**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**FORM      10-Q**

**BNL      FINANCIAL CORPORATION**

| IOWA                                                    | 42-1239454                                          |
|---------------------------------------------------------|-----------------------------------------------------|
| (State                of incorporation)                 | (I.R.S.                Employer Identification No.) |
|                                                    |                                                |
| 7010                Hwy 71 W., Ste 100                  |                                                |
| Austin,                Texas                            | 78735                                               |
| (Address                of principal executive offices) | (Zip                Code)                           |
|                                                    |                                                |
|                                                    |                                                |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES**

**PART      I - FINANCIAL INFORMATION**

**Item      1. Financial Statements**

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

| **ASSETS**                                                                                                                                                 |   | **June                30**                                     |           | December                31,                 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|----------------|---------------------------------------------|--------|
|                                                                                                                                                            |   | **2006                (Unaudited)**                            |           | 2005                (Audited)               |   |
| Cash                and cash equivalents                                                                                                                        |   | **$        2,789,292** |           | $                    946,272 |   |
| Investment                in fixed maturities, at fair value Available for Sale (amortized                cost                $589,816, $589,816, respectively) |   |                                                           | **574,210**    |                                        |   | 600,756 |   |
| Investment                in fixed maturities, at amortized cost, Held to Maturity (fair value                $17,466,374; $18,334,704, respectively)           |   |                                                           | **18,064,962** |                                        |   | 18,717,461 |   |
| Other                long-term investments                                                                                                                      |   |                                                           | **1,525,828**  |                                        |   | 1,543,441 |   |
| Investment                in equity securities (cost $378,359; $356,056,                respectively)                                                           |   |                                                           | **379,315**    |                                        |   | 357,792 |   |
| Total                Investments, Including Cash and Cash Equivalents                                                                                           |   |                                                           | **23,333,607** |                                        |   | 22,165,722 |   |
|                                                                                                                                                            |   |                                                           |           |                                        |   |   |   |
| Accrued                investment income                                                                                                                        |   |                                                           | **216,555**    |                                        |   | 185,286 |   |
| Funds                receivable on matured fixed security                                                                                                       |   |                                                           | **-**          |                                        |   | 807,500 |   |
| Furniture                and equipment, net                                                                                                                     |   |                                                           | **1,401,866**  |                                        |   | 1,368,975 |   |
| Deferred                policy acquisition costs                                                                                                                |   |                                                           | **359,684**    |                                        |   | 389,110 |   |
| Policy                loans                                                                                                                                     |   |                                                           | **133,064**    |                                        |   | 126,303 |   |
| Receivable                from reinsurer                                                                                                                        |   |                                                           | **48,385**     |                                        |   | 48,385 |   |
| Premiums                due and unpaid                                                                                                                          |   |                                                           | **969,229**    |                                        |   | 1,027,683 |   |
| Income                tax assets                                                                                                                                |   |                                                           | **50,000**     |                                        |   | 37,000 |   |
| Intangible                assets                                                                                                                                |   |                                                           | **145,761**    |                                        |   | 146,540 |   |
| Other                assets                                                                                                                                     |   |                                                           | **268,143**    |                                        |   | 318,973 |   |
| Total                Assets                                                                                                                                     |   | **$**                                                          | **26,926,294** |                                        | $      | 26,621,477 |   |
|                                                                                                                                                            |   |                                                           |           |                                        |   |   |   |
| **LIABILITIES                AND SHAREHOLDERS' EQUITY**                                                                                                         |   |                                                           |           |                                        |   |   |   |
|                                                                                                                                                            |   |                                                           |           |                                        |   |   |   |
| **Liabilities:**                                                                                                                                                |   |                                                           |           |                                        |   |   |   |
| Liabilities                for future policy benefits                                                                                                           |   | **$**                                                          | **2,473,182**  |                                        | $      | 2,591,479 |   |
| Policy                claims payable                                                                                                                            |   |                                                           | **2,330,715**  |                                        |   | 2,558,565 |   |
| Annuity                deposits                                                                                                                                 |   |                                                           | **2,811,505**  |                                        |   | 2,835,552 |   |
| Deferred                annuity profits                                                                                                                         |   |                                                           | **333,233**    |                                        |   | 339,429 |   |
| Premium                deposit funds                                                                                                                            |   |                                                           | **29,704**     |                                        |   | 31,807 |   |
| Supplementary                contracts without life contingencies                                                                                               |   |                                                           | **22,675**     |                                        |   | 36,981 |   |
| Advanced                and unallocated premium                                                                                                                 |   |                                                           | **973,571**    |                                        |   | 803,290 |   |
| Commissions                payable                                                                                                                              |   |                                                           | **545,937**    |                                        |   | 501,821 |   |
| Accrued                taxes and expenses                                                                                                                       |   |                                                           | **667,307**    |                                        |   | 752,376 |   |
| Bonds                payable                                                                                                                                    |   |                                                           | **1,714,374**  |                                        |   | 1,747,178 |   |
| Other                liabilities                                                                                                                                |   |                                                           | **949,949**    |                                        |   | 1,299,637 |   |
| Total                Liabilities                                                                                                                                |   |                                                           | **12,852,152** |                                        |   | 13,498,115 |   |
|                                                                                                                                                            |   |                                                           |           |                                        |   |   |   |
| **Shareholders'                Equity:**                                                                                                                        |   |                                                           |           |                                        |   |   |   |
| Common                stock, $.02 stated value, 45,000,000 shares authorized, 17,213,170;                17,213,170 shares issued and outstanding respectively  |   |                                                           | **344,264**    |                                        |   | 344,264 |   |
| Additional                paid-in capital                                                                                                                       |   |                                                           | **7,608,534**  |                                        |   | 7,608,519 |   |
| Accumulated                other comprehensive income (loss)                                                                                                    |   |                                                           | **(13,975)**   |                                        |   | 10,622 |   |
| Accumulated                surplus                                                                                                                              |   |                                                           | **6,430,109**  |                                        |   | 5,412,928 |   |
| Treasury                stock, at cost; 425,628; 383,879 shares respectively                                                                                    |   |                                                           | **(294,790**   | **)**                                       |   | (                252,971 | ) |
| Total                Shareholders' Equity                                                                                                                       |   |                                                           | **14,074,142** |                                        |   | 13,123,362 |   |
| Total                Liabilities and Shareholders' Equity                                                                                                       |   | **$**                                                          | **26,926,294** |                                        | $      | 26,621,477 |   |
|                                                                                                                                                            |   |                                                           |           |                                        |   |   |   |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES **

**CONSOLIDATED      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**

|                                                                       | Three                Months EndedJune                30 |                    | Six                Months EndedJune                30 |            |   |
|----------------------------------------------------------------------------|---------------------------------------------------------|-------------------------|-------------------------------------------------------|-----------------|--------|
|                                                                       |                                                    | **2006****(Unaudited)** |                                                  | 2005(Unaudited) |   |  **2006****(Unaudited)** |   | 2005(Unaudited) |   |
| **Income:**                                                                |                                                    |                    |                                                  |            |   |    |   |   |   |
| Premium                income                                              | **$**                                                   | **11,032,159**          | $                                                     | 11,239,144      | **$**  | **22,348,846** | $ | 22,137,635 |   |
| Vision                insurance income                                     |                                                    | **332,830**             |                                                  | 244,042         |   | **724,854** |   | 475,203 |   |
| Net                investment income                                       |                                                    | **321,674**             |                                                  | 245,295         |   | **594,038** |   | 494,501 |   |
| Marketing                fees                                              |                                                    | **33,726**              |                                                  | 33,459          |   | **67,687** |   | 62,474 |   |
| Realized                gains on debt retirement                           |                                                    | **2,430**               |                                                  | 7,368           |   | **10,933** |   | 59,065 |   |
| Realized                gains                                              |                                                    | **2,833**               |                                                  | 0               |   | **20,615** |   | 73 |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Total                Income                                                |                                                    | **11,725,652**          |                                                  | 11,769,308      |   | **23,766,973** |   | 23,228,951 |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| **Expenses:**                                                              |                                                    |                    |                                                  |            |   |   |   |   |   |
| Liability                for future policy benefits expense                |                                                    | **(58,487)**            |                                                  | 55,123          |   | **(118,298)** |   | 203,161 |   |
| Policy                benefits and other insurance costs                   |                                                    | **8,532,378**           |                                                  | 8,503,755       |   | **17,441,827** |   | 16,790,641 |   |
| Amortization                of deferred policy acquisition costs           |                                                    | **3,996**               |                                                  | 8,541           |   | **7,775** |   | 16,592 |   |
| Operating                expenses                                          |                                                    | **2,251,367**           |                                                  | 2,192,476       |   | **4,379,204** |   | 4,122,480 |   |
| Taxes,                other than income, fees and assessments              |                                                    | **390,284**             |                                                  | 401,414         |   | **811,184** |   | 792,664 |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Total                Expenses                                              |                                                    | **11,119,538**          |                                                  | 11,161,309      |   | **22,521,692** |   | 21,925,538 |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Income                from Operations before Income Taxes                  |                                                    | **606,114**             |                                                  | 607,999         |   | **1,245,281** |   | 1,303,413 |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Provision                for income taxes                                  |                                                    | **108,035**             |                                                  | 169,675         |   | **228,100** |   | 290,127 |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Net                Income                                                  | **$**                                                   | **498,079**             | $                                                     | 438,324         | **$**  | **1,017,181** | $ | 1,013,286 |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Net                income per common share (basic and diluted)             | **$**                                                   | **0.03**                | $                                                     | 0.02            | **$**  | **0.06** | $ | 0.06 |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Weighted                average number of fully paid common shares         |                                                    | **16,795,299**          |                                                  | 17,355,359      |   | **16,821,440** |   | 18,080,397 |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Other                comprehensive income (loss), net of tax:              |                                                    |                    |                                                  |            |   |   |   |   |   |
| Unrealized                gains (losses) on securities:                    |                                                    |                    |                                                  |            |   |   |   |   |   |
| Unrealized                holding loss arising during period (net of tax)  | **$**                                                   | **(4,269)**             | $                                                     | 9,605           | **$**  | **(12,794)** | $ | (43,438) |   |
| Reclassification                adjustment for loss included in net income |                                                    | **(6,869)**             |                                                  | (3,565)         |   | **(11,802)** |   | (60) |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Other                Comprehensive Income (loss)                           |                                                    | **(11,138)**            |                                                  | 6,040           |   | **(24,596)** |   | (43,498) |   |
|                                                                       |                                                    |                    |                                                  |            |   |   |   |   |   |
| Comprehensive                Income                                        | **$**                                                   | **486,941**             | $                                                     | 444,364         | **$**  | **992,585** | $ | 969,788 |   |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

