**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.) |
|                                                    |                                                |
| 2100                W. William Cannon, Suite L          |                                                |
| Austin,                Texas                            | 78745                                               |
| (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**                                                                                                                                                 |   | **September                30**                                |           | December                31,                  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------|----------------|----------------------------------------------|--------|
|                                                                                                                                                            |   | **2005                (Unaudited)**                            |           | 2004                (Audited)                |   |
| Cash                and cash equivalents                                                                                                                        |   | **$        2,793,397** |           | $                   3,809,913 |   |
| Investment                in fixed maturities, at fair value Available for Sale (amortized                cost                $589,521, $589,521, respectively) |   |                                                           | **614,540**    |                                         |   | 664,488 |   |
| Investment                in fixed maturities, at amortized cost, Held to Maturity (fair value                $16,500,415; $16,957,702, respectively)           |   |                                                           | **16,742,922** |                                         |   | 17,005,973 |   |
| Other                long-term investments                                                                                                                      |   |                                                           | **1,557,407**  |                                         |   | 1,557,407 |   |
| Investment                in equity securities (cost $356,056; $588,885,                respectively)                                                           |   |                                                           | **351,620**    |                                         |   | 628,821 |   |
| Total                Investments, Including Cash and Cash Equivalents                                                                                           |   |                                                           | **22,059,886** |                                         |   | 23,666,602 |   |
|                                                                                                                                                            |   |                                                           |           |                                         |   |   |   |
| Accrued                investment income                                                                                                                        |   |                                                           | **182,465**    |                                         |   | 183,197 |   |
| Furniture                and equipment, net                                                                                                                     |   |                                                           | **668,613**    |                                         |   | 434,799 |   |
| Deferred                policy acquisition costs                                                                                                                |   |                                                           | **391,690**    |                                         |   | 346,373 |   |
| Policy                loans                                                                                                                                     |   |                                                           | **127,934**    |                                         |   | 153,470 |   |
| Receivable                from reinsurer                                                                                                                        |   |                                                           | **34,121**     |                                         |   | 34,121 |   |
| Premiums                due and unpaid                                                                                                                          |   |                                                           | **969,668**    |                                         |   | 855,959 |   |
| Income                tax assets                                                                                                                                |   |                                                           | **54,000**     |                                         |   | 101,000 |   |
| Intangible                assets                                                                                                                                |   |                                                           | **147,994**    |                                         |   | 154,483 |   |
| Other                assets                                                                                                                                     |   |                                                           | **165,000**    |                                         |   | 128,516 |   |
| Total                Assets                                                                                                                                     |   | **$**                                                          | **24,801,371** |                                         | $      | 26,058,520 |   |
|                                                                                                                                                            |   |                                                           |           |                                         |   |   |   |
| **LIABILITIES                AND SHAREHOLDERS' EQUITY**                                                                                                         |   |                                                           |           |                                         |   |   |   |
|                                                                                                                                                            |   |                                                           |           |                                         |   |   |   |
| **Liabilities:**                                                                                                                                                |   |                                                           |           |                                         |   |   |   |
| Liabilities                for future policy benefits                                                                                                           |   | **$**                                                          | **2,586,003**  |                                         | $      | 2,268,652 |   |
| Policy                claims payable                                                                                                                            |   |                                                           | **2,534,327**  |                                         |   | 2,235,929 |   |
| Annuity                deposits                                                                                                                                 |   |                                                           | **2,794,238**  |                                         |   | 2,783,838 |   |
| Deferred                annuity profits                                                                                                                         |   |                                                           | **309,919**    |                                         |   | 373,985 |   |
| Premium                deposit funds                                                                                                                            |   |                                                           | **32,596**     |                                         |   | 36,024 |   |
| Supplementary                contracts without life contingencies                                                                                               |   |                                                           | **48,229**     |                                         |   | 55,799 |   |
| Advanced                and unallocated premium                                                                                                                 |   |                                                           | **809,152**    |                                         |   | 659,498 |   |
| Commissions                payable                                                                                                                              |   |                                                           | **494,769**    |                                         |   | 483,655 |   |
| Accrued                taxes and expenses                                                                                                                       |   |                                                           | **617,240**    |                                         |   | 810,437 |   |
| Bonds                payable                                                                                                                                    |   |                                                           | **1,801,180**  |                                         |   | 2,007,339 |   |
| Payable                for Securities                                                                                                                           |   |                                                           | **-**          |                                         |   | 650,000 |   |
| Other                liabilities                                                                                                                                |   |                                                           | **432,461**    |                                         |   | 433,828 |   |
| Total                Liabilities                                                                                                                                |   |                                                           | **12,460,114** |                                         |   | 12,798,984 |   |
|                                                                                                                                                            |   |                                                           |           |                                         |   |   |   |
| **Shareholders'                Equity:**                                                                                                                        |   |                                                           |           |                                         |   |   |   |
| Common                stock, $.02 stated value, 45,000,000 shares authorized, 17,213,170;                20,980,760 shares issued and outstanding respectively  |   |                                                           | **344,264**    |                                         |   | 419,616 |   |
| Additional                paid-in capital                                                                                                                       |   |                                                           | **7,608,417**  |                                         |   | 10,829,800 |   |
| Accumulated                other comprehensive income                                                                                                           |   |                                                           | **18,031**     |                                         |   | 90,165 |   |
| Accumulated                surplus                                                                                                                              |   |                                                           | **4,613,806**  |                                         |   | 3,109,839 |   |
| Treasury                stock, at cost; 371,670; 1,933,646 shares respectively                                                                                  |   |                                                           | **(243,261**   | **)**                                        |   | (1,189,884 | ) |
| Total                Shareholders' Equity                                                                                                                       |   |                                                           | **12,341,257** |                                         |   | 13,259,536 |   |
| Total                Liabilities and Shareholders' Equity                                                                                                       |   | **$**                                                          | **24,801,371** |                                         | $      | 26,058,520 |   |
|                                                                                                                                                            |   |                                                           |           |                                         |   |   |   |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES **

