**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**                                                                                                                                                 |   | **September                30**                          |           | December                31,                 |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------|----------------|---------------------------------------------|--------|
|                                                                                                                                                            |   | **2006                (Unaudited)**                      |           | 2005                (Audited)               |   |
| Cash                and cash equivalents                                                                                                                        |   | **$       1,748,290** |           | $                    946,272 |   |
| Investment                in fixed maturities, at fair value Available for Sale (amortized                cost                $589,816, $589,816, respectively) |   |                                                     | **604,376**    |                                        |   | 600,756 |   |
| Investment                in fixed maturities, at amortized cost, Held to Maturity (fair value                $18,367,629; $18,334,704, respectively)           |   |                                                     | **18,716,385** |                                        |   | 18,717,461 |   |
| Other                long-term investments                                                                                                                      |   |                                                     | **1,517,054**  |                                        |   | 1,543,441 |   |
| Investment                in equity securities (cost $467,323; $356,056,                respectively)                                                           |   |                                                     | **502,429**    |                                        |   | 357,792 |   |
| Total                Investments, Including Cash and Cash Equivalents                                                                                           |   |                                                     | **23,088,534** |                                        |   | 22,165,722 |   |
|                                                                                                                                                            |   |                                                     |           |                                        |   |   |   |
| Accrued                investment income                                                                                                                        |   |                                                     | **228,566**    |                                        |   | 185,286 |   |
| Funds                receivable on matured fixed security                                                                                                       |   |                                                     | **-**          |                                        |   | 807,500 |   |
| Furniture                and equipment, net                                                                                                                     |   |                                                     | **1,390,110**  |                                        |   | 1,368,975 |   |
| Deferred                policy acquisition costs                                                                                                                |   |                                                     | **342,121**    |                                        |   | 389,110 |   |
| Policy                loans                                                                                                                                     |   |                                                     | **155,979**    |                                        |   | 126,303 |   |
| Receivable                from reinsurer                                                                                                                        |   |                                                     | **48,385**     |                                        |   | 48,385 |   |
| Premiums                due and unpaid                                                                                                                          |   |                                                     | **1,012,584**  |                                        |   | 1,027,683 |   |
| Income                tax assets                                                                                                                                |   |                                                     | **16,000**     |                                        |   | 37,000 |   |
| Intangible                assets                                                                                                                                |   |                                                     | **142,178**    |                                        |   | 146,540 |   |
| Other                assets                                                                                                                                     |   |                                                     | **155,526**    |                                        |   | 318,973 |   |
| Total                Assets                                                                                                                                     |   | **$**                                                    | **26,579,983** |                                        | $      | 26,621,477 |   |
|                                                                                                                                                            |   |                                                     |           |                                        |   |   |   |
| **LIABILITIES                AND SHAREHOLDERS' EQUITY**                                                                                                         |   |                                                     |           |                                        |   |   |   |
|                                                                                                                                                            |   |                                                     |           |                                        |   |   |   |
| **Liabilities:**                                                                                                                                                |   |                                                     |           |                                        |   |   |   |
| Liabilities                for future policy benefits                                                                                                           |   | **$**                                                    | **2,445,094**  |                                        | $      | 2,591,479 |   |
| Policy                claims payable                                                                                                                            |   |                                                     | **2,362,413**  |                                        |   | 2,558,565 |   |
| Annuity                deposits                                                                                                                                 |   |                                                     | **2,699,328**  |                                        |   | 2,835,552 |   |
| Deferred                annuity profits                                                                                                                         |   |                                                     | **320,385**    |                                        |   | 339,429 |   |
| Premium                deposit funds                                                                                                                            |   |                                                     | **29,293**     |                                        |   | 31,807 |   |
| Supplementary                contracts without life contingencies                                                                                               |   |                                                     | **19,977**     |                                        |   | 36,981 |   |
| Advanced                and unallocated premium                                                                                                                 |   |                                                     | **915,441**    |                                        |   | 803,290 |   |
| Commissions                payable                                                                                                                              |   |                                                     | **472,703**    |                                        |   | 501,821 |   |
| Accrued                taxes and expenses                                                                                                                       |   |                                                     | **840,117**    |                                        |   | 752,376 |   |
| Bonds                payable                                                                                                                                    |   |                                                     | **1,702,629**  |                                        |   | 1,747,178 |   |
| Other                liabilities                                                                                                                                |   |                                                     | **900,590**    |                                        |   | 1,299,637 |   |
| Total                Liabilities                                                                                                                                |   |                                                     | **12,707,970** |                                        |   | 13,498,115 |   |
|                                                                                                                                                            |   |                                                     |           |                                        |   |   |   |
| **Shareholders'                Equity:**                                                                                                                        |   |                                                     |           |                                        |   |   |   |
| Common                stock, $.02 stated value, 45,000,000 shares authorized, 17,213,170;                17,213,170 shares issued and outstanding respectively  |   |                                                     | **344,264**    |                                        |   | 344,264 |   |
| Additional                paid-in capital                                                                                                                       |   |                                                     | **7,582,718**  |                                        |   | 7,608,519 |   |
| Accumulated                other comprehensive income (loss)                                                                                                    |   |                                                     | **41,341**     |                                        |   | 10,622 |   |
| Accumulated                surplus                                                                                                                              |   |                                                     | **7,300,948**  |                                        |   | 5,412,928 |   |
| Treasury                stock, at cost; 1,445,708; 383,879 shares respectively                                                                                  |   |                                                     | **(1,397,258** | **)**                                       |   | (                252,971 | ) |
| Total                Shareholders' Equity                                                                                                                       |   |                                                     | **13,872,013** |                                        |   | 13,123,362 |   |
| Total                Liabilities and Shareholders' Equity                                                                                                       |   | **$**                                                    | **26,579,983** |                                        | $      | 26,621,477 |   |
|                                                                                                                                                            |   |                                                     |           |                                        |   |   |   |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES **

**CONSOLIDATED      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**

|                                                                             | Three                Months EndedSeptember                30 |                    | Nine                Months EndedSeptember                30 |            |    |
|----------------------------------------------------------------------------------|--------------------------------------------------------------|-------------------------|-------------------------------------------------------------|-----------------|---------|
|                                                                             |                                                         | **2006****(Unaudited)** |                                                        | 2005(Unaudited) |    |  **2006****(Unaudited)** |   | 2005(Unaudited) |   |
| **Income:**                                                                      |                                                         |                    |                                                        |            |    |    |   |   |   |
| Premium                income                                                    | **$**                                                        | **11,081,025**          | $                                                           | 11,139,338      | **$**   | **33,429,870** | $ | 33,276,973 |   |
| Vision                insurance income                                           |                                                         | **445,745**             |                                                        | 263,591         |    | **1,170,599** |   | 738,794 |   |
| Net                investment income                                             |                                                         | **312,502**             |                                                        | 241,661         |    | **906,540** |   | 736,162 |   |
| Marketing                fees                                                    |                                                         | **39,027**              |                                                        | 23,205          |    | **106,713** |   | 85,679 |   |
| Realized                gains on debt retirement                                 |                                                         | **3,915**               |                                                        | 23,463          |    | **14,850** |   | 82,527 |   |
| Realized                gains (losses)                                           |                                                         | **(261**                | )                                                           | 30,153          |    | **20,354** |   | 30,226 |   |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Total                Income                                                      |                                                         | **11,881,953**          |                                                        | 11,721,411      |    | **35,648,926** |   | 34,950,361 |   |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| **Expenses:**                                                                    |                                                         |                    |                                                        |            |    |   |   |   |   |
| Liability                for future policy benefits expense                      |                                                         | **(28,088**             | )                                                           | 114,190         |    | **(146,386** | ) | 317,351 |   |
| Policy                benefits and other insurance costs                         |                                                         | **8,371,819**           |                                                        | 8,562,480       |    | **25,813,646** |   | 25,353,121 |   |
| Amortization                of deferred policy acquisition costs                 |                                                         | **6,911**               |                                                        | 9,995           |    | **14,685** |   | 26,587 |   |
| Operating                expenses                                                |                                                         | **2,138,236**           |                                                        | 2,102,555       |    | **6,517,439** |   | 6,225,034 |   |
| Taxes,                other than income, fees and assessments                    |                                                         | **326,446**             |                                                        | 355,373         |    | **1,137,631** |   | 1,148,037 |   |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Total                Expenses                                                    |                                                         | **10,815,324**          |                                                        | 11,144,593      |    | **33,337,015** |   | 33,070,130 |   |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Income                from Operations before Income Taxes                        |                                                         | **1,066,629**           |                                                        | 576,818         |    | **2,311,911** |   | 1,880,231 |   |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Provision                for income taxes                                        |                                                         | **195,791**             |                                                        | 86,136          |    | **423,891** |   | 376,263 |   |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Net                Income                                                        | **$**                                                        | **870,838**             | $                                                           | 490,682         | **$**   | **1,888,020** | $ | 1,503,968 |   |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Net                income per common share (basic and diluted)                   | **$**                                                        | **0.05**                | $                                                           | 0.03            | **$**   | **0.11** | $ | 0.09 |   |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Weighted                average number of fully paid common shares               |                                                         | **16,532,522**          |                                                        | 16,784,080      |    | **16,701,162** |   | 17,693,416 |   |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Other                comprehensive income gain (loss), net of tax:               |                                                         |                    |                                                        |            |    |   |   |   |   |
| Unrealized                gains (losses) on securities:                          |                                                         |                    |                                                        |            |    |   |   |   |   |
| Unrealized                holding gain (loss) arising during period (net of tax) | **$**                                                        | **57,079**              | $                                                           | (3,607          | **)$**  | **44,284** | $ | (47,045 | ) |
| Reclassification                adjustment for loss included in net income       |                                                         | **(1,762**              | )                                                           |  (25,027   | )       | **(13,564** | ) | (25,087 | ) |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Other                Comprehensive Income (loss)                                 |                                                         | **55,317**              |                                                        | (28,634         | )  | **30,720** |   | (72,132 | ) |
|                                                                             |                                                         |                    |                                                        |            |    |   |   |   |   |
| Comprehensive                Income                                              | **$**                                                        | **926,155**             | $                                                           | 462,048         | **$**   | **1,918,740** | $ | 1,431,836 |   |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

