right to redeem up to an additional 13,483
shares) at a price of $16.25 per share. Shareholders tendered 348,538 shares of preferred
stock and the Company redeemed 259,574 shares of preferred stock at $16.25 per share in
December, 2006. Shareholders who tendered their preferred stock in this offering did not
receive a dividend payment for the quarter ended December 31, 2006.

# Liquidity and Capital

The
consumer products business segment has incurred net losses and negative cash flows from
operating activities over the past four years and the Company had an accumulated deficit
of $5.66 million at December 31, 2006. The sale of the Financial Services Assets during
2006 generated sufficient cash to allow the Company to pay off debt, to fund operations,
and to partially redeem shares of the Companys outstanding preferred stock. Absent any
adverse factors outside the control of the Company, management expects 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 necessary cash to meet
operating and working capital requirements during through June 30, 2008. The Company is
required to redeem $10.37 million of preferred stock by July 1, 2008, to the extent the
Company has legally available funds for the redemption and it is otherwise permitted under
Wisconsin law. (See Note 15 of the Notes to Consolidated Financial Statements, in Item 7
Consolidated Financial Statements, herein.) The Company is considering various
financial alternatives in order to address all of its financial obligations, including the
required redemption of preferred stock.

# Off Balance Sheet
Arrangements

There
were no undisbursed construction or loan commitments at December 31, 2006.

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 could
increase in the future. As of December 31, 2006, LMOD owed the supplier approximately
$250,000.

# Recent Accounting
Pronouncements

Accounting for
Uncertainty in Income Taxes

In
June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109, (FIN No. 48). FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. The interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. The
interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The standard is
required to be adopted by the Company on January 1, 2007. Management is currently
analyzing the impact of this interpretation on the Companys consolidated financial
statements.

Establishing Standards on
Measuring Fair Value

In
September 2006, the FASB issued SFAS No. 157 Fair Value Measurements.
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
accordance with U.S. GAAP, and expands disclosures about fair value measurements. The
statement clarifies that the exchange price is the price in an orderly transaction between
market participants to sell an asset or transfer a liability at the measurement date. The
statement  emphasizes that fair value is a
market-based measurement and not an entity-specific measurement. The statement establishes
a fair value hierarchy used in fair value measurements and expands the required
disclosures of assets and liabilities measured at fair value. Management will be required
to adopt this statement beginning in 2008. The adoption of this standard is not expected
to have a material impact on the Companys consolidated financial statements.

17

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Accounting for Defined
Benefit Pension and Other Postretirement Plans

In
September 2006, the FASB issued SFAS No. 158 Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158
amends SFAS No. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize in
its statement of financial position an asset for a plans over-funded status or a
liability for a plans under-funded status. Secondly, it requires employers to
measure the plans assets and obligations that determine its funded status as of the end of
the fiscal year. Lastly, employers are required to recognize changes in the funded status
of a defined benefit postretirement plan in the year that the changes occur with the
changes reported in comprehensive income. The standard is required to be adopted by
entities having fiscal years ending after December 15, 2006. Because the Company does not
have any defined benefit plan or other postretirement plans, this standard is not expected
to have an impact on the Companys consolidated financial statements.

Quantifying Financial
Statement Misstatements

In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 (SAB 108). SAB 108 expresses the views of the SEC
regarding the process of quantifying financial statement misstatements to determine if any
restatement of prior financial statements is required. SAB 108 addresses the two
techniques commonly used in practice in accumulating and quantifying misstatements, and
requires that the technique with the most severe result be used in determining whether a
misstatement is material. SAB 108 was adopted by the Company on December 31, 2006. The
adoption of SAB 108 did not have a material impact on the Companys consolidated
financial statements.

Fair Value Option

In
February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial
Assets and FinancialLiabilities. SFAS No. 159 permits entities to choose to
measure financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. The decision to elect the fair value option may be
applied instrument by instrument, is irrevocable and is applied to the entire instrument
and not to only specified risks, specific cash flows or portions of that instrument. An
entity is restricted in choosing the dates to elect the fair value option for an eligible
item. Adoption of SFAS No. 159 is effective for the Company on January 1, 2008. Early
adoption is permitted, provided the entity also elects to apply the provisions of SFAS No.
157 Fair Value Measurements. Management of the Company is currently
evaluating the potential impact of SFAS No. 159 on the Companys 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.  In addition to the risk factors described in Item 1 of this Annual Report
on Form 10-KSB, 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:

18

---

| |  | demand
for the Companys consumer products;
| | - | -------------------------------------------

| |  | the
degree of success of the strategy to reduce expenses and to increase revenue at the
consumer products business segment;
| | - | ---------------------------------------------------------------------------------------------------------------------------

| |  | competition;
| | - | ------------

| |  | 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 and real estate portfolios;
| | - | ------------------------------------------------------------------

| |  | payment
when due of principal and interest on loans made by the Company;
| | - | ------------------------------------------------------------------------

| |  | payment
of rent by lessees of the Companys properties;
| | - | -------------------------------------------------------

| |  | the
necessity to make additions to the Companys allowance for doubtful accounts;
| | - | ---------------------------------------------------------------------------------

| |  | the
necessity to make additions to the Company's allowance for obsolete inventory;
| | - | ----------------------------------------------------------------------------------

| |  | the
timing of sales and the selling prices of the Companys remaining leased real estate;
| | - | -----------------------------------------------------------------------------------------

| |  | the
ability of the Company to provide the necessary cash to meet operating and working
capital requirements beyond 2007; and
| | - | ----------------------------------------------------------------------------------------------------------------------------

| |  | the
ability of the Company to provide the necessary cash to redeem the remaining outstanding
preferred stock
| | - | ------------------------------------------------------------------------------------------------------------

These risks and uncertainties should
be considered in evaluating forward-looking statements and undue reliance should not be
placed on such statements.

19

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|Item 7. | Consolidated Financial Statements
|------- | ---------------------------------

# The Middleton Doll
Company

# Consolidated Financial
Statements

# Contents

|Report of Virchow, Krause & Company, LLP, Independent Registered Public Accounting Firm | 21
|--------------------------------------------------------------------------------------- | --
|Consolidated Balance Sheets as of December 31, 2006 and 2005                            | 22
|Consolidated Statements of Operations                                                  
|For the years ended December 31, 2006 and 2005                                          | 24
|Consolidated Statements of Shareholders' Equity                                        
|For the years ended December 31, 2006 and 2005                                          | 26
|Consolidated Statements of Cash Flows                                                  
|For the years ended December 31, 2006 and 2005                                          | 27
|Notes to Consolidated Financial Statements                                              | 29

# Financial Statement
Schedules

|Schedule I      Condensed Financial Information of Registrant | 51
|------------------------------------------------------------- | --
|Schedule II    Valuation and Qualifying Accounts              | 51
|Schedule IV    Mortgage Loans on Real Estate                  | 52

20

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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, 2006 and 2005, and the related consolidated
statements of operations, shareholders equity, and cash flows for the years then
ended. We have also audited the financial statement schedules listed in Item 7. 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, 2006 and 2005, and the consolidated results of their operations and their
cash flows for the years then ended, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the financial statement
schedules listed in Item 7, 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, WisconsinMarch
22, 2007

21

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# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE
SHEETS December 31, 2006 and
2005

# ASSETS

|                                                 | 2006 | 2005
|------------------------------------------------ | ---- | ----
|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                              |      |     
|Tenant advance                                   |      |     
|Loans held for investment, net                   |      |     
|Loans held for sale                              |      |     
|Leased properties, net                           |      |     
|Leased properties, net, listed for sale or under |      |     
|contract to be sold                              |      |     
|Other assets                                     |      |     
|                                                 |      |     
|Total Financial Services Assets                  |      |     
|                                                 |      |     
|TOTAL ASSETS                                     |      |     
|                                                 |      |     

See accompanying Notes
to Consolidated Financial Statements.

