**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**

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**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,   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|----------------|-------------------------------|--------|
|                                                                                                                                                                                    |   | **2005                (Unaudited)** |           | 2004                (Audited) |   |
|                    Cash and cash equivalents                                                                                                                             |   | **$**                               | **2,170,131**  |                          | $      | 3,809,913 |   |
|     Investment                in fixed maturities, at fair value Available for Sale (amortized                cost                $589,521, $589,521, respectively) |   |                                | **640,703**    |                          |   | 664,488 |   |
| Investment                in fixed maturities, at amortized cost, Held to Maturity (fair value                $16,690,702; $16,957,702, respectively)                                   |   |                                | **16,807,996** |                          |   | 17,005,973 |   |
|                    Other long-term investments                                                                                                                           |   |                                | **1,557,407**  |                          |   | 1,557,407 |   |
|                    Investment in equity securities (cost $588,885; $588,885,                respectively)                                                                |   |                                | **593,997**    |                          |   | 628,821 |   |
| Total                Investments, Including Cash and Cash Equivalents                                                                                                                   |   |                                | **21,770,234** |                          |   | 23,666,602 |   |
|                                                                                                                                                                                    |   |                                |                |                          |   |  |   |
| Accrued                investment income                                                                                                                                                |   |                                | **168,764**    |                          |   | 183,197 |   |
| Furniture                and equipment, net                                                                                                                                             |   |                                | **352,804**    |                          |   | 434,799 |   |
| Deferred                policy acquisition costs                                                                                                                                        |   |                                | **383,951**    |                          |   | 346,373 |   |
| Policy                loans                                                                                                                                                             |   |                                | **158,664**    |                          |   | 153,470 |   |
| Receivable                from reinsurer                                                                                                                                                |   |                                | **34,121**     |                          |   | 34,121 |   |
| Premiums                due and unpaid                                                                                                                                                  |   |                                | **820,329**    |                          |   | 855,959 |   |
| Income                tax assets                                                                                                                                                        |   |                                | **58,000**     |                          |   | 101,000 |   |
| Intangible                assets                                                                                                                                                        |   |                                | **151,576**    |                          |   | 154,483 |   |
| Other                assets                                                                                                                                                             |   |                                | **179,066**    |                          |   | 128,516 |   |
| Total                Assets                                                                                                                                                             |   | **$**                               | **24,077,509** |                          | $      | 26,058,520 |   |
|                                                                                                                                                                                    |   |                                |           |                          |   |  |   |
| **LIABILITIES                AND SHAREHOLDERS' EQUITY**                                                                                                                                 |   |                                |                |                          |   |  |   |
|                                                                                                                                                                                    |   |                                |                |                          |   |  |   |
| **Liabilities:**                                                                                                                                                                        |   |                                |                |                          |   |  |   |