|                                                                                                            | Six                Months Ended June                30, |           |
|-----------------------------------------------------------------------------------------------------------------|---------------------------------------------------------|----------------|
| **Cash                flows from operating activities:**                                                   | **2006****(Unaudited)**                                 |           | 2005(Unaudited) |   |
| Net                income                                                                                       | **$**                                                   | **1,017,181**  |   | $ | 1,013,286 |   |
| Adjustments                to reconcile net income to net cash provided by operating                activities: |                                                    |           |   |   |   |   |
| Realized                gain on investments                                                                     |                                                    | **(14,892**    | **)** |   | (73 | )  |
| Realized                gain on furniture and fixtures                                                          |                                                    | **(5,723**     | **)** |   | - |   |
| Realized                gain on debt retirement                                                                 |                                                    | **(10,935**    | **)** |   | (59,065 | )  |
| Decrease                in deferred tax asset                                                                   |                                                    | **-**          |   |   | 51,000 |   |
| Depreciation                                                                                                    |                                                    | **158,471**    |   |   | 117,864 |   |
| Amortization                of deferred acquisition costs, and intangibles                                      |                                                    | **10,682**     |   |   | 19,499 |   |
| Accretion                of bond discount                                                                       |                                                    | **(3,445**     | **)** |   | 2,032 |   |
| Change                in assets and liabilities:                                                                |                                                    |           |   |   |   |   |
| (Increase)                decrease in accrued investment income                                                 |                                                    | **(31,269**    | **)** |   | 14,433 |   |
| Decrease                in premiums due and unpaid                                                              |                                                    | **58,454**     |   |   | 35,630 |   |
| Increase                (decrease) in liability for future policy benefits                                      |                                                    | **(118,298**   | **)** |   | 203,161 |   |
| Increase                (decrease) in policy claims payable                                                     |                                                    | **(227,850**   | **)** |   | 236,566 |   |
| Decrease                in annuity deposits and deferred profits                                                |                                                    | **(30,243**    | **)** |   | (14,741 | ) |
| Decrease                in premium deposit funds                                                                |                                                    | **(2,103**     | **)** |   | (1,878 | ) |
| Increase                (decrease) in advanced and unallocated premium                                          |                                                    | **170,281**    |   |   | (76,396 | ) |
| Increase                in commissions payable                                                                  |                                                    | **44,116**     |   |   | 51,364 |   |
| Other,                decrease                                                                                  |                                                    | **(144,113**   | **)** |   | (430,498 | ) |
| Net                Cash Provided By Operating Activities                                                        |                                                    | **870,314**    |   |   | 1,162,184 |   |
|                                                                                                            |                                                    |           |   |   |   |   |
| **Cash                flows from investing activities:**                                                        |                                                    |           |   |   |   |   |
| Proceeds                from sales of furniture and equipment                                                   |                                                    | **11,532**     |   |   | - |   |
| Proceeds                from maturity or redemption - Held to Maturity Investments                              |                                                    | **2,569,357**  |   |   | 2,600,455 |   |
| Proceeds                from sale of equity securities                                                          |                                                    | **96,504**     |   |   | - |   |
| Purchase                of furniture and equipment                                                              |                                                    | **(400,170**   | **)** |   | (35,869 | ) |