22

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE
SHEETS December 31, 2006 and
2005

# LIABILITIES AND
SHAREHOLDERS EQUITY

|                                                           | 2006 | 2005
|---------------------------------------------------------- | ---- | ----
|LIABILITIES                                                |      |     
|CONSUMER PRODUCTS                                          |      |     
|Accounts payable                                           |      |     
|Accrued royalties                                          |      |     
|Accrued real estate and personal property taxes            |      |     
|Accrued salaries                                           |      |     
|Accrued vendor rebates                                     |      |     
|Accrued liabilities                                        |      |     
|                                                           |      |     
|Total Consumer Products Liabilities                        |      |     
|                                                           |      |     
|FINANCIAL SERVICES                                         |      |     
|Lines of credit                                            |      |     
|State of Wisconsin Investment Board notes payable          |      |     
|Loan participations with repurchase options                |      |     
|Accrued liabilities                                        |      |     
|                                                           |      |     
|Total Financial Services Liabilities                       |      |     
|PREFERRED SHARES SUBJECT TO MANDATORY                      |      |     
|REDEMPTION                                                 |      |     
|                                                           |      |     
|Total Company 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, 2006 and 2005 |      |     
|Additional paid-in capital                                 |      |     
|Accumulated deficit                                        |      |     
|Treasury stock, 674,010 shares, at December 31, 2006       |      |     
|and 2005, at cost                                          |      |     
|                                                           |      |     
|                                                           |      |     
|                                                           |      |     
|TOTAL LIABILITIES AND                                      |      |     
|SHAREHOLDERS EQUITY                                       |      |     
|                                                           |      |     

See accompanying Notes
to Consolidated Financial Statements.

23

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF OPERATIONS  Years Ended December 31, 2006 and 2005

|                                             | 2006 | 2005
|-------------------------------------------- | ---- | ----
|CONSUMER PRODUCTS                            |      |     
|NET SALES                                    |      |     
|COST OF GOODS SOLD                           |      |     
|                                             |      |     
|Gross Profit                                 |      |     
|                                             |      |     
|OPERATING EXPENSES (INCOME)                  |      |     
|Sales and marketing                          |      |     
|New product development                      |      |     
|General and administrative                   |      |     
|Impairment of goodwill                       |      |     
|Litigation settlements                       |      |     
|                                             |      |     
|Total Operating Expenses                     |      |     
|Net operating loss                           |      |     
|                                             |      |     
|OTHER INCOME (EXPENSE)                       |      |     
|Interest expense                             |      |     
|Other income, net                            |      |     
|                                             |      |     
|Net Other Income                             |      |     
|Loss before income taxes and intercompany    |      |     
|charges                                      |      |     
|Less: Applicable income tax expense          |      |     
|                                             |      |     
|LOSS BEFORE INTERCOMPANY                     |      |     
|CHARGES - CONSUMER PRODUCTS                  |      |     
|                                             |      |     
|FINANCIAL SERVICES                           |      |     
|REVENUES                                     |      |     
|Interest on loans                            |      |     
|Rental income                                |      |     
|Gain on sale of leased properties            |      |     
|Other income                                 |      |     
|                                             |      |     
|Total Revenues                               |      |     
|                                             |      |     
|EXPENSES                                     |      |     
|Interest expense                             |      |     
|Depreciation expense                         |      |     
|Management fee expense                       |      |     
|Compensation expense                         |      |     
|Provision for impairment of leased property  |      |     
|Provision for losses on loans                |      |     
|Loss on early extinguishment of indebtedness |      |     
|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.

24

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF OPERATIONS (Continued)Years Ended December 31, 2006 and 2005

|                                               | 2006 | 2005
|---------------------------------------------- | ---- | ----
|TOTAL COMPANY                                  |      |     
|Income (loss) before income taxes and          |      |     
|intercompany activity                          |      |     
|Consumer products                              |      |     
|Financial services                             |      |     
|                                               |      |     
|Total Company                                  |      |     
|Income tax expense                             |      |     
|                                               |      |     
|NET LOSS                                       |      |     
|Preferred stock dividends                      |      |     
|Gain on redemption of preferred stock, net     |      |     
|of accrued dividends and expenses              |      |     
|                                               |      |     
|NET LOSS AVAILABLE TO                          |      |     
|COMMON SHAREHOLDERS                            |      |     
|                                               |      |     
|Basic loss per common share                    |      |     
|                                               |      |     
|                                               |      |     
|Diluted loss per common share                  |      |     
|                                               |      |     
|Weighted average shares outstanding            |      |     
|                                               |      |     
|Dividend paid per preferred stock share        |      |     
|                                               |      |     
|SEGMENT RECONCILIATION                         |      |     
|CONSUMER PRODUCTS                              |      |     
|Loss before intercompany charges               |      |     
|Interest expense to financial services segment |      |     
|                                               |      |     
|Total Segment Net Loss                         |      |     
|                                               |      |     
|FINANCIAL SERVICES                             |      |     
|Income before intercompany revenue             |      |     
|Interest income from consumer products segment |      |     
|                                               |      |     
|Total Segment Net Income                       |      |     
|                                               |      |     
|NET LOSS                                       |      |     
|                                               |      |     

See accompanying Notes
to Consolidated Financial Statements.

25

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# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF SHAREHOLDERS EQUITY Years Ended December
31, 2006 and 2005

|                                           | Common
stock | Additional
paid-in
capital | Accumulated
deficit | Treasury
stock | Total
|------------------------------------------ | ------------ | -------------------------- | ------------------- | -------------- | -----
|BALANCES - December 31, 2004               |              |                            | $                   | 293,441        |      
|Net loss - 2005                            |              |                            |                     | --             |      
|Cash dividends on preferred stock -        |              |                           
|5.37% dividend rate                        |              |                            |                     | --             |      
|                                           |              |                            |                     |                |      
|BALANCES - December 31, 2005               |              |                            | $                   | 293,441        |      
|Net loss - 2006                            |              |                            |                     | --             |      
|Stock-based compensation                   |              |                            |                     | --             |      
|Gain on redemption of preferred stock, net |              |                            |                     | --             |      
|Cash dividends on preferred stock -        |              |                           
|5.37% dividend rate                        |              |                            |                     | --             |      
|                                           |              |                            |                     |                |      
|BALANCES - December 31, 2006               |              |                            | $                   | 293,441        |      
|                                           |              |                            |                     |                |      

See accompanying Notes
to Consolidated Financial Statements.

26

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# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF CASH FLOWS Years Ended December
31, 2006 and 2005

|                                             | 2006 | 2005
|-------------------------------------------- | ---- | ----
|CONSUMER PRODUCTS                            |      |     
|CASH FLOWS FROM OPERATING ACTIVITIES         |      |     
|Segment net loss                             |      |     
|Adjustments to reconcile segment net loss to |      |     
|net cash flows from operating activities     |      |     
|Depreciation                                 |      |     
|Impairment of goodwill                       |      |     
|Loss (gain) on sale of property              |      |     
|Provision for losses on accounts receivable  |      |     
|Provision for obsolete inventory             |      |     
|Net change in:                               |      |     
|Accounts receivable                          |      |     
|Inventory                                    |      |     
|Other assets                                 |      |     
|Accounts payable                             |      |     
|Other liabilities                            |      |     
|                                             |      |     
|Net Cash Flows 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 decrease in short term borrowings        |      |     
|Net intercompany transactions                |      |     
|                                             |      |     
|Net Cash Flows from Financing Activities     |      |     
|                                             |      |     
|Net Change in Cash and Cash Equivalents      |      |     
|CASH AND CASH EQUIVALENTS - BEGINNING        |      |     
|OF YEAR                                      |      |     
|                                             |      |     
|CASH AND CASH EQUIVALENTS - END OF YEAR      |      |     
|                                             |      |     
|SUPPLEMENTAL CASH FLOW DISCLOSURES           |      |     
|Cash paid for interest                       |      |     

See accompanying Notes
to Consolidated Financial Statements.