**CONSOLIDATED      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**

|                                                                       | Three                Months EndedSeptember                30 |                    | Nine                Months EndedSeptember                30 |            |                          |
|----------------------------------------------------------------------------|--------------------------------------------------------------|-------------------------|-------------------------------------------------------------|-----------------|-------------------------------|
|                                                                       |                                                         | **2005****(Unaudited)** |                                                        | 2004(Unaudited) |  **2005****(Unaudited)** | 2004(Unaudited) |   |
| **Income:**                                                                |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Premium                income                                              | **$**                                                        | **11,402,928**          | $                                                           | 10,863,281      | **$**                         | **34,015,766** | $ | 32,372,886 |   |
| Net                investment income                                       |                                                         | **241,662**             |                                                        | 242,661         |                          | **736,163** |   | 732,841 |   |
| Marketing                fees                                              |                                                         | **23,205**              |                                                        | 40,972          |                          | **85,679** |   | 124,048 |   |
| Realized                gains on debt retirement                           |                                                         | **23,463**              |                                                        | 89,578          |                          | **82,527** |   | 304,025 |   |
| Realized                gains                                              |                                                         | **30,153**              |                                                        | 25,138          |                          | **30,226** |   | 130,595 |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Total                Income                                                |                                                         | **11,721,411**          |                                                        | 11,261,630      |                          | **34,950,361** |   | 33,664,395 |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| **Expenses:**                                                              |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Liability                for future policy benefits expense                |                                                         | **114,190**             |                                                        | 193,308         |                          | **317,351** |   | 623,814 |   |
| Policy                benefits and other insurance costs                   |                                                         | **8,562,480**           |                                                        | 8,068,403       |                          | **25,353,121** |   | 24,363,720 |   |
| Amortization                of deferred policy acquisition costs           |                                                         | **9,995**               |                                                        | 8,642           |                          | **26,587** |   | 22,898 |   |
| Operating                expenses                                          |                                                         | **2,102,555**           |                                                        | 1,976,981       |                          | **6,225,034** |   | 5,854,708 |   |
| Taxes,                other than income, fees and assessments              |                                                         | **355,373**             |                                                        | 349,680         |                          | **1,148,037** |   | 964,360 |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Total                Expenses                                              |                                                         | **11,144,593**          |                                                        | 10,597,014      |                          | **33,070,130** |   | 31,829,500 |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Income                from Operations before Income Taxes                  |                                                         | **576,818**             |                                                        | 664,616         |                          | **1,880,231** |   | 1,834,895 |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Provision                for income taxes                                  |                                                         | **86,136**              |                                                        | 5,414           |                          | **376,263** |   | 167,175 |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Net                Income                                                  | **$**                                                        | **490,682**             | $                                                           | 659,202         | **$**                         | **1,503,968** | $ | 1,667,720 |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Net                income per common share (basic and diluted)             | **$**                                                        | **0.03**                | $                                                           | 0.03            | **$**                         | **0.09** | $ | 0.08 |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Weighted                average number of fully paid common shares         |                                                         | **16,784,080**          |                                                        | 19,063,704      |                          | **17,693,416** |   | 19,282,426 |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Other                comprehensive income (loss), net of tax:              |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Unrealized                gains (losses) on securities:                    |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Unrealized                holding loss arising during period (net of tax)  | **$**                                                        | **(3,607)**             | $                                                           | (31,212)        | **$**                         | **(47,045)** | $ | (29,539) |   |
| Reclassification                adjustment for loss included in net income |                                                         | **(25,027)**            |                                                        | (27,944)        |                          | **(25,087)** |   | (125,848) |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Other                Comprehensive Loss                                    |                                                         | **(28,634)**            |                                                        | (59,156)        |                          | **(72,132)** |   | (155,387) |   |
|                                                                       |                                                         |                    |                                                        |            |                          |   |   |   |   |
| Comprehensive                Income                                        | **$**                                                        | **462,048**             | $                                                           | 600,046         | **$**                         | **1,431,836** | $ | 1,512,333 |   |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

|   | Nine                      Months Ended September                      30, |
|--------|---------------------------------------------------------------------------|

| **Cash                      flows from operating activities:**  |  | **2005****(Unaudited)** |   | 2004(Unaudited) |
|----------------------------------------------------------------------|--|-------------------------|--------|-----------------|