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

| **Cash                    flows from operating activities:**  | **2006****(Unaudited)** |   | 2005(Unaudited) |   |
|--------------------------------------------------------------------|-------------------------|--------|-----------------|--------|

| Net                  income                                                                                         | **$**  | **1,888,020**  |   | $      | 1,503,968  |    |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------|--------|--------|------------|---------|
| Adjustments                  to reconcile net income to net cash provided by operating                  activities: |   |           |   |   |       |    |
| Realized                  gain on investments                                                                       |   | **(14,721**    | **)**  |   | (30,226    | )  |
| Realized                  gain on furniture and fixtures                                                            |   | **(5,633**     | **)**  |   | -          |    |
| Realized                  gain on debt retirement                                                                   |   | **(14,850**    | **)**  |   | (82,527    | )  |
| Decrease                  in deferred tax asset                                                                     |   | **15,000**     |   |   | 60,000     |    |
| Depreciation                                                                                                        |   | **244,285**    |   |   | 209,286    |    |
| Amortization                  of deferred acquisition costs, and intangibles                                        |   | **19,047**     |   |   | 30,948     |    |
| Accretion                  of bond discount                                                                         |   | **(3,098**     | **)**  |   | 2,776      |    |
| Change                  in assets and liabilities:                                                                  |   |           |   |   |       |    |
| (Increase)                  decrease in accrued investment income                                                   |   | **(43,280**    | **)**  |   | 732        |    |
| (Increase)                  decrease in premiums due and unpaid                                                     |   | **15,099**     |   |   | (113,709   | )       |
| Increase                  (decrease) in liability for future policy benefits                                        |   | **(146,386**   | **)**  |   | 317,351    |    |
| Increase                  (decrease) in policy claims payable                                                       |   | **(196,152**   | **)**  |   | 298,396    |    |
| Decrease                  in annuity deposits and deferred profits                                                  |   | **(155,268**   | **)**  |   | (53,666    | )       |
| Decrease                  in premium deposit funds                                                                  |   | **(2,514**     | **)**  |   | (2,428     | )       |
| Increase                  in advanced and unallocated premium                                                       |   | **112,151**    |   |   | 149,654    |    |
| Increase                  (decrease ) in commissions payable                                                        |   | **(29,118**    | **)**  |   | 11,114     |    |
| Other,                  increase (decrease)                                                                         |   | **95,072**     |   |   | (425,395   | )       |
| Net                  Cash Provided By Operating Activities                                                          |   | **1,777,654**  |   |   | 1,876,274  |    |
|                                                                                                                |   |           |   |   |       |    |
| **Cash                  flows from investing activities:**                                                          |   |           |   |   |       |    |
| Proceeds                  from sales of furniture and equipment                                                     |   | **5,640**      |   |   | -          |    |
| Proceeds                  from maturity or redemption - Held to Maturity Investments                                |   | **2,654,553**  |   |   | 2,665,824  |    |
| Proceeds                  from sale of equity securities                                                            |   | **96,504**     |   |   | 262,982    |    |
| Purchase                  of furniture and equipment                                                                |   | **(468,426**   | **)**  |   | (443,100   | )       |
| Purchase                  of fixed maturity securities - Held to Maturity                  Investments              |   | **(1,873,302** | **)**  |   | (2,899,375 | )       |
| Purchase                  of equity securities                                                                      |   | **(200,202**   | **)**  |   | -          |    |
| Other                  investments - line of credit received                                                        |   | **26,387**     |   |   | -          |    |