27

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# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS
OF CASH FLOWS (Continued)  Years Ended December 31, 2006 and 2005

|                                                              | 2006 | 2005
|------------------------------------------------------------- | ---- | ----
|FINANCIAL SERVICES                                            |      |     
|CASH FLOWS FROM OPERATING ACTIVITIES                          |      |     
|Segment net income                                            |      |     
|Adjustments to reconcile segment net income to                |      |     
|net cash flows from operating activities                      |      |     
|Depreciation                                                  |      |     
|Provision for losses on loans                                 |      |     
|Provision for impairment of leased property                   |      |     
|Gain on sale of leased properties                             |      |     
|Gain on sale of furniture and fixtures                        |      |     
|Stock-based compensation expense                              |      |     
|Net change in:                                                |      |     
|Interest receivable                                           |      |     
|Tenant advance and other assets                               |      |     
|Accrued liabilities                                           |      |     
|                                                              |      |     
|Net Cash Flows (used in) from Operating Activities            |      |     
|                                                              |      |     
|CASH FLOWS FROM INVESTING ACTIVITIES                          |      |     
|Net loan repayments received                                  |      |     
|Proceeds from sale of leased properties                       |      |     
|Proceeds from sale of loans                                   |      |     
|Purchase or improvements to leased property                   |      |     
|Proceeds from sale of furniture and fixtures                  |      |     
|                                                              |      |     
|Net Cash Flows from Investing Activities                      |      |     
|                                                              |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES                          |      |     
|Net decrease in commercial paper borrowings                   |      |     
|Net decrease in lines of credit                               |      |     
|Repayment of SWIB notes                                       |      |     
|Repayment of loan participations with repurchase options      |      |     
|Net intercompany transactions                                 |      |     
|                                                              |      |     
|Net Cash Flows used in Financing Activities                   |      |     
|                                                              |      |     
|Net Cash Flows from Financial Services                        |      |     
|Payment for redemption of preferred stock, including expenses |      |     
|Preferred stock dividends paid                                |      |     
|                                                              |      |     
|Net Cash Flows used in Redemption of Preferred Stock          |      |     
|and Preferred Stock Dividends                                 |      |     
|                                                              |      |     
|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                    |      |     
|Loans held for investment transferred to loans held for sale  |      |     

See accompanying Notes
to Consolidated Financial Statements.

28

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# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  December 31, 2006 and 2005

# 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), and its wholly-owned
subsidiary, Lee Middleton Original Dolls, Inc. (LMOD) and LMODs
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 Company presently consists of two
business segments; the consumer products business segment and the financial services
business segment. The Companys segments conducted substantially all of their
business in the United States.

The consumer products business
segment consists of a portion of LMOD and LPI. LMOD is a designer and distributor of
lifelike collectible and play dolls and LPI is a designer and distributor of clocks and
home décor products.

Prior to January 1, 2006, the
financial services business segment 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. During 2006, the Company sold substantially all of the assets of the
financial services business segment and used the net proceeds to pay off indebtedness and
to redeem certain shares of the Companys outstanding preferred stock. The Company
does not intend to continue in the financial services business segment after all of the
segments assets are sold.

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 previously, the Company has two reportable
segments: consumer products (which includes a portion of LMOD and LPI) and financial
services (which includes the Parent and a portion of LMOD (formerly known as 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 operations 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.

29

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# 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. During the year ended
December 31, 2006, management established a loan loss allowance of $250,000. There was no
loan loss allowance during 2005.

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 $175,248 and $155,000 at December 31, 2006 and
December 31, 2005, respectively. Accounts receivable are considered past-due when the
amount due is ninety days past the terms of the invoice. At December 31, 2006, LPI did not
have any past-due accounts and LMOD had past-due accounts totaling approximately $136,000.

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 and excess inventory. Inventories are presented net of an
allowance for obsolete and excess inventory of $482,847 and $451,330 at December 31, 2006
and December 31, 2005, respectively.

30

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

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

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.

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. During the third quarter of
2006, an impairment provision of $98,812 was recorded on a vacant leased property which
was sold in the fourth quarter of 2006. During the fourth quarter of 2006, management
concluded that the remaining amount of goodwill was impaired and $506,145 was charged to
operations in 2006.

Revenue Recognition

Revenue is recognized when legal
title passes to the purchaser, which is primarily upon shipment of product or upon sale of
real estate. Rental income is accrued on a monthly basis based on the lease agreement.

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 $1,014,943, and $953,742 for the years ended December 31, 2006 and 2005,
respectively.

Stock Based Compensation

On January 1, 2006, the Company
adopted Statement of Accounting Standard (SFAS) No. 123R, Accounting for
Stock-Based Compensation (SFAS No. 123R). SFAS No. 123R requires all
share-based payment to employees, including grants of employee stock options, to be
recognized as expense in the statement based on their fair values. Prior to SFAS No. 123R,
only certain pro forma disclosures of fair value were required. The amount of compensation
is measured at the fair value of the options when granted and this cost is expensed over
the required service period, which is normally the vesting period of the options. SFAS No.
123R applies to awards granted or modified after January 1, 2006, or any unvested awards
outstanding at December 31, 2005. The effect of the adoption of the new accounting
principles on results of operations depends on the level of options grants, the vesting
period for those grants, and the fair value of the options granted at such date. For the
periods prior to January 1,

31

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# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

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

Stock Based Compensation
(continued)

2006, the Company elected to remain
with the former method of accounting under Accounting Principles Board Opinion 25
(APB No. 25) and has made the pro forma disclosures in Note 17 of net loss and
loss per share as if the fair value method provided for in SFAS No. 123R had been adopted.

Income Taxes

For the year ended December 31, 2006,
the Company was taxed as a C Corporation and will 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.

Prior to January 1, 2006, the Parent
and its subsidiary, BMSBLC, qualified as a real estate investment trust (REIT)
under the Internal Revenue Code of 1986, as amended (the Code). Accordingly,
the REIT was not subject to income tax on taxable income that was distributed to common
shareholders. However, the REIT was allowed to retain capital gains from the sale of real
estate and pay income taxes on that gain. In January, 2006, the REIT paid $546,917 in
income taxes from the sale of real estate during 2005. As of January 1, 2006, BMSBLC
merged with and into LMOD and no longer qualifies as a REIT.

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, deferred revenue, net operating losses,
capitalization requirements of the Internal Revenue Code, allowances for doubtful accounts
and obsolete inventory, and other carryforwards. Valuation allowances are established when
necessary to reduce deferred income tax assets to the amount expected to be realized.

Shipping and Handling
Costs

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

Advertising Costs

Advertising costs are charged to
operations when incurred. Advertising expense was $466,425 and $542,985 for the years
ended December 31, 2006 and December 31, 2005, respectively.

Earnings Per Common Share

Earnings (loss) 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.

32

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

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

Fair Value of Financial
Instruments

SFAS 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. SFAS 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.