| Purchase                of fixed maturity securities - Held to Maturity                Investments              |                                                    | **(1,132,412** | **)** |   | (2,899,375 | ) |
| Purchase                of equity securities                                                                    |                                                    | **(111,654**   | **)** |   | - |   |
| Other                investments - line of credit received                                                      |                                                    | **17,613**     |   |   | - |   |
| Net                Cash Provided By (Used In) Investing Activities                                              |                                                    | **1,050,770**  |   |   | (334,789 | ) |
|                                                                                                            |                                                    |           |   |   |   |   |
| **Cash                flows from financing activities:**                                                        |                                                    |           |   |   |   |   |
| Net                (payments) receipts on supplementary contracts                                               |                                                    | **(14,306**    | **)** |   | (15,026 | ) |
| Purchase                of treasury stock                                                                       |                                                    | **(42,489**    | **)** |   | (2,364,629 | ) |
| Bonds                payable purchased                                                                          |                                                    | **(21,869**    | **)** |   | (93,904 | ) |
| Exercised                stock options                                                                          |                                                    | **600**        |   |   | 6,382 |   |
| Net                Cash Used In Financing Activities                                                            |                                                    | **(78,064**    | **)** |   | (2,467,177 | ) |
|                                                                                                            |                                                    |           |   |   |   |   |
|  Net                Increase (Decrease) In Cash and Cash Equivalents                                       |                                                    | **1,843,020**  |   |   | (1,639,782 | ) |
| Cash                And Cash Equivalents, Beginning Of Period                                                   |                                                    | **946,272**    |   |   | 3,809,913 |   |
| Cash                And Cash Equivalents, End Of Period                                                         | **$**                                                   | **2,789,292**  |   | $ | 2,170,131 |   |
|                                                                                                            |                                                    |           |   |   |   |   |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES**

** **
**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**Note      1.**

**Note      2.**

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES**

**Item      2. Management’s Discussion and Analysis of Financial Condition and Results of      Operations**

**Forward-Looking      Statements**

**Liquidity      and Capital Resources**

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**Consolidated      Results of Operations**

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**Item      3. Quantitative and Qualitative Disclosures About Market      Risk**

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**Item      4. Internal Control and Procedures**

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**PART      II -- OTHER INFORMATION**

**Item      1. Legal Proceedings.**

**Item      2. Changes in Securities.**

**Item      3. Defaults Upon Senior Securities.**

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

**Item      5. Other Information.**

**Item      6. Exhibits and Reports on Form 10-Q.**

**(b)      Material Contracts - Reports on Form 8-K.**

|  No                items were reported on Form 8-K during the period covered by this                report. |
|------------------------------------------------------------------------------------------------------------------|

**SIGNATURES**

|                                       |   | BNL                FINANCIAL CORPORATION                 |
|--------------------------------------------|--------|----------------------------------------------------------|
|                                       |   | (Registrant)                                             |
|                                       |   |  /s/                Wayne E. Ahart                  |
| Date:                August 14, 2006       |   | By:                Wayne E. Ahart, Chairman of the Board |
|                                       |   | (Chief                Executive Officer)                 |
|                                       |   |                                                     |
|                                       |   |  /s/                Barry N. Shamas                 |
| Date:                August 14, 2006  |   | By:                Barry N. Shamas, Executive V.P.       |
|                                       |   | (Chief                Financial Officer)                 |