| Net                    income                                                                                                |        | **$**          | **1,503,968** |   | $          | 1,667,720 |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------------|---------------|--------|------------|-----------|
| Adjustments                    to reconcile net income to net cash provided by operating                    activities:      |   |           |          |   |       |
| Realized                    gain on investments                                                                              |   | **(30,226**    | **)**         |   | (133,858   |
| Realized                    loss on furniture and fixtures                                                                   |   | **-**          |          |   | 3,262      |
| Realized                    gain on debt retirement                                                                          |   | **(82,527**    | **)**         |   | (304,025   |
| Decrease                    in deferred tax asset                                                                            |   | **60,000**     |          |   | 35,000     |
| Depreciation                                                                                                                 |   | **209,286**    |          |   | 176,353    |
| Amortization                    of deferred acquisition costs, and intangibles                                               |   | **30,948**     |          |   | 22,898     |
| Accretion                    of bond discount                                                                                |   | **2,776**      |          |   | 5,656      |
| Change                    in assets and liabilities:                                                                         |   |           |          |   |       |
| (Increase)                    decrease in accrued investment income                                                          |   | **732**        |          |   | (28,407    |
| (Increase)                    decrease in premiums due and unpaid                                                            |   | **(113,709**   | )        |   | 259,142    |
| Increase                    in liability for future policy benefits                                                          |   | **317,351**    |          |   | 623,814    |
| Increase                    (decrease) in policy claims payable                                                              |   | **298,396**    |          |   | (88,578    |
| Decrease                    in annuity deposits and deferred profits                                                         |   | **(53,666**    | **)**         |   | (53,125    |
| Decrease                    in premium deposit funds                                                                         |   | **(2,428**     | **)**         |   | (1,520     |
| Increase                    (decrease) in advanced and unallocated premium                                                   |   | **149,654**    |          |   | (580,275   |
| Increase                    in commissions payable                                                                           |   | **11,114**     |          |   | 60,417     |
| Other,                    decrease                                                                                           |   | **(425,395**   | **)**         |   | (355,894   |
| Net                    Cash Provided By Operating Activities                                                                 |   | **1,876,274**  |          |   | 1,308,580  |
|                                                                                                                         |   |           |          |   |       |
| **Cash                    flows from investing activities:**                                                                 |   |           |          |   |       |
| Proceeds                    from sales of furniture and equipment                                                            |   | **-**          |          |   | 23,800     |
| Proceeds                    from maturity or redemption - Available for Sale                    Investments                  |   | **-**          |          |   | 793,634    |
| Proceeds                    from maturity or redemption - Held to Maturity Investments                                       |   | **2,665,824**  |          |   | 6,158,875  |
| Proceeds                    from sales of equity securities                                                                  |   | **262,982**    |          |   | 121,590    |
| Purchase                    of furniture and equipment                                                                       |   | **(443,100**   | **)**         |   | (153,376   |
| Purchase                    of fixed maturity securities - Held to Maturity                    Investments                   |   | **(2,899,375** | **)**         |   | (6,547,058 |
| Purchase                    of equity securities                                                                             |   | **-**          |          |   | (160,442   |
|                            Other                    investments - Line of credit advanced |   | -              |          |   | (30,000    |
| Net                    Cash Provided By (Used In) Investing Activities                                                       |   | **(413,669**   | **)**         |   | 207,023    |
|                                                                                                                         |   |           |          |   |       |
| **Cash                    flows from financing activities:**                                                                 |   |           |          |   |       |
| Net                    (payments) receipts on supplementary contracts                                                        |   | **(7,570**     | **)**         |   | (15,170    |
| Purchase                    of treasury stock                                                                                |   | **(2,475,837** | **)**         |   | (605,885   |
| Treasury                    shares sold                                                                                      |   | **125,725**    |          |   | 88,791     |
| Bonds                    payable purchased                                                                                   |   | **(123,228**   | **)**         |   | (281,076   |
| Exercised                    stock options                                                                                   |   | **1,789**      |          |   | 24,240     |
| Net                    Cash Used In Financing Activities                                                                     |   | **(2,479,121** | **)**         |   | (789,100   |
|  Net                    Increase (Decrease) In Cash and Cash Equivalents                                                |   | **(1,016,516** | )        |   | 726,503    |
| Cash                    And Cash Equivalents, Beginning Of Period                                                            |   | **3,809,913**  |          |   | 3,398,661  |
| Cash                    And Cash Equivalents, End Of Period                                                                  | **$**  | **2,793,397**  |          | $      | 4,125,164  |
|                                                                                                                         |   |           |          |   |       |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES**

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

**Note      1.**

**Note      2.**

**Note      3.**

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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:                November 14, 2005       |   | By:                Wayne E. Ahart, Chairman of the Board |
|                                         |   | (Chief                Executive Officer)                 |
|                                    |   |  /s/                Barry N. Shamas                 |
| Date:                November 14, 2005  |   | By:                Barry N. Shamas, Executive V.P.       |
|                                         |   | (Chief                Financial Officer)                 |

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