Recent Accounting
Pronouncements

Accounting for
Uncertainty in Income Taxes

In
June, 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109, (FIN No. 48). FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. This interpretation prescribes a
recognition threshold and measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken in a tax return. The
interpretation also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The standard is
required to be adopted by the Company on January 1, 2007. Management is currently
analyzing the impact of this interpretation on the Companys consolidated financial
statements.

Establishing Standards on
Measuring Fair Value

In
September 2006, the FASB issued SFAS No. 157 Fair Value Measurements.
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in
accordance with U.S. GAAP, and expands disclosures about fair value measurements. The
statement clarifies that the exchange price is the price in an orderly transaction between
market participants to sell an asset or transfer a liability at the measurement date. The
statement emphasizes that fair value is a market-based measurement and not an
entity-specific measurement. The statement establishes a fair value hierarchy used in fair
value measurements and expands the required disclosures of assets and liabilities measured
at fair value. Management will be required to adopt this statement beginning in 2008.
Management believes the adoption of this standard is not expected to have a material
impact on the Companys consolidated financial statements.

Accounting for Defined
Benefit Pension and Other Postretirement Plans

In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 amends SFAS
No. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize in its statement
of financial position an asset for a plans over-funded status or a liability for a
plans under-funded status. Secondly, it requires employers to measure the plans
assets and obligations that determine its funded status as of the end of the fiscal year.
Lastly, employers are required to recognize changes in the funded status of a defined
benefit postretirement plan in the year that the changes occur with the changes reported
in comprehensive income. The standard is required to be adopted by entities having fiscal
years ending after December 31, 2006. Because the Company does not have any defined
benefit plan or other post retirement plans, management believes this standard will not
have an impact on the Companys consolidated financial statements.

33

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# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

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

Quantifying Financial
Statement Misstatements

In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 (SAB 108). SAB 108 expresses the views of the SEC
regarding the process of quantifying financial statement misstatements to determine if any
restatement of prior financial statements is required. SAB 108 addresses the two
techniques commonly used in practice in accumulating and quantifying misstatements and
requires that the technique with the most severe result be used in determining whether a
misstatement is material. SAB 108 was adopted by the Company on December 31, 2006. The
adoption of SAB 108 did not have a material impact on the Companys consolidated
financial statements.

Fair Value Option

In
February 2007, the FASB issued SFAS No. 159 The Fair Value Option for Financial
Assets and Financial Liabilities. SFAS No. 159 permits entities to choose to
measure financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. The decision to elect the fair value option may be
applied instrument by instrument, is irrevocable and is applied to the entire instrument
and not to only specified risks, specific cash flows or portions of that instrument. An
entity is restricted in choosing the dates to elect the fair value option for an eligible
item. Adoption of SFAS No. 159 is effective for the Company on January 1, 2008. Early
adoption is permitted, provided the entity also elects to apply the provisions of SFAS No.
157 Fair Value Measurements. Management of the Company is currently
evaluating the potential impact of SFAS No. 159 on the Companys consolidated
financial statements.

Reclassifications

Certain 2005 amounts have been
reclassified to conform with the 2006 presentation. The reclassifications have no effect
on reported amounts of net (loss) income or equity.

# NOTE 2  Liquidity
and Capital Resources

The consumer products business
segment has incurred net losses and negative cash flows from operating activities over the
past four years and the Company had an accumulated deficit of $5.66 million at December
31, 2006. The sale of the Financial Services Assets during 2006 generated sufficient cash
to allow the Company to pay off debt, to fund operations, and to redeem certain shares of
the Companys outstanding preferred stock. Absent any adverse factors outside the
control of the Company, management expects 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 necessary cash to meet operating and working
capital requirements through June 30, 2008. The Company is required to redeem $10.37
million of preferred stock by July 1, 2008, to the extent the Company has legally
available funds for the redemption and it is otherwise permitted under Wisconsin law. (See
Note 15 of the Notes to Consolidated Financial Statements, in Item 7 Consolidated
Financial Statements, herein.) The Company is considering various financial
alternatives in order to address all of its financial obligations, including the required
redemption of preferred stock.

34

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# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 3  Related
Entity

Pursuant to a Loan and Real Estate
Services Agreement (the Loan Services Agreement), which was terminated
effective June 30, 2006, InvestorsBank (the Bank) administered the loan and
real estate portfolios of the Company from January 1, 2006 to June 30, 2006. The Bank
received a monthly fee equal to (a) 1/12 of 0.25% multiplied by the total outstanding
principal balance of loans under management, (b) 1/12 of 0.25% multiplied by the total
cost of all of the properties originally acquired by BMSBLC from Bando McGlocklin Real
Estate Investment Corporation (the Bando Investment Properties) and (c) 6% of
the rents from the real estate portfolio other than the Bando Investment Properties. For
the year ended December 31, 2006, management fees totaled $45,139. In addition, Ms. Hauke,
Chief Financial Officer of the Bank, was required to provide between January 1, 2006, and
June 30, 2006, a maximum of 140 hours of accounting services under the Loan Services
Agreement for an aggregate fee of $17,500. Also under the Loan Services Agreement, LMOD
paid the Bank a fee of $19,554 for rent, real estate taxes, and building related and
overhead expenses, which is included in other operating expenses during the year ended
December 31, 2006. No additional fees were paid under the Loan Services Agreement. During
the year ended December 31, 2006, the Bank paid the Company $34,633 for fully depreciated
financial services furniture and fixtures which the Bank retained at the termination of
the Loan Services Agreement. The purchase price of the furniture and fixtures was
determined based on an estimate of fair value provided by a third party.

At December 31, 2005, the Company
shared common management with InvestorsBancorp, Inc. (IBI), which owns the
Bank. The Second Amended and Restated Management Services and Allocation of Expenses
Agreement, dated June 1, 2004, (the Management Agreement) between the Company
and the Bank, which terminated on December 31, 2005, 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 Management Agreement was $748,618 for the
year ended December 31, 2005. Overhead expenses were also shared between the two entities
in accordance with the Management 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,
for the year ended December 31, 2005, and is included in other operating expenses.

# NOTE 4 
Concentrations

The consumer products business segments
customers are not concentrated in any specific geographic region. For the year ended
December 31, 2006, the consumer products business segment had one customer that accounted
for $2.39 million or 20%, of the segments net sales. At December 31, 2006, this
customer accounted for 12% of the consumer products business segments outstanding
accounts receivable. For the year ended December 31, 2005, the consumer products business
segment had two customers that accounted for $4.16 million or 29%, of the segments
net sales. At December 31, 2005, these customers accounted for 27% of the consumer
products business segments outstanding accounts receivable. The Company establishes
an allowance for doubtful accounted 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 business
segment imports substantially all finished goods inventory from two suppliers in China.

Approximately 33% of LMODs
labor force is subject to a collective bargaining agreement which has an expiration date
of April 30, 2009.

35

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# 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 its loans and loan participations
(previously owned by BMSBLC) to the Bank. The purchase price for the sale of the loans and
loan participations was the total of the outstanding principal balance of all such loans
and loan participations, plus accrued interest. During the year ended December 31, 2006,
the Bank purchased $15.58 million of loans and loan participations under the asset
purchase agreement. In addition, outside of the asset purchase agreement, the Bank
purchased an additional $4.16 million of loans and loan participations under the same
terms.

At December 31, 2006, the
Companys loan portfolio consisted of six loans totaling $463,575. Management expects
that one loan totaling $11,763 will be paid off in 2007 and one loan totaling $56,062 will
be paid off in 2008. The remaining loan balance of $395,750 is comprised of four
non-accrual loans to two borrowers. Two of the non-accrual loans totaling $227,963 are
presently in foreclosure proceedings. During the year ended December 31, 2006, management
established a loan loss allowance of $250,000 against the non-accrual loans. No interest
income was accrued or received on these non-accrual loans during the years ended December
31, 2006 and 2005. There were no loans charged off during 2006 and 2005.