| Net                  Cash Provided By (Used In) Investing Activities                                                |   | **241,154**    |   |   | (413,669   | )       |
|                                                                                                                |   |           |   |   |       |    |
| **Cash                  flows from financing activities:**                                                          |   |           |   |   |       |    |
| Net                  payments on supplementary contracts                                                            |   | **(17,004**    | **)**  |   | (7,570     | )       |
| Purchase                  of treasury stock                                                                         |   | **(1,234,786** | **)**  |   | (2,475,837 | )       |
| Treasury                  shares sold                                                                               |   | **64,550**     |   |   | 125,725    |    |
| Bonds                  payable purchased                                                                            |   | **(29,700**    | **)**  |   | (123,228   | )       |
| Exercised                  stock options                                                                            |   | **150**        |   |   | 1,789      |    |
| Net                  Cash Used In Financing Activities                                                              |   | **(1,216,790** | **)**  |   | (2,479,121 | )       |
|                                                                                                                |   |           |   |   |       |    |
|  Net                  Increase (Decrease) In Cash and Cash Equivalents                                         |   | **802,018**    |   |   | (1,016,516 | )       |
| Cash                  And Cash Equivalents, Beginning Of Period                                                     |   | **946,272**    |   |   | 3,809,913  |    |
| Cash                  And Cash Equivalents, End Of Period                                                           | **$**  | **1,748,290**  |   | $      | 2,793,397  |    |
|                                                                                                                |   |           |   |   |       |    |

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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. Control and Procedures**

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**PART      II -- OTHER INFORMATION**

**Item      1. Legal Proceedings.**

**Item      1A. Risk Factors**

**Item      2. Unregistered Sales of Equity Securities and Use of      Proceeds.**

**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.**

| Exhibit                Number |   |  Description                of Exhibit                                                                                                                                                                                                                       |
|-------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1                          |   | Certification                of Principal Executive Officer Pursuant to Rules 13a-14(a)and 15d-14(a)                under the Securities Exchange Act of 1934, as Adopted Pursuant to                Section                302 of the Sarbanes-Oxley Act of 2002 |
|                          |   |                                                                                                                                                                                                                                                              |
| 31.2                          |   | Certification                of Principal Financial Officer Pursuant to Rules 13a-14(a)and 15d-14(a)                under the Securities Exchange Act of 1934, as Adopted Pursuant to                Section                302 of the Sarbanes-Oxley Act of 2002 |
|                          |   |                                                                                                                                                                                                                                                              |
| 32.1                          |   | Certification                of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350,                as                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of                2002                                                 |
|                          |   |                                                                                                                                                                                                                                                              |
| 32.2                          |   | Certification                of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350,                as                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of                2002                                                 |

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

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

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**SIGNATURES**

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

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