| Liabilities                for future policy benefits                                                                                                                                   |   | **$**                               | **2,471,813**  |                          | $      | 2,268,652 |   |
| Policy                claims payable                                                                                                                                                    |   |                                | **2,472,495**  |                          |   | 2,235,929 |   |
| Annuity                deposits                                                                                                                                                         |   |                                | **2,807,467**  |                          |   | 2,783,838 |   |
| Deferred                annuity profits                                                                                                                                                 |   |                                | **335,615**    |                          |   | 373,985 |   |
| Premium                deposit funds                                                                                                                                                    |   |                                | **33,146**     |                          |   | 36,024 |   |
| Supplementary                contracts without life contingencies                                                                                                                       |   |                                | **40,773**     |                          |   | 55,799 |   |
| Advanced                and unallocated premium                                                                                                                                         |   |                                | **583,102**    |                          |   | 659,498 |   |
| Commissions                payable                                                                                                                                                      |   |                                | **535,020**    |                          |   | 483,655 |   |
| Accrued                taxes and expenses                                                                                                                                               |   |                                | **634,911**    |                          |   | 810,437 |   |
| Bonds                payable                                                                                                                                                            |   |                                | **1,851,941**  |                          |   | 2,007,339 |   |
| Payable                for Securities                                                                                                                                                   |   |                                | **-**          |                          |   | 650,000 |   |
| Other                liabilities                                                                                                                                                        |   |                                | **440,151**    |                          |   | 433,828 |   |
| Total                Liabilities                                                                                                                                                        |   |                                | **12,206,434** |                          |   | 12,798,984 |   |
|                                                                                                                                                                                    |   |                                |                |                          |   |  |   |
| **Shareholders'                Equity:**                                                                                                                                                |   |                                |           |                          |   |  |   |
| Common                stock, $.02 stated value, 45,000,000 shares authorized, 17,213,170;                20,980,760 shares issued and outstanding                                       |   |                                | **344,264**    |                          |   | 419,616 |   |
|                    Additional paid-in capital                                                                                                                            |   |                                | **7,638,110**  |                          |   | 10,829,800 |   |
|                    Accumulated other comprehensive income                                                                                                                |   |                                | **46,665**     |                          |   | 90,165 |   |
|                    Accumulated surplus                                                                                                                                   |   |                                | **4,123,125**  |                          |   | 3,109,839 |   |
|                    Treasury stock, at cost; 448,230; 1,933,646 shares                respectively                                                                        |   |                                | (281,089       | )                             |   | (1,189,884 | ) |
| Total                Shareholders' Equity                                                                                                                                               |   |                                | **11,871,075** |                          |   | 13,259,536 |   |
| Total                Liabilities and Shareholders' Equity                                                                                                                               |   | **$**                               | **24,077,509** |                          | $      | 26,058,520 |   |
|                                                                                                                                                                                    |   |                                |                |                          |   |  |   |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES **

**CONSOLIDATED      STATEMENTS OF INCOME AND COMPREHENSIVE INCOME**

|   | Three                  Months EndedJune                  30 |   |   |   | Six                  Months EndedJune                  30. |   |
|--------|-------------------------------------------------------------|--------|--------|--------|------------------------------------------------------------|--------|

|   |                                **2005****(Unaudited)** | 2004(Unaudited) |   |  |                      **2005****(Unaudited** | 2004(Unaudited |   |
|--------|---------------------------------------------------------------------------------------------------------------|-----------------|--------|--|--------------------------------------------------|----------------|--------|

| **Income:**                                                                             |   |           |   |       |        |                        |           |   |            |   |
|-----------------------------------------------------------------------------------------|--------|----------------|--------|------------|--------|-----------------------------|----------------|--------|------------|--------|
| Premium                      income                                                     | $      | **11,483,186** | $      | 10,720,870 |   | $                           | **22,612,838** | $      | 21,509,605 |   |
| Net                      investment income                                              |   | **245,295**    |   | 255,333    |        |                        | **494,501**    |   | 490,180    |   |
| Marketing                      fees                                                     |   | **33,459**     |   | 41,409     |        |                        | **62,474**     |   | 83,076     |   |
| Realized                      gains on debt retirement                                  |   | **7,368**      |   | 209,307    |        |                        | **59,065**     |   | 214,447    |   |
| Realized                      gains (loss)                                              |   | **0**          |   | 111,091    |        |                        | **73**         |   | 105,457    |   |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Total                      Income                                                       |   | **11,769,308** |   | 11,338,010 |        |                        | **23,228,951** |   | 22,402,765 |   |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| **Expenses:**                                                                           |   |                |   |            |        |                        |           |   |            |   |
| Liability                      for future policy benefits expense                       |   | **55,123**     |   | 6,605      |        |                        | **203,161**    |   | 430,505    |   |
| Policy                      benefits and other insurance costs                          |   | **8,503,755**  |   | 8,240,679  |        |                        | **16,790,641** |   | 16,295,317 |   |
| Amortization                      of deferred policy acquisition costs                  |   | **8,541**      |   | 9,202      |        |                        | **16,592**     |   | 14,256     |   |
| Operating                      expenses                                                 |   | **2,192,476**  |   | 2,070,437  |        |                        | **4,122,480**  |   | 3,877,727  |   |
| Taxes,                      other than income, fees and assessments                     |   | **401,414**    |   | 234,095    |        |                        | **792,664**    |   | 614,681    |   |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Total                      Expenses                                                     |   | **11,161,309** |   | 10,561,018 |        |                        | **21,925,538** |   | 21,232,486 |   |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Income                      from Operations before Income Taxes                         |   | **607,999**    |   | 776,992    |        |                        | **1,303,413**  |   | 1,170,279  |   |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Provision                      for income taxes                                         |   | **169,675**    |   | 103,982    |        |                        | **290,127**    |   | 161,761    |   |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Net                      Income                                                         | $      | 438,324        | $      | 673,010    |   |  $                     | 1,013,286      | $      | 1,008,518  |   |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Net                      income per common share (basic and diluted)                    | $      | 0.02           | $      | 0.03       |   |  $                     | 0.06           | $      | 0.05       |   |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Weighted                      average number of fully paid common shares                |   | **17,355,359** |   | 19,415,273 |        |                        | **18,080,397** |   | 19,426,714 |   |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Other                      comprehensive income, net of tax:                            |   |                |   |            |        |                        |           |   |            |   |
| Unrealized                      gains on securities:                                    |   |                |   |            |        |                        |           |   |            |   |
| Unrealized                      holding gain (loss) arising during period (net of tax)  | $      | 9,605          | $      | (13,315)   |   |                      $ | (43,438)       | $      | 1,673      |   |
| Reclassification                      adjustment for gain (loss) included in net income |   | **(3,565)**    |   | (93,346)   |        |                        | **(60)**       |   | (97,905    | )      |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Other                      Comprehensive Income (Loss)                                  |   | **6,040**      |   | (106,661   |        |                        | **(43,498)**   |   | (96,232    | )      |
|                                                                                    |   |                |   |            |        |                        |           |   |            |   |
| Comprehensive                      Income                                               | $      | 444,364        | $      | 566,349    |   |  $                     | 969,788        | $      | 912,286    |   |

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**BNL      FINANCIAL CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

|   | Six                    Months Ended June                    30, |   |
|--------|-----------------------------------------------------------------|--------|