# NOTE 6  Loans Sold
with Repurchase Options

The Company did not sell any loans
with repurchase options to third parties during the years ended December 31, 2006 and
2005. As of December 31, 2005, the balance of loan participations sold with repurchase
options was $135,254. These loan participations were repurchased in the first quarter of
2006.

# NOTE 7  Inventory

Inventory consisted of the following
at December 31:

|                                            | 2006 | 2005
|------------------------------------------- | ---- | ----
|Raw materials                               |      |     
|Work in process                             |      |     
|Finished goods                              |      |     
|                                            |      |     
|                                            |      |     
|Allowance for obsolete and excess inventory |      |     
|                                            |      |     
|                                            |      |     
|                                            |      |     

36

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# 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 $138,714, and $349,111 for the years ended December 31, 2006 and December 31, 2005,
respectively.

During the year ended December 31,
2006, the Company sold eleven leased properties to third parties resulting in a net gain
of $2.24 million. During the year ended December 31, 2005, the Company sold seven leased
properties to third parties resulting in a net gain of $1.78 million.

The Company previously leased
properties pursuant to lease agreements with initial lease terms primarily ranging from
five to fifteen years. The leases required the lessees to pay all operating expenses
including utilities, insurance and taxes. If it was determined that a lessee would not be
able to make all required lease payments, the lease was put on nonaccrual and no future
amounts of rent were accrued. At such time that the lessee would become current on past
lease payments, the Company would resume the accrual of lease payments.

At December 31, 2006, LMODs
real estate portfolio consisted of one commercial leased property with a carrying cost of
$1.41 million. In accordance with the terms of the lease, the lessee has given advance
notice that they will be vacating the property as of July 15, 2007. The property is
presently listed for sale for $2.0 million.

The following table shows minimum
future rental income by year. It is based on lease agreements in effect at December 31,
2006.

|Leased Properties
|-----------------
|Year             
|2007             

37

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 9  Property
and Equipment

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

|                               | 2006 | 2005
|------------------------------ | ---- | ----
|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 $716,110 and $870,179 and for financial services was $0 and $4,502 for the
years ended December 31, 2006 and December 31, 2005, respectively. In the year ended
December 31, 2006, the Bank paid the Company $34,633 for fully depreciated financial
services furniture and fixtures which the Bank retained at the termination of the Loan
Services Agreement.

# NOTE 10  Goodwill

The goodwill associated with the
acquisition of the LMOD consumer doll business amounted to $619,753. The unamortized
amount and carrying value of goodwill at December 31, 2005 was $506,145. During the fourth
quarter of 2006, after reviewing the operating results of the business for the year ended
December 31, 2006, and projected future results, management concluded that the carrying
value of goodwill was impaired and $506,145 was charged to operations in 2006. Based on
the consumer products business segments losses from 2003 through 2006, and based on
managements evaluation of fair value of the consumer products business segments
assets and upon the present value of future expected cash flows; management concluded that
at December 31, 2006, that there was no longer any value associated with the goodwill.

# NOTE 11 
Short-Term Borrowings

As of December 31, 2006, the Company
no longer had a line of credit facility with any financial institution.

Consumer Products:

In 2004, LMOD entered into a loan
agreement with the Bank, a related party, providing for a line of credit facility of
$2,000,000 bearing interest at prime rate. At December 31, 2004, the line of credit
facility was $220,000 and the note was paid in full in January, 2005.

38

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 11 
Short-Term Borrowings (continued)

Financial Services:

As of December 31, 2005, BMSBLC had a
line of credit with three participating banks with an outstanding balance of $22,820,000.
The line of credit was paid off in August, 2006 using proceeds from the sale of loans,
loan participations and leased properties.

# NOTE 12  Long-Term
Debt

As of December 31, 2006, the Company
did not have any long-term debt.

The financial services business
segment had a term note with the State of Wisconsin Investment Board (SWIB)
which had a fixed rate of interest of 6.98% per year through its maturity on June 1, 2013.
In February, 2006 the note was paid in full with proceeds from the bank line of credit.
The prepayment of the note resulted in a prepayment penalty of $289,034, which was
expensed in 2006 as a loss on the early extinguishment of indebtedness. At December 31,
2005, the term note had a balance of $5.0 million.

# NOTE 13  Operating
Leases

As of December 31, 2006, the consumer
products business segment leased 7,400 square feet of office space in Columbus, Ohio, and
retail space in the Polaris Fashion Mall in Columbus, Ohio, from third parties. Prior to
August, 2006, LMOD leased a 44,100 square foot warehouse facility in Columbus, Ohio, and
prior to May 1, 2006, LMOD leased 18,800 square feet of office space in Westerville, Ohio.
These leases were classified as operating leases and lease expense was approximately
$360,000 and $993,000 in 2006 and 2005.

At December 31, 2006, the future
minimum lease payments for each of the remaining years are as follows:

|2007 |  |  | $ | 178,384 | 
|---- |  |  | - | ------- | 
|2008 |  |  |   | 119,917 | 
|2009 |  |  |   | 9,536   | 
|     |  | 
|     |  |  | $ | 307,837 | 
|     |  | 

During the second quarter of 2005,
the consumer products business 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 consolidated Statements of Operations.

39

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTSDecember 31, 2006 and 2005

# NOTE 14 
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.

As of November 12, 2003, the Company
extended a guarantee to a supplier of LMOD in which the Company 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 $600,000; however, the amount of the
guarantee is unlimited and the amount of the obligation could increase in the future. As
of December 31, 2006, LMOD owed the supplier approximately $250,000.

# NOTE 15  Mandatory
Redeemable Preferred Stock

The Company issued 690,000 shares of
Adjustable Rate Cumulative Preferred Stock, Series A, in a public offering dated October
13, 1993, 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.

In November, 2006, the Company
commenced a tender offer to redeem up to 246,154 shares of preferred stock (with a right
to redeem up to an additional 13,483 shares) at a price of $16.25 per share. Shareholders
tendered 348,538 shares of preferred stock and the Company redeemed 259,574 shares of
preferred stock at $16.25 per share in December 2006. Shareholders who tendered their
preferred stock in this offering did not receive a dividend payment for the quarter ended
December 31, 2006.

Mandatorily redeemable preferred
stock consisted of the following as of December 31, 2006 and 2005:

|                                                  | 12/31/2006 | 12/31/2005
|------------------------------------------------- | ---------- | ----------
|Redeemable Preferred stock, 1 cent par value,     |            |           
|$25 carrying value, 3,000,000 shares authorized,  |            |           
|690,000 shares issued, 414,617 and 674,191 shares |            |           
|outstanding and 275,383 and 15,809 shares         |            |           
|redeemed as of December 31, 2006 and 2005,        |            |           
|respectively                                      |            |           
|                                                  |            |           

40

---

# THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 15  Mandatory
Redeemable Preferred Stock (continued)

The following table provides detail
regarding the gain on the redemption of 259,574 shares of preferred stock in December of
2006.

|                                                                | 12/31/2006
|--------------------------------------------------------------- | ----------
|Payment for the redemption of 259,574 shares of preferred stock |           
|Carrying value of shares at redemption date ($25 per share)     |           
|Accrued fourth quarter dividends on shares redeemed             |           
|Expenses incurred in connection with redemption                 |           
|                                                                |           
|Gain on redemption of preferred stock                           |           
|                                                                |           

# NOTE 16 
Retirement Plans

LPI and LMOD have 401(k) contribution
plans for eligible employees. Employer contributions to the plans were $17,548 and $19,645
for the years ended December 31, 2006 and December 31, 2005, respectively.

During the year ended December 31,
2005, the Company provided a supplemental retirement benefit of $130,610 for George
Schonath, which was included in the management fee expense. This payment was made under
the Management Agreement approved by the independent members of the Board of Directors of
the Company.

# NOTE 17 
Stockholders Equity

In December, 2004, FASB issued SFAS
No. 123R, which requires compensation costs related to share-based payment transactions to
be recognized in financial statements. SFAS No. 123R replaced SFAS No. 123
Accounting for Stock Based Compensation and supersedes Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, which
generally resulted in no compensation expense being recorded in the financial statements
related to the grant of stock options to employees if certain conditions were met.

On January 1, 2006, the Company
adopted SFAS No. 123R using the modified prospective method. SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options, to be
recognized as expense in the consolidated statement of earnings based on fair value. The
amount of compensation expense is determined based on the fair value of the options when
granted and is expensed over the required service period, which is normally the vesting
period of the options. SFAS No. 123R applies to awards granted or modified after January
1, 2006, and any unvested awards outstanding at December 31, 2005. Consequently,
compensation expense cost is recorded for prior option grants that vest on or after
January 1, 2006, the date of adoption. The Company has elected to use the Black-Scholes
option pricing model and the straight-line method of amortization expense over the
requisite service period of the grant.

At December 31, 2006, the Company had
a stock-based employee compensation plan, the 2003 Stock Option Plan. Prior to the
adoption of SFAS No. 123R, the Company accounted for plans under the recognition and
measurement principles of APB Opinion No. 25 which resulted in no compensation expense
being recorded. Under SFAS No. 123R, stock based compensation of $2,944 was recognized in
the year ended December 31, 2006. The pro forma effect for 2005 was $8,345.

41

---

THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 17 
Stockholders Equity (continued)

Under the 2003 Stock Option Plan, 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 the agreement. Options granted under the Plan are
considered non-qualified stock options as defined the Code. All options must
be exercised within ten years of the date of grant.

Activity is summarized in the
following table:

|                                                        | 2006                   | 2005  
|------------------------------------------------------- | ---------------------- | ------
|Shares                                                  | Weighted
Average
Price | Shares
|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                                   |                        |       
|Weighted Average Remaining Contractual Life - 6.1 years |                        |       

SFAS No. 123R encourages a fair
value based method of accounting for stock-based compensation plans. Had
compensation cost for the Companys Plan been determined based upon the fair value at
the grant dates as prescribed by SFAS No. 123R, the Companys pro forma net loss and
loss per share for 2005 would have been as follows:

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

42

---

THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 17 
Stockholders Equity (continued)

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%      

Outstanding options to purchase
24,540 and 219,805 shares of common stock for the years ended December 31, 2006 and 2005,
respectively, were excluded from the loss per common share calculations as they were
non-dilutive.

# NOTE 18  Income
Taxes

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

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.

There were no income tax benefits
recognized for the years ended December 31, 2006 and December 31, 2005, due to changes in
the valuation allowance.

A reconciliation of the
Companys loss at December 31, 2006, before income taxes to the loss subject to
income taxes is as shown in the following table. For the year ended December 31, 2005, tax
expense was calculated on the consumer products business segments loss before the
elimination of intercompany expenses.

|                               | 2006 | 2005
|------------------------------ | ---- | ----
|Loss before income taxes       |      |     
|Less intercompany eliminations |      |     
|                               |      |     
|Loss subject to income taxes   |      |     
|                               |      |     

43

---

THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 18  Income
Taxes (continued)

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

|                                                      | 2006 | 2005
|----------------------------------------------------- | ---- | ----
|Federal income taxes at statutory rate                |      |     
|State income taxes, net of federal benefit            |      |     
|Other                                                 |      |     
|Benefit of current year federal and state net         |      |     
|operating loss carryforwards and other                |      |     
|deferred income tax assets not recognized             |      |     
|                                                      |      |     
|Effective income tax rate before changes in valuation |      |     
|allowance                                             |      |     
|                                                      |      |     

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

|                                             | 2006 | 2005
|-------------------------------------------- | ---- | ----
|Deferred income tax assets:                  |      |     
|Accounts receivable and loan loss allowances |      |     
|Inventory allowances                         |      |     
|Accrued liabilities                          |      |     
|Federal net operating loss carryforwards     |      |     
|State net operating loss carryforwards       |      |     
|Other                                        |      |     
|                                             |      |     
|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           |      |     
|                                             |      |     

44

---

THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 18  Income
Taxes (continued)

In evaluating the Company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 business segments income tax expense. In the
years ended December 31, 2006 and December 31, 2005, the Company provided valuation
allowances of $1.02 million and $1.19 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.

As of December 31, 2006, the Company
had unused net operating loss carryforwards of approximately $12.3 million available to
offset against future federal taxable income and approximately $9.75 million to offset
against future state taxable income. The use of the net operating loss carryforwards are
subject to limitations. The state net operating loss carryforwards expire at various dates
beginning in 2010 and continuing through 2026. The federal carryforwards expire as follows:

|     | LMOD
(prior to 2006) | LPI
|---- | -------------------- | ---
|2008 |                      |    
|2010 |                      |    
|2011 |                      |    
|2012 |                      |    
|2018 |                      |    
|2019 |                      |    
|2023 |                      |    
|2024 |                      |    
|2025 |                      |    
|2026 |                      |    
|     |                      |    

# Financial Services:

Prior to January 1, 2006, the Parent
and its subsidiary, BMSBLC, qualified as a REIT under the Code. Accordingly, the REIT was
not subject to income tax on taxable income that was distributed to common shareholders.
However, the REIT was allowed to retain capital gains from the sale of real estate and pay
income tax on that gain. In January, 2006, the REIT paid $546,917 in accrued income taxes
from the sale of leased properties during 2005. In January, 2005, the REIT paid $128,371
in accrued income taxes from the sale of leased properties during 2004.

# Consolidated:

Income tax (expense) benefit is
summarized as follows:

|                           | 2006 | 2005
|-------------------------- | ---- | ----
|Consumer products segment  |      |     
|Financial services segment |      |     
|                           |      |     
|                           |      |     
|                           |      |     

45

---

THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 19  Dividends

For the years ended December 31, 2006
and December 31, 2005, the Companys Board of Directors did not declare any common
stock dividends.

# NOTE 20  Fair
Value of Financial Instruments

The Companys financial
instruments consist of cash and cash equivalents, accounts and interest receivable, a
tenant advance, loans receivable, short-term borrowings, notes payable and accounts
payable for whose carrying values approximate fair value.

The estimated carrying values and
fair values of the Companys redeemable preferred stock at December 31, 2006 and
December 31, 2005 are as follows:

|                           | 2006           | 2005                
|-------------------------- | -------------- | --------------------
|                           | Carrying
Value | Estimated
Fair Value
|Redeemable preferred stock |                |                     
|                           |                |                     

The estimated fair value of the
redeemable preferred stock was based on quoted market prices.

# NOTE 21  Pro Forma
Financial Information

The following tables present the
unaudited pro forma results of operations of the Company for the years ended December 31,
2006 and December 31, 2005, assuming that the loan sales and leased property dispositions
which occurred during 2006 had occurred on January 1, 2005.