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

| Net                  income                                                                                         | **$**  | **1,013,286**  |    | $      | 1,008,518  |    |
|---------------------------------------------------------------------------------------------------------------------|--------|----------------|---------|--------|------------|---------|
| Adjustments                  to reconcile net income to net cash provided by operating                  activities: |   |           |    |   |       |    |
| Realized                  gain on investments                                                                       |   | **(73**        | **)**   |   | (95,719    | )  |
| Realized                  loss on furniture and fixtures                                                            |   | **-**          |    |   | 3,263      |    |
| Realized                  gain on debt retirement                                                                   |   | **(59,065**    | **)**   |   | (214,448   | )  |
| Increase                  (decrease) in deferred tax asset                                                          |   | **51,000**     |    |   | (11,000    | )       |
| Depreciation                                                                                                        |   | **117,864**    |    |   | 104,400    |    |
| Amortization                  of deferred acquisition costs, and intangibles                                        |   | **19,499**     |    |   | 14,256     |    |
| Accretion                  of bond discount                                                                         |   | **2,032**      |    |   | 4,844      |    |
| Change                  in assets and liabilities:                                                                  |   |           |    |   |       |    |
| (Increase)                  decrease in accrued investment income                                                   |   | **14,433**     |    |   | (13,151    | )  |
| Decrease                  in premiums due and unpaid                                                                |   | **35,630**     |    |   | 305,343    |    |
| Increase                  in liability for future policy benefits                                                   |   | **203,161**    |    |   | 430,505    |    |
| Increase                  (decrease) in policy claims payable                                                       |   | **236,566**    |    |   | (247,331   | )       |
| Decrease                  in annuity deposits and deferred profits                                                  |   | **(14,741**    | **)**   |   | (41,037    | )       |
| Decrease                  in premium deposit funds                                                                  |   | **(1,878**     | **)**   |   | (1,206     | )       |
| Decrease                  in advanced and unallocated premium                                                       |   | **(76,396**    | )       |   | (161,125   | )       |
| Increase                  in commissions payable                                                                    |   | **51,364**     |    |   | 124,680    |    |
| Other,                  decrease                                                                                    |   | **(430,498**   | **)**   |   | (76,008    | )       |
| Net                  Cash Provided By Operating Activities                                                          |   | **1,162,184**  |    |   | 1,134,784  |    |
|                                                                                                                |   |           |    |   |       |    |
| **Cash                  flows from investing activities:**                                                          |   |           |    |   |       |    |
| Proceeds                  from sales of furniture and equipment                                                     |   | **-**          |    |   | 23,800     |    |
| Proceeds                  from maturity or redemption - Available for Sale                  Investments             |   | **-**          |    |   | 1,620,060  |    |
| Proceeds                  from maturity or redemption - Held to Maturity Investments                                |   | **2,600,455**  |    |   | 3,316,080  |    |
| Proceeds                  from sales of equity securities                                                           |   | **-**          |    |   | 86,628     |    |
| Purchase                  of furniture and equipment                                                                |   | **(35,869**    | **)**   |   | (141,530   | )       |
| Purchase                  of fixed maturity securities - Held to Maturity                  Investments              |   | **(2,899,375** | **)**   |   | (4,905,679 | )       |
| Purchase                  of equity securities                                                                      |   | **-**          |    |   | (109,629   | )       |
| Net                  Cash Used By Investing Activities                                                              |   | **(334,789**   | **)**   |   | (110,270   | )  |
|                                                                                                                |   |           |    |   |       |    |
| **Cash                  flows from financing activities:**                                                          |   |           |    |   |       |    |
| Net                  (payments) receipts on supplementary contracts                                                 |   | **(15,026**    | **)**   |   | (12,755    | )       |
| Purchase                  of treasury stock                                                                         |   | **(2,364,629** | **)**   |   | (162,224   | )       |
| Treasury                  shares sold                                                                               |   | **-**          |    |   | 14,289     |    |
| Bonds                  payable purchased                                                                            |   | **(93,904**    | **)**   |   | (191,498   | )       |
| Exercised                  stock options and stock bonus                                                            |   | **6,382**      |    |   | 19,242     |    |
| Net                  Cash Used In Financing Activities                                                              |   | **(2,467,177** | **)**   |   | (332,946   | )       |
|  Net                  Increase (Decrease) In Cash and Cash Equivalents                                         |   | **(1,639,782** | )  |   | 691,568    |    |
| Cash                  And Cash Equivalents, Beginning Of Period                                                     |   | **3,809,913**  |    |   | 3,398,661  |    |
| Cash                  And Cash Equivalents, End Of Period                                                           | **$**  | **2,170,131**  |    | $      | 4,090,229  |    |
|                                                                                                                |   |           |    |   |       |    |

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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.**

**SIGNATURES**

|                                       |   | BNL                FINANCIAL CORPORATION                 |
|--------------------------------------------|--------|----------------------------------------------------------|
|                                       |   | (Registrant)                                             |
|                                       |   |                                                     |
| Date:                August 15, 2005       |   | By:                Wayne E. Ahart, Chairman of the Board |
|                                       |   | (Chief                Executive Officer)                 |
|                                       |   |                                                     |
| Date:                August 15, 2005  |   | By:                Barry N. Shamas, Executive V.P.       |
|                                       |   | (Chief                Financial Officer)                 |

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