The pro forma financial information
gives effect to all of the following transactions as if they had occurred on January 1,
2006 and January 1, 2005.

| | The
sale of loans and loan participations to the Bank on various dates during the year ended
December 31, 2006 for the aggregate purchase price of $15.58 million, plus accrued
interest, pursuant to an asset purchase agreement entered into by LMOD and the Bank.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
sale of six additional loans to the Bank, outside of the asset purchase agreement, for
the aggregate purchase price of $4.16 million, plus accrued interest.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
sale of nine leased properties and two vacant properties to various unrelated parties
which resulted in a gain of $2.24 million. The net book value of the properties at the
time of the sales was $11.77 million. The pro forma condensed consolidated statement of
operations for the year ended December 31, 2006, excludes the gain on the sale of the
properties.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
reduction of indebtedness under the Companys revolving line of credit agreement, in
the amount of $22.82 million, the payoff of the notes payable to SWIB in full, in the
amount of $5.14 million, and the redemption of 259,754 shares of preferred stock with a
carrying amount at redemption of $4.22 million, with proceeds from the sales of the
Financial Services Assets. The prepayment of the notes payable to SWIB required a
prepayment penalty of $289,034 which has been excluded from the December 31, 2006 pro
forma financial information.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

46

---

THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 21  Pro Forma
Financial Information (continued)

The pro forma financial information
adjusts the Companys historical results of operations for the transactions listed
above. The pro forma financial information should be read in conjunction with the
Companys historical financial information, but does not purport to be indicative of
the results which may be obtained in the future or which would actually have been obtained
had the transactions occurred as of January 1, 2006 or January 1, 2005. For purposes of
presenting the pro forma information, income taxes have been excluded as no income tax was
due on the 2006 transactions.

|                                               | 12/31/2006
Historical | Pro Forma
Adjustments | 12/31/2006
Pro Forma
|---------------------------------------------- | --------------------- | --------------------- | --------------------
|Consumer products segment's net loss           |                       |                       | $                   
|                                               |                       |                       |                     
|Financial services segment's total revenues    |                       |                       |                     
|Financial services segment's total expenses    |                       |                       |                     
|                                               |                       |                       |                     
|Financial services segment's net income (loss) |                       |                       |                     
|                                               |                       |                       |                     
|Total Company net loss                         |                       |                       |                     
|Preferred stock dividends                      |                       |                       |                     
|Gain on redemption of preferred stock          |                       |                       |                     
|                                               |                       |                       |                     
|Net loss applicable to common shareholders     |                       |                       | $                   
|                                               |                       |                       |                     
|Basic and diluted loss per common share        |                       |                       | $                   
|Weighted average shares outstanding            |                       |                       |                     

|                                            | Year Ended
12/31/2005
Historical | Pro Forma
Adjustments | Year Ended
12/31/2005
Pro Forma
|------------------------------------------- | -------------------------------- | --------------------- | -------------------------------
|Consumer products segment's net loss        |                                  |                       | $                              
|                                            |                                  |                       |                                
|Financial services segment's total revenues |                                  |                       |                                
|Financial services segment's total expenses |                                  |                       |                                
|                                            |                                  |                       |                                
|Financial services segment's net income     |                                  |                       |                                
|                                            |                                  |                       |                                
|Total Company net loss                      |                                  |                       |                                
|Preferred stock dividends                   |                                  |                       |                                
|                                            |                                  |                       |                                
|Net loss applicable to common shareholders  |                                  |                       | $                              
|                                            |                                  |                       |                                
|Basic and diluted loss per common share     |                                  |                       | $                              
|Weighted average shares outstanding         |                                  |                       |                                

47

---

THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 22  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 |             
|                                                 |             
|Total Liabilities                                |             
|SHAREHOLDERS' EQUITY                             |             
|                                                 |             
|TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY       |             
|                                                 |             

48

---

THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 22  The
Middleton Doll Company (Parent Company Only) Financial Information (continued)

CONDENSED STATEMENTS OF
OPERATIONS

|                                                      | Years Ended December 31,
|----------------------------------------------------- | ------------------------
|
|REVENUES                                              |                         
|Interest on loans                                     |                         
|Equity in loss of subsidiaries                        |                         
|Other income                                          |                         
|                                                      |                         
|Total Income                                          |                         
|                                                      |                         
|EXPENSES                                              |                         
|Other operating expenses                              |                         
|                                                      |                         
|Net loss                                              |                         
|Gain on redemption of preferred stock, net of accrued |                         
|dividends and expenses                                |                         
|Preferred stock dividends                             |                         
|                                                      |                         
|NET LOSS AVAILABLE TO                                 |                         
|COMMON SHAREHOLDERS                                   |                         
|                                                      |                         

49

---

THE MIDDLETON DOLL
COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS December 31, 2006 and 2005

# NOTE 22  The
Middleton Doll Company (Parent Company Only) Financial Information (continued)

CONDENSED STATEMENTS OF
CASH FLOWS

|                                              | 2006 | 2005
|--------------------------------------------- | ---- | ----
|CASH FLOWS FROM OPERATING ACTIVITIES          |      |     
|Net loss                                      |      |     
|Adjustments to reconcile net income available |      |     
|to common shareholders to net cash flows      |      |     
|from operating activities                     |      |     
|Stock-based compensation expense              |      |     
|Equity in subsidiaries' earnings              |      |     
|Dividends from subsidiary                     |      |     
|Net change in                                 |      |     
|Other assets                                  |      |     
|Other liabilities                             |      |     
|                                              |      |     
|Net Cash Flows from Operating Activities      |      |     
|                                              |      |     
|CASH FLOWS FROM INVESTING ACTIVITIES          |      |     
|Advances to subsidiaries                      |      |     
|                                              |      |     
|Net Cash Flows used in Investing Activities   |      |     
|                                              |      |     
|CASH FLOWS FROM FINANCING ACTIVITIES          |      |     
|Payment for redemption of preferred stock,    |      |     
|including expenses                            |      |     
|Preferred 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       |      |     
|                                              |      |     

50

---

# Schedule I

Condensed Financial Information of
Small Business Issuer(Refer to footnote 22 of the consolidated financial statements)

# Schedule II

# Valuation and Qualifying
Accounts

Changes in the reserves deducted from
assets in the consolidated balance sheets for each of the two years in the period ended
December 31, 2006, are as follows:

|                                             | Balance at
beginning
of period | Additions | Deductions | Balance
at end
of period
|-------------------------------------------- | ------------------------------ | --------- | ---------- | ------------------------
|Allowance for loan losses:                   |                                |           |            |                         
|Year ended:                                  |                                |          
|December 31, 2006                            |                                |           | $          | --                      
|December 31, 2005                            |                                |           | $          | --                      
|                                             |                                |           |            |                         
|Allowance for doubtful accounts:             |                                |          
|Year ended:                                  |                                |          
|December 31, 2006                            |                                |           | $          | 155,000                 
|December 31, 2005                            |                                |           | $          | 154,833                 
|Allowance for obsolete and excess inventory: |                                |          
|Year ended:                                  |                                |          
|December 31, 2006                            |                                |           | $          | 451,330                 
|December 31, 2005                            |                                |           | $          | 319,412                 
|Deferred income taxes valuation allowance:   |                                |          
|Year ended:                                  |                                |          
|December 31, 2006                            |                                |           | $          | 4,506,792               
|December 31, 2005                            |                                |           | $          | 3,316,489               

51

---

# 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
12/31/2006 | Principal
amount
of loans
subject to
delinquent
Principal
or
Interest
|--------------- | ------------- | ------------------- | ---------------------- | ----------- | ------------------------ | --------------------------------------------- | ---------------------------------------------------------------------
|Commercial      |               |                     |                        |             |                          |                                               |                                                                      
|Second Mortgage |               |                     | 6.5% to                |             |                          | Demand to                                     |                                                                      
|                |               |                     | 8.00%                  |             |                          | 2/1/08                                        |                                                                      
|All others      |               | (1)                 | N/A                    |             |                          | N/A                                           |                                                                      
|                |               |                     |                        |             |                          |                                               |                                                                      
|Total loans     |               |                     |                        |             |                          |                                               |                                                                      
|                |               |                     |                        |             |                          |                                               |                                                                      

| | (1)                       This
category includes all non-mortgage loans on the balance sheet.
| | ---------------------------------------------------------------------------------------------

|                             | For the Years Ended December 31,
|---------------------------- | --------------------------------
|
|Loans, beginning of period   |                                 
|Additions during the period  |                                 
|Loans made                   |                                 
|Deductions during period     |                                 
|Principal collected on loans |                                 
|                             |                                 
|Loans, end of period         |                                 
|Allowance for loan losses    |                                 
|                             |                                 
|Net loans, end of period     |                                 
|                             |                                 

52

---

|Item 8. | Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure
|------- | ------------------------------------------------------------------------------------

| | None. | 
| | ----- | 

|Item 8A. | Controls and Procedures
|-------- | -----------------------

The
Companys management and Audit Committee were notified by Virchow, Krause &
Company, LLP (Virchow Krause), the Companys independent registered
public accounting firm, that during the course of their audit of the Companys
consolidated financial statements for 2006 they identified deficiencies in internal
control. Virchow Krause indicated that it is their belief that the combination of the
deficiencies constitutes a material weakness. The deficiencies relate to the following:
(1) the lack of timely account reconciliation for certain general ledger accounts; (2) duplicate
payment of a certain vendor invoice; (3) entering into a business agreement to sell or
lease property without a written contract; and (4) the lack of segregation of duties with
respect to the payment of vendor invoices. The Company has discussed the deficiencies
identified above with the Audit Committee and Virchow Krause and believes that through
measures already taken since such deficiencies were identified the Company has
remediated the material weakness.

This
Annual Report on Form 10-KSB does not include a report of our managements assessment
regarding internal control over financial reporting or an attestation report of our
registered public accounting firm due to a transition period established by the rules of
the Securities and Exchange Commission for small business issuers. The Company is
currently in the process of reviewing and formalizing its internal controls and procedures
for financial reporting in accordance with the Securities and Exchange Commissions
rules implementing the internal control reporting requirements included in Section 404 of
the Sarbanes-Oxley Act for small business issuers. The Company has not completed this
process, and this process will require significant amounts of management time and
resources. In the course of evaluation and testing, management may identify deficiencies
that will need to be addressed and remediated.

Under
the supervision and with the participation of management, including the Chief Executive
Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design
and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the
period covered by this Annual Report on Form 10-KSB, the disclosure controls and
procedures did not provide reasonable assurance of effective because of the internal
control deficiencies identified above. However, they concluded that the internal control
deficiencies identified above did not impact the quality of the financial information in
this Annual Report on Form 10-KSB and that the consolidated financial statements included
in this Annual Report on Form 10-KSB fairly state, in all material respects, the
Companys financial position, results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles.

There
can be no assurances that our disclosure controls and procedures will detect or uncover
all failure of persons with the Company to report material information otherwise to be set
forth in the reports that we file with the Securities and Exchange Commission.

Based
on an evaluation performed by the Companys management, with the participation of the
Companys Chief Executive Officer and Chief Financial Officer, except as identified
above, 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, 2006 that have materially affected, or are likely to materially affect, the
Companys internal control over financial reporting.

|Item 8B. | Other Information
|-------- | -----------------

| | None. | 
| | ----- | 

53

---

Part III

|Item 9. | Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance;Compliance With Section 16(a) of the Exchange Act
|------- | ------------------------------------------------------------------------------------------------------------------------------------

The
information called for by Item 401 of Regulation S-B with respect to the directors of the
small business issuer and by Item 405 of Regulation S-B is incorporated herein by
reference from the small business issuer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, 2006 (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.

The
information concerning the audit committee financial expert and the identification of the
audit committee members required pursuant to Items 407(c)(3), 407(d)(4) and 407(d)(5) of
Regulation S-B is incorporated herein by reference from the 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 10. | Executive Compensation
|-------- | ----------------------

The
information called for by this Item 10 is incorporated herein by reference from the 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.

|Item 11. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
|-------- | ----------------------------------------------------------------------------------------------

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

|Item 12. | Certain Relationships, Related Transactions, and Director Independence
|-------- | ----------------------------------------------------------------------

The
information called for by this Item 12 is incorporated herein by reference from the Proxy
Statement under the heading Related Person Transactions.

|Item 13. | Exhibits
|-------- | --------

Reference
is made to the separate exhibit index contained on pages 56, 57 and 58 hereof.

|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

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

54

---

# SIGNATURES

In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the small
business issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized on March 23, 2007.

| |                                      
| | -------------------------------------
| | 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 small business issuer and in the capacities
indicated on March 23, 2007.

| |                                                    
| | ---------------------------------------------------
| | /s/   Salvatore L. Bando                           
| | Salvatore L. Bando                                 
| | President and Chief Executive Officer, Director    
| | /s/   Craig R. Bald                                
| | Craig R. Bald                                      
| | Vice President Finance and Chief Financial Officers
| | (Principal Financial and Accounting Officer)       
| | /s/   Kenneth A. Werner, Jr.                       
| | Kenneth A. Werner, Jr.                             
| | Director                                           
| | /s/   Peter A. Fischer                             
| | Peter A. Fischer                                   
| | Director                                           
| | /s/   David A. Geraldson, Sr.                      
| | David A. Geraldson, Sr.                            
| | Director                                           
| |                                                    
| | Jeffrey B. Rusinow                                 
| | Director                                           
| |                                                    
| | Douglas M. Schosser                                
| | Director                                           

55

---

# INDEX TO EXHIBITS

# Exhibit No.
           
           
           
              Exhibit Description

| | 3.1 | 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).
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.2 | 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).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.3 | By-laws
(incorporated by reference to Exhibit 3.2 to the Companys Form 10-Q for the
quarterly period ended March 31, 1997).
| | --- | ----------------------------------------------------------------------------------------------------------------------------

| | 3.4 | Amendment
to By-laws (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K,
dated February 15, 2007, as filed with the Securities and Exchange Commission on
February 21, 2007).
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

56

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| | 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 | Twelfth
Amendment to Amended and Restated Credit Agreement among Lee Middleton Original Dolls,
Inc. (as successor in interest to 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 23, 2006 (incorporated by reference to Exhibit 10.1 to the Company's Form 10-QSB for the
quarterly period ended June 30, 2006).
| | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | 4.16 | 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).
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

57

---

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

| | 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 (incorporated
by reference to Exhibit 10.4 to the Company's Form 10-K for the year ended December 31, 2005).
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 10.6* | Restated
Employment Agreement, dated December 1, 2006, by and among Lee Middleton Original Dolls,
Inc., License Products, Inc. and Craig R. Bald (incorporated by reference to Exhibit 99.1
to Current Report on Form 8-K, dated January 19, 2007, as filed with the Securities and
Exchange Commission on January 22, 2007).
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 10.7* | Employment
 Agreement,  dated June 20, 2005,  by and among The  Middleton  Doll Company, Lee
Middleton Original Dolls, Inc., License Products, Inc. and Kenneth A. Werner
(incorporated by reference to Exhibit 99.2 to Current Report on Form 8-K, dated October
5, 2006, as filed with the Securities and Exchange Commission on October 5, 2006).
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 11 | Statement
Regarding Computation of Net Loss Per Share
| | -- | -----------------------------------------------------

| | 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.
| | - | ---------------------------------------------------------

58